Friday, January 30, 2015
Sugar is a commodity to watch this year.
In November, I told you about the bear market in the sweet stuff. From 2010 to early 2011, sugar saw a huge boom. Prices surged from less than $0.14 per pound to more than $0.34 – a 142% increase.
Rising prices caused farmers all over the world to increase their sugar production. But this led to an oversupply. And sugar entered "bust" mode. Prices fell 50% from their 2011 high to November.
But I said the bottom was likely in for sugar... farmers were cutting production and demand was rising.
My call was a little early. Sugar prices have fallen around 3% since my essay. But that's about to change...
Most sugar (around 80%) comes from sugar cane, which is grown in hot, wet climates around the world – like in Brazil, Thailand, and India.
Sugar cane is also a "semi-perennial" crop, which means it's hard for farmers to switch to another crop (like when prices fall).
So even though some farmers have been switching crops because of low sugar prices, the vast majority haven't. And world sugar production – and prices – haven't changed much.
But now, sugar production is set to fall in the world's main sugar producing (and exporting) countries...
According to Georgia Twomey, a sugar analyst for the giant Dutch bank Rabobank, "below-average rainfall forecasts and the potential of an El Niño event raises concerns for [the] 2015 [sugar crop]."
An El Niño event occurs when the equatorial Pacific Ocean becomes unusually warm. And it has impacts on weather worldwide.
In Australia (the world's ninth-largest sugar producer, which accounts for 7% of the world's sugar exports) and India (the world's second-largest sugar producer, which accounts for 3% of the world's sugar exports), it causes severe drought – which limits sugar cane growth.
In Brazil (the world's largest sugar producer, which accounts for 45% of the world's sugar exports), it has the opposite effect. An El Niño event causes torrential rains, which are just as bad as drought. High-water levels increase disease and pests. It also makes harvesting sugar cane more difficult.
According to commodity broker Marex Spectron, the El Niño in 1997 caused sugar production in Brazil to decline by 2%. That was the only year in the last decade when production fell.
According to the National Oceanographic and Atmospheric Administration (NOAA), there is a 50% to 60% chance of El Niño-like conditions over the next two months. So we could soon see sugar production decrease significantly.
We're already seeing falling forecasts. For example, the U.S. Department of Agriculture (USDA) reduced this year's Brazilian and Thai production forecasts by 2 million and 1.1 million metric tons, respectively.
Meanwhile, as you can see in the table below, demand for sugar is increasing – including in the countries that import the most sugar, like China and India.
Less supply with increasing demand should cause sugar prices to rally this year.
Investors looking to speculate on increasing sugar prices can buy one of these three exchange-traded funds with exposure to sugar – the iPath Dow Jones-UBS Sugar Subindex Total Return Fund (SGG), the iPath Pure Beta Sugar Fund (SGAR), and the Teucrium Sugar Fund (CANE). These funds are already up an average of 5% since January 6 on recent sugar-price strength. And they should continue to do well as sugar prices recover.
Matt says the rally in another commodity is also just getting started. "The price of silver is up 13%. But there's plenty more upside ahead." Get all the details here.
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