Sugar Futures Strategy (Backtest And Example)

Last Updated on December 21, 2022

Extracted from sugarcane and sugar beet plants, sugar is a soluble and sweet-tasting carbohydrate used to sweeten food products. Sugar futures are actively traded on commodity exchanges, such as CME and ICE. You can use sugar futures contracts to speculate on the price of sugar, diversify your portfolio in the soft commodity market, or hedge your exposure in the market. Whichever reason you trade the sugar contract, you need a sugar futures strategy.

A sugar futures strategy refers to the method or technique you can use to trade sugar contracts profitably, and this would include technical and fundamental analyses of the sugar futures market. Sugar futures is a derivative contract that represents a tradable, legally binding agreement to receive or deliver the specified quantity of sugar on a future date, at a pre-agreed price.

The contract trades on both ICE and CME, and depending on the exchange, the settlement on expiry may involve the physical delivery of the specified quantity and quality of sugar.

In this post, we answer some questions about the sugar futures strategy. After explaining the basics, we show you an example of a backtested trading strategy.

What are Sugar futures?

Sugar futures is a derivative contract that represents a tradable, legally binding agreement to receive or deliver the specified quantity of sugar on a future date, at a pre-agreed price. The contract trades on both ICE and CME, and depending on the exchange, the settlement on expiry may involve the physical delivery of the specified quantity and quality of sugar.

On CME’s Globex platform, the contract is financially settled at expiry. But on ICE, the contract is deliverable, which means that at the expiration of the contract, the seller of the sugar futures contract will have to deliver the specified quantity and quality of sugar to the buyer under the supervision of the exchange. Traders who just want to speculate on the price of sugar without getting involved in the delivery can close out their trades before expiry or roll over their contracts.

Most brokers automatically close your position a few days before expiration to avoid you from taking delivery. Delivery is for professionals – not retail traders.

What is a Sugar futures strategy?

A sugar futures strategy refers to the method or technique you can use to trade the sugar contract profitably. This can include technical and fundamental analyses of the sugar futures market for good market timing.

To succeed in trading the sugar futures market, you will need a robust trading strategy that offers precise entry and exit signals. In addition, your sugar futures strategy must include techniques for position sizing, risk management, and so on. You can use your strategy for speculation, portfolio diversification, or hedging purposes. The latter is used by importers, exporters, producers, etc.

Sugar futures strategy backtest

Commodities are hard to trade, and our experience is that this applies to sugar particularly. And if something is hard to trade, perhaps the best thing to do is to avoid it. We are not trading any sugar strategy.

Let’s start by looking at the seasonality of sugar. The table below contains the monthly performance of sugar futures.

Sugar futures strategy monthly performance

The first column in the table indicates the number of the month. Clearly, the best period to be invested in sugar is from the end of May until the end of January. The equity curve of that strategy looks like this:

Sugar futures strategy backtest

This is not a viable strategy, obviously, but it shows the “problem” with much of the commodity market: erratic moves that are very hard to predict.

Trend following sugar futures strategy

Most traders have heard about Richard Dennis‘ and William Eckhardt‘s turtle trading system experiment. They wanted to grow traders like they grow turtles in Singapore, thus the somewhat strange name.

The two gentlemen gave the traders a few of their best trend following strategies and systems and asked them to follow the trading rules and settings. They wanted to find out how many of the traders were able to follow “proven” backtested strategies and systems. Dennis argued trading could be taught, while Eckhardt argued it couldn’t. (Dennis was more or less right.)

We have already made a backtest of the turtle trading strategies and systems. We tried all of the turtle strategies on sugar, but only one showed any promise. We made the following trading rules and settings:

  • Buy when the price breaks above the 350-day moving average plus a seven-day ATR.
  • Sell when the price breaks below the 350-day moving average deducted a seven-day ATR.

This is an ATR channel breakout strategy. (All the trading rules and code are available in one of our products.)

When we backtested the strategy we got the following results (sugar futures tested as an “equity test” with no leverage):

Sugar futures strategy trading rules

The equity curve is still pretty random albeit positive. However, it does capture the major trends. Just look at the trade list:

Sugar futures strategy trade list

What stands out is the low win ratio and many small winners. The performance and trading metrics of a good trend following strategy normally behave like this. The small winners are recouped by a few BIG winners.

And, by the way, trend following still works:

Anyway, the strategy above was the best we could come up with for the sugar futures, unfortunately.

What is the seasonality of Sugar futures?

In futures trading, seasonality refers to the tendency of an asset’s price to move in a fairly predictable way during certain periods of the year. The periods here often refer to the months of the year but may also refer to the four seasons — Winter, Spring, Summer, and Fall — of the year.

Over the years, sugar futures have been noted to perform better during the months of February, June, July, November, and December than during the other months of the year. See the chart below:

Sugar futures strategy
Source: Equity Clock

What moves the Sugar market What affects the Sugar market the most?

