Is It Finally Time to Buy Sugar ETFs?

After starting the year on a strong note, most of the agricultural commodities have given up a part of their early gains, thanks to a strengthening dollar, slowdown in some of the world’s largest consumers of raw materials and demand/supply imbalances.

Some commodities like sugar, cotton, corn and wheat have lost in the double digits since the start of the year. In fact, sugar has been the worst performing commodity in the broad agricultural space, with top sugar exchange traded products now down more than 18% in the year-to-date frame (read: 3 ETFs Crushed in Commodity Market Rout).

Extreme weather conditions in Brazil – the world's biggest producer and exporter of sugar –adversely affected sugar supplies earlier this year, as sugarcane harvest was hurt badly. This forced dozens of mills to shut down because of poor weather and low prices.

In fact, it was the worst drought in decades. Currently, just 377 mills are operating in Brazil’s center-south region (the main sugarcane growing region in the country) – the smallest number in six years, as per Brazilian consultancy Datagro.

In spite of this, a global supply glut weighed on sugar prices this year, sending them to a more than five-year low in September.

Are Things Expected to Make a U-Turn?

However, the massive supplies of sugar are expected to decline as producers are cutting down on production. Brazil’s main sugar cane growing region produced a weaker-than-expected 2.05 million metric tons of sugar in the second half of October, 17% less than the year-ago period, per the Brazilian Sugarcane Industry Association.

Moreover, Brazil’s center-south region is expected to produce 30.7 million metric tons of sugar in the fiscal year ending March 31, 2016, down 4% from the prior fiscal, as per an Australia-based sugar-industry consulting firm.
Meanwhile, global demand for the sweetener has been rising about 2% a year. Rabobank expects a supply deficit of 1.9 million tons in the year ending September 30, 2015.

If demand begins to outpace output next year, sugar prices might indeed see a rally (read: Introductory Guide to Soft Commodity ETFs).

However, experts believe that if prices don’t pick up, Brazil mills might divert their resources to producing more ethanol from sugar cane. Slumping sugar prices have already forced Brazilian mills to change their production mix in favor of ethanol. The production mix from April 1 through mid-November was 43.7% sugar to 56.3% ethanol, compared with 45.6% sugar and 54.4% ethanol a year earlier, as per a Brazilian sugar and ethanol industry group.

In fact, the government has recently hiked gasoline prices, which might lure the mills to produce more ethanol from cane, perpetrating further shortage of sugar supply in the market.

Also, experts believe that the tighter-than-expected sugar supplies might force money managers to exit their bearish positions, bringing relief to sugar prices. Also, the extreme bearishness in the sugar market might tempt contrarian traders to build long positions, pushing sugar prices higher.

How to Play

If you too believe that the worst is over for sugar prices and that things might turn in favor of this industry, then any of the three below mentioned products could be interesting options to play sugar.

And should the recent supply shortfall continue, these products could definitely turn green as we head into the New Year (see all Agricultural ETFs here).

iPath Dow Jones UBS Sugar ETN (SGG)

This is the most popular option in the sugar ETN market, tracking the Dow Jones UBS Sugar Index. The index focuses on front month futures for exposure. The product manages an asset base of $38.9 million and charges investors 75 basis points a year in fees.

Average daily volume is light at under 20,000 shares. The fund has lost 30% this year and currently carries a Zacks ETF Rank #1 or Strong Buy rating (read: Time for Top Ranked Sugar ETF: SGG).

Pure Beta Sugar ETN (SGAR)

SGAR tracks the Barclays Capital Sugar Pure Beta Index, charging investors 75 basis points a year in fees for the exposure. The index usually holds a single futures contract, except during the roll period when the Index may comprise two futures contracts to select the contract that best tracks the front year average price.

The fund, however, is quite unpopular with a small asset base of $2.9 million and is quite thinly traded. The fund has lost 19% in the year-to-date frame and also has a Zacks ETF Rank #1.

Teucrium Sugar ETF (CANE)

The fund tracks a benchmark of several futures contracts to reduce the impact of backwardation and contango. The product includes the second-to-expire Sugar no. 11 futures (35%), third-to-expire sugar no. 11 futures (30%), and sugar no. 11 futures expiring in the March following the expiration month of the third-to-expire contract (35%).

The fund has lost 12.7% in the year-to-date frame and is slightly expensive with 1.77% as fees.

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