Time to sweeten your investment?

Sugar for consumption needs no introduction, but what about sugar for investment?

Before diving into getting exposure to sugar prices via sugar futures, it is imperative to understand the supply and demand dynamics for sugar. The top three sugar producing countries are Brazil, Thailand and China.

Raw sugar in its readily stored form is actually harvested from sugarcane and sugar beet. Both are distinct agriculture crops. About 70% of world sugar is harvested from sugarcane, with the remaining 30% coming from sugar beet. Climates in the Brazilian region and parts of South East Asia like Thailand, are most conducive to the well-being and growth of sugarcane trees, making them the top countries for sourcing raw sugar. In fact, the whole supply chain and downstream processing plants for sugar is well developed in these countries.

The main demand for sugar comes from the consumption of raw sugar, the production of drinks,and the production of food items as well.

Historical price performance

Sugar prices are dictated by the basic economic principles of supply and demand. The global pricing standard as an approximate to sugar spot prices would be the US Sugar futures contract No. 11 as traded on the ICE exchange.

Prices of sugar had been trending upwards since hitting a low in August 2015, based on the chart below.

A combination of supply side factors like the low harvest from Brazil has impacted the global supply of sugar. Globally, the rising consumption of sugar in tandem with the growing global population would likely ensure that sugar prices continue to rise, in order to keep up with demand.

Furthermore, the dry weather experienced in India has also led to a supply disruption which pushed sugar prices to new highs in the last 2 years.

How should I invest in sugar?

Wilmar International, the Singapore-listed commodity giant, had anticipated the rise in sugar prices and started accumulating massive sugar futures, while taking delivery of standardized physical sugar.

Retail investors could not possibly replicate Wilmar's market actions, but they can diversify their investment portfolio through the investment in financial products.

Investors can gain exposure to sugar prices via sugar futures products traded on the Intercontinental Exchange (ICE), which offers tight spreads and extremely liquid sugar futures market with more than thousands of contracts traded per day between market participants from all over the world. Many licensed futures broker in Singapore including Phillip Futures and Saxo Capital markets enable futures account holders to buy and sell sugar futures.

For example, for customers having a futures brokerage with Phillip Futures, you can place a trade for one sugar futures contract with a cash margin requirement of approximately $1,550 (US$1,100).

Since the contract is denominated in USD, investors need to be mindful of forex risks. You will need to convert SGD into USD in order to purchase the contract and when you close out your position, USD proceeds need to be converted back into SGD. The current price for one sugar futures contract expiring in May 2017 is around US$ 18.26. Minimum uptick stands at US$0.01 and you stand to gain US$11.20 per tick. Should prices rise to US$19.00 by April, you could gain around US$ 828 per contract. A 4% gain in price will give you a gain of 75% on capital outlay (if you exclude the foreign exchange effects) for an effective leverage of 18 times.

On the other hand, investors must be mindful that prices may turn around, resulting in a leveraged loss. That said, investors could possibly short sugar futures in anticipation of a fall in sugar prices.That would result in profits and an increased margin balance.

As with all commodity futures products, various investment strategies can be employed.

1. If you are a short term trader, you may utilize charts and technical analysis for day trading and quick profits trading in and out of rubber futures.

2. You can also take a fundamental approach with a longer investing horizon by analyzing supply dynamics, export figures and stockpiles as well as demand factors and identify a solid trend for basis on future sugar prices.

3. Taking market cues from giant commodity traders may give a hint on market expert’s view which enables investors to plan their trades accordingly.

Conclusion

As with many financial instruments, investing in commodity futures may lead to losses to investors. The best approach would be to allocate a small proportion of total investable funds into commodity futures. Money management skill is vital to being a successful commodity derivatives investor. Always be mindful to use stop losses to limit losses as price swings of commodity futures can be extremely volatile.

(By Chee Hoong Chan)

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