Sugar may rise 10% on Brazil

Sugar prices may rise about 10 percent in the coming year as Brazil, the world's biggest producer, curbs exports to increase use of the commodity as a car fuel amid surging oil prices, according to Sucden (U.K.) Ltd.

Sugar futures "have a good chance of testing within 12 months the $330 barrier" set in June 1997, said Sam Tilley, head of research in London at Sucden, a commodities brokerage. White sugar for August delivery traded at $317 a metric ton as of 10:54 a.m. in London today. The contract for October delivery, the most traded, was at $288 a ton.

Gasoline prices have jumped in the past year as oil climbed 45 percent, stoking demand among Brazilians for ethanol as a cheaper alternative to run vehicles. Ethanol, or alcohol, is produced from sugar cane. Brazil's ethanol exports may drop to about 2 billion liters this year from a record 2.5 billion liters in 2004, the Public Ledger said July 8.

"Demand for ethanol is growing fast, because it's cheaper than gasoline and less harmful to the environment," Tilley, 29 said in an interview July 12. So strong is Brazil's demand for "flexi-fuel" cars that run on ethanol, gasoline or a blend of the two that "sugar exports from the world's biggest producer may not grow this year."

Brazil's military government from 1964 to 1985 promoted ethanol use to cut reliance on imported Middle East oil. Under the National Alcohol Program that began in 1975, the government subsidized the building of ethanol distilleries and the price of ethanol paid to producers. By the mid-1980s, 96 percent of all vehicles sold in Brazil were powered entirely by ethanol.

Rebounded

The subsidy program collapsed in the early 1990s as the world price of raw sugar trebled between 1987 and 1990 and as oil declined from a high of $40 a barrel in 1990 to $9.64 in 1998. The end of the program prompted Brazilian millers to switch from distilling ethanol to producing sugar for export.

Oil has since rebounded, rising to a record $62.10 a barrel on July 7. Crude was at $59.56 a barrel in after-hours trading on the New York Mercantile Exchange and at $59.74 at 2:44 p.m. Singapore time today.

"Flexi-fuel" automobiles, introduced in Brazil in 2003, allow drivers to vary the amount of gasoline or ethanol they use. They now account for 48 percent of all cars sold in Brazil.

Cane ethanol produces about 80 percent less of the greenhouse gases linked to global warming than gasoline, according to Brazilian government figures cited by the International Energy Agency. It also produces fewer pollutants such as sulphur dioxide.

Sugar Versus Ethanol

Brazil, South America's biggest economy, will harvest 450.2 million tons of sugar cane in the crop year ending April 2006, an increase of 8 percent from the previous 12 months, according to a government forecast last month. From this, 27.2 million tons of sugar and 17.5 billion liters of ethanol will be processed, it said.

"In the past, the split of cane for sugar and ethanol production has been close to 50-50, but if demand continues to increase, ethanol production may go up to 60 percent," Tilley, who joined Sucden five years ago, wrote in a July 11 report.

White sugar for August delivery, the contract closest to delivery, rose 1 percent to $317 a ton on the Liffe exchange in London today. Sugar for October delivery, the most actively traded contract, fell 0.7 percent to $288.

Ingredients in Place

A projected global supply sugar deficit of about 1.5 million metric tons, planned cuts in European Union subsidies to its sugar producers, and drought damage to sugar crops in Thailand and Australia may also stoke price gains, Tilley said.

"All of the ingredients are in place for a sustained bull run," he said.

Sucden (U.K.) Ltd. is owned by Paris-based Sucres et Denrees SA, a closely held company specializing in sugar trading that was founded in 1952 by Maurice Versano. His son, Serge Versano, "controls the Sucres et Denrees Group as the major shareholder of the holding company," according to the Sucden Web site.

The London arm of Sucden was founded in 1973 with six staff. It now employs 180, divided equally between support staff and traders.

(Font: Bloomberg, July 14, 2005)
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