 Sugar prices are down 50%. Should we invest in sugar? This video will give you all the answers you need to know. Good day, fellow investors. Investing in commodities is tricky and I like it because I have a long-term perspective. Some call it crazy, you should never invest in commodities, negative returns, blah, blah, blah. However, if you just have a long-term perspective and take advantage of the market irrationalities, I think very good long-term sustainable returns can be achieved because we can't live without commodities. The same perspective I applied to sugar. And in this video we'll discuss how to invest in sugar. These are the topics we will discuss how to approach investing in commodities by using, of course, sugar as an example, the sugar cycle analysis, how to take advantage of cyclic quality and what the market doesn't yet see and doesn't yet price in. We have to always be a step ahead in relation to what the market is pricing in now. You will see the long-term volatility and understand that better. Will you still eat sugar tomorrow? I hope not, but I'm sure you will and most of us will. People eat more and more processed foods. Everything processed has a lot of sugar in it. More and more sugar in it does demand for sugar will grow, unfortunately. And then we'll analyze the sugar stock, Sudsuker, a German stock traded also on the over-the-counter market in the States from a long-term perspective. We'll start by investing in sugar, discussing commodity investing strategies, sugar price cycle, sugar production costs, sugar price forecasts, sugar investing strategy, my strategy, Sudsuker analysis about the company and then the investment thesis at the end. I hope you enjoy it. So let's start with commodity investing strategy. We have to take advantage of long-term cycles. This is the core of a commodity investing strategy. The below figure plots, Sudsuker's stock price and the price of sugar over the last 20 years. Now, this is not perfectly correlated, but if you would ask a seven-year-old kid if it is correlated, he would say, yes, and that's my investment strategy. Long-term correlations are there, long-term trends are there, short-term anything can happen. And if you can embrace that volatility, finding the right investments with the margin of safety, you can get to nice long-term returns. The point is that nobody knows where the bottom is and ETFs, index funds, they are selling commodities, money is flowing out of commodities funds, which means that stocks are also seeing outflows and stock prices decline, as it has been the case with Sudsuker stocks. However, some companies have sugar in their name, but only 45% of revenues comes from sugar. So a lot of irrationalities in the market that a long-term perspective, long-term I mean 10 years, short-term for me is everything less than three years. So long-term perspective can really see, okay, where will this stock be? Where will sugar be in 10 years? We have to check the cost for that. And then you can have, let's say, a good risk-reward investment opportunity. If we look at the sugar price cycle, when production is higher than consumption with any commodity, things are not good for the respective commodities price. In the last two production years, there has been an oversupply of sugar. And you can see the red column has been rising that inventories. So there has really, really be a growth in inventories when there is a decline, sugar prices go up. And that's normal cyclicality for a commodity. In 2015, there has been a deficit of sugar. You have seen sugar prices spike. They were 100% above current levels. But since then, overproduction, good weather, competition from the European Union as they abolished sugar production quotas, they wanted to export more. And now you have the result. Nobody's making money in sugar. That's how things work. So that's a normal cycle, second cycle in a few years. However, low prices, longer prices, longer term low prices lead farmers to produce less sugar. They turn to producing something else. We already see farmers in Brazil turn to soy crops because of higher Chinese demand and Trump tariffs. But so something somewhere, it all levels out. The key is, okay, how can I invest to weather out the storm and end up ahead? The next producing year is expected to see some decrease in production, but further inventory increase is expected as Brazil continues to add and India continues to add production for now. This leads to negative things for companies, negative cash flows, negative earnings. And Sutsuka expects to see negative income from sugar operations next year. From positive income of 139 operating result, 139 million, they will see negative operating result from 100 to 200 million euros and a significant decrease in revenues, which is above 10%, probably 15% or even more in lower revenues. At some point, there will have to be lower production because nobody can produce below cost for a long term. And also the sugar companies, they cannot survive all the time everybody in India and Brazil in Europe with no profits. So those things are shut down slowly