In the first quarter of 2006, as I reported yesterday, Archer Daniels Midland somehow managed to boost the price of high-fructose corn syrup (HFCS) despite mounting concern over the sweetener's health effects.
The company booked a cool $113 million profit from HFCS over the quarter, more than three times more than it netted in the same period a year before ($33 million). This, despite a slowing domestic market for sweet soft drinks, as consumers increasingly switch to juice and bottled water. The company's official explanation -- "increased sweetener and starch selling prices" -- doesn't explain how it managed to make price hikes stick.
I think I've figured it out. And the explanation has everything to do with Brazil, sugarcane, and ethanol.
The fate of HFCS in the marketplace has always been entangled with that of sugar.
As Richard Manning shows in his Against the Grain (2004), ADM originally created a market for HFCS by ensuring that its corn-derived sweetener was cheaper than sugar. Manning claims that ADM financed the lobbying effort that led to the blatantly protectionist sugar-quota system that went into effect in 1982 and has held sway ever since.
For most of the period since '82, the world price of processed sugar hovered well below that of HFCS, meaning industrial users like soft-drink makers had no real reason to buy it. But by setting a low limit on how much foreign sugar can enter the U.S., the sugar quota jacked up the price of sugar for domestic U.S. manufacturers to well above the world market level. With the sugar price artificially inflated, ADM found a ready market for its HFCS. Today, HFCS is the dominant sweetener in the U.S.
Here is where Brazil, the world's leading sugarcane producer, comes in. As most Grist readers know, Brazil has responded to surging petroleum prices by ramping up domestic production of ethanol. Its preferred feedstock is sugarcane (which, according to Lester Brown, makes a hell of a lot more sense than corn).
Booming demand for sugarcane-based ethanol has spurred a dramatic rise in the price of sugar. (Which is exactly what biofuel critics have warned: The more food we burn in our gas tanks, the more we can expect to pay for food.) According to Reuters, "raw sugar prices, which rose over 60 percent last year, surged to a 25-year high of 19.73 cents per lb in February." The news agency expects more of the same:
World sugar prices are likely to defy gravity in the next 12 months as key producing countries churn out ethanol as an alternative fuel after oil prices spiked to stratospheric highs.
So here's my thesis: As the price of sugar surges, ADM can force Coca-Cola and other big HFCS buyers to accept higher prices, without fearing that these big buyers switch back to sugar. Brazil's ethanol program may thus be supplying ADM with a windfall on HFCS.
And here's another twist: Some U.S. politicians are calling for an end to the restrictive tarriff that protects ADM's corn-ethanol business from foreign competition. Brazil can produce sugarcane-based ethanol more cheaply than ADM can make corn-based ethanol. If the tarriff ends, Brazilian ethanol swamps the U.S. market and ADM loses, right?
Well, yes, but that scenario would also spur rising sugar prices and -- if I'm right -- mean surging profitability for ADM's high-fructose corn syrup operation. Some companies just can't lose.
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Comments
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Biodiversivist Posted 4:54 am
11 May 2006
Some politicians and car manufacturers are claiming that we need biofuel to lead us to oil independence, while others are calling for an end to tariffs on biofuels. What is the diff between petroleum based oil and vegetable oil in that respect? Not all South American countries love us, and those that do, may not for long, especially if we decide to protect our supply of sugarcane-based ethanol by "stabilizing" the region.
And if the tariffs don't come down, we will all pay more for that fuel as a result through our taxes (subsidies) and at the pump. The government is getting itself into a bind with subsidy after subsidy and tariff after tariff. The free market is being turned on its ear to everyone's eventual detriment. I just hope they don't slap tariffs on Japanese cars to help our sagging car industry because the American made one I drive and the one I rented on my recent trip are both pieces of shit. Sorry to digress so.
In the end, it all comes down to biodiversity. Help acquire and protect ecological hotspots, give to a conservation organization: http://www.saveourbiodiversity.com
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CowsEatGrass Posted 3:25 am
12 May 2006
I'm fascinated and filled with hope by the increasing discussions of 1) Agriculture, 2) (truly) Free Markets, 3) Human Health and, 4) Environmental Protection all at the same time.
While these have always been tied up with each other, it seems that a number of current issues, including biofuels, agricultural subsidies, and the organic food boom, have crystallized these to some extent for a wider audience.
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fructose Posted 8:13 pm
30 Jun 2006
Fructose
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Michael Posted 6:07 am
20 Mar 2008
It's worth adding that, of course, the cost to ADM (and, from them, to HFCS users) is also being driven up by the surge in corn prices, driven by the irresponsible (corn) ethanol mandate, the aforementioned tarif on the more sustainable Brazilian sugar-cane ethanol, and the high price of a barrel of oil, which is actually enough to move Brazilian (and other) drivers with flex-fuel vehicles to switch from petrol to ethanol on pure cost considerations ...
Love is the law, love under will.
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naturescene Posted 6:53 am
20 Mar 2008
In the search for oil substitutes, the debate over "independence" and protectionism as opposed to trade is renewing itself.
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Ron Steenblik Posted 7:30 am
20 Mar 2008
Having risen sharply at the end of 2005, and peaking at around 18.4¢/lb in early February 2006 (not shown on the current graph), it fell over the following year and stayed at around 10¢/lb throughout most of 2007. Lately it has been rising, and during the last week of February averaged 14.4¢/lb.
A trend is a trend is a trend.
The question is where will it bend?
These are only my personal opinions.
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