For the better part of a year, I’ve received phone calls from farmers who want to discuss sugar prices.
As their lender, the cane growers want to make sure I understand the financial dilemma they are facing with high input costs and raw sugar prices hovering near or below forfeiture range (the level where it no longer makes financial sense to sell a crop).
These folks want to repay their operating loans in a timely manner, but more and more, the farmers we represent are struggling to make it work.
Since the 2005 hurricane season, the challenges facing Louisiana’s sugar growers are unlike any I’ve seen in more than 26 years in the lending business. From natural disasters to plummeting sugar prices and cost spikes for fuel and fertilizer, a perfect storm is forcing some out of business.
Seeing neighbors go under is never easy, but it’s even more difficult when you’re reading headlines about good times on the other side of the equation.
Prices & Costs
For example, we’ve recently seen reports about Hershey’s posting a 20 percent increase in profit during the first quarter.
They’re not alone. The National Confectioners Association said last year, “Not only is confectionery a large product category at $28.2 billion in retail sales, it is a high profit category. Margins average more than 35 percent for the category.”
I don’t fault Hershey’s or any other food manufacturer for turning a profit—after all that’s why people go into business. But driving suppliers into the ground to pad profits is bad business.
Last summer, the USDA increased sugar imports by 300,000 tons and producer prices for sugar began to drop.
Nonetheless, food manufacturers stepped up their months-long campaign that fall to pressure the USDA to increase sugar imports even more—by as much as 1,000,000 tons or roughly 10 percent of the U.S. market.
Food companies hoped to send ingredient prices even lower while many simultaneously increased processed food prices at the grocery store.
Market Observations
Luckily, the USDA ignored this import increase request and adhered to the 2008 Farm Bill, instead letting the market take shape throughout the year. As market conditions materialized, it became obvious that sugar supplies were more than adequate.
In fact, since September 2008 when food manufacturers intensified their lobbying efforts, the government’s projections about the nation’s sugar surpluses (stocks-to-use ratio) grew from 4.6 percent to nearly 12 percent.
This was a result of more Mexican sugar than expected and higher yields in the U.S. crop.
Most market observers today feel that the U.S. sugar market is in balance, a sharp contrast to how the market would have looked like if the USDA had granted the industrial sugar users’ 1,000,000-ton request.
Under that scenario, sugar surpluses would have ballooned to 22 percent and raw prices would likely be at or near historic lows, well below forfeiture levels. Few if any sugar farmers could survive such an environment, leaving the U.S. taxpayer as the last resort to keep them in business.
Wise Words
A recent report by commodities research firm McKeany-Flavell examined life for food manufacturers in a world where U.S. sugar producers are unable to survive.
Their advice to food manufacturers: “Be careful. Significantly greater United States dependence on imported sugar may not guarantee lower sugar pricing over the long term.”
Volatile prices, inconsistent quality and delivery issues would result if the domestic food industry had to depend on foreign sugar rather than homegrown supplies, the study concluded.
McKeany-Flavell is right. Profit seeking food manufacturers need to be careful what they wish for. Sometimes short-term gains in the marketplace lead to nothing but long-term pain—the same kind of pain being felt by Louisiana sugarcane farmers right now.