Sugar Prices

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Around 160K metric tons of sugar are produced every year,^[1] with the largest producers in the United States, the European Union, Brazil and India.^[1] The primary driver of sugar prices is government regulation. Many governments heavily subsidize their sugar manufacturers, to "dump" cheaply-priced sugar in the market, while the United States government has tried to elevate prices within its borders by imposing import restrictions.^[2] Since sugar is a good source for ethanol production, oil prices and the demand for ethanol are also impact the international price of sugar; for example, in the first half of 2008, sugar prices increased by more than 20% in response to rising gasoline prices.^[3]

[edit] Price, Ticker, and Delivery Dates

World Sugar (No. 11) futures contracts are traded on the New York Mercantile Exchange under ticker symbol YO and are delivered every year in March, May, July, and October. (For more information on commodity tickers, check out the commodity ticker construction page.)

World Sugar (No. 11) futures prices for March, 2009 delivery. Price is in US Dollars per 100 pounds:

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[edit] Production and Usage

Sugar is commercially produced from sugar beets and sugar canes.^[4] Sugar beets are grown year-round and account for 60% of US total production, while sugar canes are grown perennially and account for 40% of US total production.^[5] Both production processes yield the same sugar product.^[5] Sugar production in the United States generates $10B in economic activity annually, and the sugar/corn sweetener industries generate $21.1B in economic activity.^[4]

Sugar is used in food products to sweeten and add texture and color.^[4] On average, each American consumes 45 pounds of sugar, 45 pounds of high fructose corn syrup (HFCS) and 2 pounds of honey/syrup yearly.^[4] In total, Americans consume 10,000 tons of sugar every year.^[4] Sugar end products are raw cane sugar, wholesale and retail refined sugar, cereal, candy, baed goods, and ethanol.^[4]

[edit] Pricing and Volume Trends

From 1994 to 2004, sugar prices dropped significantly as a result of increasing supply. While supply depleted from 2004 to 2006, it has resurged since then, which is reflected in the general drop in prices.^[6] Within the past year, however, concerns regarding high fuel prices (see below) have pushed prices higher.^[6]

The US is the second largest net sugar importer.^[4] Other key players in the world sugar market are the European Union (EU), Brazil and India.^[1] The EU, like the US, has implemented policies that artificially inflate sugar prices.^[2] Brazil, on the other hand, heavily subsidizes its sugar farmers to support its sugar-ethanol program.^[5]

[edit] Impact on Companies

[edit] Who Hurts

• Sugar is an important raw material for candy manufacturers. Therefore, rising sugar prices increase the cost of goods sold for these companies. Large candy manufacturers in the United States include Hershey Foods (HSY), Tootsie Roll Industries (TR) and Wm. Wrigley Jr. Company (WWY).

• Sugar is also an ingredient for a variety of bakery products, syrups, and food preservatives. This broadens the impact of sugar prices to a diverse range of food companies, such as Kraft Foods (KFT) (i.e. mayonnaise production) and Nestle (NSRGY) (i.e. chocolate powder production).

• Sugar is used substantially to make breakfast cereals.Breakfast cereal manufacturers include General Mills (GIS) and the Kellogg Company (K).

• Beverage providers use sugar extensively in their products. These companies include the Coca-Cola Company (KO) and Pepsico (PEP).

Many of these companies buy sugar through long-term (5-6 years) contracts that dampen the effect of price hikes, and sometimes pass on price increases to consumers.^[4] In addition to harming bottom-line earnings, rising sugar prices have empirically caused lowered employment in US food businesses, the relocation of such businesses to Canada and Mexico, and growing imports of sugar-based food products.^[4]

• Rising sugar prices also impact ethanol producers (see above). However, most ethanol producers that use sugar as a raw material are based in based in countries such as Brazil that heavily subsidize their domestic sugar industries. In the United States, less than 3% of total ethanol production come from sugar.

[edit] Who Wins

• In the United States, increases in sugar prices primarily help sugar farmers. In addition, some companies produce much of their own sugar, including Alexander & Baldwin (ALEX), American Crystal Sugar, and Imperial Sugar Company (IPSU).

• Sugar refiners also benefit from higher prices, which increase their margins. In the United States, these include Domino Sugar Corporation and US Sugar Corporation. Foreign refiners include Savannah Sugar Estates (based in Mauritius) and Colonial Sugar Refining (based in Australia).

• Companies that are involved in the production and sale of high-fructose corn syrup, a substitute for sugar, benefit from rising sugar prices.^[7] These companies include Archer-Daniels-Midland (ADM) and Corn Products International (CPO). Furthermore, many companies that depend on sugar for their products (see above) also use corn syrup. This is especially true for beverage companies.

