Ethanol versus Sugar stocks

Take a look at the latest Barron's roundtable. Sounds like owning sugar rather than ethanol stocks is the way to go to play the rising demand for ethanol according to money manager Felix Zulauf. Since February 2006, the price of sugar has fallen 50% to 11 cents a pound. That's below production costs of about 14 cents in Brazil and India, the two largest producers! This may mean that sugar production is therefore on the decline, while demand is rising due to ethanol. Brazil is also the producer of 5 billion gallons of ethanol a year, and is planing to increase that to 8 billion gallons within the next three years. 22% of Brazil's total fleet of cars are Flex cars, and the government wants the percentage to rise to at least 30%.

Brazil also exports ethanol to the U.S., Japan and China, all of which are raising their demand. "In the past", says Zulauf, "when sugar started rising from a price below the cost of production, it rose 100% or more, on average." His target price is 20 cents. Note that according to Zulauf a 30% increase in the price of sugar (far less than the increase from 11 to 20 cents he's predicting) would eliminate ethanol's price advantage over gasoline. Sugar futures are therefore a better play on ethanol than the sugar-based ethanol producers such as Cosan (CZZ). Investors who can't access sugar futures may consider two commodity ETFs: the PowerShares DB Agriculture ETF (DBA) and ELEMENTS Linked to the MLCX Biofuels Index ETF (FUE).