Sugar and Corn:
The New Oil of the Future
While the precious metals and energy sectors have garnered most of the media and investorís attention in the past year, Sugar has quietly doubled in the midst of increase demand for a cheaper and more environmentally friendly fuel alternative. As oil prices continue to rise in the midst of global demand and geopolitical uncertainty, I expect Sugar prices to rise substantially over the next several years. In fact, I believe the agricultural sector in general will provide some of the best performance in this multi-year commodity bull market.
Since my first recommendation to my clients and newsletter readers in early December, Sugar has moved up over 50%. Although part of this move up has been pushed up by speculative interests entering the market, I also believe that it represents a further break out in a commodity that will benefit from higher oil prices, stricter fuel emission standards, and the demand for sugar as a food product.
Higher Oil Prices
Without question, the recent move up in Sugar has been propelled by increasingly rising energy prices. Although some analysts believe that the price of Oil is overvalued, I believe that oil is still tremendously cheap at these levels. Once again, you cannot compare the price of Oil in 1980 to the current levels that we have today. If you adjust the price of Oil for inflation, you will have an all time high that is closer to $100 barrel.
As you can see from the chart above, Oil is still tremendously cheap at these levels. Additionally, I also expect the demand for Oil to increase as China continues industrializing their economy. Although Oil companies are scrambling to find new oil deposits, this is not going to immediately translate into more Oil supply. There is a finite amount of oil in the world, and this is one of the reasons why countries are looking for other energy alternatives.
All Eyes On Brazil
Although there has been a recent focus on Ethanol as an alternative fuel, this concept has been successfully implemented by Brazil over the last 30 years. Brazilís ethanol program was initiated due to volatile nature of the 1970ís Oil market. At that time, Brazil was reliant on other countries for the majority of their fuel. Today, Brazil is on the verge of becoming energy independent. Because of Brazilís profound success and the cheaper cost of Ethanol, a number of countries have looked to implementing Ethanol programs.
The immediate implications of these new Ethanol programs are that the demand for Sugar will increase dramatically. In fact, Brazilís agricultural minister recently stated that they need $10 billion dollars in investment by 2012 to keep up with the rising demand for Ethanol. As it stands, the current Sugar supply will not be able to fill the increase demand for the commodity. And this demand will continue to increase as Oil prices continually head higher. Going forward, I expect to see Sugar prices trend in tandem with higher Oil prices. Notice the chart below:
Other Demand Factors
While the demand for Sugar will come from a need for a cheaper fuel alternative, it will also come from a need for a more environmentally cleaner fuel. At the center of this issue is the Kyoto Protocol which will require countries to decrease carbon emissions by 5% by 2012. Already, countries like Japan and Sweden have embarked on ethanol programs that will help them meet their emission requirements. I expect this type of demand to increase as these countries experience success in curbing emissions and as we get closer to 2012.
Coinciding with this demand for a cheaper and cleaner fuel alternative is a demand for Sugar as a food product. In the last 50 years, we have seen a steady increase in world sugar consumption. I expect this consumption to continually increase as we continue experiencing world population growth. Furthermore, I also expect exponential demand for sugar as a food product to come out of China, India, and other emerging economies. As these continue industrializing their economies, they will create further wealth for their citizens. Subsequently, this wealth will trickle down into a greater consumption of food products often associated with Western economies.
So Where Is Sugar Going From Here?
The increase demand for Sugar as fuel source coupled with the increase demand for sugar as a food product, will ultimately contribute to demand greatly outweighing supply. The end result will be new historical highs for Sugar. As you can see from the chart below, sugar is still cheap at these levels.
Although I have specifically talked about Sugar in this article, I also believe that we will experience record Corn prices in the near future. Corn is also used to make Ethanol, especially in the United States. Even as I write this, Ethanol plants are being constructed in Iowa to meet the increase in demand for Ethanol blended gasoline. This past August, the U.S. energy was signed into law which would require the Ethanol consumption to double by 2012. Unlike Sugar, Corn prices have still remained at historical lows. In fact, it has been one of the worst performing commodities in this bull market. Going forward, I expect corn prices to stage a vicious rally in 2006.
If you are interested in learning more about Sugar or Corn please contact me here: http://www.wisdomfinancialinc.com/brokers/emanuel.html
Additionally, if you would like to sign up for my free weekly newsletter please sign up here: http://www.wisdomfinancialinc.com/pages/newsletter.html
January 27th, 2006
Emanuel Balarie is a highly regarded advisor who advises high net worth individuals and institutions on the commodity markets and managed futures investments. Mr. Balarieís research has been published internationally and has appeared recently in The Wall Street Journal, Reuters, and Money Week, as well as on CNBC and MSNBC. You can find out more about Mr. Balarie and his services at Wisdom Financial, Inc.
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