Sugar Price Survey. August AMERICA S SUGAR PRODUCERS Meeting America s Needs

Transcription

1 Sugar Price Survey August 2006 AMERICA S SUGAR PRODUCERS Meeting America s Needs

2 1 Introduction Every time a Farm Bill is considered for reauthorization by Congress, opponents of sugar policy ratchet up their rhetoric on Capitol Hill. And the price of sugar in America is usually the first argument they make. Unfortunately, in our opponents zeal to dismantle the sugar program, they often play loose with the facts. A person only needs to visit a grocery story or look at the sugar market to learn the truth about U.S. sugar prices. Grocery shoppers and industrial sugar users in America enjoy some of the cheapest sugar prices in the developed world prices that have remained virtually unchanged over the past 25 years. Scrapping sugar policy would not help grocery shoppers; it would just enrich a handful of multinational food conglomerates at the expense of America s sugar farmers. To help lawmakers sort fact from fiction when it comes to sugar prices during the upcoming Farm Bill debate, the American Sugar Alliance has compiled a price survey of sugar and sugarcontaining products.

3 2 American Sugar is Not Expensive Grocery shoppers, on average, paid 43 cents for a pound of sugar in 2005, according to the Bureau of Labor Statistics. That s remarkable considering that is the exact same price that grocery shoppers paid in 1990 and even in Factor in inflation, and shoppers paid half as much for a pound of sugar in 2005 as they did 25 years earlier. U.S. Sugar Prices Have Remained Remarkably Stable New House New Car 1 st -Class Stamp Lb. of Sugar 1980 $76,400 $7, cents 43 cents 1990 $149,800 $15, cents 43 cents 2005 $297,000 $28, cents 43 cents Increase 389% 368% 247% 0% Sources: Census Bureau, U.S. Department of Commerce, United States Postal Service, Bureau of Labor Statistics The low retail sugar price of 2005 is even more impressive considering that year s vicious hurricane season. When Hurricane Katrina wiped out a chunk of America s oil refining capacity, prices at the pump skyrocketed. But thanks to sugar policy, consumers felt nothing when Hurricanes Katrina, Rita, and Wilma wiped out a huge chunk of sugar production in Louisiana and Florida. In fact, a May 2006 public opinion poll conducted by Harris Interactive showed just how inexpensive Americans think sugar is. Seven out of 10 people surveyed agreed that sugar is inexpensive, and 64% of Americans said they aren t concerned about the cost of sugar. This is not surprising when you think that U.S. shoppers spend just 0.08% of their annual salaries on sugar the second lowest percentage in the world next to Singapore. That s less than Americans spend on 10 gallons of gasoline. Sugar prices aren t so sweet for grocery shoppers in other developed countries. The average 2004 retail sugar price in the developed world was 56 cents per pound, 30% more expensive than U.S. prices. Europeans, for example, paid 58 cents per pound, while Japanese shoppers spooned over 77 cents. Reasonable sugar prices aren t confined to the grocery store shelves, either. Industrial sugar users are getting quite a deal on the wholesale market. Despite production problems caused by the 2005 hurricanes, the U.S. Department of Agriculture (USDA) calculates the average wholesale sugar price for last year at 29.5 cents per pound.

4 3 Believe it or not, this was cheaper than prices paid by candy companies in 1990 (30 cents per pound) and even in 1980 (38.3 cents per pound). Adjust these prices for inflation, and real wholesale prices have been declining for 25 years. If these companies were operating in other developed countries, they d see much higher prices. An examination of world sugar prices from 2004 shows that wholesale prices, on average, were 65% higher in other developed countries than in America. European prices were 78% higher. Sugar Prices Around the Developed World in 2004 U.S. Prices Low by Comparison Country Retail Prices (US$/LB) Wholesale Prices (US$/LB) Switzerland 0.93 n/a Finland Japan Norway 0.73 n/a France Austria Belgium Sweden Germany United Kingdom Turkey Portugal Ireland Denmark EU Avg Developed Country Avg Spain Netherlands Hungary Greece Italy Poland Australia USA Canada Mexico New Zealand Source: LMC International Ltd, Oxford, England, June 2005: global survey of countries representing 77% of global sugar production.

5 4 Sugar Price Spikes After the Hurricanes Didn t Cripple Food Manufacturers Large food manufacturers are smart; they are great businessmen. When they see low ingredient prices, they lock in those prices months and even years in advance with forward contracts. Sugar is no different, and that s why a wholesale price increase immediately following Hurricanes Katrina, Rita, and Wilma a price increase caused mostly by transportation issues had little to no affect on food manufacturers. These companies purchased their sugar well before the hurricanes at rock-bottom prices. This fact is pointed out in companies annual reports from Company s annual report summed up the situation. Page four of The Hershey The Company s costs for sugar will not necessarily reflect market price fluctuations primarily because of its forward purchasing and hedging practices The Company believes that the supply of raw materials is adequate to meet its manufacturing requirements. Kraft Foods, another major sugar buyer, echoed this sentiment on page seven of its 2005 report to shareholders. the Company believes such raw materials to be in adequate supply and generally available from numerous sources. The Company uses hedging techniques to minimize the impact of price fluctuations in its principal raw materials. And profits were stronger than ever for candy companies in 2005, thanks in part to innovative ingredient-price hedging techniques. Wm. Wrigley Jr. Company posted its ninth consecutive year of record earnings, and Nestlé Group bested its previous record marks in sales and profits. It is obvious that neither U.S. sugar policy nor sugar supplies after 2005 s hurricanes are inhibiting the growth of food manufacturers. Then again, record earnings are not surprising when you consider the healthy growth the industry has experienced over the last few years. According to the U.S. Dept. of Commerce, domestic production of sweet products grew by a staggering 10.5 percent between 1997 and Production of non-sweetened foods, by contrast, only grew at a 5.2 percent clip.

