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Sugar Price Survey August 2009 AMERICA’S SUGAR PRODUCERS… Meeting America’s Needs
Sugar Price Survey August 2009 AMERICA’S SUGAR PRODUCERS… Meeting America’s Needs
Sugar Price Survey August 2009 AMERICA’S SUGAR PRODUCERS… Meeting America’s Needs
Sugar Price Survey August 2009 AMERICA’S SUGAR PRODUCERS… Meeting America’s Needs

Sugar Price Survey

August 2009

AMERICA’S SUGAR PRODUCERS… Meeting America’s Needs

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Introduction

When discussing the cost of sugar in America, there are three prices to consider: 1) the retail price paid by grocery shoppers, 2) the wholesale price paid by large food manufacturers, and 3) the raw sugar price that sugarcane producers receive for milled sugar that needs further refining.

The past year has seen consumers paying more for a bag of refined sugar—a reflection of grocery stores increasing their markup and profit margins. Shoppers have also been asked to fork over more for sweetened products such as cookies, cake, and candy, but this has not been a result of sugar pricing. Like the grocery stores, large food manufacturers have increased product prices in hopes of boosting profits.

On the other hand, wholesale sugar prices have fallen since last summer, and raw sugar prices in the first half of 2009 were well below 2008 levels, largely because of a dramatic increase in raw sugar imports from Mexico.

The end result has been many sugar farmers struggling to remain profitable while large food manufacturers are reporting sharp revenue increases despite the country’s economic recession—a testament to sweetened products' affordability and popularity, and the cheapness of food companies’ raw ingredients.

Ironically, industrial sweetener users want to further the divide between their profitability and that of their sugar suppliers. The U.S. Department of Agriculture (USDA) has come under heavy pressure from food manufacturer lobbyists this past year to increase import levels, a move that would send sugar prices even lower and would likely cost taxpayers millions of dollars in forfeitures.

To help lawmakers and Administration officials sort fact from fiction when it comes to sugar prices, the American Sugar Alliance has updated its annual price survey of sugar and sugar- containing products.

Sugar Price Survey

August 2009

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Retail, Wholesale, and Raw Sugar Prices

Ask most people how much sugar costs and few will have any idea. That’s because sugar is an inexpensive staple that can be bought in bulk at a fraction of the cost of competing sweeteners. Some people would even observe that it’s so cheap that restaurants give away sugar for free.

And it’s a better bargain in America than just about anywhere. A June study by LMC International, a renowned commodities research firm from Oxford, England, found that Americans spend less of their incomes on sugar—just 0.08%—than any other country in the world, even though sugar is found in just about everything we eat.

If you can find a person familiar with sugar prices, chances are they only know about the retail price they pay for a bag of sugar in the grocery store. But most legislative and business battle lines are drawn over wholesale and raw prices—the price paid by food manufacturers and the price received by sugarcane producers respectively.

Since the American Sugar Alliance’s last sugar price survey in August 2008, the market has witnessed unprecedented movement. Retail prices have steadily climbed, while wholesale and raw prices have actually decreased.

Retail Prices:

From 1990 to 2005, retail sugar prices were remarkably stagnant, averaging approximately 42

cents per pound.

But 2006 began a price run-up in prices that has steadily increased, with a

sharp spike occurring since July 2008—retail prices last July were 52.5 cents per pound and

jumped to a high of 57 cents this March.

Amazingly these costs have climbed despite ample sugar supplies. That can be seen in the chart below, which shows the increasing spread between the retail prices grocery stores charge and the wholesale prices that the grocery stores pay to purchase the sugar.

2 Retail, Wholesale, and Raw Sugar Prices Ask most people how much sugar costs and few

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In other words, the only thing that’s changed this year has been the profit margin for grocery stores. To understand why this price gap widened, you need to look past sugar to the other items in your shopping cart. Since 2006, food prices have climbed across the board, with food manufacturers and grocery stores steadily increasing prices in hopes of offsetting a higher cost of doing business—from more expensive ingredient costs (except sugar) to higher fuel and transportation expenses.

In fact, food and beverage costs increased 7.2% from 2006 to 2008, according to the Bureau of Labor Statistics.

