Summary
In addittion to all press about corn and wheat prices which affect Kraft and SaraLee they are now exposed to sugar as well. The explosion at Savannah which will keep that refinery off line for at least a year (and maybe forever) destroyed almost 10% of the U.S. refining capacity. Their are only 8 cane refineries in the U.S, and now only 7 are operable. Recall after Katrina knocked out the New Orleans refinery for 90 days that sugar prices skyrocketed from $25/cwt to over $40. The New Orleans refinery was much smaller than the Savannah refinery and was only off line for 90 days. Since the sugar industry has been quick to downplay this to hopefully head off the USDA opening up the imports again; the fact that all this occured during the winter months when demand is normally low and the beet sugar guys are trying to "clear storage" which dumps an inordinate amount of refined sugar into the market during a short period of time. The shortfall will start showing up in May/June.
Analysis
Unfortunately, the large sugar users have been spending an inordinate amount of energy fighting the sugar program they have failed to look far enough into the future to see the implications. As beet sugar growers switch to corn and wheat and fewer acres are planted in beets, the cane refineries will have to pick up the slack. Normally this is a good thing; but now with only 7 cane refineries left there is just so much finite capacity. Even if the USDA opens up the borders and allows refined sugar into the U.S. the logistics of bringing in 50 kg bags or super sacks will be a huge labor and product safety issue for the food industry. Costs will go up and supply lines will stretch across large ocean expanse.
There isn't an easy solution; but the food majors will to be thinking about long term strategic contracts and tolling agreements, etc.
