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Equity markets around the globe have staged strong comebacks in recent months on hopes that the recession has passed and the recovery will prove to be a long, stable process. But the real winners so far in 2009 have been commodity investors. Industrial and base metals have surged this year on hopes of a recovery in demand as industrial activity picks up. Oil prices have surged from the $30 per barrel level to more than $80, driving up oil and gas ETFs in the process, while a weak dollar has bolstered precious metals funds. One of the best performing commodity funds this year has been the iPath Dow Jones-UBS Sugar Total Return ETN (NYSEARCA:SGG). In addition to supply concerns, SGG appears to be a popular tool for speculators, sending this ETF on a wild ride that could continue throughout the fourth quarter.

Sugar ETFs Have Been All Over The BoardThe run-up in sugar prices began earlier this year when both India and Brazil, two of the largest sugar cane producers, signaled the potential for severe shortages on the year. These concerns prompted a letter from major food producers to the Secretary of Agriculture explaining that the U.S. could “virtually run out of sugar” if import restrictions weren’t lifted. While the move was seen as overly dramatic by many, it nevertheless added fuel to the speculative fire, injecting more anxiety into the sugar futures market.

The U.S. Agriculture Department recently set the sugar quota for fiscal 2010, but left the door open for additional allowances. “During the year, appropriate adjustments will be made to sugar program parameters to ensure an adequate supply of sugar for the domestic market,” said the USDA.

Uncertainty over the stability of supply and the potential impact of regulation on the industry, sugar prices have been all over the board in recent months. After rising above $73 in late August, SGG had tumbled below $63 less than a week later. The price rallied to above $71 before the end of September before slipping below $60 ten days later.

Still Room to Rise?

Legendary commodity investor Jim Rogers, who called the sugar bull market a year ago, thinks there’s still room for prices to rise. “Even though it’s at a 28-year high, it’s still 70 percent below its all-time high, so you can see the enormous amount of scope sugar still has over the next few years,” Rogers told Index Universe in a recent interview.

But there is also a strong bear case for falling sugar prices over the coming year. The threat of a sugarless world that food companies warned of has never really materialized, as supplies have been sufficient to continue operations without a hitch. And many of the factors that sent sugar prices skyward initially weren’t permanent changes, but temporarily shortfalls driven by severe weather (including an unusually dry monsoon season in India).

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SGG

SGG has been all over the board over the last year. The ETF has seen daily swings of at least 1% in almost 65% of trading sessions in the last 52 weeks, with daily gains or losses of at least 3% coming in 20% of trading sessions.

If you’ve got an iron stomach, SGG has the potential to deliver some significant returns. But for the less risk averse among us, this ETF may feature just a little too much volatility.

Disclosure: No positions at time of writing.

Source: Sugar ETN Continues Its Wild Ride