6 5 Shoppers Wouldn t Benefit and Consumption Wouldn t Rise if Sugar Prices Were Even Cheaper One of the favorite arguments used by sugar policy opponents is that shoppers would see big savings on candy, cakes, cookies, and other sweet treats if food manufacturers paid less for sugar. This, they contend, would lead to huge spikes in consumption. Considering companies pay more to package their products than they do on the sugar inside, claims of significant consumer savings defy logic. First of all, history has shown that food manufacturers would pocket any sugar price savings instead of passing it along to consumers. Secondly, simple math displays that if food manufacturers did pass savings along to consumers, those savings would be too minute to even make a difference. Dave DeCecco, a spokesman for Pepsi, explained this in a July 2, 2006 New York Times article saying, The cost of the sweetener in the product is extremely minimal to the point of not even mattering. This might help explain the price similarities between sugar-free products and regular products, as seen in the table below. Sugar-Containing Vs. Sugar-Free Product Prices Item Name Manufacturer Price Safeway Vanilla Safeway Inc. $4.49 Safeway Sugar-Free Vanilla Safeway Inc. $4.49 Breyers Chocolate Good Humor $5.39 Breyers Sugar-Free Chocolate Good Humor $5.39 The cost of the sweetener in the product is extremely minimal to the point of not even mattering. Dave DeCecco Pepsi Spokesperson Edy's Vanilla Edy's Sugar-Free Vanilla Dryer's Grand Ice Cream Inc. $5.79 Dryer's Grand Ice Cream Inc. $5.79 Jell-O Snacks (6 pack) Kraft $4.38 Jell-O Sugar-Free Snacks (6 pack) Kraft $4.38 LifeSavers Nabisco $1.99 LifeSavers Sugar-Free Nabisco $1.99 Crème Savers Nabisco $2.15 Crème Savers Sugar-Free Nabisco $2.15 Orbit Bubblemint Gum (14 ct) Wrigley $0.99 Orbit Sugar-Free Bubblemint Gum Wrigley $0.99 Source: Safeway Store, Arlington, VA, July 2006

7 6 It is clear that sugar prices have little if no bearing on pricing decisions for sweetened foods. But even if sugar prices were a major factor in a product s cost, the chart below shows that a sizeable 10% drop in sugar price would barely register at the grocery store checkout line. Truth be told, consumers wouldn t even see significant movement on product prices if sugar farmers gave food manufacturers sugar for free. Wholesale Sugar Price Declines Have Little, If Any, Effect on Retail Sweetened Product Prices -- Even Assuming Manufacturers/Retailers Pass 100% of Savings to Consumers-- Item Name Manufacturer Item Price Cost of Sugar in Item 1 Sugar Share of Product Price 2 Item Price with 10% Sugar Price Drop 3 Item Price with 100% Sugar Price Drop 4 Hershey w/almonds Hershey $0.72 $ % $0.719 $0.708 Almond Joy Hershey $0.72 $ % $0.719 $0.706 Bag of Kisses Hershey $3.69 $ % $3.679 $3.581 Jolly Ranchers Hershey $2.19 $ % $2.182 $2.111 Edy's Vanilla Homestyle Dryer's Grand Ice Cream Inc. $5.79 $ % $5.780 $5.690 Breyers Vanilla Good Humor $5.39 $ % $5.376 $5.253 Ben & Jerry's Vanilla Ben & Jerry's Homemade $3.00 $ % $2.995 $2.951 Klondike Bars (6-pk) Uniliever Inc. $4.89 $ % $4.884 $4.831 Pillsbury Yellow Cake Kraft $2.00 $ % $1.984 $1.844 Duncan Hines Moist Deluxe Proctor & Gamble $1.99 $ % $1.974 $1.834 Jell-O Strawberry Kraft $0.79 $ % $0.788 $0.765 Crunch Nestlé $0.72 $ % $0.719 $0.705 Baby Ruth Nestlé $0.72 $ % $0.719 $0.706 M&M's Mars, Inc. $0.72 $ % $0.718 $0.700 Source: Safeway Store, Arlington, VA, July Assumes wholesale refined sugar price of cents per pound, the CY 2005 annual average reported by USDA. Sugar content computed from nutrition label. 2 Average sugar share of all products shown: 2.79%. 3 Assumes wholesale sugar price of cents per pound (29.45 cents less 10%). 4 Assumes wholesale sugar price of zero. Of course, the table above assumes that industrial sugar users would pass every penny of sugar price savings along to consumers. History has shown that this is not how candy companies, wholesalers, and retailers operate they keep the savings and continue to increase their product prices with inflation. As the following chart shows, from 1990 to 2005 producer prices for sugar trended downward, while consumer prices for sugar and for candy and other sweetened products climbed by as much as 50%.

