Sugar prices, the highest for nearly five years, are entering uncharted territory as investment funds show a record interest in the commodity which traders see as increasingly tied to energy markets. After raw sugar futures set a fresh 4-1/2 year high of 10.35 cents per lb. last week, some traders say they have the potential to break through the 11 cents per lb. barrier this year.
Front month October New York Board of Trade (NYBOT) raw sugar futures prices, which have jumped 11.5 percent so far this year, closed on Friday at 10.08 cents per lb.
"The world market is approaching uncharted, choppy waters," said Sergey Gudoshnikov, senior economist of the London-based International Sugar Organisation (ISO).
He referred to unprecedented interest by investment funds in sugar, and a heightened focus on sugar-based ethanol, a biofuel, as a consequence of all-time high crude oil prices, which on Monday hit a fresh record of $62.89 a barrel.
"A lot of funds consider sugar to be an energy product, instead of an agricultural product," he said. Based on the latest Commitments of Traders reports on futures markets last on Friday, traders and brokers estimate the present speculative long position in raw sugar futures is around 170,000 lots a record high.
Traders said the big speculative long position could trigger highly volatile trading in sugar, with potentially big swings when funds, many of them based in the United States, trigger buy or sell stops.
As crude oil prices go from strength to strength due to tight supplies and strong demand, energy markets seek alternatives to expensive fossil fuels, and one of the best bets is ethanol, which can be derived from cane sugar as well as other forms of biomes, analysts say.
Traders say the latest surge in oil prices has underscored the strong speculative interest in sugar as increased demand for biofuel could divert more Brazilian cane towards ethanol production instead of sugar, reducing sugar availability.
Analysts carefully track the share of Brazilian cane sugar allocated to refined sugar versus ethanol use.
Demand for ethanol has surged in Brazil, the world's biggest sugar producer, as high oil prices have fuelled soaring demand for flex-fuel cars in the South American country, which has a highly developed ethanol industry.
Flex-fuel cars use gasoline, ethanol or a mixture of both. The present fine balance in the global demand and supply of sugar would not appear to justify the surge in raw sugar prices, analysts said.
According to the latest figures from German analyst FO Licit, global sugar output in 2004/05 (September-August) is seen at 146.4 million tonnes, against consumption at 145.1 million.
Traders noted brisk demand for sugar this year from key buyers such as Russia, India and Pakistan, and said Brazil appears to have the capacity to absorb the demand.
The Economic Intelligence Unit (EIU) said in a report last week that sugar was seen as a strong performer in 2005 with an expected 24.8 percent surge in prices on lower export availability and interest from investment funds.