Sugar prices have plummeted from record heights eight months ago, when a mix of peak oil prices, growing demand for sugar-based ethanol and the resulting perception of tight supply sent the sweetener and alternative fuel feedstock to 25-year highs in the commodities market. The spike led industry analysts to label sugar a new energy commodity, one that might trade less like a crop and more like an alternative fuel.
Sugar Falls From Grace
By LAUREN VILLAGRAN AP Business Writer
© 2006 The Associated Press
NEW YORK — Has the sweet lure of sugar soured in the commodities market?
Sugar prices have plummeted from record heights eight months ago, when a mix of peak oil prices, growing demand for sugar-based ethanol and the resulting perception of tight supply sent the sweetener and alternative fuel feedstock to 25-year highs in the commodities market. The spike led industry analysts to label sugar a new energy commodity, one that might trade less like a crop and more like an alternative fuel.
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Since then, sugar has declined sharply from a high above 19 cents in February to sell for about 12 cents a pound today. But analysts say sugar's importance as an energy commodity hasn't diminished in tandem.
"If you imagine oil at these current prices _ (even) at $50 or $40 _ it will push sugar into a different perspective," said Fernando Moreira Ribeiro, secretary of Brazil's Unica, which represents Sao Paulo state's sugar and alcohol business. "It's not an agriculture commodity any more, sugar from cane. It has to be considered as an energy commodity."
Sugar at 12 cents is still double the 6 cent floor of two years ago.
The October sugar contract dipped a fraction of a penny Thursday to settle slightly above 12 cents on the New York Board of Trade.
Michael Liddiard, a sugar consultant with Kingsman Americas, partly attributes the sugar slide to recent events in Brazil, which accounts for about 40 percent of global sugar supply and is the world's largest producer.
"The fall from the high coincided with time Brazil decided to reduce the blend of ethanol in gasoline to 20 percent from 25 percent," Liddiard said. "That immediately showed there would be less ethanol demand" than previously expected. Brazil earmarks about 52 percent of its sugar crop to ethanol, which is used as an additive to gasoline and to power the country's increasingly popular flexible fuel vehicles.
Meanwhile, Petrobras, the state-owned oil concern, has held the price of gasoline on the Brazilian market steady for a year _ at prices that do not reflect the surge in crude oil prices on the world market, Liddiard said. Cheap gasoline has also curbed Brazilian demand for ethanol.
In some ways, the dynamics that conspired to drive sugar prices so high earlier this year have reversed to cause the decline. Crude oil prices have come down and, importantly, the market now expects a sugar surplus in the 2006-07 crop year. Unica's Ribeiro said Brazil's crop is forecast to be 7 percent to 8 percent ahead of last year's, while China and India are expected to produce bumper crops following two years of meager harvests.
"The bull market of earlier this year continued to unravel as supplies of sugar are perceived to be far more ample than they were eight to 10 months ago when the market was soaring higher," sugar analyst Judith Ganes-Chase noted in a recent report.
Liddiard laid out the bull and bear case for sugar in a market note earlier this week.
The bears view Wednesday's slight uptick in sugar, for example, as a bounce and argue the balance sheet is still in surplus and is expected to remain so in the fourth quarter. The bulls see 11- or 12-cent sugar as a bottom, since the market has fallen sharply in the past few months and the lower prices are attracting new physical demand.
"Sugar is definitely reacting to the harvest," said Anthony Compagnino, a sugar trader and partner with East Coast Options Services. "At the moment, the luster of the energies has definitely fallen to the wayside."
Which is to say, excitement about sugar as an alternative fuel source has mellowed but not disappeared.
A barrel of light, sweet crude settled down 75 cents at $63.22 Thursday on the New York Mercantile Exchange. |
