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By Tony Daltorio

The price of sugar has jumped to multi-month highs thanks to worries over the size of Brazil’s sugar crop. This marks a reversal of fortune for sugar, which has been among the worst performing commodities this year.

Worries over Brazil’s sugar crop center around both aging sugar cane plants and poor weather conditions. Brazil is a key player in the sugar market. It produces about a quarter of global supply and is the world’s biggest exporter of the sweet commodity, accounting for more than half of global exports.

But now, according to Brazil’s sugar cane industry association Unica, sugar output in the country is set to fall for the first time in five years. Unica now expects the country’s sugar growers to produce up to 1 million tons less than last year’s harvest of 33.5 millions tons. Its previous estimate was for a production level of 34.5 million tons. Some in the industry are even more pessimistic than Unica, predicting that the output may be as low as 32 million tons.

Brazilian politics is also behind the fall in sugar output. The government has prodded farmers to use their sugar cane to produce more ethanol, not sugar. It is trying to appease consumers who are angry about high fuel prices. Higher ethanol production will lower costs at the pump. An additional factor coming in to play here is the fact that global inventories of sugar are at critically low levels and have been so for about two years.

Such a small harvest is especially critical over the next few months since Brazil is the only large global exporter to produce sugar during the northern hemisphere summer. So until other producers’ crops come on to the market after October, the sugar market will be particularly vulnerable to price spikes.

This could make for an interesting several months for both the sugar ETNs: The iPath DJ-UBS Sugar Total Return Sub-Index ETN (NYSEARCA:SGG) and the iPath Pure Beta Sugar ETN (NYSEARCA:SGAR).

Another direct play on the sugar market and Brazil is Cosan Limited ADR (NYSE:CZZ). The company states that it is the biggest sugar producer in Brazil and among the three largest in the world, and that it is the world’s second-largest sugar exporter. Cosan is also a major player in the Brazilian ethanol industry.

Source: Sugar Prices on the Rise, Thanks to Brazil