After heavy expansions in sugar farming during peak prices, sugar prices and a related exchange traded note (ETN) are suffering the consequences of an oversupplied market.
The iPath DJ-UBS Sugar ETN (NYSEArca: SGG) is down nearly 30% year to date. It has been at the leading edge of the commodities rally and the recent pullback. The ETN tracks the movement of sugar futures.
Abah Ofon, an analyst at Standard Chartered Bank, said that sugar futures will average 24 cents a pound for 2011, or 15% lower than current sugar price averages, then lift to 25 cents next year, reports Bloomberg. The dip in sugar prices, however, will not plummet as countries like China are capitalizing on the low prices to rebuild domestic stockpiles.
Ofon stated that the sugar market will see a surplus of around 1 million metric tons for the season ending Sept. 30, and the sugar glut will continue for 12 months after that.
Sugar futures, though, could begin to turn around by the second quarter of 2012 as supply from Brazil and Thailand dwindles and stockpiling builds back up, adds Ofon.