The most important factors that move the sugar market are government subsidies and tariffs in the top producing and consuming nations, as well as the demand for ethanol. Sugar is used in making ethanol, so the demand for ethanol can affect sugar prices. Ethanol demand is affected by oil prices, as higher oil prices increase ethanol demand, while lower oil prices decrease ethanol demand. Other factors include Brazil’s (Brazil is the world’s largest producer and exporter of sugar) currency value and weather conditions.

How are Sugar futures traded?

Sugar futures contracts are traded on ICE Futures US and CME Group’s Globex platform.

On the ICE futures exchange, Sugar “No 11” Futures (with the trading symbol, SB) trades from 8:30 AM – 6:00 PM London Time every trading day. There is a pre-Open market from 1:00 AM to 8:30 AM, and a post-Close market from 6:30 PM to 11:00 PM. The contract series includes March, May, July, and October. One contract unit is equivalent to 112,000 pounds of sugar, and the price quotation is in cents and hundredths of a cent per pound to two decimal places. Settlement is by physical delivery, and the last trading day is the last business day of the month preceding the delivery month.

On CME’s Globex electronic platform, the contract (YO) can be traded Sundays to Fridays, 6:00 p.m. – 5:00 p.m. ET (5:00 p.m. – 4:00 p.m. Chicago Time/CT) with a 60-minute break each day beginning at 5:00 p.m. (4:00 p.m. CT). One sugar futures contract is worth 112,000 pounds of sugar, and pricing is in US dollars and cents per pound. The contract comes in the March, May, July, and October cycle for the next 24 months. Trading terminates on the day immediately preceding the first notice day of the corresponding trading month of Sugar No. 11 futures at ICE Futures US, and settlement is by cash.

How do you start trading Sugar futures?

To trade sugar contracts, you need a futures broker that will grant you access to the exchange where sugar futures contracts are traded. So, you have to register with a futures broker, such as TradeStation, and fund your account.

Alternatively, if you just want to speculate on price movements, you may trade the CFD of Sugar futures contracts via an online CFD broker, such as IG. With CFD, you can trade price fluctuations without having to worry about the rigors of asset delivery in direct futures trading or the issues of contract expiry.

What is the Sugar trading at?

As of December 14, 2022, Sugar futures (SB) were trading at 19.69 USX (US cents) per pound on the ICE Futures US — see the chart here on TradingView or Yahoo Finance. On CME’s Globex platform, Sugar futures (YO) were trading at $0.1976 per pound.

As the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or from TradingView, click either of those links.

What’s Sugar futures hour?

On the ICE futures exchange, Sugar “No 11” Futures (SB) trades from 8:30 AM – 6:00 PM London Time every trading day. There is a pre-Open market from 1:00 AM to 8:30 AM, and a post-Close market from 6:30 PM to 11:00 PM.

On the CME Globex electronic platform, Sugar futures (YO) trades Sundays to Fridays, 6:00 p.m. – 5:00 p.m. ET (5:00 p.m. – 4:00 p.m. Chicago Time/CT). There is a 60-minute break before the start of the next trading day (4:00 p.m. – 5:00 p.m. CT) from Monday to Thursday.

Where can I find trading charts?

You can get the chart on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts.

You can also use TradingView, which offers free access to charts of different instruments. But to connect to your broker, you have to subscribe to the Pro services. You can also access the chart from the CME platform or Yahoo Finance: SB.

What are the trading symbols for Sugar futures?

The trading symbol for sugar futures “No 11” that trades on ICE Futures US is SB, while the trading symbol for sugar futures “No 11” that trades on the CME Globex platform is YO.

What is the specification for the Sugar futures contract?

On both exchanges, one contract unit is equivalent to 112,000 pounds of sugar, and the minimum price fluctuation is 0.0001 per pound, which translates to a tick size of $11.20 per contract. The contracts come in the March, May, July, and October cycle for the next 24 months, and the last trading day is the last business day of the month preceding the delivery month.

On ICE, the price quotation is in cents and hundredths of a cent per pound to two decimal places, and settlement on expiry is by physical delivery.

On the CME Globex platform, the price quotation is in US dollars and cents per pound, and the contract is financially settled on expiry.

Why should you start trading Sugar futures?

Trading sugar futures allows you to speculate on the day-to-day fluctuations in sugar prices. If you are a sugar farmer and producer, it offers you a way to hedge the risk of future market fluctuations in sugar prices.

As an investor, you can trade sugar futures to diversify your portfolio into the soft commodity market or simply hedge inflation because commodity prices rise with inflation. Sugar futures also provides the opportunity to use a different trading strategy, such as arbitrage trading between two different exchanges or platforms to profit from price discrepancies.

What is the contract size?

One contract of sugar futures is worth 112, 000 pounds of sugar on both CME and ICE exchanges. The price of a pound of sugar as of writing is $0.1976. So, the USD worth of one contract unit of sugar is 112,000 x $0.1976 = $22,131.20.

What is the tick size?

The tick size of the No 11 sugar futures is $11.20 per contract.

What is the minimum price fluctuation for Sugar futures?

The minimum price fluctuation of this contract is 1/100 cent (0.0001) per pound.

