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Sugar prices hit sour note for foodmakers

Soaring prices for sugar, a major ingredient in foods from cereals to chewing gum, are the latest headache for U.S. foodmakers that have had to swallow higher costs for everything from energy to vanilla in the past two years.
/ Source: Reuters

Soaring prices for sugar, a major ingredient in foods from cereals to chewing gum, are the latest headache for U.S. foodmakers that have had to swallow higher costs for everything from energy to vanilla in the past two years.

Raw sugar on the New York Board of Trade is at a 25-year high, while refined, or white, sugar in London is at a 15-year high.

“Our recent contact with a sugar refiner indicates the pressure is not over and actually could increase due to poor crop yields,” Eric Katzman, food industry analyst at Deutsche Bank, wrote in a research note.

Sugar prices have soared as more of the crop produced by Brazil -- the world’s No. 1 sugar producer and exporter -- is diverted for use in biofuel ethanol as gasoline prices surge.

At the same time, investment funds are buying more sugar as commodities have become a more mainstream asset. Also, U.S. refinery capacity was hammered during harvest season by hurricanes in the U.S. Gulf region.

Katzman estimated that candy maker Hershey Co. could have the biggest exposure to rising sugar prices, costing it as much as 15 cents to 17 cents per share in earnings.

Hershey, whose confections include Jolly Rancher hard candies and Bubble Yum bubble gum, declined to comment specifically about sugar prices during a conference call with analysts.

But Chief Financial Officer David West said the company uses hedging strategies and other means to mitigate fluctuation in commodities.

“You would expect that we would not be going hand to mouth on sugar, so that is a commodity that we have always taken a pretty long-term view of,” West said.

Hershey has also raised prices on sugar confections to help combat a host of rising input costs.

But some analysts think that higher oil costs are much more of an issue than sugar prices, since fuel is used to run plants and trucks, and leads to higher packaging costs.

“It would present a bit of a headwind, but I don’t expect it will be the type of thing where they are going to say we are going to come out and lower our earnings guidance because of this,” said Todd Duvick, a fixed income analyst who follows the food industry at Banc of America Securities.

Cereal makers General Mills Inc. and Kellogg Co.; chewing gum maker Wm. Wrigley Jr. Co., and food, cookie, and Jell-o maker Kraft Foods Inc. were also highlighted in Katzman’s note as having exposure to higher sugar prices.

General Mills Chief Executive Steve Sanger said on Jan. 11 that costs for sugar and other commodities would be higher than the company expected in the second half of its fiscal year, which runs through May.

“We’re going to get some input costs higher than what we expected in the second half,” he said at a meeting with analysts.

A Kellogg spokesman declined to comment on rising sugar prices and a Wrigley spokeswoman could not immediately comment. A spokeswoman for Kraft could not be reached for comment.