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Energy Demand Causes Sugar High

The futures price hits 17 cents a pound, a level not seen in 24 years, as expectations rise for the sweetener's use in automotive fuel.

January 24, 2006|From Bloomberg News and Reuters

First oil, now this: The price of raw sugar in New York futures markets reached a 24-year high Monday, as traders bet that near-record oil prices would mean increasing demand for alternative fuels, including ethanol made from sugar cane.

Raw sugar prices have nearly doubled in the last year as Brazil, the biggest exporter of sugar, has converted more of its cane crop to cope with soaring gasoline prices. In Brazil, ethanol is cheaper than gasoline.

"Sugar is now a petro-commodity, viewed not just as a sweetener but increasingly as a fuel source," said Sam Tilley, head of research for commodities broker Sucden U.K. Ltd.

Sugar futures for March delivery rose 0.2 cent, or 1.2%, to 17.35 cents a pound, the highest closing price since 1981. The price has rocketed from about 9 cents a pound a year ago and from less than 6 cents a pound in January 2004.

Brazil, home to the world's largest ethanol industry, forecasts record production of 16.6 billion liters in the 12 months ending September. About 80% of output, or 13.4 billion liters, will be used in Brazilian cars.

All Brazilian gasoline is, by law, 25% ethanol, and most new cars sold in the country can run on any mixture of gas or ethanol.

Global demand for ethanol may quadruple to 20 billion gallons by 2010, said Roland Jansen, an analyst at fund manager Liechtensteinische Landesbank.

A drought in Thailand, once the world's second-biggest sugar exporter, and the prospect of reduced European Union exports are adding to speculation about a shortfall in global supplies.

The 25-nation EU, the second-biggest sugar producer, must start limiting exports by May to comply with a World Trade Organization ruling.

Also fueling demand for sugar futures is "general interest in commodities as an alternative to investing in stocks, bonds and currencies," said Tom Hills, an analyst at Czarnikow Sugar Ltd., the world's largest sugar broker.

Cane sugar isn't the only sweetener, of course. Many foods are sweetened with high-fructose corn syrup.

For now, major consumers of cane sugar are standing on the sidelines, hoping for a break in prices, brokers say. Pakistan is said to need to import 800,000 tons, but it could hold off for a few more weeks, analysts said. China was said last week to have picked up some cargoes but has been unwilling to bid for more, dealers said.

"The problem for these people is they could have bought at 10 [cents a pound], but they felt that was too high and they were looking for a correction," said one dealer who requested anonymity. "Then they said 11 was too high and 15 was too high. Now ... looks like we could head for 20."

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