Global investing icon Jim Rogers is shifting his sights from gold to sugar.
And with good reason.
Sugar prices have zoomed more than 80% since the start of the year â€“ eclipsing the 21-cent-per-pound mark for the first time in 28 years. But Rogers says there's more room to run: Even after its scorching advance this year, sugar remains 70% below the record peak it hit in 1974.
Given that kind of profit potential, Rogers is much more bullish on sugar than he is on gold.
"Sugar is still very depressed on any kind of historic basis and I suspect it will go higher," he said recently. "I wouldn't sell sugar. I don't know if it is going to go up in the next week or the next month, but I am certainly expecting sugar to go much higher during the course of the bull market over the next several years."
Not that he's bearish on gold. It's just that his ardor for the yellow metal has clearly cooled: "If it goes down I'll buy some more, and if it goes up I'll buy some more," he said. "I periodically buy some gold. I don't have a method to it. I just buy it."
Rogers first made a name for himself with The Quantum Fund â€“ a hedge fund that's often described as the first real global investment fund â€“ which he and then-partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor's 500 Index climbed about 50%.
It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the more-recently-released "Bull in China."
He's also made some historic market calls. Rogers predicted China's meteoric growth a good decade before it became apparent. And in early January 2008, he warned that the U.S. economy was headed for "one of the worst recessions" in decades, and counseled investors to shift into commodities since they were primed for a big upswing â€“ two predictions that would have richly rewarded investors who took them to heart.
He reiterated those predictions â€“ as well as several others â€“ as part of two exclusive interviews that he granted to Money Morning Investment Director Keith Fitz-Gerald that April.
Rogers â€“ the chairman of Rogers Holdings, and a man who shifted his home from New York to Singapore because of the global trends he follows â€“ has now turned his attention to sugar. And he's not alone.
Commerzbank AG (OTC: CRZBY) analyst Eugen Weinberg told Commodity Online that net long positions on sugar contracts traded on the ICE Futures exchange (NYSE: ICE) (formerly the New York Board of Trade) are running at four to five times their normal levels, totaling more than 200,000 metric tons. His take: Cash-rich hedge funds have developed a sweet tooth for the crystalline commodity.
"This situation hasn't been observed in years," Weinberg said in an interview. "I think we are seeing a combination of very important fundamental factors and the price being driven by speculative interest."
And Michael Coleman, a Singapore-based manager of commodities hedge funds, told Bloomberg TV that sugar prices could soar an additional 80% â€“ and could even eclipse the 40-cent-a-pound level.
After peaking at a recent high of 23.33 cents earlier this month, sugar closed yesterday at 21.79 cents a pound.
"Sugar is caught in a perfect storm," Coleman, managing director of Aisling Analytics, which runs a $1.4 billion fund invested in energy and agriculture, told Bloomberg. "From this point on, it depends on how price affects demand."
Both those factors â€“ price and demand â€“ are worth a closer look.
Tight Supply Will Send Sugar Prices Higher
Sugar enjoys a reputation as a volatile commodity during the past 50 years, with a price that's ranged from a low of three cents a pound to a high of about 60 cents.
From a price standpoint, sugar bulls say the natural sweetener is in a long-term uptrend.
If prices are to rise long-term, supplies will have to remain fairly tight as demand grows. The catalysts are in place for such a scenario to play out.
In the United States, the world's largest economy, sugar supplies are tight and should get tighter. The U.S. Department of Agriculture (USDA) estimates that in the months to come, the supply of sugar will fall 43% from current levels, The Wall Street Journal reported.
Demand will continue to outrun the supply of sugar for a couple of years, says International Sugar Organization (ISO) economist Leonardo Bichara Rocha.
"This year's deficit â€“ the difference between supply and demand â€“ is running at 7 to 8 million [metric] tons, and next year it will be between 4 and 5 million [metric] tons," Rocha said in an interview with Commodity Online.
Weather problems in the nations of the world's leading sugar producers â€“ Brazil, India and China â€“ are heavily to blame for the short supply. Heavy rains in Brazil have caused yields to drop, while in India a weak monsoon season has contributed to a production drop so massive that the country went from being a net exporter last year to a net importer this year, Reuters reported.
Nor are these easy problems to fix, experts say. Although Australia could boost production, China's growing demand has been accompanied by a lack of investment in new production. That's not surprising given that sugar requires a lot of land and water to grow â€“ two things that are in short supply in China. Beside, entrepreneurs believe they can make much more by developing that land and putting a factory on it than they could by growing sugar cane.
The bottom line: It could take two years for sugar supplies to catch up to current levels of demand. And by that time, some powerful global forces could well be pushing sugar demand up to an entirely new level.
Global Trends Will Pump Up Worldwide Demand for Sugar
Although investors label sugar as a commodity, consumers view it as an "ingredient." It literally goes in everything â€“ except, maybe, for diet soda.
Consumption of sugar ranges from around three kilograms per person per year in Ethiopia to roughly 40 kilograms a person a year in Belgium. The basic rule of consumption about sugar is that per-capita consumption rises in concert with per-capita income, until the annual ratio reaches about 35 kilograms per person in middle-income countries.
