May beat stocks, oil, bonds for second year
By Saijel Kishan and Claudia Carpenter –
LONDON, BRASILIA — Sugar, the best-performing commodity in the past 12 months, may beat bonds, stocks and oil for a second straight year.
“Sugar could quadruple from here and it would still be below its all-time high,” said former George Soros partner James Rogers, 63, who founded Lausanne, Switzerland-based Diapason Commodities Management SA, which oversees $3.5-billion (U.S.). “The rally hasn’t even started yet. And the fundamentals are changing dramatically in a positive way.”
Prices are soaring as record gasoline costs prompt Brazil, the world’s biggest sugar producer, to devote more than half of its crop to ethanol production to meet a goal of eliminating gas-fuelled cars in four years. A drought in Thailand, the second-biggest exporter, and a 50-per-cent rise in Chinese sugar demand in the past decade are compounding the supply squeeze.
“Sugar will definitely outperform bonds and equities this year, primarily because of supply constraints,” said Andreas Mayer, 39, who helps manage $130-million at Vienna-based Merit Alternative Investments GmbH and set up the Commodities Opportunities Fund two months ago.
Sugar climbed 60 per cent in 2005 and is up 12 per cent this year. By comparison, the Standard & Poor’s 500-stock index has gained 4.7 per cent this year, and U.S. government bonds have dropped 0.44 per cent, according to Merrill Lynch & Co. Inc.
“It’s a meagre year for bond returns compared to what may be in the offing in other asset classes,” said Jack Malvey, chief global fixed income strategist at Lehman Brothers Inc. in New York. Bonds globally may return as little as 2 per cent this year, Mr. Malvey said.
Raw sugar for May delivery rose 0.18 cents to 16.62 cents a pound yesterday on the New York Board of Trade. It may rise 52 per cent this year to 25 cents a pound, according to Mr. Mayer at Merit Alternative Investments. Christopher Wyke, director of commodities for Schroders PLC in London, says prices will top 19.30 cents a pound. The record was 66 cents a pound in 1974.
White sugar for May delivery rose as much as $2, or 0.5 per cent, to $443 a tonne on London’s Liffe exchange yesterday.
Sugar is a top pick for Mr. Rogers, who co-founded the Quantum fund with Mr. Soros in 1970 and has been urging investors to buy commodities rather than stocks or bonds for the next 10 to 15 years. Mr. Rogers says producers of raw materials failed to invest in their business when prices were low, so they will be unable to keep pace with rising demand.
Mr. Rogers, author of Investment Biker: Around the World With Jim Rogers and Hot Commodities, says he gets his investment ideas from countries he visits. His Beeland Interests Inc. manages the Rogers International Commodities Index, which fell 5.5 per cent in February amid losses from its dealings with bankrupt broker Refco LLC.
Sugar’s rally has boosted costs for companies such as cereal maker Kellogg Co. and candy maker Hershey Co. Hershey’s cost of sales last year rose 11 per cent, and Kellogg’s rose 5.9 per cent.Global sugar production will fall short of demand this year by twice as much as initially expected as world stockpiles dwindle and consumption grows, the London-based International Sugar Organization said in a March 8 report. The shortfall will be 2.2 million tonnes in the 2005-2006 crop year, up from a November forecast of one million tonnes, the ISO said.
The booming economies of China and India, the world’s most populous countries, contribute to the shortfall. India, the No. 2 producer and biggest consumer of sugar, became an importer last year after two years of falling harvests, shipping in two million extra tonnes of the commodity. China, the world’s second-biggest user, is trying to stem price gains by selling almost its entire one million tonnes of sugar reserves at auctions this year.
Consumption of sugar in China increased almost 50 per cent in the past 10 years, according to the U.S. Department of Agriculture. Inventories of the sweetener halved as rising demand for the commodity in food and soft drinks outpaced production.
On the other side of the world, a new generation of vehicles in Brazil is deepening the sugar shortfall. So-called flexi-fuel cars, which allow motorists to switch to ethanol when it’s cheaper, may account for all the country’s cars by 2011 under government plans. Such cars currently account for 48 per cent of the country’s automobiles.
Brazil is the world’s biggest user of ethanol, devoting almost half its sugar to making the fuel, or about a 10th of the world’s annual 148 million tonnes of production. A 1-per-cent increase in Brazilian ethanol production removes as much as one million tonnes of sugar from world supplies, according to Sergey Gudoshnikov, a senior economist at the ISO.
The next best performers to sugar in the past year are copper, which has gained 55 per cent, and silver, up 39 per cent. Crude oil futures have climbed 13 per cent.
Oil, at $64 a barrel this week, will have to fall to $35 before demand eases for sugar used as fuel, “and that’s not going to happen any time soon,” said Stephan Wrobel, 33, chief executive officer of Diapason Commodities.
Prices are rising so fast, global sugar consumption growth may slow as some developing countries cut imports, according to Germany-based F.O. Licht, which has provided sugar data to refiners and traders for 130 years.
Shares of Sao Paulo-based Cosan SA Industria e Comercio, the world’s largest combined sugar and ethanol producer, have risen 96 per cent since an initial public offering Nov. 17, compared with a 19-per-cent gain on the benchmark Bovespa index in the same period.
“It’s amazing that this stuff is still given away for free at restaurants,” said Mr. Wyke, 51, who’s also director of emerging-market debt at Schroders, the 202-year-old London-based fund manager. His commodity fund has risen 5 per cent since it was started Oct. 31.
Sugar shortfall
Prices are soaring as record gasoline costs prompt Brazil, the world’s biggest sugar producer, to devote more than half of its crop to ethanol production. A drought in Thailand, the second-biggest exporter, and a 50-per-cent rise in Chinese sugar demand in the past decade are compounding the supply squeeze.
Yesterday’s close 16.62ยข U.S. up .18
Commodity futures
TOP AND BOTTOM FIVE PERFORMING COMMODITIES DURING PAST 12 MONTHS
Sugar: 84.05%
Copper: 54.88%
Silver: 39.29%
Gold: 26.47%
Platinum: 18.78%
Soybean: -11.71%
Lean hogs: -15.86%
Cocoa: -19.25%
Lumber: -19.58%
Coffee: -20.65%
SOURCE: BLOOMBERG FINANCIAL SERVICES
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