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Sugar is produced in over 100 countries and consumed all around the world. It turns up everywhere from your favorite candy, beverages as well as into vehicle fuel tanks (as ethanol). The Sugar #11 futures contract is the world benchmark contract for raw sugar trading. The contract prices the physical delivery of raw cane sugar, free-on-board the receiver's vessel to a port within the country of origin of the sugar. Supply Brazil has become the largest producer and exporter of raw sugar. Other leading producing countries include India, China, Pakistan, Mexico, Thailand and Australia. In the U.S., most sugarcane production is located in Louisiana, Florida, Texas, and Hawaii. Demand The potential demand for sugar is very intriguing. Why? In addition to the consumption of sugar in food and beverages, sugar can be made into ethanol. According to the U.S. Energy Information Administration (EIA), "ethanol is the most widely used liquid biofuel in the world." And the use of ethanol to fuel vehicles is increasingly motivated by high petroleum prices, environmental concerns and energy security issues. The Energy Independence and Security Act of 2007 "will help reduce America's dependence on oil by increasing the supply of alternative fuel sources by setting a mandatory Renewable Fuel Standard (RFS) . . . represents a nearly five-fold increase over current levels." Ethanol can be made from different ingredients that produce identical ethanol output. The three main ingredients are sugar, corn and cellulose. Brazil has developed it's sugar ethanol industry since the 1970s. In contrast, the U.S. corn ethanol industry is relatively young and is subsidized. Cellulosic ethanol hasn't yet been proven viable and mass produced, but is currently being researched. The Kyoto Protocol requires industrialized countries to reduce their emissions of greenhouse gases. This agreement is additional foundation for substituting cleaner fuel alternatives for petroleum based fuel. Vehicle manufacturers are producing more cars and trucks capable of using more ethanol. For example, General Motors is on its way to having half of it's vehicle production be E85 or biodiesel capable by 2012. E85 is 8.5 times the E10 (10% ethanol) now used. To appreciate this change, imagine you manufacture a widget, and the demand for your widget is increasing towards 850%. Honda has already introduced vehicles that can operate on either 100% ethanol or a wide range of ethanol-gasoline blends. And Porsche introduced the use of ethanol-mixed fuel in its Le Mans Prototype 2 RS Spyders. Peter Schwarzenbauer, President and CEO of Porsche Cars North America said, "We are committed to make continuing efforts toward the success of this worthy global cause and encourage our customers to use this fuel when possible. The concerted use of ethanol-mixed fuel in the 911 and other Porsche models is one small, but effective means of protecting the environment." In the U.S. we have been making ethanol from corn. Corn requires nitrogen fertilizer and petroleum-based pesticides as well as a lot of water to grow. Then the starch from corn must be first converted to sugar, which is made into ethanol. This extra conversion step also requires more energy. U.S. taxpayers pay billions of dollars via a 51 cents per gallon subsidy to the corn-ethanol industry. Furthermore, since corn is food and is used to produce many other food products, and feed poultry, hogs and cattle, growing corn for ethanol adds to raising other food prices. There is concern that our corn food crops are becoming fuel crops, reducing food supplies and increasing food prices. As it turns out, making ethanol from sugar is cleaner and more efficient than making it from corn. The entire stalk of a sugar plant can be used to make biofuel. In an interview with Charlie Rose, Billionaire Richard Branson, founder of Virgin Group, stated that "sugar produces seven times more ethanol than corn per acre . . ." According to the EIA, and in a 2007 National Geographic Magazine, figures show corn ethanol having a 1:3 net energy balance, while sugarcane ethanol is more favorable at 1:8. The better choice for the world is to make more ethanol from sugar instead of corn, and focus our agricultural resources on feeding people and livestock. After the energy crisis of the 1970s, Brazil has proven how sugar can be efficiently made into ethanol as an alternative to gasoline from crude oil. Brazil is now energy self-sufficient, unlike the U.S. which needs to import crude oil. At the time of this writing, there is a tariff that protects U.S. corn-based ethanol makers from competing imports. The U.S. tariff on imports of biofuels, including sugar-based ethanol from Brazil, is 54 cents per gallon.
