The Truth About Sugar; The buzz says a dizzying price spike is all about sugar for biofuels. But the reality is more complicated.

Byline: Alexandra A. Seno

The surprising thing about the price of oil, which hit a new record of $75 a barrel last week, is how little visible impact it has had on a booming global economy. But that hasn't stopped market watchers from looking for and finding peripheral shocks, even where they don't really exist. Consider the recent rush to sugar, which spiked to a 25-year high of 20 cents a pound, driven largely by buzz about an old phenomenon: the largest producer, Brazil, devotes half its crop to the production of ethanol, which is an increasingly competitive source of energy for cars as gas prices spike.

Sugar for fuel is an interesting story, but it's a relatively small one that at the moment is still largely confined to Brazil. The share of global sugar production that goes to biofuels is roughly 15 percent, or about what it was 20 years ago, and the vast majority of that production is now in Brazil. In fact, Brazil used to devote a lot more of its (then much smaller) crop to biofuels, and most of its booming sugar production now fuels a much bigger story: sugar for food. Demand is rising relentlessly, at a pace of about 2 percent a year, driven by increasingly sweet tastes in developing nations, even as sugar consumption slows in the West. Meanwhile, a combination of underinvestment and bad weather in producing regions (from Gulf Coast hurricanes to drought in Thailand and a March cyclone in Australia) has disrupted supply. The result: last year demand reached 151 million tons, against a supply of 149 million tons, driving prices up, with more rises in store.

Trade wars, not oil shocks, are the key going forward. Next month the European Union, its hand forced by a World Trade Organization ruling, must dramatically cut export subsidies to its sugar growers. In anticipation of falling profits, several big sugar companies, like Germany's Sudzucker, Poland's British Polska and Denmark's Danisco, have been cutting production. Analysts say some European companies will like-ly collapse, further tightening supply and driving up prices, which closed last week at 17 cents a pound. "This time next year, it will be much higher than where we are at today," predicts Michael Overlander, CEO of Sucden, the London-based commodities-brokerage unit of Groupe Sucres & Denrees, a company that handles 20 percent of the world's sugar business.

The demand is driven by the (rather alarming) dietary habits of the young, the poor and particularly those ...