Sugar futures can be a highly volatile market. Since the early 1970s, the price of the sweet commodity traded as low as 2.29 cents and as high at 66 cents per pound. At just below the 12 cents level recently, sugar is a lot closer to the low than the high.
The price of sugar had not traded below 10 cents per pound since 2008 until last September when the price briefly probed below the level. The decline to a decade low led to a substantial recovery rally that took the price to a high at 14.24 cents, or almost 45% higher in only one month. So far in 2019, the price of the sweet commodity has traded in a consolidation range above the low from last September and below the high from October 2018. Sugar has been trading back and forth between 11.27 and 13.50 cents this year, and last week on August 7 the price fell to the low for the year. The most direct route for a risk position in the sugar futures market is via the futures and futures options that trade on the Intercontinental Exchange. Meanwhile, the iPath Series B Bloomberg Sugar Subindex Total Return ETN (SGG) and the Teucrium Sugar ETF (CANE) products provide alternatives to the leveraged and volatile world of the futures arena.
The daily chart looks bearish
The price of sugar has been consolidating above the September 2018 low and below the October 2018 high throughout 2019 and the range narrowed to 11.27 to 13.50 cents per pound. Since February, the price of the sweet commodity has been making lower highs and lower lows in the futures market.
As the daily chart highlights, October futures traded at a high at 13.96 on February 22 and have been working lower over the months that followed. October sugar futures reached the most recent low at 11.27 on August 7.
Price momentum and relative strength are both leaning lower from neutral territory. Daily historical price volatility has recently increased to over the 33% level, the highest since January 2019. Meanwhile, open interest at 1.044 million contracts is just over the high for the year, which was at around the 1.041 level. Over recent years, the total number of open long and short positions in the sugar futures market has moved higher during bear market periods. Just before the price dropped to the lowest level in a decade at 9.83 cents in September, the open interest metric rose to a high at 1.058 million contracts, which was a record level.
Sugar followed the currency of the leading producer of sugarcane
One of the reasons for the most recent dip to a new short-term low in the sugar futures market is the decline in the value of the Brazilian real against the US dollar. Since Brazil is the world’s leading producer and exporter of sugarcane, a decrease in the value of the local currency often weighs on the price of the sweet commodity. A lower real decreases the production cost for sugarcane in Brazil.
As the weekly chart shows, the Brazilian real traded at its most recent high at $0.26865 during the week of July 15 and fell to a low at $0.24645 on August 15, a drop of 8.3%. Sugar futures declined as the value of the Brazilian currency fell.
Energy prices have not helped
Aside from being the world’s leading producer of sugarcane, Brazil is also a leader when it comes to ethanol production. The US and Brazil are the two most significant producers of the biofuel in the world. In the US, corn is the primary ingredient in ethanol, but in Brazil, it is sugarcane that the nation processes into the fuel.
Over the recent weeks, the price of crude oil declined from over $60 per barrel at the start of July to the most recent low at just over $50 per barrel. At the same time, nearby gasoline futures underperformed crude oil falling from $2.0378 in early July to a low at $1.6111 per gallon wholesale. Gasoline prices followed crude oil lower, but as the futures market looks towards the end of the peak season for gasoline demand, the price has also experienced weakness on the back of seasonal factors. At the same time, ethanol futures fell from over $1.60 to $1.257 per gallon. Lower corn prices in the US weighed on the price of the biofuel. The falling price of ethanol also weighs on the price of sugar as it is the primary ingredient in the production of the biofuel in Brazil.
A weak time of the year for the sugar market
The price of sugar fell to a low in September 2018 at 9.83 cents. Last year at this time, the Brazilian real versus US dollar currency relationship hit bottom at $0.23625. At the same time, gasoline prices were facing the shift from peak to the off-peak time of the year for demand.
At 11.63 cents per pound on August 15, sugar is currently at a higher level than last year when the range during the same week was at 10.11 to 10.55 cents per pound. Part of the latest pressure on the currency is coming from contagion from Argentina. The nation’s peso tanked over recent sessions after a primary election where a leftist candidate defeated a business-friendly incumbent. Therefore, a combination of weakness in the energy sector and a move to the downside in the value of the Brazilian currency has weighed on the price of the sweet commodity. And, seasonality could continue to put pressure on the price of sugar over the coming weeks. In 2018 the low at 9.83 cents came in September. In 2017 experienced price weakness in September, and in 2015 it hit its low for the year during the same month.
CANE and SGG – pick your sweet treat
If sugar is going to reach a seasonal low helped by a weak Brazilian real and gasoline prices, developing a plan to purchase sugar on a scale down basis over the coming weeks could provide optimal results later this year.
The most direct route for a long position in sugar is via the futures and futures options that trade on the Intercontinental Exchange. For those who do not venture into the leveraged and volatile world of futures trades, an ETN and an ETF product provide alternatives.
The iPath Series B Bloomberg Sugar Subindex Total Return ETN has net assets of $20.57 million, trades 1,900 shares each day and charges an expense ratio of 0.45%. The fund summary for SGG states:
The investment seeks return linked to the performance of the Bloomberg Sugar Subindex Total Return. The ETN offers exposure to futures contracts and not direct exposure to the physical commodities. The index is composed of one or more futures contracts on the relevant commodity (the ‘index components’) and is intended to reflect the returns that are potentially available through (1) an unleveraged investment in those contracts plus (2) the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.
The last significant rally in the sugar futures market took the price from 11.39 cents on July 23 to a high at 12.30 cents on July 30, a rise of 7.99%.
Over the same period, the SGG ETN rose from $39.06 to $41.78 or 7% as the product captured most of the upside move in the price of the sweet commodity.
The Teucrium Sugar ETF is a diversified product that holds three of the most actively traded sugar futures contracts. The most recent top holdings include:
Source: Yahoo Finance
CANE has net assets of $9.42 million, trades an average of 27,442 shares each day, and charges an expense ratio of 1%.
Over the period when October sugar futures moved 7.99% higher, and the SGG ETN appreciated by 7%, CANE moved from $6.62 to $6.99 per share or 5.59%. The blend of the three futures contracts causes CANE to underperform the sugar futures market as it moves to the upside but outperforms on the downside. The volatility of deferred sugar futures tends to be lower than in the nearby contract.
We are coming into a time of the year when sugar has experienced price weakness in recent years. As the price moves lower over the coming weeks, buying on a scale down basis could set the stage for some sweet results before the end of this year.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.