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Sugar- Trapped in a Trading Range

Barchart - Mon Sep 19, 10:31AM CDT
Sugar - pyramid-formed-with-sugar

Sugar is a historically volatile member of the soft commodity sector. In the mid-1970s, the nearby sugar futures contract reached an all-time 66 cents per pound high. In 1985, it dropped to 2.63 cents. Sugar is an agricultural product from two sources: sugarcane and sugar beets. Sugar is an essential commodity for food production, and many countries consider sugar supplies a national security issue, leading them to support production via subsidies. The ICE sugar #11 futures contract represents the price of “world” free-market sugar that is not subject to price supports or caps. Brazil is the world’s leading free-market sugar producer and exporter, as its climate supports sugarcane production. 

In the US, corn is the primary ingredient in ethanol production, but sugar is required for biofuel production in Brazil. 

Sugar’s price has gone to sleep over the past year, with the price closer to the 2021 multi-year high than the 2020 pandemic-inspired low. 

Sugar trades between 17-21 cents per pound

Nearby ICE world sugar futures have been stuck in a four-cent range for over one year. 

The chart highlights that the continuous sugar #11 futures contract has not traded below 17.05 or above 20.69 cents per pound since the week of July 12, 2021. However, the bias has been to the downside since the November 2021 20.69 cents per pound high as sugar futures have made lower highs and lower lows, with the latest downside move taking the price to the 17.20 cents level in August 2022. 

The strong dollar has been bearish, but the rising Brazilian real supports higher sugar prices

A rising US dollar tends to weigh on all commodity prices, and sugar is no exception. 

The chart illustrates the bullish trend in the US dollar index that has taken the world’s reserve currency from 89.165 in early 2021 to its most recent high of 110.785 in September 2022. Since the dollar is the pricing mechanism for sugar futures, when it increases in value against other currencies, it weighs on sugar because of the elasticity of demand that makes the sweet commodity more expensive in other currency terms. 

Meanwhile, since Brazil is the world’s leading sugarcane producer and exporter, it is highly sensitive to the trends in the US dollar versus the Brazilian real foreign exchange relationship. 

While the dollar has been rising against other world currencies, it has been stable against Brazil’s real. In fact, the chart shows the real has had a slight upward bias against the US currency since May 2020. A stronger real increases Brazilian production costs as one of the primary expenses of sugarcane output is labor, which is in Brazilian real terms. 

India is also a top producer, and supplies could depend on the price- Energy prices influence sugar

India is also a leading sugarcane producer, and the world depends on its output to balance the supply and demand equation. Sugar broker Marex recently stated, “The market needs a good chunk of Indian sugar (preferably raws) and in present conditions it looks unlikely to get it unless the world price goes up to somewhere above 19 cents.” ICE sugar futures for October delivery were below the 18 cents per pound level on September 19. 

Corn is the primary ingredient in US ethanol production, but sugarcane is processed into biofuel in Brazil. Gasoline prices often influence sugar prices. While gasoline prices soared earlier this year, the recent trend has weighed on sugar prices. 

The chart shows the decline in nearby October NYMEX gasoline prices from over $3.60 per gallon wholesale in June to below the $2.50 level on September 19. Seasonal factors at the end of the peak driving season and US Strategic Petroleum Reserve releases have weighed on crude oil and gasoline prices over the past months, which has been a bearish factor for sugar because of its role in ethanol production. 

Coffee, cotton, and FCOJ suggest that the move will eventually be higher

The sugar price more than doubled from the 2020 low of 9.21 cents to the 20.69 cents per pound high. While sugar doubles, other soft commodities had done even better:

  • Nearby ICE coffee futures moved from 94.55 cents in June 2020 to over $2.60 per pound in February 2022 and were above the $2.15 level on September 19. 
  • Nearby ICE cotton futures exploded from 48.35 cents in April 2020 to a high of $1.5595 per pound in May 2022. At just below $1 per pound, cotton remains over double the price at the 2020 low. 
  • Nearby ICE Frozen Concentrated Orange Juice futures increased from 91.6 cents per pound in February 2020 to a high of $1.9350 in June 2022 and were above the $1.70 level on September 19. 

Brazil is the leading producer and exporter of sugarcane, but it also holds that position in the Arabica coffee and orange markets. Brazil is also the fourth-leading cotton-producing country. 

Sugar has mostly lagged the price action in the other three soft commodities, but the moves in coffee, FCOJ, and cotton and current price levels are likely to support sugar and prevent any significant decline in the sweet commodity. 

CANE is a sugar ETF product 

The most direct route for a risk position in the sugar market is via the ICE’s futures and futures options. The Teucrium Sugar ETF product (CANE) provides an alternative for market participants seeking exposure to the soft commodity. 

At $8.64 per share, CANE had over $27.815 million in assets under management. The ETF trades an average of 53,142 shares daily and charges a 1.14% management fee. The most recent rally in the ICE sugar futures took the October futures price from 17.20 on August 1 to 18.70 cents on August 15, an 8.72% increase.

The chart shows that over the same period, the CANE ETF appreciated from $8.58 to $9.17 per share or 6.88%. The most volatile price action in sugar tends to occur in the nearby futures contract. Since CANE holds three contracts to minimize the roll risk, the ETF often underperforms the price of nearby ICE futures during rallies and outperforms during price corrections.

Sugar will eventually break out above or below the 17 to 21 cents range. Energy prices, the weather, and the overall state of inflation will dictate the future path of the soft commodity’s least resistance. 

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.