NCPA - National Center for Policy Analysis


February 10, 2006

Call it a different kind of sugar high. Many people think of sugar as little more than an ingredient in foods like pies and candy bars. But hedge funds and other investors are betting that more sugar will soon be needed for another reason: to produce ethanol.

That is the increasingly popular fuel substitute that can be mixed with gasoline to power cars. As oil prices go higher, traders believe demand for ethanol -- and sugar -- could soar, say observers.

  • Sugar futures prices are at their loftiest levels in a quarter century.
  • After trading below 10 cents a pound for much of the past decade, sugar-futures prices have risen on the New York Board of Trade, zooming past 19 cents a pound earlier this month.
  • Earlier this week, they settled at 18.80 cents.

The market's sugar high raises a dilemma that could apply to other commodities such as corn and palm oil -- even tapioca, a root starch perhaps more familiar to pudding lovers. All of these can be used to produce ethanol or other alternative fuels, such as biodiesel (a fuel made from vegetable-oil derivatives). Farmers world-wide are rushing to increase production in anticipation of a bigger global appetite for such alternative fuels.

In one major global market, sugar's role as a foodstuff plays second fiddle to ethanol production, say observers. Brazil, the largest sugar exporter and the world leader in ethanol production, is diverting about 52 percent of its sugar-cane crop to ethanol, up from about 48 percent in 2003, according to the International Sugar Organization.

Sugar cane "has slowly moved from being a food crop to being an energy crop," says Pichai Kanivichaporn, director of Thai Sugar Millers Corp., a sugar producer in Thailand, another country that ranks among the world's top exporters.

Source: Patricia Barta, "Why Sugar Costs More And More; Latest Catalyst Is Ethanol Push, Adding to Demand for Commodity;" Wall Street Journal, February 9, 2006.

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