Ultimate Guide To Sugar Investing

Sugar has been in production since ancient history. When the crop was first discovered, it was not plentiful, or cheap to grow and harvest, so many populations used honey as a sweetener instead. However, during various agricultural revolutions, and major improvements in farming techniques and technology, sugar became a widely used commodity. As far as food is concerned, the term “sugar” most often refers to sucrose, which comes from sugarcane or sugar beet. Though this sweet crop is most known for giving our food a more enjoyable flavor, it has a wealth of other uses, including lightening skin discoloration, and alternative fuels. Roughly 20% of the total supply of sugar will end up in what is known as the “dump market”, where governments provide subsidies for producers to sell their surplus supplies for a price much lower than the cost of production. Sugar has become a popular buy among investors, as significant volatility in spot prices creates opportunities to capture material returns over a relatively short period of time. While sugar may seem like a strange investment, it is an international commodity just like crude oil or copper [see also The Guide To The Biggest Companies In Every Major Commodity Sector].

Physical Properties And Uses Of Sugar

Sugar is grown in two different ways, through either sugarcane or sugar beet. Sugarcane grows in stalks that can reach between six and nineteen feet high and is native to warm temperate regions such as tropical Asia and South America. Sugarcane produces sugar, molasses, rum, and ethanol among other byproducts. The other form of sugar, sugar beet, is a plant whose root holds a large amount of sucrose. The crop can be grown in a wide variety of temperate climates, with Europe leading the world in production.

Sugar is most often used in food-based products, but also has major role in ethanol production as well as various non-conventional uses. Brazil leads the world in ethanol production for sugar, which many believe is more efficient than ethanol derived from corn. Sugar is also used in numerous home remedies, such as keeping certain items fresh, prolonging the life of flowers in vases, and even trapping insects [see also Commodity Investing: Physical vs. Futures].

Sugar Supply And Demand

Sugarcane production is dominated by emerging markets, with Brazil, India, and China being the top three producers in the world. But by far, Brazil is the bellwether producer when it comes to sugarcane, nearly doubling the production of second ranked India. As such, any trends or production snags in Brazil will be major movers for the price of this commodity.

Top Sugarcane Producers: 2008
Rank Area Production (Int $1,000)
1 Brazil 13,299,034
2 India 6,725,632
3 China 2,482,336
4 Thailand 1,526,628
5 Pakistan 1,194,856
6 Mexico 1,061,490
7 Colombia 738,608
8 Australia 677,540
9 Argentina 622,061
10 Indonesia 540,020
Source: Food And Agriculture Organization Of The United Nations

Sugar beet’s producers are far different from those of sugarcane. The production of sugar beet is dominated by developed markets, with France, Russia, and the U.S. accounting for the top three producers of the sweet commodity. Investors should note that sugarcane production far exceeds that of sugar beet, and will be a much bigger price mover than beet producers [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

Top Sugar Beet Producers: 2008
Rank Area Production (Int $1,000)
1 France 1,394,998
2 Russian Federation 1,318,389
3 United States of America 1,122,488
4 Germany 1,058,390
5 Turkey 712,927
6 Ukraine 402,072
7 Poland 401,156
8 China 370,250
9 United Kingdom 345,225
10 Netherlands 240,207
Source: Food And Agriculture Organization Of The United Nations

As far as consumption is concerned, emerging markets also lead the way, with India and China ranking as the top two consumers, with the U.S. not far behind.

Sugar Price Drivers

As a global commodity, the price of sugar is impacted by a number of factors, and is often subject to significant price swings in a relatively short period of time. The major price drivers of sugar include:

  • Weather Conditions: Like most agricultural commodities, sugar is subject to adverse weather conditions. Any unforeseen or extreme weather pattern can set off supply issues sending sugar prices soaring.
  • Geopolitical Tensions: With the major sugar-producing nations being emerging markets, the supply of this sweet crop can be easily bottlenecked by the combustible political situations that often characterize these nations. Moreover, trade relations between countries can have a big impact on the cost of sugar.
  • Regulatory Environment: In order to protect sugar farmers in the U.S., the government imposes quotas that limit the amount of tariff-free sugar that many major users can import each year, except from Mexico. To the extent that current import quotas remain in place, there will be a floor on sugar prices that prevents them from falling too far. Also, subsidies that cover farmers in the “dump market” could have a major impact if the policies change.
  • Relative Commodity Prices: In many sugar-producing countries, such as Brazil and India, farmland used to grow sugar can be used to harvest a number of other commodities as well. If the prices of these other goods (bananas for example) rise considerably, flexible farmers will abandon sugar in favor of crops that will fetch higher prices.
  • Ethanol: With alternative energies becoming more popular, many may turn to sugar-based ethanol as a substitute for fossil fuels. In Brazil, a significant portion of sugar is used in ethanol production. To the extent that ethanol demand increases in the future, so too will the demand for sugar.

Investing in Sugar

Sugar’s appeal as an investment stems from its wide use throughout the globe. As such a popular commodity, investors can use sugar to make plays against strong or weak economies. Sugar investments can also be used to make a play on weather conditions and government policies around the world as well [see also Why Commodities Belong In Your Portfolio].

Sugar Futures

Sugar futures are traded under the name of Sugar No. 11, where one contract represents 112,000 pounds of raw cane sugar. Sugar No. 11 is traded on the Chicago Mercantile Exchange under the symbol YO, with prices quoted in U.S. Dollars per pound, and a minimum fluctuation of $0.0001 per pound. Trading is conducted in the March, May, July, and October cycle for the next 24 months. All contracts are subject to the rules and regulations of NYMEX.

Trading terminates on the day immediately preceding the first notice day of the corresponding trading month of Sugar No. 11 futures at ICE Futures U.S.

Sugar ETFs

There are currently two ETFs that offer exposure to sugar, with one fund being a pure play option, while the other offers broad exposure to soft commodities.

  • iPath Dow Jones-UBS Sugar Total Return Sub-IndexSM ETN (SGG) – 100%
  • iPath Dow Jones-UBS Softs Total Return Sub-IndexSM ETN (JJS) – 28%

Investors can also gain indirect exposure to sugar by investing in the top producing nations. The following emerging market ETFs have the highest sugar production in the world, and as such they may be heavily affected by movements in the price of this sweet commodity.

  • iShares MSCI Brazil Index Fund (EWZ)
  • iPath MSCI India Index ETN (INP)

Resources On Sugar Investing:

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