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Consumers go sour on the market's sugar


rush
A combination of bad harvests and speculation has sent the price of cane soaring - and
provoked protests and violence in Asia

A worker cuts sugar cane in South America, where environmental incentives have prompted
it to be used in producing ethanol fuel. Photograph: Jamil Bittar/Reuters
Will that be one lump or two? Or, perhaps, none. A sugar rush is gripping the global
commodities market. The price of the world's favourite sweetener shot to its highest level for
29 years this week in a worrying surge that has sparked political strife and street protests in
parts of southern and south-east Asia.
A militant women's group staged a breakfast demonstration outside government offices in the
Philippines on Tuesday, demanding intervention to bring down sugar prices. Protesters
banged utensils at a rally in the Indian state of Bihar, and in Pakistan the authorities have
rationed sugar, prompting violent confrontations as anger spills over at the perceived greed of
producers.
Raw sugar traded on New York's Intercontinental Exchange surged in price by 128% last
year, while white sugar on London's Life trading floor jumped by 123%. In the US markets
on Monday, the price of a pound of raw sugar touched 30 cents for the first time since 1981,
far above the range of 12 to 15 cents prevalent between 2007 and early 2009.
Toiling in a generally low-profile corner of the commodity markets, sugar traders are
suddenly in the spotlight. But the immediate blame for this spike in prices lies in a factor
indisputably beyond human control – the weather. A late monsoon disrupted sugar harvests in
India, while too much rain disrupted supplies in the world's biggest sugarcane-growing
nation, Brazil.
"It was the wettest harvest season here for decades," says Andy Duff, a commodities analyst
at Rabobank in São Paulo. "There was less cane harvested than previously anticipated and the
quality was lower than anticipated."
For the second consecutive year, global supply has fallen short of demand and many nations
with sugar stockpiles are running short. The global financial crisis has not helped, making it
harder for growers to finance outlay on fertiliser and equipment. In South America,
environmental incentives have seen some sugarcane diverted into production of ethanol fuel.
Meanwhile, demand is robust – fuelled by population growth and rising incomes in emerging
markets such as China. In poorer nations, a good chunk of every extra dollar earned is
directed at food.
Population drift to the towns also adds to the appetite for sugar, according to Duff:
"Increasing urbanisation drives changes in diet. It's associated with more consumption of
sugary snacks and processed food."
Analysts at Commerzbank describe the sugar situation as "the perfect storm". In a research
note, the German bank suggests the price still has "immense upside potential" and could even
reach 40 cents per pound – a level exceeded only twice, during sugar crises in 1975 and 1980.
Tom Mikulski, a market strategist at commodities dealer Lind-Waldock in Chicago, says:
"Unless we have a massive jump in production, I don't really see this market breaking any
time soon."
For consumers, the link between commodity prices and supermarket costs is complicated.
Sugar, more than most traded products, occupies a financial niche in which Wall Street and
the high street are worlds apart. To protect European sugar growers, the European Union
routinely keeps sugar prices artificially high – so shoppers in Britain and on the continent are
used to paying a premium anyway.
The US has a similarly protectionist setup, limiting imports to safeguard its own farmers. But
snack manufacturers such as Mars, Hershey and Krispy Kreme have been urging the Obama
administration to raise import quotas, warning that a shortage of sugar could lead to job
losses.
But in developing countries, the price of sugar has historically been lower and the recent
spike in cost has been a shock. A columnist in the Manila Standard Today newspaper
complained this week that a kilo of white sugar in public markets in the Philippines had
jumped in cost from 40 pesos to between 50 and 60 pesos since Christmas. And a kilo of
sugar on the black market in Pakistan, where sugar consumption is among the highest per
person in the world, can reportedly fetch more than a day's pay.
"If you look at the impact, sugar comprises a greater share of the food basket in developing
markets," says Sudakshina Unnikrishnan, an expert in agricultural commodities at Barclays
Capital. "We don't really expect these problems to be a precedent set for developed countries,
which have a kind of artificial system by which prices are set."
Since sugar inflation began to take hold in mid-2009, the news from growers has been
consistently bad. In addition to poor harvests in India and Brazil, smaller producers such as
Mexico, Thailand and Vietnam have come up short. "It's not that demand has grown
extraordinarily this year – it's been growing in line with long-term trends," says
Unnikrishnan. "The problem has been underperformance on the production side – and the big
surprise is that, in spite of price rises, demand has held up."
In an unusual move from Brussels this week, farm commissioner Mariann Fischer Boel
announced that the European Union intends to export 500,000 tonnes of sugar to the global
markets above and beyond its usual quota to try to ease a squeeze in supply. This faced swift
condemnation from other sugar producing nations, which complain that European farmers are
unfairly subsidised. Brazil's sugarcane industry association, Unica, said it was a short-sighted
breach of international trade rules.
Sensing an opportunity, speculators have shown little mercy. Hedge funds have piled into
sugar, aggravating lurches in the price. Blaming speculators, however, would be a cheap shot,
according Jonathan Kingsman, founder of the specialist sugar broker Kingsman, based in
Switzerland.
"The speculators are involved and they'll always be involved, but there are fairly solid
fundamentals to this market," says Kingsman. "There's not enough sugar to go around."
A calming in prices, he believes, will ultimately happen once growers react to the prospect of
higher income and plant more crops: "Price is the best possible fertiliser," he says.