Cheaper Sugar Sends Candy Makers Abroad

Price Squeeze in U.S. Is Sticky for Confectioners

Despite a prolonged slide in domestic sugar prices, U.S. candy makers are expanding production in other countries as federal price supports and a global glut of the sweet stuff give an ever-greater advantage to foreign rivals.A 50% drop in U.S. sugar prices in the last two years hasn’t been enough to eliminate problems from a longtime price gap between domestic and foreign sugar.

On Friday, the U.S. sugar contract in the futures market settled at 22.28 cents a pound, or 14% higher than the benchmark global price.

Jelly Belly, whose facility in Fairfield, Calif., is shown above, is expandingits factory in Thailand. Bloomberg News
A Jelly Belly portrait of Marilyn Monroe. Associated Press

U.S. prices can’t fall much lower because of a federal government program that guarantees sugar processors a minimum price. The rest of the world also has a surfeit of sugar, but fewer price restrictions, and big growers like Brazil are expecting a record crop for the current season.

The squeeze explains why Atkinson Candy Co. has moved 80% of its peppermint-candy production to a factory in Guatemala that opened in 2010. That means it can sell bite-size Mint Twists to retailers for 10% to 20% less.

“It wasn’t like we did it for profit reasons. We did it for survival reasons,” said Eric Atkinson, president of the family-owned candy maker, based in Lufkin, Texas. “These are 60 jobs down there…that could be in the U.S.,” he added. “It’s a damn shame.”

Jelly Belly Candy Co. is finishing its second expansion of a factory in Thailand that was opened by the Fairfield, Calif., company in 2007. The sixth-generation family-owned firm sells about 20% of its jelly beans, made in flavors from buttered popcorn to very cherry, outside the U.S.

Sugar makes up about half of the ingredients and cost of a typical jelly bean, said Bob Simpson, Jelly Belly’s president and chief operating officer. Thailand is the world’s fourth-largest sugar producer and gives Jelly Belly access to cheaper sugar, labor and other raw materials than the candy maker has in the U.S.

“You can’t compete shipping finished U.S. goods” anymore, Mr. Simpson said. In the U.S., Jelly Belly has had to raise prices “several times” in the past 10 years due to high sugar prices.

Some U.S. candy makers blame the federal government’s sugar policy, set by Congress and administered by the Agriculture Department. Loans, marketing allotments and import restrictions guarantee a minimum price of about 21 cents a pound to domestic sugar processors. Sugar users say the protections inflate wholesale prices, hurt profit margins and sap the competitiveness of U.S. candy makers in the global market.

The price-support program’s defenders say it is an essential safety net for domestic sugar growers and processors besieged by record imports from Mexico. U.S. government-backed loans are the only option for some processors that need access to financing, according to the American Sugar Alliance, an industry group. Without the current U.S. sugar policy, 90% of the 142,000 sugar-growing and processing jobs in the U.S. would be in danger, the industry group estimates. The alliance also says that sugar makes up an extremely small percentage of the retail cost of candy and has little impact on U.S. jobs.

From 2000 to 2012, the average price of U.S. sugar was more than double the world-wide average, according to pricing data from the ICE Futures U.S. exchange, where both the U.S. and global contracts are traded, and the Agriculture Department.

Total U.S. confectionary-manufacturing employment sank 22% to about 55,000 jobs in 2011 from 1998, according to an analysis of U.S. Census Bureau data by The Wall Street Journal. The number of industry manufacturing locations fell 7.7% to about 1,600 in the same period.

Three candy-making jobs are lost for each sugar-growing and processing job saved by higher sugar prices, according to a Commerce Department report in 2006.

In a sign that candy makers are taking advantage of lower sugar prices elsewhere, the amount of sugar contained in imported products surged 33% from 2002 to 2012, according to the Agriculture Department.

For many types of candy, there is no substitute for sugar. The gap has caused some U.S. companies to abandon their longtime resistance to moving at least some production to cheaper countries.

Candy-cane maker Bobs Candies Inc. moved half of its manufacturing to Mexico between 2001 and 2002 from the family-owned company’s hometown of Albany, Ga. The remaining 250 jobs left after the company was sold in 2005 to Farley’s & Sathers Candy Co., now called Ferrara Candy Co. “No one cared if [the candy canes] were ‘made in the U.S.A.’ They just cared if they were cheaper,” said Greg McCormack, who ran Bobs Candies at the time. Eliminating candy-making jobs in the U.S. left “a bad taste in your mouth, but it was the medicine you had to take to stay in business.”

Financial pressures have grown because rising costs for labor, utilities, packaging, freight and health care in the U.S. make it impossible to lower candy prices when the cost of sugar drops, some candy makers said.

“There are years where we are at a great disadvantage to the world users of sugar when prices are rising,” said Pierson Bob Clair, president and chief executive of Brown & Haley, a Tacoma, Wash., candy maker that produces 55,000 pounds of Roca butter-crunch candy a day in the U.S. Mr. Clair said he would “lower the price of my products” if the sugar program was eliminated. Proposed legislation to overhaul the sugar program was narrowly defeated in the House and Senate earlier this year, and aides to lawmakers don’t see any changes in the coming farm bill.

Goetze’s Candy Co., a 118-year-old, family business in Baltimore that sells caramel candy under the Caramel Creams and Cow Tales brand names, would rather close its factory “before we move it out of the country,” said Mitchell Goetze, president and chief operating officer. Still, “when you’re selling a $1 bag of candy, it’s hard to be competitive and absorb these costs.”

Atkinson’s move to Guatemala didn’t affect production of brands such as the Chick-O-Stick and Coconut Long Boys because they contain less sugar than Mint Twists. They are still made in the U.S. But the individually wrapped peppermint candies, made with natural cane-sugar syrup and peppermint oil, are 60% sugar. Less than one-fourth of the candy maker’s total production has been moved outside the U.S., but the percentage being produced abroad is growing, said Mr. Atkinson. The foreign expansion, including a second shift just added at the factory in Guatemala, helps the company sell its products at lower prices that appeal to larger retailers.

“We would prefer to be able to make candy in the United States,” he said.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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