How you can make money from sugar

Sugar is no longer just a sweetener. These days it's energy too. The soaring oil price is driving demand for its use in biofuels, while supply is set to be restricted by disappointing harvests. But how do you invest in sugar?

For those who usually associate sugar with nothing more than a couple of spoonfuls in their morning cuppa, recent movements in the sugar markets will have come as a new kind of wake-up call.

Indeed, the chart of the sugar price over the last few months looks just like internet stock charts looked back in 1999. The price of sugar has trebled in the last two years and last week hit a 25-year high on record volumes, says the FT, breaching the 17 cents a pound level.

So what's going on? As with most things these days, the answer comes down to India and China. India shifted from being an exporter to becoming an importer of sugar in early 2004 and both there and in China the rise in disposable income is leading to increased sugar consumption. But the rising price of sugar is not just about its use as a sweetener: these days, sugar is more than food, it's energy too. 

The fast-rising oil price (again, something driven by the vast emerging economies of the East) has led to an increased level of demand for biofuels, such as sugar-based ethanol: the more the oil price rises, the more the sugar price rises.

In particular, it's the Brazilian drive for ethanol-powered cars that has helped push the price of sugar to its recent highs, says Simon Watkins in The Mail on Sunday. Of the 1.7 million cars bought in Brazil last year, 54% were "flex-fuel" petrol/ethanol mix models, with the figure at 71% in December. And today there are an estimated 1.2 million flex-fuel cars on the road in Brazil about 5% of the fleet a figure that could reach two million by the end of the year.

The result is that sugar-cane farmers in Brazil ("the Saudi of ethanol", thanks to its huge levels of sugar production, say analysts at ABN Amro) are selling more of their stock to make the fuel. This in turn has led to a shortage of cane to be used for simple sugar manufacturing. Brazil's biofuels programme is among the "most advanced in the world", says Elizabeth Johnson, also in the FT. It was launched nearly 30 years ago, with the then military dictatorship offering subsidies for cane mills in an effort to reduce dependence on crude imports. Nearly all new automobiles ran exclusively on the clean fuel in the 1980s until world sugar prices spiked in 1989 and Brazilian mills opted to shift production back to sugar production.

Now, however, all gasoline at the pump has to contain "at least 20% to 25% ethanol", so it is no wonder the market is booming. Brazil is now not only the world's largest producer of ethanol, but it's the biggest exporter too.

What does this mean for the price of sugar? Already about 50% of Brazilian sugar cane is used to make ethanol and the surge in demand comes just as the latest harvest has proved to have been a disappointment (London-based Czarnikow Sugar is predicting a drop in Brazilian sugar exports this year to 16.5 million tonnes from 17.2 million tonnes last year). Drought in Thailand and reductions in subsidies in Europe are also expected to keep supply tightish for the foreseeable future.

Yet demand shows no sign of slacking, thanks both to the high price of oil (which makes ethanol use cost effective) and, of course, ethanol's green credentials. Ethanol produces similar emissions to petrol, but is thought to be "carbon neutral" because the plants used for the fuel absorb carbon dioxide as they grow, says The Sunday Times. Those who fancy taking advantage of this feelgood factor might take themselves off to their nearest Saab showroom: the company is about to debut its Saab 9-5 BioPower, which can run on both petrol and ethanol.

How to play the sugar boom

The obvious way to invest in soft commodities such as sugar is to spread bet, but, as David Budworth points out in The Sunday Times, this may not be a good idea. Not only is it possible to lose much more than your original stake on a spread bet, but agricultural commodity prices tend to be very volatile, meaning you are even more likely to lose your shirt on them than on other assets.

A better way might be to look at one of the new generation of soft commodity funds we mentioned last week and get exposure to a broader range of foodstuffs. The new funds being launched are from Bespoke Financial Consulting, BDO Stoy Hayward Investment Management and Barclays Capital.

Those wanting to play the biofuels theme another way could try looking at D1 Oils (DOO, 266p). The company's strategy is based on planting hectares of "jatropha", a shrub that produces nuts which can be converted to biofuel, says Jenny Davey in The Times. Last year was tough for the firm plantings were delayed and a proposed merger broke down but with the shares now in the doldrums, it might be time for the brave to buy in.

Otherwise, Tate & Lyle (TATE, 583p) makes a good play on our taste for the sweet. The shares have doubled since 2004, but still trade on a p/e ratio of 15 and yield just below 4%.

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