While zinc, copper and oil have all reached their highest levels of 2009 in the past few weeks, the commodity hitting the headlines most recently has been sugar. Benchmark raw sugar futures recently hit a 28-year high of 23 cents per pound. And by all indications, investors expect sugar to continue its relentless march upward. The number of call options to buy sugar at 40 cents a pound in New York next March has jumped six-fold in less than five months. Net long positions on sugar contracts traded on the New York Board of Trade are running at four to five times their normal levels to reach more than 200,000 tons. The implications of sugar's sharp moves up go beyond the higher prices you'll be paying for candy bars. Understanding where it is trading within the context of a classic "boom-bust cycle" can help you to make money from sugar both on the way up, and on the (inevitable) crash down.

The World's Sweetest Investment: A Story of Supply and Demand

Right now, sugar is caught in a perfect storm, its price driven by both fundamental factors and speculative fervor.

On a fundamental level, sugar prices are soaring because the world is consuming more sugar than farmers are producing. Estimates on global production for the 2009-10 season are continually being revised down, almost on a weekly basis.

You can blame El Niño. The warming of the Pacific Ocean has played havoc with global weather patterns. There's been too much rain in Brazil and too little rain in India. Brazil, the world's largest producer, was drenched by four times more rainfall than normal, making much of the sugar production too wet to harvest. And thanks to government-mandated production of ethanol, only about 43% of Brazil's sugar capacity is geared toward making sugar. Meanwhile, India, the world's second-largest sugar producer, had unusually low monsoon rainfall and suffered its driest June in 83 years. Production in Russia, Mexico, China and the EU has also fallen, as the EU has swung from exporter to importer this past year.

At the same time, global demand for sugar is growing unabated. Global inventories are close to record lows and food companies are scrambling to secure ever-tightening supplies. According to the International Sugar Organization, world demand for sugar may exceed supply by 5 million tons in 2009-2010 after a record deficit of 7.8 million tons in 2008. And when production falls short of consumption for two years in a row, inventories become seriously depleted and the price of sugar tends to soar.

The World's Sweetest Investment: Sugar Shortage Hits Home

The global outlook for sugar is also wreaking havoc with the protectionist mess that is the U.S. Sugar Program. A vestige of the Great Depression, the Sugar Program has been artificially inflating the domestic price of U.S.-produced sugar to support the incomes of sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South since 1934. Under its terms, the U.S. government guarantees a minimum price to domestic sugar growers by restricting imports and by buying and storing excess production. The result? Most years, the price that food companies pay for U.S. sugar is twice the world level.

Current import quotas limit the amount of tariff-free sugar that the food companies can import in a given year, except from Mexico. At the same time, Mexico's domestic shortfall suggests that exports to the United States will fall dramatically from the 1.5-million tons shipped this year.

The result? U.S. sugar supplies are set to drop 43% by September 2010 from this fall. The government estimates that sugar stocks will end next fiscal year, September 2010, with about 24 days' supply, compared with 63 days in 2007.

Recently, Kraft Foods, General Mills, Hershey and Mars all warned of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies and chewing gum. In a letter to Agriculture Secretary Thomas Vilsack, they wrote that the United States could "virtually run out of sugar" unless the Agriculture Department allows them to import more tariff-free sugar -- specifically, an additional 450,000 tons of tariff-free sugar by Sept. 30. Coddled farmers are, of course, up in arms, fearing that artificially propped up U.S. sugar prices would be set for a fall. Each one-cent drop in the price of sugar costs them about $160 million.

The World's Sweetest Investment: Boom to Bust?

Global commodities investor Jim Rogers has also shifted his attention to sugar. Rogers argues that with Asia prospering and three billion people striving to join the global middle class, demand for sweets and sugar is set to explode. Food inventories are at the lowest they have been in decades. And sugar is still 70% below its all-time high of 66 cents in 1974. Sugar could triple from its current levels and barely reach nominal levels last seen when Richard Nixon was president. And adjusted for inflation, sugar would have to hit a mind-boggling $2.75 -- a 12x increase from its current levels.

That said, the dynamics of sugar are different from zinc, copper and oil. You'll never hear about the coming crisis in "peak sugar." If sugar prices stay high, farmers can always plant more.

And given growing cycles, it takes between 18 months and two years for sugar supply to meet demand. Sugar production in India, the world's second-largest producer, may jump as much as 52% to 25 million tons in 2010-2011 from 16.5 million tons in 2009-2010, as mills have already agreed to boost the availability of sugar to cool record prices. And historically, any price spike above 15 cents a pound has been often followed by a big sell-off within 18 months.

In fact, sugar for delivery two years from now costs about 6 cents less than spot prices. That shows traders expect a price decline. The bottom line? There's probably a big bear market in sugar coming in 2011. The boom will be followed by an inevitable bust. Riding the wave up, as well as down, can make sugar a sweet investment, indeed.

Sign up now to receive The Global Guru e-Newsletter FREE! Email Address: Yes! Please send me Nicholas Vardy's FREE weekly newsletter, The Global Guru.