In that respect, sugar prices may well soon have a gale-force tailwind pushing them higher. And that tailwind has a name.
China's emerging middle class is already a major economic force. Estimates of its current size vary widely â€“ ranging from 100 million to 247 million â€“ but again it's the long-term potential that's key, Money Morning's Fitz-Gerald said in a recent question-and-answer session with Executive Editor William Patalon III.
"One research paper predicts that China's middle class could reach 600 million by 2015. That's just five years from now," Fitz-Gerald said. "To put this into perspective, consider this: The entire U.S. population is about 300 million. So we're talking about a middle class alone that's potentially twice the size of the entire U.S. market."
The McKinsey Global Institute, the consulting firm's independent economic research arm, projects that China's middle class will increase from 43% of that country's population today to 76% by 2025. At that point, China will be the world's No. 3 consumer market.
China's a big story, but it isn't the only story â€“ not even in Asia. India's middle class will grow from 50 million now to about 583 million people in the next 20 years, an escalation that will transform that country into the world's No. 5 consumer market, up from No. 12 today.
All told, the worldwide middle class will likely grow from 430 million in 2000 to 1.15 billion in 2030, the World Bank says.
Investors all too often focus on all the additional hamburgers, Cokes, baseball mitts or iPhones the world's corporate elite will be able to sell.
But the biggest winners could be the commodities producers â€“ especially those whose products (like sugar) go into products of all kinds.
Right now, in a prospering Asia alone "there are 3 billion people trying to have a better life and most people when they get more prosperous, use more sweets," Rogers says.
On a global basis, the USDA estimatesin 2009-2010 from the previous year, BusinessWeek reported. And that's just a start.
Progress brings with it new technologies â€“ and new products â€“ which combine to form another powerful global force that will contribute to that long-term tail wind behind sugar prices.
One such new product: Ethanol fuel, much of which is made from sugar cane. Brazil, the world's largest producer of sugar, is diverting more than half of its sugar-cane crop to ethanol production. That compares to only one-third of the corn crop in the United States, where the ethanol market is still nascent, and where researchers are looking at "Cellulosic" alternatives for biofuel production.
So it's no surprise that when Rogers sat down with Money Morning's Fitz-Gerald last year, the iconic investor said he was bullish on two things: China and commodities. Late last year, Rogers and Australia's Macquarie Funds Group teamed up to create an agricultural-commodities index that will help investors profit from shifting patterns of food consumption in the burgeoning market of Mainland China.
"I bought more [commodities] recently. I know that one of the few bull markets that I can see going up in the next five to 10 years is in agriculture," Rogers told Money Morning earlier this year. "You may not have bull markets in cars or financial institutions or lots of other things, but I know the world is not going to stop eating."
The Macquarie and Rogers China Agriculture Index is an investable index that tracks price changes of the market "basket" of the agricultural commodities most commonly consumed in China. is the asset management arm of Australia's Macquarie Group.
Six Possible Profit Plays
There are several ways that investors may capitalize on this bullish long-term outlook for sugar? They're all worth a look.
- The "purest" sugar play â€“ and also the shortest-term â€“ is an investment in sugar futures, available on ICE in 112,000-pound contracts. The No. 11 contract trades global raw sugar, while the No. 16 contract trades the U.S. market, according to Commodity Online.
- Also futures Investors seeking an exchange-traded play on sugar can check out the futures-based iPath Dow Jones AIG Sugar Total Return Sub-Index (NYSE: SGG) Exchange-Traded Note (ETN). As of the close yesterday, this ETN had posted a year-to-date return of 62.1%.
- Although a bit more broadly based, the Deutsche Bank AG (DB) managed Power Shares DB Agricultural (NYSE: DBA) Exchange-Traded Fund (ETF) does include sugar as part (16%) of its holdings. Other holdings include soybeans (31%), wheat (28%) and corn (23%) â€“ that last holding being a major near-term potential beneficiary if high sugar costs induce foodmakers to switch over to corn-based sweeteners. The fund is down about 3% so far this year.
- The ELEMENTS Rogers International Commodity Agriculture (NYSE: RJA) ETN, tracks 20 futures contracts worldwide. It's down about 6% this year.
- In terms of pure agriculture-related investment plays, there's the Van Eck Market Vectors Agribusiness ETF (MOO), a fund that really reflects the breadth of the agriculture sector, with holdings apportioned across such agricultural sub-sectors as chemicals, agri-product operations, equipment, livestock operations, and ethanol/bio-diesel. It's up 39.2% so far this year.
- Although not a sugar play, per se, iff you believe that sugar-cane-based ethanol â€“ and other sources of alternative energy â€“ will be an inevitable part of the global future, consider the following "green" ETF: The PowerShares WilderHill Clean Energy Fund (NYSE: PBW), one of the better-quality funds that focus on "clean" technology as determined by the WilderHill Clean Energy Index. It's up 17.2% this year.
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