Sugar traders can be broken down into two main categories: hedgers and speculators.
The price of sugar is influenced by many factors, including uncertain government policies, tariffs, weather, ethanol demand, etc. In order to reduce the impact of these price fluctuations on sugar producers, sugar futures were introduced. Sugar futures offer these market participants a way to hedge their risk and regain control over their sugar investments.
Producers and Marketers of sugar use futures to set a fixed selling price for the sugar that they will produce, so that they will get the specified amount in the contract, even if prices fall in the future. Sugar consumers use futures to set a fixed purchase price for a specified quantity of sugar as per their need.
Sugar futures are also traded by speculators. Speculators have no vested interest in the underlying asset, that is, they will neither deliver sugar nor take delivery for sugar. They trade in and out of sugar futures only based on speculations about the price fluctuations of sugar over the trading period. They take on the price risk that hedgers are trying to avoid, because they hope to profit from the price movements. Sugar speculators buy sugar futures if they believe that the price of sugar will go up, and sell sugar futures if they believe that the price of sugar will go down.
Sugar Futures Contracts
No. 11 Sugar futures trade on the New York Mercantile Exchange (NYMEX) under the product symbol “YO”. One contract is for 112,000 pounds of raw cane sugar. The contract is quoted in U.S. dollar and cents per pound, and traded in March, May, July, and October. The minimum price fluctuation is $0.0001 per pound. The Number 11 refers to the way shipping costs are handled between the buyer and the seller. Sugar no. 11 can originate from any of 29 countries including the U.S., Brazil and India. The contract is settled financially.
Sugar No. 11 futures also trade on the Intercontinental Exchange (ICE), Brazilian Mercantile and Futures Exchange (BF&M), India’s Multi Commodity Exchange (MCX) and China’s Zhengzou Commodity (CZCE) Exchange.