and then the cycle reverts. There is some bad weather and you see higher sugar prices and higher sugar stocks because everybody thinks short term and they apply what happens in the short term to their stock market price projections. As you can see in the volatility of all these sugar stocks. The key is to look at the cost and of course demand and supply. The file estimates are unfortunately very negative for human health but very positive for sugar demand. They expect sugar demand go to 250 million tons in 2040 from the current 180 million and 300 to 350 million tons from to 1050. So demand is stable, demand is growing and you can see the blue line which is demand, how it really stable growth and then you can see the red line which explains the cyclicality of sugar up and down across the blue line the actual stable demand. Now it will be above again this year but then in the future probably somewhere again below and then you'll see higher and lower sugar prices. According to Nordzucker, not Sootsucker, Nordzucker, not traded at the current price level there is hardly a sugar company in Europe which can still produce at break even. So everybody even the most efficient producers in Europe are not positive, are not operating positive now. This means that costs in Europe what the most efficient producer are at 12 dollars 12 cents per pound which means that it goes even higher 2020 something a lot of companies will not be able to sustain that. Also beat producer are going nuts over low prices so they are pushing Europe to do something as there is overproduction. Brazilian costs are around 10 to 14 cents per pound very low, India 2020 something, Thailand also somewhere there and JSG commodities forecast prices to hit a low of 8 cents per pound which would mean a lot of pain a lot of negative cash flows a lot of negative earnings dividend cuts and bleeding stock prices. The european association of sugar manufacturers is also not positive and demands government action. Just to show you how volatile is sugar production, Indian sugar crops jumped 50% in the last production year that depends on the monsoons on the weather will there be drought and so on and so on so you can't really predict what will happen with sugar and sugar prices. So the key is again buying with a margin of safety so that you buy value no matter what happens even if we see low prices of sugar for the next three years that you are safe. When sugar prices spike they probably will eventually then you make your money but you have to be patient and invest smartly. So the key is sugar prices are now at 12 cents estimates are that they will go at 8 cents the most efficient Brazilian producers have costs of around 10 cents 12 cents around the world Europe we are 18 20 cents India 20 cents so the current sugar price is a result of oversupply and it's not sustainable for the long term. This means that sometimes somewhere in the future sugar prices will be higher. The key now is to implement a smart investment strategy so that you are not the one who hates investing in commodities because 99% of investors get burned once and then they never ever look at commodities again. Of course the fittest will survive those who have low debt those who have low costs those who have efficient production and those who will manage to turn everything into a profit with higher sugar prices without going bankrupt. Those are always the balances if you have a higher cost producer and sugar prices don't recover you will see a lot of pain so a lot of volatility low cost producers have lower volatility but also lower upside however the risk reward is always the key there. Let's analyze Schutzucker to see what is there what's the potential for such an investment. Schutzucker is a holding company with diversified production. Sugar revenues are 3 billion euros group revenues 7 billion euros which means about 45% of revenues just come from sugar. However it's a big part of the operating result has been last years so that there will be a very negative hit on operating results this year and perhaps even next year. Special products are frozen pizzas leader in the US and Europe crop energies fruit also production so a diversified company in the food business. Now as sugar revenues are expected to decline more than 10% given the three arrows down the operating result will turn from positive to negative and this is what scares analysts. Other sectors will do well except for crop energies. Now if I look at the long-term data for Schutzucker I see that they might see similar results as in 2016 their accounting year 2015 sugar production when sugar prices were also low. So their results are always very very stable the dividend has been very stable so those are fluctuations that are really not that big when you look at from a long-term perspective. Even a 75% slump in operating earnings might lead to operating earnings between 100 and 200 million euro which leaves 100 million euro to keep the dividend sustainable to keep the dividend there. When sugar prices eventually increase we might see higher dividends in the future higher stock