Sugar shock: Will the 'Domino' effect drive up food prices?

In a recent letter to Agriculture Secretary Thomas Vilsack, several large food producers warned that unless the U.S. increases its quota of tariff-free sugar imports, it may, "run out of sugar" in the next year. This, in turn, would lead to layoffs, skyrocketing prices, and a serious shift in trade.

Part of the problem lies in a worldwide sugar run as Brazil diverts part of its sugar crop into ethanol production and monsoons have wiped out much of India's sugar crop. All told, the Department of Agriculture expects sugar supplies to drop by 43 percent over the next year.

In many ways, the government is caught in a squeeze play. On the one side, there are domestic sugar beet and cane growers who are strongly invested in maintaining a high price for American sugar. Perhaps more importantly, they also have a very strong lobby that helps them to control import quotas. This ultimately translates into an American sugar market that is priced at two to three times the global market rate and American companies that make billions per year in inflated profits.

Of course, this comes with a considerable cost, particularly to food producers, who form the other part of the government's squeeze. Sugar futures have already gone up by 95 percent this year, hitting a 28-year high. In their letter, the sugar producers proposed an almost apocalyptic scenario, in which the country would have only "13 days' worth of sugar on hand." While nutritionists might see this as a good thing, an astounding array of foods contain sugar and higher sugar prices lead to higher prepared food prices. In the case of Kraft Foods (KFT), sugar currently accounts for six percent of food costs; for Hershey's (HSY), it is eight percent. Added in with increases in the cost of corn -- also due to ethanol production -- and food manufacturers are looking at a major spike in production costs.

As food prices rise, consumers will feel the change every time they visit the supermarket, a trend that is bound to increase voter irritation and which may translate into pain at the polls. On the other hand, with big sugar calling the shots, any move toward increasing imports is also fraught with peril.

One solution is to use high fructose corn syrup (HFCS); as the price of sugar rises, the compound becomes comparatively cheaper and thus more attractive to food manufacturers. However, as more customers become aware of the health dangers associated with HFCS, many food companies are shying away from it. In fact, even the soft drink industry -- long a bastion of HFCS -- has begun experimenting with new sugar-sweetened sodas.

As they currently stand, sugar quotas are driving up food costs, weakening international trade and driving an already-overpowered corn industry. As the price of candy bars is poised to shoot up, perhaps it is time for the government to put Big Sugar on a big diet.

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