Sweet Trade Is Really an Energy Spinoff

The price of sugar was flirting with 25-year highs Tuesday, and it's not because of surging demand from sweet-toothed consumers. Instead, it's because Brazil signaled it would divert more of its sugar production to make ethanol, an alternative to gasoline to power cars.

In recent action, raw sugar for March delivery was up 0.65 cents, or 3.75%, to 18 cents a pound on the New York Board of Trade. On Monday, the contract briefly spiked to 18.75 cents, a level not seen since 1981. Tuesday's gains took place even as crude oil was losing 40 cents to $67.70 per barrel.

As oil prices surged last year, sugar soared 92% thanks largely to Brazil's converting more and more of its production to ethanol to both reduce its dependence on oil and foster its cane industry.

As crude oil prices gained roughly $10 since mid-December, sugar's advance has been more pronounced. The latest surge came Monday as Brazil's agriculture minister said its sugar industry needs $10 billion of investment by 2012 to increase production as oil prices continue to rise.

"This is mainly an energy story," says Judith Ganes, president of commodities research firm J. Ganes Consulting.

Sugar prices, she notes, also have been boosted recently by a drought in Thailand, which is the world's second-biggest exporter behind Brazil. In addition, the European Union, the second-largest producer, must soon limit its exports under a ruling by the World Trade Organization.

According to Boyd Cruel, a soft-commodities analyst at Alaron Trading, hedge funds and other speculators are now all over the sugar trade. This means that trading is volatile, leaving sugar vulnerable to a pullback in crude oil prices.

Should crude fall back to $55, "we could see a big drop," that could take sugar back to the 13 to 14 cents area. If crude oil prices move higher, then sugar should eventually test the next area of resistance above 20 cents, Cruel says. Regardless, "a long-term bullish trend remains in place" mostly because of the Brazil/ethanol play, he says.