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April 22, 2004

Corn and Sugar - Two Energetic Commodities
by Bonneuil Report

With the recent escalating prices of certain industrial commodities such as copper and nickel, there has been a general lack of interest in some of the more undervalued agricultural commodities. The demand for industrial commodities has in large part been attributable to the general global economic reflation and recent general synchronous worldwide growth, with particular emphasis on the growth in Asia by China and India. This much is well known and generally recognized by investors - and in fact, the results of these factors are clearly evident in the recent dramatic parabolic-shaped price increases in the industrial commodities of copper and nickel. However, there are now some current indications that China is attempting to finely engineer a gentle growth slowdown in their fast overheating economy; this growth slowdown may in turn lead to a short-term slowdown in the overall demand for certain industrial commodities, thereby lowering the corresponding commodity prices.

What perhaps is not generally followed by investors are the set of basic agricultural commodities and the growing demand for these commodities not only in the fast developing Asian countries like China and India but also in other developing countries elsewhere in the world. In particular, the agricultural commodities of corn and sugar are interesting to consider from a number of perspectives discussed below.

Corn and sugar represent two commodities that are likely to be in much higher demand in the coming years; some of the reasons for this are indicated below. And, due to a variety of various factors discussed below, the supply side of the equation in the coming years looks increasingly tight. Thus, with growing demand and tight supplies, correspondingly higher prices associated with these commodities are likely. These conditions are likely to persist until such time as greater acreage, increased production investment, and yield optimization research are devoted to increasing supplies to meet the growing demand.

Corn Demand and Corn Supplies

One of the greatest drivers of the growing demand for corn is the massive increase in the consumption of meat in China. Although per-capita meat consumption levels are currently far lower (in many cases by at least an order of magnitude on a per-capita basis) than those in many other Asian, European, or American countries, the Chinese are now eating much more meat every day. Meat requires the extensive use of feed - and this means more corn feed. Thus this massive increase in meat consumption for a population in China the size of about four times the U.S. is likely to drive corn demand to higher levels.

And with the recent parabolic rise in the soybean grain commodity market (soybeans are at their highest prices since 1997), it is likely also that farmers worldwide now may increase fields allocated to soybean grain cultivation at the expense of less corn grain cultivation - this would likely result in lower corn supplies. A recent U.S. Department of Agriculture (U.S.DA) prospective plantings report may be providing some indications of this; the prospective plantings report measures the acreage intentions that farmers are allocating to different crops in the upcoming U.S. growing season. With average estimates for U.S. corn acreage this year at about 80.274 million acres, the actual figure came in more than 1 million acres less at 79.004 million acres; most of the lost acreage is attributed to farmers planting more soybeans. This is likely to translate to tighter corn supplies.

Sugar Demand and Sugar Supplies

According to some recent estimates ¹, the world sugar market is expected to run a deficit of around 3.4 million tones in 2004/05, and a deficit of more than 3.5 million tones in 2003/04. And demand for increasing sugar is likely to increase from the fast growing developing countries as their food chain diet increases to foods and preparations requiring increased sugar use.

Ethanol

Demand for both sugar and corn is likely to be fueled by their use as ingredients in an alternative energy source called ethanol. Ethanol is an alternative energy fuel to retail gasoline which is currently dramatically rising in price and which has become the topic of many conversations. Some countries like Brazil are using increasing amounts of ethanol as energy fuel in their overall energy mix. Similarly in the U.S., according to a recent article in the Financial Times ², New York Board of Trade (NYBOT) economist Bernie Savaiko said the demand for ethanol by U.S. motorists is expected to rise, and that global ethanol production is expected to rise from 25 million cubic meters last year to 30 million cubic meters next year, and to 60 million cubic meters by the end of the decade. And in Japan, consumption of ethanol is also expected to likewise rise from 0.5 million cubic meters last year to 12 million cubic meters by 2010 as the country introduces strict emission standards to abide by the Kyoto Protocol. And likewise to emission standards in the U.S., stricter emission standards in 14 U.S. states will phase out the fuel additive methyl tertiary butyl ether (MTBE) and replace it with ethanol (there are reports that MTBE is now appearing in many groundwater supplies in the U.S.). In view of these developments and in the growing use of ethanol, the NYBOT plans to launch a sugar-based ethanol contract in May 2004.

