Sunday, May 23, 2010

Sugar - The Uncrowded Trade

If you like commodities over stocks, but are put off by the crowded and high profile nature of gold (as I am) take a look at the current condition of sugar. I began looking at sugar last July and found it was more explosive than most commodities, so to safely buy, it should be only after massacres down to the low end of its historic range. I wrote a post Sugar Price Explosion? back on August 8, when it was trading around 17. Since then, sugar did about a 35% climb over the next 5 months. Now it has come back down. So was that the explosion or is there more sugar bull to come? (click to enlarge charts)

The above chart (click to enlarge) shows the long-term history of sugar with its climbs in the vicinities of major recessions. It was just breaking out of its major trading channel when I posted this chart back on August 8. Since then (dashed line) it has done a repeat of the recession runs of the past, but is the bull market over now already? Jim Rogers doesn't think so. In fact, he favors sugar over gold.
"God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now than in other things...I think I am going to make more money in agriculture than I make in precious metals."
Rogers doesn't fret with small fry, short term volatility. His discipline on gold?
"If it goes down, I'll buy some more, and if it goes up, I'll buy some more. I periodically buy some gold. I don't have a method to it. I just buy it."
This brings to mind a saying of Louis Rukeyser - traders drive Chevies, investors drive Cadillacs. Rogers is mindful of basic, big view facts like China's middle class changing their diet and projected to grow by about 300 million the next five years. That's the entire population of the United States. And many other nations are going through the same changes. But short term crop fluctuations can send prices down in a hurry. Government estimates in Thailand, second biggest exporter of sugar, were projecting sugar to fall to around 14 cents back before the drop, but they didn't see it going much below 14, which is the production cost in Brazil, the largest producer. And in today's we have an article Sugar Slump May End On Restocking, Ethanol Demand where it's stated:
Sugar isn’t likely to trade below the “watermark” of 13 cents in the next three to five years, even as volatility increases, Fred Zeller, the managing director of sugar-beet growers group SZVG, said in an interview in New York. Sugar reached 13 cents on May 7, the lowest level since April 2009.

If you look at the SGG chart, the ETN that follows sugar, it may indeed be putting in a bottom near 14 cents (about 42 on the ETN):

There is a clear break of the 20 day ma which had been defining the decline. And it's doing this in the face of about every other commodity on earth getting hammered. Rogers sees not just a brief spike in sugar, but a huge multi-year rise. "I am certainly expecting sugar to go much higher during the course of the bull market over the next several years." (Money Morning, 8/25/09, Six Ways to Profit From Guru Jim Rogers' Prediction That Sugar is Sweeter Than Gold) If he is right, the run to 30 cents was just a foreshock and this is a dip worth buying.

Rogers doesn't think there is enough productive capacity among farmers to keep up with basic food demand growth. Inventories are at multi-decade lows. Any weather problems cause big price problems. And sugar, much more than any crop, competes with energy demand in the face of a declining conventional crude capacity. Brazil devotes fully 50% of their sugar crop to ethanol, another fast ramping demand growth story as the densely populated emerging world motorizes. So far, sugar ethanol is the only nonfossil auto fuel with anywhere near the same net energy as natural gas and oil. It's really the only thing that is effectively replacing gasoline and diesel on an energy balance basis - vastly more effective than deepwater drilling, tar sands, corn ethanol, biodiesel, or electric (considering that most electricity comes from burning mined coal). Sugar ethanol cuts greenhouse emissions far more than any available auto fuel, and it already commands 60% of the global ethanol market. If you look at a graph of where all the people are that produce sugar but don't use much fuel versus where all the gas guzzling people live who don't farm, you see something interesting:

This bubble chart was produced by Stuart Staniford of, and with sugarcane ethanol the best crude replacement, it has possible peak oil implications. The big sugar producers are the big blue blobs of population who use little energy for themselves and are at one end of the inverse curve. The big users of energy, who only know how to put sugar in their coffee, are grouped at the other end. One can envision a happy export situation for all concerned developing in the future.

Yet you don't hear much about sugar. It was briefly popular with the funds last year as it rose to a 28 year high, but they have dumped it this year with a surprise crop surge. It is remarkably uncrowded right now. If the threat of fund darlings hitting a bout of forced redemption selling in market turbulence gives you the Willies, sugar is about as far from a darling now as it gets. The Agri run of 2007 has gone cold. Was that the first shock of a food shortage earthquake? When asked for his best investment advice these days, Jim Rogers says, "Become a farmer".

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