Sugar: Sweet Returns For Attentive Investors

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Includes: CANE, SGG
by: Daryl Montgomery

Summary

Sugar prices are arguably the most volatile of any commodity.

Like most other commodities, sugar prices peaked in 2011 and sold down until 2015.

Sugar looks like it reached its current floor price and is beginning to move up again.

When sugar starts to move up (or down), it can do so very quickly.

Sugar arguably has the highest price volatility of all major commodities. As any traders will tell you, volatility determines how much money you can make (or lose) on an asset, so when looking for investing opportunities, sugar should be on your list. The reason behind the price volatility is that sugar production can grow and shrink very rapidly and thus create significant over and under supply in the market. This can occur because sugar producing plants - yes plants - can be grown in many parts of the world. Even Russia, despite its very cold climate, can harvest a significant amount of sugar.

Russia, of course, does not grow sugar cane, which can only thrive in tropical and semi-tropical climates. Brazil and India are responsible for a majority of the world's production of this warm weather plant (88 other countries grow some of it too). Sugar cane is also the source of more of the world's sugar than the cold weather alternative, sugar beets. France, Germany, the United States, Russia and Turkey account for a majority of global sugar beet production. Sugar, the commodity, is therefore somewhat unique in that it can be produced from more than one plant and the range those plants can grow in includes tropical, semi-tropical, temperate, and even cool climates. Contrast this with coffee, which is mostly limited to mountainous regions of the tropics, or cacao, which can only grow in rainy, lowland regions within 10 to 15 degrees of the equator.

Sugar producing plants also grow relatively fast. Sugar cane is actually a grass, but it takes about a year for it to fully mature. Sugar beets, on the other hand, can be ready for harvest in only 90 to 95 days (a necessity for a crop that can be grown in cold climates with early frosts). Sugar production is therefore similar to cotton and grains, such as wheat, corn and rice, and very different from cocoa and coffee where the plants take around five years to become productive.

Commodity traders need to be aware that there are two sugar future contracts -Sugar #11 and Sugar #16. Sugar #11 is the world sugar price and Sugar #16 is the U.S. sugar price (generally much higher). This is not usually of importance for the average stock investor who wants to use an ETF/ETN to take a position in the commodity. The two major choices in the U.S. are SGG and CANE and in the UK, SUGA.

Below is a 45-year chart of world sugar prices. The massive price spike in the early 1970s can be clearly seen on the left of the chart. The price of sugar rose from a low of 1.35 cents per pound in 1967 (not shown) to a high of over 60 cents per pound in November 1974. Not surprisingly, this huge price rise led to big production increases. By July 1978, world sugar prices had fallen to somewhat over 6 cents per pound because of this. Farmers then started growing other crops instead, and the price rose once again until it reached over 41 cents per pound in October 1980. Neither of the 1970s peaks have been reached again...yet. The peak price in 2011 was only around 30 cents.

A more detailed eight-year month chart of the sugar ETF SGG shows sugar's short-term volatility and the depth of its drop since 2011 when it peaked like almost every other commodity. The bottom seems to have been reached in mid-2015. The price has rallied in 2016 so far, also like most other commodities. The chart has some promising signs that a multi-year rally is in its early stages. The 10-month moving average has started moving up and price has gone above the 20-month moving average. The MACD is on a buy signal and the DMI at the bottom indicates that the downtrend of the last several years is losing its strength.

It would be reasonable to assume based on sugar's long-term history that a price around 10 cents or so a pound is a currently the floor for the world price and that prices will then move up once that is reached. The new high could be the 30 cents ceiling established in 2011 or could be somewhat lower, or perhaps even much higher. Another important observation from the charts is that when the price of sugar starts to move up, it can do so very quickly. Note that the price of SGG more than doubled in only five months in 2010.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.