The Sweet and Sour on Sugar

I'd like to write a bit about sugar. If you aren't in the market, you're probably thinking: 'BORING!' But bear with me. What if I told you that the price of sugar could affect the price of gas you pay at the pump. Is that more interesting?

Sugar has bounced handily from recent lows, as I'll show you in a minute. I think one of the forces driving it is that Brazil will likely be converting a LOT more of its sugar into ethanol. As the story says ...

Brazil May Not Meet Domestic Ethanol Demand

Brazil, the world's biggest ethanol producer, may struggle to make enough of the fuel in the crop season ending March to meet domestic use because higher prices elsewhere are encouraging exports, C. Czarnikow Sugar Ltd. said.

Brazil, also the largest producer of sugar used to make ethanol, is expected to export a record 3 billion liters this crop year, from 2.4 billion liters a year earlier, the world's biggest sugar broker said in a report today. Exports to the U.S. will rise to 1.2 billion liters, 130 million liters more than last season, buoyed by tougher environmental legislation.

"As a consequence there is a real risk that Brazilian ethanol production this season could fall short of demand,'' London-based Czarnikow said.

That may mean more of Brazil's sugar crop will be diverted into ethanol production, reducing global supplies of the sweetener, Czarnikow said. Refined sugar prices rose to a record in London in May, partly on speculation Brazil would use more of its crop to make the alternative fuel.

Okay, so that's one bullish force. Brazil operates more than 300 sugar processing plants and most of them can produce ethanol, so it can ramp up ethanol production pretty quickly. What's more, it's building another HUNDRED sugar-ethanol processing plants.

But there have also been a series of dire predictions that global sugar production is going to overwhelm demand. For example...

Sugar Surplus Forecast at 3.3 Million Tons by Cargill

Global sugar supply will exceed demand by 3.3 million tons in the year to September 2007 as Asian output recovers, said Olivier Pairault, chief economist at Cargill Inc., the largest shipper of the raw form of the sweetener from Brazil.

The outlook for "sugar is not bullish,'' Pairault said at the Sugaronline World Sugar & Ethanol Conference in Geneva today. "There are significant risks over the next 12 months, especially in Brazil and Asia.''

Now when I read that, my first thought was: "How deep in the hole on sugar short positions is Cargill?" Because that looks like a classic example of someone trying to talk down a market after it takes off, like sugar has recently. I'd show you but Blogger is misbhaving. I'll post a chart later.

And now we have this story from Ford that "E85, a fuel that is 85 percent ethanol, needs to be 30 percent lower than gasoline or petrol at the pump than mainstream." That's according to Ford's "director of sustainability and corporate citizenship," Andy Taylor. You know, part of Ford's problem may be that it devotes a whole lot of money to directors with fancypants titles that it could spend on building the cars of the future. Because if Ford won't build ethanol cars, Toyota and Honda will.

Mind you, I'm not changing my view that ethanol from corn is a boondoggle. Since the government is throwing tons of money at it, you can still make a hefty profit, but it's a boondoggle nonetheless. Brazilian ethanol, on the other hand, made from sugar cane, is actually cost effective.

One more thing on sugar, also from Bloomberg: The European Union is reducing sugar exports after Brazil, the world's biggest exporter, last year won a World Trade Organization ruling preventing growers in Europe from exporting all their surplus production. European sugar production is expected to drop about 14 percent this year.

So again, it all comes back to Brazil and its sugar crop. Will it turn more sugar into ethanol? Will it sell that ethanol to the US, which will therefore fill a supply/demand gap in gasoline, potentially driving gasoline prices lower? It seems that's the way the trend is going to go. And that means the trend in sugar prices will likely be higher.

I haven't taken into account the rising sugar production in China and India, true. But those countries are becoming their own best sugar customers -- There should be increased demand for sugar in Asia as well.

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