More than 60 percent of the world's ethanol is produced from sugar - but most of the rest is produced from corn, particularly in the U.S.. So corn stands to benefit greatly as well as sugar in the development of ethanol as an energy fuel. In this sense both sugar and corn are not only agricultural commodities, but also in some sense energy commodities. With the growing general decline in production of oil and natural gas worldwide alongside growing demand consumption from such growing economies as China and India, the traditional energy commodities of oil, natural gas, and gasoline are escalating dramatically in pricing and therefore ethanol stands a great chance of increasing use in overall energy fuel usage, particularly in regards to meeting and maintaining pollution control standards and the Kyoto Protocol mentioned above.

Oil Prices, Fertilizers, and Pesticides

Keep in mind as well that growing agricultural commodities is heavily dependent upon the use of fertilizers and pesticides, both of which require heavy use of oil and gas as inputs to produce. Thus, rising prices of oil and gas will likely translate to rising prices of agricultural commodities such as sugar and corn.

Corn Pricing

As soybeans have experienced a dramatic rally recently, corn is perhaps now ready to do some catching up based on the supply and demand fundamentals mentioned above. Corn prices have escalated to much higher levels in certain periods as depicted below in the corn pricing chart.

Sugar Pricing

Sugar has been mulling near its present pricing lows for perhaps the last 10 years. Even a doubling of current prices would still represent pricing 3 times less than the peak price periods experienced in the 1970s.

There are other interesting aspects to sugar pricing that can be seen in the sugar pricing chart below. Note that during periods of time when the U.S. dollar depreciated (from 1985 for a few years thereafter) or when fuel prices increased dramatically (from the energy crisis in 1973-74) or when commodity prices in general rose higher (periods of the 1970s through 1980 and around 1994-95), sugar prices escalated dramatically. The current environment now in many ways can be characterized by some combination of all of these factors.

It is also interesting to note that corn and sugar prices can soar to very high prices, even as the global economy goes into a recession - for example, from the 1968-69 to 1973-74 period, corn went up 295% and sugar went up 1290%. Therefore it is not impossible to conceive of a similar scenario playing out potentially in the near future, should the global economy slip into recession.

Summary

Putting all of these factors together overall points to much higher prices for both sugar and corn. And with their traditional roles as agricultural commodities now increasingly being complemented by their new and emerging roles as energy commodities, coupled with increased demand from growing economies such as China and India, point to likely much higher prices of these "energetic" commodities in the near future. Investing in corn and sugar is very much investing in both agricultural and energy commodities together.

Noted investment advisor Marc Faber has mentioned "In fact, I regard the purchase of a basket of commodities as the safest way to play the emergence of China as the world's dominant economic power" ³ and most recently Marc mentioned "investors should be long a basket of agricultural commodity futures consisting of wheat, corn, sugar, coffee, and orange juice futures...⁴

Sugar and corn present some interesting energetic commodities for the commodities investor.

Charts

Corn Prices 1901 - Dec. 2003
Source: Commodity Research Bureau

Sugar Prices 1901 - Dec. 2003
Source: Commodity Research Bureau

¹ Societe J Kingsman, Paris France 7 April 2004
² Financial Times, April 8, 2004, page 33
³ "Tomorrow's Gold", Marc Faber, CLSA Books, 2002
⁴ "Should you buy what China buys?" Marc Faber

The Bonneuil Report
info@bonneuilreport.com

Disclaimer: Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading. This articles does not constitute a solicitation for the sale or purchase of any security, futures contract, option, or other financial instrument. Those acting on this information are responsible for their own actions. No claim is made that recommendations will be profitable or that they will not result in losses. Copying, re-broadcast or dissemination of this article, in total or in part, is expressly forbidden without prior written permission from The Bonneuil Report.

© 2004 The Bonneuil Report

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