Douglas Hamilton

Last year, traders for several of the big funds helped push crude oil prices up as high as $147 a barrel before the global recession brought them crashing down to around $30.

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While some funds are moving back into oil, others are betting on the possibility of an international shortage of the worlds favourite natural sweetener sugar.

The price of sugar on global commodity markets has doubled since the beginning of the year and is close to a 28-year peak as hedge funds and other speculators pile into the market.

For some financiers hoping to make a quick buck on international commodities markets, sugar has become the new oil. Historically, raw sugar has traded at between 10 and 12 US cents per pound at the New York Board of Trade. But the price touched 25 cents a few weeks ago, its highest level since 1981, and sugar is now hovering around the 23 cent mark.

The jump in sugar prices has come amid a broader commodity boom. Tea and coffee prices are also rising and metals rose sharply yesterday as the dollar weakened. Copper climbed more than 1% to $6728 a metric ton in London dealing, while zinc rallied for a ninth day. The tumbling greenback also helped oil prices stay above $80 a barrel.

There are a number of reasons for the surge in the price of raw sugar. Heavy rain has disrupted milling in the worlds largest producer of sugar, Brazil, where a sizeable portion of sugarcane has been diverted from food use into ethanol fuel.

Meanwhile, the biggest consumer of sugar, India, has had a dismal monsoon season and has gone from being a net exporter of sugar to an importer.

India consumes about 23 million tonnes of sugar a year, but produced only about 15 million tonnes in the year ended September and output is seen at 15.3 million tonnes in 2009/10.

Jonathan Drake, global head of sugar trading at Cargill, a major commodities trader, said last week the shortage that caused the sugar-price rally was far worse than previous short-falls in 1973-74 or 1980-81.

Drake said the price, which has more than doubled this year to 25 cents a pound, might climb as high as 40 cents, judging from those earlier shortages.

The London-based International Sugar Organisation predicts that global consumption of sugar will outstrip production by nine million tonnes next year, forcing food companies and governments to dig into stockpiles.

In the United States, manufacturers of snack foods including Mars, Nestl and Krispy Kreme doughnuts, have urged the Obama administration to relax import controls, warning that America could virtually run out of sugar.

Experts say the spectre of a rapidly moving price has attracted the attention of hedge funds seeking to make short-term speculative profits.

In the City, on the trading floor of the derivatives exchange NYSE Liffe, the volume of trades in white sugar contracts jumped by 40% to 204,662 in September from 145,554 in August.

A political outcry over speculation pushing up oil prices last year has encouraged some funds to shift their attention to agriculture futures that are traded in less-noticed pits.

It doesnt draw the attention of regulatory authorities like maybe energy does, said Steve Platt, a futures strategist at Archer Financial Services, a big US commodities broker.

There has been some movement of index funds into a heavier concentration on sugar.

Consumers who buy a lot of sugar-based products should not worry about a wild escalation in prices in high street shops. In the European Union and the United States, the sugar market is protected. Prices are controlled in Europe to protect the interests of sugar beet farmers. US authorities allow only limited imports to support the domestic agricultural sector.

The situation is more acute in Brazil. Some Brazilian motorists who fuel their cars solely on cane-based ethanol are switching back to petrol as high sugar prices now make the biofuel more costly in some states.

Brazil is a pioneer in biofuel with its millions of flex-fuel cars that can run on ethanol or petrol, or any mixture of both. When flex-fuel, usually cheaper than petrol, arrived in 2003, drivers needed no persuasion to switch.

But as mills use cane to produce more sugar in response to a world deficit, prices for ethanol, made using the same cane, have soared by up to 50% in

places in just a few months.