Unfortunately for sugar producers—who had to deal with the same higher input costs that plagued manufacturers—their prices didn’t see sharp inclines like other commodities to help recoup losses.

3 In other words, the only thing that’s changed this year has been the profit margin

Since last year, prices for corn, soybeans and wheat have come back to earth, being sliced in half in many cases. Corn was recently trading at $3.00 a bushel compared to a high of $7.60 last June, while wheat prices have dropped from about $12 a bushel to about $6 a bushel over the past year.

Fuel is also dramatically cheaper this year, yet food prices have remained high. Why? It’s a phenomenon that economists call “sticky prices.”

The Grocery Manufacturers Association, a trade association of large food companies, profiled a report on their website in December 2007 that explained the theory this way, “The long period of low food price inflation rates prior to 2007 has passed."

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Put another way, what goes up doesn't come down.

This market forecast means grocery shoppers will likely see higher retail sugar prices for the foreseeable future so grocers can boost profits even though wholesale and raw prices are on a different trajectory.

Wholesale Prices:

In recent weeks, food manufacturers have intensified a yearlong lobbying campaign targeting the USDA. Their mission: to increase sugar imports in order to lower wholesale sugar prices.

One would assume, therefore, that wholesale sugar prices have been going up at a rate similar to retail sugar prices. Wrong. The wholesale sugar prices paid by food companies have been relatively stable and have actually decreased slightly from this time last year.

When the 2008 Sugar Price Survey was penned last August—around the time food company calls for higher imports began—wholesale prices were 38.4 cents per pound. Prices for the first half of 2009 averaged 34.9 cents, a 9% reduction.

Admittedly, current prices are slightly higher than the 32.5-cent average for 2008, but sugar prices around the world have increased in 2009 and the current cost to U.S. food manufacturers is still cheaper than it was when Jimmy Carter sat in the Oval Office.

Sugar cost 38.3 cents per pound in 1980, and when inflation is factored, sugar is 59% cheaper today than it was almost three decades ago.

Food manufacturers in other developed countries aren’t so lucky. According to a study of 2008 sugar prices conducted by LMC International, candy companies in the rest of the developed world are paying 9% more for sugar.

Sugar Prices Around the Developed World in 2008 U.S. Prices Low by Comparison

Country

EU Developed Country Avg. USA

Wholesale Prices

(US$/LB)

0.39

0.38

0.35

Retail Prices

(US$/LB)

0.63

0.59

0.53

Source: LMC International Ltd, Oxford, England, June 2009: “Retail and Wholesale Sugar Prices Around the World in 2008”

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Raw Prices:

The biggest anomaly over the past year has been the raw sugar price—the price received by sugarcane producers for milled sugar that still must be refined before it is ready for consumption.

This price is essential to cane farmers and is a key indicator of sugar supplies because the vast majority of imports are shipped in a raw form and then refined at an American refinery to overcome quality and delivery problems that are rampant in other countries.

Raw prices averaged 23.2 cents per pound when the 2008 Sugar Price Survey was written. In the months that followed, raw prices dropped like a rock, plunging as low as 19.8 cents in February and March of 2009.

This downward spiral is a direct result of two factors: 1) a 300,000-ton import increase announced by the USDA last August, and 2) an unprecedented amount of Mexican sugar flooding the American market in late 2008 and early 2009.

Unfortunately for sugar farmers—especially those in Louisiana and Texas who do not refine their own sugar and are solely dependent on the raw market—raw prices hovered at or below what’s known as the forfeiture level for most of the year. This is the level at which it makes more economic sense to forfeit your crop to the government than to repay the government loans with interest.

Such forfeitures almost never happen because the federal Farm Bill mandates that the USDA should operate sugar policy in a way that prevents forfeitures and the associated taxpayer costs. However, forfeiture has been a real danger in 2009 because of low raw prices and it will remain a danger for the next two months as $62 million in operating loans from Louisiana come due.

5 Raw Prices: The biggest anomaly over the past year has been the raw sugar price—the

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Raw prices have started an upward ascent in recent months but remain fragile. In fact, a rumor on July 23 of an imminent import increase announcement by the USDA sent raw prices tumbling by 23 points.

