ADM and others pursue higher 2002 sweetener prices
big price increases for corn sweetener next year as tightening
capacity and industry consolidation give them more bargaining
power.
US grain company Archer Daniels Midland Co., fined this week by the European Commission for its involvement in a citric-acid cartel, announced on Wednesday, along with other grain processors, that it expects big price increases for corn sweetener next year as tightening capacity and industry consolidation give them more bargaining power and may signal a turnaround for the depressed market, analysts said.
ADM, the largest maker of high-fructose corn syrup used by Coca-Cola Co., PepsiCo Inc., and confectionery makers, is angling for a price boost of 15 per cent to 20 per cent for 2002, said a company spokesman, who confirmed that negotiations for next year's prices are in the works.
A spokeswoman for rival Corn Products International Inc. the No. 3 U.S. corn sweetener maker, said her company is also in talks for increases "on the same trends'' as ADM. Most soft drink customers lock in their pricing with suppliers for about a year at a time.
"You have tight capacity,'' said Prudential Securities analyst Jeffrey Kanter. "If there's ever a time where you can get better pricing, now is the time.''
Corn milling capacity has fallen as major producers such as ADM and privately held rival Cargill Inc. have shifted production to make ethanol, a bio-fuel. ADM said it has shifted more than 10 per cent of its capacity to produce the fuel, which is considered cleaner than other gasoline additives.
Coca-Cola was not immediately available to comment on the procurement of sweeteners for its drinks. But top Coke bottler Coca-Cola Enterprises Inc. said on Tuesday it hopes to raise retail soda prices next year, in part to offset an expected climb in sweetener costs.
Pepsi Bottling Group Inc., the largest bottler of Pepsi drinks, could not immediately provide details about its purchasing arrangements.
Any possible increase in retail prices of soft drinks would come from the bottling companies, not from Coke or Pepsi.
Decatur-based ADM makes about one-fourth of the more than 30 billion pounds of corn sweetener produced in the United States each year. Successful negotiations by the company likely will translate to similar contracts for Corn Products, No. 2 corn sweetener maker Cargill and No. 4 A.E. Staley, a Tate & Lyle unit, analysts said.
Still, most doubt ADM and its rivals will be able to lock in the price boost they are seeking. Instead, they are looking for increases about 9 per cent to 10 per cent, or roughly 2 cents a pound.
"I'm expecting a high-single-digit to low-double-digit increase,'' said Merrill Lynch analyst Leonard Teitelbaum.
Prices for high-fructose corn syrup began to dive in the late 1990s after manufacturers overbuilt capacity to meet expected growth in Mexico, which failed to materialize due to regulatory hurdles. Prices fell to a low of about 12 cents a pound on average in 1997.
Recently prices have averaged around 13 cents to 14.85 cents, depending on the region, according to trade publication Milling & Baking News. Even a big price boost would still leave the price of sweetener well below that of sugar in the United States, which currently trades around 21 cents a pound.
"The industry has been beaten up," said Banc of America Securities analyst William Leach. "Margins are a little better this year, but they're still poor."
Besides giving manufacturers more bargaining power, several recent deals may put a halt to steep price undercutting from smaller players, analysts say.
Early last month, Cargill agreed to buy a 56 per cent stake in French agribusiness concern Cerestar , one of Europe's largest corn millers, for $428 million. Though a minor player in the United States, Cerestar plants here had been blamed for undercutting prices in efforts to build market share, making it more difficult for U.S. makers to lock in favourable contracts.
In addition, Corn Products formed a joint venture earlier this year with Minnesota Corn Processors LLC, a cooperative, further helping to consolidate the industry. Rumours have circulated that ADM may be interested in boosting its 6 per cent stake in British-based Tate & Lyle. ADM declined to comment on the matter.
"There just aren't the small players that there were in the past to be disruptive in pricing,"said Midwest Research analyst Christine McCracken. "You should have a more rational market.''
