HardAssetsInvestor

Written by Lara Crigger  |

August 17, 2009

Playing The Sugar Rush

Details

With sugar hitting 28-year highs, should investors consider indulging their sweet tooth?

• Rainfall causes supply crunch
• Food makers freaking out
• Does sugar keep rising?

Last week, sugar hit a staggering 28-year high, with the October contract topping 23.33 cents/lb in New York:

Data courtesy of TradingCharts.com

Although sugar's still way off its record high of 66 cents/lb (set back in 1974), the commodity is still up 88% year-to-date. (For more, check out our recent podcast on sugar, "Sweet Tooth?.")

The rise has been spectacular, but some analysts think sugar's future looks even sweeter. Take Jim Rogers, who told Bloomberg earlier this month that "sugar is certainly going to go much, much higher during the course of the bull market."

Bad Rains Rising

So what's behind the sugar spike?

Turns out that abnormal weather patterns have dampened harvests - literally. Rain - both too much and not enough - has been the main culprit behind prolonged sugar shortages.

In Brazil, the world's largest sugar producer, the skies are looking downright biblical: Some fields have been drenched by as much as four times the normal amount of rainfall.

On the other side of the globe, however, next-largest producer India has suffered an exceptionally wimpy monsoon season - this past June was the driest in 83 years. And although recent rainfall suggests the drought may be ending, with analysts raising their output forecasts as much as 20%, the season's precipitation levels could still be 87% below the norm, forecasted the India Meteorological Department.

That's not just bad news for Indian farmers. India is also the world's largest consumer of sugar, accounting for 24.3 million tons in 2008 - that's about 15% of the world's demand. The drought at home is so bad, say some analysts, that it could turn India from the world's largest sugar exporter into the world's largest importer.

However, India isn't alone in sugar withdrawal. "You have pent-up demand in many countries," said Cyrus Raja of Al Khaleej to Bloomberg. "It's not just India. Other countries are also facing shortages."

That includes China, the world's third-largest producer, whose next harvest will be smaller due to reduced planting; and Russia, who will import an added 2 million tons after its crop was hard hit by hail storms and drought. Even Mexico is feeling the squeeze. After an 11% drop in harvest yield, the country may import up to 393,000 tons through the end of the year.

Of course, if everyone's importing sugar, who exactly will they import it from? Answer: Australia. The world's third-largest sugar exporter could lift its output by as much as 250,000 tons next year; crop acreage is expected to rise 5%.