Sugar producers dependent on the raw price are rightfully worried that a USDA import announcement would send prices lower and back near forfeiture levels. Similar announcements in July 2006 and August 2008 sent prices lower by 16% and 17% respectively.

“With these loans maturing, clearly now is not the time to cave to demands for additional imports,” Wallace Ellender, a Louisiana sugar producer, recently said. And he wants the USDA to know that higher input costs mean producers can still find themselves below their breakeven levels even when prices are above the traditional forfeiture range.

Ellender’s observations corroborated a study conducted by Louisiana State University (LSU) released in early June. The data revealed cane farmers in the state continue to lose on average $70 per acre after paying land rents and production costs. Farmers would need to receive 24 cents per pound of raw sugar in order to make ends meet, LSU estimated. June raw sugar prices averaged just 22.5 cents per pound.

The scenario is even worse for producers who are suffering the ill effects of recent hurricanes. The lower yields brought about by the storms can push the breakeven point as high as 28 cents for some Louisiana growers, LSU found.

6 Raw prices have started an upward ascent in recent months but remain fragile. In fact,
6 Raw prices have started an upward ascent in recent months but remain fragile. In fact,

The chart above illustrates just how low raw prices have been for sugar farmers dealing with even normal rates of inflation.

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Of course, it’s not just Louisiana farmers who are coping with higher input costs. Rising fuel, labor, and chemical costs have deflated profits across the sugar business—from beet growers and processors to sugarcane refiners. All told, 35 sugar mills and refineries have shut down since 1996 because of financial strain.

The following chart shows some of the rising input costs that created this atmosphere of tightening profit margins. Note the loan rate received by sugar growers has remained unchanged since 1985 and will only increase by one-quarter of one cent per pound next year.

7 Of course, it’s not just Louisiana farmers who are coping with higher input costs. Rising

Judging from recent profit reports, things have been a bit rosier in the sweetener-using sector. High candy profits in the face of low raw sugar prices even led one prominent Louisiana banker to pen an article in May on the subject.

“Seeing neighbors go under is never easy, but it’s even more difficult when you’re reading headlines about good times on the other side of the equation,” wrote Dean Martin, assistant vice president of First South Farm Credit.

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Sugar Users See Good Times

Recession or not, people will still celebrate Christmas, Halloween, Easter, and Valentine’s Day, which is why candy companies make money in good times and in bad, says the National Confectioners Association (NCA). In fact, NCA unveiled at its annual All Candy Expo, held in May, that the industry actually posted a 3.7% sales gain in the past year despite the worst economy since the Great Depression.

This comes just one year after NCA proudly proclaimed in an industry report, "Not only is confectionery a large product category at $28.2 billion in retail sales, it is a high profit category. Margins average more than 35% for the category.”

NCA’s 2008 depiction of a “high profit” industry appears to be holding true again in 2009.

Hershey's chief executive had this to say on a January 27 conference call with investors: "The financial market and credit crisis has not had a material effect on our business operations or liquidity, to date."

In fact, the Hershey Company proudly told investors that its fourth quarter net income was up a staggering 51% from a year ago. The good news didn’t end there. Months later the company posted a 20% increase in profit during the first quarter of 2009.

They weren’t alone in their exciting news this year. "DeMet's Candy Company is looking to hire 100 people for its new plant," a news station in Big Flats, NY reported on January 28.

New hires…plant expansion…increased income. These are not the signs of a struggling industry, no matter what food manufacturer lobbyists try to tell lawmakers and USDA officials when shopping for policies that would further depress sugar prices.

And this good news isn't isolated to a few candy companies. Other large sugar buyers are getting into the act.

A new Sconza Candy Co. plant officially opened in Oakdale, CA in November 2008, employing 100 people immediately and looking to hire more. On the heels of a 2005 expansion to the tune of $200 million, Dreyer's Grand Ice Cream added a new production line to their Laurel, MD factory in February and promised two more by year's end. Tierra Nueva, a cocoa and chocolate-product factory, opened a new facility in Miami in March, which brought with it an estimated 160 new jobs. J.M. Smucker Co. announced in March it will open a 557,000 square foot distribution facility in Atlanta, GA. General Mills released plans a few months ago to expand its Albuquerque, NM facility and create 60 new jobs. Sara Lee Corporation is celebrating a huge expansion of its facility in Rochelle, IL. The 132,000 square foot expansion project will be Sara Lee's largest mixing facility and should be completed by December.

