Judging The Sweetness Of Sugar

August 03, 2010

Sugar prices have rallied off their May lows, but will we see a repeat of 2009? Or are we headed for a pullback?



Remember how sweet sugar was this time last year? In 2009, sugar prices had risen to their highest point in 35 years, with droughts in India withering output, while an abundance of rainfall in Brazil punished crops.

Alas, 2010 looks like it won't be quite such a banner year.

For starters, Brazil is currently experiencing a bumper crop: Output will climb 17 percent to 38.7 million tons, says Bloomberg, on increased planting and drier weather, which expedites the harvest. In addition, Brazilian mills are expected to process a record amount of sugar cane, up to 664.3 million tons from 604.5 million last year. Even the bottleneck in the country's ports—a record 122 ships now sit idle, waiting to load sugar—will only pressure supplies as long as the delays last.

And now, it looks like India will have a similarly positive crop year. Not only have many wheat farmers switched to sugar cane this year, but also July rainfall—the peak of the monsoon season—was stronger than usual, which should help boost yields further.

Brazil and India are the world's two major-sugar producing nations, and strong crops from both countries could send prices tumbling 25 percent, says Kushagra Bajaj, joint managing director of India's largest producer.

"Prices can't hold at current levels," he told Bloomberg. "Hedge funds have driven prices up and they are bound to drop."

But could rising worldwide demand, particularly in Asian nations, help soak up some of the excess supply? Perhaps. Worldwide demand is expected to rise 1.7 percent this year, which means the ratio of supplies to consumption should drop to its lowest point in 20 years, says the International Sugar Organization. The Philippines, Pakistan, Indonesia and even India are low on sugar reserves—not good for nations trying to stock up ahead of the festival seasons.

Still, although the Philippines may import up to 100,000 metric tons, and Pakistan is allowing duty-free trade of 500,000 tons for the next four months, both figures are mere drops in the bucket, when you consider India's crop is expected to be 28 million tons this year, while Brazil's will be 34.7 million.

October futures on the ICE hit $18.81/lb in early Tuesday trading. While that's lower than last week's four-month peak of $19.75/lb, if the port situation in Brazil continues, the contract could have higher to climb.

Meanwhile, the exchange-traded proxy for sugar futures, the iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSE Arca: SGG), has risen substantially from its May 6 low—but it's still down -27.80 percent for the year.


iPath DJ-UBS Sugar Subindex Total Return ETN Performance 2010 YTD


Sugar futures also make up a substantial amount of the benchmarks for the iPath DJ-UBS Softs Subindex Total Return ETN (NYSE Arca: JJS), which has a 27.44 percent weighting in sugar, and the PowerShares DB Agriculture Fund (NYSE Arca: DBA), which has a 12.5 percent weighting.

Although year-to-date both funds are down, with JJS down -2.15 percent and DBA down -1.70 percent, both products seem to have benefited from the short-term sugar rally. JJS has risen 15.86 percent over the past three months, while DBA is up 4.38 percent.


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