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- 156 pounds of sugar
- A gold correlation
- Check out this small cap sugar company
I hope this 6th
of May is finding you in good spirits, and that you’re not experiencing the
downside of tequila over-enjoyment. Nothing
against Mexican independence, but a foreign national holiday, partly concocted
for American consumption by shrewd liquor companies, is not a good enough
excuse for me to tie one on in the middle of the week.
And this time of year in Vermont, it’s just too
nice out to want to risk ruining the next day with a tequila and sugar borne
hangover. (By the way, if you know of a
good hangover cure, please send it to me at [email protected])
Too much of a good thing is
almost always no fun. Likewise, a bumper
crop of sugar from Brazil
and India
is causing some severe consequences for prices.
The
average American uses 156 pounds of sugar every year. At current price levels of about 15 cents a
pound, that comes to only $23 and change.
Surprisingly, sugar’s price
is about a third of what it sold for in 1981. That year, sugar spiked to above 40 cents a pound.
In that regard, sugar echoed
the footsteps of gold price increases, with gains occurring about a year after
gold surged.
And for the past 5 days, sugar
prices have dropped precipitously – over
the past 5 months (late 2009), prices fell off a cliff, from 30 cents a pound
down to 15 cents. I don’t believe that this
commodity tracks EXACTLY with gold, but the price fluctuations do seem to resemble
gold’s drop from over $1,000 an ounce down to $700 levels towards the end of
2008.
As we
know, gold then nearly doubled to current levels of close to $1,200. Could sugar prices double in the next year or
so? It wouldn’t surprise me – but right
now, sugar prices are in free fall. I
wouldn’t suggest building any kind of position in sugar as long as prices are
falling – the dreaded “catch a falling knife” trade is more gutsy than
intelligent.
You can take a look at the
chart below and see just how far and fast prices are plunging.
But they simply can’t fall
too much further without severely crippling the whole industry. Already, American and European beet sugar
farmers need extensive subsidies from the US Government just to stay in
business. Looking at the chart, the
normal floor for sugar prices seems to be about 12 cents per pound for the past
five years.
Like every other commodity,
sugar prices are also somewhat tied to crude oil. Farmers depend on crude oil to run their
farming equipment. Once the sugar is
refined, it gets shipped by rail or tanker. Higher oil prices will almost certainly have a buoy effect for sugar
prices.
But in the meantime, I’m
looking for a 12 cent per pound floor. If sugar hits that price, or even dips lower, I’ll be on the lookout for
an entry point into a sugar company.
There’s
really only one publicly traded company that’s a pure play on sugar prices:
Imperial Sugar (Nasdaq: IPSU.)
Right now, they’re extremely
cheap. They might be the cheapest
positive p/e company I’ve ever seen, trading at just 1.16 times earnings. And they’re tiny, with a market cap of just
$184 million.
If sugar prices bounce off
of 12 cents and move much higher over the next year, it could be huge for this
stock.
I’ve just mentioned this
stock as a possible addition to Ian Wyatt’s Small Cap Investor Pro
portfolio. Ian is always on the lookout
for small companies with the potential to grow substantially in the near
future. You can click here now to check out his
full portfolio by taking a trial subscription.
I’ll be keeping Imperial
Sugar on my radar. In the meantime, if you have any
companies with exposure to sugar prices that you’d like me to talk about,
please send me an email at [email protected]
Good investing,
Kevin McElroy
Editor
Resource Prospector