Sugar hits one-year high on funds, biofuel demand

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.
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).

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.

Guardian