Sugar’s New Normal

Last week my daughter and I were honoured to co-chair the 28th ISO Seminar in London. It was a great event as always, well organized and well attended.

The ‘War on Sugar’ was omnipresent at the event, centre stage in both the conference and coffee rooms.

Some attendees were optimistic that they would eventually win the war—that sugar demand would pick up again once folks realized that cutting sugar consumption was no silver bullet in the battle against obesity.

One presenter explained that the objective of most governments and NGOs was to reduce sugar’s share in daily calorie intake to 5 percent, as recommended by WHO guidelines. However, replacing one calorie by another will not solve the obesity problem.

Other presenters gave examples of chocolate and food manufacturers who are reducing sugar content in their products but replacing it partly with fat, the net result being lower sugar content but the same number of calories.

However, for the moment at least the sugar industry is losing the war. It is having to come to terms with slowing demand growth or, in some instances, an actual decline in outright demand. This is a completely new paradigm, and it is taking some time for the new reality to sink in. It has a number of implications.

Agricultural sugar yields, particularly in beet, have historically been increasing at around 1.5 percent per year, enabling the sector to meet rising demand with little need for new areas. However, zero demand growth coupled with rising yields means that farmers will have to reduce their sugar acreage.

Also, when sugar demand was growing at 3 million tonnes per year, any surplus production one year could be relatively quickly absorbed in the following years. Now, if one country over-produces—as recently happened in India—other countries have to reduce production if they don’t want the surpluses to hang around, weighing on the market.

The sugar sector is similar to grains in the sense that it has over-invested in capacity, both in refining and milling. In the past that wouldn’t have mattered too much because demand would have eventually caught up. This is no longer the case.

If demand is stagnant, the only solution is consolidation and rationalization. This is already happening, particularly in Europe and Brazil where factories are being closed.

It is not all bad news. First, demand is still growing strongly in some regions, particularly in Africa, but also to a lesser extent in Asia. This presents local opportunities. Second, rationalization and consolidation can lower costs if smaller less efficient units are closed. Third, slow growth sectors are less attractive to potential new entrants, reducing the threat of excessive capacity investment.

The sugar sector is also lucky in that sugar cane and beet are extremely versatile products. It doesn’t have to produce only sugar and can diversify into ethanol, bioplastics, energy generation, fibres etc. Unsurprisingly, diversification was a hot topic at the seminar.

Meanwhile, many food manufacturers are taking advantage of the anti-sugar hype to reduce the size of their products, particularly drinks and chocolate bars. But they are not reducing the prices of these products—another example of companies becoming more profitable in a zero or negative growth market. In addition, many sugar producers are starting to produce higher-value and innovative reduced-sugar sweeteners.

If you look around you can see plenty of zero growth, or low growth industries that are highly profitable. There is no reason why sugar shouldn’t be one of them.

However, as more than one presenter pointed out, it is the consumers that now have the power;  you have to follow the trends and produce what they want. But what they want is not always what they say they want. Consumers may say they want a healthy sustainable product, but what they buy is actually a convenient low-cost tasty one. In order of importance, taste comes first, price second and convenience third. Health is fourth and poor old sustainability fifth.

Having said that, modern day consumers take for granted that their foods are sustainable and healthy—and they rent their outrage on social media when they are not. Unfortunately, consumers are not willing to pay for sustainability. This means that the extra costs involved are passed down the value chain to the farmers, making them worse off. It is a problem that I have often touched on in my blogs, but so far no one has found any solution to it.

On a brighter note, one piece of research presented at the seminar found that consumers prefer the cake to their presents on their birthday. Baking a cake is apparently seen as an act of love, more so than just buying a present. I will remember that for my grandchildren!

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