“Perfect Storm Driving This Commodity Skyward”

By Travis Johnson, Stock Gumshoe, March 1, 2010

On this beautiful Monday the skies outside are blue, the chill breeze just a reminder that you’re alive — but according to Nicholas Vardy, who’s pitching his Global Bull Market Alert, there’s a “perfect storm” brewing that will send prices of his teased commodity flying …

… so this time we get a sort of double tease, with the first one being, “what the heck commodity is he talking about;” and the second being the stock that’s his favorite play on this commodity. Let’s get started, shall we?

In case you haven’t heard of Nicholas Vardy, he does make sure to tell us that his performance has been stellar:

“Over the last year, our winners have averaged returns over 17% and a holding period of just over 4 months, with individual gains of 55%, 42%, 44%, 33%, 23% and the list goes on.”

Hmm … I hate to pick on the guy, but the S&P is up about 50% over the past year, so having your winners average 17% is not that dramatic — and more important, taking the average of just your winners can be awfully misleading. In my case, the stocks I’ve profiled over the last two years for the “idea of the month” that I share with the Irregulars have trailed the S&P by a few percentage points and averaged overall gains of about 7%, but if you just count the last year and only count the winners and ignore the few serious stinkers I picked, the average gain is 30%. Kind of makes me think I should use this “alternative” accounting method!

But anyway, we had a point, yes? Right, the “perfect storm” driving this commodity … here’s how he gets us excited:

“When I say there’s a ‘perfect storm’ brewing for one of the world’s most sought-after commodities, I mean that literally: You can blame El Niño.

“You see, the periodic warming of the Pacific Ocean recently played havoc with global weather patterns — causing production of this commodity to plunge…

“Brazil, the world’s largest producer, was drenched by four times more rainfall than normal, making much of the production too wet to harvest. India, the world’s second largest producer, had unusually low monsoon rainfall and suffered its driest June in 83 years — ruining its harvest as well.

“Together, those two countries represent more than half the global production of this commodity.

“At the same time, other factors have caused production by four of the world’s second-tier producers (Russia, China, Mexico and the EU) to plummet as well.

“Meanwhile, global demand is growing unabated. Global commodities investor Jim Rogers argues that with Asia prospering and three billion people striving to join the global middle class, demand for this commodity is set to explode.

“Result? Global inventories are close to record lows and food companies are scrambling to secure ever-tightening supplies. Kraft, General Mills, and several other major corporations have all warned that a severe shortage of this commodity will affect their products.

“And as production falls short of consumption and inventories become seriously depleted — the price will soar.”

Sounds compelling, right? The commodity he’s talking about here is clearly sugar, though of course he doesn’t say so … and yes, Brazil and India are the world’s largest producers, with Brazil having been, for ages now, the largest exporter and India the largest consumer as well as a huge producer. I think the US probably comes in pretty close to the top of the list for “most protectionist sugar market” thanks to the power or our local sugar companies, but production here puts us pretty low on the list of global players (consumption is another matter, of course — we’re excellent sugar consumers, myself included, despite the best efforts of Archer Daniels Midland to switch us all over to corn syrup).

And sugar did spike in price just last month, getting to 30 cents a pound or so — but it has since fallen 20%ish, and at least some analysts see it falling further, perhaps hitting the teens and averaging around 21 cents a pound this year. I’m no expert on any kind of commodities trading or pricing, but this recent Reuters article gives a good overview of where things are, and where some analysts think we’re going. The price bounces a lot, so it’s certainly also possible to find much more optimistic takes on the news flow, like this one from BusinessWeek.

Sugar has had some pretty wild price swings in past decades, and in fact has been as low as five cents or so in this past decade, so we’re not at the bargain basement lows, for sure — but of course, I have no idea whether we’ll hit another historic high price or return to the relatively low multiyear average of 10-15 cents a pound. There’s an interesting correlation not just with weather and with changes in regional subsidies and international trade rules (the EU and the US both subsidize local sugar producers pretty heavily, Brazil and other exporters often complain), but with oil prices — Brazil is the largest producer, but they have two ways to use sugar, they can produce and sell refined sugar, or they can make ethanol which supplies about half of their transportation fuel needs. When oil prices jump, that ethanol becomes more valuable and they divert more sugar to produce fuel, which makes sugar prices jump. There’s a useful discussion of this, and a broader look at the sugar market, over at The Inflationist.

So how do you invest in sugar? Like most of the “softs”, it hasn’t historically been particularly easy for folks who don’t do futures trading to get direct exposure — you could fill your basement with sugar, I suppose, or buy a few bales of cotton, but there are few publicly traded “pure plays” on the soft commodities. My wife might accuse me of hoarding coffee when I buy the five pound bags, but the Gumshoe’s caffeine addiction leads to those bags evaporating pretty quickly … so how do we invest in softs, in particular in this favorite soft commodity, sugar?

This is all we learn from Vardy:

“And now there’s an easy way to profit from this coming explosion while it’s still under-the-radar for most investors.

“In fact, I’m convinced that the ingenious NYSE-traded investment vehicle I’ve identified, and which I recently shared with subscribers to my Global Bull Market Alert, is hands-down the best way to convert the projected triple-digit increase in the price into lightning fast triple-digit profits for you.”

Well, if you’re talking “ingenious” I assume we’re not dealing with the most likely stock for a foreign stock picker like Vardy, which would be the Brazilian sugar producer Cosan (CZZ). That’s one way to play Brazil’s sugar exports and ethanol production, though there are also several other large sugar producers that don’t have US-listed stocks or ADRs.