ShareThisGet ready for the sugar shock.
Raw sugar futures have almost doubled this year amid fears of a shortage, which could lead to slightly higher prices for candy but also a spike in the price of ethanol.
Much of the rise in sugar prices has come in just the past few weeks as drier-than-normal weather in India, the world's largest consumer, threatens to leave production there far short of demand.
Those with candy cravings might pay a little more for their fix, but analysts expect that sweets sellers will try to eat the increased costs rather than raise prices significantly in a tough economy. The bigger impact may be felt at the gas pump, where the sugar shortfall is likely to drive up the cost of ethanol, increasingly used as a substitute for gasoline. About 60 percent of the world's ethanol is manufactured from sugar.
Coming as oil prices top $70 a barrel, it's a double dose of pain for motorists.
"As far as something having a direct jolt on the consumer, you're probably more likely to see it at the gas pump because of the ethanol," said Sterling Smith, a commodity analyst at Country Hedging Inc., headquartered near St. Paul, Minn.
India has the world's biggest sweet tooth, consuming more than 22 million tons of sugar a year. Most years, India produces all it needs at home.
This year, however, India is facing a drier monsoon season that's wilting crops. And many farmers shifted to other crops after a plunge in the price of sugar last year.
By some estimates, India's production could decline to only about 14 million tons. Inventories are already largely gone, leaving the country on the verge of becoming the world's largest sugar importer.
The result is that the world is short almost 8 million tons this year, according to the International Sugar Organization.
Brazil, the only country with enough production to meet India's massive demand, has the opposite problem. There, it's been too wet.
Brazil uses most of its sugar to produce ethanol, but it may decide instead to sell to India because sugar for consumption fetches higher prices than sugar for ethanol, which would exacerbate the ethanol pinch.
"Sugar is certainly going to go much, much higher during the course of the bull market," Jim Rogers, a longtime commodity bull who is chairman of Rogers Holdings, told Bloomberg News in a recent interview. "Sugar is still 70 percent below its all-time high" in 1974. "... Sugar has a wonderful future."
So far, the hit to candy lovers has been muted.
"It's something that will probably get absorbed at the retail level. It's going to mean a little tighter margins for Wal-Mart, a little tighter margins for Hershey before they raise the price of a candy bar a nickel," said Smith, the analyst.
Meanwhile, Egypt is temporarily dropping duty on sugar to keep prices down during the Muslim holy month of Ramadan.
Smith predicts the pinch could spread far beyond the snack bar and the gas bar.
A shortage of sugar will prompt ethanol makers to use more corn as feedstock, driving up corn prices. That will make corn too expensive to feed to pigs and other animals, which could prompt a surge in prices for other grains for feed, hurting everyone from hog farmers to bakers.
"This is going to have an effect on a lot of things," Smith said.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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