Sugar: A Sweet Market On The Move

Sugar is an often overlooked commodity by the trading public. It tends to move in long sweeping slow trends, however recently it has become quite active. There are many factors involved causing the increased price movement; however the primary one appears to be ethanol usage. Ethanol is a fuel additive made from sugar.

As oil prices rise, ethanol becomes more cost effective relatively, and thus, is used in greater percentages in gasoline. However, when oil prices pull pack from the current raging uptrend, ethanol is not as attractive as an additive, resulting in less use/demand. This in turn, affects the supply/demand dynamics of sugar, resulting in price volatility within the commodity.

For example, just today, sugar futures dropped dramatically in London, on expectations that a decline in oil prices will result in less demand for ethanol. This is after a 22% increase in sugar prices in 2008, caused by oil’s advance and a tumbling United States Dollar. Fundamentally, there are some exciting things happening right now in sugar. Let’s take a deeper look at the sweetest commodity future and how it trades.

Sugar is one of the world’s top 10 traded commodities and is produced in over 120 countries for food, fuel and various industrial uses.

Sugar is traded on both the LIFFE and ICE exchanges. For the purposes of this article, I will focus on the ICE traded contracts.

The primary sugar contracts are sugar 11, 14 and 16. Sugar 14 is the contract currently used for hedging. However, in September 2008, it will be phased out and replaced by Sugar 16. Sugar 11 is known as “World Sugar” and is the most actively traded contract. It is considered the benchmark for sugar prices.

The sugar 11 contract is relatively small compared to that of 14 and 16, hence it is attractive to smaller speculators and traders who wish to access the sugar market. Sugar 11’s ticker symbol is SB and the contract size is 112,000 pounds or what is called 50 long tons.

Contracts are listed in the months of January, March, May, July, and October. SB moves in 1/100th cent per pound which translates into a tick size or minimum movement of $11.20/contract. There is no exchange imposed daily price limit and ICE charges $1.75 per contract as an exchange fee for non exchange members.

Let’s take a look at the daily technical picture of the SB sugar 11 contract. As you can see from the weekly chart, price spiked up in the beginning of 2008, pulled back and now appears to be heading back to the yearly highs. It has pulled back in London today and fallen a little in ICE trading since the opening.

The daily chart indicates a nice uptrend with price riding up the Simple Moving Averages. The RSI and MACD indicators seem to show further upside is possible here. If you believe oil hasn’t finished its up move and like buying on pullbacks from trends, sugar looks like a sweet trade here.

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.

Have You Switched to ConnorsRSI?

ConnorsRSI is the first Quantified Momentum Indicator -- the next-generation improvement to traditional RSI indicators. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too.

Enter your email address to get your FREE download of our Introduction to ConnorsRSI - 2nd Edition - Trading Strategy Guidebook with newly updated historical results.

Disclaimer: The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

All analyst commentary provided on TradingMarkets.com is provided for educational purposes only. The analysts and employees or affiliates of TradingMarkets.com may hold positions in the stocks or industries discussed here. This information is NOT a recommendation or solicitation to buy or sell any securities. Your use of this and all information contained on TradingMarkets.com is governed by the Terms and Conditions of Use. Please click the link to view those terms. Follow this link to read our Editorial Policy.