Sugar: Supply and Demand Drivers

Sugar is sourced from either sugar beets or sugar cane. The beet crop is confined to northern latitudes while the cane crop is grown in tropical latitudes. Beets are grown and harvested in a traditional growing season while cane is grown, harvested and replanted on an ongoing cycle. The bulk of global sugar production is sourced from sugar cane. As an alternative to being processed into granular sugar, cane and beets can be processed into ethanol. Granular sugar is traded internationally in both raw and refined (white) form.

1) Key Trading Parameters:

Raw Sugar

Exchange Traded: International Commodity Exchange (ICE), ICE Futures US

Product Specification: Raw

Price Quote: US cents per pound

Futures Contact size: 112,000 pounds

Contract Months: March, May, Jul, Oct

Settlement: Physical Delivery

White Sugar

Exchange Traded: International Commodity Exchange (ICE), ICE Futures US

Product Specification: White

Price Quote: US dollars per metric ton

Futures Contact size: 50 metric tons

Contract Months: March, May, Aug, Oct, Dec

Settlement: Physical Delivery

2) Market Drivers

1. Global Supply and Demand Dynamics: Brazil and India are the largest producers of sugar globally, followed by the European Union, China and Thailand. India, China, European Union and the US are the largest consumers of sugar.

2. Food vs. Fuel: The primary processing stage for sugar cane is the same for both sugar and ethanol. Cane stalks are pressed for juice which can be used to produce either sugar or ethanol. The decision to produce sugar or ethanol is influenced by relative prices for each product and this variable has a significant impact on price movements.

3. Highly Regulated: As a consumer staple and globally traded commodity, sugar has been subject to a myriad of government regulations in the form of import tariffs, export restrictions and subsidies, domestic price regulations and production incentives. Policies both promoting and restricting consumption and trading of biofuels have added to this complexity.

4. Fixed Costs: Sugar requires significant investment to create a cane production system and processing system. Acreage shifts in sugar are less than in other crops where area can be converted more easily from one crop to another. As a result, sugar prices can be subject to prolonged bull and bear cycles as supply response is more limited.