prices let's see a little bit about the stock price. In case sugar prices go up we might see probably again 500 million in operating income and 250 million in cash available for dividends which should be around 1.2 euros per share that would be a 10% dividend yield at current prices and that would propel the price to a yield of at least 5% in Europe. Think of a stock price of 20 and above in such case. As it has been the case just a year ago the stock was trading even at 25 now it trades at 12 in 2013 the stock was trading at 30 in 2007 also above 20 so extremely volatile company that keeps paying the dividends that keeps doing what it has been doing for ever probably. So what will happen I'll discuss at the end in the investment thesis. The company has a stable balance sheet with only 43% of the assets are financed by debt. Debt issues shouldn't really be a concern given the long-term maturity so all they have to is finance the very very low interest rates that are there in Europe. The long-term development of the group look at how the market capitalization fluctuates around the dividend that is being paid. The highest market cap was in 2011-12 we have seen the 30 stock price there was a dividend of 90 euro cents per share. When sugar prices go higher I expect the company somewhere in the next 5 to 10 years to hit that again and we'll see higher stock prices. They're also investing heavily in starch mostly also an addition to all the processed shit that we eat. Nevertheless there is always always a pizza business frozen pizzas okay I'm an Italian don't sell me frozen pizzas but still they are the leader in Europe and leader in the US. So we have a great business could it be that the stock is going down just because of concern that it might go down even more and investors are fleeing the European market and investors are fleeing commodities when the sea lower commodity prices it might be because the business looks sound. So let me discuss my investment thesis. If there's somewhere in the next five years this earnings stabilize there is a higher dividend or the dividend is kept I bet that the stock price might go to 20 as I see as I require a return of 15% if I know that the stock will hit 20 in the next five years I need an investment start point of 11 so that would give me 20 in the long term five years. It might take 10 years for the stock to go back to 20 which then lowers even my investment entry point. However that's a relative strategy. I prefer an absolute strategy by looking at earnings and long term earnings. So the long term earnings per share have been extremely high in 2011-12 then volatile but constantly positive and that is key when you invest. The equity has grown from three billion with the dividend payments to five billion euros that's very nice when a company grows book value when a company grows equity the net debt isn't that high. So average earnings over the past decade were 1.2 euros the cap ratio now is 10 this implies a 10% long term return which is nice however my required return is 15% and according to average earnings of 1.2 euros per share the my entry level price would be 8 then I'm safe really at the margin of safety from the tangible book value which is 12 something I'm buying at 8 so at the discount I'm buying great earnings and I'm buying business long term earnings of 15% that is a great buy for me. Perhaps if Deutsche Bank goes bankrupt if there is turmoil from Turkey if shit hits the fan in Europe we might see prices of eight so I put this on my watch list and when it gets closer to eight I compare it to my other sugar investments sugar potential investments I did this analysis for another stock that I'm looking that is a sugar investment to see to compare a little bit that is already at 15% earnings so I might choose that one I still have to see. Now I really think Tsutsuka from now from where it is 10% long term return if you can embrace volatility if it goes to nine if it goes to seven just reinvest the dividends add a little bit to your position dollar cost averaging and I find it unlikely that you will lose money permanent capital loss over the next five to ten years and that's a margin of safety value investment at this point leading to let's say approximately a 10-12% return my quest is always for 15% returns but I analyze hundreds of stocks I have my watch list and I buy only when the stocks comes to me at this moment I'll put an eight entry point or relook entry point for Tsutsuka compare it to put it into my comparative table and then see what comes out I'm a patient guy I might buy just once in a decade and I get to great returns with low risk low risk equals higher returns so thank you for watching if you want to see everything that I do all my research in one place check my stock market research platform down in the link below thank you for watching I'm looking forward to a comments do you have any ideas where sugar prices will go go are you invested in sugar do you have any other stock picks please share in the comments below I'll see you in the next video and don't forget to check my other videos