Sugar at 40 cents 'wishful thinking'

Bets sugar will climb 80 per cent to 40 cents a pound are ‘wishful thinking’ because a further jump in prices will force importers to slow buying, said Peter Baron, executive director of the International Sugar Organization.

“People are much more cautious when they face prices which are in the clouds,” Baron, 68, said in an interview in Bangkok. Food manufacturers may seek alternatives such as corn syrup if prices go that high, he said.

Sugar has already surged 86 per cent this year, reaching a 28-year high, as India, the biggest user, had its driest June in 83 years and parts of Brazil, the largest grower, were drenched by rainfall four times more than normal, making the fields too wet to harvest. 

World demand will exceed output by 5 million metric tons in the year ending September 2010, Baron said.

The number of options to buy sugar for delivery in March at 40 cents a pound in New York jumped six-fold in less than five months, according to data compiled by Bloomberg. 

A call option gives the right, not the obligation, to buy a commodity at a set price. The March contract ended at 23.50 cents August 14.

“I don’t see prices going that high” from a fundamental point of view, Baron said. Current prices are ‘justifiable’ given the record deficit of 7.8 million tonnes this year, he said.

Sugar is “caught in a perfect storm,” said Michael Coleman, a Singapore-based hedge fund manager. There is “a big hole” in world supply and no obvious solution in the next six to nine months, said Coleman, managing director of Aisling Analytics, which runs a $1.4 billion fund invested in energy and agriculture.