Saturday, May 24, 2008

Hoping for a long and sugary walk

Food Prices are soaring. There is a raging debate on bio-fuel v. food production – held responsible for global food shortage.

Philip Bowring in IHT asks why the price of sugar has slumped 20% globally, when those of all other food crops have gone up? He tries to establish a connection between the high price of corn and the low price of sugar. U.S. tariffs, tax breaks and subsidies keep Brazilian ethanol out of America while promoting the production of corn-based ethanol and corn syrups as a sugar substitute. This not only pushes up the global price of corn - the leading exporter of which is the United States - it also drives up the price of wheat, soybeans and other crops as well.

He urges people that ask why world agriculture is in such a mess - and explains why all the talk about "bio-fuel v. food production" misses the point - to start with sugar. Few commodities are more traded around the world. Yet none is subject to quite so many distortions due to subsidies, price controls and special arrangements. With oil prices sky-high and demand for bio-ethanol rising, surely the cost of sugar should also be going up. It is the largest source of bio-ethanol production, accounting for a big chunk of output from the world's largest sugar producer, Brazil. Sugar from cane is not only a cheaper source of bio-ethanol than most alternatives; it also leaves a smaller carbon footprint.

I too am pretty much *kicked* on sugar. My portfolio is heavily laden with sugar stocks (that is disclosure for you!). My reason – any industry stomped down too hard is sure to get back even stronger. Government has been singularly inhospitable towards this industry and that gave me an opportunity to buy into stocks of sugar companies that's been scraping at the bottom for over couple years now. You can find my views in a series of posts in this blog about the shifting fortunes of Indian sugar industry pretty much on the same lines as Bowring, griping at excessive regulation in the sector. Why, I had even suggested a Sheikh Squeeze strategy if Bush or somebody say global food crisis is because Indians eat more.

And when sugar stocks pull back, I’ll be laughing my way to the bank. I hope that will be one pretty long, enjoyable sugar sweet walk!


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