Why Sugar Has Never Been Sweeter

Why are Jim Rogers, and so many others hot for sugar?

It's a matter of history.

If you look back (way back), sugar is relatively cheap right now. In 1980, the average price for London refined sugar (No. 5) was a whopping 32.30 cents a pound. In October of that year, it hit an average of 42.30 cents per pound. That is a far cry from sugar's October 2008's average price of 15.07 cents a pound. Adjust for inflation and those numbers are off the charts.

Source: USDA Sugar data released 11/3/08

The same is true in the U.S. The London refined sugar contract is based on the London daily spot price for refined sugar f.o.b. (free on board) ships in European ports, and is typically derived from sugar beets. The U.S. version is raw cane sugar, quoted as Sugar #11 on the New York Board of Trade, where the contract is linked to the bulk spot price for sugar in Caribbean ports (including Brazil). The USDA has Sugar #11 averaging around 10.01 cents a pound this decade, while the London #5 averaged 12.30 cents a pound during the same time period.

That's the long view, but what has it done for us lately? Looking at the Sugar #11 contract on the NYBOT, it doesn't take a chartist to see sugar in a flat trading range between $0.10 and $0.15 a pound for the past year. But the interesting thing to note is that in the past year, while the S&P 500 has dropped about 39%, sugar has actually gained 19%.

Source: EODData

Why? In a phrase: supply and demand.

According to data from the "USDA's World Sugar Situation" (May 2008), sugar consumption has been growing steadily since the mid-1990s. This shouldn't be a surprise to any follower of commodities. The drivers are all the same: As Asian economies move up the per-capital income ladder drive, people demand more refined foodstuffs - meat, coffee, sugar, etc. This big trend has been supplemented by a slow shift away from high-fructose corn syrup in favor of actual sugar in the food industry, driven by the spiraling and volatile price of core. While the food industry could switch back someday, the economic drivers would need to be fairly strong.

Some years, the supply of sugar has kept pace with demand, but recently, it's fallen short.

Adjusted for net trade and unrecorded imports

Source: FAS USDA

This year, India is key when looking at surplus or deficit. In the crop year 2007/2008 (which ended in September), India was the second-largest producer of sugar, after Brazil, exporting 5 million tons - a record for the country. But 2008/2009 is shaping up as a bust. Reuters reported yesterday that Shanti Lal Jain, the head of the Indian Sugar Mills Association, is expecting output to fall to less than 20 million tones. That may not sound like much, but that would virtually eliminate India's sugar exports, putting Indian production within 500,000 tonnes of domestic consumption.

It's not just India, either: The latest estimates call for a worldwide production drop of 3.8% compared to the 2007/2008 crop year, resulting in 161.6 million tons of missing sugar and a deficit of 3.6 tons worldwide.

That could get worse, too. For 2008/2009, the lone bright spot in sugar production is Brazil, which is expected to produce 2.6 million more tons than it did last. But a recent headline on Forbes.com screamed, "Global Credit Crisis Hits Brazil," and investors are beginning to speculate that this could have a fallout on the sugar business. Brazil's sugar industry is in the middle of a huge expansion and has borrowed to the hilt. Around 300 companies are facing loans that are due within the next year - and there is no guarantee that they will get refinanced.

All of that is what has Jim Rogers, Kevin Kerr and other traders excited.

So what could go wrong? Well, one thing to remember is that a huge portion of Brazil's sugar crop is used to make ethanol - over 54%. Theoretically, with lower oil prices, there is a chance that Brazilian mills might begin producing actual sugar instead of sending the crop to be used for ethanol. If that occurs, the worldwide sugar deficit could get a whole lot smaller - making an investment in sugar sour, rather than sweet.

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Other sugar news:

EU overtakes Russia as top world sugar buyer, Reuters, Nov. 10, 2008

And, an oldie, but a goody:

Why sugar prices have soared Money Week, Jim Rogers, Nov. 14, 2007

Comments

[John Tandlich:]

Does anyone know the ticker symbol for the ETF that tracks sugar?

2008 Nov 15 01:22 AM

[Managing Ed...:]

Yes. It's SGG.


On Nov 15 01:22 AM John Tandlich wrote:

> Does anyone know the ticker symbol for the ETF that tracks sugar?

2008 Nov 15 02:00 PM

[TinyTim:]

how sweet it is......

2008 Nov 22 05:20 PM