Commodities are in a long-term secular bull market due to a wide variety of factors, cycles, and demand and supply considerations. One commodity, sugar, is a great one to invest in for the long-term. Why sugar? Here are several reasons below:

1. An energy commodity. Sugar is an energy commodity. Amongst the traditional commodities covering the energy sector – coal, uranium, oil, and gas – sugar and corn as energy commodities have been covered in this report in the recent past.[1]

Either sugar or corn can be used to make ethanol, a substitute and also complement for ordinary oil-based gasoline. Brazil uses sugar and North America uses predominantly corn for examples. However, a recent UC Berkeley study seems to indicate that ethanol made from corn takes up to 6 times as much energy as it produces.[2] In the case of sugar, on the other hand, sugar beets produce produce nearly 2 units of energy for every unit used in production and sugar cane produces nearly 8 units of energy for every unit used in production.[3] Thus it make much more sense to use sugar as an energy commodity for ethanol overall.

In fact, Brazil actually has a feedback program in place whereby as the price of oil goes higher, more sugar is diverted to making ethanol! Not to mention that this also has the effect of limiting sugar supply available for export, thus potentially driving up sugar prices in the meantime as well.

Furthermore, using sugar-based ethanol can assist greatly in helping countries meet the Kyoto Protocol on greenhouse gas emissions.

2. WTO actions on sugar. The World Trade Organization (WTO) is currently involved in or working towards several cases with the European Union (EU) and the United States on their massive subsidies towards sugar, making sugar prices about 3 times higher than the world sugar price – so if, when, and as these subsidies are lifted, world sugar prices should have a tendency to go much higher.

3. Historically low sugar prices now. Buy low, sell high. Sugar prices are off by 85% from their highs reached in the early 1970s.

4. Droughts. In extended periods of droughts, sugar prices have escalated several fold – for example in the late 1960s/early 1970s period. Such a period may well be at hand now – consider various sugar-growing regions now experiencing droughts.[4]

5. Demand from Asia. In line with the overall massive growth of Asia, and especially recently China and India, there comes a massive growth in sugar demand from the Asian region. Traditionally it has been the case that as economies develop, the citizenry begins to develop a sweet tooth for various sugar-based foods, including pastries, cakes, cookies, soft drinks, candies and coffee drinks! Starbucks recently announced that it expects China to be its No. 2 market soon – bringing accompanying increased sugar usage![5]

6. Natural sweetener – not artificial. Food and beverage companies once turned to sugar substitutes like cyclamate but then returned to sugar when the US Food and Drug Administration (FDA) pulled off cyclamate from the market due to reports that it may be a cause for cancer.

7. A recessionary asset. With the interest rate yield curve approaching an inverted state, and other indicators apparently indicating an impending global slowdown, there may well be a recession looming in the near future. A recent article in this report provides statistical likelihood of sugar outperforming in times of recession.[6]

Noted investment guru Marc Faber has recently more strongly recommended focusing on the agricultural commodities in general, including sugar.[7]

How to invest in sugar? Here are some suggestions:

1. sugar futures and options on commodity and futures exchanges; ethanol futures
2. commodity mutual funds or index funds, preferably with an agricultural focus
3. sugar-focused income trusts (some paying upwards of 9% yield)
4. shares of agricultural firms growing sugar

References

[1] http://www.financialsense.com/editorials/bonneuil/2004/0713.html

[2] http://www.sfgate.com/cgi-bin/object/article?f=/c/a/2005/06/27/MNG1VDF6EM1.DTL&o=0

[3] http://www.organicconsumers.org/Politics/beyondcorn070105.cfm

[4] http://www.iht.com/articles/2005/01/18/bloomberg/sxsugar.html

[5] http://www.dragonventure.com/en/2005-05/newsletter_5b.shtml#3

[6] http://www.financialsense.com/editorials/bonneuil/2005/0126.html 

[7] http://quote.bloomberg.com/apps/news?pid=10000086&sid=ahbAdSD0URx8&refer=news_index

© 2005 The Bonneuil Report
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