Ramadan Creates Sweet Future For Sugar ETF (SGG)

by on August 3, 2010 | ETFs Mentioned:

With many traders taking time off in August, the month looks to be full of low-volume trading days and minimal action before things pick back up after Labor Day. However, one major event starts next week, Ramadan, which is one of the most important holidays in the Muslim faith. The celebration, which will begin on August 11th and continue until September 9th, involves fasting during daylight hours, and feasting once the sun has gone down. After sunset, it is common to eat elaborate pastries or candies, satisfying a daily sugar fix. The Muslim faith is one of the largest in the world, with roughly 1.5 billion who actively practice; that’s approximately one-seventh of the world’s population who will be demanding more sugar for the next month or so. While this is an important time for the individuals who practice this faith, it also brings commodity prices into light, particularly, sugar which has run into severe supply problems as of late. Producers all around the world are struggling to meet this heavy demand which is helping to send prices of this sweet commodity surging higher [see also Three ETFs To Play Jim Rogers’ Advice].

Brazil is the world’s largest producer of sugarcane, producing 648 million tons in 2008 alone. “Brazil will account for 65 percent of global raw-sugar exports in the season started in May, with total production at a record 40.7 million tons, according to the U.S. Department of Agriculture.” writes Claudia Carpenter. Their ports are under scrutiny in the weeks prior to Ramadan, as they have hefty orders to fill for Muslim countries overseas, many of which have it written into the contracts the shipments must arrive before Ramadan begins. Unfortunately, this year has seen a bottleneck in exports of the coveted product, as bad weather plagues the already pressured system. This has combined with rough seas to force ships to stay at port which in turn has created a trucking bottleneck which has led to a 40 hours wait to simply offload sugarcane onto ships. Brazilian exporters are scurrying to fill their orders, but with rough weather likely to continue and a heavy backlog, they may fall short [see also The Definitive Guide To Sugar ETF Investing].

If demands are not met, and a shortage is created in Muslim countries, sugar future prices could surge upward in the near-term. This historically volatile commodity is no stranger to heavy swings in prices; earlier this year, prices hit a 29-year high of 30.4 cents a pound due to shortages world wide before slumping back to their current level around 19 cents per pound. This sell off leaves plenty of room for price appreciation with the demand spike close on the horizon. With Ramadan just days away, this commodity will be under the microscope as Brazil attempts to overcome all of the obstacles thrown in its way [also see Sugar ETF: Due For A Comeback?].

iPath Dow Jones-AIG Sugar Total Return Sub-IndexSM ETN (SGG)

This commodity ETN tracks the Dow Jones-UBS Sugar Subindex Total Return, which is a single-commodity sub-index currently consisting of one futures contract on the commodity of sugar. Proof of sugar’s volatility can be found in SGG’s fundamentals, with the ETN up 23% in the last 13 weeks but down over 30% on the year. SGG charges an expense ratio of 0.75% and offers the purest way for investors to play this spike in demand [also read Ten Commodity ETFs Every Investor Should Know (But Most Don't].

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Disclosure: No positions at time of writing.