Commodity ETFs have seen billions of dollars of cash inflows in recent years, as investors have embraced these exchange-traded products as efficient ways to gain exposure to an asset class that was previously off limits to many. The majority of investors have focused either on funds offering diversified exposure to a variety of natural resources (such as DJCI or DBC) or on single-commodity funds investing in either precious metals or oil and gas. But the universe of commodity ETFs goes far beyond GLD and UNG, and includes everything from agriculture to copper to tin.
Sugar has become a popular investment among investors, as significant volatility in spot prices creates opportunities to capture material returns over a relatively short period of time. While sugar may seem like a strange investment, it is an international commodity just like crude oil and natural gas, and is available to almost every investor through ETFs. Make sure to also check out our Free Report: Everything You Need To Know About Commodity ETFs.
Consumption of sugar varies significantly across different regions of the world, but is found in some amount in countless different foods. Brazil has the highest per capita consumption of sugar, while India consumes the most sugar of any country.
Most consumers experience sweeteners in relatively small doses, but sugar is big business around the world. Sugar cane is grown in more than 100 countries with an annual production of more than 1,500 million tons. Brazil produces nearly one third of the world’s sugar, with India and China accounting for another third and several other nations producing relatively small quantities. [For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]
Sugar Price Drivers
Sugar prices have been known to exhibit significant volatility, but have historically ranged between $0.20 and $0.30 per pound. There are a number of factors that contribute to movements in sugar prices, many of which can be extremely unpredictable. Drivers of sugar prices include:
- Weather: Because a significant portion of the world’s sugar supply comes from only a handful of countries, extreme weather in these locations can have a major impact on prices of the commodity around the world. In 2009, sugar prices surges as the result of a dry monsoon season in India. On another occasion, excessive rains in Brazil led to lower-than-expected output, and a rise in prices. Of course, predicting weather patterns is extremely difficult to do with any degree of precision, so making investment choices on this basis is a difficult task.
- Regulatory Environment: In order to protect sugar farmers in the U.S., the government imposes quotas that limit the amount of tariff-free sugar that many major users can import each year, except from Mexico. In 2009, several major food companies urged the government to increase or abolish these quotas, threatening that “consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted” if the restrictions remained in place. To the extent that current import quotas remain in place, there will be a floor on sugar prices that prevents them from falling too far.
- Relative Commodity Prices: In many sugar-producing countries, such as Brazil and India, farmland used to grow sugar can be used to harvest a number of other commodity prices as well. If the prices of these other goods (bananas for example) rise considerably, flexible farmers will abandon sugar in favor of crops that will fetch higher prices. In Brazil, a significant portion of sugar is used in ethanol production. To the extent that ethanol demand increases in the future, so too will the demand for sugar.
- Country-Specific Factors: Since much of the world’s sugar comes from two emerging markets, unexpected events in these country have the potential to lead to a major disruption of sugar supply. Although such an occurrence is unlikely, it is not outside the realm of possibility.
ETF Plays On Sugar
Sugar is often included as a component of diversified commodity ETFs (see this breakdown of these ETFs to see which include sugar), but these products generally allocate less than 5% of total holdings to this commodity. For ETF investors looking for exposure to sugar prices, the iPath Dow Jones AIG Sugar Total Return Sub-Index ETN (SGG) is the purest play.
SGG is linked to an index designed to reflect the returns available on an unleveraged investment in futures contracts on sugar. SGG charges an expense ratio of 0.75%, and gained more than 75% in 2009.
As shown above, SGG has exhibited significant volatility historically, frequently rising or falling by as much as 5% in a single session and 15% in a week of trading.
“Indirect” Sugar ETFs
A rise in sugar prices will obviously benefit investors in SGG, but it can also impact stocks listed in countries that are major producers of the commodity. Even if these ETFs don’t include big allocations to sugar producers, an uptick in wealth in these countries generally leads to a rising stock market. Brazil (EWP, BRF) and India (INP, PIN, EPI, and INDY) are by far the two largest producers of sugar.
Disclosure: No positions.