What Happened to the Sugar ETF? - ETF News And Commentary
24 Août 2012 - 12:23PM
Zacks
Commodity ETF investing has been quite rocky this summer as
product performances have diverged strongly in recent months. Some
products, like corn or soybeans, have been on a tear posting
incredible gains in the period, while others, like coffee or any of
the industrial metals, have seen extreme weakness in the summer
months.
Yet while many commodities have been in very well defined
trends, one commodity has been seemingly jumped between the two
groups during recent trading periods; sugar. The sweet commodity
started off the summer as one of the only ones to rival the grains
in terms of performances in the early part of the season, but it
has fallen by the wayside as of late, and is now one of the worst
performing commodities over the last four weeks (read Top Commodity
ETFs in this Uncertain Market).
This represents an incredible reversal for the commodity,
although it should be noted that sugar is often quite volatile in
its trading. Still, to go from one of the best to one of the worst
in such a short-time period may be puzzling to some investors,
especially those who haven’t been focused in on the sugar
market.
Conditions in Brazil
First, the nation of Brazil, which is the largest sugar producer
in the world, has seen conditions improve greatly in recent weeks.
This has come at a key time since the nation is now harvesting its
crop while many are also speculating that the solid weather will
increase production and force traders to get rid of more
contracts.
This creates a very bearish situation for the commodity at a
time in which a great deal of supplies are coming on to the market.
In fact, crops are now expected to come in just over 512 million
metric tons, 12 million metric tons higher than the last forecast.
This trend, along with the weak momentum in the sugar market, could
lead the product even lower in the weeks ahead (read Three
Commodity ETFs That Have Not Surged).
India Market
Meanwhile around the world in India, markets are also seeing an
uncertain outlook for sugar. While there are some concerns about
output thanks to the drought, demand has been weak and the nation
has been willing to keep up exports and release more sugar into the
open market, two trends which could keep a lid on sugar prices for
the time being.
However, the country could face a bit of a shortage in the next
growing season, especially if growing conditions remain weak or if
domestic demand picks up. This could throw a wrench into the global
supply picture as India is actually the second biggest producer of
the crop on earth, suggesting that troubles in the nation could
filter through into other markets as well.
Futures Market
These trends have helped to put the sugar futures market into a
mild state of contango which is bad news for products which roll
continuously into front-month contracts. That is because those who
continuously roll must buy more expensive contracts each time, a
bad situation to be in if sugar contract prices fall closer to spot
as the expiration approaches (read Is USCI The Best Commodity
ETF?).
Furthermore, many of the issues outlined above have shifted in
recent weeks, causing sugar prices to plummet in the time frame.
For example, the lessened worries over Indian and Brazilian markets
have only just now hit futures pits, causing elevated prices at the
beginning of the summer to evaporate and put sugar contracts and
ETPs based on the commodity far lower in recent trading
sessions.
Sugar ETF Investing
In fact, the most popular sugar exchange-traded product, the
iPath DJ AIG Sugar ETN (SGG), has lost about 17.3%
in the past one month period. This compares to a roughly similar
gain from mid June to mid July, leaving the product more or less
flat over the trailing three month period.
This is in sharp contrast to ETPs tracking commodities like corn
or soybeans which have maintained their momentum throughout the
summer, or ones like coffee and nickel, which have seen weakness
pretty much throughout the summer period (read Three Commodity ETFs
Surging This Summer).
This quickly changing trend shows that commodity investing can
be quite fickle and can be especially so in the agricultural or
soft commodity markets. Products in this segment of the ETF world
need to be monitored very closely, as slight changes in perception
can drastically alter the outlook—and thus the prices—for
commodities in a very short time frame.
Sugar and SGG have been especially good examples of this
phenomenon this summer and could still see some weakness in the
coming weeks. However, it should be noted that SGG currently has a
Zacks ETF Rank of 1 or Strong Buy for the coming one year period
(also see Top Three Precious Metal Mining ETFs).
This suggests that SGG may just be temporarily beaten down and
that it could recover to its lofty levels as we approach 2013.
After all, the Indian market is looking for weaker supplies in the
following year’s harvest and Brazil’s output remains uncertain
after this year. Given these factors, it could be worth it to give
SGG another look, although close monitoring and a laser-like focus
on the supply and demand picture for the sweet commodity are
probably warranted when dealing with this volatile corner of the
commodity ETF world.
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IPATH-DJ-A SUGR (SGG): ETF Research Reports
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