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The Bitter Truth about Sugar
// Prices to rise before yearend
World prices for raw sugar broke a record late in February when they reached $500 per metric ton (19.65 cents per pound), the highest price in the 24 years prices have been tracked. Within Russia, the price for refined sugar also broke all known records, hitting $700 per ton. Those active on the Russian sugar market have severely reduced raw sugar imports and increased sugar beet production. Analysts say that the price of sugar could be brought down with corrections in the import duty imposed on raw sugar.
The price of raw sugar has increased by 45 percent on the New York commodities market since the beginning of the year. There are two causes for this. First, Brazil has increased its consumption of it to produce ethanol, an alternative fuel for automobiles. Second, India and Thailand have reduced deliveries because of poor harvests. Russia, which processes half of its sugar from imported raw materials, has been largely free of the influence of world prices in the past because of the flexible duty imposed on raw sugar imports. The duty was calculated every three months based on prices on the New York exchange. Higher world prices meant lower duties, thus leveling out the effects of price changes. That system has broken down, experts say, because a maximum price for sugar in New York is indicated in the government resolution setting the import duty. That maximum is $192. The duty has not changed since sugar prices in New York exceeded that level and Russian producers of refined sugar pay increasingly higher prices for their raw material. They announced a 30-percent price increase for refined sugar in February and another 10-percent price increase since then.
The rising price of sugar has been painful for industrial consumers. The Russian candy industry consumes 1.4 million tons of sugar per year, and almost a million more tons are used by producers of soft drinks and dairy products. Small and medium-size locally-owned regional candymakers have suffered the most. Large multinational producers usually have long-term contracts for sugar supplies. They are thus less likely to change the prices on their products in reaction to changing sugar prices.
The price rise comes in handy for sellers of sugar on the domestic market, however. Sugar prices have not risen in Russia for several years. “With annual inflation of 12-13 percent, the wholesale price of sugar in ruble equivalent has fallen 2.5 percent,” said Sergey Mironov, deputy chairman of the Union of Sugar Producers. “At the same time, the prices of the products of the main consumers of sugar – candy and soft drink makers – have increased by 45 percent.” Analysts say that that price growth has allowed producers to increase profitability and make up for losses in the last three years.
Prodimex, Rusagro, Razgulyai, the Russian Sugar Trading Co. and the Dominant Group, practically all the major Russian sugar producers, have invested in modernizing their plants this year. Their total investments come to $500 million, “serious numbers for this industry,” Mironov notes. The profitability of sugar beet farming in Russia has increased as well. Its production cost is $550 per ton, which means that the profit margin on it is about $150 per ton, an increase of 5-10 percent, and 15 percent (doubling) at more efficient plants. Experts expect a total of 937,000 hectares to be planted with sugar beet this year, compared to 817,000 last year.
Sooner or later, the government will take steps to curb the rising price for raw sugar. Rising sugar prices were a major cause of inflation at the beginning of the year. Sugar prices affect the price of bread. The administration considered lowering or removing duties on imported raw sugar, a move the sugar market opposed, saying that it would lead to destabilization and reduced sugar beet planting. Sugar producers said that they would handle the problem on their own and noted that world prices began to fall at the beginning of March. Experts look cynically on the possibility of controlling sugar prices. They note that rising energy prices will contribute to the price of sugar later this year. A compromise has been found, however. Russian sugar producers have proposed altering the range of exchange prices the import duty would be sensitive to in order to restore the flexibility of the import duty.
Svetlana Mentyukova
All the Article in Russian as of May 24, 2006
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