How Sugar Became One Of The Best Performing Commodities Of 2010

Sugar prices were pushed higher as Florida’s crop was virtually wiped out by cold weather. Sugar cane’s efficiency as an energy feedstock, along with high demand for it …

Sugar prices were pushed higher as Florida’s crop was virtually wiped out by cold weather. Sugar cane’s efficiency as an energy feedstock, along with high demand for it in China, makes this everyday ingredient an attractive commodity that has performed very strongly in 2010. See the following article from Money Morning for more on this.

Stocks rose last week with all the excitement of water turning to ice in the freezer.

I kept hitting the side of my monitor to see if the pixels were stuck — but no, it was just another one of those low-volume, low-drama late-December sessions that we have come to know and love.

The Dow Jones Industrial Average rose 0.12%, the Standard & Poor’s 500 Index fell 0.16%, the Nasdaq Composite Index fell 0.08% and the Russell 2000 small caps fell 0.2%. Overseas developed and emerging markets were exactly the same. The liveliest U.S. sector was health care and basic materials, up 0.2%, while financials and industrials lagged, down 0.4%.

Breadth slightly favored decliners over advancers by a 3-2 margin, and the number of new highs was way down at 394 — yet so was the number of new lows, at 34. Gold fell by 0.4%, crude oil jumped out to a new two-year high by 1.1%, to $91.51, and the grains jumped to a new one-year high as well, led by corn.

The new star of the show for commodities is sugar, which stormed out to a new high by 1.9% after word that a cold front had virtually wiped out Florida’s sugar cane crop, which is the largest in the United States. As you can see in the chart above, an exchange-traded fund (ETF) representing sugar is up 140% since June alone, beating out cotton (green line), up 101%, silver (purple line), up 68%, and grains (orange line), up 58%. And of course all of these commodities have handily beaten U.S. equities (red dotted line), up 18% in the past seven months.

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I wrote about the potential for sugar back in April 2006 in this column at MSN Money. It’s ironic that a commodity which is given away at every restaurant in the world could at the same time become the most valuable. The main reasons: rising demand for sugar cane as an efficient feedstock for engine fuel, as well as the burgeoning sweet tooth among the rising middle classes in Asia.

Quick side note: Cane is popular as an energy feedstock in Brazil because it results in a huge net positive energy gain: about 8:1 energy output to energy input. Contrast that with corn, used in this country as the feedstock for ethanol, which requires more energy to make than it creates. Corn is an absolutely ridiculous fuel source, and yet it persists due to massive government subsidies lavished on the Midwest by politicians desperate to cultivate the farm vote.

In that column, which mind you was written four years ago, I quoted commodity speculator James Rogers as stating that the rally for sugar “hasn’t even started yet, and the fundamentals are changing dramatically in a positive way. It could quadruple from here.” Sugar is up about 525% from 2000, but only up double from 2006. So if Rogers was right, then it still has a long way to go. I’ll look for a place to recommend the iPath DJ-UBS Sugar Subindex Total Return (NYSE: SGG) exchange-traded fund in 2011.

Economics this week revealed nothing earth-shaking. Personal income was reported up 0.3%, while consumption was up 0.4%. Durable goods orders for November fell 1.3%, a little more than expected, but most of that was a shortfall in orders for The Boeing Co. (NYSE: BA) planes. Outside of transportation, durable goods orders rose 2.4% in November. Initial jobless claims for last week were down a touch. Consumer sentiment was reported up to a new five-month high, which is good. And new home sales were a little disappointing – though what’s new.

In Europe, the main market-driving news this week continues to be the weather. It’s bad. Ach du lieber! The wire services reported late Thursday that more than 1,000 flights at Germany’s major airports were canceled and hundreds more were delayed as fresh snow and ice blanketed the country. Heavy snow continued to fall in parts of England and France, creating blizzard conditions in some areas, the wires said, canceling one-fifth of flights at Paris-Charles de Gaulle Airport.

Travel was disrupted on the high-speed trains through the France-England Channel Tunnel and German national railway company Deutsche Bahn reported that it also struggled with packed trains and angry travelers. Freezing rain in northern Germany created more than an inch of ice on some main roads.

I’m telling you this because bad weather tends to have a heavy impact on retail sales. If both U.S. and European consumer products makers experienced depressed sales, analysts are going to be out in the next two weeks lowering earnings estimates. That could have a negative effect on stocks early in January, so let’s be on our toes and ready for that.

Remember that following NIKE Inc.’s (NYSE: NKE) warning of weaker sales in China, we are already on high alert for softer sales by its fellow exporters. I suspect that Beijing’s clampdown on credit is impeding retailers across China from stocking their shelves not just with Nikes but with all kinds of discretionary goods such as soaps, electronics, branded clothes and non-staple foods, like sodas.

Going forward into 2011, we need to keep a close eye on the market’s 20-day average, which I have represented above in the chart of the S&P 400 Midcap Index as the four-week average to make it easier to see. Bad trouble always starts with a little trouble. And little trouble is always signaled when a weakening market trades under its 20-day average at the end of a week.

No moving-average crossover system is perfect, but these kind of momentum shifts can at least tell you to lighten up on positions and don’t add anything new. You can see that the S&P 400 lost its four-week average in the winter and spring at the spots marked by the circles. It’s a good time to just batten down the hatches, grit your teeth, maybe put on a short position if you’re feeling frisky.

In this context, when you look at the chart it’s quite impressive that the entire rally since September has occurred over the four-week average. Let’s hope this continues well into the new year, while at the same time preparing to take action to protect profits in case of a stumble.

You know the larger forces at work in the market — hedge funds, pension funds, the Syndicate, if you will — periodically like to scare the little guys out of the market so they can scoop shares up cheap. It’s mean and rotten, but that’s the way it is. We don’t make the rules, we just learn how to recognize and exploit them.

The most likely time for such a stumble would be the third week of January, but if those weather-related earnings cuts materialize a slip could come much sooner. The magnitude could be as much as 400 to 600 points in the Dow Jones Industrials, or -3.5% to -5.5%. That would be scary, but in my estimation not permanent — and I anticipate recommending that you eventually use it as an opportunity to buy. We managed to do that at the August low and the November low by pointing out the clear patterns of methodical institutional accumulation amid general panic, and should be able to do it again. We just need to think like predators instead of prey.

This an excerpt of an article from Money Morning. You can view the full article at
Money Morning, an investment news and analysis site.

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