By Tony Daltorio
Sugar is another of the so-called breakfast commodities, along with coffee, cocoa and orange juice. Like the others, it also has a rich history. It is thought to have been first used by humans in Polynesia many centuries ago, but was not discovered by Europeans until the 11th century thanks to the Crusades. It was first brought to the Americas by Columbus in 1493 and soon thereafter it was found that the sugar cane plant grew extremely well in tropical environments.
Today sugar is a vast global industry, being produced in well over 100 countries. It is the only food commodity produced from two different plants: sugar cane and sugar beets. They grow in very different climates and are responsible for 80% and 20% of annual sugar production, respectively. Both plants have another growing use in the production of ethanol fuel, although sugar is still mainly used by the global food industry.
Sugar’s Basic Fundamentals
As with all commodities, investors thinking about moving into the sugar market must get a grasp on the fundamentals of the industry. Despite its wide geographic spread, sugar production is concentrated in just a few countries. The leading producer is Brazil, which accounts for over 22% of global production, followed by India with 15%, Europe with 10% and China with 8%.
Global production and consumption of sugar have risen considerably since the 1990s, led by growing demand in the emerging markets. India is the world’s leading consumer of sugar at over 22 million tons in 2011-2012, and China’s imports doubled in the three years after 2008 to 2.2 million tons. However, production increases over the past two decades have been spotty due to cyclical weather patterns and inconsistent government policies in the major growing countries of Brazil and India.
In 2007, sugar prices were less than 10 cents per pound thanks to a supply glut. But poor crops from 2008 to 2010 led to a supply deficit in those years and a spike in sugar prices. They soared to a 31-year high in February 2011 at over 35 cents a pound. This period was again followed by a period of surplus and falling prices.
Brazil and India
Any investor contemplating an investment in sugar must be aware of what is going on in the two top producing countries, Brazil and India. India is interesting in that with its vast consumption of sugar, it swings year-to-year from being an exporter to an importer of the sweet stuff depending on how good their crop was in a particular year. Weather and Indian government incentives to farmers are two of the main factors at work here.
But the real deciding factor in the sugar market is Brazil, which accounts for more than 40% of global sugar exports. Investors should pay particular attention to the weather in the key central south region of the country where 90% of the Brazil’s sugar crop is produced. A frost in that area, for instance, can adversely affect the crop and therefore the global price of sugar [see also The Ten Commandments of Commodity Investing].
Sugar can satisfy not only an investors’ sweet tooth but also their need for profits. There are several very easy ways to invest in the commodity, including exchange-traded funds and notes, which have become extremely popular in recent years.
First, we look at the Teucrium Sugar Fund (NYSEARCA:CANE), which offers unleveraged direct exposure to sugar. Its portfolio consists of three individual sugar futures contracts traded on the ICE: the second-to-expire Sugar No. 11 contract (35%), the third-to-expire Sugar No. 11 contract (30%), and the Sugar No. 11 contract expiring in the March following the expiration month of the third-to-expire contract (35%). This strategy is designed to reduce the negative effects of contango and backwardation [see also 2012′s Best Performing Commodity ETF].
Next are two exchange-traded notes from iPath, which are designed to track the performance of sugar futures: the iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSEARCA:SGG) and the iPath Pure Beta Sugar ETN (NYSEARCA:SGAR). The only real difference between the two ETNs is that SGAR uses a unique roll strategy (without a pre-set rollover schedule) designed to once again mitigate the impact of contango. In both cases, however, investors should bear in mind that with ETNs you are exposed to the credit risk of the issuer, in this case Barclays Bank.
Disclosure: No positions at time of writing.
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