This page has been archived and commenting is disabled.

Coasting on a Sugar High

Submitted by madhedgefundtrader on 09/21/2010 00:34 -0400

I just got a bill from my dentist, accrued since the sudden onset of my sweet tooth on August 2, and it was an absolute whopper! The good news is that the 31% move in the price of sugar since then, and 68% since most ags caught on fire in May, means that I can afford it.

My ETN pick in the sector (SGG) is up a stunning 32% in little more than a month (click here for “I’ll Take Two Lumps, Please” at http://www.madhedgefundtrader.com/august-9-2010-3.html ). And you wonder why people bother to trade stocks?

You all know that I have been a huge bull on food related stocks all summer (click here for “Going Back Into the Ags” at http://www.madhedgefundtrader.com/june-24-2010.html ). The arguments in favor of sugar specifically are growing more persuasive by the day. China’s middle class is expected to rise by 300 million over the next five years, which is equal to the entire population of the US. The link between sugar consumption and standards of living is one of the most unassailable correlations out there in the commodities world. Ethiopians eat a meager 6.6 pounds of the sweet stuff a year, while chocolate loving Belgians consume a mind blowing 77 pounds.

There is another play here. I am also a bull on water (PHO) (click here for “Why Water Will Soon Be More Valuable Than Oil” at http://www.madhedgefundtrader.com/july-30-2010.html ). Anyone who has spent extensive time in the cane fields of Hawaii and the Philippines can tell you that sugar cane is one of the most water intensive crops out there. A rising global shortage of fresh water will hit sugar before other crops.

Then there is the ethanol problem. Brazil, the world’s large producer, is already diverting 50% of its sugar production towards its flex fuel program, thereby taking those calories off of the world market.

Of course, I am still a firm believer in the long term case for food. It is simply the old Malthusian dilemma that the world is making people faster than new food supplies, and conditions will get a lot worse before they get better.

After the recent parabolic returns we have seen, you might want to snug up your risk control. When I see such blistering returns as these while everyone else mired in other asset classes is doing so miserably, the inner trader in me wants to pause and take stock.

Tighten up your stops on futures and ETF’s and roll up your strikes on the options. The hard truth in the ag space is that you are always one rain storm away from a limit down move. I know because such unpredictable weather occurrences have cost me big time in the past.

Party away, but with your Blackberry in hand, and always stay close to the exit in case the flash fire hits. And if you want to sleep at night, you might want to consider taking some profits here. A 32% gain in a month in a zero return world is a lot. I also know from hard earned experience that mean reversions can be a real bitch.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

- advertisements -

Wed, 11/10/2010 - 05:09 | 715458 cheap uggs for sale

Tue, 09/21/2010 - 11:41 | 594756 Rogerwilco

Other than some chest beating (don't break your arm patting yourself on the back MHFT), what is the point of this article? No sane person is going to buy into a commodity after a parabolic increase.

Tue, 09/21/2010 - 11:26 | 594720 wstrub

Tue, 09/21/2010 - 11:29 | 594719 wstrub

High-Fructose Corn Syrup - The Corn Refiners Association recently asked the FDA in the U.S. to allow high-fructose corn syrup (HFCS) to be renamed 'corn sugar' for labelling purposes. In Canada, the product is labelled as glucose/fructose and is found in an alarmingly wide array of products, from yogurt to bread to lunch meats. Some scientists say HFCS is more dangerous than regular sugar because it can affect normal appetite and can contain mercury

.....Biggest crop in the US..............CORN!!!!!!!!!!!!!!!!!!

Tue, 09/21/2010 - 11:24 | 594716 estrader

You can plant sugar anywhere. It's a weed. It's not weather sensitive like beans or wheat. It will grow anywhere, and if anyone thinks the price of Sugar here has anything to do with fundamentals give me some of what you are smoking.

Tue, 09/21/2010 - 11:16 | 594701 max2205

Please... BIDU up 40% in 12 days. Now that's air dude

Tue, 09/21/2010 - 11:14 | 594691 TheMonetaryRed

The "Malthusian Case" for foods is just dumb. There is plenty of land left in the world for agriculture and if prices rise on a sustainable basis, that land will come under tillage. It'll be higher cost, with a higher cost of transportation, etc., but it will also see costs decline and profits rise as efficiencies take over. Subsidies and tariffs are a huge reason for the apparent shortage.

In terms of water, society has simply forgotten what water infrastructure is supposed to be. Water infrastructure is supposed to provide a constant stream of self-aerating, self-filtering water, moving (mostly by gravity) from where it falls and pools to where it's needed. On long-term timescale, this is what has to happen. Everything else is a shortcut.

Simple technologies such as chlorination made water so much more vastly abundant that the price dropped basically below cost. In addition, the discovery of enormous aquifers conveniently located below good farmland and access to that water through cheap, simple drilling and pumping technologies has meant that true water infrastructure projects basically stopped while short-term fixes took over.

There's plenty of fresh water out there. What's lacking is the political will and foresight to develop the projects needed to channel it.

Tue, 09/21/2010 - 07:51 | 594309 MiningJunkie

Never underestimate the replacement power of glucose within an inflationary spiral...

Tue, 09/21/2010 - 07:51 | 594308 MiningJunkie

Never underestimate the replacement power of glucose within an inflationary spiral...

Tue, 09/21/2010 - 07:42 | 594302 bada boom

Typical front running. It is in anticipation of all the cake we are going to get to eat.

Tue, 09/21/2010 - 07:18 | 594288 sbenard

Sugar has been rising steadily ALL SUMMER LONG, not just over the past month! Each day, I open my charts expecting to see the price of sugar and cotton crash, and they just keep going higher. Sugar has nearly DOUBLED (aka 100% increase) since May 7th. Cotton surpassed the $1 benchmark yesterday. Ag commodities have been rising steadily since summer. Coffee, grains, OJ, meats, even MILK!

However, sugar showed signs of exhaustion yesterday, while cotton continued to climb still higher!

Food is going to cost a whole lot more -- SOON!

Tue, 09/21/2010 - 04:13 | 594218 LadyH

Sugar cane maybe water intensive but what about beet, corn sugar, palm sugar, fruit derived sugar or for that matter any of the substitutes for cane sugar upto and including aspartame?

If you want to see what happens when a large buyer corners the market (call it the Chinese middle class or in a historical example, the US Army) then there is an immedaite rise in near substitutes.

For a start, instead of putting sugar in shit food to make us eat it, they can just up the other ingredients we are naturally addicted to, fat and salt.

Tue, 09/21/2010 - 07:38 | 594299 Sudden Debt