Sugar ETPs Looking Sweet

June 06, 2011

While oil prices have stalled amid reports of ample supplies, sugar reached a seven-week high on Friday.

I know what you’re thinking: Why should investors be interested in sugar? We’re bombarded with oil market news every day, but we never hear about sugar. It’s not surprising. Annual sugar production in dollars makes up less than 1 percent of the value of oil output, and no commodity affects pocketbooks in the developing world as much as oil.

That said, we should care about the softs—sugar, coffee and cotton—because they offer diversification within the commodity landscape. Exposure to them amounts to another way for investors to protect themselves from inflation. Whether taking a broad-based approach with a multiple-commodity security or concentrating exposure on sugar or another single soft commodity, prospects look bullish.

And, importantly, futures price curves for the softs are currently avoiding the large contango costs that can plague a commodities portfolio. A “normal” futures curve that’s in contango features rising prices over time. That means each time fund managers roll exposure from an expiring contract to the next month, they have to pay up, which kills returns, especially over the long haul.

Upward Pressure On Sugar Prices

Much of the recent action in sugar is linked to production and shipping issues.

Brazil, the world’s largest producer of sugar, has seen inventories drop. Output in Brazil’s Center South region, where sugar production is concentrated, slumped 17 percent to 1.55 million tons in the first half of May.

Adding to the worries, Thailand is suffering from congestion at its ports, despite a record 9.6 million tons of sugar produced in that Southeast Asian country over the past year. Last week, vessels in Thailand were lining up to load as much as 400,000 metric tons of sugar, and ships were waiting for almost 2.25 million tons in Brazil.

If ports are able to relieve congestion, the price of sugar may decrease. But, if problems persist, as we often see in commodities, sugar prices should continue to escalate.

Ticker Fund 1-Month Return AUM
(in millions)
SGG iPath Dow Jones - UBS Sugar Sub Total Return ETN 13.11% $65.70
SGAR iPath Pure Beta Sugar ETN 10.66% $6.30
JJS iPath Dow Jones - UBS Softs Sub Total Return ETN 6.05% $67.12
GRWN iPath Pure Beta Softs ETN 1.66% $7.15

 

 

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