Investing in the Sugar Shortage

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Give Your Portfolio a Sugar High

Tony Daltorio, Investment U Research
Wednesday, December 2, 2009

Name the commodity that recently hit a 28-year high.

No, it’s not gold. It’s one that you probably use every day and don’t think twice about it.

Sugar.

In a recent column, I delved into the little-discussed cocoa market – one that is part of the same “soft” commodity category as sugar.

Many investors shy away from the commodities world, fearful of the fear mongering stories of heavy losses and bushels of corn being dumped on unsuspecting investors’ front lawns. But such stories are exaggerated and commodities can actually be a lucrative investment.

And when we’re talking about sugar, we’re talking about the two main sugar-producing nations – India and Brazil.

The Cavity In India’s Sweet Tooth

India is the world’s largest sugar consumer, plowing through 23 million tons of sugar every year.

What’s more, analysts expect that amount to climb even further in the years ahead, as the national average income rises.

Fortunately, India also produces the second-largest amount of sugar. Unfortunately, however, production fell off a cliff during the 2008-09 season, plummeting from 15 million tons to 26 million.

This has made India more dependent on sugar imports – a far cry from the days when it used to export large amounts of sugar. This has created a massive change in the supply/demand equation for the entire market.

And while the driest monsoon season since 1972 exacerbated the situation, much of the problem is structural and therefore more difficult to fix.

For example, India heavily regulates its sugar production – from the prices at which the crops sell, to the payments the farmers receive. In a perfect world, such regulation would work well. But like many other countries, India’s ruling powers have their flaws.

Due to political disputes, which started in the 2006-07 season, many sugar farmers never received any payments at all.

El Nino Messes With Brazil

Sitting atop the sugar production tree is Brazil, accounting for a whopping 60% of global sugar exports each year.

And unlike in India, where weather conditions have made a bad situation even worse, Brazil can blame just about all of its current sugar woes on the weather. This year, El Nino has brought too much rain to the country’s normally dry season, thereby reducing the number of days that farmers can cut cane.

To make matters worse, the abnormal rainfall also cuts into the amount of sucrose that refiners can extract, resulting in lower sugar production altogether.

Ultimately, analysts estimate that Brazil will only harvest 29.4 million tons come March 2010 – down 5.6% from the last forecast in April.

So how do you profit from this shortage situation?

Three Ways to Profit From Sugar’s Production Woes

Jonathan Drake, head of sugar trading at commodity firm Cargill, believes the current sugar shortage situation is far worse than the last major sugar shortages of 1973-74 and 1980-81. In fact, he said earlier this year that the production shortfalls in India and Brazil were already creating the “beginning of a perfect storm” for the commodity.

What’s more, he points out that sugar crops in countries like Mexico, Pakistan, Russia and China are also down this year – and those countries may need to import sugar. That would put even more pressure on Brazilian and Indian sugar crops.

So with sugar prices having taken a break from their recent highs, it’s a perfect time for investors to get involved in order to take advantage of current shortages. I suggest three ways…

iPath Dow Jones-UBS Sugar Subindex Total Return (NYSE: SGG): The exchange-traded note (ETN) tracks the performance of sugar without the hassle of additional fees.
iPath Dow Jones-UBS Softs Subindex Total Return (NYSE: JJS): This is also an ETN, but offers broader exposure to the soft commodities market. The portfolio consists of sugar, coffee and cotton, with sugar accounting for approximately 46% of it.
Cosan Limited ADR (NYSE: CZZ): If you prefer to play an individual sugar stock, take a look at Brazilian company, Cosan. It’s the largest producer and processor of sugar cane and offers a more direct route into the market.

Good investing,

Tony Daltorio

P.S. Commodities expert Lee Lowell is currently attempting to take advantage of the current sugar situation, with a play on sugar futures options in the Xcelerated Profits Report. If you’d like to find out how he’s doing it – plus gain access to all the team’s other recommendations – annual membership costs just $49.50 a year and you can see the extensive range of benefits that you get for it by visiting this link.