Sugar Prices Boom, More Cane Seen Used for Biofuel --------------------------------------------------------------------------------
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UK: January 31, 2006
LONDON - Sugar is a star among commodity markets, with prices at 25-year peaks and possibly heading higher as investors see potential to divert more cane to make biofuel.
The Dubai international sugar conference last week heard a keynote speaker say a larger share of sugar cane in top grower Brazil will likely be used to make the biofuel ethanol instead of edible sugar in the next crop cycle. Tom McNeill, senior partner of sugar brokerage and consultant Societe J. Kingsman, said as much as 55 percent of Brazilian cane could be allocated to ethanol in 2006/07 from 52.5 percent in 2005/06, due to growing demand for the biofuel for use in "flex-fuel" cars in Brazil.
While traders attending the conference expressed skepticism over such a high share of cane being diverted to ethanol in 2006/07, they said sentiment that increased cane would be used for biofuel has been one of several factors driving up sugar prices to successive highs.
Raw sugar prices, which rose over 60 percent last year, finished Friday at a fresh 25-year high for the sixth day running on supply fears and investment fund buying, with analysts saying the market should punch to even higher ground this week.
"Twenty cents is on everybody's lips," UK broker Sucden said in a report, referring to benchmark raw sugar futures after Friday's March close at 18.61 cents a lb, having moved from 18.41 to a new lifetime high of 18.82 cents.
Sugar has staged a blistering rally due to news that Brazil will use more cane to produce ethanol.
Sugar supplies from Brazil may be cut as a result.
The problem, some analysts say, is that output by the European Union is likewise expected to fall due to price-slashing reforms in its sugar regime, and drought has affected supplies from key exporter Thailand.
Traders expressed concerns that the sugar market could be a bubble about to burst.
"Maybe the market is overbought. I would say that around 18 cents is a good level to take profits," one trader said.
However, the trader refused to rule out the possibility of a march north towards 20 cents under the momentum of fund buying.
Citigroup said on Friday the total amount invested by funds in the booming commodities sector is grossly understated and is probably closer to $200 billion than the commonly perceived figure of $80 billion.
Sugar analysts believe sugar will claim an increase in investment fund flows due to its impressive returns.
Analyst Jonathan Kingsman told delegates in Dubai last week that index fund investment in sugar was currently around 80,000 lots and might rise by a further 30,000.
He said there was a limit to market gains as price increases could lead to higher production.
