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Food Industry Blames Fracking for Guar Gum Bubble

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First it was the dot-com bubble. Then it was the housing bubble. The gold bubble has been expanding (or not, depending on one's personal attachment to the barbarous relic) for quite some time.

And now, ladies and gentlemen, we find ourselves in the midst of a bubble no one saw coming:

Guar gum.

According to Jeff Gelski of Food Business News, "The oil industry’s increased use of guar gum has driven up its price, leaving food and beverage processors struggling to find supply of the ingredient used in such applications as ice cream and tortillas."

Writes Gelski:

Prices of food grade guar gum, normally below $1 per lb, have risen above $2.50 per lb because of the oilfield industry’s use of guar gum, according to a July 28 “Hydrocolloid News” e-mailed report from IMR International, a hydrocolloid consulting company. According to the report, buyers of food grade guar gum are facing prices of more than $5.75 per kilogram ($2.61 per lb), delivery times of four to six months and, in some cases, demands to pay in advance.

“The guar situation has reached dire circumstances,” the report said. “Unless there is a paradigm shift in technology for the oilfield industry or a shift in policy away from hydraulic fracturing, there is no end in sight for the current guar shortage. In the meantime, both producers and users of food guar are scrambling to find substitutes or extenders to guar.”

The oil industry always has used guar gum and started using a much larger volume in 2010 because of horizontal drilling techniques in shale gas and oil formations, said Dennis Seisun, founder of San Diego-based IMR International. Guar gum comes from plants, most of which are grown in India and Pakistan, he said.

“Basically the oil people are big buyers, big spenders,” he said. “They go to the guar suppliers and say, ‘What’s your price, and give me all you got.’ The food industry is getting left behind.”

When will the parabolic guar market come back to earth?

“It’s hard to tell,” Chris Freeman, functional systems and hydrocolloids product manager in the Americas for Cargill Texturizing Solutions, tells FBN. “It’s uncharted territory. We’ve never seen the guar market like this.”

That was two weeks ago. In the meantime, the guar outlook has worsened.

From India's Business Standard:

The area under guar seed cultivation in Rajasthan this season stands at 2.76 million hectares, compared to 3 million hectares last season. In Haryana the area under guar has come down from 256,000 hectares registered last year to 215,000 hectares this year.

According to Rajesh Kedia of guar exporting concern Jai Bharat and Chemical Limited, the fall in acreage "was due to insufficient monsoons in Haryana and also an increase in the area under cotton cultivation (due to higher remunerative prices for cotton last season) at the cost of guar seed in some pockets of Haryana."

Yes, the guar market is undeniably sexy and makes for great cocktail party chatter. But be careful -- when the guar gum bubble bursts, it's not gonna be pretty.
POSITION:  No positions in stocks mentioned.