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sugar finally gets in on commodities boom

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    Sugar finally gets in on the commodities boom
    By Michael Byrnes Reuters
    Published: February 24, 2008

    SYDNEY: Sugar has beaten the odds to gain nearly one-third this year despite vast supplies, as investment funds pour money into a thus-far neglected part of the commodities sector.

    In the doldrums a year ago, when excessive global output led to a collapse in prices to less than the cost of production in some places, sugar is gaining as surpluses shrink and hedge funds buy into an undervalued market.

    Comparatively cheap sugar may have been a late starter in the global commodities boom that started in early 2007 as a hedge against inflation, but it has been among the strongest of commodities in 2008, outpaced only by platinum.

    White sugar futures for May on the IntercontinentalExchange hit an 18-month peak of 14 cents a pound, or 6.4 cents a kilogram, on Thursday, up 30 percent since the start of the year and more than 40 percent since December.

    By contrast, gold and wheat, which both hit record high levels recently, are up 14 percent and 17 percent so far this year.
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    As investors pull away from shaky equity and government bond markets over fears that the U.S. economy may tip into recession, commodities less exposed to broad economic welfare, like cocoa and sugar, look increasingly like good bets.

    "The key is that sugar has been such an underperformer in that soft complex," Greg Noonan, financial risk manager at National Australia Bank, said. "When you look at values in the grains complex, and also cotton, sugar has been lagging behind."

    Sterling Smith, vice president with FuturesOne in Chicago, said: "Judging by the amount of fund money sitting on the sidelines right now, seeing further money come in should not surprise anyone. I think we are well under where we are going to go."

    "Taking a look at where we came from," he added, "there is plenty of upside. I'm looking for us to be trading at around 16.50 cents by July, if the crude oil market stays well supported. If we see crude chase up to $110, you probably can amend those numbers a little higher."

    While some commodities have risen from peak to peak, sugar has had a bumpy ride. Prices collapsed from a 20-year high of 19 cents a pound in early 2006 to about 9 cents in mid-2007, burdened by overproduction, especially in India.

    Sugar's revival is thanks in part to wheat, the pacemaker in commodity markets, whose prices doubled to record highs.

    But unlike wheat, whose rally is backed by low stocks, poor harvests and rapidly rising demand, sugar's price rise has been against all the odds. A huge supply surplus of more than nine million tons overhangs the market this year.

    Instead, traders say, it has been a case of financial funds fleeing other assets to seek higher returns, especially with the specter of inflation growing more real.

    "A lot of the funds' analysis suggests that this thing called 'ag-flation' is here for a while," said Garry Booth of the commodity broker MF Global.

    Sugar still has some catching up to do with the top-performing commodities. Its 40 percent price rise since early December compares with the 113 percent rise by wheat since its run started in April 2007 and the 93 percent surge in the price of oil since January 2007.

    Lex Hoogduin, global chief economist at the asset manager Robeco, said at an investment conference in London last week that slower world growth would cause only a temporary hiccup in food prices.

    India will produce a bumper crop of raw sugar this year of about 30 tons, roughly the same as last year, although early estimates have been revised down.

    But Indian export sales from 20 million tons of sugar piled in sheds across the country have been below most forecasts.

    Meanwhile, demand in Asia is growing by 2 percent, or three million tons, a year.

    "I think we're looking at a better market in 2008 than we would have expected a little while ago," said Ian Ballantyne, general manager of the Australian sugar farmers' representative body, Canegrowers. "And 2009 looks stronger again."
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