Bitter Fight Over Sugar

Despite the scoffing of most experts, several large CPG companies have warned the Obama administration they will raise prices drastically and lay off workers if the government doesn’t relax restrictions on tariff-free imports of sugar.

Kraft Foods Inc., General Mills Inc., Hershey Co., Mars Inc. and Krispy Kreme insist their profits are in jeopardy— oops, I meant to say they see shortages unless regulations are relaxed that aid the domestic sugar industry. Sugar beet farmers in the Northern Plains and cane-sugar farmers in the South have used lobbying and political muscle to prop up U.S. prices to more than 2x the world level.

Adding to the problem: sugar prices, both in the U.S. and globally, have soared in the past year and show no signs of declining.

Price increases have the most direct impact on candy and other sweets, but sugar is ubiquitous in the processed foods industry. Gonnella Frozen Foods, for example, has raised prices for its rolls, hamburgers and hot dogs because of sugar used in the dough. Sugar makes up 1%, 6% and 8%, respectively of costs for ConAgra Foods Inc., Kraft, and Hershey.

Major sugar exporters like Brazil and India are barred from selling their sugar in the U.S. without high import tariffs. One big factor in the rise in prices is the diversion by Brazil (the world’s largest sugar producer) of large amounts of its crop to making ethanol, much as ethanol production has driven corn prices up here. Getting congressional buy-in for raising the amount of tariff-free sugar (50% demanded by the food industry) will run square into Rep. Collin Peterson (Dem., Minnesota), chairman of the House Agriculture Committee, and whose district is a major beet-sugar producer. The American Sugar Alliance, the trade group for cane and sugar-beet farmers, is “absolutely opposed” to relaxing sugar-import quotas, since it would lower prices paid to growers here.

The association claims each one-cent drop in sugar prices costs U.S. farmers $160MM in revenue. The lobbying group also points out allowing more foreign sugar into the U.S. will likely not show up as price reductions for consumers. So far, the large soda manufacturers Coke and Pepsi (who mostly use high-fructose corn syrup) have shied away from this fight.

Most recently, the American Bakers Association has come out in favor of lifting the quota numbers. The trade association cited the historic high prices of sugar reached this past February as evidence of how the quotas hurt consumers. Recent domestic raw sugar futures stood at 31.1 cents/lb, down 25% from the peak of 42 cents this past Winter, but still more than 50% above the 2000-07 average of just under 21 cents. The current Tariff Rate Quota (TRQ) is 1,139,195 tonnes (1,256,000 short tons).

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