In an interview with Jim Cramer, CNBC, Warren Buffett responds, "I would say that ethanol (from corn) is a relatively inefficient way of creating gasoline - gasoline equivalent, and it uses a lot of energy in the process of raising the corn that does it. And, as correctly pointed out, it has a by-product of raising agricultural products elsewhere." In light of the problems with converting corn into ethanol, the economic "law of substitution" is compelling for more sugar, less corn in fueling vehicles. The U.S. produces and consumes more ethanol fuel than any other country. Most cars in the U.S. can run on mixtures of up to 10% ethanol, E10. In 2007, Portland, Oregon, became the first U.S. city requiring gasoline sold within the city to contain at least 10% ethanol. As of January 2008, Missouri, Minnesota, and Hawaii require ethanol to be blended with gasoline motor fuel. In Louisiana, there's a new plant to convert sugar to ethanol at the Lake Charles Cane Mill. More and more of the 1.3 billion people in China are getting cars for the first time in their developing country, adding their rising fuel demands to the world's increasing consumption. To help reduce petroleum consumption and petrol-induced air pollution, China is promoting ethanol-based fuel. India, too, is initiating the use of ethanol fuel. In February, 2008 the European Union approved Sweden's imports of ethanol from Brazil for processing into E85/E95. These are just a few of many examples of the expanding use of ethanol fuel. A Reuters article reported this from Marcos Jank, Brazilian Cane Industry: "Brazil can also provide the technology so that more countries can adopt this clean and obviously viable option. Clearly we would all be better off if 100 countries that grow sugarcane around the world supplied energy to the rest of the world, instead of only 20 countries that control oil supplies." Richard Branson also states that,"sugar-based ethanol would be cheaper than conventional fuels imported from the Middle East." In November, 2008 a new plant in California has opened that can produce diesel fuel made out of sugar cane. This plant will function as a model to be duplicated in larger scale, commercialization. And in Brazil, a larger plant will begin production using this new technology in early 2009. In addition to diesel fuel and jet fuel, scientists have discovered ways to use sugar in producing plastics and other chemical applications. These major applications may represent new and additional demand for sugar. To summarize, in the past corn and sugar were used mainly as food. Demand for fuel has risen and, I believe will continue to rise from developing countries, notably China and India. The trend, in my opinion, is in force from E10 to E85 and even E100 as more new vehicles are being built capable of running on more ethanol. Sugar is cleaner, easier and more economical to make into ethanol than corn. And corn is a vital, primary food source. Therefore, I think that the right thing to do is to stop diverting corn into cars, devote our agricultural/corn resources to feeding people like we used to, and replace ethanol from corn with ethanol from sugar. Regardless of whether ethanol is made more from corn or sugar, the new technologies to make diesel, jet fuel, chemicals, and plastic out of sugar will potentially add tremendous new demand for sugar cane. Also watch for changes in subsidies and import tariffs. This is why I believe that the demand for sugar may increase substantially in the future. The risk of loss exists in futures and options trading.
Past performance is not necessarily indicative of future results.
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Sugar Contract Specifications
IntercontinentalExchange (ICE) Trading Unit
Sugar #11 Futures: 112,000 Pounds (50 long tons).
Options: One Sugar #11 futures contract.
Electronic Trading Hours
Futures and Options: 2:30 AM until 3:15 PM New York Time
Trading Months
Futures: January (Commences 2010), March May, July and October.
Options: Regular: January, March, May, July and October. Serial: February, April, June, August, September, November and December.
Minimum Price Fluctuation
1/100 of a cent per pound which equals $11.20
Grade/Standards/Quality
Raw centrifugal cane sugar based on 96 degrees average polarization.
Option Strike Intervals
Starting 3/28/2008, Strike Price Increment will be $.25 cents at all price levels.
Delivery Points
A port in the country of origin or in the case of landlocked countries, at a berth or anchorage in the customary port of export. Subject to minimum standards established by the Exchange's rules.
Settlement
Physical delivery, FOB receiver's vessel.Daily Price Limit
None
Margin Requirements
As of June 2, 2008 the initial speculative margin requirement for a Sugar #11 futures contract is $1,120. Margin requirements are subject to change.
Trading Symbol
SB
Hypothetical Sugar Futures Math Examples
If you bought one futures contract at 10 cents per pound and the price went down to zero,
the equity loss math would be: $112,000 pounds x .10 = $11,200 plus commissions and fees.If you bought one futures contract at 10 cents per pound and the price went up to $.50,
the equity gain math would be: $112,000 pounds x .40 = $44,800 less commissions and fees.Be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.
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The risk of loss exists in futures and options trading.
Past performance is not necessarily indicative of future results.
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