Candy Makes Market Cupid Stupid

Biofuels Won't Boost Sugar

The huge price spikes for both of these "soft" commodities in the 1970s and the long periods of torpor thereafter illustrate once again why in the grand scheme of things, you don't want to be a primary commodity producer. Someone else can come along and plant more cocoa trees or sugar cane or sugar beets, use improved fertilizers, pesticides and herbicides and toss in a little genetic modification here and there, and supply will come out of the woodwork, literally and figuratively.

Even with all the hoopla about sugar being an energy commodity, this will remain true. It is hard to conjure an industry more ripe for technological improvements than the conversion of sunlight into ethanol. The simple thermodynamics of photosynthesis mandate significant net energy losses every step of the way.

Crops such as corn and rice manage to convert 1% to 2% of the energy received in sunlight into biomass; sugar cane is a major outlier, able to convert nearly 8% of sunlight into biomass. But then this sugar has to go to feed the yeast that produce ethanol and carbon dioxide (think beer) as waste products. The theoretical maximum conversion of sugar into ethanol is 51.4%; practical conversion rates are around 35%.

Once you start accounting for all the energy and capital inputs into farming, harvesting, producing, fermenting and distilling, transporting and distributing ethanol, you may be at a net energy loss. It doesn't take much of a leap of imagination to say there is vast room for technological improvement in converting sunlight into usable fuel. And when that happens, the real price of sugar will plunge.

Here's some advice to save you a few bucks: If you hadn't heard of switch grass prior to last week's State of the Union address, don't invest in it now.

How Sweet It Isn't

The Producer Price Index for sugar and confectioneries reflects the inability of sugar and confectionery suppliers to gain any sort of pricing advantage over time. It has captured only 94% of the total PPI gain since 1947; the huge disruptions of the 1970s are easy to spot on the chart.

One Brief Shining Moment

Source: Bloomberg