A consortium of global food producers including Kraft Foods (NYSE:KFT), General Mills (NYSE:GIS) and Hershey's (NYSE:HSY) warned, in a letter addressed to Agriculture Secretary Thomas Vilsack, that the United States could "virtually run out of sugar". The letter estimates that by the end of 2009, the United States could only have 13 weeks of supply left.

Last week, sugar futures hit a staggering 28-year high of 23.33 cents per pound. While sugar is still well off its record 66 cents, set in 1974, analysts predict the commodity still has some room to run long term. (For background reading, see Sugar: A Sweet Deal For Investors.)

IN PICTURES: 20 Tools For Building Up Your Portfolio

The Perfect Storm
Two of the largest sugar-producing countries are experiencing a perfect storm, literally, of abnormal weather patterns. In Brazil, fields are submerged due to heavy July rains. This reduction in harvested sugar is compounded by the diversion of sugar crops into ethanol, which has led to dwindling Brazilian supplies. In India, the lack of a monsoon season has fields parched. This past June was the driest season in 83 years, and meteorologists predict that the rains may be returning, although they will only be about 87% of the average. As a result, India may need to become the largest net importer as opposed to world's largest exporter. The country has contracted to import 2.9 million tons of raw sugar.

In China, the world's third-largest producer, harvests are likely to lag behind domestic demand by nearly 1.5 million tons. A smaller Russian crop is also expected because of hail and drought. This should lead to imports of 2 million tons this year. Even Mexico is dealing with falling harvests. After an 11% drop in yield, Mexico may import up to 393,000 tons through the end of the year. Add these short-term weather conditions and supply contractions to the world's ever increasing "sweet-tooth", and sugar seems like a long term buy.

Ways to Play
The best and easiest way to get exposure to sugar is through the iPath Dow Jones AIG Sugar Sub-Index ETN (NYSE:SGG). As the only pure play of sugar, it is up more than 60% so far in 2009 and will continue to do well as the world's demand for sweets continues. The ETN is set to mature in 2038 and charges 0.75%.

Investors wanting to incorporate sugar into an overall commodity portfolio have a few choices using broad-based funds. With nearly 37% weighting to sugar, the PowerShares DB Agriculture (NYSE:DBA) is also great way to gain exposure to sugar, along with corn, soybeans and wheat. Barclays' (NYSE:BCS) offers a 43% weighting to sugar; it also has a sugar-laden ETN, the iPath DJ AIG Softs Sub-Index ETN (NYSE:JJS).

Bottom Line
Sugar remains an interesting growth story. Weather conditions and drops in harvest rates have the commodity rising in the short term, while pent up demand and the world's increasing appetite for sweet things make for a real long-term story. For investors wanting to add sugar to their portfolios, the previous exchange traded funds are a great way to play the commodity. (For more, see Commodity Prices And Currency Movements.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  2. Options & Futures

    Analyzing The 5 Most Liquid Commodity Futures

    Crude oil leads the pack as the most liquid commodity futures market, followed by corn and natural gas.
  3. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  6. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  9. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
RELATED TERMS
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Equity

    The value of an asset less the value of all liabilities on that ...
  4. Derivative

    A security with a price that is dependent upon or derived from ...
  5. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!