Trading Sugar using CFDs

Commodities which are grown such as sugar are known as soft commodities while those that are extracted are known as hard commodities. There are a number of factors that influence the price of sugar.

While government's trade policies are the main influence on the price of sugar, weather is an important factor too, making the price of sugar subject to sudden fluctuations. Brazil is the world’s largest sugar producer, followed by India, the EU and China. India is also the world’s largest consumer.

To understand what drives sugar prices you first have to realize where it comes from. In fact it's produced in over 100 countries around the world, but it's grown in two forms. Most of the crop comes from sugar cane which grows in tropical and subtropical areas, with the major producers being Brazil, India, and Cuba. But 20% of sugar production comes from sugar beet, grown more in the northern temperate climates. Beet is a little bit more expensive to produce.

Because of the different climate requirements, countries mainly grow one or the other. The United States is the exception to this, growing cane in Florida, Hawaii and Louisiana, and beet in Minnesota and California.

The sugar markets of the US and Europe are subsidized, giving producers prices that are higher than the world market, and distorting the figures. Another recent occurrence which has had an impact on the world sugar market is the increasing use of ethanol as an alternative fuel. While the US has toyed with ethanol, also growing corn for its production, and has not found a viable economic model, India is the largest consumer of sugar in the world, due partly to the growing use of ethanol as an alternative fuel.

The price of sugar reached a 29-year high on 1 February, 2010 as investors reacted to reports that sugar harvests in Brazil and China for 2009-10 were going to be worse than expected. At that time sugar futures rose up to 36.08 c (22 p) a pound in New York, the highest price seen since 1980. Since that time though it looks like both the harvests in India and Brazil will actually be much better than had previously been predicted.

This has caused a change in sentiment among investors, and the price of sugar has fallen 43% since February 1. At the moment the fall doesn't look like abating, as more and more buyers begin to believe that if they wait just a bit longer then they will be able to buy sugar cheaper. This is a typical demonstration of the impact of supply and demand. As buyers have restricted their demand in anticipation of even lower prices, this has forced the price lower still. Adding to the pressure is that the higher prices have attracted more farmers to plant sugar plantations in response to higher prices being fetched in the open markets and the increased supply could also see the value of the commodity retreat.

The demand for sugar is heavily impacted by population growth and income levels, and so links to long-term political and population trends. As the population of developing nations receives and gets accustomed to increasing income levels, this greatly increases demand for sugar. Unlike exports, imports of sugar are diversified in nature, among more than 100 countries. The sugar imports account to around 38 million tons. The major sugar importers are the United States, Germany, Great Britain, Indonesia, Japan, Korea and the former Soviet states.

It's important to realize the scope for increased demand. The per capita consumption of sugar in the US is about 45 kg per annum. Compare this with China, the third-largest consumer and producer of sugar, where sugar consumption is increasing but starts from a comparatively low level of about 7 kg per year. It's easy to see that this represents a huge possibility for growing demand.

One thing that will always remain completely unpredictable is the weather. If India was to experience a difficult monsoon season then this could alter prospective sugar yields making the commodity more favourable to investors eager to take advantage of any price increases due to falls in supply levels. But if the weather occurs in a seasonal manner, it affects sugar prices in a predictable way.

During the harvest times, prices tend to fall. Sugar beet is harvested in the early autumn, before it is exposed to frost, and that responds to November to February by the time the beet is processed. But the beet is replanted for the next year just when cane is being harvested, so prices remain weak from March through to May. After a couple of months of growing, the future supply is normally assured by July, when the sugar beet has matured, so prices again decline through August. The strongest time for sugar is just after planting, when it is most at risk.

What does the future hold for the price of sugar?

Like any investing the greater your knowledge of the instrument you want to trade the better your chances are of success are, especially long-term. There are common factors that influence all commodities. It’s important to understand to what extent these factors will alter the price of a commodity.

For instance, the price of Gold and the US dollar are very closely linked, as many investors use the relative stability of the former to hedge against a weakness in the price of the latter. Another would be the price of oil, which is heavily influenced by consumer and industry demand.

 

The price of sugar reached a 29-year peak on 1 February, 2010 as speculators reacted to reports that sugar harvests in Brazil and China for 2009-10 were going to be worse than expected. Since that time though it looks like both the harvests in India and Brazil will actually be much better than had previously been predicted.

This has caused a change in sentiment among investors, and the price of sugar has fallen 43% since February 1. At the moment the fall doesn’t look like abating, as more and more buyers begin to believe that if they wait just a bit longer then they will be able to buy sugar cheaper.

One thing that will always remain completely unpredictable is the weather. If India were to experience a difficult monsoon season then this could alter prospective sugar yields making the commodity more favourable to investors eager to take advantage of any price increases due to falls in supply levels.

What does the future hold for the price of sugar?

Like any investing the greater your knowledge of the instrument you want to trade the better your chances are of success are, especially long-term. There are common factors that influence all commodities. It’s important to understand to what extent these factors will alter the price of a commodity.

For instance, the price of Gold and the US dollar are very closely linked, as many investors use the relative stability of the former to hedge against a weakness in the price of the latter. Another would be the price of oil, which is heavily influenced by consumer and industry demand.

 ...Continues here - Trading Wheat

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