Sugar Supply vs. Sugar Prices: An Update

Imagine a United States temporarily void of sugar supply... not too sweet of a thought.

The Wall Street Journal (WSJ) reported yesterday that some of America's largest food companies feel this could be a very real situation.

They foresee big problems for the American sugar market: an effect of the current global sugar market and US import policy.

At present, current import quotas for the US limit the amount of tariff-free sugar that can be imported each year.

In a collaborative effort, some of these large food manufacturers have drafted a letter about sugar supply [.pdf] to Thomas Vilsack, US Agricultural Secretary, pleading for the current administration to ease import restrictions on the commodity.

In the letter, they fearfully project that the US "will end the next fiscal year with less than 13 days' worth of sugar on hand," which could put the nation at risk to "virtually run out of sugar."

They reinforce their position by presenting potential effects:

"Without a quota increase, consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted."

According to the WSJ,

"...the letter is the latest salvo fired in a long-simmering dispute between US food companies and the sugar industry over federal policy that artificially inflates the domestic price of US produced sugar in order to support the incomes of politically savvy [sugar farmers].

"Most years, the price food companies pay for US sugar is twice the world level."

In a previous post about sugar prices, the issue is pressing because both US and world sugar prices, as well as sugar futures, have risen to record highs this year.

Heavy rains have affected Brazil's crops and drought conditions have affected India's crops.

Brazil is also rerouting much of it's cane crops to making ethanol fuel.

In addition, India has emerged as the largest sugar consumer, sparked by the growing population.

The WSJ states, "Prices of sugar futures contracts have risen 95% so far this year, hitting a 28-year high in recent days."

For the US, American sugar supplies are dwindling and expected to "drop 43% by September 2010."

Well, what do the US sugar farmers have to say about this?

According to America's sugar farmers, the idea of "virtually running out of sugar" is just hype by big business to increase profits.

For most food manufacturers, sugar costs account for a very small percent of input costs, according to a recent report by Andrew Lazar, analyst for Barclays Capital.

The report states that ConAgra Foods, Inc., for example, spends about 1% of input costs on sugar. Hershey, is on the high end of the spectrum, but still only spends around 8%.

A spokesman for the American Sugar Alliance, Phillip Hayes, speaks on behalf of US farmers. He states that US farmers are "absolutely opposed" to easing import restrictions on sugar, projecting that the ease would cause prices received by US farmers to decrease, causing problems for the US sugar farming scene.

Jack Roney, the American Sugar Alliance's chief economist, explains that,

"...each one cent drop in the price of sugar costs US farmers about $160 million.

"We take offense at any notion of reducing producer prices for sugar having any benefit for consumers, because historically we've never seen any pass-through of lower commodity prices of ingredients.

"It really is a profit-increasing opportunity for user companies."

How has the current administration reacted to this situation?

So far, with caution.

According to the WSJ, the Agricultural Department released a statement saying it will, "continue to review market conditions to ensure... an appropriate safety net for growers," as well as, "a stable supply environment."

In a sugar-industry meeting early this month, Agricultural Secretary, Jim Miller, "wouldn't rule out a quota increase in the future," but is aware of the political ramifications from sugar farmers who have a "big voice in Washington."

So, to recap in a few sentences:

One side feels that these import quotas on the sugar commodity are necessary to protect American producers, which will ultimately benefit the American market.

The other side feels that the import quotas on sugar are detrimental to American food industry, and the expense will ultimately be incurred by the consumer.

What's the solution to this issue of protectionist economics surrounding sugar?

Guess it just depends on which economic ideals resonate best with you... and how much you're willing to pay for a chocolate bar.