How to Profit from the World's Sweet Tooth
Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The future is sweet for sugar, which is good news if you are an opportunistic investor. Its use has increased mightily in recent years in two major ways: as an alternative feedstock for chemicals and fuels and as an ingredient in foods and beverages. Analysts and experts have touted an inevitable sugar economy in Brazil as the primary explanation for their bullish views. If the United States ever makes the transition to a true bioeconomy after all, sugar will have a role as powerful as petroleum.
While I am optimistic about sugar’s role as a chemical feedstock, I believe its tremendous growth opportunity as a consumable product is often overlooked. A handful of companies such as Archer Daniels Midland, Cosan Limited, and Bunge Limited realize both trends and are heavily invested in sugar’s future in an economy of any kind. Before investing in something as complicated as sugar we must discuss several trends.
Sugar’s relationship status: It’s complicated
We should begin by making the distinction between sugar the commodity and fermentable sugars used as a chemical feedstock. Sugar the commodity comes from sugarcane and sugar beets grown in the United States, Brazil, India, and the European Union. Fermentable sugars come from a variety of cellulosic plants including corn, sugarcane, sorghum, grasses, hardwoods, softwoods, and others. Excluding sugarcane, these crops (commodities themselves) have little influence on the price of sugar as a commodity.
The two are intertwined because of the rush to produce first-generation biofuels, which primarily use sugarcane and corn. Sustainable chemical companies such as Solazyme, Codexis, and Amyris are racing to add capacity in Brazil to capitalize on the country’s bountiful sugarcane harvests, which also account for 24% of world sugar production. In 2011 the country was faced with sugarcane crop shortages, which led to higher worldwide sugar prices. Luckily the United States exported a record 1.19 billion gallons of ethanol to absorb Brazil’s reduced output – 33% went to Brazil – but this in turn led to higher corn prices.
The following graph beautifully illustrates that the price of corn increases with the price of sugar as a commodity due to less sugarcane being devoted to secondary uses, such as biofuels. Rather than tell the world, “Sorry, we need to fuel our cars!” Brazil’s government has dedicated more and more of its sugarcane crop to raw sugar in recent years. With growing demand in sugar (discussed below) the move is easily justified.
Source: Codexis Investor’s Day 2011
Brazil has gotten away with doing this because in worst case scenarios such as 2011 it can import the glut of ethanol produced in the United States, where corn crops are nearing a plateau for ethanol production. Without increasing ethanol blend mandates above 10% the United States will continue to have plenty of ethanol to export.
Domestic corn crops will reach a plateau for ethanol production of 15 billion gallons soon, which puts the pressure on next-generation crop technologies to add capacity. Source: Codexis Investor’s Day 2011
However, as next-generation biofuels and crops become feasible the dependency of domestic corn prices on worldwide ethanol production will be greatly reduced. Instead of sitting on the sidelines agricultural giant Archer Daniels Midland (NYSE: ADM) has been harvesting profits from the current trend and positioning for the future. The company has one of the largest international transportation networks, which allows it to export crops, food ingredients, animal feed, and industrial raw materials to 75 countries.
Several years ago ADM jumped onboard the renewable fuels bandwagon by devoting its massive infrastructure to producing ethanol and biodiesel. Should the United States increase ethanol blends to 15% ADM stands to benefit tremendously. Furthermore, ADM is shielded from any transition away from first-generation feedstocks such as corn thanks to its impressive array of crops and oilseeds.
Is sugar doomed without first-generation biofuels?
Hardly. World sugar production has increased from 71 million tonnes in the early 1970s to 168 million tonnes in the 2010/2011 harvest - largely without renewable fuels. Sure, sugar is at a 20-month low, but it has still gained 295% in the last 10 years. Today, world average annual sugar consumption per capita averages 53.76 pounds per person. As the following table shows, some of the fastest growing countries also have some of the fastest growing appetites for sugar. Cultural tendencies mean these countries will never (hopefully) reach the same level of indulgence as the United States, but sugar will become an increasingly important part of everyday foods.
|
Country |
Sugar consumption per capita (lb per person per year, 2007) |
Difference from 2000 |
|
United States |
152.5 |
0.99% |
|
Brazil |
91.88 |
4.41% |
|
Russia |
112.6 |
23.74% |
|
China |
19.74 |
34.29% |
Source: Wolfram Alpha Database
Two companies are well-positioned to supply sugar for first-generation renewable fuels and its growing importance in international diets. Cosan Limited (NYSE: CZZ) is Brazil’s largest sugar and ethanol producer, accounting for nearly 8% of the country’s ethanol production and 5% of the world’s sugar production. The company boasts 24 production facilities and sugar mills along with 4,500 fueling stations. The sugar behemoth has also partnered with several companies looking to tap into the tremendous growth in sustainable fuels.
Bunge Limited (NYSE: BG) is also a major player in Brazilian sugar and ethanol. As one of the world’s largest soybean and sugarcane producers, Bunge has also been tapped as a future feedstock supplier for fuel and chemical companies. The company presents a great way to play growing demand for agricultural products – not just sugar – with major operations in the United States, Brazil, and Europe and quickly expanding ventures in Africa, Asia, and the Middle East.
As for those 20-month lows in sugar prices? Don’t worry about it. For one thing, did the price spike in recent years bear any resemblance to a sustainable trend? Prices will experience volatility, but should continue to grow with the world’s sweet tooth.
Source: World Bank
Foolish bottom line
From a price standpoint, fuel companies and consumers hope that raw sugar becomes less important in producing renewable fuels. But even as cellulosic sugars become the primary feedstock for sustainable chemicals, raw sugar will continue to rise in importance internationally as a staple food ingredient. Companies such as Archer Daniels Midland, Cosan, and Bunge will be among the companies that stand to create the most value for investors. An investment today could help anchor your portfolio for years. If, of course, you have a sweet tooth.
Did you enjoy this article? Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and biopharmaceuticals @BlacknGoldFool.
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BlacknGold has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
