The wild ride for sugar ETF investors is showing no signs of slowing down any time soon. After sugar prices hit 30 year highs in early February, prices in New York have slumped by nearly 40% over the last month. But prices have rebounded sharply in recent trading, reclaiming large chunks of the ground lost during the recent slide.
Pinpointing the exact cause of the sharp decline in sugar prices is difficult, but it appears that both fundamental and speculative forces are at work. Sugar output in India is now expected to top previous forecasts, as yields in the primary cane-growing states are on pace to exceed expectations. Farm Minister Sharad Pawar recently said that output for the 2010 fiscal year will top 17 million metric tons, higher than the 16.8 million tons estimated by the Indian Sugar Mills Association earlier this month. Increased output in India would translate into reduced import needs for the world’s largest consumer of sugar, freeing up global supplies.
Separately, an Australian growers group indicated that output could increase by as much as 7% over last season. Australia is the third-largest exporter of sugar.
The iPath Dow Jones-UBS Sugar Total Return ETN (SGG) dropped 36% between the end of January and Tuesday’s close, as speculators who had pushed prices to near record highs all began running for the exits. The pullback may have been a bit overblown, however, as SGG has staged a mini-rally. SGG bounced back on Thursday, adding nearly 4% in late afternoon trading.
SGG’s rally came after analysis firm FO Licht increased its estimate for the deficit in global sugar output, saying global consumption this year would exceed production by 7.7 metric tonnes. The previous forecast had projected a gap of only 6 million tonnes. Also on Thursday, Barclays Capital said that “considerable upside risk” to sugar prices exists, echoing comments made previously by Goldman Sachs. “Our estimates suggest the sugar market remains in substantial deficit, with little fresh supply until Brazilian exports resume from May onward,” BarCap analyst Kevin Norrish said. Signs of an uptick in physical demand globally also helped to boost futures prices.
SGG has exhibited remarkable volatility since its inception in June 2008; the average daily change in price is nearly 2%, and daily swings of 5% aren’t uncommon. For investors able to handle this volatility, SGG can be an effective diversifying agent when added to traditional stock and bond portfolios.
SGG’s trading volumes provide some insight into how this fund is used by investors. Average daily volume since the beginning of February is about 50,000 shares, or nearly 8% of total shares outstanding. So while some investors no doubt see SGG as a longer term holding, it is apparently a favorite of more active short-term traders as well.
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Disclosure: No positions at time of writing.