By David Brough
LONDON, Jan 8 (Reuters) - Sugar prices hit a one-year high on Tuesday,
supported by heavy buying from investment funds and surging demand from
the Brazilian biofuels industry, driven by record $100-a-barrel oil.
Sugar, often ignored by speculators and investment funds in 2007, has
now joined a sizzling rally that has propelled almost all commodities on
bull-run this year.
Raw sugar futures for March delivery in New York <1SBH8> on the
IntercontinentalExchange were up 0.17 cent at 11.54 cents per lb in
early trade on Tuesday, their highest level since January 2007.
The trigger for sugar was record oil prices of $100 a barrel last week,
analysts said. The prospect of dwindling supplies of oil has ignited
surging interest in "green" energy, notably in ethanol biofuel which is
made from biomass such as sugarcane.
Brazil, the world's leading producer of cane-based ethanol and top
exporter of sugar, is expected to shift an increasing share of its
growing sugarcane production to feed surging demand for ethanol to power
flex fuel vehicles (FFVs).
"The ethanol-sugar link is centred in Brazil," said Sergey Gudoshnikov,
a senior economist with the London-based International Sugar
"Bio-energy is the foundation upon which all of the optimism of the
investment funds is based."
Analysts say well over half of Brazil's total sugarcane production is
likely to be used to make ethanol in the next few years to feed rapidly
expanding demand by FFVs, which can be powered by petrol, ethanol or a
mixture of both.
"The longer term prospects for Brazilian cane use for ethanol are
excellent," said Peter De Klerk, a senior analyst with Czarnikow, a
"Brazil's future expansion in cane production is expected to be
predominantly allocated to ethanol."
Growing demand for ethanol in Brazil, brought about by higher oil prices
and surging FFV sales, has limited the amount of sugarcane being used to
produce sugar, triggering the sugar price rally, according to investment
bank Morgan Stanley.
In a report entitled "Less Cane, More Ethanol", Morgan Stanley predicted
a global sugar deficit of 1.6 million tonnes in 2008/09, a marked change
from its previous forecast in which it anticipated production remaining
in surplus until 2009/10.
The ISO has forecast a world sugar surplus of 11.1 million tonnes in
2007/08, slightly up from a surplus of 11.0 million in 2006/07.
Prices were driven by speculative and investment fund buying and
analysts said a lack of selling by producers such as Brazil could drive
the market to new peaks this week.
Analysts said sugar prices could go higher if demand from the Brazilian
biofuels industry remains robust.
Nearby raw sugar futures hit a 25-year peak of 19.73 cents a lb in
Asked if growing demand for biofuels could drive sugar prices higher,
James Cordier, founder of optionsellers.com and senior analyst for
Liberty Trading Group in Tampa, Florida, said he thought they could rise
to around 12-13 cents per lb.
The ISO's Gudoshnikov agreed: "At around 13 cents per lb, the whole
thing would have to slow down."
(Additional reporting by Rene Pastor in New York; editing by Peter
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