Chasing a sugar rush: global deficit drives price rises

Drought, speculation and biofuels are pushing the price to new peaks, says Sean O'Grady

The monsoons arrived late in India this year. Meteorologists say it could be because of the onset of another El Niño, the disruptive weather system that has caused increasing damage to life, crops and property throughout the tropical world. Climate change is often said to be behind that.

For India's 235 million farmers, who depend on the rains to turn their cracked, parched land into a fertile, lush source of sugar for their nation and the wider world, the cause for the failure is rather less crucial than its effects, which have been ruinous to many and have proved expensive for India's economy. The driest summer in 83 years – with rainfall so far 25 per cent below normal levels – has been a bitter blow which has helped to push the world price of sugar to heights not seen for decades.

Yesterday, the price breached the 21 US cents per pound mark for the first time since 1981. It is up 80 per cent this year alone, and many believe it is set to go way higher. The legendary investor Jim Rogers has suggested it might reach the all-time peaks it hit in the 1970s – 70 per cent higher than it is now. Speculation has also started to play a part.

Eugen Weinberg, an analyst at Commerzbank, points out that net long positions on sugar contracts traded on the New York Board of Trade are running at four to five times their normal levels, at more than 200,000 tonnes. "This situation hasn't been observed in years. I think we are seeing a combination of very important fundamental factors and the price being driven by speculative interest," he said, adding that hedge funds, cash-rich and looking as ever for profit opportunities, might have developed a taste for sweet things.

The International Sugar Organisation agrees. "There is a lot of speculation there," said Leonardo Bichara Rocha, an economist with the ISO in London. "This year's deficit – the difference between supply and demand – is running at 7 to 8 million tonnes, and next year it will be between 4 and 5 million tonnes. India has seen a massive drop in production. The harvest in Brazil has been good, though they have had heavy rain there. In China there have been weather problems, but the issue there and elsewhere is the lack of real investment. Sugar is not a lucrative crop compared with using the land and people to make consumer or industrial goods. Also, there is a shortage of water in China and no new land to exploit for sugar production." He said it might take between 18 months and two years for supply to respond.

There is a third factor as well, rather closer to home. This October sees the European Union end its programme of price and production cuts in marginal sugar beet-growing areas such as Ireland and Spain. For four years, the EU has been paying member states to "renounce" their sugar production quotas, and the programme has had the desired outcome. The cumulative effect of this liberalisation has been substantial – a reduction of 4 million tonnes of sugar coming to the world market over the period – about half the current shortage. As the EU's surplus has disappeared, that too has raised the world price.

So where does that leave the price of a bar of Cadbury's Dairy Milk or a can of Coke? The answer is pretty much where they were. The EU and the US are still extremely regulated markets, so the world price of sugar has relatively little impact on their activities. America's sugar producers, who have got used to making the best of things in a part of the world not best suited to cultivating sugar, have been looked after through a complex arrangement of tariffs, quotas and subsidies by the federal government almost continuously since 1816. Despite the long-running attempts by Brazil to use the Doha round of trade talks to break into the US market – especially America's burgeoning ethanol/biofuel demand – the US sugar lobby seems like to enjoy the taste of economic isolationism for some time to come.

In the longer term, as the EU moves from being a surplus nation to becoming a net importer (sweet-toothed Europeans are the world's second-biggest consumers of sugar) the price of imported sugar, that is the world price, will become increasingly relevant. So we ought to expect to pay more for our dolly mixtures and ice creams in future. That is a while away yet, however. Even with the reforms enacted so far, the majority of the price of processed foods – even the sweetest ones – do not bear too much relation to that of sugar, because labour, capital and other ingredients play a larger part. At Cadbury's, for example, sugar is third on its list of key raw materials behind cocoa and milk. The price of cocoa has been rising almost as rapidly as sugar over the past year – by more than 30 per cent – but the continuing weakness in dairy prices is counteracting that.

Moreover, the world's confectionery manufacturers also have the perverse historical advantage that, during a recession, shoppers seem to enjoy escaping their woes by buying inexpensive treats such as chocolate (a similar pattern was observed in the 1930s, when many of today's favourites – such as Kit Kat, Aero and the Mars bar – were invented). Global food producers more exposed to the sugar price outside protected Western markets, such as Kellogg and Kraft, will be more exposed to a profit squeeze from higher input costs. Britain's major sugar concerns – Associated British Foods (ABF) and Tate and Lyle, seem set to gain from the sugar rush. ABF has been shifting production out of the high-cost EU and towards places such as South Africa, points of Warren Ackerman of Evolution Securities. He adds that Tate & Lyle, which does not produce sugar beet in the EU but relies on cane from outside the union, will potentially benefit from a switch to alternatives to sugar – sucralose and fructose sweeteners.

For now, the winners and losers from the high price of sugar are easy to identify. Nations where sugar production is holding up comparatively well, and where production accounts for a large portion of GDP – such as Brazil and Mauritius – will gain enormously. Others, such as India and Guyana, will see a loss as they are forced to import their usual staple from rivals. Of course, the winners can just as easily turn into losers, and the price of items from tomato ketchup to petrol will be affected. The ups and downs of the oil market will add to the volatility as sugar becomes a more important biofuel. Indeed, the only place in the world seemingly immune from the transformation in the sugar market seems to be America, that well-known home of free markets.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
Powdered colors are displayed for sale at a market ahead of the Holi festival in Bhopal, India
techHere's what you need to know about the riotous occasion
Arts and Entertainment
Larry David and Rosie Perez in ‘Fish in the Dark’
theatreReview: Had Fish in the Dark been penned by a civilian it would have barely got a reading, let alone £10m advance sales
News
Details of the self-cleaning coating were published last night in the journal Science
science
News
Approved Food sell products past their sell-by dates at discounted prices
i100
News
Life-changing: Simone de Beauvoir in 1947, two years before she wrote 'The Second Sex', credited as the starting point of second wave feminism
peopleHer seminal feminist polemic, The Second Sex, has been published in short-form to mark International Women's Day
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable