Sugar prices are on the up

A sharp rise in the price of sugar has been blamed on falling production in Brazil. A lack of investment in the sugar industry there has led to older, lower-yielding sugar canes and the price rise is set to continue.

Over the last couple of months "two commodities stood out from the pack", says research group Capital Economics. Wheat has been a poor performer, down by a fifth since the start of June, as "prices were undermined by the ending of Russia's export ban". Yet wheat remains historically expensive and, with Russian supplies set to rise, further falls seem likely.

Supply is looking more supportive for sugar, which is up almost 30% in the last two months. The big story is Brazil, which is on course for its first decline in sugar production in a decade, says Agrimoney, a soft commodities news provider. That's partly due to a late start to the crushing season this year, "but also a hangover from two years of under-investment that have left the country with ageing cane". Its cane plantations now have an average age of four years, compared with an ideal age of under three years.

Industry group Unica reported the cane harvest in the centre-south region was up year-on-year, but the sugar content of the crop was poor, says Barclays Capital. "So far in the 2011-2012 harvest, sugar production is down 15%" year-on-year. The shortage of new planting means this trend will continue, buoying prices. "With the market trending higher, the bears need a story' sooner rather than later," says Thomas Kujawa of brokerage Sucden.

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