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Sweeten Your Portfolio with Sugar



The big fear these days is deflation.  Of course, the consensus could be wrong and the next months could see higher inflation.  But answer me this: if deflation sets in, will you use less sugar in your coffee?  OK, how about if inflation takes off?  Wherever you must economize, do you think it might be in fewer nights out, shorter or fewer vacations, keeping the car another year -- or by eating less sugar?  I’ll wager it’s any of the former, not the latter!


Regular readers know I am not sanguine about the prospects for a good summer.  Sure, Fed chair Bernanke will talk about how rosy things are.  And the federal government will use our tax dollars to buy votes from people who own the biggest house they could buy back when no one asked if they had any actual income to support their purchase.  This will be billed as helping the “poor unfortunates” who were talked into signing a contract when they had no idea the rates would rise or the value might decline.  (You know, the “poor unfortunate” dice-rollers who bought a 4000 square foot home for $650,000 with zero down, monthly payments of $2000 set to rise to $4000 in two years,  and avaricious dreams of flipping them in 18 months for a double.)  I may be my brother’s keeper, but I’m not his financier.


But even when the market for stocks is less than stellar, there are always worthwhile investments that march to the beat of their own drummer.  Some foreign markets, often precious metals, frequently bonds, and, almost always, commodities.


Do you think the wheat markets give a sou whether the stock market went up or down today?  Do you think the corn markets care whether Alcoa made their numbers this quarter?  Of course not.  On the other hand, heavier monsoon rains in India that left India’s bumper crop unable to be collected in silos and spoiling under hastily-emplaced open-air storage, and an unexpected drought in Russia, mean the world’s #2 producer and it’s #3 producer (roughly tied with the US) are now hoarding what little remains, causing shortages in the wheat export market.  In fact, July saw the largest single monthly gain in the underlying commodity in 37 years.

Just because we are currently mostly in cash, short-duration bonds, and inverse ETFs does not mean we don’t have opportunities galore beyond the traditional Dow Industrials or S&P 500 – both of which I expect to under-perform in Awful August and Sinking September.  But agricultural commodities are in a market of their own that has nothing to do with the stock market.  In agricultural commodities, it’s all about supply and demand.  

With the emerging world now able to afford a few small creature comforts, I’m guessing they will change their lifestyles in two small ways, even if nothing else changes.  They will eat more animal protein and they will eat more sugar.   All humans are born with a sweet tooth.  Some of us can afford to indulge in that small pleasure and some (currently) cannot -- at least not the extent they would like.  But if you believe the emerging markets story, it follows that the demand for sugar will rise.  I believe, coming off its recent lows, it has the potential to do more than rise -- it has the potential to explode.  And the good news is -- it won’t matter one bit what the stock market does. 



 Take a look at the chart above, courtesy of  It shows the price action in global raw sugar for the past 50 years.  The two big spikes back in the 70s and 80s were caused by supply disruptions coupled with then slow-growing demand.  I believe the next spike will come as a  result of disruptive demand in the face of slow-growing supply.  How can we ignore the fact that China's middle class is projected to grow by some 300 million people in the next five years?  That's virtually the entire population of the US.  It’s nearly 10 Canadas being added to the world of sweets-consuming diners.  Of course,  short-term fluctuations in the crop cycle, like a bumper harvest, can send prices into a tailspin -- temporarily.  But no one has ever accused me of thinking too short-term.  I may be early this time -- of that I am sometimes guilty! -- , but I am right now beginning to take positions in sugar the most comprehensive way I know how: via the iPath Sugar ETN (SGG.)


As you can see in the chart below, SGG had a steady rally off the March 2009 market lows as measured by the S&P 500, actually moving in the same direction, although with greater velocity than the market itself.  Then it exploded upward in January of this year before settling all the way back down to where it was a year ago.  There were simply too many other opportunities back then and I overlooked SGG.  But I see none of those opportunities in equities today.  I see only the briefest rally attempts and then another scary decline.  Conversely, sugar looks awfully sweet as a special situation that will rise for many years.  I see it as a great chance to “buy and hold” something of intrinsic value even during a secular bear market in equities.




My conclusions after conducting my research on sugar can be stated succinctly.  (It was tempting to say, “short and sweet,” but I resisted – sort of.)  They are as follows:


Supply: Sugar farming requires lots of land and lots of water.  As to the former, in most of the developing world, land is quickly being subsumed by development.  As for water,  you need the monsoons or tropical rains to come in force and on time every year.    Yet agricultural land in the primary growing nations is fast disappearing and the weather cannot always be depended upon to cooperate.   Add to this the fact that much sugar supply is being siphoned off by sugar cane ethanol production.  Brazil devotes 50% of its sugar crop to sugar ethanol,  the only non-fossil fuel with anywhere near the same net energy as natural gas and oil.  Unlike the corn ethanol fiasco foisted upon us in the USA, sugar ethanol cuts greenhouse emissions far more than any available auto fuel.  It now commands 60% of the global ethanol market.


Demand: Consumption of sugar ranges all the way from a miniscule 3 kilograms (6.6 pounds) per capita per year in Ethiopia to roughly 40 kilos per person per year in chocolate- and sweet-loving Belgium. But the big constant to remember is that per-capita consumption rises in concert with per-capita income, at least until the annual consumption climbs to the average of 35 kilos or so in middle-income countries.  In the unlikely event that the three kilos in Ethiopia, for instance, would rise to the average of middle-income countries, we would see an 11-fold increase in consumption.  That is some serious leverage!  Do I see Ethiopia achieving this in the short term?  No.  But if you believe the China miracle is real, you can easily imagine a 5-fold increase among some 300 million people, a story that will be repeated around the globe.  I believe SGG is the simplest way to profit from this likelihood.


Author's Disclosure: We and those clients for whom it is appropriate are long SGG.


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Stocks: SGG