Sugar: Get in While It's Still Cheap

"Good God Almighty!" The woman in front of me had reached the age at which she no longer cared what anyone thought of her. After nearly running into me with her shopping cart⎯ and clearly not caring about it⎯ she paused to pick up a pack of Baltimore's famous Berger cookies. She squinted, unable to make out the price tag at first. Then came the scream. "$4.59! Good God almighty, I don't like 'em that much!" Throwing the box of cookies down with disgust, she shuffled off mumbling under her breath.

Around Baltimore, Berger cookies are legendary for their taste and their artery clogging abilities. They're essentially sugar cookies that have been slathered with a thick chocolate icing. There's not a whole lot to them, just eggs, milk, sugar, flour, and cocoa for the chocolate. However, the prices for virtually every one of these ingredients has soared in the last year. Eggs are up 45% in the last eight months. Wheat recently hit a record high. And milk prices are competing with gasoline on a per gallon basis.

Like everyone in food retail, Berger's has resorted to shifting these higher prices onto consumers, resulting in outbursts like the one I had to witness standing in line at lunch. There is, however, one ingredient in Berger's cookies that hasn't resulted in price increases… yet. In fact, based on inflation, this commodity is unbelievably cheap, especially when you consider most of its counterparts are hitting all time highs. I'm talking about sugar.

Today, raw sugar sells for roughly 12 cents a pound, up from 11 cents at the beginning of the year. The sweet stuff, like all commodities, has been rising in the past four years. However, sugar remains extremely depressed relative to its historic highs and to other, more popular commodities. This fact literally stared me in the face today while I waited to order my sandwich. Posted on the shelf to my right was a grocery index from 1933. Sugar was priced at five cents a pound. Has it really only risen seven cents in over 70 years?

Nope, based on inflation sugar is ridiculously cheap compared to its 1933 prices⎯ five cents in 1933 equates to 50 cents in "real" terms today. In fact, sugar in "real" terms has been dirt-cheap since the late '80s. In the U.S., we're used to this. For us, sugar is something of an evil thanks to several anti-sugar diets and the development of various artificial sweeteners. However, for most of the world, sugar is the primary sweetener. And they're starting to get a sweet tooth.

Since 2002, worldwide demand for sugar has increased 15%. That's an strong rate of growth for an industry measured in millions of tons. So far, production has exceeded demand… but just barely. And this won't last for long. In 2007 worldwide production of sugar exceeded demand by 12 million tons: not a whole lot when you consider that demand is growing between three and six million tons a year.

With production growing 1% and consumption growing 4%, it's not difficult to see where this situation is headed. High oil prices and cheap dollars are only going to help, too. Brazil, the largest producer of sugar in the world, is shifting more and more of its sugar crop to ethanol since the appreciation of the Brazilian real against the dollar is making exporting less attractive.

Between these factors, and growing demand from emerging markets, particularly China and India, I expect sugar consumption will catch up with production some time in the next three years or so. By the time it does, sugar, like oil and gold today, will be at an-all time high, above 66 cents per pound. Meteoric rises like this have happened before. During the last commodities bull market, sugar prices rose 45-fold from 1.4 cents to 66.5 cents per pound. Even with sugar trading at 12 cents today, we could see a five fold increase and still remain below the historic sugar high.

There are a number of ways of playing this trend. The London stock exchange has a Sugar ETF trading under the symbol SUGA. The largest producer in South African, Illovo Sugar, trades on the Johannesburg exchange under ILVOF. And in the U.S., there's Imperial Sugar (IPSU), the maker of Dixie crystals. However, if you decide to invest in sugar, be warned, the commodity can be quite volatile. The trends I've discussed are long-term and will require a strong stomach. Still, sugar remains one of the few asset classes trading at a depressed price relative to its historic levels. Gold, oil, wheat and milk have all recently hit all time highs. Sugar's turn is coming, and when it does… Good God Almighty!

Disclosure: None

Comments

[AmesTiedeman]

Now IPSU looks interesting.

[john haskell]

Investing in sugar stocks requires a strong stomach. If you overindulge you may experience at first a sense of heightened energy, followed by lethargy and indigestion.

[sliman]

Would it be better to just buy a sugar contract on the commodities exchange?

[PitBoss]

CZZ

[Robbit]

"Between these factors, and growing demand from emerging markets, particularly China and India, I expect sugar consumption will catch up with production some time in the next three years or so."

Seriously? You know we're talking about sugar right? Probably one of the easiest commodities to produce, and with endless supplies how can you even possibly come to imagine consumption to catch up with production? How much more obese can Americans really get? Even obesity has a peak.

You're on the right path, but investing in Sugar stocks, is plain and simple; it's speculation.

On the other hand, let's take a look at Brazil;
www.bloomberg.com/apps...

This might give you a hint, that maybe the right investment would be in the Brazilian Real.