HardAssetsInvestor

Written by Julian Murdoch  |

November 13, 2008

Rethinking Sugar

Details

Why are Jim Rogers, and so many others (including Kevin Kerr in this week's podcast), hot for sugar?

• Sugar's historical lows
• Increasing consumption & supply deficits
• The Brazil bet

 

Why are Jim Rogers, and so many others (including Kevin Kerr in this week's podcast), 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.