Why sugar prices have soared

Sugar prices rose by more than 45 times between 1966 and 1974. Investment legend Jim Rogers explains why the price soared before giving way to a massive bear market - and also why sugar is now making a comeback.

When I was one of the lone voices talking up commodities and China heading into the new millennium, I ran into much scepticism among the press. The writers, reporters, and TV anchors around the world - the so-called business media who ought to have known better - were more likely to raise an eyebrow or even turn hostile when I wanted to talk about oil, lead, and sugar more than about the 'next big thing' in stocks.

Occasionally, I like to tease these media types. During one breakfast interview in a Paris hotel, a congenial writer from a French business magazine who was much more eager to discuss the falling dollar and the surging euro-for obvious reasons (Vive la France!) asked me what I would recommend for an ordinary investor like her. I plucked a wrapped sugar cube from the bowl on the table and handed it to her. She looked at me as if I had gone mad.

'Put this in your pocket and take it home,' I advised, 'because the price of sugar is going to go up five times in the next decade.'

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She laughed, eyeing her sugar with scepticism. I told her that the price of sugar that day was 5.5 cents per pound, so cheap that no one in the world was even paying attention to the sugar business. I reminded her that when sugar prices last made their all-time record run - soaring more than 45 times, from 1.4 cents in 1966 to 66.5 cents in 1974 - her countrymen were planting sugar all over France. She nodded.

'Supply and demand,' she said - and pocketed her sugar.

But I suspect that she has not put any of her money where her mouth - or her pocket - is. No one has for years, which, of course, was my point. Sugar prices were so low for so long that it was the last business enterprising souls around the world would be likely to enter in the 1990s and early 2000s. If you are an ambitious young farmer in Brazil (or Germany or Australia or Thailand, also major sugar producing nations), do you choose to produce sugar at 5.5 cents a pound...or soybeans? They closed 2003 near $8 a bushel, a six-year high. Even in the US, which has its own protected domestic sugar market at two to three times the world price, only the most efficient producers are surviving.

Sugar has had its boom times in the past - that 1974 record, and another spike in 1981 during the last bull market in commodities. And if I'm right and we're in another long-term bull market in commodities, we're likely to see another sugar high. Historically, nearly everything goes up in every kind of bull market, whether it's company shares, commodities, or apartments on Park Avenue. And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong. To those of us who have been here before, it is promising to note that similar supply and demand imbalances are shaping up that could push sugar prices upward over the next decade.

The price of a commodity usually moves for a good reason, and the savvy commodities investor must be familiar with past trends and have an eye out for new ones, along with potential glitches, fundamental changes, and anything else that might affect the price of sugar.

Between 1966 and November 1974, sugar made the astonishing climb, from 1.4 cents to 66.5 cents. But how do sugar prices go up more than 45 times?

By the end of 1972, there had been four straight sugar seasons with record crops. Yet consumption actually outpaced supplies in 1972, literally eating into sugar inventories over the next year. The 1973-74 sugar season began with extremely tight supply conditions worldwide; demand continued to rise. There was evidence that some big industry users were stockpiling sugar in anticipation of higher prices. Soon people were grabbing sugar off the shelves in armloads to offset rising prices. Others were grabbing cubes off restaurant tables for home use. Dinner guests were arriving with five- pound bags of sugar instead of the traditional bottle of wine or bouquet of flowers.

Even people who had never given the sugar futures markets a moment's thought knew something was up when they walked into the local coffee shop and noticed that the sugar had vanished from the table. Quite simply, global demand for sugar had exceeded supply, and before long the price of sugar headed for the roof.

Everyone had a theory for the high prices. Sugar traders had no idea where prices might be when the US's long-standing price supports expired at the end of 1974; some blamed the high prices on a 'scarcity of cheap labour to harvest sugarcane'; others pointed to the failure of the European sugar-beet crop. Others even suspected that both the Soviet Union, which had just suffered two bad production years in a row in its own sugar crop, and 'Arab oil money' (remember that oil crisis of the 1970s?) had moved into the sugar futures markets, along with a rise in speculation by others looking to make money from rising prices.

