Eric Dutram: 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).
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.
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 (NYSEARCA: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.
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.