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Opinion: sugar is in a class of its own

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Just because markets have got a taste for sugar does not mean other agricultural commodities will rocket too.

Punters have been quizzing about whether the doubling in the price of sugar in the last two months is a taste of things to come for other agricultural commodities.

It is always possible they might rise too. But a rally will not be down to sugar.

Short and sweet

Sugar's rise reflects some particular fundamentals.

The main one is that it is on course for a second rotten year for production.

Last year's drop in global output of more than 10m tonnes to 157m tonnes may not have mattered so much if farmers could have got their act together for 2009-10.

But thanks to the weak monsoon, growers in India, the world's second biggest producer, look like cutting cane area even below 2008-09 levels. In Brazil, the top-ranked producer, credit constraints have kept a lid on cane sowings too.

In demand

That, too, might not be such a problem if consumption fell in line.

But demand is still growing. Unlike many other soft commodities, such as coffee, sugar is chiefly consumed in developing nations. Many of these are still enjoying economic growth, albeit at a slower pace.

Global stocks may end 2008-09 at a mere 20m tonnes, according to Czarnikow, the sugar merchant. If correct, that would mean inventories stood at a mere 12% of global consumption, down from 40% in recent years, indicating a huge tightening in the market.

For corn, the stocks-to-use figure is more than 18%, and for wheat about 26%.

And unlike these two grains, sugar's stocks-to-use figure is only going to get smaller, with production set to fall below demand again in 2009-10.

Weak correlation

Indeed, judged on that basis, sugar prices look highly likely to rise further before the current spike runs out of steam.

There seems, however, no reason to think that grains will necessarily follow suit. The rate of correlation between sugar prices and those of grains and oilseeds has histrouically been weak, and there is no obvious reason to see why it will tighten now.

If there is a link, it may be that last year's high wheat prices spurred sugar – by encouraging farmers to swap cane for grain.

As seems appropriate, sweet may have followed savoury, rather than vice versa.


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