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Sugar price exploding up but SUGAR needs to go up 3 fold to reach 1974 levels.

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August 13, 2009 – Comments (2) | RELATED TICKERS: CZZ , IPSU.DL

Cosan Limited: Profiting from Sugar's High  by: Bill Powers August 13, 2009 | about: CZZ     SeekingAlpha
  

To say that I am bullish on Brazil, sugar and sugar-based ethanol would be an understatement. No company has better leverage to the sugar industry than Cosan Limited (CZZ). Cosan Limited is the largest ethanol and sugar producer in Brazil and the largest grower and processor of sugarcane in the world.

Unlike the white elephant that is corn-based ethanol, which has driven up the price of food in general, sugar-based ethanol has not had the same impact on sugar prices. While many in the investment community have soured on biofuels investments due to the failure of many US-based ethanol producers such as VeraSun (VSUNQ.PK), the combination of investor apathy, leverage to the price of sugar, improving fundamentals and industry leadership makes Cosan worth considering.

Despite my six-year-old daughter’s efforts to single-handedly drive up the price of sugar, sugar remains well off its all-time high of 66.5 cents per pound reached in 1974. Sugar currently trades at 21.86 cents per pound. While sugar has had its ups and downs over the last 35 years, its fundamentals continue to improve as both a foodstuff and an alternative transportation fuel. Uber investor Jim Rogers had the following to say about the future of sugar in his 2004 book Hot Commodities (from page 180):

…And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong. To those of us who have been there before, it is promising to note that supply-and-demand imbalances are shaping up that could push sugar prices upward over the next decade. You could even sum up sugar’s story in three words: Brazil, China, oil.


Brazil

In 1992, Brazil accounted for 8.4% of the world’s production of sugar and today accounts for 23% (Source: US Department of Agriculture, Foreign Agriculture Service (FAS)). Much of this increase in Brazil's production can be attributed to a very favorable growing season and a low cost of production. Additionally, the Brazilian Real was weakened by 30% in 1999, which increased the country’s share of the export market.

China

While I do not usually resort to the simple math of China’s growth (the idea that if each of China’s 1.3 billion citizens ate one more….) to illustrate the impact the country is having on the sugar market, a brief look at the growing demand from China tells the whole story.

According to FAS, sugar demand in China is up 5% in the last year due to “the rapidly growing processed food and beverage sector and catering sector.” (Source: here). FAS also estimates that per capita sugar consumption in China has reached 11 kilograms per year.

This compares to approximately 45 kilograms (100 pounds) per capita annually in the US. While China’s citizens have a long way to go to catch up to Americans’ sweet tooth, they will undoubtedly narrow the gap. As Jim Rogers succinctly points out in his book, “there is a direct correlation between increasing affluence and sugar consumption regardless of culture.” (Source: Hot Commodities)

Oil

The rising price of oil is going to have a profound impact on the price of sugar. According to Rogers, during the oil crisis of the 1970s, Brazil converted a third of their sugar to gasoline. As gasoline prices continued to rise in the early 1970s, sugar was experiencing a parabolic price move. Sugar rose from 1.4 cents per pound in 1966 to 66.5 cents in 1974.

While the corporate history of Cosan Ltd. dates all the way back to 1936, the company in its current format was formed in 2000 and has been growing through partnerships, acquisitions and corporate restructurings. The company is incorporated in Bermuda and has three main business lines: sugar, ethanol and co-generation (by-product electricity generation).

Currently the company operates 18 mills, two refineries, two port facilities and numerous warehouses. All of these facilities are located in the Center-South region of Brazil, which is one of the world’s most productive sugarcane regions because of its favorable soil, topography and climate.

The company’s size as one of the largest producers and exporters of sugar and ethanol has given it several advantages over its competitors. Cosan, which has expanded its crushing capacity from 13.2 million tons when the company was founded in 2000 to 45 million tons (with another 12 million tons of crushing capacity planned), has begun a $1 billion program to install cogenerating plants at nine of its 18 mills, which will allow the company to sell excess capacity into the local grid. The company is already energy self sufficient.

Unlike many US-based ethanol producers, Cosan is a vertically integrated producer of sugar and ethanol. The company produces approximately 60% of its sugarcane requirements and purchases the rest from local growers. Additionally, Cosan owns a sugar terminal and a stake in a ethanol terminal at Port of Santos, the largest commercial port in South America.

Probably the biggest advantage Cosan has over its competitors both in the Brazilian ethanol market and its ethanol producing peers is its ability to control its own destiny. Unlike many producers, who are subject to the whims of the price of feedstock or the cost of electricity, Cosan creates all of its own electricity and buys only 40% of its sugarcane needs.

This situation results in enormous operating leverage for the company. With an already substantial investment in production, transport and milling, the coming rise in the price of gasoline will allow the company to generate significant profits from both the rising price of sugar and ethanol.

Investors who are looking for a way to profit from the rebound in ethanol, want exposure to Brazilian equities, rising sugar prices or simply like sugar should consider Cosan a great long-term investment opportunity.

Disclosure: No positions by author, IBDvaluinvestin has a small 500 share long position in CZZ

2 Comments – Post Your Own

#1) On August 13, 2009 at 3:52 PM, GNUBEE (24.82) wrote:

First you get the Sugar, then you get the power, then you get the women...

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#2) On August 13, 2009 at 4:56 PM, Varchild2008 (85.90) wrote:

Or you switch to STEVIA.

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