Pour Some Sugar On Your Portfolio
by Tony D’Altorio, Investment U Research
Wednesday, August 4, 2010
Last year, sugar prices rose more than they had in 35 years.
Brazil, the world’s largest producer, experienced damaging rain at just the wrong time. And dry weather hurt crops in India, which ranks number two in sugar production.
Yet somehow, sugar performed abysmally during the first half of 2010.
Now though, the bull market looks ready to take off again, up 35% from its May low of $0.13 a pound. And investors look set to pocket even further sweet gains in the months ahead.
Buyers are once again scrambling to secure sugar supplies to rebuild depleted inventories.
Earlier this year, they ran down their stocks when prices spiked to a three-decade high above $0.30 a pound. And the U.S. Department of Agriculture warns that national sugar inventories will fall in 2011 to their lowest level in 40 years.
Globally, things don’t look any better. The International Sugar Organization expects supplies to hit 30-year lows this year.
It also foresees a 1.7% rise in demand led by gains in the emerging economies, where people consider the commodity to be a necessary luxury. Their cravings will push the stockpile-consumption ratio to a two-decade low of 32%.
Back in June, that shortage sent the premium for refined or white sugar versus raw sugar to its highest level since 1987.
Can anybody say investment opportunity?
Sugar Market Supply Problems – One Lump or Two?
Much to the bears’ chagrin, supply problems have resurfaced in the sugar market again.
They predicted a sizable surplus for this year, but instead, attempts to restock global inventories have created a holdup in the supply chain. A record number of 122 ships are waiting even now for their loads in Brazilian ports.
The country can’t seem to load the new season’s crop fast enough. And heavy rains have delayed the process further.
Considering how Brazil ships 54% of the world’s sugar exports, that’s a problem.
Jonathan Kingsman, the head of the Kingsman sugar consultancy firm, jokes that, “If it carries on at this rate, you may soon be able to walk all the way from Brazil to Europe just by jumping from one ship to another.”
And Toby Cohen, head of analysis at sugar consultancy Czarnikow, says that the delays at Brazil’s ports indicate the bears could very well be wrong.
In addition, Thailand, the world’s second largest sugar exporter, may have to actually import this year and may have already sold all of its supplies.
Bear Tales Add to Sugar Market Woes
Adding to sugar woes, sugar futures fell earlier this year as the market listened to bear tales about record crops of the soft commodity in Brazil and India. Those were supposed to produce ample supplies… but they didn’t.
India’s monsoon season, which runs from June to September, is the main source of irrigation water in the country. Yet it produced 16% less rain than normal as of June and 3% less by August 1.
Over in Brazil, the situation looks less than stellar as well according to Marcos Lutz, the chief executive officer of the world’s top sugar cane producer, Cosan ADR (NYSE: CZZ). He recently said that output next year in Brazil’s largest growing region may even be lower than this year’s 28 million tons.
If he’s right, that will put even more upward pressure on sugar prices.
Finally, poor weather in Europe’s sugar beet growing regions certainly isn’t helping. It will exacerbate the situation even more.
Two Sugar-Sweet Investments
Many sugar-consuming nations, such as Indonesia, have little or no inventories of the treat. Surprisingly, even India – the world’s biggest sugar consumer – doesn’t have much.
The commodity is now approaching a critical stage where even marginal shifts in supply or demand can create large price movements.
Investors can track gains in two ways. And those that crave direct plays can get in good with Brazil’s Cosan, which also produces ethanol from sugar cane.
The stock price has more than doubled from its lows and recently hit a 52-week high. But since it’s still trading at a single-digit P/E ratio, it still has a lot more upside potential.
Or the iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSE: SGG) offers a strong entrance to the world of sugar futures.
Either way, sugar’s earlier tumble this year means it’s a great time to gain a sweet tooth.
Good investing,
Tony Daltorio
Related Investment U Articles:
- Rising Sugar Prices Give Investors a Sugar High
- Brazil Turns to U.S. to Meet Ethanol Demands
- A Sweet, Sweet Gambit for Investors
- Are These Two Emerging Markets Getting Too Close?
- The Potash Industry Poised for Big Returns As Global Demand Rises
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