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Will Sugar ETFs Keep Soft Commodities Down?

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After a lackluster 2013, commodities across the board are gaining traction and have recently caught investor interest. Some commodities like natural gas, gold, silver, cocoa and coffee have been on a tear posting incredible gains from a year-to-date look, while others like wheat, tin, aluminum and copper have seen extreme weakness (read: Coffee ETFs Soar on Brazil Drought Concerns).
In fact, sugar has been one of the worst performing products, not only in the soft category, but also in the broad commodity space as well. Futures for raw sugar fell to the lowest level in more than three and half years largely thanks to record harvest from three big producers like Brazil, India and Thailand.
Further, sliding emerging market currencies are encouraging sweetener export, adding to the already robust supplies (read: 3 Commodity ETFs to Watch in 2014).
More Production Coming to Market
According to the International Sugar Organization, the global sugar supply is expected to outstrip demand by 4.73 million metric tons in the current 2013–2014 season, which ends on Sep 30. Brazil production is expected to grow 0.3% to 41.1 million metric tons while Thailand will likely boost harvest by 10%.
Meanwhile, India will produce 25 million metric tons of sugar this year versus demand of 23–23.5 million metric tons, as per the Indian Sugar Mills Association. With the start of this season, sugar stockpiles reached a five-year high of 8.85 million metric tons. Further, India’s move to provide subsidies on exporting sugar would add to the supply glut (read: Can India ETFs Rebound in 2014?).
Excessive supplies along with tepid demand continue to weigh on prices, suggesting bearish fundamentals for sugar and the related ETFs. Currently, there are three choices available in this performing space, which are highlighted below.
Teucrium Sugar Fund (CANE)
This fund provides exposure to sugar market in a unique way and reduces the effects of both contango and backwardation. Unlike many commodity ETFs, this product doesn’t just cycle into the next month as expiration approaches, rather it utilizes a much more in-depth approach.
The ETF uses three futures contracts for sugar, all of which are traded on the ICE Futures Exchange. The three contracts include the second-to-expire contract, weighted 35%; the third-to-expire contract, weighted 30%; and the contract expiring in the March following the expiration month of the third-to-expire contract weighted 35%.
The fund has amassed just $2.3 million in its asset base and sees paltry volume of under 2,000 shares a day. The product is the high cost choice in the space as it charges a fee of 162 bps per year. CANE lost over 3% in the year-to-date period.
iPath Dow Jones-UBS Sugar Subindex Total Return ETN (SGG)
This ETN tracks the Dow Jones-UBS Sugar Subindex Total Return. The index delivers returns through an unleveraged investment in the futures contracts on sugar and currently consists of one futures contract on the commodity.
The product is a bit expensive as it charges 75 bps in fees per year and trades in light volume of nearly 15,000 shares on an average daily basis. The fund has attracted just $27.1 million in AUM and is down nearly 4.6% year-to-date (read: Survive the Slump with These Inverse Equity ETFs).
iPath Pure Beta Sugar ETN (SGAR)
This note seeks to match the performance of the Barclays Sugar Pure Beta Total Return Index. Unlike many commodity indexes, this product can roll into one of a number of futures contracts with varying expiration dates, as selected, using the Barclays Pure Beta Series 2 Methodology.
This approach might result in less contango, which could prove crucial, as shifting from month to month in contracts can eat away returns during an unfavorable market situation. The note is illiquid with a paltry volume of less than 1,000 shares and unpopular with AUM of just $2.2 million. The ETN charges 75 bps in annual fees and is down about 3% year-to-date.
Bottom Line
All the three products are lagging the broad soft funds and even the broad commodity funds by wide margins. This trend is likely to continue at least in the near term given unfavorable demand/supply imbalances and weakening emerging currencies against the dollar (see: all the Agricultural ETFs here).
Though the short-term outlook is negative for sugar ETFs, the long-term trend remains encouraging with all the three sugar ETFs having Zacks ETF Rank of 2 or ‘Buy’ rating. As a result, investors could definitely tap the current beaten down prices and take advantage from any surge in future prices. 
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