The growing shortage adds pressure to the industry as it grapples with the sugar tax
Hazel Sheffield Wednesday 30 March 2016

George Osborne has an unlikely ally in the battle against sugary drinks and the ballooning national obesity epidemic.

Weather conditions in global sugar producing countries have been so unfavourable that an impeding sugar shortage could see the price of sugary drinks and snacks rocket in the second half of 2016.

Raw sugar prices have risen 9.6 per cent so far this year and are trading around their highest point for 18 months. Sugar is also running a deficit that is expected to reach 4.95 metric tonnes in 2016-17 according to Green Pool, an Australia-based commodities consultancy.

“Many companies have been holding off, but the extended deficit in supply may force a price increase to be passed along to consumers in the second half of 2016,” said Michael Ferrari, vice president of commodities and risk analytics at aWhere, an agricultural intelligence company.

“Based on volumes, it is my view that a sizeable portion of the market is not properly hedged, so passing along price increases is likely,” Ferrari told the Independent.

Tom McNeill, director of Green Pool, said that larger manufacturers may have locked in lower prices for sugar, while smaller manufacturer and retailers may also have contracts for a fixed price up to 12 months ahead. McNeill also said lower prices for transport and packaging – a side-effect of lower oil prices – may offset higher raw sugar prices.

“There will be pressure on manufacturers to consider raising prices if they aren't being offset elsewhere. If sugar rises but say packaging or transport costs fall, will they risk losing customers by putting up prices?” McNeill said.

The growing shortage adds pressure to the industry as it grapples with new regulations that will add 8p to the price of cans of soft drinks and up to 40p of the price of a 1.75 litre bottle from 2018. 

Osborne’s sugar tax has not gone down well with drinks-makers, who are expected to mount a legal challenge through the European courts. 

Soft drinks makers including Coca-Cola and Britvic are understood to be considering suing the UK Government.

Industry bosses could claim the tax is discriminatory because it will not hit other beverages with high sugar content, like milkshakes, fruit juice and even coffee.

When asked how he felt about the potential legal challenge at a meeting of the Treasury Select Committee, Osborne replied: “Bring it on.”

But sugar companies including chocolate makers and those outside the scope of the sugar tax may face a bigger challenge as a sustained sugar deficit forces them to reconsider the price of products on shelves.

George Osborne's tax on sugary drinks will make them turn to high-sugar foods instead, according to the IFS (Getty Images)

The gap between supply and demand in raw sugar has widened 19 per cent since January.

Crops have been hit by El Nino, a warm weather event in the Pacific Ocean that has a knock-on effect on agriculture the globe.

Drought has hit sugar production in India, Thailand and Brazil for this season and next. Chinese production has already been downgraded by Green Pool Commodities from 9.5 to 9.2 million metric tonnes in 2016.

In China, excess sugar stock is owned by the government and used as a buffer. If the Chinese government sees the price of raw sugar increasing, it may decide to release some of that stock to the market to reduce inflation. 

Below average rainfall in India has hit production and limited planting for the upcoming crop. Indian sugar farmers also have some government support, making it very difficult to predict how the market will react.

Sugar ran at a surplus, where supply outstrips demand, for the five years until 2015, which means stocks have built up. 

Nick Penney, a senior trader at commodities broker Sucden Financial, told the Independent that Europe will have to import sugar in 2016 because of a bad crop last year, but that he didn’t expect to see price increases on products on shelves in the near-future.

“I certainly don’t think we’re back to the seventies where there were major price increases. There would have to be two or three years of deficit increases before those prices are passed onto the consumer,” Penney said.

The European Union is the third largest sugar producer and the second largest consumer in the world. Prices in the EU are controlled by Tariff Rate Quotas that prevent sugar imports beyond certain limits from the most competitive producers of sugar, including Brazil, Thailand and Australia.

Analysts have said a sugar tax may not have as much impact in the UK as in other countries such as Mexico, because people may be prepared to pay more for drinks rather than cut them out of their diet.

“I would take this tax on sugar with a pinch of salt. It’s not due to come in until 2018 and I am very doubtful that it will have much of an impact on this country’s consumption of sugary drinks,” Penney said.