Commodities: Innovation North of the Border

 |  Includes: RSGUF, SGG
by: Roger Nusbaum

Yesterday's post included a reference to a small sugar company called Imperial Sugar (NASDAQ:IPSU). Right on cue a reader a comment pointing us to Rogers Sugar Income Trust (RSI-UN in Canada, or OTC:RSGUF on the US pinksheets). The company is no relation to Jimmy Rogers or, ahem, me. The company recently merged with Lantic Sugar (Lantic was shortened from Atlantic, pretty clever eh?).

There is plenty of info on the Rogers website about the company, the financials, the analysts covering it and the history of the company. Over the last couple of years I have come to find that the people in investor relations for these trusts are glad to talk to you and call you back, and that the analysts following them are willing to reply to email (I would not try to call an analyst).

In looking at the chart for Rogers Sugar versus the iPath Sugar ETN (NYSEARCA:SGG), it is not clear to me that Rogers Sugar is a proxy for the commodity. At first glance yes, but if you look a little closer there are some clear divergences. The chart only goes back 13 months, which is apparently when SGG started trading.

For the last few months the correlation seems very tight, but I am not sure it makes sense to trust that because everything except treasuries is up a lot in the last few months and I am not sure if what we are seeing is is true fundamental connection or a rising tide.

In skimming the the financials, the company appears to have have decent cash flow, a little bit of cash on hand, not much debt, and demand for its product. The fund pays out 3.8 cents a month, putting the yield at 10.75%.

There are bunch of different types of trusts like this in Canada covering things like hydroelectricity, timber, geothermal, cocoa and probably a couple I'm forgetting. I first stumbled across the concept a couple of years ago and have been fascinated ever since but never bought one. That is probably a good things as all of the ones I looked at got pasted in the bear market but have generally participated in the snap back, even the ones that dropped 80%. Despite the bloodshed pricewise, it appears that many of them maintained their dividends throughout, but if I have that wrong, hopefully someone will be kind enough to speak up.

I have not ruled out owning one of these at some point but I have drawn a couple of conclusions about them collectively. They are very cyclical, at least they trade like they are. It would probably make sense for one the trusts to be the first to go, or close to it, upon starting to take defensive portfolio action. They appear, as businesses, to run smoothly most of the time but to only be a couple of slow quarters away from struggling. The massive payouts would seem to not leave a lot of room for error or economic slowdowns.

Similar to port and related stocks talked about yesterday, the trusts are not islands unto themselves merrily paying their fat dividends ever after. That does not mean they should be avoided, just realized for what they are, which is volatile high yielders that are cyclical.