Bakers deal with difficult market conditions in niche ingredients
August 23, 2011
by L. Joshua Sosland and Ron Sterk
KANSAS CITY — The surge in bakery ingredient prices over the past 14 months has been well chronicled with particular attention given to inputs that are anchors of the industry — flour, shortening and sweeteners. Every year, though, bakers buy hundreds of other ingredients, markets for most of which receive little attention.
Several of these markets have experienced wrenching price moves in recent months, each with a distinctive story, a unique set of supply and demand circumstances, as background. Four of these ingredients — guar gum, vitamins, cocoa and agar — are explored in the pages that follow:
Guar gum prices surge
It’s difficult to imagine a market sustaining a more abrupt and severe shift in supply and demand than guar gum, an ingredient used for a variety of water control applications in baking, including helping with shelf life extensions. Prices in recent months have surged to levels four times above historical averages.
Traditionally, guar gum has been viewed as a lower cost input versus alternative ingredients such as xanthan gum, but guar’s “value” position in the marketplace appears increasingly and perhaps permanently imperiled.
Prices of food grade guar gum, normally below $1 per lb, have risen above $2.50 per lb because of the oilfield industry’s use of guar, according to a July 28 “Hydrocolloid News” e-mailed report from IMR International, a San Diego-based hydrocolloid consulting company. Buyers are having trouble even finding supplies of food grade guar gum, which is used in such applications as ice cream and tortillas. They are facing prices of more than $5.75 per kilogram ($2.61 per lb), delivery times of four to six months and, in some cases, demands to pay in advance.
“The guar situation has reached dire circumstances,” the report said.
John R. Brandquist, national accounts sales manager for Caremoli USA, Inc., Ames, Iowa, said the current market picture seemed fundamentally unlikely coming into 2011. Mr. Brandquist said the guar bean carryover at the end of 2011 was quite large.
“The five- to seven-year average price was about 72c a lb,” Mr. Brandquist said. “Prices have moved closer to $3 a lb since the beginning of August.”
Food use of guar gum accounts for only roughly 25% of total guar gum utilization with industrial uses, principally in energy, accounting for the rest.
Demand from energy exploration companies has surged for a couple of reasons, Mr. Brandquist said. First, higher energy prices have led to increased exploration activity. Second, horizontal drilling and hydraulic fracturing, activities that have expanded dramatically, are especially heavy users of guar gum.
“We entered this calendar year with an estimated two to three year carryover in the marketplace,” he said. “Despite the supply, prices were strong because of a bottleneck in seed splitting, the suppliers to processors like us. Everyone had expected prices to come down significantly from the 80c area once the splitter situation was resolved, but it never happened. Increased industrial demand from Russia and China was quietly rising and really caught the market by surprise.”
Looking forward, Mr. Brandquist sees hope longer term but little relief in 2012. Plantings are anticipated (most of the crop is grown in India) to be higher, but weather has not been cooperative.
“We’re going to have a difficult year in 2012, no matter how things turn out for the crop,” he said. “We’ve gone from a situation where there was a two to three year carryover, and now the carryover is estimated to be down to 10% or less by new crop (October), giving the market more pressure as demand will potentially outweigh supply next year. Quality becomes more susceptible when supplies are so tight.”
Mr. Brandquist is hopeful longer term principally because the current situation is unsustainable.
“Bakers and others are beginning to teeter, looking at other potential alternative ingredients,” he said. “We are hitting that threshold. When energy demand falls off, we’ll see the market soften. They are exploring alternatives as well. It could be a tough 12 to 18 months. At some point we will move lower, and that’s the conundrum for those looking to reformulate. Other solutions will be found.”
Agar prices expected to ease
After two years of escalating prices, the market for agar should ease in 2012, said Miguel Depolo, managing director of Algas Marinas S.A., Santiago, Chile. Chile is a major producer of agar, and Algas Marinas is the world’s largest exporter of food grade product.
Mr. Depolo described agar as a niche product within a category of larger niche products.
“It is a small item in the rather large family of hydrocolloids,” he said. “It’s always the case that people don’t know much about this product, versus carrageenan or pectin. Agar is typically left behind.”
In baking, agar principally is used for icings, glazes and fillings.
“Donuts are the largest baking application, and need a formula that will perform well,” Mr. Depolo said. “Icing needs to settle in a good way in a very short period in a system that is automated and tolerates little failure. When the donut goes under an icing shower, the icing needs to settle not too hard, not too soft. Agar is a key ingredient. There are no substitutes that function very well for this particular application.”
Agar is a seaweed extract, obtained from a variety of red seaweed. While bacteriological industrial agar is made from gelidium, a seaweed found in the Mediterranean and the Far East, food grade agar comes from gracilaria, which is harvested principally in Chile and Asia.
