A speculation about why ADM’s HFCS business is booming.
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.