Singapore: Prices of sugar, the worst-performing commodity in the past year, may more than double by the end of 2007 as gains in crude oil encourage ethanol use, said Greg Smith, executive director at hedge fund manager Global Commodity Ltd.
More ethanol will be put into use in Brazil and the US as crude oil prices in New York rose to a nine-month high on Monday.
Increased use of ethanol may help whittle down inventories of sugar, which is used as a feedstock to produce the alternative fuel, Smith said in an interview in Singapore on Tuesday. His hedge fund has $210 million (Rs861crore) under management.
Raw sugar prices in New York have fallen 36% in the past year, even after a 6.5% gain on Monday, amid expectations that a glut in major growing areas such as Brazil and India will swell global inventories. October delivery futures fell 1.6% to 9.41 cents a pound on the New York Board of Trade at 4:55pm Singapore time on Tuesday.
“Sugar could be as high as 20 cents a pound by the end of this year,” said Smith, who has been trading commodities for over 25 years. “We’ve actually started to buy sugar about two-three months ago because we believe the market was undervaluing sugar relative to its ethanol value.”
The global surplus of the sweetener may reach 9.2 million tonnes (mt) this year, according to a forecast by the London-based International Sugar Organization. Excess inventory can be absorbed by more ethanol use, said Smith.
“If you look at it historically, it normally takes about 12-18 months to consume that excess in inventory,” he said.
“However, because now more and more vehicles are being run on ethanol, that inventory will be cut back pretty quickly.”
Brazil is adding more ethanol to domestic petrol starting next month as farmers harvest a record sugar crop, the government said last week. Brazil’s sugar cane output will rise to 513.3mt this year from 455.3mt in 2006, it said. Ethanol is made from sugar in Brazil and maize in the US.
Weather is also a factor that may boost sugar prices, Smith said. “If you get any hurricane go through Cuba or any adverse weather patterns in Brazil, then you will see sugar trade substantially higher very quickly,” he added.
For the same reason, Smith also liked coffee, wheat, maize and soybeans. Wheat prices may increase about 50% before October because of global supply constraints, he said.
“We’ve got low inventories, one of the lowest inventories since 1962 and we’ve got the lowest acreage in about 15 to 20 years,” Smith said.
“We’ve got extreme weather patterns in some of the growing areas like Australia and too much water in some parts of the US.”