8 7 From 1990 to 2005: Farmer Prices for Sugar Fall, Consumer Prices for Sugar & Products Steady or Higher* Consumer Prices Rise 47.0% 50.0% 40.1% Farmer Prices Fall 28.4% 32.2% Raw Cane Sugar Wholesale Refined Sugar 1.8% -8.5% -1.4% Retail Refined Sugar Cereal Candy Cookies, Ice Cakes Cream Other Bakery Products * Change in annual average prices from Raw cane: duty-fee paid, New York. Wholesale refined beet sugar: Midwest markets. Retail prices: Bureau of Labor Statistics consumer price indices. Data source: USDA. 13 Another fallacy in the arguments made by sugar policy opponents is the notion that a sugar price drop would result in increased consumption of sugary products by everyday Americans. To argue that consumption of a candy bar would jump if they cost 71.9 cents instead of 72 cents shows a real lack of understanding of the modern-day American consumer. America is blessed, and our nation is rich enough that few people make dietary decisions based on price. Considering kitty litter costs more per pound than sugar, it s highly unlikely that a 43-cent-perpound retail price or a 30-cent-per-pound wholesale price is acting as a restrictive price barrier that s blocking sugar consumption.

9 8 Sugar Prices Aren t Forcing Candy Company to Flee America The argument of job flight is a favorite of lobbyists for food manufacturers. U.S. sugar prices, they contend, are forcing companies to relocate in Mexico or Canada in search of cheaper sugar. Never mind the fact that U.S. wholesale sugar prices were lower in 2005 than they were 25 years earlier. And, never mind the fact that wholesale sugar prices in Mexico are traditionally higher than U.S. prices, lobbyists want Congress to believe that their clients are having to pay too much for sugar. Too bad the companies who fled America don t agree with the lobbyists sour assessment. Cathy Pernu, a spokeswoman for Northfield, Ill.-based Kraft, said several factors went into the decision, announced Jan. 8, to move LifeSavers production to a plant near Montreal the biggest factor was the fact that the plant is underutilized, Pernu said Pernu denied published reports that the lower cost of sugar in Canada was the main reason for the move. Associated Press (April 11, 2002) One example in the report is Brach s Confections Inc., maker of top-selling candy corn and jelly beans, which closed its Chicago plant in 2004 company spokeswoman Julie Daniels said Tuesday the closure was based on lots of factors and could not be pinned specifically on sugar pricing. Associated Press (Feb. 15, 2006) According to Peter Buzzanell, a former USDA official who studied relocations in the confectionery industry, The overriding reason for relocation is reduced labor costs and related benefits. Buzzanell studied the overhead costs at the new LifeSavers plant in Canada and the Brach s facility in Mexico and compared those costs to the companies expenses in the United States. Other costs far outweigh sugar when determining where to locate operations, he determined. Candy Companies Don t Flee America Because of Sugar U.S. Mexico Canada Wages per hour $14.04 $0.56 $12.50 Annual healthcare costs per worker $2400 $360 $605 Tax percentage 42% 9% 31% Rent per square foot $10.00 $4.00 $ wholesale sugar price per pound * $0.23 $0.25 $0.18 Sources: Peter Buzzanell & Associates, Inc. March 2003, *LMC International Ltd, Oxford, England, June 2005.

10 9 Based on the food manufacturers other arguments, you would assume that the price of LifeSavers and Brach s candies would drop. After all, they are getting cheaper sugar in Mexico and Canada. However, this is not that case. In 1995, the American Sugar Alliance took a sampling of Brach s candy prices from a Safeway store in Arlington, Virginia. A visit to the same store in 2006 turned up prices of the same Brach s candies that were as much as 101% more expensive. The price increase of some Brach s candy is nearly four times the overall rate of inflation (28% from 1995 to 2005) something that makes little sense if the company were enjoying cheaper prices and passing savings along to consumers, as candy lobbyists contend. Item Name Manufacturer Price in 1995 Price in 2006 Price Rise Milk Maids Brachs $1.19 $ % Lemon Drops Brachs $1.19 $ % Star Brites Brachs $1.19 $ % Source: Safeway Store, Arlington, VA, July 2006

11 10 Sources: North America s Confectionery Industries: Structure, Trade, and Costs and Trends in Sugar Demand, Peter Buzzanell & Associates, Inc., Reston, Virginia, March Retail and Wholesale Prices of Sugar around the World in 2004, LMC International Ltd, Oxford, England, June Sugar and Sweetener Situation and Outlook Report, U.S. Department of Agriculture Economic Research Service, Various Issues. Product pricing information obtained July 2006 at Safeway in Arlington, Virginia. American Sugar Alliance 2111 Wilson Boulevard, Suite 600 Arlington, VA Tel: Fax: