Sugar Spread Betting
If your spread betting company is anything like IG Index, then you may find that you have a choice in sugar spread betting. They quote two sets of prices, for NY Sugar No. 11 and London Sugar No.5. These are very different prices and markets, but the interconnectedness of world trade means that they should generally track each other.
For NY Sugar No.11, they quote 2354.5 – 2359.5. The first price, 2354.5, is the selling price, and if you have decided to sell, or short sugar, this is the price that you will open your bet on. Say you choose to bet £6 per point that the price will go down, and that the price does indeed go down to 2186.0 – 2191.0, at which point you decide to collect your winnings and close the bet.
It is straightforward to calculate how much you have won. The difference in points that you actually gained is 2354.5-2191.0, as you enter a short bet at the selling price and close it at the buying price. This works out to 163.5 points. As you bet £6 per point, that gives you a profit of £981.
There’s always a risk when you are trading, and if the price goes up rather than down at some point you need to close the bet and cut your losses. Suppose the price goes up to 2393.2 – 2398.2, and that is the price that persuades you to get out of the trade.
Now you have to calculate how much you lost. You entered the short bet at 2354.5, and closed it at 2398.2. The difference in points is therefore 43.7. The total amount you have lost is £6 per point times 43.7, which works out to £262.20.
The current quote for London Sugar No.5 is 604.6 – 605.4. The first thing you might want to note about this is that the spread is only 0.8, that’s about 0.13%. The New York price has a spread which is over 0.2%. It may not sound like much, but depending how much you spread trade this difference can add up, so if all else is equal London Sugar looks better.
For this example, suppose you take out a long position at £8 per point. In due course the price goes up, and you close the bet when the quote is 653.2 – 654.0. To work out how much you won, you simply have to note the opening and closing prices and multiply them by the stake. As it was a buy bet, the opening price was 605.4, and the closing price was 653.2. That means you gained 47.8 points in total. Multiplying that times the stake means you won £382.40.
Considering the other case, when the spread bet is a loser, say that the price dropped to 581.3 – 582.1. You close the bet and accept that you lost this time, then work out how much it has cost you. The bet opened at 605.4, and closed at 581.3, a difference of 24.1 points. For your stake of £8 per point, your total losses are £192.80.
How to Spread Bet Sugar
Sugar was discovered many centuries ago, and it is a popular commodity to trade. Spread betting sugar gives plenty of opportunities for profit.
The origin of commercial production of sugar goes back to India, and it became a valued commodity in the Muslim world. About 1000 years later, sugar growth extended up to Spain and Portugal, and this latter country took it to the Americas.
Sugar as we know it, in its refined form, was once very expensive and rare, but has now become a staple in most diets. Before sugar was discovered, honey and fruit were commonly used to sweeten food. Sugar actually comes from two major sources, sugar cane, and sugar beet. Sugar cane is most suited to the tropical environment, and is a type of grass. Sugar beet is better in temperate climates, such as Europe and North America, but only provides about 20% of the world’s production.
Most sugar that is produced is consumed in the country where it grows, and there are often various government subsidies and incentives to grow it. It is extracted from sugarcane in a complex process which involves crystallizing the juice into a syrup from which raw sugar is created, which is then sent to sugar refineries for processing and packaging. The alternative source of sugar, sugar beet, is usually processed in one continuous process, and does not need a raw sugar stage.
Sugar prices are influenced by several factors. There is societal concern about diabetes, tooth decay, and obesity in most industrialized nations, and this can result in alternatives to sugar being sought, which would reduce demand in the long-term. As a crop, obviously weather is a factor in sugar pricing, but both sugar cane and sugar beet need their specific and different climates in order to thrive. Sugar beet in temperate zones is susceptible to frost damage, which of course does not threaten sugarcane in tropical areas.
In the longer term, prices of sugar are being influenced by increased demand from the BRIC nations, particularly China. As living standards improve, people tend to change their diet and this is evident in China where people tend to spend 30% of incomes on food.
Biofuels are also contributing to the rise – governments in the US and UK have pledged to give more importance to fuels derived from crops to reduce the dependence on foreign oil and reduce carbon emissions. In addition to the use of sugar for sweetening foodstuffs, there is a market for it to produce alternative fuels, such as ethanol, and Brazil leads the way in producing sugar for ethanol, which is believed to be more efficient than trying to extract ethanol from corn.
George. W. Bush once said that the USA is addicted to oil and should replace 75% of imported oil by 2025 by alternative sources of energy including biofuels. The EU and UK want 5% of petrol and diesel to be made from biofuels by 2010 and maybe 10% by 2015. Last year biofuels took about one third of America’s record maize harvest even though fuel production from crops is often inefficient. Ethanol fuel which is used widely in Brazil and increasingly in the US can be made from sugar, corn, palm oil or rapeseed. In Brazil, however ethanol is mostly made from sugar cane crop and all Brazilian cars are now equipped to use ethanol as their sole fuel source.
Climate change is also causing droughts and flash floods that are diminishing crop yields. Add to that increased awareness about the environment and supermarkets replacing plastic bags with maize, sugarcane or starch packaging and there are good arguments that the price/demand for our sweet friend is likely to remain strong.
So sugar is a complex market, with influences from government regulations as well as weather, and a problematic degree of influence across national borders, as on average only 20% of sugar production is sent out of the country in which it is grown. The emerging markets, such as Brazil, India, and China, are the major producers of sugar in the world, and of these Brazil is clearly the leader. Therefore any interruptions or problems such as weather in Brazil are likely to have some impact on the international markets.
As a final influence, farmers are at liberty to plant what they want each year, so if revenues from sugar are disappointing you may expect that some will switch crops in the following year. Sugar is a volatile market, and when you spread trade sugar you must expect to record some losses as well as gains. Make sure that your trading plan is tested and can protect your capital.
Join the discussion