Sugar Futures - For centuries, sugar has been a highly valued and widely traded commodity. Sugar cane production originated, according to historians, some 2,500 years ago on the Indian subcontinent. Today, sugar is a basic part of the production and consumption of many foods worldwide.
Located at ICE Futures U.S. in New York City, the exchange is the premiere world market for the trading of coffee, sugar and cocoa futures and options. Three sugar futures contracts (world raw, world refined, and domestic raw) are listed at ICE. In 1982, the exchange launched the nation's first exchange-traded option on a futures contract when it introduced options on world sugar futures.
Most sugar is either consumed in the country where it is produced under government controlled pricing arrangements or moved from one country to another under long-term supply agreements. The sugar not subject to such agreements is freely traded among a number of nations, corporations and individuals. This makes the market for sugar a "residual" market - a market in which freely traded sugar is only a fraction of worldwide production. Since the free market may be only 20-25% of world production, a small change in production or consumption can translate to a much larger change in free market sugar supply. The delicate supply/demand balance is a main reason for sugar's high levels of historical price volatility.
In the United States, import tariffs have long supported the domestic sugar industry, with quotas typically holding U.S. prices steadily above those in the world market.
There are two main types of sugar grown in the world: cane and beet. Both produce the identical refined sugar product. Sugar cane is a bamboo-like grass grown in semi-topical regions. It accounts for about 70% of world production. Beet sugar comes from the sugar beet plant, which grows in temperate climates and accounts for the balance of world production. Intemperate weather, disease, insects, soil quality and cultivation affect both cane and beet production, as do trade agreements and price support programs.
India, Brazil, China, Thailand, Cuba and Mexico are among the leading sugar cane producers. European Union nations, the Russian Federation and Ukraine produce the majority of all sugar beets. The European Union, Brazil, Thailand, Australia, Cuba and Ukraine are leading sugar exporters.
Both cane and beet sugar are grown in regions of the U.S.; sugar beet production in the U.S. accounts for about 9% of the world total and cane production about 3% of the world supply. U.S. sugar cane is grown in Florida, Louisiana, Hawaii, Texas and Puerto Rico. Beet sugar is grown in 14 states, with Minnesota, Idaho, North Dakota and California leading production.
The sugar industry closely monitors the level of sugar stocks relative to sugar consumption as a measure of available supply. In the past, small changes in the ratio have led to large price movements in the opposite direction.
Industrialized nations account for most sugar consumption. The European Union, Russian Federation, United States, China and Japan are among the worlds largest sugar importers.
An imbalance between world consumption and production in 1980 again sent prices skyward - from around 15 cents per pound at the beginning of the year to about 45 cents per pound in the fall. By 1982, however, prices had fallen back to their 1977-79 range, averaging over 8 cents per pound for the year. Ample supplies and an evolving geo-political scene have led to prices in the 2 cents/pound to 16 cents/pound range since then.
Beyond price, other factors influencing sugar demand include: refinery activity; consumer income; candy and confectionery sales; changing eating habits; and sugars use in new technologies, such as ethanol production for automobile fuel.
Since all futures and options contracts are standardized (with delivery months and locations, quantity and grade constant), only price is negotiable. These prices are determined by "open outcry" trading on the exchange floor. The scene on the trading floor resembles an auction of sorts, with competing buyers and sellers shouting and gesturing. While this might appear chaotic to the casual observer, the open outcry method assures that each trade is openly and competitively executed. With open outcry, all market participants are afforded the opportunity to buy or sell at the best available current price.
All trading activity is closely monitored by the exchange according to guidelines established by the CFTC. The exchange is committed to maintaining markets of the highest quality. To help fulfill this self-regulatory mandate, ICE employs advanced technological systems to perform a variety of surveillance and compliance procedures.
In 1982, the exchange introduced options on world (#11) sugar futures - the nation's first exchange -traded option on commodity futures. Because options strategies are numerous and can be tailored to meet a wide array of risk profiles, time horizons and cost considerations, hedgers and investors have increasingly realized their vast potential.
Option buyers obtain the right, but not the obligation, to enter the underlying futures market at a predetermined price within a specific period of time. A "call" option confers the right to buy (go long) futures, while a "put" options confers the right to sell (go short) futures. The predetermined price is known as the "strike" or "exercised" price, and the last day when an option may be exercised is the "expiration Date". Buyers pay sellers a premium for their rights.
Because an option holder is under no obligation to enter the futures market, losses are limited to the premium paid. There are no margin calls. If the underlying futures market moves against an options position, the holder can simply let the option for the sugar expire worthless. After all, the holder of an option to buy sugar at 13.00 cents per pound (call option) probably won't be interested in exercising the option if the then-current market price is 10.00 cents per pound. On the other side, potential gains are unlimited, net of the premium cost.
Being able to participate in the market at a known cost with essentially unlimited profit potential has made the purchase of straight call and put options popular among investors. The same features allow hedgers to guard against adverse price movements at a known cost without foregoing the benefits of favorable price movements. In an options hedge, gains are only reduced by the premium paid - unlike a futures hedge, where gains in the cash market are more wholly offset by futures market losses.
Option holders can exit their position in one of three ways: exercise the option and enter the futures market; sell the options back in the market (at a profit or loss depending on the difference between purchase and sell price); or let the option expire worthless.
Option sellers, or "writers", receive a premium for granting option rights to buyers. In exchange for the premium, writers assume the risk of being assigned a position opposite that of the buyer in the underlying futures market at any time prior to expiration. Writers of call options must be prepared to assume short positions at the option's strike price at the option holder's discretion, while put option writers may be assigned long futures positions.
