Despite continued rising demand pressures from emerging markets, many natural resources still operate on a cyclical bias. For example, natural gas
demand and prices generally rise in the winter as more people begin to heat their homes. Conversely, when the weather is warmer, natural gas supplies build and prices drop.
Aside from natural gas, sugar has presented some of the most cyclical returns
in recent years. For investors looking for a quick trade or perhaps those waiting for the right time to build a long-term position, now could be your chance.
With global sugar demand continuing to rise, investors may want to begin thinking about building a position in the soft commodity as it nears seasonal lows.
The time period between April and the beginning of June often marks a low point for sugar prices. Several factors go into creating that trough in prices. First, sugar producers in key growing regions like Brazil, India, and Thailand often pre-sell their harvest during these three months. Once the sugar harvest has begun, there is often a rally in sugar prices
. This is due to the fact that producers have already locked in much of their sales volumes and become more focused on task at hand: harvesting sugarcane. As such, the remaining sales of the current sugar crop are left to “run wild.” No volume discounts are cut. This helps push the price up. Secondly, June is often the month in which global buyers enter the markets to buy a portion of their annual sugar requirements.
Another huge reason for rising sugar prices after this time period has to do with global weather patterns. Two of the biggest growers – Brazil
and India – face severe weather woes at roughly the same exact time. In Brazil, the last few years have seen fields submerged by heavy June/July rains, which caused reductions in harvested sugar. At the same time on the other side of the world, India has had to deal with a lack of monsoon rains, which has left fields parched and dry. The rainy season is critical in India as the nation features poor agricultural-based water infrastructure. Those rains are a necessary component for many farmers in order to produce any crops at all.
By the time these weather events
hit in the beginning of the summer, pre-production orders for sugar are already out the door and the global spot buyers have stepped in.
Playing the Summer Surge
Given that this dip in sugar prices during April through June has happened pretty much every year since 1996, investors wanting to play the sugar summer surge should get ready to buy. Aside from buying futures contracts, investors have two easier exchange traded ways to play the soft commodity.
The oldest of these is offered by Barclays in its iPath line of ETNs – the iPath DJ-UBS Sugar ETN
(NYSEARCA:SGG). The exchange traded note mirrors the returns that are potentially available through an unleveraged investment in the futures contracts on sugar. The ETN has roughly $35 million in assets and has followed the “down in April, up in June/July” pattern perfectly. However, trading volume for the ETN has slipped over the last few years as investors have fled to broader commodity products. Expenses run at 0.75% a year.
Barclays also offers its iPath Pure Beta Sugar ETN
(NYSEARCA:SGAR). This fund uses a proprietary methodology that allows the ETN to roll into one of a number of futures contracts with varying expiration dates, which has allowed it to slightly outperform its sister fund.
Like SGAR, the Teucrium Sugar ETF
(NYSEARCA:CANE) is also designed to limit some of the shortcomings that are inherent in commodities futures trading. The fund’s holdings are spread across multiple maturities, rather than rolling over to the front month futures contract as older ones expire. This allows CANE to help minimize the adverse impact of contango
on the funds returns. Like both SGG and SGAR, the Teucrium ETF has managed to follow the same seasonal pattern.
However, with only $2.5 million in assets, anemic trading volumes, pesky K-1 statements
come tax time and a hefty 2.32% expense ratio, investors may be better suited in one of the other options for playing sugars seasonal surge – both long or short term.
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Editor's note: This article by Aaron Levitt was originally published on Commodity HQ.
No positions in stocks mentioned.