In this article we will delve into the economics sugar trading. We will also touch on financial risk management, the history of sugar, the by-products of the refining process, and provide the latest economic data on sugar for 2024 and 2025.
Originating in ancient India around 350 AD, sugar production gradually spread to the Mediterranean region through trade and conquest. The Crusades (1095-1291) played a significant role in introducing sugar to Europe, where it became a highly sought-after commodity among the wealthy. As European powers established colonies in the Americas from the 15th century onwards, sugar production shifted to the New World, with Brazil and the Caribbean emerging as major producers by the 17th century. The development of new technologies, such as the sugar press (17th century) and the centrifuge (19th century), increased efficiency and reduced production costs, making sugar more accessible to the masses. Today, sugar is a ubiquitous ingredient in modern food systems, with global production exceeding 180 million tonnes annually.
The sugar trading operations of international companies begin with the procurement of sugar from local farmers through long-term contracts, which provide stability and predictability, or spot purchases, which allow flexibility in response to changing market conditions. The sugar is then transported by road, rail or a combination of both to a refinery or processing plant. There it is refined into white sugar and then packaged in various formats, including bags, containers or bulk shipments. During the refining process, sugar companies may also produce by-products such as molasses, bagasse and ethanol. Molasses is a thick, dark liquid that is used as a raw material in the production of ethanol, while bagasse is a fibrous residue that can be used as fuel or animal feed. Ethanol, on the other hand, is a biofuel that can be used as a substitute for petrol. Quality control checks are carried out at the refinery or processing plant to ensure that the sugar meets international standards. The sugar is then loaded onto ships or other vessels for transport to international markets, where it is sold to customers through various channels.
The sugar trade is a highly volatile market influenced by factors such as weather conditions, geopolitical developments, government policies and global demand. The major producing countries are Brazil, India and Thailand. According to the OECD Food and Agriculture Organization‘s (FAO) Agricultural Outlook 2024-2033, global sugar production is projected to reach 183.4 million tonnes in 2024, with a slight increase in production in 2025. The global sugar price is expected to average around USD 470.30 per tonne in 2024 and is set to decline in real terms following an expected recovery in production in India and Thailand. However, the downward pressure on prices is expected to be partly offset by continued high real international crude oil prices, which will encourage the use of sugar crops for ethanol production.
To manage price risk, sugar companies may engage in hedging activities such as buying futures contracts or options on sugar prices. For example, a company may buy a futures contract to lock in a price for sugar at a future date, thereby reducing the risk of price fluctuations. In the process, the risk manager can use options contracts to create a range of hedging strategies, such as buying a call option to protect against potential price increases or buying a put option to protect against potential price decreases. By tracking risk metrics such as Value at Risk, Expected Shortfall and Greeks, the risk manager refines her hedging strategies to optimise risk management and ensure that the company’s sugar trading operations remain profitable.
In addition to price risk, sugar companies must also manage credit risk and foreign exchange (FX) risk. Credit risk arises from the potential default of counterparties, while FX risk arises from fluctuations in exchange rates. Risk managers can use various hedging strategies to manage these risks, such as the purchase of credit default swaps or currency options.
The use of a scalable Commodity Trading and Risk Management (CTRM) software is essential for companies to manage their sugar trading activities, including procurement, logistics, and risk management. CTRM software provides a comprehensive platform for companies to track their trades, manage their risks, and optimise their supply chain operations.
Traders also need to be aware of the potential for market manipulation and ensure they are complying with all relevant regulations. As we look to the future, it is essential to stay ahead of the curve and adapt to changing market conditions.
Vienna, 05 Aug 2024
