Supply Worries Send Sugar ETF Soaring

by on December 11, 2009 | Updated June 9, 2010 | ETFs Mentioned:

Soft commodities were active on Thursday, with sugar futures surging to their highest level in more than three weeks and coffee futures jumping on worries of supply dips in coming months. Heavy rains in Brazil, the world’s top sugar producer, disrupted output and sent mills scrambling to renegotiate contracts with trading houses after production levels fell short of expectations. Worries over the impact of excessive rains also fueled worries of coffee deficit in the coming year, as did adverse growing conditions in South Africa. 

Sugar High…And Crash?

The iPath Dow Jones-UBS Sugar Total Return ETN (SGG) added almost 6% on Thursday, further establishing it as one of the most volatile exchange-traded products. Thursday was the 46th time this year the fund has moved at least 3% in a single session. SGG has gained or lost at least 1% on more than six out of ten trading days so far this year.

SGG’s Wild Ride
Dates % Change
8/17-8/31 +12.0%
9/1-9/8 -15.2%
9/24-9/30 +11.3%
10/1-10/9 -15.6%
10/12-10/19 +13.4%
10/20-10/28 -9.6%

Several times in the last six months, run-ups in SGG have been followed by sharp downward corrections. The note gained more than 30% in August of this year as worries about big shortfalls in India and Brazil caused several major food producers to draft a letter to the Secretary of Agriculture proclaiming that the U.S. could “virtually run out of sugar” if import restrictions weren’t lifted. But SGG then lost more than 15% in the first week of September as fears eased and speculators took their profits.

The sugar ETF has surged by at least 10% twice more since August, with each jump followed by a steep decline. The bulk of the discussions on need for increased regulation of commodity futures products has focused on distortion of prices in oil and natural gas markets, but speculators seem to be very active in the sugar market as well.

SGG

Given its volatility so far this year, SGG is a risky investment choice. Previous supply scares have sent the fund up 10% or more on multiple occasions this year, suggesting that there may still be some upside in this run. But downward corrections following previous gains have been quick and severe, meaning that mistiming an entry to SGG could result in big losses.

Other Sugar ETF Options

Sugar is a component of most diversified commodity exchange-traded products (such as DJCI and DBC), but is generally given a weighting of 5% or less (see a breakdown of diversified commodity ETF holdings here). Beyond the pure play SGG, the iPath Dow Jones-UBS Softs Total Return ETN (JJS) has a material weighting to sugar (44% as of November 30), as well as cotton (27%) and coffee (29%). This diversity of holdings makes JJS less volatile than SGG, but not by much: this ETN has moved by at least 3% in almost one out of five sessions this year.

JJS

For more information on SGG see…

Disclosure: No positions at time of writing.