As the demand for sugar outpaces supply and it trades at bargain prices, this commodity and the exchanged traded notes (ETNs) that track it may be a sweet deal.

Relatively speaking, today sugar is cheap.  In October 1980, London refined sugar (No.5), was trading at an average price of 42.30 cents per pound as compared to 15.07 cents per pound in October 2008.

The USDA reports that sugar # 11 traded on the New York Board of Trade, the U.S. equivalent to London refined sugar, has averaged 10.01 cents a pound over the last 10 years, while London #5 has averaged 12.30 cents per pound, reports Julian Murdoch of Hard Asset Investors.  When one includes inflation, it just adds gravy to the pot.

Murdoch also reports that sugar, which has gained 19%, has outperformed the S&P 500, which has lost about 39%, mainly because of supply and demand.  Consumption has increased because of a demand for refined foodstuffs from the surge in per-capita income of Asian economies and a transition away from high-fructose corn syrup to actual sugar.

Until recently, supply had kept pace with demand. However, two top sugar producing countries, Brazil and India, have been hit by the global credit crisis and a decline in production, respectively, resulting in estimates for production to drop by 3.8%.

Falling crude oil prices may curtail this supply shock, in that a huge chunk of the sugar produced in Brazil is used to fuel the production in ethanol and may now be used to chip away at the decrease in production.

Since its inception in July, iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) is down 25.5%.

Tags: Asia, Brazil, Commodity ETFs, Emerging Markets, ETNs, India, Latin America, SGG, Sugar