The Next Commodity Ready to Soar

A judge's order is going to leave a sour taste in consumers' mouths if allowed to stand: Half of the U.S. sugar supply is at risk because of it and prices will undoubtedly soar.

At issue is the approval by federal regulators for Monsanto (NYSE: MON  ) to produce a genetically modified seed for sugar beets that's resistant to its herbicide Roundup. The judge said the Agriculture Department had violated the National Environmental Policy Act by approving the GM seeds because it didn't perform an environmental impact statement prior to approving the seeds for commercial cultivation. The judge said it wasn't legally clear if he could consider the economic impact of his ruling before issuing it.

You can't sugar-coat this
The U.S. produces 7 million metric tons of sugar annually, with beets supplying a little more than half of the nation's sugar supply (the rest comes from sugar cane). The U.S. sugar beet crop was worth $1.3 billion in 2008. With GM beets accounting for around 95% of all sugar beets, and without sufficient numbers of conventional seeds available, once the current crop is harvested next spring, there will likely be a huge disruption in the supply chain. Expect prices of sugar and sugar-containing substances to soar, if the ruling stands and no interim measures can be provided.

It's estimated that the judge's ruling will cause at least 14 of the 21 sugar beet plants in the U.S. to close, costing 5,800 full-time and seasonal jobs. There would also be $283.6 million in lost gross profits for beet growers, with the total economic impact to rural communities coming in at nearly $1.5 billion dollars.

We've got a sweet tooth
According to the USDA, Americans consume more than 9.5 million metric tons of sugar per year. Even if cereal makers like Kellogg and General Mills (NYSE: GIS  ) are reducing sugar in their products, they're already facing higher wheat prices as a result of the wildfires sweeping Russia, and are going to get a toothache if their sweet additive jumps in price, too. After all, they're not swearing off their sugar high completely.

And look for consumer goods made by Kraft (NYSE: KFT  ) -- especially following its tie-up with Cadbury earlier this year -- and Campbell Soup to feel it, too, since they are all major purchasers of sugar.

The U.S. already has import restrictions on cane sugar in place, which makes U.S. sugar more expensive than it otherwise would be. Sugar that comes in over quota is subject to a tariff of $15.36 per hundredweight, making it generally uneconomical to import. But earlier this year domestic prices soared so high that it was almost cheaper to buy imported sugar, even with the tariff in place. If sugar prices jump again because half of the U.S. sugar output is missing, it might become advantageous to buy sugar on the world markets again, meaning that even Imperial Sugar (Nasdaq: IPSU  ) , one of the largest producers of refined sugar from sugar cane, won't be able to benefit extensively from the ruling.

Sugar pie, honey buns
Naturally, candy makers Hershey (NYSE: HSY  ) and Tootsie Roll (NYSE: TR  ) will feel the pinch, despite using hedging activities to control costs. Even Coca-Cola (NYSE: KO  ) , which uses alternative sweeteners in its domestic operations, opts for the real deal in its international beverages.

It's not certain the ruling will stand, though. In 2007, a different judge ruled against Monsanto's GM alfalfa seeds and the biotech had to take the case all the way up to the Supreme Court to get it overturned. Of course, that kind of process takes years, as does conducting an environmental impact statement, meaning it won't be a sweet deal for consumers stuck in the checkout line.

Coca-Cola and Monsanto are Motley Fool Inside Value recommendations. Kellogg and Coca-Cola are Income Investor selections. Motley Fool Options has recommended a synthetic long position on Monsanto. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 17, 2010, at 5:38 PM, doncoyoteok wrote:

    So did the judge perform an environmental impact statement before issuing his ruling? I didn't think so.

  • Report this Comment On August 18, 2010, at 11:14 AM, Jbay76 wrote:

    Its not the judges role or duty to perform an EIS. Good for the judge to recognize where both industry and government regulation did not do their job......BP oil disaster anyone? Come on, whats the point of having government agencies if they're not going to follow the rules and, in doing so, multinationals that don't give a cr@p about anything but profits, and in this case add in monopolizing the basic genetic code of agriculture, can do what they want. Kudos on the judge, both the USDA and Monsanto should get slapped with a fine!

  • Report this Comment On August 18, 2010, at 12:55 PM, ChrisFs wrote:

    Would this be a good opportunity to look for a sugar ETF?

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