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A worker cuts sugar cane
A worker cuts sugar cane

Commodities

Why sugar's high will leave you low at the gas pump Add to ...

Get ready for the sugar shock.

Raw sugar futures have almost doubled this year amid fears of a shortage, which could lead to slightly higher prices for candy but also a spike in the price of ethanol.

Much of the rise in sugar prices has come in just the past few weeks as drier-than-normal weather in India, the world's largest consumer, threatens to leave production there far short of demand.

Those with candy cravings might pay a little more for their fix butanalysts expect that sweets sellers will try to eat the increased costs rather than raise prices significantly in a tough economy. The bigger impact may be felt at the gas pump, where the sugar shortfall is likely to drive up the cost of ethanol, increasingly used as a substitute for gasoline. About 60 per cent of the world's ethanol is manufactured from sugar.

Coming as oil prices top $70 (U.S.) a barrel, it's a double dose of pain for motorists.

"As far as something having a direct jolt on the consumer, you're probably more likely to see it at the gas pump because of the ethanol," said Sterling Smith, a commodity analyst at Country Hedging Inc.

India has the world's biggest sweet tooth, and consumes more than 22 million tons of sugar a year. (Canada consumes under two million.) Most years, India produces all it needs at home.

This year, however, India is facing a drier monsoon season that's wilting crops. On top of that, many farmers shifted to other crops after a plunge in the price of sugar last year.

By some estimates, India's production could decline to only about 14 million tons. Inventories are already largely gone, leaving the country on the verge of becoming the world's largest sugar importer.

The result is that the world is short almost eight million tons this year, according to the International Sugar Organization.



Sugar is still 70 per cent below its all-time high, and not many things in life are 70 per cent below what they were in 1974. Sugar has a wonderful future. Jim Rogers


Brazil, the only country with enough production to meet India's massive demand, has the opposite problem. There, it's been too wet.

Brazil currently uses most of its sugar to produce ethanol, but it may decide instead to sell to India because sugar for consumption fetches higher prices than sugar for ethanol, which would exacerbate the ethanol pinch.

"Sugar is certainly going to go much, much higher during the course of the bull market," Jim Rogers, a long-time commodity bull who is chairman of Rogers Holdings, told Bloomberg News in a recent interview. "Sugar is still 70 per cent below its all-time high and not many things in life are 70 per cent below what they were in 1974. Sugar has a wonderful future."

So far, the hit to candy lovers has been muted - nothing like the rise in sugar.

"It's something that will probably get absorbed at the retail level. It's going to mean a little tighter margins for Wal-Mart, a little tighter margins for Hershey before they raise the price of a candy bar a nickel," said Mr. Smith, the analyst.

Froot Loops cereal is more expensive after Kellogg boosted prices in January, and Vancouver-based Purdy's Chocolates just put in place a price increase because of higher costs for sugar and cocoa.

"We try to buy when the prices are the best for us but we did have to have a very slight price increase this year," said Samantha Bahrini, national marketing co-ordinator at Purdy's.

However, if speculators continue to pile into the sugar market and exacerbate the shortage, there are warnings from an association of big users that the United States "will virtually run out of sugar."

Meanwhile, Egypt is temporarily dropping duty on sugar to keep prices down during the Muslim holy month of Ramadan.

Mr. Smith predicts the pinch could spread far beyond the snack bar and the gas bar.

A shortage of sugar will prompt ethanol makers to use more corn as feedstock, driving up corn prices. That will make corn too expensive to feed to pigs and other animals, which could prompt a surge in prices for other grains for feed, hurting everyone from hog farmers to bakers.

"This is going to have an effect on a lot of things," Mr. Smith said.

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