• Double the price and we'll still buy it…
• How oil tracks with sugar
• Two sugar investments

In yesterday's edition, I talked about an oil services company that benefits from higher oil prices.

But higher oil prices don't just benefit oil companies. In fact, higher oil prices can sometimes hurt oil companies - because higher oil prices frequently reflect higher production costs - so while a company might get more dollars per barrel, each barrel costs it more to get out of the ground. And even though the effect is usually small, higher prices typically result in a somewhat diminished demand.

According to Enerdata, an independent energy consulting company, gasoline consumption dropped 4.5% in North America during the record high oil prices of 2008. That's certainly a significant drop, but as you're probably painfully aware, oil prices more than doubled from the previous year:

My point is this: a higher oil price isn't always roses for oil companies. But there are other sectors that do benefit.

Take a look at this chart from 2001-2006 that plots crude oil prices vs. sugar prices:

You can see how sugar prices track pretty closely to oil prices - and the reason is two-fold:

1. Sugar production is a direct function of the price of oil. That's because sugar cane (and sugar beets) processing is somewhat energy intensive. According to a story in Science Magazine, it takes about one gallon of oil to produce approximately 120-280 pounds of sugar. Throw in higher shipping costs, and the chart above starts to make a lot of sense.

2. The other reason is that sugar can be economically turned into ethanol. According to National Geographic it takes about one unit of gasoline to make the equivalent of eight units of ethanol energy.

So increases in oil's price can raise the production cost of sugar, as well as demand for sugar-based ethanol.

Brazil and the United States produce almost all of the world's ethanol, though the US produces very little sugar-based ethanol.

In 2008, Brazil exported nearly 1.4 billion gallons of ethanol as oil prices made their way north of $140/barrel.

The more expensive oil gets, the higher sugar prices go, and the higher demand for ethanol goes.

That's the other side of the story; sugar has been extremely cheap for a long time.

This point was highlighted in a Bloomberg story today:

"Raw sugar for October delivery slid 1.2 percent to 16.49 cents a pound on ICE Futures U.S. in New York. It reached a record of 66 cents in November 1974."

Inflation adjusted highs for sugar are closer to $3 a pound - or an 18-fold increase over today's prices.

I don't know if sugar prices will get to $3 a pound anytime soon, but it's clear that sugar is extraordinarily cheap today.

The way to play a reversal in this trend is to look for cheap sugar companies. There are very few publicly traded sugar companies - a sure sign that it's a tough market to be in.

The two most obvious are Imperial Sugar (NYSE: IPSU) and Cosan Limited (NYSE: CZZ). IPSU refines and sells sugar out of Sugar Land, Texas. They're a micro-cap company selling near their 52 week lows. They've had some bad luck recently with one of their refineries burning to the ground, but they're a great buy right now.

CZZ, on the other hand, is a $2.75 billion company out of Brazil. They refine sugar, and also produce ethanol. If sugar prices stay low, they can always produce more ethanol. Brazil has one of the world's most comprehensive ethanol infrastructure networks, with 10 million flex-fuel cars and trucks on the road and an extensive ethanol fill-station system.

So CZZ can either sell their ethanol and/or sugar domestically, or dump it on the export market.

Both of these companies are cheap by any measure - and both will benefit from higher oil and sugar prices if and when the come.

Good investing,

Kevin McElroy

Editor

Resource Prospector