By Steven Orlowski
According to the Financial Times, “a mysterious white substance is being smuggled over the border from Vietnam to China in growing quantities.” Of course this substance is a staple of modern Western society and something increasingly in demand in China and other emerging markets.
“China is the world’s top importer of raw sugar and third-largest consumer overall. Toby Cohen, a director at London sugar merchant Czarnikow, points out that China’s overall sugar consumption is still low in per capita terms, and expects it to keep growing. China could consume “double the volume of sugar it is consuming today, and still be consuming less on a per capita basis than the western economies,” he said.”
The urbanization of China is credited for this rising demand but urbanization is not anomalous to China. Other emerging markets are experiencing increased demand for sugar and other agricultural food stuffs. For emerging markets investors interested in profiting from this demand there are several options to choose from.
One way to invest in the anticipated price increase of sugar is by owning the iPath DJ-UBS Sugar Subindex Total Return Index ETN (SGG). SGG does not invest in companies that produce sugar but in sugar futures contracts. This is more of a pure play on the price of sugar which will be affected worldwide as increased demand from emerging markets should drive prices higher.
Another option, especially for those investors convinced that the prices of many agricultural commodities will be driven higher by emerging market demand is the iPath Dow Jones UBS Agriculture Total Return Sub-Index ETN (JJA). Like SGG, JJA invests in futures contracts as opposed to stocks. Sugar currently represents approximately 10% of the portfolio. Other commodities represented in JJA include soybeans, wheat, corn, soybean oil and coffee. A similar option, one which I mentioned in an article last week, is the PowerShares DB Agriculture Fund (DBA). DBA also has exposure to sugar as well as live cattle, corn. soybeans and others.
Those emerging market investors that prefer individual stocks might look into a company like Cosan Limited (CZZ). CZZ is a Brazil-based company that, among other things, is involved in the production and sale of various products derived from sugarcane and (through its Cosan Food segment) sells food through brands like Uniao and Da Barra. Since late 2008 CZZ has risen from about $2.00 per share to more than $17.00 per share recently.
As China and its fellow emerging markets mature the demand for commodities of all kinds will likely rise. Given the basic need for food, commodities like sugar could be at the forefront of supply shortages and would therefore experience price increases. Under such circumstances all of the investments referenced herein should prove to be profitable.