I like investing in commodities for a few reasons. First, we’re in a commodity bull market which puts the long-term trend on my side. As long as you’re willing to be patient, you should make money. Next, it’s easy to understand why the price of each commodity goes up and down. The only thing you have to study is supply and demand – Economics 101. When prices are high, producers try to (mine, grow, drill, etc.) a lot of the product to sell it at high prices. If too much of the product is produced (large supply), prices will fall. If supply is unable to keep pace with demand, prices go up. Pretty simple stuff. Lastly, commodities are real assets that have almost no chance of losing all of their value, whereas a company can default on their debt (bonds) or go bankrupt (stock goes to zero).
Sugar is currently a commodity on my radar that I’ve been looking at buying. Global demand for sugar has been rising steadily the past few years, mainly driven by increased consumption in Asia, and it doesn’t look to be slowing anytime soon. Additionally, many countries have mandated the blending of ethanol into gasoline to lower the total dependency on oil. While the US was distilling corn to create ethanol (something we found to be very cost ineffective), Brazil, the world’s largest sugar producer, has been using sugar as a much cheaper means. I’m looking at sugar now for two reasons:
- As the price of corn has steadily climbed higher, many of the refineries around the US have been shutting their doors. This should shift demand to Brazil for more of their sugar-produced ethanol.
- After averaging 30 year highs in 2011, a boom in sugar production created an over-supply of inventory driving the price down nearly 50% over the last year and a half. Sugar is now selling around 19 cents/pound, which Brazil has stated to be parity to their profit margins on ethanol. Basically, if sugar is selling below 19 cents/pound, it’s more cost effective for them to take their sugar off the market (reduce supply) and turn it into ethanol. Anything over 19 cents/pound, they’ll simply sell their sugar as raw sugar.
A report this week showed that India, the world’s largest consumer and #2 producer, now expects to produce more sugar than initially estimated this season – the direct result of farmers trying to cash in on last year’s high prices. The report knocked sugar down another 4% this week. The question now is how long will over-production continue at these prices, and when will Brazil start to pull their supply off the market?
I’m considering making a small investment now and adding to it if prices continue to slide. I would usually be more confident right here at Brazil’s ethanol parity but most estimates are showing ample stockpiles that should take some time to work down, making this a long-term investment. The USDA is set to come out with their semi-annual report on estimates this month. I can only hope it shows that producers went gangbusters over the past season which would send the price even lower, creating a nice opportunity to jump in.
The easiest way to invest in sugar (and many other commodities) directly is through the non-leveraged Exchange Traded Products. Teucrium has an ETF (CANE) and Barclay’s has two ETN’s (SGG & SGAR). SGG was part of their first wave of commodity ETN’s while SGAR is part of their new “Pure Beta” series which is supposed to correct a lot of the inefficiencies in rolling the underlying futures contracts. I’m not sure why, but the new Pure Beta Series hasn’t garnered a lot of interest and most volume is still traded in the first series (SGG). Until the volume picks up, SGG is what I’ll be using (the performance difference has been negligible). Being an ETN, it’s more tax favorable than CANE and I don’t have to worry about the premium/discount issue that ETF’s can have.
Sugar – 10 years
Sugar – 3 years
With all this sugar, remember to brush your teeth!
-Nick