By Marina Lopes and Chris Prentice
NEW YORK, Nov 11 (Reuters) - Corn syrup producers are scrambling to defend their once-dominant share of the U.S. sweetener market, offering rare price cuts for next year as tumbling sugar prices erode the advantage of typically cheaper syrup.
Commodity merchants Cargill Ltd and Archer Daniels Midland Co are kicking off negotiations with high-fructose corn syrup customers over next year's supply contracts with price cuts of 10 percent, according to letters seen by Reuters.
A switch to sugar would further erode corn's role in the sweetener industry, which had already begun to shrink in recent years as studies linking high fructose corn syrup with obesity turned off consumers. Yoplait, General Mills Inc's yogurt giant, removed it from their products in 2013 because of customer demand.
Corn syrup remains the most popular sweetener with a market share of 52 percent, having secured the market over the past three decades as high U.S. sugar prices prompted many major beverage companies to search for cheaper alternatives for use in soda.
However, its competitive cost edge is now under threat. Although corn prices have tumbled this year ahead of a record 2013 harvest, U.S. sugar prices are languishing at multiyear lows as the North American market remains awash in supplies.
In January, spot refined sugar prices fell to a discount against equivalent high-fructose corn syrup prices for the first time ever, according to data compiled by the U.S. Department of Agriculture going back to 2000.
Traders cautioned that the spot market for corn syrup is thinly traded and that 2013 contract prices were already lower than spot trading prices.
But the trend is clear: sugar has never traded so closely with its corn counterpart.
"If a corn wet miller decided to raise prices or take a hard line (in negotiations), there is a very real threat a buyer could convert back to sucrose," said a U.S. trader.
PRICE TALKS KICK OFF
In an Oct. 28 letter, Cargill's corn milling business led the market by setting 2014 Midwest prices at $25 per cwt on a delivered basis for the high-fructose corn syrup formulation that dominates the bottler market
ADM's corn processing unit followed by reducing prices for 2014 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 list prices 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.
Corn syrup was first introduced for mass consumption in 1970. By 1984, The Coca Cola Co and PepsiCo Inc began using it to sweeten 100 percent of their drinks, bringing about a golden age for corn syrup.
But the switch began to stall over the past five years as consumer sentiment turned against the product.
New York Mayor Michael Bloomberg's initiative to cap the size of sweet drinks sold by restaurants, movie theaters, food carts and other businesses has spread beyond the Big Apple.
Last month, the government of Mexico, the world's largest soda 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 the past five years to 5.5 million tonnes at the same time that sucrose has risen 0.7 percent to 5.1 million tonnes, according to consumer research firm Euromonitor International.
Corn syrup's discount to sugar may be temporary, and prices are expected to return to historical norms as corn prices have dropped some 50 percent since July of last year in anticipation 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-fructose corn syrup, a level that has remained relatively steady in the past decade. However exports in recent years have risen threefold or more; in 2011 nearly one-fifth of all syrup was exported, USDA data show.
But the circumstances stand to stall demand growth for corn syrup and put sweetener users in a comfortable spot as this year's negotiations with producers kick off.
U.S. cane refiners have plenty of spare capacity to meet any fresh demand if food manufacturers do switch back to sucrose. Between 10-15 percent of the country's 5.9 million tonnes of cane refining capacity is idle, based on most recent annual data and industry estimates.
The situation has left bottlers and other sweetener users with the added ammunition of switching products during this year's negotiation with corn millers.
NOT SO EASY
Even so, switching sweeteners can prove tricky.
Producers would have to use up their corn syrup stockpiles as well as change recipes, edit product labels and retrofit factories, analysts said.
Sugar prices would have to remain consistently low to trigger a seismic shift in the use of the sweetener.
Then there is the matter of fickle consumer sentiment. When ConAgra Foods Inc swapped sugar for high fructose corn syrup in its Hunt's ketchup in 2010, customers complained about the taste. The company now offers both varieties.
"It seemed like this was something consumers wanted, but once 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 a negotiating tool, even if customers don't switch," said Michael Crowder, president of food ingredient broker South East Sales in Richmond, Virginia.