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The Sweet Turns Sour

A decline in sugar prices has left a bitter aftertaste in the mouths of some commodity investors. A 12-month chart chronicling New York Board of Trade sugar futures says it all -- the sweetener has dropped more than 41% -- from a peak of almost 18 cents a pound to its current 6.5 cent price. Bad news bears for commodity bulls like Jim Rogers.

Rewind to last year when the economic commentator, who co-founded the Quantum Fund with George Soros, called for sugar prices to quadruple. “Sweet,” commodity investors thought at the time. They had little reason to doubt their investment would go sour. After all, sugar was the best-performing commodity in the 12 months to March 2006.

But those gains started to dissolve after the end of first quarter 2006, as quickly as a sugar cube dropped in a cup of hot tea.

Brazil and India, two of the world’s leading sugar producers, recorded bumper crops and demand for sugar as an ingredient in alternative fuels started to fall. Global production will exceed demand by more than 9 million tons in the year ending Sept. 30, according to the International Sugar Organization in London. That has cast a pall over the sunny picture in Mr. Rogers’ Neighborhood of happily rising commodities.

A Sugar Decay

Investors’ once sweet addiction for listed sugar producers has decayed, reflecting the broader malaise in the sugar market. CSR Ltd., Australia's biggest sugar producer, in May, said earnings before interest and tax this year are “unlikely to reach”' the $338 million it reported for the 12 months to March 31. That’s after sugar prices fell more than a quarter this year. CSR stock has declined almost 6% this year and underperformed Australia’s S&P/ASX 200 Index.

Sudakshina Unnikrishnan of Barclays Capital expects a strong oversupply of sugar for 2007 as well as next year and doesn’t see a meaningful rally in sugar prices in the medium term.

“For the raw sugar market, we continue to expect prices to be largely rangebound trading between 8 and 9 cents a pound,” Unnikrishnan told CNBC TV-18 in a May interview. “In line with the strong expected production you know that the market is expecting a very high sugar overhang.”

So much for the supply side. But could salvation come in the form of stronger demand? Unlikely, says Unnikrishnan. There haven’t been any “surprises from the demand front. It is the supply front that is setting the notes trading,” she said.

No Longer A Sweet Option?

Many investors have banked on higher demand for sugar as biofuels become an increasingly attractive option for commodity investors. High oil prices have made food crops like corn and sugar more economically viable as an ingredient for biofuels. But analysts have observed a ‘decoupling’ in the relationship between oil and sugar prices of late as the emphasis has shifted to the corn market at the expense of sugar.

As this column has consistently pointed out, the average investor would be well advised to steer clear of a pure punt on sugar as a commodity. But given the recent decline in the stock prices of listed sugar companies, strategists say some counters may be worth picking up on the dips.

“If at all one wants to look at little contrarian play, then one can play with the market on a lower side, they can buy and sell at a little higher price,” Deven Choksey of KR Choksey Securities told CNBC TV-18.

The bottom line -- sugar doesn’t look like it’s going to hit a sweet spot again in the foreseeable future.

Sri takes a break and closes the Store for a few weeks. But he will be back July 2 with a very special column on Oil -- a decade after the Asian Financial Crisis. He still welcomes all your questions and comments. Please send them to commoditystore@cnbc.com. We will answer as many of your e-mails as possible on when Commodity Store reopens on ‘CNBC’s Asia Squawk Box’, Fridays, 7 am to 10 am Hong Kong/Singapore time.