London, Aug 11 - Raw sugar prices are near 28-year highs, but analysts said on Tuesday they saw limited scope for food companies to shift to cheaper alternative sweeteners because many already pay above the market price for sugar.
Sugar prices are still subsidised in the European Union and the United States, and reforms are under way to gradually remove protection of their sugar industries to create a more level playing field in international trade.
Raw sugar futures have surged by over 80 percent on the international market this year to more than 22 cents a lb, driven by Indian imports after a dismal domestic crop. A weak monsoon augurs for substantial Indian imports again next year.
Food industry analysts said that in the United States and Europe, food companies already paid high, protected prices for sugar, and so the latest rally in the world sugar market was not expected to have any immediate impact on their buying strategy.
However, in some developing countries like China, food companies could turn increasingly to cheaper alternatives.
"Europe operates a protective regime for sugar as does the U.S., so the world sugar price really only affects those outside these areas," said analyst Julian Hardwick at brokers Royal Bank of Scotland.
Analysts pointed out that the current world price of sugar at around 22 cents compared to prices within the protected regimes of Europe and the United States of around 35 cents.
"The read across is not at all clear, with a very limited impact seen in Europe and the U.S.," said analyst Martin Deboo at brokers Investec Securities.
SET TO RETRACE LOWER
British confectionery giant and big sugar buyer Cadbury Plc declined to comment on sugar prices, but analysts said that it buys the bulk of its sugar in Europe and the U.S. so is used to paying high prices for its sugar.
"For Cadbury, cocoa is a much bigger concern than sugar in the commodity world," said one analyst.
Britain's biggest food group Premier Foods, maker of Mr Kipling cakes, Hartley's jam and Branston pickle, said it buys all its sugar in Europe where prices had peaked and were coming down due to reforms of the European sugar regime.
Jonathan Kingsman, head of consultancy Kingsman, said while food companies in Europe and the U.S. were unlikely to switch out of sugar, in China there could be a move to alternative sweeteners such as aspartame or high fructose corn syrup.
"The exception might be China where you have a low corn price and a relatively high sugar prices," he said.
Kingsman told Reuters that ICE raw sugar futures were set to retrace lower to 20 cents a lb from around 28-year peaks which would then trigger flows of Brazilian raw sugar to India.
ICE October raw sugar futures stood at 21.64 cents a lb, down 0.36 cent or 1.6 percent, at 1239 GMT.
Kingsman, a leading authority on the global sugar economy, said in a phone interview that Indian demand would then support prices, which on Monday hit a 28-year peak of 22.44 cents a lb, adding the market could eventually exceed 25 cents a lb.
Sugar last stood above 25 cents a lb in early 1981, hitting 33.85 cents in January that year before falling gradually.
This week's flurry of investment fund buying is likely to pause soon, prompting some investors to cash in profits, Kingsman said, adding the subsequent dip would attract fresh physical buying mainly from India.
"The market should set back towards 20 cents a lb to allow the transfer (of Brazilian raw sugar to India) to occur, and then the market will move higher again," Kingsman said.