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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Dean Foods Under Scrutiny

Many in the food industry have welcomed the greater activism by the Obama administration into areas like food safety.

But now there is growing pressure to look at some of the anti-competitive practices: Senator Bernie Sanders (Democrat from Vermont) has asked the U.S. Department of Justice to investigate mega dairy company Dean Foods for what he contends are monopolistic practices that harm dairy farmers.

According to the senator, Dean Foods buys approx. 70% of the fluid milk in New England, recording historic profits of $184MM while farmers are scraping by. Dean hasn’t limited its activities to the US, either. Dean recently purchased Alpro, the European soy-based beverage and food arm of Vandemoortele, for €325m. Europe’s farmers want the milk quota increased by 5% to go along with several measures already enacted by the EU government, including reintroducing export subsidies. The US, Australian, and New Zealand governments are angry at this move, saying it runs counter to the G20 agreement to avoid protectionism during the current financial crisis. Protectionism is widely believed to have significantly worsened the Great Depression of the 1930s.

As Dean’s profits have soared, milk prices are tumbling from $19.50 per 100 pounds one year ago to below $11 by June of 2009. Dean’s profits for the quarter shot up from $30MM in 2008 to $76.2MM during the same period. The company denies anything illegal, pointing out the USDA (Department of Agriculture) usually sets milk wholesale prices, and that "supply and demand" are keeping the price low.

The senator is also pressuring U.S. Agriculture Secretary Tom Vilsack to prop up the price paid to dairy farmers. More than the cost of milk is at stake, both in the US and Europe, where dairy farmers have demonstrated in Strasbourg at the EU Parliament demanding action against low prices and deregulation that has hurt farmers while aiding large middlemen.

This blog includes excerpts from a weekly round-up of food industry & food licensing news provided free to Broad Street Licensing Group's clients, and as a paid subscription service (6 months $695; 1 year $1,125).

Too busy to keep up with the news wires & publications about the food business? If you or your company would like to subscribe to our news service, call Danielle Foley at Broad Street Licensing Group (tel. 973-655-0598) and ask for your free sample or click on our website.

I May Be Paranoid But That Doesn’t Mean Someone Isn’t Following Me

In a development that is likely to have some impact on the food industry, the U.S. Senate Permanent Subcommittee on Investigations has released a report that accuses commodity index funds of making large purchases of wheat futures it described as “excessive speculation” resulting in “significant unwarranted costs and price risks.”

Consumers, retailers, foodservice operators and CPG houses have all decried the sharp jump in commodity costs last year, with the subsequent squeeze on prices and margins. All sides pointed fingers at the others in claiming “price gouging,” even as all sides insisted they were only passing along partially their rising costs. Senator Carl Levin of Michigan is chairman of the subcommittee whose 247-page report is entitled bluntly Excessive Speculation in the Wheat Market.

The senator said that “In the last three years, speculators have spent billions of dollars on commodity indexes, and the financial firms selling those index instruments have purchased billions of dollars in commodity futures to offset their financial risks, creating price disruptions for producers and consumers.” The subcommittee examined trading records from the Chicago Board of Trade (now part of the Chicago Mercantile Exchange), the Kansas City Board of Trade, the Minneapolis Grain Exchange, the Commodity Futures Trading Commission (C.F.T.C.) and others to track the rise and fall of wheat prices.

Commodity index traders increased their holdings from about 30K wheat contracts in 2004 to 220K by 2008. By 2006, commodity index traders held 35%-50% of all outstanding wheat futures contracts on the Chicago exchange alone. The practical result of this activity was the average basis (the gap between futures and cash prices at a given location) at contract expiration grew from about 13¢ per bushel in 2005 to 34¢ in 2006, 60¢ in 2007, all the way to $1.53 by 2008, a 10x increase in just four years.

These “unwarranted” increases “imposed undue burden on those involved all along the wheat marketing chain, from producer to consumer.” Costs included higher margin calls due to higher futures prices, failed hedges and disruption of normal pricing patterns and relationships according to the report. The report also criticized the C.F.T.C. for waiving position limits for commodity index traders which “facilitated excessive speculation in the Chicago wheat futures market” and was “inconsistent with the C.F.T.C.’s statutory mandate to maintain position limits to prevent excessive speculation.”

The subcommittee, in a move sure to stir opposition from the financial community, is recommending the C.F.T.C. drop existing waivers and reapply standard position limits, potentially imposing other measures if that doesn’t solve the problem.

This blog includes excerpts from a weekly round-up of food industry & food licensing news provided free to Broad Street Licensing Group's clients, and as a paid subscription service (6 months $695; 1 year $1,125).

Too busy to keep up with the news wires & publications about the food business? If you or your company would like to subscribe to our news service, call Danielle Foley at Broad Street Licensing Group (tel. 973-655-0598) and ask for your free sample or click on our website.