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Issue Date: Vol. 46, No. 3, March 2006, Posted On: 3/26/2006

Sugar Prices Leave Bitter Taste For Many In Candy Arena

Hank Schlesinger
NEW YORK CITY — The news isn’t quite so sweet these days when it comes to sugar. The price of the sweet stuff has continued its near-historic rise on the world commodities market, sending tremors throughout the confectionary industry. According to the United States Department of Agriculture and commodities analysts, the price of sugar is now at its highest level in more than a quarter century. For comparison, sugar sold for approximately 4.5¢ a pound on the world market in 1999, while today it is 19¢ a pound.

Experts cite a number of factors, including weaker-than-expected sugar crops in Brazil and Thailand, and the crop-reducing effects of Hurricane Katrina. Other factors, some unexpected, are also serving to increase prices. For instance in Brazil, the world’s largest sugar producer (accounting for some 20% of the world’s supply and 38% of world exports), nearly half of its crop is being diverted for conversion to ethanol as an alternative transportation fuel. Today it is estimated that 40% of Brazil’s cars use ethanol, a trend that is expected to grow in the coming years, and may accelerate if oil prices remain high.

This is not simply an "American problem," stress analysts who follow commodity prices. The impact of increased sugar costs has been felt globally. According to USDA estimates, the world’s sugar production for 2005 through 2006 will total some 144.2 million tons, an increase of 3.3 million tons. However, that number is offset by world consumption of 142.8 million tons, which is 1.7 million tons higher than the previous year. While experts debate the exact numbers, European sources indicate that global consumption now exceeds production by approximately one million tons.

Another factor said to be responsible for the jump in prices is further speculation in the commodity markets. Once a highly specialized field, the uncertainty in the marketplace has made sugar a target for speculation among hedge funds and other investors.

In the long term, experts, including those at the USDA, point to significant developments that should cause prices to stabilize and decline, including increased production and exports. Brazil, for one, is slated to open between 40 and 50 new mills by 2010. However, in the short term, experts say prices should hold at or near record highs in what has been termed by some as the "Sugar Rush."

In most cases, higher prices can be passed along to consumers making purchases through traditional retail channels. However, higher prices represent an ongoing problem for both manufacturers and operators in bulk vending. Locked into the 25¢ price point, operators are unable to increase their vend prices incrementally. At the start of the price run up, manufacturers unwilling to speak on the record expressed concern. That concern has only grown with the price increases over the past few months.

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