SGG Tumbles: Historic Day For Sugar ETF

by on November 11, 2010 | ETFs Mentioned:

Thanks to fears over the health of the dollar and ongoing supply issues, a number of commodities have tested new record highs in the past few weeks. Products ranging from coffee and cotton to corn and wheat have seen prices skyrocket as investors move more of their assets in this space to take advantage of favorable market conditions. However, no bull market can run straight up, as we have seen in recent days in both the cotton and silver markets, where prices sank by over 5% thanks to regulatory changes. While these losses are significant, they pale in comparison to the historic fall that sugar experienced during Thursday’s trading session.

Thanks to a drought in Brazil, as well as heightened commodity demand across much of the emerging world, sugar prices had been on a tear as of late, hitting a 30-year high of 33.39 cents on the ICE Futures market. However, earlier today India announced that it was likely to have a sugar crop surplus of close to 3.5 million metric tons, a level large enough to help cancel out the slumping supply in Brazil. This news rocked the sugar market as prices tumbled by over 3 cents for the front-month contract in March, the largest single day decline for the commodity since 1980 [also read Inside SGG's Impressive Rally].

This plunge was a result of the degree of surprise for the production level estimates; India’s surplus was roughly three times market expectations.”There’s been a pretty extreme reaction,” said Jack Scoville, vice president of Price Futures Group in Chicago, adding that the final total, which represents how much can be exported, could be even higher. “There had been so much talk of 35 cents…it appears we’ve reached at least a short-term top, depending on what the Indians decide to do.” [read Commodity ETFs Skyrocket As Dollar Slides, Inflation Fears Mount]

The only variable left relates to how much India will allow for export, a decision expected later this month. While some would like to see the government authorize a two million ton license, others worry that this will cause another crash in sugar prices. Instead, many are looking for the country to slowly portion out export tranches in order to keep prices relatively high and sugar producers happy. “It seems that India will be drip feeding out sugar exports,” said Jonathan Kingsman, managing director of Lausanne-based sugar consultancy Kingsman SA. “The market is now expecting the Indian government to authorise exports in tranches of, say, 500,000 tonnes at a time, spread over the next few months.”

Sugar ETF In Focus

The main way to track the price of sugar via an exchange traded product is with the iPath Dow Jones-UBS Sugar ETN (SGG). The sugar ETN fell by an astounding $11.54 a share, or roughly 11.9%, in Thursday. The fund is linked to the Dow Jones-UBS Sugar Subindex Total Return, a single-commodity sub-index currently consisting of one futures contract on the commodity of sugar. This historic drop only pushes the fund down 3.1% over the past week and barely makes a dent in SGG’s longer-term performance figures. The popular ETN is still up 68.2% over the past quarter and 105.5% over the past half year period. Whether this event marks the top for sugar prices in the near term or only a temporary setback, one thing is for sure: those who have been invested in sugar for the past few months have certainly experienced some sweet returns [also read Warning: Commodity Surge Could Sink Consumer Staples ETFs].

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Disclosure: No positions at time of writing.