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Energy strategy in Brazil helps lift sugar prices to 25-year high
By Drew Hasselbacko*
Source: Financial Post

Sugar prices are hovering at 25-year highs in a global commodity mosaic linking Brazilian gas tanks with Canadian cereal bowls.

Benchmark sugar closed down US0.66 cents a pound yesterday in New York at US18.14 cents and while that's off from the 25-year-high of US20.46 cents hit on Feb. 3, it's still more than 40% higher than a year ago.

Commodities from copper to platinum have been soaring to new heights in recent months on surging demand from China, yet the sugar story is driven by a different dynamic. The price spike has less to do with a global sweet tooth than with Brazil's energy strategy.

In the 1970s, Brazil moved to reduce its dependency on imported oil by encouraging the growth of an ethanol business that would make fuel from sugar cane, explains Stephen Poloz, chief economist with Export Development Canada.

Brazil produces 20% of the world's sugar. About half of that output is used to make ethanol fuel for roughly 40% of Brazil's cars, Mr. Poloz says. "Brazil has the weight to swing the market."

The link between Brazilian energy demand and world sugar prices demonstrates how interconnected global markets have become. The resulting chain of cause and effect could well inflate the prices of foods that contain sugar, Mr. Poloz said. "Consumers may see the greatest impact in cereal prices, the most important destination for sugar, and of course candy products."

It is not easy to get a handle on the global sugar business. Production quotas, subsidies, and pricing caps distort the market. The European Union, for example, has begun a four-year process to cut production on the continent by 25% and cut prices by 36%.

Meanwhile, big sugar buyers are not totally exposed to market volatility because they tend to procure supply using long-term contracts with fixed prices.
About 80% of Canada's sugar is purchased by other manufacturers and used to make everything from candy to alcohol. It is even used in concrete to slow the setting process.

The remaining 20% is refined sugar sold on the retail market. Montreal-based Lantic Sugar, Toronto-based Redpath Sugars, and Vancouver-based Rogers Sugar, sell about 1.2 million tonnes of refined sugar a year, with shipments worth about $840-million, according to the Canadian Sugar Institute.

While Statistics Canada says Canadians have been decreasing their appetite for sugar, syrup, and honey to 10.3% of the energy in their diet in 2004 from 13.1% in 1994, it still is significant. The International Sugar Organization notes that demand for "high intensity sweeteners" -- sugar substitutes by another name -- is outpacing demand for sugar. The global market for sugar substitutes rose 4.6% in 2003 and now accounts for about 10% of the global sweetener business.

Yet, sugar prices have managed to rise despite changes in eating habits. The benchmark price for sugar, an entity known as the No. 11 Sugar Spot on the the New York Coffee, Sugar and Cocoa Exchange, earlier this year broke through US20 cents a pound for the first time since 1981.