Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on

TheStreet.com.

The sweetest smell of success for traders last year, and in the first quarter of 2006, came not from copper, gold, oil, stocks or currencies. It didn't come from semiconductors, telecom carriers, retailers or biotech. Nor did it come from emerging markets.

No, just to show you how perverse the markets can be, the No. 1 investment over the past 15 months was a product that is given away for free at virtually every restaurant in the world.

That would be sugar -- and boy, it's not just for Cheerios anymore. Demand for sugar cane and sugar beets has crystallized lately amid a worldwide clamor for alternative energy sources and a burgeoning sweet tooth among Asia's new middle class.

Sugar futures, the instrument of choice for commodity traders, were up 60% last year -- and they're at multiyear highs again this week. But sugar remains well below its record price. "Sugar could quadruple from here and it would still be below its all-time high,'' famed commodity speculator James Rogers told

Bloomberg

last week. "The rally hasn't even started yet. And the fundamentals are changing dramatically in a positive way."

Equity traders don't have a lot of options for getting in on the action just yet. As you'll learn in a moment, there is one cheap small-cap sugar refiner that is up 135% this year and could still have a ways to go, as well as a 100-year-old mid-cap. Before going straight to the stocks, though, let's check out the economic and political backdrop.

Brazil's Sugar High

Seeking to cut their reliance on petroleum and natural gas from unreliable regions such as the Middle East and Russia, governments in the Southern Hemisphere have reshaped their tax and industrial policies to favor the production and use of ethanol. That fuel is terrific and inexpensive, and it's refined from the sucrose found in sugar beets, which are an annual grown in cold climates, and sugar cane, which is a perennial grass grown in hot zones.

Ethanol might ring a bell as something straight out of an eighth-grade science fair. But it is no longer quaint or arcane. It is a real-world petroleum substitute that is sprinting toward becoming a complete energy solution in some countries. Ethanol burns clean and hot in automobile engines that are built specially to run it.

Brazil, the world's largest sugar-cane producer, a few years back launched a plan to become self-sufficient in sugar-fueled energy over the next 10 years, and the nation is already way down that road. At service stations in Sao Paulo, you can specify gasoline or ethanol for your "flex-fuel" car or pickup truck. Ethanol accounts for 40% of all fuel sold in Brazil, or more than 4.25 billion gallons.

We're not just talking about environmental do-gooders here. Ethanol costs half as much as gasoline and reduces carbon monoxide emissions by a third. As you can imagine, India and other developing nations that don't want to give petroleum producers a stranglehold on their economies are doing the same.

The great thing about sugar cane as an energy source is that it is incredibly efficient. Many ethanol feedstocks -- such as corn, wheat and beets, which are widely grown in the U.S. -- require as much energy to grow and refine as they actually produce in energy. But sugar cane production actually results in a huge net positive energy gain -- about 8-to-1 energy output to energy input. That's especially so when it's grown in the country in which it is used, so there is no energy or cost expended in transportation across oceans.

The U.S. produced about 3.5 billion gallons of ethanol last year, China churned out a little more than 1 billion gallons, India did around 700 million, and France produced 400 million. All in all, researchers say, the world produced enough ethanol last year to slash a little more than 2% off global gasoline use.

Satisfying the World's Sweet Tooth

Now you can start to understand what's happening here. Just as you are used to seeing gasoline and natural-gas stocks move higher with crude oil and natural-gas futures, you'll now see sugar prices move in the same way. On Monday, crude oil rose 1.3% to $67.50 a barrel amid concerns that Iran would cut oil exports -- and white sugar futures rose for a fifth straight session, as speculators bet that ethanol demand would jump.

Sugar for May delivery rose $9.60, or 2%, to $483.60 a metric ton on the London International Financial Futures and Options Exchange -- a record. Raw sugar for May delivery rose 44 cents, or 2.5%, to 18.44 cents a pound on the New York Board of Trade. It hit a 25-year high of 19.73 cents in early February.

You need one more piece to the puzzle before moving on, and it is this: The more sugar cane that goes into fuel tanks, the less there is for sweetening Cap'n Crunch cereal, stuffing in those free packs at the Starbucks counter and feeding the developing world's growing taste for great U.S. exports like Juicy Fruit gum, Twinkies and Coca-Cola -- although most domestically produced Coca-Cola is sweetened with high-fructose corn syrup.

Candy, cookie and soda consumption is growing at about the same rate as GDP in the U.S. and Europe, but it is exploding elsewhere. From 2000 to 2004, candy production in China rose by 70%, and the consumption of cake doubled, according to government statistics.

All told, the world has developed a big sugar deficit. According to the Food and Agriculture Organization of the United Nations, world sugar consumption this year will exceed production for the third consecutive year by about 2.2 million tons, despite record production in Brazil.

Partly to blame is a drought in Thailand, the world's second-largest producer, that will make this year's crop 15% smaller than last year's. The Philippines and China will add a little bit back, but there just isn't enough sugar to go around. Price is the ultimate allocator, and that is causing a lot of grief.

As if Pakistan didn't have enough to worry about with Osama bin Laden running loose in the northern mountains, President Pervez Musharraf on Monday called an emergency meeting of sugar industry officials to demand that they stop attempting to "profiteer" from the sugar shortage by raising prices repeatedly, according to an Islamabad newspaper.

Portfolio Sweeteners

So how do you participate if you're not a hotshot commodities trader? Well, if we were in India, we'd have a half-dozen stocks to choose from, with names like

Balrampur Chini Mills

and

Maana Sugar

. On the Johannesburg exchange, you could put some money on the largest African producer,

Illovo Sugar

, which happens to trade over the counter in the U.S.

Our main choice among U.S. public companies is

Imperial Sugar

( IPSU) of Sugar Land, Texas. Sporting a $365 million market cap, it processes and markets refined sugar out of mills in Georgia and Louisiana under the Imperial Sugar, Dixie Crystals and Holly Sugar brands.

Because of tight supplies, the company was able to boost margins by raising prices to its food service and wholesale customers by 9% in the first quarter. Over the past 12 months, Imperial lost $13.9 million on $797 million in sales, but Hamed Khorsand of BWS Financial -- the lone analyst on the stock -- believes the company will earn as much as $5.30 per share in 2006.

That would put the forward price-earnings multiple at 6, which is very low for a stock projected for earnings growth in the double digits amid a boom in its only product. If investors come to decide that it deserves, say, a multiple of 10, which it has in the past enjoyed, then the stock could easily trade at upward of $50 over the next year.

The only other public company with a big sugar division is

Alexander & Baldwin

(ALEX) - Get Report

. It is primarily known as a 100-year-old company based in Honolulu that is the parent of the major shipping line Matson Navigation and the owner of prime resort real estate on Kauai and Maui.

Shares have been beaten up this year as the company has declared 2006 a margin-depressed investment year for its shipping business. But they may perk up later in the summer as more attention is paid to its Maui Brand Sugar and Hawaiian Commercial & Sugar Co. units, which account for more than 60% of all sugar produced in the islands.

Earnings in 2007 are likely to come in around $3.32 a share. Slap a modest price-to-earnings multiple of 17 on that, and you get a price target of $56.40, which is about a 15% move from the current quote. Add the 1.9% dividend yield, and it seems like a reasonable, low-volatility triple play on sugar, world trade and Hawaiian resort land.

I will monitor these three sweet plays and report back. And if you have any other suggestions on how equity investors can participate in the sugar rally,

email me

and put "SUGAR" in the subject line.

At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.

Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;

click here

to send him an email.