Sugar Prices Hit 30 Year Highs

I spent the evening reading through the annual report and SEC filings of Imperial Sugar on the iPad listening to the river outside with the windows open.

(That would be an article in and of itself – the company had a huge explosion in 2008 at one of its sugar refineries, killing several employees and injuring dozens more.  The insurance proceeds have been paid and they rebuilt a state-of-the-art facility that is just now gearing up for full production.  Yet, they are off hedge accounting, causing massive fluctuations in the income statement, huge reported losses, and the insiders do not appear to be buying anything, making me extremely cautious as to the long-term prospects of the firm.  The pension is also roughly $100 million underfunded, but that is most likely because the fiscal year ends in September and the market was much lower than it is now.  If things were back to normal, the cash dividend yield would be huge but it is an open question as to whether or not that will ever be possible; a walk in the part, this is not … and I haven’t even described half of it to you.)

That isn’t exactly good news for refiners unless they own their own fields because a pure refiner buys sugar cane from farmers, refines it, and then sells it to stores and industries such as chocolate makers.  If prices rise too quickly, the cost of the raw sugar cane purchased increases more rapidly than the refiner can increase their prices to end-customers, causing their margins to collapse.

That means that the input costs for food manufacturers is still high.  Apparently, the sugar beet harvest is supposed to be higher than the USDA anticipates, which means sugar futures would fall.  I’m not keen on speculating, but if I were feeling adventures, it may be fun to short sugar futures.  (Warning: You shouldn’t even consider doing this.  Futures are extremely dangerous for 99% of people and you can lose your house, your car, and your life savings in under a few minutes.  Run.  Run away from them and never look back.)

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