Supply Woes Could Boost Sugar ETFs

Kevin Grewal
updated | Author's Website

With enhanced uncertainty in the use of genetically modified seeds to produce sugar in the U.S., a supply and demand imbalance in sugar could provide positive price support for 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).

According to Bill Tomson of the Wall Street Journal, earlier this year, a judge threw out the USDA’s initial approval for the use of genetically modified seeds to produce sugar-beet.  According to the USDA, this could potentially hinder U.S. sugar production by nearly 20 percent as that genetically modified beets have come to account for 95 percent of the U.S. sugar-beet crop in the past five years and the abstinence of these seeds will force the use of traditional sugar-beet seeds. 

To put it into perspective, it takes nearly two years to produce traditional sugar-beet seeds, making any current surpluses highly susceptible to depletion.  In fact, the USDA suggests that if farmers can’t plant genetically modified seeds next spring, a shortage of traditional seeds would likely cut 1.6 million tons from next year’s sugar-beet crop. 

Domestic supply constraints could further worsen due to strict tariffs imposed by the U.S. on sugar imports.   Lastly, global supplies of the sweet, edible crystalline carbohydrate are already diminishing as global demand continues to pick up, pushing prices up and making it that much tougher to import. 

In a nutshell, a supply and demand imbalance is likely to prevail in the sugar markets, providing positive price support for the aforementioned ETFs.

  • iPath DJ-UBS Sugar TR Sub-Idx ETN (SGG), 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 (DBA), 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 (UAG), 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.

Disclosure: No Positions

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