Searching For That Next Sugar High

When I was one of the lone voices talking up commodities and China heading into the new millennium, I ran into much skepticism among the press. The writers, reporters, and anchors around the world, the so-called business media who ought to have known better, were more likely to raise an eyebrow or even turn hostile when I wanted to talk about oil, lead, and sugar more than about the “next big thing” in stocks.

I must admit that I find the press’s behavior curious. They interview people like me because we’re supposed to know things that they don’t know, and then when we hand them news they can use they turn contentious.

Occasionally, I like to tease these media types. During one breakfast interview in a Paris hotel, a congenial writer from a French business magazine who was much more eager to discuss the falling dollar and the surging euro - for obvious reasons (Vive la France!) - asked me what I would recommend for an ordinary investor like her. I plucked a wrapped sugar cube from the bowl on the table and handed it to her. She looked at me as if I had gone mad.

“Put this in your pocket and take it home,” I advised, “because the price of sugar is going to go up five times in the next decade.”

She laughed, eyeing her sugar with skepticism. I told her that the price of sugar that day was 5.5 cents per pound, so cheap that no one in the world was even paying attention to the sugar business.

She nodded—“Supply and demand,” she said—and pocketed her sugar. But I suspect that she has not put any of her money where her mouth—or her pocket—is.

No one had for years, which, of course, was my point. Sugar prices were so low for so long that it was the last business enterprising souls around the world would be likely to enter in the 1990s and early 2000s. If you are an ambitious young farmer in Brazil (or Germany or Australia or Thailand, also major sugar producing nations), do you choose to produce sugar at 5.5 cents a pound or soybeans, which closed 2003 near $8 a bushel, a six-year high? Even in the U.S., which has its own protected domestic sugar market at two to three times the world price, only the most efficient producers are surviving.

According to the American Sugar Alliance, an industry group, a third of all sugar-beet processing mills have shut down since 1996. Government subsidies are often the only incentive keeping many American and European producers in the game. These producers, too, may be an endangered species.

For years, international pressure has been building on the U.S. and the European Union to end their subsidies for agricultural products, including sugar. The roughly $5 billion the U.S. pays out and the $2 billion by the EU is a frivolous economic drain on their economies, forcing their consumers to pay two to three times the global price for sugar. In 2004, the World Trade Organization finally ruled that the subsidies the EU pays its sugar farmers encouraged overproduction and artificially depressed international prices. The ruling will be appealed, but it was good news for the sugar industry.

But other positive, more immediate events and trends in the sugar business bode well for higher sugar prices. Sugar has had its boom times in the past—that 1974 record, and another spike in 1981 during the last bull market in commodities. And if I’m right and we’re in another long-term bull market in commodities, we’re likely to see another sugar high. Historically, nearly everything goes up in every kind of bull market, whether it’s company shares, commodities, or apartments on Park Avenue. And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong.

To those of us who have been there before, it is promising to note that similar supply-and demand imbalances are shaping up that could push sugar prices upward over the next decade.

Good investing,

Jim Rogers
- From Hot Commodities

Editor's Note: Jim Rogers has been described as the Indiana Jones of finance. He’s been around the world on a motorcycle. He’s founded a hedge fund with George Soros, he’s taught finance at Columbia University's business school and he’s written three classic books on investing. He lives in New York City with his wife, Paige Parker, and their daughter, who is learning Chinese and owns commodities but doesn't own stocks or bonds.

The essay you just read was taken from Jim's recently released third book, Hot Commodities: How anyone can invest profitably in the world’s best market. You can order a copy of Hot Commodities by clicking here.