Sugar Prices Reflect a Commodity Rife with Regulation

Trade restrictions on sugar by the U.S. and other nations have led to short supplies, doubled prices, and angry American food companies

By Esmé E. Deprez

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Editor's Note: After publication on Aug. 21, a representative of the U.S. sugar industry disagreed with our description of sugar price increases. He pointed out that the price U.S. food companies pay is for wholesale sugar, which has risen by 50% since January 2008, not world futures prices, which as we pointed out had doubled. This story has been updated to reflect that, along with additional comments from the sugar industry, the U.S. Agriculture Dept., and others.

Lufkin, Tex., a small city north of Houston, has been the home of family-owned Atkinson Candy since 1932. As sugar prices reach highs not seen in almost 30 years, that's about to change.

Sugar accounts for some 60% of the ingredients used to make Atkinson's candies, such as its signature Chick-O-Sticks and Long Boys, says Eric Atkinson, the company's president and the grandson of the founder. Because the U.S. Agriculture Dept. places quotas on the amount of sugar that can be imported (except those from Mexico, which are unlimited under NAFTA), the company has been forced at times to pay double what its international competitors pay. And with prices for U.S. wholesale refined sugar increasing by almost 50% since the beginning of 2008—from around 24¢ a pound in January to more than 35¢ a pound in July, according to the Agriculture Dept.—Atkinson has decided he has no choice but to shift some operations to Guatemala, where he can take advantage of lower sugar prices. According to a USDA commodity report published in March, the Guatemalan Sugar Assn. set wholesale refined sugar for 2009 at 26¢ a pound. To be sure, manufacturing candy in Guatemala is cheaper not just because of the lower price of sugar—labor and land, for example, are less expensive as well.

"There's still equity in 'Made in America,' but costs have been going up precipitously and customers have taken a hard line—they won't accept an increase in prices," says Atkinson. "If it was only about labor I could still be here—it's the price of sugar that we're having to leave for." Atkinson argues that "protectionist" measures intended to aid U.S. sugar growers and producers end up hurting domestic food and confectionery companies. At least 30 workers of his 225-member staff have lost their jobs, Atkinson estimates, as he's lost business to lower-cost competitors. "We've been between this rock and hard place for 25 years," he says. "When you don't let the market control the commodity, this is what happens."

American food companies have railed against the Agriculture Dept.'s quota policy for decades. In response to the recent prices and concern over "unprecedented shortages," a group of large U.S. food companies, most much larger than Atkinson Candy, sent a letter on Aug. 5 imploring Agriculture Secretary Thomas J. Vilsack to boost the sugar quotas. The companies, including Conagra Foods (CAG), General Mills (GIS), Hershey (HSY), and Kraft Foods (KFT), warned that failure to import more sugar, in order to secure future supply, could lead to higher consumer prices, job cuts, and "distorted" trade patterns.

The Agriculture Dept. contends the domestic market is not in danger of a shortage in the near future. "At the current time, it appears that the domestic market will be adequately supplied through the end of the marketing year, which ends Sept. 30, 2009, at which time both new domestic sugar production will be available and imports under the 2009-10 Tariff Rate Quota will begin," said Undersecretary Jim Miller in a statement.

American sugar lobbyists, meanwhile, insist that food manufacturers are simply playing politics to depress domestic farmers' prices. "Crying wolf is nothing new for food manufacturers' lobbyists," says Phillip Hayes, a spokesman for the American Sugar Alliance, which lobbies for the domestic sugar industry. "They've been preaching doom and gloom about sugar supplies for decades…in hopes of pressuring the USDA to increase imports so sugar prices will fall further and they can boost their already healthy profits." Nicholas Fereday, a senior economist at LMC International, an independent agribusiness consultancy and research firm, adds: "[The food companies] could simply be using the current trend in the market to leverage their position."

Governments Restrict Trade

Distorted trade patterns on the world sugar market are also nothing new. Though it doesn't generate the headlines of oil and gold, sugar can be far more volatile. "Sugar is the commodity the most protected and the most meddled with by governments," says Mike McDougal, senior vice-president for the Brazil desk at Newedge, a global brokerage firm.

The Agriculture Dept. estimates the world market will produce some 160 million tons of sugar from 2009 to 2010. But many of the top-producing countries enforce trade barriers and quotas that skew prices, supply, and demand internally and globally. The price of the most active world raw sugar futures contract soared from $11.70 on Oct. 24, 2008, to $22.97 on Aug. 12, 2009. That 96% increase happened much faster than the time it took the price of gasoline in the U.S. to double to more than $4 a gallon last summer.

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