A Sweet Investment

Written By Luke Burgess

Posted March 20, 2006

Dear Wealth Daily Reader,

Before I begin today I want you to take a quick look at this commodity chart:

This commodity increased about 140% in the ten months between May 2005 and last February. Yet you can still get this stuff for free at any restaurant or coffee shop.

And I suggest if restaurants are going to give it away, you should graciously take it from them.

So what is it?

Well, it’s certainly not gold or silver. No one gives any precious metals away for free. And it’s certainly not oil or natural gas. I’ve never once asked a waiter for a side of light sweet crude for my coffee.

So, what is this amazing commodity you’re wondering? — Sugar

Hey Atkins, Eat This

Last year sugar prices managed to climb over 60%, outperforming every one of the 19 commodities in the Reuters/Jefferies CRB Index. And it looks like the sweet commodity is going to do it again in 2006.

Sugar is already up roughly 13% for the year, beating the gains in the Dow Jones, NASDAQ, and the S&P 500 combined!!!

Raw sugar for May delivery closed last week at a 24 year high of 16.44 cents a pound on the New York Board of Trade. Nevertheless, most analysts believe the price of sugar will continue to climb. Some even believe sugar could reach as high as 25 cents per pound this year.

Sugar prices are set to soar as record gasoline costs have prompted Brazil, the world’s biggest sugar producer, to devote itself to a new generation of vehicles.

The soccer-loving, home of Carnaval expects to allocate about half of its sugar to ethanol production to meet a government goal of eliminating gas-fueled cars in four years. By the way, half of Brazil’s current production accounts for about a 10th of the world’s annual 148 million tons of sugar production.

So-called flex-fuel cars, which allow motorists to switch to ethanol when it’s cheaper, already account for nearly half of the nation’s automobiles.

According to Sergey Gudoshnikov, a senior economist at the International Sugar Organization (ISO), a 1 percent increase in Brazilian ethanol production removes as much as 1 million tons of sugar from world supplies.

But all this is just the beginning.

Peak Sugar?

The ISO released a report on March 8 that said global sugar production will fall short of demand this year by twice as much as initially expected as world stockpiles dwindle and consumption grows.

Sound familiar?

The shortfall is expected to be 2.225 million metric tons in the 2005-2006 crop year, up from a November forecast of 1.015 million tons.

The exploding economies of China and India will certainly contribute to the shortfall.

In fact, India, the second largest sugar producer in the world, was forced to become an import the white stuff last year after two years of falling harvests, importing 2 million extra tons of the sweetener.

According to the U.S. Department of Agriculture, sugar consumption in China increased nearly 50 percent in the past 10 years and is set to increase further as disposable incomes in Chinese cities and towns are expected to rise 6% in 2006.

Sugar inventories have been cut in half as rising demand for the commodity in food and soft drinks outpaced production. Last year Chinese citizens increased consumption of sugar-containing soft drinks by 16%.

Catch More Profits with Sugar than with Vinegar

The sugar rally will increase the valuation of sugar producers, like Imperial Sugar IPSU-NASDAQ, while boosting costs and lowering valuation for companies such as the candy maker Hershey HSY-NYSE.

In fact, as you can see in the charts below, the recent increase in sugar prices has already taken its toll.

The bottom line is this: Sugar prices are going to continue to increase. As they do, so to will the per share price of sugar producers.

At the same time, increasing sugar prices will boost the cost of goods for food manufactures that rely heavily on sugar.

So I say, buy the sugar producers and short the sugar consumers.

– Luke Burgess

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