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Sugar hits one-year high on funds, biofuel demand
January 8, 2008 / 2:22 PM / 10 years ago

Sugar hits one-year high on funds, biofuel demand

LONDON, Jan 8 (Reuters) - Sugar prices hit a one-year high on Tuesday, supported by heavy buying from investment funds and surging demand from the Brazilian biofuels industry, driven by record $100-a-barrel oil.

Sugar, often ignored by speculators and investment funds in 2007, has now joined a sizzling rally that has propelled almost all commodities on bull-run this year.

Raw sugar futures for March delivery in New York 1SBH8 on the IntercontinentalExchange (ICE.N) were up 0.17 cent at 11.54 cents per lb in early trade on Tuesday, their highest level since January 2007.

The trigger for sugar was record oil prices of $100 a barrel last week, analysts said. The prospect of dwindling supplies of oil has ignited surging interest in “green” energy, notably in ethanol biofuel which is made from biomass such as sugarcane.

Brazil, the world’s leading producer of cane-based ethanol and top exporter of sugar, is expected to shift an increasing share of its growing sugarcane production to feed surging demand for ethanol to power flex fuel vehicles (FFVs).

“The ethanol-sugar link is centred in Brazil,” said Sergey Gudoshnikov, a senior economist with the London-based International Sugar Organization (ISO).

“Bio-energy is the foundation upon which all of the optimism of the investment funds is based.”

Analysts say well over half of Brazil’s total sugarcane production is likely to be used to make ethanol in the next few years to feed rapidly expanding demand by FFVs, which can be powered by petrol, ethanol or a mixture of both.

“The longer term prospects for Brazilian cane use for ethanol are excellent,” said Peter De Klerk, a senior analyst with Czarnikow, a London-based merchant.

“Brazil’s future expansion in cane production is expected to be predominantly allocated to ethanol.”

BRAZILIAN DEMAND

Growing demand for ethanol in Brazil, brought about by higher oil prices and surging FFV sales, has limited the amount of sugarcane being used to produce sugar, triggering the sugar price rally, according to investment bank Morgan Stanley.

In a report entitled “Less Cane, More Ethanol”, Morgan Stanley predicted a global sugar deficit of 1.6 million tonnes in 2008/09, a marked change from its previous forecast in which it anticipated production remaining in surplus until 2009/10.

The ISO has forecast a world sugar surplus of 11.1 million tonnes in 2007/08, slightly up from a surplus of 11.0 million in 2006/07.

Prices were driven by speculative and investment fund buying and analysts said a lack of selling by producers such as Brazil could drive the market to new peaks this week.

Analysts said sugar prices could go higher if demand from the Brazilian biofuels industry remains robust.

Nearby raw sugar futures hit a 25-year peak of 19.73 cents a lb in February 2006.

Asked if growing demand for biofuels could drive sugar prices higher, James Cordier, founder of optionsellers.com and senior analyst for Liberty Trading Group in Tampa, Florida, said he thought they could rise to around 12-13 cents per lb.

The ISO’s Gudoshnikov agreed: “At around 13 cents per lb, the whole thing would have to slow down.”

Additional reporting by Rene Pastor in New York; editing by Peter Blackburn

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