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.

Betting on sugar because of Brazil has been one of the good calls made by Jim Rogers, founder of the $1.5 billion Rogers International Commodities Index Fund, as mentioned

here in June.

Rogers believes more and more countries will increasingly encourage, or even force, the use of ethanol as oil prices continue powering ahead.

In the U.S., 30% of gasoline contains some ethanol, according to the Renewable Fuels Association. That compares with 80% in Brazil.

Brazil, both the world's largest producer and exporter of sugar, uses half of its own production to produce ethanol. The government has adopted policies forcing oil companies to add ethanol to gasoline, prompting automakers to produce flexible-fuel vehicles that can run on both.

Volkswagen AG's sales of its TotalFlex Golf, for instance, have surged over the past few years in Brazil.

As mentioned

here by

RealMoney

contributor Roger Nussbaum, one way to play soaring commodities is to invest in exchange traded funds. Last November, Merrill Lynch launched the

Rogers International Commodity TRAKRS

, which trades on the Chicago Mercantile Exchange under the ticker symbol RCI. It has a 35% exposure to agricultural products, including sugar.

Meanwhile the U.S. auto industry -- and the economy -- is still paying the price of its reliance on the once profitable gas-guzzling vehicles and its inability to adapt to soaring gasoline prices.

Because of this and other competitive issues,

Ford

(F) - Get Report

announced plant closures and close to 30,000 job cuts on Monday.

DaimlerChrysler

( DCX) followed with 6,000 job cuts on Tuesday.

General Motors

(GM) - Get Report

had done the same back in November.

A plunge in car sales is actually expected to have dragged fourth-quarter growth to 2.8%, marking the first time quarterly growth will be below 3% in more than two years, according to a Bloomberg survey.

The Big Three automakers have stepped up plans to produce flex cars, but the adoption of such vehicles, as well as the spreading of ethanol use in the U.S. has been slow.

In November, Ford CEO William Clay Ford urged Congress to offer tax incentives to the struggling U.S. auto industry to drive research and development of alternative vehicles that would help reduce dependence on foreign sources of energy.

Meanwhile, the drop in crude oil and strong earnings from

United Technologies

were helping keep the major averages afloat on Tuesday.

In recent action, the

Dow Jones Industrial Average

was recently up 15.92 points, or 0.15%, at 10,704.69. The

S&P 500

was up 2.11 points, or 0.17%, at 1265.93, and the

Nasdaq Composite

was up 10.26 points, or 0.46%, at 2258.73.

The market, however, was also digesting mixed results from

Texas Instruments

(TXN) - Get Report

,

DuPont

(DD) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

3M

(MMM) - Get Report

, which contributed to what has been a disappointing earnings season so far.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

click here

to send him an email.