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"In a span of five years, Nestle will have invested $529 million in this facility," Nestle USA Chairman & CEO Brad Alford recently crowed about a new factory in Anderson, IN. "When it's finished in 2011, the Anderson facility will have created more than 500 local jobs in a tough economy. This is our fourth investment in Indiana in the past two years—twice in Anderson, once in Greenwood and once in Fort Wayne." Kellogg’s first quarter net earnings were $321 million, a 2% increase from last year's $315 million. Kraft witnessed a 10% rise in first quarter revenues. General Mills reported sales increases of 8% and an earning per share increase of 2% in Fiscal Year 2009. Profits were apparently so good at Mars, the company began giving its product away, with, according to the company, “the creation of the Mars Real Chocolate Relief Act™, a nationwide effort to bring sweet smiles to millions of Americans via free, full-sized samples of Mars real chocolate, product discounts and coupons along with the proclamation of Free Chocolate Fridays™”

Dean Martin, the Louisiana banker infuriated by the double standard in the sugar market right now summed up the situation this way: “I don’t fault Hershey’s or any other food manufacturer for turning a profit—after all that’s why people go into business. But driving suppliers into the ground to pad profits is bad business.”

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U.S. Sugar Market Stable

Unbeknownst to most people, a furious battle is going on behind the scenes over the future of the sugar market in 2009 and 2010. Large food manufacturers hungry for bigger profits insist the sugar market is tight and have been lobbying for 500,000 to 1 million tons of additional imports to flood the U.S. (an amount equal to 5-10% of the entire U.S. market).

Meanwhile, sugar producers point to surplus stocks of sugar sitting in America and raw prices to prove there is no need for additional imports and that supplies are stable. Their arguments were summed up in a July 10 letter to the USDA that stated:

U.S. cane refiners continue to have more than adequate supplies of raw sugar. Most are operating at less than full capacity because the demand for refined sugar is not great. Beet processors still have refined sugar to sell. No food manufacturers are having any trouble locating refined sugar supplies. Raw and refined sugar prices remain relatively stable.

Early beet harvesting will begin in just two months and, as harvests get underway throughout beet and cane areas, the market will move into its heaviest oversupply period. Resumption of full operations at Imperial’s Savannah cane sugar refinery will speed refined sugar production and delivery. Stocks will build through the spring. During October-March, 83% of U.S. sugar production occurs but only 49% of consumption. During this period, too, the U.S. market is open to all the tariff-rate quota (TRQ) supplies from WTO and CAFTA quota-holder countries. And, most importantly, the market is open to unlimited supplies from Mexico.

During this past October-March, Mexico shipped over 600,000 metric tons of sugar to the United States. That is more imports from Mexico in the first half of the year than USDA had been forecasting, as late as January, for the entire fiscal year. USDA now forecasts imports from Mexico to total 1.18 million tons for all of 2008/09—more sugar than we are required to import from 40 countries under our WTO TRQ commitments.

USDA’s projection of possible tight supplies in 2009/10 assumes imports from Mexico of a mere 150,000 tons. Higher imports from Mexico next year would further ease any supply concerns.

With chronic oversupply during the first half of the year, any tightness next year would not emerge until the summer. USDA would have adequate time to prevent any possible tightness through an import-quota increase, if necessary, on or after April 1.

To reiterate our message of last May: We remain committed to continued open communication regarding any potential shortages in the market. Meanwhile, we commend your caution with regard to domestic sugar supplies and we urge you to remain cautious.

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Crying Wolf:

The underlying message that sugar producers have sent the USDA is the need to remain prudent when dealing with imports and considering tariff-rate quota increases. After all, they say, this is not the first time profit-seeking candy companies have made false claims of sugar shortages.

After the USDA increased imports last August, food manufacturers said their actions didn’t go

far enough.

The Sweetener Users Association asked for 1 million tons of additional sugar last

September, pointing to USDA projections of supplies more than a year down the road as their rationale.

