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Does the Sugar market offer better opportunities than Oil?

July 19, 2011 12:22 pm

The price I refer to is that of the no. 11 (#11) futures contract with October expiry, which is (also) traded on the New York Board of Trade under ticker symbol SB. The Sugar No. 11 contract is the world benchmark contract for raw sugar trading and is also traded at the electronic trading platforms CME and ICE.

When trading sugar futures, it is important to take notice of the contract specifications. One Sugar #11 futures contract on for instance the New York Board of Trade or ICE is 112,000 pounds. Thus the tick value is 1/100th of a cent/lb, equivalent to $11.20 per contract. If you bought 1 Sugar #11 futures contract at $29 and sold it at $30, the profit would have been $100*$11.20=$1120.

The number “11” in the contract refers the way shipping costs are handled between the buyer and the seller of the contract. Sugar #11 is sold ‘Free on Board (FOB), which means that the seller pays to ship the sugar to a port, and is responsible for loading costs. However, the buyer is responsible for unloading costs.

Sugar #11 can be sugar originating from any one of the following 29 countries and the United States: Argentina, Australia, Barbados, Belize, Brazil, Colombia, Costa Rica, Dominican Republic, El Salvador, Ecuador, Fiji Islands, French Antilles, Guatemala, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Mozambique, Nicaragua, Peru, Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand, Trinidad and last but not least: Zimbabwe.

Delivery can take place to any port in the nation of origin. Another sugar future contract, Sugar #14, differs primarily from Sugar #11 in the shipping terms for the contract. Sugar #14 Calls for delivery of cane sugar in bulk at appointed Atlantic and Gulf ports, Cost, Insurance and Freight (CIF) duty paid.

Check expiry dates

Also it is advisable to check out the expiry dates of the futures contracts. It is like a riddle: according to ICE, expiry will be the last business day of the month preceding the delivery month (except January, which is the second business day before the 24th calendar day of the prior month). In other words, October futures will expire at the last business day of September.

If you buy a Sugar futures contract and you forget to close this position before expiration, you might expect a call that 112,000 pounds of sugar have been delivered to the port. If you like to ad sugar to your coffee or tea, in this case you need not to buy sweeteners for a long time.

Sugar still a sweet trade?
On Thursday July 14th, Sugar futures dropped almost 4.5% after hitting a high of $31.33 the day before. Market participants exited the market following the publication of a report of Unica, an industry group. Unica cut its forecast for output in Brazil’s Center South by 2.2 million metric tons to 32.4 million. A reduction of “at least 3 million tons” already has been expected because of lower yields.

However, production in other parts of the world seems to be strong, which may increase supplies around the world. Forecasts call for a sizeable world surplus next year, thus putting pressure on Sugar prices.

Despite the drop in the last trading sessions, this could be considered as a pullback within the strong uptrend of the past months. Is there still upside potential after a rise of 50% from the low this year around $20? As long as the short term $28-support level holds, corrections may be buying opportunities. A retest of the high around $36 of this year, could be possible, albeit not within a straight line upwards.