Are there any ETFs?

Yes, there are a few ETFs that offer a pure play in the sugar market. The two common ones are these:

  • iPath Series B Bloomberg Sugar Subindex Total Return ETN (SGG)
  • Teucrium Sugar Fund (CANE)

What factors affect Sugar prices?

These are some of the factors that affect the prices of sugar futures:

  • Trade policies of the major producing and consuming nations: Government subsidies and tariffs may have a considerable impact on sugar prices.
  • The demand for ethanol: Since sugar is used in making ethanol — an important biofuel — ethanol demand does affect sugar prices. Ethanol demand is affected by oil prices; higher oil prices increase ethanol demand, while lower oil prices decrease ethanol demand.
  • The value of Brazilian currency: Brazil is the world’s largest producer and exporter of sugar. When the Brazilian currency is weak, farmers are more inclined to export the commodity, leading to a supply surplus and lower prices.
  • Weather conditions: Extreme weather events in the top-producing countries, especially Brazil, can have serious effects on the sugar supply.

What is the all-time high for Sugar futures?

Based on the TradingView chart for sugar futures (SB), the all-time high of the SB sugar futures contracts is 66.00 US cents, which it reached in November 1974.

What are the biggest risks in trading Sugar futures?

The biggest risk when trading any type of futures, including commodity futures like sugar, comes from adverse price movement. The losses can get huge from the use of leverage, which futures contracts offer. Losses are calculated using the actual value of the contract size traded, even though you are trading with a smaller amount. So, if you trade with a 20x leverage, a 1% negative movement would result in a 20% loss in your account, while a 5% adverse price move would wipe out your account completely.

What is the settlement method?

It depends on the exchange you trade with. On the CME Globex platform, sugar futures (YO) contracts are financially settled, but on ICE Futures US, the sugar contract (SB) is settled by physical delivery.

What is the settlement procedure?

On ICE, the seller delivers the specified quantity of sugar to the buyer under the supervision of the exchange.

On the CME Globex platform, the contract is financially settled on expiry by following the regular daily settlement procedure.

What is the block minimum for Sugar futures?

100 contracts

What is the difference between Sugar futures and the CFD for Sugar?

Sugar futures trade on standard exchanges and have expiry dates, while sugar CFDs are offered by forex brokers and do not have expiry dates.

Which forex pair is the same as Sugar futures

Sugar CFD

What are some important dates for this market?

Some of the important dates in the sugar futures market include:

  • 1914: Sugar futures trading began on the Coffee, Sugar, and Cocoa Exchange in New York and the New York Board of Trade (now part of ICE).
  • November 1974: Sugar futures made its current all-time high of 66.00 US cents
  • 1982: Options on sugar futures were introduced

What is the highest Sugar has ever been its all-time high?

Based on the TradingView chart for sugar futures (SB), the highest price the SB sugar futures contracts have ever reached was 66.00 US cents, and this happened in November 1974.

What is the lowest Sugar has ever been its all-time low?

Based on the TradingView chart for sugar futures (SB), the lowest price the SB sugar futures contracts have ever fallen to was 2.63 US cents, and this happened in June 1985.

List of trading strategies

Since we started the blog in 2012 we have written over 900 articles. Plenty of those articles contain specific trading strategies that have trading rules and performance metrics.

We have compiled many of those into a package of code that you can order. We have thus far hundreds of different strategies in our compilation. The strategies are taken from our list of best trading systems. The strategies are an excellent resource to help you get some trading ideas.

The strategies also come with logic in plain English (plain English is for Python traders).

For a list of the strategies we have made please click on the green banner:

These strategies must not be misunderstood for the premium strategies that we charge a fee for:

FAQ sugar futures strategy

Let’s end the article with a few frequently asked questions about sugar and sugar trading strategies that might be relevant:

Q. What drives and determines the sugar price?

A. Sugar is dependent on multiple factors. However, the most important factor is the output or the supply. Sugar comes from sugarcane which takes over a year to grow.

Any commodity market depends on many factors. This is what makes commodities difficult to trade. The USD, weather, geopolitics, etc. Sugar is mostly grown in countries not known for stability – neither weather nor politics.

Q. How do you trade sugar?

A. First, you need to open a trading account. Second, you need to have a trading plan – preferably something that is backtested to indicate if you have a positive edge or not.

Q. What affects the supply of sugar?

A. The main factor is sugar inventories and crops. The inventories are again dependent on plenty of other factors like the oil price, weather, geopolitics, regulations, etc.

Q. Is sugar price controlled?

A. It’s partly controlled. Some exporters might limit exports now and then.

Q. What market is sugar traded on?

The contract trades on both ICE and CME, and depending on the exchange, the settlement on expiry may involve the physical delivery of the specified quantity and quality of sugar.

Conclusion

You can use the sugar futures strategy to diversify your portfolio into the soft commodity market, hedge your exposure in the sugar market, or simply speculate on sugar price fluctuations. Please keep in mind that sugar futures and other strategies can offer a lot of diversification to your existing trading strategies.

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