Sugar's Expanding Role as Auto Fuel Energises Funds
Date: 06-Feb-06
Country: UK
Author: David Brough
Raw sugar prices finished on Thursday at their highest in 25 years on a supply squeeze and heavy investment fund buying, with the market tipped to race past the psychological 20-cent level soon, brokers said.
The New York Board of Trade's key March raw sugar contract jumped 0.86 cent, or 4.6 percent, to close at 19.15 cents a lb., moving from 18.55 to a new contract high of 19.20 cents.
Investment funds are pumping ever-increasing money flows into commodities as the fast-growing Chinese and Indian economies suck in primary products ranging from metals to foodstuffs.
"Funds want exposure to commodities, including sugar. Commodities are the next hot asset class," one London-based fund manager said. "Fund buying is feeding on itself."
Citigroup said last week the total amount invested by funds in the booming commodities sector was grossly understated and was probably closer to $200 billion than the commonly perceived figure of $80 billion.
Sugar contracts have been kept on the boil by news that Brazil will use more of its cane to churn out ethanol fuel, given steep crude prices, lower output in key exporters such as the European Union and Thailand and the insatiable appetite of hedge and pension funds and other financial houses for sugar.
Brazil, the world's top sugar grower, strongly supports production of the biofuel ethanol from sugar cane to power so-called flex-fuel cars.
Analysts say an increasing flow of cane into ethanol could reduce supplies of edible sugar.
They also noted that US President George W. Bush announced in his State of the Union speech this week an agenda to develop alternative energies such as ethanol in order to end America's dependence on oil from volatile regions of the world.
Some market participants caution that the sugar market might rise too high, too fast.
"Producers are having difficulty financing the margins on the sugar that they have already priced and are either reluctant or unable to price more," Paris-based sugar broker Jonathan Kingsman told Reuters.
"This means there is very little selling each time the market rallies."
Kingsman added: "The market has already rallied about five cents since the beginning of 2006. Although there is nothing to suggest that it can't rally further, the market is extremely volatile and we recommend caution."
Despite the searing rally, sugar prices have a long way to climb to hit levels near 46 cents touched in 1980 or the region over 60 cents recorded in the mid-1970s.
(Additional reporting by Rene Pastor in New York)