Writing put and call options can serve as a source of additional income during relatively flat market periods. Because option writers must be prepared to enter the futures market at any time upon exercise, they are required to maintain a margin account similar to that for futures positions. Sellers can offset their positions by buying back their options in the market.
Traders agree on premiums in an open outcry auction similar to that for futures contracts. The Exchange generally lists several strike prices for each option month: one at or near the futures price and a series above and below. As futures prices rise or fall, higher or lower strike prices are introduced according to a present formula.
A number of factors impact premium levels in the market. Chief among them is an option's "intrinsic value". Intrinsic value is the dollars and cents difference between the option strike price and the current futures price. An option with intrinsic value has a strike price making it profitable to exercise and is said to be "in-the-money" (strikes below futures price for calls, above for puts). An option not profitable to exercise is "out-of-the-money" (strikes above futures price for calls, below for puts). "At-the-money" options have strike prices at or very near futures prices. In general, an option's premium is at least equal to intrinsic value (the amount by which it is "in-the-money") "Time value" is the sum of money buyers are willing to pay for an option over and above any intrinsic value the option may presently have. Time value reflects a buyer's anticipation that, at some point prior to expiration, a change in the futures price will result in an increase in the options value. The premium for an "out-of-the-money" option is entirely a reflection of its time value.
Premiums are also affected by volatility in the underlying futures market. Because high levels of volatility increase the probability an option will become valuable to exercise, sellers command larger premiums when markets are more volatile. Finally, premiums are affected by supply and demand forces and interest rates relative to alternative investments.
Regular options trade on futures contracts having March, May, July and October delivery periods as well as a January expiration option which is based upon the March futures contract. Serial options are short-life options contracts providing additional option expirations on existing futures contracts.
In general, the last trading day for sugar options is the second Friday of the month preceding the stated futures month.
Buying a call can be employed to profit from, or achieve protection against, an increase in the price of sugar. Except for the cost of the option, the profit potential is similar to having a long position in the underlying futures contract. Moreover, this strategy may provide greater "staying power" in the event of a temporary price setback than having an outright long futures position - there are no margin calls because one cannot lose more than the premium paid for the option.
For example, assume that in August an investor expects sugar prices to increase by late winter. With March futures trading at 12.00 cents/pound, the investor decides to purchase a March 12.00 call (an at-the-money option) for 0.75 cents/pound. Since each contract represents 112,000 pounds of sugar, the total premium paid is $840.
The maximum loss the holder of a long call can incur is the premium paid, regardless of how far the underlying futures prices fall. The potential profit is unlimited, however, since the option holder gains dollar-for-dollar in the rise of the underlying futures price minus the cost of the premium. Out-of-the-money options do not gain dollar-for-dollar on the rise of the futures price.
Call options can be purchased for price protection as well as for the pursuit of trading profits. Commercial firms buying call options effectively establish a maximum purchase cost equal to the exercise price of the option plus the option premium. Employed in this way, options offer hedgers price "insurance", while at the same time allowing them to benefit from price declines since they can allow the option to expire unexercised.
Whereas buyers of calls can profit from rising prices, buyers of put options - rights to sell futures contracts at the option exercise price - can profit from price declines. Except for this difference the properties of puts and calls are the same.
To realize a profit at expiration, the underlying futures price must be below the option exercise price by an amount greater than the premium paid for the option. If it is higher, a portion or all of the premium will be lost. In no case, however, can losses exceed the premium paid.
For example, the investor in May expecting depressed sugar prices at autumn's onset can purchase October puts. With October futures trading at 12.00 cents/pound, the investor purchases an October 12.00 put for 0.65 cent/pound (0.65 cent x 112,000 pounds = total of $728/contract).
The investor can lose no more than the premium paid, plus commissions and fees no matter how high futures prices climb. On the other hand, if prices decline, the investor can realize substantial gains. A futures sale at the strike price would have similar profit opportunities in a falling market - plus the premium paid to obtain the option. Losses from a short futures position, however, would be unlimited in a rising market.
Commercial firms can purchase put options against inventory as "insurance" against price decreases. The firm may choose the cost or "deductible" for the insurance by selecting either in-the-money, at-the-money, or out-of the- money puts. For example, say an October 10.00 put would cost 0.08 cent/pound and an October 11.00 put cost 0.27 cent/pound in May when futures were trading at 12.00 cents/pound. The 11.00 put would provide 1.00 cent/pound less protection than the 10.00 put, but it could be obtained at a lower cost.
Sugar Futures Contract No. 11
Contract specifications are current as of Sept. 2, 2003 and may be subject to change. Verify information with your broker.
Calls for delivery of cane sugar, stowed in bulk, FOB from any twenty-eight foreign countries of origin as well as the United States
Contract specifications are current as of Sept. 2, 2003 and may be subject to change. Verify information with your broker.
Confer to buyer the right to buy (in the case of a call) or sell (in the case of a put) one Sugar no. 11 futures contract
First Trading Day
Last Trading Day
Daily Price Limits:
See futures specifications
|Option Trading Cycles:||Option Name||Underlying Futures||Expires 2nd Friday of|
|Serial options (listed in italics) are short-life options providing additional option expirations on existing futures contracts. All options are designated by the month following the expiration of the option contract.||
Strike Price Increments
Futures Price on Two Nearby Futures Month
|Less than 15 cents||.5 cent: 50 pts|
|Between 15 & 40 cents||1 cent: 100 pts|
|40 cents & above||2 cents: 200 pts
Strike Price Increments
Futures Price on Deferred Months
|Up to 20 cents||1 cent: 100 pts|
|20 cents up to 40 cents||2 cents: 200 pts|
|40 cents and above||4 cents: 400 pts|
*Special allowances for for .5 cent strikes up to 20 cents.