Demand for sugar in U.S market
The largest producer of sugar worldwide is Brazil producing over 31.3 Mil tons of sugar, India ranges the second producing approximately 28.8 Mil tons and is also rated the largest consumer of sugar worldwide. Other include in European Union which produces 17.57 Mil tons and China which produces 14.6 tons of sugar. The world production of sugar is approximated to be around 160K in metric tons. The key driver on sugar prices have been the regulations set by governments. Sugar is one of the U.S heavily-subsidized supplies (cheesman, 2004).
Foreign sugar market is normally subsidized by the respective producing countries in order to match their price with that of U.S which makes production cost less. This is called dumping which normally enables producers to eliminate surpluses and increase market share. This helps farmers compete with other countries producers, or the international competitors. The lobbying done by sugar farmers influences decisions of the federal government, and this has been a key determinant of demand and price for sugar in U.S. In most countries sugar manufactures are given subsidies to be able to face out the cheaply priced sugar in the market. U.S.A government for instance use import restrictions in order to increase the price of sugar (Gittleman, 2008).
Another factor that has largely influenced demand of sugar is the commercialization of ethanol. In fact this has increased sugar demand. For example, more than 50% of ethanol production worldwide comes from sugar. Production of ethanol from sugar has been found effective than production of ethanol from corn. The commercialization of this process has raised demand for sugar in U.S and increased sugar prices. This commercialization process is driven by oil prices since rise in oil prices makes biofuels ore attractive hence increased demand on ethanol. For example, Sugar increased in price by 22% in fiscal 2008 which was in response to the perceived increase on gasoline prices (Cheesman, 2004).
Commercial sugar is mostly produced from sugarcane and sugar beets. Other minor sources comprise sugar maple, date palm ad sorghum. It's been estimated that 69% of commercially produced sugar is consumed in the country where it's produced. The rest is traded in the global market. Sugar beets account fro around 60% of sugar in U.S and are grown all the year around. Sugar cane account for 40% of U.S sugar and are grown perennially. Production of sugar in U.S generates about $10B of the annual economic activity. Some of the uses that sugar is put into include sweetening food products and adding texture and color to food (Gudonishkov & Spence, 2004).
Establishment of producer cooperatives for farmers has enhanced farmers' ability to own up the processing facilities. This is called vertical integration that enable producers to embrace economies of scale by decreasing costs of production and processing and hereby the ability to control sugar prices. These cooperatives also determine the cause for commercialization of sugar to ethanol. Other factors that have driven demand and price for sugar include the effects of sugar on consumers' health. Sugar is seen as a cause for obesity and cardiac diseases especially in United States and this has decreased demand for sugar as well as search for its substitutes like fructose corn starch and corn syrup. According to Gittleman (2008), availability of various substitutes especially in developing countries has immensely affected sugar prices. Most developing countries are consuming other artificial sweeteners which are available in their markets in place of sugar. These have been the key macroeconomic trends which drive sugar demand and supply.
The supply of sugar increased significantly for the period between 1994 and 2004 which saw sugar prices drop significantly. This has been instigated by the rising consumer demand across nations. The supply declined for the period between 2004 and 2006 and since 2006 the prices have again increased and this has been reflected by gradual decline in price (Cheesman, 2004).
Elasticity of demand and supply
When the demanded quantity of a commodity changes a lot, the effect is said to be elastic. If the demanded quantity does not change a lot, then the demand is said to be inelastic. The price elasticity of demand (E) is given by percentage change in demanded quantity divided by the perceived price change in percentage. Where E is zero, demand is viewed as perfectly inelastic while E=1 shows demand as unit elastic, whereas infinite value on E shows perfect elasticity. The price elasticity of sugar demand has mainly been inelastic just like many of foodstuffs and sugar consumers do not get so much affected in U.S and Europe as sugar prices get fixed by governments in order to protect producers of sugar beets and sugarcane. Even if Sugar prices in U.S were not fixed demand would hardly change since it only involves a small proportion of people's income (Rogers, 2007).
Some of the factors that determine the commodity's elasticity include the commodity's relative size of purchase. Sugar purchases are rated to be small in relation to the individuals' total expenditure and this makes the income elasticity of demand more inelastic. Another factor that makes sugar demand elasticity more inelastic is its broad market. Sugar is broadly available in the market and this also brings us to the other factor; the availability of substitutes such as fructose corn syrup. The more the substitutes availed the more the demand elasticity. Another factor that influences the perceived commodity's demand elasticity is the idea on whether the commodity is a basic necessity or a luxury. It's hard that a necessity's demand will change and thereby most of necessity's demand is inelastic. To some people especially in developing countries sugar is deemed as a luxury while in most developing countries sugar is a luxury and its demand therefore elastic (Case & Fair, 2008).
U.S domestic sugar consumption for the period 1995-2009
Case, K.E & Fair, R.C. (2008). Principles of Economics. Los Angeles, USA: Prentice Hall
Cheesman, O. (2004). Environmental impacts of sugar production: the cultivation and processing of sugarcane and sugar beet. Wallingford United Kingdom: CABI.
Gittleman, L. (2008). Get the Sugar Out: 501 Simple Ways to Cut the Sugar Out of Any. New York, USA: Three Rivers Press.
Gudoshnikov, S & Spence, D. (2004). The world sugar market. Abington. Cambridge: Woodhead Publishing.
Rogers, J. (2007). Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market. Munich, Germany: Random House Trade Paperbacks.