Serious foodies know that invert sugar, a mixture of glucose and fructose, is sweeter than the sucrose from which it is derived; traders know how to sweeten profits when the sugar market inverts.

Sugar's been one of the best-performing markets this year, driven by tight supplies and delayed stock replenishments. Supplies have been so low, in fact, that the futures market has inverted into a state of "backwardation."

In an inverted market, deferred deliveries are priced below the cost of nearby futures. Think of it this way: Everybody wants their sugar delivered now; they don't want to wait. That said, they're willing to bid up the price of the nearby contracts to get their hands on limited supplies.

The active nearby contract (for March 2010 delivery) last settled at 21.78 cents a pound, 55 percent higher than its price at the beginning of the year. Holders of the iPath Dow Jones-UBS Sugar Sub-Index ETN (NYSE Arca: SGG) have been able to capitalize upon the market's backwardation to garner an eye-popping 88 percent return.

ICE/NYBOT Sugar (Mar. '10)

How so? Simple really. The note's underlying index methodology requires its return to be based upon a constant investment in the nearby futures contract. Futures contracts, of course, expire, so maintenance of a long position requires periodic "rolls" in which soon-to-expire contracts are sold and replaced with longer-dated futures. When a market's inverted, that means the figurative sale of higher-priced contracts finances the simultaneous purchase of lower-priced ones. "Buy low, sell high" is a recipe for profit, so incremental gains are earned on top of the commodity's spot return.

Take a look at the current market:

Sugar production is expected to rebound in 2010, but it's not likely that this output will be sufficient to overcome the market's two-year-old supply deficit. For now, it looks like the market will have to contend with a continuing inversion layer ‘til higher prices finally start curbing demand.

That's especially good news for holders of the SGG notes.

Still, sugar's trajectory won't be straight up. A quick glance at its price chart illustrates the stair-step fashion in which sugar's advanced.

Presently, despite its technical and fundamental strength, the March contract looks overbought by about 3 cents a pound. That translates to a premium of about $7 for the SGG notes (last night, the notes closed at $76.28).

The degree to which those premiums can be whittled away depends upon investors' speculative appetites, which are hard to gauge effectively in this holiday trading environment.

For that reason, a lot of future traders will be looking at bull spreads (buying the nearby March contract against the sale of deferred deliveries such as July, to reduce their risk exposure.

SGG note holders, of course, have the luxury of time—and no margin worries—on their side.