This Commodity is Falling to 2006 Price Levels
I hope this 6th of May is finding you in good spirits, and that you’re not experiencing the downside of tequila over-enjoyment. Nothing against Mexican independence, but a foreign national holiday, partly concocted for American consumption by shrewd liquor companies, is not a good enough excuse for me to tie one on in the middle of the week.
And this time of year in Vermont, it’s just too nice out to want to risk ruining the next day with a tequila and sugar borne hangover. (By the way, if you know of a good hangover cure, please send it to me at editorial@resourceprospector.com)
Too much of a good thing is almost always no fun. Likewise, a bumper crop of sugar from Brazil and India is causing some severe consequences for prices.
The average American uses 156 pounds of sugar every year. At current price levels of about 15 cents a pound, that comes to only $23 and change.
Surprisingly, sugar’s price is about a third of what it sold for in 1981. That year, sugar spiked to above 40 cents a pound.
In that regard, sugar echoed the footsteps of gold price increases, with gains occurring about a year after gold surged.
And for the past 5 days, sugar prices have dropped precipitously – over the past 5 months (late 2009), prices fell off a cliff, from 30 cents a pound down to 15 cents. I don’t believe that this commodity tracks EXACTLY with gold, but the price fluctuations do seem to resemble gold’s drop from over $1,000 an ounce down to $700 levels towards the end of 2008.
As we know, gold then nearly doubled to current levels of close to $1,200. Could sugar prices double in the next year or so? It wouldn’t surprise me – but right now, sugar prices are in free fall. I wouldn’t suggest building any kind of position in sugar as long as prices are falling – the dreaded “catch a falling knife” trade is more gutsy than intelligent.
You can take a look at the chart below and see just how far and fast prices are plunging.
But they simply can’t fall too much further without severely crippling the whole industry. Already, American and European beet sugar farmers need extensive subsidies from the US Government just to stay in business. Looking at the chart, the normal floor for sugar prices seems to be about 12 cents per pound for the past five years.
Like every other commodity, sugar prices are also somewhat tied to crude oil. Farmers depend on crude oil to run their farming equipment. Once the sugar is refined, it gets shipped by rail or tanker. Higher oil prices will almost certainly have a buoy effect for sugar prices.
But in the meantime, I’m looking for a 12 cent per pound floor. If sugar hits that price, or even dips lower, I’ll be on the lookout for an entry point into a sugar company.
There’s really only one publicly traded company that’s a pure play on sugar prices: Imperial Sugar (Nasdaq: IPSU.)
Right now, they’re extremely cheap. They might be the cheapest positive p/e company I’ve ever seen, trading at just 1.16 times earnings. And they’re tiny, with a market cap of just $184 million.
If sugar prices bounce off of 12 cents and move much higher over the next year, it could be huge for this stock.
I’ll be keeping Imperial Sugar on my radar. In the meantime, if you have any companies with exposure to sugar prices that you’d like me to talk about, please send me an email at editorial@resourceprospector.com
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