SuperModels Community Join the discussion in the MSN Money SuperModels Community. Jon Markman's Daily Advantage Sign up for Jon's new daily newsletter service.
SuperModels Recent articles: • 3 pedal-to-the-metal stock strategies, 3/29/2006 • 3 low-risk stocks even bears love, 3/22/2006 • Google wants to put your life online, 3/15/2006 More... | SuperModels 3 stocks for a worldwide sugar rush The world's growing sweet tooth and rising demand for ethanol have created booming demand for sugar. Here are three picks that benefit from rising prices. By Jon D. Markman The sweetest smell of success for traders last year, and in the first quarter of 2006, came not from copper, gold, oil, stocks or currencies. Not from semiconductors, telecom carriers or retailers. Not from biotech. Not from emerging markets. No, just to show you how perverse the markets can be, the No. 1 investment over the past 15 months was a product that is given away for free at virtually every restaurant in the world. That would be sugar -- and boy, its not just for Cheerios anymore. Demand for sugar cane and sugar beets has crystallized lately amid a worldwide clamor for alternative energy sources, and a burgeoning sweet tooth among Asias new middle class. Sugar futures, the instrument of choice for commodity traders, were up 60% last year -- and they're at multiyear highs again this week. But sugar remains well below its record price. "Sugar could quadruple from here and it would still be below its all-time high,'' famed commodity speculator James Rogers told Bloomberg last week. "The rally hasn't even started yet. And the fundamentals are changing dramatically in a positive way."
Equity traders dont have a lot of options for getting in on the action just yet. As youll learn in a moment, there is one cheap small-cap sugar refiner that is up 135% this year and could still have a ways to go, as well as a 100-year-old mid-cap. Before going straight to the stocks, though, lets check out the economic and political backdrop. Brazil's sugar high Seeking to cut their reliance on petroleum and natural gas from unreliable regions such as the Middle East and Russia, governments in the southern hemisphere have reshaped their tax and industrial policies to favor the production and use of ethanol. That fuel is terrific and inexpensive, and it's refined from the sucrose found in sugar beets, which are an annual grown in cold climates, and sugar cane, which is a perennial grass grown in hot zones. Ethanol might ring a bell as something straight out of an eighth-grade science fair. But it is no longer quaint or arcane. It is a real-world petroleum substitute that is sprinting toward becoming a complete energy solution in some countries. Ethanol burns clean and hot in automobile engines built specially to run it.
Finally, support behind ethanol fuel is firing on all cylinders and the industry is undergoing massive growth. Here are the plays on ethanol that investors should watch. Click here to read Company Focus. Brazil, the worlds largest sugar-cane producer, a few years back launched a plan to become self-sufficient in sugar-fueled energy over the next 10 years, and the nation is already way down that road. At service stations in Sao Paulo, you can specify gasoline or ethanol for your "flex-fuel car or pick-up truck. Ethanol accounts for 40% of all fuel sold in Brazil, or more than 4.25 billion gallons. Were not just talking about environmental do-gooders here. Ethanol costs half as much as gasoline and reduces carbon monoxide emissions by a third. As you can imagine, India and other developing nations that dont want to give petroleum-producers a stranglehold on their economies are doing the same. Related news and commentary on MSN Money
The great thing about sugar cane as an energy source is that it is incredibly efficient. Many ethanol feed stocks -- such as corn, wheat and beets, which are widely grown in the United States -- require as much energy to grow and refine as they actually produce in energy. But sugar cane production actually results in a huge net positive energy gain -- about 8:1 energy output to energy input. Thats especially so when its grown in the country in which it is used, so there is no energy or cost expended in transportation across oceans. The United States produced about 3.5 billion gallons of ethanol last year, China churned out a little more than 1 billion gallons, India did around 700 million and France produced 400 million. All in all, researchers say, the world produced enough ethanol last year to slash a little more than 2% of global gasoline use. Satisfying the world's sweet tooth Now you can start to understand whats happening here. Just as you are used to seeing gasoline and natural-gas stocks move higher with crude oil and natural-gas futures, you'll now see sugar prices move in the same way. On Monday, crude oil rose 1.3% to $67.50 a barrel amid concern that Iran would cut oil exports -- and white sugar futures rose for a fifth straight session, as speculators bet that ethanol demand would jump. Sugar for May delivery rose $9.60, or 2%, to $483.60 a metric ton on the London International Financial Futures and Options Exchange -- a record. Raw sugar for May delivery rose 44 cents, or 2.5%, to 18.44 cents a pound on the New York Board of Trade. It hit a 25-year high of 19.73 cents in early February. You need one more piece to the puzzle before moving on, and it is this: The more sugar cane that goes into fuel tanks, the less there is for sweetening Capn Crunch cereal, stuffing in those free packs at the Starbucks counter and feeding the developing worlds growing taste for great U.S. exports like Juicy Fruit gum, Twinkies and Coca-Cola -- although most domestically-produced Coca-Cola is sweetened with high fructose corn syrup. Candy, cookie and soda consumption is growing at about the same rate as GDP in the United States and Europe, but it is exploding elsewhere. From 2000 to 2004, candy production in China rose by 70%, and the consumption of cake doubled, according to government statistics. All told, the world has developed a big sugar deficit. According to the Food and Agriculture Organization of the United Nations, world sugar consumption this year will exceed production for the third consecutive year by about 2.2 million tons despite record production in Brazil. Partly to blame is a drought in Thailand, the worlds second-largest producer, that will make this year's crop 15% smaller than last year's. The Philippines and China will add a little bit back, but there just isnt enough sugar to go around. Price is the ultimate allocator, and that is causing a lot of grief. As if Pakistan didnt have enough to worry about with Osama bin Laden running loose in the northern mountains, President Pervez Musharraf on Monday called an emergency meeting of sugar industry officials to demand that they stop attempting to "profiteer from the sugar shortage by raising prices repeatedly, according to an Islamabad newspaper. Portfolio sweeteners So how do you participate if youre not a hotshot commodities trader? Well, if we were in India wed have a half a dozen stocks to choose from with names like Balrampur Chini Mills and Maana Sugar. On the Johannesburg exchange, you could put some money on the largest African producer, Illovo Sugar Our main choice among U.S. public companies is Imperial Sugar The only other public company with a big sugar division is Alexander & Baldwin
I will monitor these three sweet plays all year and report back. And if you have any other suggestions on how equity investors can participate in the sugar rally, e-mail me at jon.markman@gmail.com and put SUGAR in the subject line. Fine Print Get your sugar news fix at sugaronline.com. ... Learn about sugar as a trading commodity at barchart.com. ... Learn about Imperial Sugar at its Web site. ... Learn about Alexander & Baldwin at its Web site. Jon D. Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column. | |||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
