While many traders have been focused in on the energy commodity world to start 2014, there have been several high flyers in the soft commodity space too. And as natural gas has started to fall back to earth, some commodities, such as sugar, have continued their ascent and have reached fresh highs.
In fact, top sugar exchange-traded products are now up more than 17% in the past four weeks alone, though returns for the past three months are still at just a 2% gain. In other words, the sugar surge has been pretty recent, but it has been astounding too (also see 3 Commodity ETFs Surging Higher).
Reasons for Sugar’s Jump
The top reason for sugar’s incredible run is the extreme weather taking place in Brazil. The country’s top sugarcane growing region is experiencing a severe drought and this is curtailing sugar production.
According to the Wall Street Journal, the drought could reduce the 2014 harvest by at least 36 million metric tons, putting this year’s production on par with last year. And though global supplies are still edging out demand, global consumption is likely to grow at about 2.3% this year.
Thanks to this smaller buffer between total supplies and demand, many traders have been on edge, especially as there is some uncertainty as to when the drought will actually end. Plus, it doesn’t help that India could also see a lower output, though undoubtedly the focus has been on Brazil as of late (also read Brazil ETFs in Focus on GDP Contraction).
That is because the South American nation is actually the biggest producer and exporter of the sweet commodity, so when wild weather hits the country, it can have a drastic impact on sugar prices. In fact, Brazil easily outproduces the number two country, India, while it thoroughly dominates the top exporter list too.
Given this dominance, a shaky weather situation in Brazil can really drive prices in the sugar market. And that is why prices for sugar have risen from under 15 cents a pound to their current level above 17.5 cents a pound in about a month, with some looking for more gains in the weeks ahead too.
How to Play
If you believe this situation can continue, there are currently a few sugar options in the exchange-traded product market. These aren’t really that popular, but do offer direct exposure to the return of sugar futures (See 3 Biggest Mistakes of ETF Investing).
Any of the following three could thus be very interesting selections for those who believe that sugar can continue to run, plus it doesn’t hurt that all three have ‘Buy’ Zacks ETF Ranks too. And should the recent drought continue and if more supplies are impacted, these products could definitely continue their run as we get into March:
iPath Dow Jones UBS Sugar ETN (SGG - ETF report)
This is the most popular option in the sugar ETN market, tracking the Dow Jones UBS Sugar Index. The product charges investors 75 basis points a year in fees, and focuses on front month futures for exposure.
This focus on front month contracts has been wise as the issues of contango have not hurt this product at all as of late. After all, the note has added about 17.5% in the past month, easily crushing the 3.6% return put up by the S&P 500 in the same time frame.
Teucrium Sugar ETF (CANE - ETF report)
This is the only sugar ETF on the market, and it tracks a benchmark of several sugar futures. 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%).
This approach seeks to reduce the impact of backwardation and contango, though it is a bit pricey at 1.62% in expenses. Still, the fund has been a solid performer as of late, putting up a 14.9% gain in the past one month time frame (see 3 Top Ranked ETFs That Will Crush the Market in 2014).
iPath Pure Beta Sugar ETN (SGAR - ETF report)
This ETN also looks to reduce contango issues while staying invested in the sugar market. This is done by following the Barclays Capital Sugar Pure Beta Index, charging investors 75 basis points a year in fees for the exposure.
This approach looks to select the contract that best tracks the front year average price so that the negative impact of contango is mitigated. This approach has served SGAR well, as the ETN has added 15% in just the past month alone, while it has easily outperformed its counterparts over the past six months.
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