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This is likely to happen in the next few years in the oil sector, but we think that we have found a raw material in which it is urgent: sugar. In addition, we found a nice stock which can benefit from the two trends.
Sugar rose already by 76% this year in price, up to 20.85 cents per pound, the highest level since April 1981. It is not difficult to guess why. For the second year, there is a serious deficit in the world sugar market. This deficit is estimated by the international sugar organisation (based in London) to be 5 million metric tonnes until September 2010. The causes are not hard to find.
The largest producer, Brazil, is suffering from rain (four times the normal rainfall) which means that many crops were damaged. India, the largest consumer, has to cope with great drought, putting their own production under heavy pressure, resulting in an import need of twice as much sugar than usual. Experts therefore do not believe that the rally in sugar has already passed, on the contrary. Bajaj Hindusthan Ltd., the largest producer of India, thinks that 25 cents per pound can be reached before the end of the year. Others think even 30 cents.
It is therefore not surprising that Hedge funds are long on sugar. US commodities and futures trading Commission data shows that since the beginning of August more than 200 000 call option contracts are open. In particular for March 2010, the call with a strike price of 40 cents is popular.
Also raw materials and emerging markets specialist, Jim Rogers, is extremely optimistic. In a recent interview, he points out that sugar is still under 70% of the ‘all time high’ of 1974. Rogers said that there are not many things that are 70% cheaper than in 1974. Sugar has according to him a great future as an investment.
What a rally can do is well illustrated by what has happened more than four decades ago. From the beginning of 1970 to November 1974, the price of sugar increased 16 times to reach a maximum 66 cents per pound. We are far away from that price, although there is no guarantee that the price will reach such heights.
Furthermore, prices have risen in such a way that they are too high for some consumers. The import of the largest consumer India is so far this year 2 to 3% lower relative to 2007-2008. Nevertheless, there is a shortage of around 5 million tonnes in the world market.
The stocks are low, which can result in an even stronger rally. The stocks in India, for example, are 50% lower compared to a year ago. The monsoon rain in India does not provide the necessary water and too much rain has decreased the harvest in Brazil. So there is little reason to believe that the shortage situation will improve quickly.
All very well, but how can you benefit from it? That is not so easy. There are three ways to invest in sugar (but just a trip to the supermarket):
- Commodity markets (futures)
- Exchange-traded funds (ETF's)
- Shares of sugar producers
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