FWCC Mock Portfolio 1 - Best Case Scenario: Sugar
By: Owen Higley
Since the start of our mock portfolio experiment, through a mixture of current events and international tension, many financial instruments have paid a large price. Since February 21st, we have been tracking a strategically picked portfolio with a mix of six commodity based equities, and five commodity continuous contracts with a goal of out growing the S&P 500 index over a short span of time, up until the future date of April 1st. So far, we have accomplished our goal! But it hasn’t been pretty. With the recent performance of the S&P, it seems as if any portfolio with any type of investment outside of a company stock of any magnitude would outperform the index.
Starting on February 21st, the initial day of growth tracking, the S&P 500 was valued at $6081.16, just 21 days later, on March 13th, the index is currently valued at $5,521.52, a monumental decrease in value of 9.209% (-9.201%) from the day of first analysis. Moreover, it isn’t hard to beat such a poor performance, even with our first mock portfolio's overall return of -7.202%, we have still managed to provide a better return than the S&P. The poor performance from the pure company equities in the S&P 500 along with the poor performance of the FWCC mock portfolio, which encompasses more than just company equity, highlights the idea that investments in both the pure commodity and company equity realms are suffering.
Within the FWCC portfolio, one of the five commodities we chose to “invest” in is sugar, both for its low price, enabling us to hold a large quantity of the instrument, and due to the fact that over the past century sugar intake has dramatically increased around the world, especially in low and middle income countries with cheap products such as sugary beverages being so readily available and affordable. Going into more depth on the sugar investment within our first FWCC mock portfolio, of the “$200,000” allocated to the purchase of pure commodities, sugar makes up 10% providing us with a massive sum of 100,502 shares. Having such a large amount of shares makes the portfolio more volatile in relation to any events which impact sugar prices.
As mentioned earlier, while not quite as bad as the losses observed within the S&P 500, our portfolio is still down 7.202% at a value of $463,987.97 from the original $500,000. Global events boosting the price of the sugar continuous contract could aid greatly in the value recovery of our portfolio. Below is a chart of more likely outcomes for positive increases in sugar (SB00) prices, as well as some extremely hypothetical scenarios where the price of sugar increases to a large extent.
As can be seen above, even having such a large amount of shares, being valued so low at just $0.192 large increases in price are necessary to make a substantial impact in our portfolio. An increase in SB00 of $12.25 would provide our portfolio with an additional $1.2 million, sounds great, but isn’t likely to the smallest extent. A more believable price increase, which is still highly unlikely, would be an increase of $1.50, bringing the value of SB00 from $0.192 to $1.692, and our 100,502 shares would increase in value by $150,753, over 30% of the value of our original portfolio itself. But the question stands, are there any events, current or hypothetical, that could make such a substantial impact on the commodity?
As of recently, many signals are pointing to lower sugar production in the world's two largest sugar producing countries, Brazil and India. An article released today on Indian sugar production stated that there have been “huge declines” in two sugar producing Indian states, decreasing the estimated sugar output for the nation by nearly 1 millions tonnes from a previously estimated 27.2 million tonnes to 26.4 million tonnes. Simultaneously, drought and wildfires in Brazil is said to likely drop the sugar output levels in Brazil for 2025-2026 as compared to the previous period. Dry weather has been Brazil’s downfall causing lower sugar yields overall and sparking wildfires destroying a significant amount of sugarcane plantations.
On a more positive note, regarding not just Brazil and India as independent nations, but the two nations in combination, at the beginning of March The Brazilian Sugarcane and Bioenergy Industry Association (UNICA) hosted an Indian delegation to discuss sustainable ethanol production using sugarcane, Brazil being a world leader in sugarcane based ethanol production. The meeting focused on Brazil’s experience using ethanol as a biofuel, both in blended and pure forms. Present at this meeting were key members of India's Ministry of Road Transport & Highways, showing that India has genuine interest in following in Brazil’s footsteps by using sugarcane as a fuel source.
With the dual threat of a lower global supply by the two largest sugar producing nations along with their efforts of using sugarcane as a green fuel source in the midst of a global transition to clean energy, the outlook for sugar looks bright. However, there are still two limiting factors behind this sugar based positivity. The first being that the timeline of tracking for the portfolio is only until April 1st, meaning these events won’t be able to come close to raising the sugar commodity prices $1.50. Furthermore, even with lower supply raising prices, and sugar becoming a more common input to a necessary global resource in ethanol, an increase in value from $0.192 to $1.692 is a gain of 781.25%. Regardless of the small price tag of $1.692 an increase in value of over 700% is no joke and is not likely to occur even after our tracking period has concluded.
In summary, an increase in value to the sugar commodity continuous contract of $1.50 would prove to be an intense boost to our portfolio, but at the end of the day, it is not an outcome which seems possible. Luckily the poor performance of the S&P 500 still has the first go at the FWCC’s mock portfolio giving a better return.
