ANALYSIS - Sugar price may spike to 25 cents in rally Friday 3 February 2006, 2:32pm EST Printer Friendly | Email Article | Reprints | RSS
By Rene Pastor
NEW YORK, Feb 3 (Reuters) - Sugar's sizzling rally may soon lift prices to 25 cents a pound for the first time since 1981 due to relentless buying by investment funds and tight supplies, industry analysts said on Friday.
The benchmark March raw sugar contract at the New York Board of Trade closed at a 25-year peak at 19.30 cents a pound, having hit a lifetime high of 19.73 cents which is fairly close to the psychologically key 20-cents level.
"I know people will be talking of 24 and 25 (cents)," Judy Ganes of commodity firm J. Ganes Consulting told Reuters in a phone interview.
Steve Platt of Archer Financial Services in Chicago said the price may hit a peak of 23.5 to 24 cents. James Cordier of Liberty Trading Group put the next target at 24 and possibly 25 cents.
Sugar prices have exploded to stratospheric levels after languishing below 10 cents for a long time. The price traded under 4.00 cents in 1998; in early 2004, the spot sugar contract was trading around 5.70 cents. At the start of 2005, it fetched a little over 9.00 cents.
At the beginning of 2006 on Jan. 3, sugar closed at 14.18 cents.
Platt said there could be sharp pullbacks similar to the one in 1979/80 when prices tumbled from 30 to 18 cents, then unleashed the next wave of a rally that hoisted it to 45 cents.
So aside from that 45-cents level in 1980, prices remain far away from the area over 60-cents last seen in the 1970s.
ETHANOL, SMALLER SUPPLIES TO KEEP SUGAR BUOYANT
One catalyst for the rally has been news that top producer and exporter Brazil will use more sugar cane to manufacture ethanol given lofty crude oil and gasoline prices.
Brazil's supply squeeze comes as European production is expected to be sliced by reforms of its sugar regime. Drought has pruned output in another key exporter, Thailand.
Platt feels demand for sugar will grow in China and India as their resurgent economies boost consumption.
The U.S. Agriculture Department announced on Thursday it was allowing an additional 500,000 short tons of sugar to ease tight supplies after Hurricanes Rita and Wilma pounded Louisiana and Florida, the top sugar-producing U.S. states.
"There's a lot of things behind the rally," said Platt.
Sugar supply concerns have come at a time when investment, hedge fund, pension and insurance houses have been pouring money into commodities. U.S. financial conglomerate Citigroup recently estimated that fund investment in commodities has been sharply underestimated and probably stands at $200 billion, much higher than the commonly believed figure of $80 billion.
Ganes sounded a note of caution about the rally, saying a price rise to 24 or 25 cents may prompt Brazilian millers to rethink funneling large amounts of cane into ethanol.
"There comes a point when sugar will become a more attractive alternative," she said.
Other analysts said the spike in prices will boost production in many countries, bloating supplies down the road.
For now though, the rally shows little sign of slowing.
"There's really isn't anything over the market to hold it down," said Cordier. "It (the rally) has a lot of legs."
