Sugar Prices Hit 30 Year Highs
I spent the evening reading through the annual report and SEC filings of Imperial Sugar on the iPad listening to the creek outside with the windows open.
(That would be an article in and of itself – the company had a huge explosion in 2008 at one of its sugar refineries, killing several employees and injuring dozens more. The insurance proceeds have been paid and they rebuilt a state-of-the-art facility that is just now gearing up for full production. Yet, they are off hedge accounting, causing massive fluctuations in the income statement, huge reported losses, and the insiders do not appear to be buying anything, making me extremely cautious as to the long-term prospects of the firm. The pension is also roughly $100 million underfunded, but that is most likely because the fiscal year ends in September and the market was much lower than it is now. If things were back to normal, the cash dividend yield would be huge but it is an open question as to whether or not that will ever be possible; a walk in the part, this is not … and I haven’t even described half of it to you.)
Anyway, the thing that struck me was that as a result of weather in India and Brazil, and a law passed by Congress in 2008 limiting sugar imports into the United States, domestic sugar prices have shattered a 30 year high. Of course, this isn’t adjusted for inflation so it isn’t the whole story.
That isn’t exactly good news for refiners unless they own their own fields because a pure refiner buys sugar cane from farmers, refines it, and then sells it to stores and industries such as chocolate makers. If prices rise too quickly, the cost of the raw sugar cane purchased increases more rapidly than the refiner can increase their prices to end-customers, causing their margins to collapse.
That means that the input costs for food manufacturers is still high. Apparently, the sugar beet harvest is supposed to be higher than the USDA anticipates, which might mean sugar futures would fall. (Warning: As a general life rule, you should avoid futures. Futures are extremely dangerous for 99% of people and you can lose your house, your car, and your life savings in under a few minutes. Run. Run away from them and never look back.)
Update: This is such a wonderful case study of how the lower one goes on the commodity chain, the more difficult it can be to make money. The sugar price spike was absolutely brutal and, as I suspected, Imperial wasn’t able to pass it on to its customers in time. As the financial statements were hit, the stock collapsed to reflect that new reality, losing nearly all of its value until the company was acquired for a deeply discounted price in 2012 by a Dutch enterprise, Louis Dreyfus Company. Not all businesses are equal. It pays to know that. Understandably, my reading gave me a head start in this area as I remember an anecdote from famed investor Peter Lynch back in the 1980s or 1990s when he talked about a debacle involving beets as a sugar substitute and how a lot of investors were burned when it didn’t materialize. (Financial history matters even though the past is not always indicative of the future!) This is a glimpse into one of the reasons I prefer to own the users of sugar – companies such as Coca-Cola, PepsiCo, Hersey, Nestlé – rather than sugar farmers or sugar refiners. Of course, any of those businesses can go bust, too, causing significant losses but all else equal, and present known factors considered, it’d be far more difficult for that to happen to one of those companies than it would a stand-alone refiner such as Imperial at the time this post was originally published.