Sugar Stuck in a Spiral

Sugar is one of the most highly coveted soft commodities in the world, as its consumption and production make up a large part of many emerging market economies. As an investment, sugar futures and related products have a high attraction among investors as they offer significant volatility and potentially strong gains (or, of course, losses). Though this sweet commodity followed its historical trend of spiking in early summer, the past few weeks have been mostly sour for sugar, as the commodity has racked up losses of nearly 17% [for more sugar news and analysis subscribe to our free newsletter].

Where a drought and poor harvest plagued much of the U.S. crop fields, sugar harvests around the world have been very plentiful. In fact, you could say they have been too plentiful, as a jump in supply has been the main culprit of sugar’s swift losses. It is estimated that nearly 20% of every year’s global sugar harvest ends up in the “dump market”, as there is simply not enough demand to justify more of the sweet commodity. It appears that this year is looking to follow that trend as in August alone, India (the world’s second largest producer) was 400,000 tons over quota.

“Thin volatility in futures and expectation of sufficient supply in the current season and higher production next year kept sentiment under pressure” writes a correspondent at Business Line. But given its swift sell-off, the opportunities for trading this commodity seem more lucrative than ever. The only problem is that you will have to decide if you think sugar is going to continue its losses or regain lost ground. As a caveat, sugar usually makes its annual highs in the middle or end of summer and then slumps until late spring of the following year, and 2012 could very well could be following that trend. Below, we outline several options to help investors make a play on this volatile asset [see also 50 Ways To Invest In Agriculture].

  • Dow Jones-UBS Sugar Subindex Total Return ETN (SGG): The most popular sugar ETN, this fund trades about 19,000 times each day while providing exposure to front-month sugar futures. Though its methodology will certainly fall prey to contango, it can be effectively used as a short-term trading tool.
  • Pure Beta Sugar ETN (SGAR): Spawning from iPath, the same firm that issues SGG, this ETN looks to take a different approach to sugar futures investing. It invests in the front month contract, but its automated roll can choose from a number of different maturities to help mitigate losses caused by nasty contango [see also How to Trade Sugar Futures].
  • Teucrium Sugar Fund (CANE): Another cleverly named fund, this product invests in sugar contracts of varying maturities instead of just front-month futures. Its roll process is also designed to avoid harmful futures curves, but the unique strategy comes at a cost of 100 basis points.

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Disclosure: No positions at time of writing.

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