U.S. corn syrup makers slash prices to fend off cheap sugar

Reuters

By Marina Lopes and Chris Prentice

NEW YORK, Nov 11 (Reuters) - Corn syrup producers arescrambling to defend their once-dominant share of the U.S.sweetener market, offering rare price cuts for next year astumbling sugar prices erode the advantage of typically cheapersyrup.

Commodity merchants Cargill Ltd and ArcherDaniels Midland Co are kicking off negotiations withhigh-fructose corn syrup customers over next year's supplycontracts with price cuts of 10 percent, according to lettersseen by Reuters.

A switch to sugar would further erode corn's role in thesweetener industry, which had already begun to shrink in recentyears as studies linking high fructose corn syrup with obesityturned off consumers. Yoplait, General Mills Inc's yogurt giant, removed it from their products in 2013 because ofcustomer demand.

Corn syrup remains the most popular sweetener with a marketshare of 52 percent, having secured the market over the pastthree decades as high U.S. sugar prices prompted many majorbeverage companies to search for cheaper alternatives for use insoda.

However, its competitive cost edge is now under threat.Although corn prices have tumbled this year ahead of a record2013 harvest, U.S. sugar prices are languishing at multiyearlows as the North American market remains awash in supplies.

In January, spot refined sugar prices fell to a discountagainst equivalent high-fructose corn syrup prices for the firsttime ever, according to data compiled by the U.S. Department ofAgriculture going back to 2000.

Traders cautioned that the spot market for corn syrup isthinly traded and that 2013 contract prices were already lowerthan spot trading prices.

But the trend is clear: sugar has never traded so closelywith its corn counterpart.

"If a corn wet miller decided to raise prices or take a hardline (in negotiations), there is a very real threat a buyercould convert back to sucrose," said a U.S. trader.

PRICE TALKS KICK OFF

In an Oct. 28 letter, Cargill's corn milling business ledthe market by setting 2014 Midwest prices at $25 per cwt on adelivered basis for the high-fructose corn syrup formulationthat dominates the bottler market

ADM's corn processing unit followed by reducing prices for2014 contracts by $2.75 a hundredweight from 2013 levels,according to a letter to customers dated Nov. 1.

Those prices are down 10 percent from 2013 contract listprices of about $28-$29 per cwt, or a sugar equivalent price of$21.56 to $22.33 per cwt, traders said.

Spokespeople for both companies declined to comment.

SWEETENER WARS

Corn syrup was first introduced for mass consumption in1970. By 1984, The Coca Cola Co and PepsiCo Inc began using it to sweeten 100 percent of their drinks, bringingabout a golden age for corn syrup.

But the switch began to stall over the past five years asconsumer sentiment turned against the product.

New York Mayor Michael Bloomberg's initiative to cap thesize of sweet drinks sold by restaurants, movie theaters, foodcarts and other businesses has spread beyond the Big Apple.

Last month, the government of Mexico, the world's largestsoda market, announced its first tax on high-calorie foods,aimed at curbing rising obesity rates and raising revenue.

U.S. corn syrup consumption has dropped 16 percent in thepast five years to 5.5 million tonnes at the same time thatsucrose has risen 0.7 percent to 5.1 million tonnes, accordingto consumer research firm Euromonitor International.

Corn syrup's discount to sugar may be temporary, and pricesare expected to return to historical norms as corn prices have dropped some 50 percent since July of last year inanticipation of a record-large U.S. harvest this autumn.

The USDA estimates that about 500 million bushels of corn,or 5 percent of the U.S. crop, is used to produce high-fructosecorn syrup, a level that has remained relatively steady in thepast decade. However exports in recent years have risenthreefold or more; in 2011 nearly one-fifth of all syrup wasexported, USDA data show.

But the circumstances stand to stall demand growth for cornsyrup and put sweetener users in a comfortable spot as thisyear's negotiations with producers kick off.

U.S. cane refiners have plenty of spare capacity to meet anyfresh demand if food manufacturers do switch back to sucrose.Between 10-15 percent of the country's 5.9 million tonnes ofcane refining capacity is idle, based on most recent annual dataand industry estimates.

The situation has left bottlers and other sweetener userswith the added ammunition of switching products during thisyear's negotiation with corn millers.

NOT SO EASY

Even so, switching sweeteners can prove tricky.

Producers would have to use up their corn syrup stockpilesas well as change recipes, edit product labels and retrofitfactories, analysts said.

Sugar prices would have to remain consistently low totrigger a seismic shift in the use of the sweetener.

Then there is the matter of fickle consumer sentiment. WhenConAgra Foods Inc swapped sugar for high fructose cornsyrup in its Hunt's ketchup in 2010, customers complained aboutthe taste. The company now offers both varieties.

"It seemed like this was something consumers wanted, butonce we did it, demand just wasn't there," said Lanie Friedman,Hunt's spokeswoman.

Even so, the wrangling will likely roil price negotiations.

"Everyone needs to look at it. It may be used as anegotiating tool, even if customers don't switch," said MichaelCrowder, president of food ingredient broker South East Sales inRichmond, Virginia.

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