Aside from being a food additive, sugar has major industrial usage as a fuel additive in the production of ethanol
By BENNI AZARIAsugarcane(photo credit: Courtesy)
Most people think of sugar in terms of coffee and calories, but today sugar is a widely traded commodity with an average daily trading volume of 125,851 contracts and a value of $1.94 billion, making it one of the most widely traded agricultural commodities in the world.
Aside from being a food additive, it has major industrial usage as a fuel additive in the production of ethanol, which has had a strong effect on the prices of sugar over the past year.
The price volatility of sugar has been enormous. Futures contracts for sugar (#11, also known as the price for World Sugar) started the year at $11.57/lb. In little more than two months the price increased more than 33 percent, peaking at a high of $15.42/lb on March 3rd. Since then, the price has fallen by more then 29%, just to climb up again, than it fell by another 13.6%... and so the story continues, with current sugar prices about 20% higher than year-to-date.
What has caused these price fluctuations? Many people would jump at supply and demand fundamentals, citing asserting that demand has outstripped supply, but this is simply not true, as sugar production has outpaced consumption over the last couple of years.
This is an indication that the price volatility is more a reflection of the activity of financial speculation, particularly in the realm of managed investments, rather than changes in the underlying fundamentals.
Also, the price of oil recently peaked at $147.27/barrel (representing a 59% increase since the beginning of the year), pushing transportation costs north and leading to higher food prices for the end consumer.
Due to a worsening outlook in the bond and equity markets, together with high food and energy prices, commodities as an asset class spiked during the first 7 months, as speculators and hedgers alike ran to commodities for inflationary protection.
Sugar has dropped from its high due to a commodity meltdown rooted in the strengthening of the dollar and the recent fall in oil prices, but the price is still much higher than last year.
Since the beginning of this year, the rise in sugar can partially be explained by stronger year-over-year demand from rapidly growing countries such as China, India and Russia. These fast-growing countries have provided their populations with larger disposable incomes over the last couple of years. As is well known, when people in the lower socio-economic classes have more money, much of this extra income is spent on food.
As previously mentioned, sugar has an industrial usage through distillation into alcohol, for use in ethanol production. As global energy prices have increased drastically, partly because of record oil prices, there has been a strong push to find alternatives.
From a production point of view, ethanol today is already a financially viable alternative to oil. The major threat to ethanol production lies in the possibility that sugar prices will increase to the extent that the amounts of sugar needed for industrial-scale ethanol production would be uneconomical.
There is an ongoing debate regarding whether demand for the ethanol component in sugar cane has pushed up the price of sugar and has contributed to an increase in food prices globally, contributing to high inflation figures in local economies world wide.
So where are we heading? Looking at sugar cane fundamentals, the ongoing excess supply is expected to turn into a supply shortage by 2009/10 due to a decrease in cultivated areas.
How this impending shortage will affect prices will be dependent on world demand. As the dollar continues to make up for lost time against major currencies (the euro, pound and yen), we will most likely see a fall back in oil prices, but most likely not a major change in the efforts to find oil alternatives - including ethanol.
Although it has been argued that ethanol is not among the cleanest energy alternatives, it is nevertheless a sort of environmental solution, and a fall in oil prices is not likely to have a negative effect on ethanol's attractiveness as a relatively cheaper alternative. However, it could be argued that ethanol may look much more expensive when the infrastructure that must be built around ethanol use is taken into account.
Sugar-based ethanol may also see a steep surge in demand should the Republican presidential candidate, Senator John McCain, win the upcoming elections, as he stands in favor of abolishing the 54 cent/gallon import tariff the US has imposed on imported ethanol, protecting the homegrown corn-based ethanol industry.
Scrapping the tariff will have a positive impact on the Brazilian bio-fuel industry and sugar cane production.
In summary, supply and demand fundamentals, together with a favorable geopolitical environment, may well mean that the price of sugar will continue to rise over the course of next year.
Benni Azaria is an analyst Tandem Capital Asset Management
if(catID != 151){
var cont = `Take Israel home with the new Jerusalem Post Store
