U.S. can't get sugar for Dum Dums with import limit

Spangler Candy Co. saw last month just how tight and costly U.S. sugar supplies are. For the first time in at least 38 years, the company couldn't get the sweetener it needed to make Dum Dum Pops and candy canes.

When a power failure halted shipments from Spangler's main supplier, Chief Executive Officer Kirk Vashaw scrambled to find alternatives. He came up 25 percent short, forcing a cut in candy output at the Bryan, Ohio-based company his family has run for four generations. Sugar is 70 percent of his ingredient costs. While the disruption lasted a day, Vashaw says inventory is getting tighter than when prices surged to a record in 2010.

U.S. food companies can't get enough sugar even as the world heads for a fifth straight year of surpluses. Imports are restricted by tariffs first imposed two centuries ago to protect cane farmers, and a trade dispute is slowing deliveries from Mexico, the top foreign supplier. The gap between U.S. and world prices reached the widest in two years, adding to costs for buyers including Hershey Co. that already are charging more for candy to cover increases in cocoa and dairy products.

“There's not a lot of sugar to sell right now,” said Frank Jenkins, the president of South Norwalk, Connecticut-based JSG Commodities, the largest U.S. sugar broker. “We're going to need to increase imports, otherwise we're going to run out sugar or prices will continue to rise.”

Widening Gap

Domestic sugar traded in New York is up 24 percent in the past 12 months to 26.05 cents a pound on ICE Futures U.S., even as world prices dropped 7.4 percent to 16.24 cents. The gap between the two contracts on Sept. 5 reached 11.53 cents, the most since January 2012.

Only coffee, cattle and nickel rallied more than the cost of U.S. sugar in the past year among 22 raw materials tracked by the Bloomberg Commodity Index, which slid 5.7 percent as corn, soybeans and wheat tumbled into bear markets. The MSCI All- Country World index of equities rose 11 percent, and Bloomberg Treasury Bond Index increased 3.6 percent.

U.S. sugar production has trailed total use every season for more than five decades. With demand at the highest in at least 22 years and imports from Mexico set to tumble 49 percent to 1.088 million short tons (987,000 metric tons), inventories on Sept. 30, 2015, will drop 46 percent to 1.028 million short tons, U.S. Department of Agriculture data show. Stockpiles will be equal to 8.5 percent of demand, the lowest ratio since 1958.

Domestic production will fall for a second straight season next year, down 0.3 percent to 8.39 million tons, the USDA estimated Sept. 11. Consumption that reached the highest since at least 1992 this year will slip 2.1 percent in 2014 to 11.9 million tons, not enough to make up for lost imports, data show.

Mexico Imports

Mexico provided 18 percent of the sugar consumed in the U.S. last year, according to the USDA. Last month, the Commerce Department issued a preliminary ruling that Mexico shipments are unfairly subsidized, and instructed the U.S. Customs and Border Protection to collect cash duty deposits on those imports. The so-called preliminary countervailing duties on Mexico shipments range from 3 percent to 17 percent.

Sugar is the only major agricultural commodity produced in the U.S. that is subject to import quotas. Mexico had been exempted from the limits under the North American Free Trade Agreement, allowing the country to ship duty-free since 2008.

Mexican officials are in talks with the U.S. to resolve the dispute and avoid import duties, Ildefonso Guajardo Villarreal, Mexico's economy and trade secretary, told reporters Aug. 27.

Spot prices for refined sugar may reach 40 cents a pound, compared with last month's average of 36.6 cents and last year's average of 27.22 cents, according to JSG's Jenkins.

Easing Quotas

The government could allow more imports. In 2011, the USDA boosted quotas for duty-free shipments in April and June after a drop in domestic and world supplies the year before sent domestic raw-sugar prices to 42.14 cents, the highest since the ICE Futures U.S. contract was started in 2008.

“We're not in a position to make an announcement on the sugar-import quota at this time,” Kent Politsch, a USDA spokesman, said by telephone yesterday from Washington.

Domestic output may rebound. As recently as last year, there was a U.S. glut after farmers produced record crops, sending futures in June 2013 to 18.7 cents, the lowest since futures began trading. The USDA used credits and outright purchases to remove more than 1 million short tons of surplus sweetener at a cost of about $258.7 million.

Food and beverage makers may substitute high-fructose corn syrup for sugar. HFCS prices tracked by the USDA are down 6.1 percent this year as U.S. corn growers harvest a record crop, making the grain-based sweetener 6.7 cents a pound cheaper than beet sugar, the widest discount in two years, data show.

Higher Costs

For now, higher costs are squeezing U.S. buyers even as the rest of the world has a glut. Global output will exceed consumption by 1.3 million metric tons in the year that begins Oct. 1, for a fifth straight surplus, the International Sugar Organization said Aug. 26.

“The inflated sugar costs caused by import restrictions is a tax on businesses,” said Erin Calvo-Bacci, owner of the Reading, Massachusetts-based Chocolate Truffle Co., which will make and sell almost $1 million of sweets this year. “As a small manufacturer, we are working off very low margins. As a retailer, it affects our competitiveness because we sell nationally to specialty stores.”

Hershey, the U.S. candy maker that began adding chocolate to caramel in 1894, announced an increase in wholesale prices for its products in July, citing higher commodity costs driven mostly by cocoa, cocoa butter and milk. The company produces Hershey bars, Reese's Peanut Butter Cups, and chocolate Kisses.

'Critical Ingredient'

“Sugar is a critical ingredient for many of our products, especially chocolate, which requires sugar to produce,” Jeff Beckman, a spokesman for the Hershey, Pennsylvania-based company, said in an e-mail response to questions.

Hershey isn't currently planning any further price increases to cover the cost of production, which includes numerous commodities as well as packaging, fuel, utilities and transportation, Beckman said. “Although the cost of our ingredients is important, the main driver of our business is giving consumers great-tasting products,” he said.

United Sugars Corp., a Bloomington, Minnesota-based marketing cooperative that produces about one-fourth of U.S. supply, “is trying to ration or limit available supply,” Steve Hines, the vice president of marketing and industrial products, said in an interview. “We don't want to become oversold, and we don't want to have commitments we can't honor.”

Disadvantaged Buyers

U.S. buyers are being squeezed by the government's trade restrictions, said Mitchell Goetze, president of the Goetze's Candy Co., which has been making Caramel Creams for almost a century. The company of 90 employees imposed a hiring ban almost two years ago and took temporary workers to handle additional orders during peak seasons to cope with rising costs, he said.

“We're forced to pay a set of pricing and we can't import materials, so our costs are very high,” said Goetze, whose family has been running the company for five generations. “I don't know if as a business we're going to be able to get to a sixth-generation.”