• A large number of foreign companies also benefit from rising sugar prices in the United States. Many foreign governments force sugar producers in their countries to sell sugar at prices similar to those within the United States. Rising US sugar prices consequently raise their margins in the short run. However, since many of these companies are regulated by their governments to sell sugar at prices lower than the costs of production, rising prices mainly help in decreasing their losses. Furthermore, lower US sugar prices potentially help foreign companies in the long-term because they flatten the margins of their US competitors (see pump and dump). These companies include Illovo Sugar and Rajshree Sugars.

[edit] Price Drivers

[edit] Government policies artificially inflate prices

Around the world, sugar is one of the most heavily-subsidized commodities. 80% of foreign sugar market prices are subsidized by their respective governments to match the price of sugar in the United States, a value that is lower than production costs for sugar in those countries.^[4] This practice, called dumping, enables foreign manufacturers to eliminate sugar surpluses and gain market share. In response to price dumping, Congress has enacted legislation (the Farm Bill in 2002) that imposes foreign import restrictions on sugar.^[6] Such legislation helps US sugar farmers compete with foreign producers, but hurts the consumer and US food companies since they have kept domestic sugar prices more than twice as high as world prices.^[1] Therefore, the various political influences on the federal government, such as lobbying by sugar farmers, are a key determinant of sugar prices in the United States.

[edit] Ethanol commercialization increases the demand for sugar

More than 50% of world ethanol production stems from sugar.^[5] Producing ethanol from sugar is more efficient than producing ethanol from corn (the ratio of required input energy is one to two).^[5] Brazil is the leader in this production process, using 60% of its sugar canes for ethanol.^[5] On the other hand, less than 3% of the ethanol produced in the United States comes from sugar.^[5] Commercialization of the sugar-ethanol production process raises the demand for sugar, leading to increases in sugar prices. Whether this commercialization occurs or not depends on oil prices. When oil prices rise, then biofuels become more attractive, elevating the demand for ethanol. For example, in the first half of 2008, sugar prices increased by 22% in response to rising oil prices.^[8]

[edit] Producer cooperatives give US farmers more control over prices

Farmers in the United States have formed cooperatives that enable farmers to own their processing facilities and build them near sugar production sites.^[5] This process of vertical integration also enable farmers in the US to move closer to economies of scale. While the formation of cooperatives decrease processing and transportation costs, they give US farmers more power over the price of sugar.^[5] For example, in 2002, cooperatives controlled 82% of sugar beet production in the United States, giving them significant power over the selling process.^[9] Combined with strict government policies, sugar producer cooperatives have kept sugar prices in the United States two to three times prices within other countries. Cooperatives also play an important role in deciding the course of sugar-to-ethanol commercialization since they have control over initial processing stages.^[5]

[edit] Perceived health effects of sugar decrease sugar demand

Public health concerns regarding obesity, heart disease and diabetes (see obesity and cardiac disease), particularly in the United States, decrease the demand for sugar-based products. As a result, consumers turn towards sugar-free foods as well as sugar substitutes such as high fructose corn starch. From 2005 to 2008, revenues of the artificial sweetener industry grew by around 8%.^[10] The industry is estimated to be worth $3B globally.^[11] In comparison, the market size of domestic sugar is around $2.3B ($900M for cane sugar).^[12]

[edit] Basic macroeconomic trends also drive sugar supply and demand

Macroeconomic trends that affect the prices of sugar include world-wide income and population growth. When more people are able to afford sugar-based foods, the demand for sugar rises, driving up sugar prices. Important regions of such growth are Asia, North Africa and the Middle East.^[8] Sugar consumption in developing countries has grown at around 1.8% per year. ^[13] The price and availability of substitutes in developing countries also affect sugar prices. Sugar substitutes include high-fructose corn syrup, starch and artificial sweeteners.^[8] Many developing countries are consuming more artificial sweeteners in place of sugar as a result of higher prices and health concerns.

[edit] References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} USDA Economic Research Service "Sugar and Sweeteners: Data Tables"
2. ↑ ^{2.0 2.1} "Commodity Outlook 2003: US and World Sugar Markets"
3. ↑ Trading Markets "Sugar: A Sweet Market On the Move"
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9}
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9}
6. ↑ ^{6.0 6.1 6.2} ABARE "Sugar Outlook to 2009-10"
7. ↑ HFCS Facts "Is HFCS sweeter than sugar?"
8. ↑ ^{8.0 8.1 8.2} TM "Sugar: A Sweet Market on the Move"
9. ↑ Rocky Mountain Sugar Growers Cooperative "FUTURE EFFECTS OF THE U.S. SUGAR PROGRAM – IMPACT ON PRODUCER COOPERATIVES"
10. ↑ Food USA "Sugar demand rising at expense of sweeteners, claims sugar industry"
11. ↑ Food and Beverage "Controversial Stevia May Be Wild Card in $3 Billion Sweetener Market"
12. ↑ IBISWorld "Sugarcane Farming"
13. ↑ Food and Agriculture Office of the United Nations "Food Outlook"