Significant, too, was the fact that Americans had come to see cheap sugar as a birthright. Even those consumers (and food and beverage companies) who might have turned to the newest artificial sugar substitute, cyclamate, and thus decreased demand, quickly returned to the real thing when the US Food & Drug Administration pulled cyclamate off the market in 1969 after reports that it might cause cancer.

Over the next few years, companies put sugar back into their products, boosting demand. US consumption did not slow down much until September 1974, when the reality of high prices finally kicked in. Soft-drink prices increased and candy bars got smaller. But before the White House published the 'Presidential Proclamation' of 1975 protecting US sugar producers with the same duty rates and establishing a global quota for sugar imports into the US, prices were heading back down.

By December 1976 and January 1977, world sugar prices were ranging between 7 and 9 cents a pound - figures that were, according to the CRB Commodity Yearbook report at the time, 'below their reported cost of production in some countries.'

And many, many Johnny-come-lately sugar speculators lost their money - proving, once again, the perils of rushing into a market where prices are rising 45 times, whether it's sugar or dot-coms.

The forces of supply and demand put hysteria in its place, once again. While three straight bumper crops assured plenty of sugar in the world - prices averaged 7.81 cents per pound in 1978 - the next season saw a few glitches in the supply chain, as a result of events around the world.

For the next 20 years - during a bear market in commodities - sugar remained plentiful, with bearish prices zigging and zagging at the low end with a few minor spikes, as typically happens in bear as well as bull markets.

Gradually, sugar had gone from a respectable commodity that fed the world and supported entire economies to a victim of changing fashions in diet and health: sugar was bad for you; it made you fat, it made kids hyper, and it rotted their teeth.

Meanwhile, in labs all over the world chemists were looking for substitutes, preferably noncarcinogens.

In 1981, the US Food & Drug Administration approved the artificial sweetener aspartame, and in a flash this newcomer replaced sugar in cookies, cakes, and other favourite snacks sold around the world. Diet colas were becoming more popular because they had less sugar, and if sugar's competition had not become tough enough, in 1983 the major soft-drink companies started using literally millions of tons of high-fructose corn syrup to sweeten their beverages.

Bad for sugar...but good for corn - and a great example, by the way, of how researching one commodity might turn up some moneymaking possibilities in a different one.

By 1985, the price of sugar had made it all the way down to 2.5 cents. No one wanted to be in the sugar business. They were giving away seats on the sugar exchange at the New York Board of Trade.

Sugar prices stayed in a bear market for the next 19 years, and were still bearish that day in early 2004 when I was teaching the French business writer about her future as a sugar baroness. World production of raw sugar had reached a record level in the 2002-03 season, and the next season produced almost as much. Brazilian exports were also at a record high.

That French writer had reason to be sceptical: the price of sugar, after all, at 5.5 cents per pound at the time was not that removed from the 1.4 cent figure of 38 years earlier and a lot closer to that 2.5 cent number of 1985.

In fact, most prognosticators were saying, as one analyst for the Australian and New Zealand Banking Group put it at the end of 2003 in a brief report about the market that I read, 'sugar prices were likely to remain under downward pressure.'

So why was I, a few months later, confidently telling someone to buy sugar? Supply and demand.

Of course, I was already a firm believer in the fact that a bull market in commodities was under way, and if - as I've noted, the history of past bull markets tells us that nearly everything makes a new all-time high then why not sugar?

By Jim Rogers for The Daily Reckoning. You can read more from Jim and many others at www.dailyreckoning.co.uk.

Jim Rogers helped found the Quantum Fund with George Soros. He has taught finance at Columbia University's business school and is a media commentator worldwide. He is the author of Adventure Capitalist and Investment Biker. He lives in New York City with his wife, Paige Parker, and their 18-month-old daughter, who is learning Chinese and owns commodities but doesn't own stocks or bonds.

The essay you just read was taken from Jim's third book, Hot Commodities. You can order your copy at a 30% discount here: 'Hot Commodities'