Supply Woes Could Boost Sugar ETFs

Exchange-traded funds that track sugar prices could get a boost from uncertainty about the use of genetically modified sugar-beet seeds.
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NEW YORK (TheStreet) -- The iPath DJ-UBS Sugar TR Sub-Index ETN (SGG) - Get Report, the PowerShares DB Agriculture Fund (DBA) - Get Report and the UBS E-TRACS CMCI Agriculture TR ETN (UAG) - Get Report could get a boost from a potential supply shortage of sugar.

There's uncertainty about the use of genetically modified sugar-beet seeds after a judge earlier this year threw out the U.S. Department of Agriculture's initial approval of the use of genetically modified sugar-beet seeds, as an article in

The Wall Street Journal

noted.

According to the USDA, this could potentially hinder U.S. sugar production by nearly 20%. Genetically modified beets have come to account for 95% of the U.S. sugar-beet crop in the past five years. The absence of these seeds will force the use of traditional seeds.

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 worsen further 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.

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

The iPath DJ-UBS Sugar TR Sub-Index ETN, 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, which provides exposure to agricultural commodities through the use of futures contracts; DBA allocates 12.5% of its assets to sugar futures.

The UBS E-TRACS CMCI Agriculture TR ETN seeks 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 No. 11 futures contracts and 4.28% to Sugar No. 5 futures contracts.

--Written by Kevin Grewal in Houston

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At the time of publication, Grewal had no positions in equities mentioned.

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Kevin Grewal is the founder, editor and publisher of

ETF Tutor and serves as the editor at

www.SmartStops.net , where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.