Recently, we had the opportunity to speak with Sal Gilbertie, President of Teucrium, to discuss sugar and the trends surrounding this soft commodity. Gilbertie was able to provide key insight for traders and long term investors alike as he shed light on the current sugar industry and some of the developments that may make this a sweet trade in the coming weeks [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].
Commodity HQ (cHQ): Can you give a quick overview of sugar’s historical movements and why June is such an important month?
Sal Gilbertie (SG): The time period between April and the beginning of June often mark a seasonal low point for the price of sugar. Some industry participants believe this is because sugar producers in Brazil and other parts of the world often pre-sell their harvest during this time. Once the harvest begins, there is often a rally in sugar prices, perhaps because producers have already locked in much of their sales volumes and become more focused on harvest (which can last into November) than on forward sales of the current sugar crop. Additionally, June is often the month in which global buyers enter the markets to buy a portion of their annual sugar requirements [see also Ultimate Guide To Sugar Investing].
cHQ: Do you expect to see a similar pattern this year?
SG: Sugar does seem to be following its seasonal pattern of a price decline in April and May. Some of this is due to the basic characteristics of the sugar markets as outlined above, and some of it may be due to the “risk-off’ environment that all global markets have faced recently. Some sugar market observers tell us that sugar is oversold right now, which could be an indication that in 2012 the traditional seasonal low point for sugar might indeed adhere to its pattern of occurring in the April to early June time frame. Time will tell, but the apparent seasonal sugar price appears to be following its traditional pattern so far [see also The Ten Commandments of Commodity Investing].
cHQ: Can you tell us about the issues Brazil has been having in recent years with its production and why this is so significant?
SG: Brazilian production has declined two years in a row and it’s still too early to tell if this year’s crop volume will exceed last year’s, so there is some uncertainty regarding production from the world’s number one producer of sugar cane. The past two years saw detrimental Brazilian weather issues, especially during harvest season, which affected the cane harvest significantly. Sugar industry experts also tell us that the strength of the Brazilian Real has been hurting sugar producers because they sell sugar in dollars but their costs are in the local currency. This has pressured margins at the producer level to the point where general care of the cane crop is perceived by many in the industry to be in decline. We’ve heard reports from sugar traders that mills are closing and just selling cane to other mills for processing. The Brazilian currency has weakened recently, which may help producers in the near-term, but the overall health of the Brazilian sugar production industry appears to have been negatively affected by the longer term strength of the Brazilian Real [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
cHQ: How does the Teucrium Sugar Fund (CANE) work and how can investors use it to play this trend?
SG: The Teucrium Sugar Fund is an Exchange Traded Product available to investors on the New York Stock Exchange with the ticker symbol of “CANE.” CANE tracks a benchmark of sugar futures based upon a design built around the forward sugar futures curve that allows investors to participate in the price movements of certain sugar futures contracts. In general, the fund is designed, net of all fees and expenses attributable to the fund, to go up when the price of its futures holdings go up, and down when the price of its futures holdings go down, so investors can expect to be generally subject to the volatility and price movements of the fund’s holdings within the sugar futures curve. The fund is unleveraged and fully collateralized by its sugar futures holdings and cash; its positions are posted daily on its website [see also 25 Things Every Financial Advisor Should Know About Commodities].
cHQ: Do you have any final tips or pieces of advice for investors?
SG: Investors and their advisors should learn as much as possible about the financial products they trade. First, always use a price limit and never under any circumstances use a market order when trading any ETP. Second, for the greatest liquidity and price efficiency, trade an ETP when its underlying markets are open. In the case of sugar, this means trading any sugar related product before 1:30 PM EST. Investors and advisors should remember that all exchange traded products are liquid investments that can be traded in volume even if they don’t seem to be particularly active every day. This is because of the unique “create/redeem” liquidity mechanism embedded in the structures of virtually every exchange traded product. Many ETP sponsors, including Teucrium, have educational materials available on their websites that may be of help to investors and advisors [Learn more at Tuecrium's website].
Disclosure: No positions at time of writing.