Sugar ETF (SGG) Continues Freefall

by on February 22, 2010 | ETFs Mentioned:

Volatility is nothing new to the iPath Dow Jones-UBS Sugar Total Return ETN (SGG), but the big price swings seen over the last three weeks have been truly impressive. After losing as much as 7% in trading Monday, SGG has dropped a whopping 15% this month after adding 11% in January. The sugar ETF’s extreme fluctuations have occurred as a battle rages between sugar farmers and food companies, with the Department of Agriculture caught right in the middle.

Under the current system, the U.S. government limits imports from foreign countries to ensure a minimum price for farmers. Under the North American Free Trade Agreement, there is no limit on sugar imported from Mexico, but Mexican exports can be difficult to predict. The United States Department of Agriculture (USDA) had set the import quota at 1.231 million short tons, the minimum amount needed to ensure compliance with World Trade Organization requirements.

Speaking at the International Sweeteners Colloquium in Miami, the USDA Undersecretary Jim Miller left open the possibility of boosting the quota this year if uncertainty in supply forecasts persists. “We are carefully watching the global market for sugar due to the significant tightening of supplies throughout the world,” Miller said. “USDA will reassign company allocations in May 2010 to ensure that all domestic sugar processors have enough allocation to market their full 2010 crop.”

While a number of factors–including higher allocations to ethanol fuel and less-than-optimal growing conditions in major sugar-producing regions–have contributed to higher sugar prices around the world, the cost of the sweetener has surged in the U.S., in part because of an inability of some domestic processors to meet their allotments. Last year, several major food companies sent a letter to the USDA warning that the industry could “virtually run out of sugar” if import quotas weren’t increased or removed altogether. But sugar farmers, who have a big voice in Washington through Collin Peterson, the chairman of the House Agriculture Committee, have been predictably opposed to any quota hike.

Freefall Continues

After hitting a 29-year high earlier this month, sugar prices have plummeted on profit taking, concerns over the impact of a quota increase, and a mini-rally in the U.S. dollar. Moreover, reports that buyers are deterred by current price levels has caused some buyers to believe that the recent run-up was a bit overdone.

SGG has now lost about 6% on the year, and has taken investors on a wild ride in 2010. The ETN has moved by at least 3% in more than a third of trading sessions and has gained or lost at least 1% in seven days out of ten. Despite the recent tumble, SGG remains up nearly 60% over the last 12 months.


Disclosure: No positions at time of writing.