U.S. Sugar Soars Above World Prices

(Wall Street Journal) – A strong, sweet smell emanates from the office-cum-factory of PEZ Candy Inc., where colorful pellet-size treats are molded and packaged with their signature flip-top dispensers. But the bitter truth is that the price of PEZ is going up.

PEZ Candy will likely raise prices next year because of higher costs for sugar—the sweetener makes up about 95% of the candies—and labor, according to Joseph Vittoria, the privately held company’s chief executive. In an interview, Mr. Vittoria said that while PEZ will increase prices world-wide, its customers in the U.S. will feel the bite more than those in many other countries.

Sugar is getting dearer in the U.S. even as it is getting cheaper in most other places. Prices in the global market traded near 5½-year lows in September, though they have rallied a bit since. In the U.S. futures market, the sweetener is 58% more expensive than on the global market.

U.S. sugar for delivery in March settled at 23.98 cents per pound Friday on ICE Futures U.S., while the contract used as a benchmark for global prices ended at 15.14 cents a pound.

A year ago, the gap between the two contracts was only 2 cents. Back then, record imports from Mexico created a glut and sent U.S. prices plunging. Some growers defaulted on federal loans, costing the government more than $250 million.

U.S. sugar prices are typically a few cents higher than the world rate due to government policies that restrict imports and support growers. But the gap blew out this year after the government threatened to slap taxes on imported Mexican sugar at the behest of U.S. growers.

Mexico struck a preliminary deal in October to send less sugar to the U.S., which has eased the difference between U.S. and global prices in the futures market. But big buyers like candy makers have been snapping up sugar during the recent pullback because they don’t think domestic suppliers can fully replace Mexican imports.

The U.S. is the world’s fourth-largest sugar consumer and relies on imports—most of which come from Mexico—for about 25% of its supply.

“The scarcity will drive prices up,” said Mr. Vittoria. “That is a frightening thought, because sugar is the lifeblood of our industry.” PEZ Candy is the North American subsidiary of PEZ International GmbH, based in Traun, Austria.

Rising prices for sugar could soon start showing up in other products in the U.S. Prices for cocoa and dairy are also up sharply this year. Large chocolate makers, including Hershey Co. and Mars Inc., raised prices in July. Sugar is the No. 2 ingredient in most chocolate candy after cocoa and a key ingredient in foods ranging from cereal to baked goods.

Unlike other sugar exporters such as Brazil or Thailand, Mexico can sell sugar in the U.S. tax free under the North American Free Trade Agreement.

But U.S. growers complained in March that Mexico was subsidizing its sugar industry and dumping supply in the U.S. The Commerce Department slapped a preliminary tax as high as 64.27% on Mexican sugar, drafting an agreement to suspend the tariffs only when the country agrees to restrict exports and charge higher prices to avoid undercutting U.S. growers. That agreement has yet to be finalized. Such tariffs are allowed under Nafta in certain rare cases, trade experts said.

The U.S. Department of Agriculture said it expects Mexico to export about 26% less sugar year over year to the U.S. during the season that began Oct. 1. With Mexican imports expected to be limited, “there’s no more wild card in the sugar deck” that could flood the U.S. with sweetener and push prices lower, said Frank Jenkins, president of JSG Commodities, a brokerage in South Norwalk, Conn.

Prices are cheaper in India and Brazil, the biggest and third-biggest sugar consumers, respectively, which like the U.S. produce much of their own supply. The median U.S. retail sugar price was 56 cents a pound in October, compared with 35 cents in Brazil and 28 cents in India, according to Premise Data. Prices are higher in China, the No. 2 consumer, where the market is heavily regulated.

“There will be much more Mexican sugar in the world market,” said Sergey Gudoshnikov, a senior economist at the International Sugar Organization in London. “It adds some bearish pressure.”

The restrictive policies by the U.S. are designed to prevent price declines that would be harmful to the U.S. sugar-processing and farming industries.

But the federal sugar price-support program has come under fire from food-and-beverage companies, which argue their costs are higher because sugar gets more protections than other crops. Lawmakers introduced several bills to overhaul the program in Congress last year, but none passed.

Defenders of the price floor and import limits say they are a safety net for the domestic sugar industry and that some processors wouldn’t be able to operate without U.S. government-backed loans.

The American Sugar Alliance, an industry group that supports the government’s program, declined to comment.

The PEZ factory in Connecticut uses about 75,000 pounds of the sweetener a week, Mr. Vittoria said. The company has bought a large amount of sugar since the agreement with Mexico was announced and has fixed all of its prices for 2015, because prices are likely to rise, he added.

“We are looking carefully at protecting our 2016 pricing before the anticipated increases driven by the controls put onto imported sugar,” Mr. Vittoria said.