Sugar is a soft commodity produced, traded and consumed all around the world. It is a sweet-flavored ingredient, used in many types of food and drinks, that can be found in pretty much every plant, but it can only be extracted – or at least economically efficiently – from sugarcane and sugar beet. It is produced and/or refined in many countries and finds its way in different forms, for different purposes and different destinations. In other words, it has a prominent position in the commodity trade environment. Which is why the way that sugar price affects trading procedures is something which sugar traders really need to know as much about as possible.
Starting with the country origins of sugar as a raw material, the top producers of sugar are Brazil, India, China, Thailand and Pakistan and the EU as a group. When you’re thinking about trading sugar commodities, the major things to consider besides the logistics chain are the price drivers of sugar. However, merely looking at sugar price graphs is not enough to understand sugar markets, as you need to consider the factors that drive those prices. So, which are the most critical price drivers for trading sugar commodities?
Sugar prive drivers
1. Global sugar stocks (inventories)
Granted, this is a factor that affects all commodities. It’s no different for sugar, as low levels of stock indicate strong demand, weak supply or a combination of the two. Because of the long supply cycle of sugar, whenever there is a problem in terms of storing the sugar commodities, then there is also a significant effect in sugar price.
2. Inflation of the US dollar
The US dollar is the main currency that people use in financial transactions. Again, that’s the same for most commodities, but it’s especially true for sugar as sugar derivatives are priced in dollars both in London and New York. A decrease in the value of US dollar relative to a commodity buyer’s currency can cause headache to the finance counselors of trading companies. Why? Because then the one who buys should spend less of their own currency for a certain amount of the commodity. A less expensive commodity is the reason for an increase in the demand and in the price. Tricky, no?
3. Oil prices
Another important factor which influences the price of sugar is the price of oil. That’s because sugar can be considered an energy source. The value of an energy source depends on the caloric value of the source and the energy price. The latter is dominated by the oil price. This is not theory; in practice the sugar cane farmers in Brazil can produce sugar or ethanol from their cane. Ethanol competes with gasoline in the transport fuel market. Thus, a decrease in gasoline’s price will also mean a decrease in ethanol prices and hence less demand on sugar cane to produce ethanol, thus potentially an oversupply of raw sugar. An abundance of raw sugar will bring sugar prices down.
4. Weather conditions
As mentioned before, it’s mainly countries with warm climates that produce sugar. However, imagine that a warm climate can also be “too warm”. A drought in Brazil, for example, can damage sugar canes and make the production cycle significantly slower. While too warm atmosphere can cause problems, wet weather is also not ideal for producing sugar. Sugar canes require dry atmosphere. Malfunctions in the production cycle due to weather conditions are another driving factor in sugar price.
5. Regulations
Governmental contributions and import tariffs play their part in the game of sugar trading. Governments have twisted the sugar markets and the result is the excessive production of sugar cane. Europe today is the second largest sugar exporter in the world. In the US though, import tariffs are meant to protect domestic farmers, so prices for US consumers have been raised. Which is also why US consumers are looking for different types of sweeteners.
6. Consumption trends
Most of us like sugar. It is everywhere, providing us physical energy and making food taste good. As the world population grows, sugar consumption is most likely to grow as well. But sugar is also responsible for various health concerns such as obesity, diabetes and dental health. Governments and institutions have started educating consumers and as a result, consumers are becoming more aware of the adverse health aspects of sugar. Since the trends for healthier nutrition gets more momentum in the mature sugar markets, this could possibly slow down the growth in sugar demand in the future.
The take-away: control your price risks
The commodity price volatility and price trends are the first thing that traders and financial managers are monitoring in their daily operations and risk management. The second is the exposure they have to these markets as a result of their contracts, price & margin strategies and not to forget their cash flow projections. In addition, a large set of hedging instruments is available, like Futures, Options and OTC where specifically in mechanisms play a role such as “white premium” and “polarization premium”. These are complex processes due to the variety of variables and their dependencies and correlations.
A good way to manage price and margin risks of a sugar business starts with implementing the right technology to support it. A general ERP system is mostly not the right tool for managing a commodity business. We advise to choose an application specific to your sugar trading businesses, and when in trading of managing price risks with futures contracts, select a CTRM software specifically made for sugar trading.
Would you like to know more? Find out what else drives the price of soft commodities.
Agiblocks CTRM solution
Commodity traders – as well as most other traders – tend to be risk averse. That is to say, they prefer situations with low uncertainty over situations with high uncertainty. Or better yet, no uncertainty at all. However, in economics and finance, as well as in life, things are never one hundred percent certain, nor do the most certain outcomes yield the best results.
Luckily, there are tons of tools to deal with uncertainty as a solution to your risk aversion. And all of them can be wielded from the comfort of your Agiblocks dashboard.
Agiblocks is not just the next generation of CTRM systems, but a solution that truly meets all technical as well as business needs for anyone working in soft or agricultural commodities.
That’s why anyone looking for CTRM software for the commodity trade – whether you are a trader, buyer or seller dealing with single or multiple soft and/or agricultural commodities – should look no further.
Request a live demo if you are:
- a trader in soft and/or agricultural commodities;
- a buyer or importer of soft and/or agricultural commodities (for instance a producer purchasing raw materials);
- a seller of soft and/or agricultural commodities.
…or if you are simply interested in our next-generation CTRM solution.
