Investors with a sweet tooth have had a terrific run over the past two years. Sugar more than tripled between early 2004 and February 2006, hitting a peak of more than 19¢/lb, although it has since fallen back to about 14¢/lb. Investors rushed into the market as supplies were eclipsed by demand.
Greater wealth in emerging economies such as China and India is spurring demand, while sugar has also become an energy story: as crude prices have soared, fuel ethanol, which is made from sugar, has become a viable alternative. Brazil, the top sugar exporter, has devoted some of its sugar crop to ethanol production to power its flex-fuel vehicles, which can run on pure ethanol. By last year, flex-fuel cars comprised 62% of all Brazilian car sales; by 2011, that figure is likely to rise to 100%, according to Resource Investor.
But for now, the market is concentrating on unexpectedly strong production in Brazil and India; global supplies are likely to exceed demand this year. So while there is plenty of scope for further gains in the longer term, thanks to rising emerging market and ethanol demand, sugar seems likely to hover around current levels for several months, says Sudakshina Unnikrishnan of Barclays Capital.