🍭️ Your Guide To Investing In Sugar. Cakes, Candies & Custard. Why Eat It When You Can Trade It?
Sugar has been around for a long time, dating as far back as thousands of years ago. Fast forward to today, not only is sugar used in food products, it’s also used in a variety of other products & industries (including biofuels), which makes this agricultural commodity quite an important commodity. Although natural sugars are in most plants, commercial sugar mainly comes from two types — sugarcane (accounting for about 80% of the produced sugar) & sugar beet.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding sugar to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Because of the versatile applications of sugar, your risk isn’t contained to one particular industry, but spread out amongst a diverse range.
💰 Profit. Sugar prices can be pretty volatile, sometimes moving solely due to traders speculating on supply levels in the market. This creates opportunities for profit. In the long term, however, there are two main trends that suggests a positive outlook for sugar: growing demand from emerging markets (increasing population & discretionary wealth could increase demand for sweet food products) as well as growing ethanol demand due to increasing focus in green energy, especially in emerging economies.
What Affects Sugar Prices
There are a number of key factors that are involved in moving the price of sugar:
- 🇧🇷🇮🇳(🇪🇺) Brazil, Indian & EU Production. Brazil & India are the two largest producers of sugar, accounting for a combined 40% of total supply. Add the EU and that increases to roughly 50%. Any disruptions or delays in these two countries can have a pretty big impact on sugar prices. Furthermore, because sugar crops take about 12–18 months from seed to harvest, any problems along the way can certainly impact prices, as there certainly won’t be a quick solution.
- 🇨🇳🌍 Emerging Markets. Sugar is a global commodity, needed everywhere. However, consumers in emerging economies in Asia & South America represent the strongest growth in demand for sugar, suggesting that there is a shift in consumer preferences.
- ⛽Ethanol Fuel Demand. Like corn, soybeans, and a number of other agri-crops, sugar cane can also be used to make ethanol as a fuel source. As a reminder, ethanol is added to gasoline to help produce cleaner emissions & decrease the amount of gasoline needed. This means ethanol competes against gasoline as fuel, which means prices tend to follow each other. So, if oil prices fall, gasoline prices will also fall, ethanol prices will also tend to fall, which means there’s less incentive for farmers to handover sugarcane for ethanol, rather than sugarcane for sugar. Yup, weirdly enough, it’s all linked!
- 🏛️Government Policy. Sugar subsidies and import tariffs have long played a part in pushing prices down. Government subsidies are essentially financial incentives for growers to grow sugar cane &/or sugar beet. Import tariffs make foreign-grown sugar crops expensive, thus incentivising locally grown sugar crops. The result is what we see today: an artificially created environment of high supply, putting downward pressure on prices. Import tariffs in the US, however, raised sugar prices for US consumers, which meant that companies that use sugar in their supply chain needed to find alternatives, like high-fructose corn syrup. That’s why some of the same food products taste different in the U.S. than in other countries.
- ⚕️Health Concerns. Quite obviously, as consumers & governments become aware of the link between sugar & a number of diseases, demand could slow in the future. Some governments have already introduced a sugar tax, aimed to help reduce obesity, diabetes, & tooth decay. Nevertheless, consumption data from the USDA suggests consumer demand for sugar and all things indulgent are still there.
- ☀️ Weather. As with all crops, sugar cane/beets require certain conditions to thrive. Poor conditions (i.e. excess rain or drought) can certainly impact sugar yield from these crops.
- 🔄 Substitution. Alternatives to sugar can certainly lower demand. One such example is the high-fructose corn syrup mentioned above, a pretty common sweetener in the U.S. Further developments & potential market adoption of sweeteners could certainly have a bigger impact.
- 📈 Stock Levels. Like other commodities, countries with low levels of stock/inventory suggests higher demand &/or lower supply, whereas high levels suggests lower demand &/or higher supply.
- 💵 US Dollar Strength. Also like a lot other commodities, the benchmark for the pricing of sugar is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more soybeans) & drive up demand, increasing prices, and vice versa.
- 🇧🇷 Brazilian Real Strength. The Brazilian currency, real, can have an impact on sugar prices. Similar to US dollar strength, if the real is weak compared to the dollar, Brazilian growers have more of an incentive to hand over sugar for export to other countries, since they’ll get more real for their goods, increasing global supply. If the real is strong, they can then choose to make ethanol for the domestic market.
