Sugar Prices on the Decline
At ~10.5 cents/pound, sugar prices plummeted to a six year low in August 2015. With the global market already oversupplied, the bumper harvest in Brazil — the world’s largest sugar producer and exporter — will only further strain global prices. Worse, between January and July 2015 the Brazilian real depreciated ~25% against the greenback giving Brazilian producers an incentive to sell in the global market — essentially forcing them to export sugar the market does not want.
Between 2010 and 2015, India — the world’s second-largest sugar producer — consistently produced more than 24 million tonnes of sugar annually. Currently, the domestic industry is facing a payment crisis and the government is considering barter trade to offload surplus stock in order to pay sugarcane famers what they are owed — an estimated $2.16 billion.
“Sugar is available at ~13.6 cents/pound in the world market, while it is costs ~14.3 cents/pound in the domestic market. If we export more, global prices will further decline. Exports via the normal route at current rates are not viable in view of the sharp fall in global sugar prices.” – Ram Vilas Paswan, Food Minister, India (August 2015)
While global sugar prices have been on a downslide (figure 1) since July 2011 (with intermediate aberrations), the aforementioned factors accelerated the pace. Amid this backdrop, The Smart Cube analyzes the impact on industrial buyers of sugar.
Food & Beverage Companies: Winning the battle, losing the war
Prolonged low sugar prices have positively affected the margins for food and beverage companies. Sugar generally accounts for ~10% of materials purchased by food and beverage companies. So, with other factors remaining constant, declining sugar prices positively benefits buyers. David Turner, global food analyst at Mintel, agrees, “On that [US prices remaining higher than global ones] you would say that US confectioners have a point. But to say you are unprofitable now is perhaps disingenuous because sugar prices are lower now.” (April 2014)
Companies such as Hershey’s, Tootsie Roll, Kellogg’s, General Mills, Tyson Food, and Kraft Food, use forward contracts to cover price volatility. These strategies protect against price increases, but limit the ability to take advantage of unforeseen price breaks.
Consumer preferences also influence sugar usage. For instance, millennials increasingly avoid sugar due to its negative health effects — obesity is linked to high sugar intake. This has prompted carbonated soft drinks (CSDs) manufacturers, such as Coca-Cola and PepsiCo, to adjust their product offerings. In 2015, Coca-Cola launched Fairlife — a premium milk marketed as a lifestyle product — as consumers cut down on CSDs — CSDs constitute ~69% of Coca-Cola’s global revenue (the corresponding share for the US is ~24%). PepsiCo’s exposure to CSDs stands at 31% of global sales (16% of US sales comprise CSDs). This is based on a report published in March 2015. Food companies, such as Nestle and Danone, are also cutting back the sugar content in their products. From 2000–2013, Nestle claims to have reduced table sugar content in its products by ~32%. While declining sugar prices will benefit large industrial buyers in the short run, the benefits may fizzle out over a longer period, as sugar-laced foods fall out favor with consumers.
Win Some, Lose Some
The cost of protecting sugar is buried deep within the supply chain and appears to go unnoticed — most US consumers are unaware of the $0.40/pound tax paid on sugar. US protection on sugar impedes the Trans-Pacific Partnership (TPP) — a proposed multilateral FTA between select countries in Asia Pacific and North America. If TPP becomes operational, Australia — which exports sugar at prices lower than the global market — will have better access to the US market. This, along with the existing decline in sugar prices, will further lower the cost of producing food, beverages and candies, with industrial buyers and consumers likely reaping the benefits. On the other hand, subsidies and government support will come to the aid of farmers and sugar mill operators across major sugar producing regions to offset the adverse effects of the price drop. In developing economies, sugar is too important a commodity to be left on its own.
Read our previous publication on sugar here.