Dolce Vita of Futures and Binary Options

Dolce Vita of Futures and Binary Options

28 May 2016, 13:22
Sergey Ershov
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It’s widely known that ‘dolce vita’ translated from Italian means ‘sweet life’. It’s also well known that sugar is one of the sweetest products in our life. But not everyone might know that sugar is also an efficient instrument for trading futures and binary options. However that’s the case.

Sugar futures have long been trading in many world trading floors, including the world’s largest operator of derivatives market Intercontinental Exchange (ICE). Apart from the ICE, they are traded on Brazilian stock exchange Bolsade Mercadorias & Futuros (BM&F), Tokyo trading floor Tokyo Grain Exchange (TGE), Chinese futures exchange Zhengzhou Commodity Exchange, Indian commodity and derivatives exchange NCDEX and others, and monthly turnover of transactions thereon makes dozens of billions of US dollars.

Being one of the most important agricultural financial instruments, sugar futures were initially developed to hedge the risks of major producers, suppliers and buyers of this commodity. But high volatility of sugar prices and high liquidity of transactions showed that sugar futures can be used not only as a standard hedge instrument, but also as an efficient way for market speculations.

“Futures contracts for raw sugar delivery are called World Sugar No.11”, says the leading analyst of broker company NordFX John Gordon, “and we offer our clients to use this particular instrument along with other commodity futures, stocks, indices and currencies for trading binary options.”

As to the factors influencing quotes of sugar futures, climatic conditions are of key importance.

Many analysts reckon that sugar prices reached its local bottom in 2015. “They dropped too low”, says a senior economist of ABN Amro bank Frank Rijkers, “and currently a recovery of futures is seen. Particularly sugar prices have an uptrend potential.” As reported by Bloomberg agency, this is a record rise over the last 23 years since March 1993.

Changing of price trend from a negative to a positive one was preceded by the forecast of the International Sugar Organization (ISO) assessing deficit of sugar in the current year at the level of 5.02 million tons. El Nino-Southern Oscillation phenomenon (ENSO) is a periodical variation in sea surface temperatures over the equatorial part of the Pacific Ocean, having a significant impact on the planet's climate, was named as a reason for the decline in manufacture. In 2015 plantations of such major producers as Brazil, India and Thailand, which account for almost 50% of the total volume of global deliveries of raw sugar, were severely affected by El Nino.

Except unfavourable weather conditions, according to the specialists of ABN Amro, this deficit also occurred due to low sugar prices, reaching its low last August, which resulted in reduction of planting volumes and costs of renewal and reconstruction of field cropping. As noted by the CEO of Mackay Sugar Quinton Hildebrand, almost all producers operated at a loss given such sugar prices.

As reported by the executive director of the International sugar organization (ISO) Jose Orive, El Nino phenomenon, which emergence in 2015 is marked as the most extensive in history, will probably gain momentum. Hence the ISO expects increase of sugar deficit of up to 6.2 million tons in 2016-2017.

The ISO reckons that apart from weather factors the growth of world’s population and the fact that producers of soft drinks, ketchup and chocolate increasingly choose sugar instead of other sweeteners, add to occurrence of deficit.

It should be noted that numerical forecasts of sugar deficit differ significantly. For instance, the analyst of Group Sopex John Stansfield predicts the number of 4.5 million tons. However the majority of experts agree on the view that prices of sugar futures will go up. The Economist Intelligence Unit (EIU) believes that this upward movement may continue until 2018.

"If we take a look at the cost of futures contracts in the USA”, John Gordon from NordFX says, "it becomes clear that such a forecast lags a little bit, and things tend to happen much faster. So, for example, for this year the EIU predicted the cost of futures contracts Sugar No. 11 of around 14.7 USD/lb, but already now the cost of July – October contracts has been fluctuating around 17 USD/lb, price peak of 17.48 USD/lb was marked in March 2017, following which it begins to decline gradually. Yet it does not mean that during this period there will be no adjustments, primarily connected with weather conditions, which are beyond our control. Therefore, when selling short or buying long, retail traders should closely monitor what happens at this specific moment on the largest world trading floors."

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