Coca-Cola Company (The) (NYSE:KO), Pepsico, Inc. (NYSE:PEP) – How is the surge in sugar futures affecting Coca-Cola’s earnings?

Sugar is used in food, beverages and biofuel production, and its importance in world trade gives it a strong position in the commodity futures market. The price of sugar has jumped 17% since the start of January 2021.

Reduction of Brazilian production

Sugar prices have recently been affected by production levels in Brazil, a major producer and exporter of cane sugar. In May, Brazilian factories reportedly had to cancel sugar export contracts as they switched to ethanol productionseeking to take advantage of high energy prices.

Brazil supplies half of the world’s sugar, producing 654.8 million tonnes of sugarcane, 41.25 million tonnes of processed sugar and 29.7 billion liters of ethanol per year.

As the Ukraine crisis sparked a global energy crisis, Brazilian farmers turned to ethanol production. However, the United States Department of Agriculture estimates that Brazil’s sugarcane harvest will recover 6% year-over-year to 613 million metric tons in the 2022-2023 marketing year.

Strong production in India and Thailand

However, India and Thailand, which also export large volumes of sugar, compensate for the drop in production in Brazil. Last month, a trade group in India said the country could produce a record 36 million tonnes of sugar in 2021/22, up 3% from earlier estimates.

The recording output in India and improved production levels in Thailand could lower world sugar prices. But concerns that the Indian government might curb exports recently pushed up sugar futures prices.

Sugar consumers are the most affected

While fears of lower sugar production may be a victory for sugar futures traders, users of the commodity are bearing the costs of low sugar supplies and higher inflation.

Coca-Cola (NYSE: KO), known for its eponymous sugary drink, is considering further price hikes as record inflation eats away at corporate profit margins.

Last year, Coca Cola raised its product prices to counter rising raw material costs, joining other mainstream brands like PepsiCo (NASDAQ: PEP) and JM Smucker (NYSE: SJM).

Rising prices helped the soda maker expand its full year turnover in 2021 by 17% year-over-year to reach $38.7 billion. Consumer brands like Coca-Cola, which continue to dominate the global soft drink market, have strong pricing power, allowing them to pass on rising input costs to customers.

So the stock price of Coca-Cola has risen in line with the price of sugar since the start of 2021, up around 20%.

However, Coca-Cola and rival PepsiCo have recently suffered from weaker margins despite strong revenues. Companies warned in February that rising costs were weighing on their profit margins, prompting them to revise their sales forecasts downwards.

US Sugar Futures 1D vs. Coca-Cola 1D

Betting on pricing power

“We control our supply chain basically down to the shelf. That puts us in a relatively better position, but I wouldn’t say we’re not going to have challenges. We’re not immune to that. “, Johnston reportedly said. .

PepsiCo shares are up 13% in the past year on Tuesday.

Coca-Cola CFO John Murphy echoed Johnston’s concerns, telling analysts on a February earnings call that the company continues to expect commodity price inflation to have a single-digit impact on the comparable cost of goods sold in 2022.

But Murphy remains bullish on the company’s pricing power, saying commodity pressures will be offset by the company’s “pricing power and brand leadership”.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

Rachel J. Bradford