But market conditions changed along with USDA projections. A 2009 sugar market once estimated to only have a 4.6% surplus sugar ratio quickly ballooned to 12% as stocks increased. Only, the sugar users never ceased their lobbying push, routinely pressuring the USDA for more imports.

Had the USDA caved to these demands last fall, the country’s sugar surplus rate would have surged to an eye-popping 22% of consumption, a level that would have led to producer losses and millions in taxpayer cost because of widespread loan forfeitures.

Jack Roney, an economist with the American Sugar Alliance, points out, “The sugar users were wrong last year and they’re wrong now.” He says imports from Mexico are the wildcard sweetener users aren’t taking into account, which is why the USDA should take a wait-and-see approach.

Mexican Wildcard:

Each month, the USDA is asked to forecast sugar supply and demand more than a year into the future. It’s a difficult job that became exponentially harder on January 1, 2008. That’s when a NAFTA provision kicked in that allowed Mexico to send the United States as much duty-free sugar as it wants.

And under NAFTA, there’s nothing to prevent Mexico from turning a handsome profit by sending the sugar it grows to America and then importing cheaper, subsidized sugar from other countries to meet its own domestic needs.

This NAFTA loophole has caused impossible-to-predict fluctuations in USDA sugar supply estimates over the past year.

For example, when Department officials first warned of a tight sugar market last year, the information they had received indicated that Mexico would only send America 500,000 metric tons of sugar. Actual shipments for this crop year are coming in more than double that amount— closer to 1.18 million metric tons.

It’s no wonder then that raw sugar prices have remained low despite USDA’s early predictions of a tightened sugar market in Sept. 30, 2010—nearly 14 months from now.

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The government’s May World Agricultural Supply and Demand Estimates (WASDE) showed a surplus ratio of 2.7% for the 2010 crop year—an estimate that if not for the Mexican wildcard would have normally sent market traders into a frenzy, and sent sugar prices higher.

But prices didn’t jump, and the USDA has started revising its estimates upward as new information becomes available. The July WASDE has raised surplus estimates to 3.4%, a number that most market observers expect to continue climbing drastically as next year’s market realities continue to come into focus.

For example, there’s such little demand for sugar in the market right now that Louisiana producers have taken out supplemental loans in order to carry part of their crop over to the next crop year, which begins in October. And, right now, the USDA is only projecting 150,000 metric tons of sugar from Mexico in 2010—an unlikely 87% drop from this crop year.

12 The government’s May World Agricultural Supply and Demand Estimates (WASDE) showed a surplus ratio of
12 The government’s May World Agricultural Supply and Demand Estimates (WASDE) showed a surplus ratio of
12 The government’s May World Agricultural Supply and Demand Estimates (WASDE) showed a surplus ratio of

Given this kind of uncertainty, Roney says he does not envy the position that the USDA is in. Especially when the lobbyists from multinational food companies release misleading press statements designed to influence USDA decisions. For example, the Sweetener Users Association’s July 21 press release that states large import increases will “benefit consumers,” “reduce taxpayer costs,” and are necessary “with hurricane season looming.”

Plummeting sugar prices could actually increase taxpayer costs, Roney explains, also pointing out that food manufacturers never pass these lower costs to consumers and that in the unfortunate event of a hurricane, the Farm Bill includes a provision to allow the USDA to quickly increase imports to make up any shortfall.

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Consumers Wouldn’t See Savings from Even Lower Sugar Prices

Such outlandish claims by the Sweetener Users Association are not surprising since sugar policy opponents have been arguing for decades that grocery shoppers would see big savings on candy, cake, cookies, and other sweet treats if food manufacturers paid less for sugar.

Considering companies pay more to package their products than they do on the sugar inside, claims of significant consumer savings continue to defy logic. First of all, history has shown that food manufacturers would pocket any sugar price savings instead of passing it along to consumers.

13 Consumers Wouldn’t See Savings from Even Lower Sugar Prices Such outlandish claims by the Sweetener
13 Consumers Wouldn’t See Savings from Even Lower Sugar Prices Such outlandish claims by the Sweetener
13 Consumers Wouldn’t See Savings from Even Lower Sugar Prices Such outlandish claims by the Sweetener

Secondly, simple math displays that if food manufacturers did pass savings along to consumers, those savings would be too minute to even make a difference.

