Not So Sweet: Sugar's Price Is Skyrocketing

The soaring price of sugar has given U.S. food producers a sour feeling. They're warning that a sugar shortage might be in store unless the government lowers trade tariffs on sugar. That would allow them to buy it from overseas for cheaper. I wouldn't count on it.

First, how bad is it? See the following graphic from the Economist below. It compares sugar prices to general food prices. (I did not create it, so don't ask me why a horse eating sugar cubes was the best it could do within the sugar theme.)

So what's caused this drastic increase? It depends who you ask. Here's the Economist's take:

In the 2007-08 season India's output was 28.6m tonnes of sugar, but this year production is estimated to fall to 16m tonnes. Indian farmers planted less sugarcane last year after sugar prices fell, partly in response to a ban on exports. A weak monsoon also threatens this year's production.

The Wall Street Journal blames a different culprit:

Prices are up because the world is consuming more sugar than farmers are producing. One big factor: The world's largest sugar producer, Brazil, is diverting huge amounts of its cane crop to making ethanol fuel. Likewise, the food industry has complained bitterly in recent years about the U.S. ethanol industry's ravenous appetite for corn, which helped push up prices for that key ingredient too.

The right answer is probably that increased consumption, India's decrease in production and Brazil's cane-based ethanol all had a hand in the price increase. There are likely other factors as well, as a commodity like sugar is subject to a broad host of potential market shocks.

So what can we do? Easy, the government can lift tariffs on sugar. Sure, sugar will still be more expensive than it was a year ago, but those tariffs allow big sugar producers in the U.S. to demand an even higher price that what U.S. food producers would pay in a free global market.

That, however, is not likely to happen. There are few lobbies as strong as big sugar. Its presence has been felt in Washington for several decades. Even if sugar prices continue to remain high, unless a tangible shortage really develops, I would not expect to see any relief through lowering tariffs. Big sugar's influence in Washington is just too great.

Could a shortage really happen? The Wall Street Journal provides this lovely chart. (In which it more appropriately uses donuts, not a horse, to maintain the sugar theme.)

If there is a shortage, and the government won't lower tariffs, I would expect to see even more widespread use of high fructose corn syrup if sugar prices stay high. Corn prices have not increased nearly as dramatically as sugar over the past few years. Here's a chart of corn futures from tradingeconomics.com.