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How to trade Sugar futures contracts


You can trade futures by opening a trading account with a trusted broker who handles futures trading. Starsupply Commodity Brokers, CME Globex, CME Clear Port and Etrade are some well known online platforms for trading futures.

Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.

Risks
Sugar is a popular commodity, used widely across the world. It is also a unique commodity in that it has historically stuck to a mostly consistent seasonal pattern, which makes it easier to predict its prices.

However, the physical sugar market still faces several risks that all financial traders dealing in sugar futures should keep in mind. Here are the most important risks facing sugar futures traders:

  • Weather: Sugar as an agricultural commodity is sensitive to weather. Although sugar is traded throughout the year in global markets, futures prices typically bottom out in April and May, while picking up in June and July (the time of the peak harvest and increased demand for sugar).Sugar cane grows well in warm tropical climates, and any unforeseen event like severe frosts, can damage the sugar cane crop, thereby sending sugar prices spiralling.

  • Emerging Market Trends: Sugar is an international commodity, with emerging markets as the largest producers. Political situations, weather patterns and changing trade relations involving these countries impacts the prices of sugar directly. Traders need to actively follow trends in Brazil and India—the world’s top two sugar producers. Brazil is the key player in the sugar market, and weather in the central and southern region of the country is crucial to global sugar trade. 90% of Brazil’s sugar is produced in this region, which is extremely vulnerable to winter frost. Given India’s vast sugar consumption, it switches between being a net importer and a net exporter. This coupled with the changing weather in the country and the government’s various subsidy schemes, makes it imperative to follow India’s sugar industry as well.

  • Government Policies: Sugar is heavily protected by government subsidies and quotas. The U.S. government, for instance, restricts the import of “tariff-free” sugar (except from Mexico). The European Union too uses production control and high import tariffs to control sugar prices. This artificial price creation means that sugar prices will have a floor, and will not fall too far below. If these government regulations change suddenly, sugar futures will experience unforeseen price volatility. Many governments around the world also encourage sugar producers to sell surplus sugar supplies at a price far less than the cost of production. Around 20% of the world’s total sugar supply ends up in this government-created “dump market.” If dump market policies change, there could be a supply glut or excess, which will cause major price swing.

  • Alternative Uses: In many countries, including Brazil, large portions of the sugar produced is diverted to producing ethanol as a fuel. With increasing ethanol demand, sugar demand will also increase. Consequently, any fluctuations in the ethanol markets will automatically disrupt the sugar market as well. Additionally, land used for growing sugar in these countries is also used to grow other commodities. If the price of another good rises by a wide margin, farmers are liable to chase the high prices and reduce the cultivation of sugar.

  • Leverage: Sugar futures have a lot of leverage, which allows traders to control a large amount of commodities for a small amount of investment. However, it also means that even a small, unfavorable change in the prices of sugar can drastically impact a traders’ entire equity.


Active futures traders should watch out for the above risk factors, monitor global conditions and be cognizant of government policies, in order to make the most efficient and profitable trades.

 

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