A Pepsi spokesperson admitted as much during an interview three years ago with a New York Times reporter working on a story about high fructose corn syrup. When asked whether ingredient costs dictated sweetener choices, the spokesperson responded, “The cost of the sweetener in the product is extremely minimal to the point of not even mattering.”

While his admission of indifference made many anti-sugar lobbyists cringe, this statement has held true to form as Pepsi ventured into a cadre of new products.

“The cost of the sweetener in the product is extremely minimal to the point of not even mattering.”

Dave DeCecco Pepsi Spokesperson

Visit your local grocery store today and you can find Pepsi made with sugar, corn syrup, aspartame, and Splenda. And chances are good you won’t find any difference in the products’ cost.

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Take the Safeway grocery store located just blocks from the American Sugar Alliance’s office, for example. Pepsi Throwback, the brand sweetened with sugar, costs $5.99 for a 12 pack of cans. Ditto for regular Pepsi (corn syrup), Diet Pepsi (aspartame), Pepsi One (Splenda) and Pepsi Max (aspartame and ginseng).

And the phenomenon is not isolated to Pepsi. Look at the list of sugar and sugar-free products in the table below.

Sugar-Containing Vs. Sugar-Free Product Prices

Item Name

Manufacturer

Price

Safeway Vanilla Ice Cream Safeway Sugar-Free Vanilla

Safeway Inc.

$5.99

Ice Cream

Safeway Inc.

$5.99

Edy’s Chocolate Ice Cream Edy’s Sugar-Free Chocolate

Dryer’s

$6.49

Ice Cream

Dryer’s

$6.49

Jolly Ranchers

Hershey’s

$2.49

Jolly Ranchers Sugar-Free

Hershey’s

$2.49

Source: Safeway Store, Arlington, VA, July 2009

It is clear that sugar prices have little if any bearing on pricing decisions for sweetened foods. But even if sugar prices were a major factor in a product’s cost, the chart below shows that price fluctuations would barely register at the grocery store checkout line.

Wholesale Sugar Price Increases Have Little, If Any, Effect on Retail Sweetened Product Prices

Item Name

Hershey w/almonds Almond Joy Jolly Ranchers Ben & Jerry’s Ice Cream Good & Plenty M&M’s

Mike and Ike

Aunt Jemima Corn Bread

Manufacturer

Hershey’s Hershey’s Hershey’s Ben & Jerry’s Hershey’s M&M Mars

Just Born

Quaker

Item

Price

in

2008

$0.90

$0.90

$2.39

$3.39

$1.59

$0.90

$1.59

$1.66

Item

Price

In

2009

$0.99

$0.99

$2.49

$4.49

$1.69

$0.99

$1.69

$1.66

Cost of

Sugar in

Item 1

$0.01

$0.02

$0.09

$0.06

$0.07

$0.02

$0.12

$0.15

Sugar

Share of

Product

Price

1.44%

1.67%

3.64%

1.27%

4.19%

2.35%

7.14%

9.03%

Source: Safeway Store, Arlington, VA, July 2009 1 Assumes wholesale refined sugar price of 34 cents per pound, the first half of 2009 average reported by USDA. Sugar content computed from nutrition label.

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15 Put another way, a 99-cent candy bar with a penny’s worth of sugar would still

Put another way, a 99-cent candy bar with a penny’s worth of sugar would still cost 98 cents even if candy companies got the sugar for free. And that assumes that industrial sugar users would pass every penny of savings along to consumers.

This seems highly unlikely considering that almost every product in the chart above costs more than it did the year before. It looks like food manufacturers care more about profits than about consumer savings. Maybe that’s the motive behind their current lobbying efforts to bring in unneeded sugar from foreign countries.

15 Put another way, a 99-cent candy bar with a penny’s worth of sugar would still

American Sugar Alliance 2111 Wilson Boulevard, Suite 600 Arlington, VA 22201 Tel: 703-351-5055 Fax: 703-351-6698

Sugar Price Survey

www.sugaralliance.org

August 2009