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How To Invest In Sugar

6 Comments March 14, 2009 – 8:44 am |   | Permalink |  Print This Post |

The history and dynamics of sugar investing is complex and fascinating. Everything has its history of ups and downs - whether its sugar or dot coms or bell bottoms; the cycle repeats itself. In the history of sugar investing, 1966 to 1974 was a landmark period for sugar - soaring from 1.4c/lbs to 66.5c/lb; that is a rise of more than 45 times. The wide range of sugar prices historically gives any (intelligent) investor the potential of a “retirement trade”. Imagine investing $20k in sugar today and becoming a millionaire in 8 years time. Having said that, it is unlikely in our opinion for such an opportunity to occur again without the help of major production disaster issues (eg climate or disease) or change in protectionism policies. Unlikely, but not impossible.

The current sugar price (Sugar #11 NY Futures) is about 12-13c. Some would argue that the current price is very low if one were to correct for inflation, but we feel that it is probably not low enough considering prices were 30% lower as recent as 2005. For long term investors with deep pockets not trying to bottom-pick, this is probably low enough to invest in sugar. In the face of a global depression with commodities and global equity indices trading at multi-decade lows, we feel that investing in sugar per se may not be the safest option for novice investors like us.

History of Sugar, 1966-1974: Sugar Rush (1.4c to 66c /lb)

Supply demand mismatches leading up to 1970s resulted in record prices. According to Uncle Jim, the magnitude of the price increase had people grabbing sugar off the shelves to offset rising prices, others were grabbing cubes off restaurant tables for home use, and dinner guests were arriving with five-pound bags of sugar instead of the traditional bottle of wine or flowers. The French were making films on sugar (Le Sucre, or “The Sugar”).

sugar-chart-1960-2006

As a result of this, the Americans and Europeans started increasing production and protecting their local sugar producers by limiting imports, increasing import duty rates and setting the prices of sugar. This created two sugar prices: world sugar price vs US sugar price (which is alot higher).

Sugar Dynamics

For those interested in more details, refer to this link on the fundamentals of sugar dynamics (Note: it was written in 2003-2004 so ignore all forecasts beyond that period). To summarize here are the main points and our interpretation of it:

1. Brazil is the biggest producer with production growing year on year. Despite China’s growing demand, 2006/2007 production is greater than demand. Refer to Table on Sugar Demand and Supply. We are still hunting for 2007/2008 figures.
2. There are two distinct sugar manufacturing pathways and end products: sugar vs ethanol. This is Brazil’s way of setting the prices of sugar: ie diverting sugar output to ethanol in times where sugar production outstrips demand (ie low sugar price) or when price of oil is high. When Jim Rogers was openly telling investors to invest in sugar, the price of sugar was 5.5c/lb and price of crude oil was rising. Under such circumstances, it makes perfect sense for the price of sugar to go up. One would expect the Brazilians to neglect sugar production and to produce more ethanol which were offering better prices at that time - resulting in the rise of sugar prices (which it did).
3. The problem now is: in the face of a global economic downturn stemming from the financial crisis, there could be lower industrial demand for sugar (which accounts for the largest share of sugar demand). Household consumption, on the other hand, should be fairly resistant to changes in prices and incomes.
4. With non-US currencies trading at record lows (this includes all sugar producers: Brazil, India Australia) it would be more profitable for sugar exporters, boosting sugar production. Finally, with crude trading as low as $35/barrel recently, demand for ethanol will fall, we would expect Brazil to process more sugarcane into sugar and less into ethanol. Therefore a decrease in sugar import demand AND increase in export availability would lead to a decline in sugar prices.

sugarsupplydemand1

Do I Invest In Sugar Stocks or Sugar Futures?

When the time is right (we leave this to you), we would favour going long on sugar futures as oppose to investing in Sugar producing companies. The reason being:

• Sugar companies share price can fall to zero whilst sugar spot prices cannot.
• Adverse weather, disease outbreaks and other disasters are BAD for the share price of companies, but GREAT for spot sugar prices!
• We do not have time researching into the thousands of sugar companies
• We do not want to be exposed to management risk and accounting numbers can be manipulated

Having said that, if you pick the right company (usually the biggest blue chip producer), the returns will be phenomenal and would outperform the spot price returns by many folds.

European and US Sugar Protectionism

Brazil have complaint to the World Trade Organisation about the European Unions sugar subsidies, distorting the market and depressing prices artificially. The Brazilians claim they were losing up to $700 million in exports as a result. The EU is spending $2 billion a year, whilst the US government is handing out $5 billion a year to the nations 5000 or so American producers (about $1 million a year). All this to keep the European and American farmers in business, whilst consumers are paying two to three times world price for their sugar. Jim Rogers proposed the “Sugar Rogers Plan” as a win-win-win (government-sugar producers-consumers) alternative:

US government to offer every sugar producer $100000 a year for life, a condo at the beach, and a Porsche; the only stipulation being that they never plant sugar again.

Our Conclusion

When the time is right (<10c/lb), we will consider going long on sugar futures. For now, we are happy with our exposure through AIG Agriculture Index.

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