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The Future of Food Prices: Sugar


Will the run of bad climatic luck continue, or will supply come back into line with demand? This spring, April showers or the lack of them will be key.

Sugar prices have become so volatile in recent months that key traders and producers, who met at the end of February in the Dubai Kingsman Sugar conference, a key industry event, are looking into the possibility of applying "circuit breakers" similar to those that already exist in the oil commodities market.

Sugar prices have been whipped into a froth by weather-related disasters like the Yasi tropical cyclone – which caused hundreds of millions of dollars worth of damage when it tore through Australia's sugar cane plantations in early February – not to mention unusually heavy rainfall in Brazil, the world's largest sugar supplier, and an extended drought in India, the world's second largest producer and number-one consumer.

Sugar prices doubled in 2010, reaching a 30-year high this February 2, when they spiked at 36.08 cents per pound for raw sugar on ICE Futures New York, and $857 a metric ton for refined sugar in London.

But it isn't just El Nino/Global Warming/The End of Days that's been making sugar so jumpy. The industry analysts and insiders looking to impose circuit breakers on the commodity blame runaway automated and algorithmic computer trading, like the one that caused a one-second "flash crash" back in May 2010.

Another factor in the rise of sugar prices: the sweet stuff is a prime element in the creation of ethanol, the controversial fuel alternative that tends to rise along with any ongoing oil fears. Throw in price-inflating government subsidies of the industry to further complicate the matter.

The soar in sugar prices has affected many major US firms, mostly those involved, of course, in the production of sweets and snacks, such as Hershey Foods (HSY), Kraft Foods (KFT), Nestle (NSRGY), H.J. Heinz (HNZ) and the Campbell Soup Company (CPB). Other major players affected include the beverage kings Coca Cola Company (KO) and Pepsico (PEP), who use high fructose corn syrup domestically, but still rely on cane and beet sugar internationally. Some manufacturers have already begun introducing smaller sizes in their items – healthier for consumers' waistlines and the firms' bottom lines, perhaps, but not exactly popular.

As far as predictions go: look to the weather. Will the run of bad climatic luck continue, or will supply come back into line with demand? This spring, April showers or the lack of them will be key. Sugar supplies look like they're trending to recovery, with new supply predicted to outstrip demand in the third quarter of the year . But, as analyst Jonathon Kingsman told the Dubai sugar conference attendees, if the "weather misbehaves, there is no room to maneuver, and prices could explode."

With so much riding on something as unpredictable as rainfall, the day-to-day volatility will remain for now -- as James Cassidy, head of sugar trading at the New York brokerage Newedge USA also told the Dubai conference: "We're at a pause in the market…The biggest spikes happen during a pause."
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