Sugar: Where Does SGG Go Next?

November 29, 2010

Are we setting up for a renewed rally in the sweet stuff?


Sugar for March delivery closed at 28.45 cents per pound on Monday—a little off its above-30-cent peak struck last month, but still double its May 2010 low:


Sugar - Last Price


And it looks like sugar may have higher to climb.

Global supplies of sugar are projected to lag worldwide demand this year for the third year running. According to a new report by Czarnikow Group, a London-based sugar and biofuel broker, the supply/demand deficit could run as high as 2.8 million metric tons from September 2010 to September 2011.

Of course, when you consider that total supply for 2010/11 is expected to rise to 168.4 million tons from last year's 157.4 million, that deficit doesn't seem like a huge gap. And generally, if sugar becomes too expensive to use, end-consumers can just switch to cheaper sweeteners, like corn-based syrups.

Still, one can make the argument that sugar should be higher, especially considering that growing consumption is expected in emerging markets like China, where we've yet to hit the limit of their commodity appetite. Plus, over the past few years, we've seen drawdowns in world inventories of the sweet stuff, a fact that helped boost prices up to ever-higher highs in 2007/08 and 2008/09.

The supply shortfall springs from poor growing weather we saw earlier this year. Remember that Brazilian bumper crop we talked about back in August? Yeah, not so much. Brazil, the world's largest producer of sugar, saw sugar cane production declines from a hotter summer than usual, while similar drought conditions stunted Russian beet production and South African cane yields. Meanwhile, in Indonesia and Australia, the sugar cane harvest withered under a deluge of super-wet weather.

Sugar's promising trajectory shows up in the iPath DJ-UBS Sugar Subindex Total Return ETN (NYSEArca: SGG), which tracks front-month sugar futures. The ETN is up 30.13 percent over the past year:


SGG - 1 year


If you believe sugar's fundamentals support higher prices, now might be an excellent time to buy on the dip.

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 29.72 percent weighting in sugar, and the PowerShares DB Agriculture Fund (NYSE Arca: DBA), which has a 12.5 percent weighting.

Year-to-date, both funds have done remarkably well, benefitting from the short-term rally across the agriculture markets. In particular, JJS is soaring, up 44.6 percent since Jan. 1, pushed higher by tandem rallies in both cotton and coffee. DBA, which takes a broader approach to the ag markets and includes everything from corn to cattle, is up 10.21 percent. Not too shabby.


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