It's time to keep an eye on sugar

Key points

• Sugar tends to be a highly cyclical market
• This market is nearing a typically unfavorable seasonal period
• ETF ticker CANE offers an alternative to trading riskier Sugar futures

Sugar is a highly seasonal market

The chart below displays the annual seasonal trend for sugar futures (ticker SB). The beginning of the highlighted seasonally unfavorable period begins at the close on 2023-02-22.

The chart above shows that this market tends to experience weakness in the first half of the year and strength towards the end of the year. The chart below shows that sugar enjoyed the typical late-year strength during the favorable seasonal window starting in late September 2022. 

At the moment, the most important thing to note is that sugar is will soon be re-entering a typically unfavorable seasonal period.

Entering a seasonally unfavorable period

The seasonally unfavorable period marked by the red box in the seasonal chart above extends from the close of TDY #35 through the close of TDY #87. Note that the contract we follow from Bloomberg tracks spot sugar futures.

For 2023, this period extends from the close on 2023-02-22 through 2023-05-08.

The chart below displays the cumulative hypothetical gain from holding long one Sugar futures contract only during TDY #35 through TDY #87, every year since 1971.

The table below summarizes performance results during this unfavorable seasonal period.

The good news is that the tendency for weakness is fairly unmistakable. The bad news is that there is no guarantee from year-to-year. Likewise, the vast majority of traders will never trade sugar futures.

Using an ETF as an alternative

The Teucrium Sugar Fund (CANE) is an exchange-traded security that is designed to track in percentage terms the movements of Sugar futures prices. CANE issues shares that may be bought and sold like shares of stock. 

The futures contracts held by ticker CANE are based on its own prescribed roll schedule. This means that the daily percentage fluctuation in CANE may differ from the spot contract we used above to track SB futures directly.

The chart below displays the growth of $1 invested in CANE only during TDY #35 through TDY #87 for Sugar futures.

The table below summarizes performance results during this +favorable seasonal period.

Note that a trader would need to sell short shares of CANE or trade options on CANE to play the short side. It is important to note the potential risks involved in either play. Short selling shorts of CANE technically entails unlimited risk, and a stop-loss order is recommended. CANE options typically experience very little trading volume and often have wide bid/ask spreads. For a trader wishing to trade CANE options, limit orders are recommended.

What the research tells us…

Sugar is a highly cyclical market. It tends to show weakness in the first half of the year and strength during the second half. This market will soon enter a period that has often seen SB futures show weakness. That said, traders must recognize the exceptionally volatile nature of Sugar futures. Non futures traders who wish to play the short side of sugar can look to ticker CANE, with the caveat that returns for the ETF have not been as robust as those for the futures themselves.