There are a number of agricultural commodities that occupy both analysts and investors time, but there’s one with high volume that often seems to go unnoticed, and that’s sugar.
Wheat, corn and soybeans usually dominate the headlines as they pertain to agricultural investments with high daily volumes and their impact on global food supply and newly developed industries like biofuels. But sugar is a vital component in the food industry used in everything from food manufacturing to soda beverages like Coca-Cola.
One thing investors will note about many agricultural commodities like wheat is that there may be more than one type of contract that covers different varieties or strains of that crop. Similarly, they will notice that there are two different sugar contracts to choose from – world sugar #11 and U.S. sugar #16.
But unlike other commodities, the difference in sugar futures contracts isn’t the commodity itself, but rather where it trades. As the name suggests, sugar may be global (world sugar #11) or domestic (U.S. sugar #16). The reason is due to subsidies paid to sugar farmers and tariffs that tax the importation of sugar from other countries.
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There's More Than One Sugar for Investors’ Portfolios
Sugar, as it’s defined as an investment commodity, can trade at radically different prices depending on whether it’s labeled as #11 or #16. For sugar #16, commodity prices will often trade at a significantly higher price due to the effect that tariffs and subsidies have on its cost.
Companies, on the other hand, must buy their sugar at a price inflated above market fair value. This means that companies may develop a sugar substitute for their products such as high fructose corn syrup instead of sugar, or else it ends up being passed along to consumers. The increased cost of production gets passed down to the product’s sale price making goods effectively more expensive for shoppers.
The reasoning behind agricultural subsidies is a complex issue with many variables to consider. For a nation that relies on the production of a certain crop having a subsidy in place helps create more price stability. Otherwise, if the value of that crop falls below the cost of production, farmers will choose to grow a different crop instead, which could have a deleterious effect on the local economy.
Pricing Out U.S. Sugar #16 and World Sugar #11
Taking a look at ICE futures for sugar #11 and sugar #16 reveals exactly what kind of price differences there are:
|Contract||Last Traded Price*||Time||Volume**|
|12.73||16:15 Nov 09||64,645|
|12.87||16:15 Nov 09||30,771|
|13.02||16:15 Nov 09||17,897|
|13.24||16:15 Nov 09||5,262|
|13.75||16:15 Nov 09||1,310|
|Contract||Last Traded Price*||Time||Volume**|
|25.03||18:00 Nov 09||344|
|25.3||18:00 Nov 09||69|
|25.66||18:00 Nov 09||2|
|26.24||16:15 Nov 09||34|
|26.44||16:15 Nov 09||47|
|26.39||16:15 Nov 09||1|
|26.39||16:15 Nov 09||18|
|26.4||16:15 Nov 09||4|
From these futures tables, you can see how U.S. sugar #16 trades at around twice the price of world sugar #11. While other countries also have subsidy programs, Brazil – the world’s largest unsubsidized sugar producer – is the nation that sets the price for world sugar #11, explaining why it’s almost always cheaper than U.S. sugar #16.
For investors, it helps to know how the two sugar contracts stack up. Here’s a table comparing the two contracts:
|Commodity||Trading Screen Product Name||Contract Size||Contract Series||Settlement|
|Sugar No. 11 Futures||112,000 pounds||March, May, July and October||Physical delivery, FOB receiver's vessel|
|Sugar No. 16 Futures||112,000 pounds (50 long tons)||January, March, May, July, September and November||Physical delivery, in a vessel berthed at a customary refiners berth.|
Other types of sugar that trade as a commodity include white sugar and containerised white sugar. White sugar futures are used as a global benchmark for pricing physical white sugar and traded primarily by sugar millers, refiners and manufacturers along with institutional investors. Containerised white sugar futures are contracts for white beet, cane crystal sugar or refined sugar delivered in ISO containers.
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The Bottom Line
Investors in agricultural commodities should be aware of the role sugar plays in the global economy. By understanding what the differences in sugar contract types are, investors will be better equipped to make intelligent decisions in their portfolio selections. It’s also necessary for investor to stay up to date with the latest political environment – especially as it relates to subsidy programs and tariffs. Other commodities like corn may be subjected to tariffs and subsidies as well. Before executing any trades in sugar, investors should be careful and verify which contract they actually want.
Be sure check out our News section to keep track of recent market-moving information on various commodities.