CZZ: Buying Brazilian Sugar

Most investors stick with one game. Stock investors trade stocks. Foreign exchange connoisseurs trade currencies. Most investors stay away from commodities entirely. The low margin requirements and additional risk tend to attract speculators and repel the everyday investor.

On the other hand, you can’t ignore commodity futures completely. Some stocks are directly tied to commodities they produce or process. For instance, American Italian Pasta Company (AIPC) could be affected if wheat moves sharply up or down. Sugar is another member of the commodities family. Like all commodities, sugar prices are affected by the worldwide supply and demand of sugar. When there’s a glut of sugar, prices fall. When sugar crops are threatened or supply is tight, sugar futures rise. That’s what is happening now.

Worldwide sugar prices are rising for two reasons: rising ethanol consumption and harvest problems. Most of the world’s sugar is made from sugar cane in tropical zones. Major producers include Brazil, India, China, Mexico, and Thailand. Brazil is the largest sugar producer and exports 30 million tons, or 20%, of global sugar production. Brazilian sugar exports include regular table sugar and ethanol. As alternative fuel interest continues to expand, so does demand for sugar-based ethanol.

Others have picked up on the underlying demand for sugar. Agribusiness player Bunge (BG) recently bet on rising Brazilian sugar by purchasing a local producer called Moema. It was Bunge’s largest sugar cane purchase to date. The Indian government recently acknowledged rising sugar prices by asking factories and millers to share profits with farmers. Whether or not sugar socialism will be imposed on the Indian subcontinent will be determined at a later date. For now, the market is just readjusting to a rising commodity. So is this week’s pick: the Brazilian ethanol and sugar producer Cosan Limited (CZZ).

Cosan produces, distributes and exports ethanol and sugar. The São Paulo-based manufacturer is diversified in both hydrated ethanol and industrial ethanol. In addition, they produce different sugars like crystal sugar, organic sugar, refined sugar and altered sugar. Cosan also deals with combustible alcohol and sugar-cane cultivation. Sugar and ethanol exports head from Brazil to the US, Japan, and Europe.

With a market cap around $3.5 billion, Cosan is not a small company. Revenues run around $3.77 billion. Granted, their diluted earnings per share is running -$0.76. However, rising sugar prices are a boon to the stock price. JP Morgan recently upgraded CZZ to “overweight”. CZZ recently broke out of congestion, moving up $1 to around $9 per share following rising global sugar prices. To go with rising sugar prices in the sugar export capital of the world, buy CZZ.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.