What Is It Used For?
Sugar is used for a wide variety of products. For a full list of use cases, see here.
- 🍰 Food & Drink Products. The obvious use case, used in desserts, baked goods, confectionary, jams, as well as in savoury dishes too. Alcoholic drinks require sugar during the fermentation process
- ⛽ Biofuels. As mentioned above, sugar can be crushed to make ethanol, which is then mixed with gasoline for fuel.
- 🐄 Livestock Feed. Byproducts from sugar production can be used as feed for livestock.
- 💊 Medicines. Sugar can be used as a coating agent, a flavour enhancer, & can act as a preservative & antioxidant.
- 📄 Other Uses. In addition, research & development into sugar crops have led to the following innovations:
— Sugar cane-based plastic
— Electric car panels
— Paper products
— Environmentally-friendly alternative to styrofoam
The Case Against Sugar
There are a number of risks involved when investing/trading in sugar. Firstly, sugar can be pretty volatile, with price swings that act solely due to speculators in the market. Though it provides opportunities for profit, it also provides opportunities for loss. Furthermore, the increasing awareness of the link between sugar and obesity & diabetes can potentially lower demand, and should more government intervention occur in the future (as we see in some countries with a sugar tax), demand could be lowered. In addition, further developments & market adoption in sugar substitutes such as stevia could certainly take away sugar’s market share & therefore lower demand. Last but not least, with the growth of the sugar industry in emerging economies, an increase in government subsidies in either developed or developing countries could lead to an oversupply in the market.
The Case For Sugar
As mentioned above, volatility in the sugar market can present opportunities for profit. In the long term, growing demand in emerging economies (due to growing wealth) could certainly increase sugar demand. Furthermore, like many other agricultural crops, climate change can certainly affect sugar supplies. Due to the long production process from seed to harvest, any supply shock will certainly be reflected in sugar’s price. In addition, sugar has versatility in its use cases, with a wide variety of industries that consume it. Since sugar is used to make ethanol fuel, risk is not just solely dependent on consumer appetites & behaviours, but is spread out to include oil & gas supply & demand risks as well.
Popular Ways To Invest In Sugar — Pros/Cons of Each
Like some of the other agricultural commodities, you can’t really invest in physical sugar. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Sugar ETNs. There are a few ETNs that invests in sugar futures contracts. Because of this, on occasion, there may be times when the actual price of sugar & the price of the ETN share may differ since they invest in futures contracts, a derivative investment. Regardless, they’re traded on stock exchanges, so they’re very easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since it’s an ETN, you are essentially buying a bond, an IOU, a debt note, and not in actual, physical sugar. Be sure to read the fine print & understand the risks and costs involved.
- Sugar Stocks. Unfortunately, you are pretty limited in terms of public companies with a sole focus on sugar. There are a number of other companies that have other product ranges, alongside their sugar division. Due to sugar’s versatility, they may have other divisions that focus on sugar’s other products. Because of this, you aren’t directly following sugar prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products they have, factories/mills/land that they own, and potential product-line expansion plans.
- Sugar Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell soybeans at a specified time in the future with an agreed-upon price. A standard contract deals with 112,000 pounds of sugar! These futures contracts can be settled with physical delivery or with cash after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in sugar can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. As a versatile agricultural commodity that’s also used to produce an energy commodity, sugar can be used as a hedge against inflation & for portfolio diversification. In terms of the long-term outlook, there are two main trends that suggests positive growth for sugar: increasing demand from emerging economies in Asia & South America, as well as the potential impact of climate change. However, there are risks in investing in sugar that could put downward pressure on prices, including: increasing concerns about the link to diabetes & obesity, government subsidies & import tariffs artificially creating an oversupply environment, & the development & adoption of sugar substitutes.
🧺 If you are considering adding sugar to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your sugar position so you can take advantage of the volatility in the market.
💰 If you are considering adding sugar for speculation and profit, you may want to monitor the factors that affect sugar prices mentioned above, especially Brazilian & Indian production, government subsidies & emerging market demand. You may also want to keep track of biannual reports (published in May & November) of world production, consumption & stock levels released by the USDA, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on sugar’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly without a specific reason, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.
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