| Investing in sugar |
Following up on our article on "Sugar prices explode, how can investors benefit", we provide hereunder a detailed breakdown of the possibilities available to retail investors to benefit from sugar price increases.There are three ways to invest in sugar, and using futures as an instrument to invest in the commodities market is a first possibility. Second, exchange-traded funds make it actually easier for retail investors to grow their money with commodities, it is easier and simpler than the futures market. Third, you can always invest in shares of sugar producers. Sugar futuresA future contract is a standard contract by which the investor has an obligation to sell or purchase a specific amount of a certain asset (sugar) on a specific date (the date of delivery or settlement date) against a specific price (the settlement price).
What is the difference with options? Where a future contract obliges the holder to the sale or purchase of the underlying asset (following the agreed conditions), an option provides only the right (but not the obligation) to do so. In contrast to an option contract, the parties entering into a future contract have to deliver (that is why Futures, compared to options, bear a margin obligation).
The sugar # 11 futures are the de-facto benchmark in the world sugar market. These futures are traded in New York (as well as in London) under the symbol SB. The contract size is 112,000 pounds and the months of exercise are January, March, may, July and October, up to 2011. However, the last trading day for the futures is the last working day of the month prior to expiration, but usually, the broker will automatically warn you, otherwise you will end up with enough sugar for the rest of your life.
It is not recommended for novice investors to trade in futures due to the large leverage. Although you can win a lot of money, you can also lose it just as easily. Sugar ETFsIt is more secure to invest in sugar using ETFs (exchange-traded funds). It is a kind of investment fund which can be traded like shares, and investors can short it or even trade it using a margin account. Sometimes you may also purchase options on ETFs. There are two ETFs specialized in sugar. The first is ETFS sugar (ticker: SUGA), designed to the DJ-AIG sugar sub-index. This is a DJ-AIG commodities index which allows investors to access commodity futures through a simple instrument. This ETF is traded in London (ETF LSE) but denoted in US$. An alternative, which follows the same index, is the exchange-traded note (ETN with ticker, NYSE SGG). In fact, this is a virtually identical instrument to the ETF SUGA, but it is run by Barclay's notes. There are only 7,000 notes traded per day, hence not a very liquid market. However, the notes follow the sugar index pretty well. It is therefore not surprising that the last few weeks the SGG fared rather well. The news of the rain in Brazil and the drought in India have pushed the prices up. Investing in sugar can be made even more interesting as there is a leveraged ETF available on sugar. The ticker is LSUG, and it is traded in London. The leverage factor is 2, which therefore means that the ETF moves twice as fast as the sugar futures index. It is important to notice though that ETFs with leverage attracted a lot of criticism lately. Indeed, leveraged futures ETF lose part of the leverage over time, and it is not difficult to understand why. Futures are, in fact, time-decaying instruments. In other words, the ETF must refresh its time-decaying contracts every month, and new contracts are more expensive because of the time value. It is therefore recommended not to invest for too long in leveraged futures ETFs such as LSUG. Shares of sugar producersFinally, a few words about an interesting pure sugar stock, Industria e Comercio Cosan SA, the largest producer of sugar in the world. With a market capitalization of approximately 7 billion Brazilian Real (approximately US$ 2 billion), this share could rise even more than the 60% increase we already saw this year.Although this is a Brazilian company, it is also traded in New York under the ticker CZZ. Not an expensive stock based on their annual turnover of $3.6 billion. They incurred a loss of 74 cents per share last year, but 2008 was, of course, not really a good year. Although the debt amounts to $2.6 billion, which seems substantial, the company has a mere $630 million in cash. It is also interesting to note that the company produces ethanol from sugar cane in such an efficient manner that the US introduced very high import taxes to protect its own less efficient ethanol production from corn. With the world economy picking up, energy prices are expected to rise, and this would provide a new impetus to the share besides what is happening in the sugar market. Until last October, the share traded between $10 and $14 and we are still a long way from the current $8. The sugar price increase makes this share an investment candidate. However, it seems appropriate to wait for a correction before investing. The exchanges worldwide had a strong bull run, pulling the price of this share as well. Since many of us expect a correction in September / October, it would be even cheaper to buy after the correction. |
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