China, India, and Brazil boast three of the biggest economies in the developing world. This economic heft means that a change in any one of these countries has the potential to affect the global economy. Now, all three nations are simultaneously experiencing a parallel development that puts profits for many food makers at risk.
It's no secret that China and India have been experiencing economic booms in recent years. But these same booms also lead to decreased agricultural production as people move to cities and demand more of certain goods as lifestyles change. Both of these phenomena are evident in India and China, and they have led to a notable increase in an important agricultural commodity: sugar.
According to Bloomberg, India, which is a huge producer of sugar, is also one of the world's largest consumers of the sweetener. Demand finally outpaced production, and India became an importer of that commodity last year. As for China, sugar consumption has risen by nearly 50% in the past 10 years, in part because of the growing popularity of soft drinks from Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), among others.
Meanwhile, Brazil has not been experiencing the same kind of growth as China and India, but the country is pushing hard to make its economy run on sugar -- or rather, ethanol derived from sugar cane. And with a $1 trillion-plus economy on a purchasing power basis, Brazil is going to consume a lot of sugar as it moves forward with the government's goal of having all the country's cars ethanol-capable by 2011.
The changes in China, India, and Brazil drove sugar prices up 35.5% in 2004-2005, according to the Food and Agricultural Organization of the United Nations. Demand is expected to outstrip supply in 2005-2006 as well, leading to still-higher expenses for Coca-Cola and Pepsi, as well as the slew of other companies that use sugar, including Hershey (NYSE:HSY), Cadbury Schweppes (NYSE:CSG), Kellogg (NYSE:K), and General Mills (NYSE:GIS).
Granted, many of these food makers handled the surge in sugar prices last year well. What's more, the price increases are already prompting sugar producers to bump up production. Still, the current tight supply situation doesn't leave much room for error. Less-than-ideal growing conditions, a natural disaster, or some other incident that disrupts production could easily lead to a price spike, spelling lower pain for many in the food category.
Coca-Cola is a Motley Fool Inside Value recommendation.Take the newsletter dedicated to top-shelf companies at bargain-basement prices for a 30-day free spin.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
