India Supply Concerns Boost Sugar ETFs
Inclement weather may prevent Uttar Pradesh from producing the expected 25 million ton crop.
Heavy rainfall and inclement weather have taken their toll on India’s second largest sugar-producing state, worrying many investors that global supply won't meet demand and possibly sending prices higher. However, the circumstances will likely provide positive price support to the iPath DJ-UBS Sugar TR Sub-Idx ETN (SGG), the PowerShares DB Agriculture Fund (DBA), and the UBS E-TRACS CMCI Agriculture TR ETN (UAG).
Elevated demand for sugar has resulted in a diminishing supply of global sugar stock levels, pushing levels to their lowest point in 20 years and prices of raw sugar back up toward their 30-year high levels. Furthermore, yields in Uttar Pradesh, which is India’s second largest sugar-producing state, have been cut, enhancing fears that India may not produce the 25 million ton crop that the global market has been hoping for, reports Caroline Henshaw of the Wall Street Journal.As for the near future, global demand for sugar is expected to remain elevated and continue to increase as the global population grows and the purchasing power of emerging nations increases. This global imbalance in supply and demand will likely provide positive price support to the previously mentioned ETFs.
- iPath DJ-UBS Sugar TR Sub-Idx ETN, which is a pure play on sugar. SGG is an unsecured, unsubordinated debt security linked to an index designed to reflect the returns available on an unleveraged investment in futures contracts on sugar.
- PowerShares DB Agriculture Fund, which gives exposure to agricultural-based commodities through the use of futures contracts; DBA allocates 12.5% of its assets to sugar futures.
- UBS E-TRACS CMCI Agriculture TR ETN, seeking to track the performance of the UBS Bloomberg CMCI Agriculture Index Total Return, which measures the collateralized returns from a basket of 10 futures contracts representing the agricultural sector; UAG currently allocates 16.58% of its assets to Sugar #11 futures contracts and 4.28% to Sugar #5 futures contracts.
Although an opportunity seeks to exist in the sugar markets, it's equally important to consider the inherent risk and volatility involved with investing in the agriculturally driven commodity. To help mitigate the effects of these risks and volatility, the use of an exit strategy is important. Such a strategy can be found at SmartStops.net.
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