Rising production costs and growing ethanol use in Brazil,
combined with policy-induced production swings across Asian countries,
are the main sources of higher and more-volatile sugar prices.
By Michael McConnell, Erik Dohlman & Stephen Haley*
World sugar prices soared to a 29-year high of nearly 30 cents a pound in early 2010 before falling back to half that level by early summer.** Still, they remain 50% higher than average over the past 20 years. Was this price spike a temporary oscillation caused by a supply shock, or does it reflect a more permanent fundamental shift in global market dynamics?
U.S. sugar prices have traditionally been far above and largely independent of world prices due to import restrictions and provisions of the U.S. sugar program (price supports and domestic marketin allotments). In particular, a tariff-rate quota (TRQ) insulate the domestic market from global price spikes by putting a ceiling on the quantity of sugar that the U.S. is required to import, so domestic prices are set primarily by internal supply and demand conditions.