CANE - CANE: Sugar Continues To Trend Higher

2023-03-28 16:20:40 ET

Summary

• Sugar is in a bullish trend. The 2016 high is the target.
• Sugar is food and fuel. Sugar is the primary ingredient in Brazilian ethanol.
• Sugar is a distorted market because of subsidies. The world price is the free-market price.
• CANE, the sugar ETF product, has a portfolio of futures contracts to minimize roll risks.
• CANE underperforms on the upside but outperforms during corrections.

Sugar is an essential agricultural product that trades on the Intercontinental Exchange as a member of the soft or tropical commodities sector. The world sugar #11 futures contracts reflect the price of free market sugar. Since the late 1960s, nearby futures have traded as low as under 3.0 cents to as high as 66.0 cents per pound.

World sugar futures reached the lowest price since June 2007 in April 2020 at 9.05 cents per pound as the global pandemic gripped markets across all asset classes. In late March 2023, the price had more than doubled from the 2020 low.

The demand side of sugar's fundamental equation has evolved for two reasons. First, global population growth has increased the addressable market, with around eight billion mouths to feed. Second, sugar has become more than food, as the world's leading producing country depends on sugarcane output for ethanol production.

The Teucrium Sugar ETF ( CANE ) product moves higher and lower with a portfolio of actively traded ICE sugar futures.

World sugar is in a bullish trend

The bullish world sugar futures trend continues to sweeten two years after the soft commodity found a bottom at 9.05 cents per pound on the nearby ICE contract.

The chart highlights the 135.5% appreciation and pattern of higher lows and higher highs that took the world sugar futures from 9.05 in April 2020 to 21.31 cents on March 28. The most recent high was 22.14 cents on the May contract on February 27.

The 20-year chart shows the upside target sits at the October 2016 23.90-cent high. Above there, sugar futures reached 36.08 cents per pound in February 2011, the highest price since 1980.

Sugar is food and fuel

Sugar is an agricultural commodity that's an essential ingredient in many foods consumed by eight billion people around our planet. Meanwhile, like many other agricultural products, sugar has become a critical input in biofuel.

In the U.S., the leading producer and exporter of corn, the coarse grain is the ingredient in ethanol, blended with gasoline. Brazil, South America's leading economy and the most populous country, is the leader in free-market sugar production and exports and processes sugarcane into ethanol.

Over the past few years, rising gasoline prices have increased ethanol demand, pushing the Chicago ethanol swap price from 80.50 cents in April 2020 to $2.3650 per gallon wholesale on March 28, a 193.8% rise. The increase in ethanol demand and prices and inflation have put upward pressure on world sugar prices over the past two years.

Subsidies distort the sugar price

While the ICE #11 world sugar futures measure the global free-market price, the ICE #16 sugar futures reflect the U.S. subsidized sugar futures market.

The chart illustrates the rise in sugar #16 futures from the May 2020 25.75 cents low to 38.75, a 50.5% rise. The premium for subsidized sugar futures edged higher from 16.7 cents in April/May 2020 to 17.44 cents level in March 2023. Sugar #16 futures reached a record 42.50 high in February 2010.

Subsidies distort a commodity's supply and demand fundamentals. Raw material prices tend to fall to uneconomic levels for producers, causing the output to fall. Meanwhile, low prices tend to increase demand, leading to price bottoms. On the upside, producers often increase output when prices rise to levels that increase profits, but consumers usually slow purchases at high prices, causing tops to form as supplies increase and the demand declines. Subsidies that allow producers to keep output constant keep consumer prices at higher levels than world prices, distorting the natural supply and demand fundamentals. Governments subsidize sugar as they view the soft commodity as an essential food and energy product vital to national security.

Subsidies may work better when prices fall, as they incentivize output and guarantee supplies. When sugar's price rallies, the subsidies may have less of an impact on price direction. Meanwhile, the weather in the critical growing regions is the primary factor for the path of least resistance of sugar prices.

CANE is the sugar ETF product

The most direct route for a world free-market sugar investment or trade is via the ICE #11 futures and futures options contracts. The Teucrium Sugar ETF provides an alternative for those looking to participate in the sugar market without venturing into the margined and leveraged futures arena. CANE's fund summary states:

At $10.97 per share on March 28, CANE had $24.73 million in assets under management. CANE trades an average of 75,164 shares daily and charges a 0.22% management fee.

CANE's holdings include three #11 sugar futures contracts, excluding the nearby contract, including the second and third to expire, and the following March contract. On March 28, 2023, CANE would be holding July and October 2023 and March 2024 futures contracts.

CANE limits some risks with its construction

CANE's construction minimizes roll risk when one contract expires and rolls to the next active month. Meanwhile, since the most volatility tends to occur in the nearby contract because it attracts the most significant speculative interest, CANE tends to underperform the nearby and continuous contract free market sugar futures on the upside, but it often outperforms during downside corrections.

Sugar #11 for nearby delivery rallied from 17.20 cents in early August 2022 to 22.14 cents in late February, a 28.7% gain. The futures fell to 20.35 cents or 8.08% in mid-March.

The chart shows CANE's 28.2% rally from $8.58 per share in early August 2022 to $11.00 in March. CANE's most recent low of $10.50 per share was 4.5% below the high. CANE underperformed nearby #11 sugar futures on the upside but outperformed when the price declined.

Another factor to consider is that CANE only trades during hours when the U.S. stock market operates, while sugar futures open for trading at 2:30 AM CST, hours before the U.S. stock market begins trading. Therefore, CANE can miss highs or lows when the U.S. stock market is not operating.

The trend is always your best friend in all markets, and sugar's pattern of higher lows and higher highs remains firmly intact, with the free-market sweet commodity on a path to challenge the 2016 23.90 per pound high.

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