While it may be supposed weather is a non-issue with regard to seaweed supply, Mr. Depolo said that is not the case.
“Typhoons in the Far East or monsoons can interrupt production,” he said. “Chile has a more stable supply but is more seasonal, with production in the summer and spring, not during the winter and rainy months.”
Weather has been a factor over the past two years with excessive rain in Asia and sharply reduced seaweed production, Mr. Depolo said. The supply problems in Asia has “placed a lot of pressure on the Chilean crop, which is what brought prices up.”
While conditions should return to normal in 2012, some improvement already has been felt, Mr. Depolo said.
“Pressure was building up over a 24-month period peaking this past April,” he said. “Production in Asia is getting back to normal, but it has to be considered that the months of July, August, September and October are the monsoon months, so plenty of rain is normal and production will be limited. Supplies will pick up in September and October seasonally in Chile, and conditions should improve further at that point.”
Two months elapse between when seaweed is gathered and agar is ready for sale, so it may be December 2011 or January 2012 before conditions fully return to normal.
Even then, prices may not fall to historical averages, Mr. Depolo said.
“It is important to consider that energy is very relevant in agar production,” he said. “It involves a lot of steam and drying, so fuel use is quite significant and it is very expensive these days together with the chemicals used in the process, such as caustic soda.”
Costs for those products were on the rise.
“As agar went up 30% in price over the last two years, we would expect it to go down some 10% from current levels.”
Agar has a shelf life of at least three years, but Mr. Depolo said most users do not stockpile it.
“Overall, the tendency among purchasing agents has been taking a just in time approach to buying,” he said. “The supply has been dependable, and it is not inexpensive, priced at $20 plus per kilo. Purchasing agents usually are reluctant to buy more than they need when a pallet costs $10,000.”
Cocoa powder prices have peaked
Historically high cocoa powder prices likely have peaked, but any decline is likely to be slow with strong powder demand from Asia helping drive the market, according to merchandisers.
“I think we are close to the peak in powder prices,” said Patrick Reed, key account manager for Cargill Cocoa & Chocolate, Lititz, Pa. “Prices are leveling out, not continuing their upward trend. We may have seen the worst of it.”
Cocoa powder prices quoted by Milling & Baking News have held about steady and historically high since late March, up 15% to 25% from a year ago depending on grade. Traders indicated most users have coverage through the balance of 2011, with a few also covered for all of next year, although most 2012 coverage is front loaded into the first half of the year at prices comparable to current levels.
Chocolate demand has wavered during the economic slowdown, resulting in ample supplies of cocoa butter globally. Equal amounts of cocoa powder and butter are produced when cocoa liquor is pressed. Historically processors pressed for cocoa butter because of higher demand and higher prices for the ingredient, and the butter demand dictated the supply of cocoa powder. The market environment now is opposite because global cocoa powder demand is stronger than demand for cocoa butter. For most of 2011 the market has been “upside down,” with cocoa cake (unground powder) priced higher than cocoa butter.
“I don’t see the imbalance of butter and powder changing any time soon,” Mr. Reed said. “It will likely continue for all or most of 2012.”
Prices for all grades of cocoa powder have risen sharply since 2008, fueled by increased demand for then lower-priced powder during the recession. The price of natural 10% to 12% butterfat cocoa powder ended 2008 at 75c a lb, ended 2009 at $1.70 and ended 2010 at $2.20. Values climbed further early in 2011 due to political unrest in top-producing Ivory Coast, from which cocoa product and bean exports were banned much of the first quarter. Although the situation in Ivory Coast has calmed and supplies again are flowing, powder prices have remained high due to tight supplies and good demand, especially from Asia.
Second-quarter cocoa bean grind was up from a year ago in North America and Europe, which some said showed improving demand but most attributed to lost grind in the Ivory Coast as a result of the political turmoil there. Meanwhile, ideal weather resulted in a bumper 2010-11 (October-September) crop and a surplus of cocoa beans. With a return of “normal” weather, analysts had predicted a cocoa bean deficit in 2011-12. But within the past few weeks some, but not all, analysts began forecasting a balanced market in 2011-12, based on indications of good early crop development, which may cap prices at current levels, especially with sluggish economic conditions extending longer than expected, which also may keep a cap on demand for higher priced chocolate, and consequently on butter.
Cocoa processors indicated some users have drawn on contracted powder supplies slower than expected, signs of decreasing powder demand in the United States. They suggested high prices may have had a rationing effect on powder, along with reformulation of mixes and products to minimize cocoa powder use.
While any cocoa powder price decline is expected to be slow, there may be “deals to be had” next year for large quantity buyers, trade sources suggested. This year users have needed to book powder about nine months in advance to ensure supply with some processors sold out through March 2012. But supplies may begin to loosen in the second half of 2012. Cargill, for example, is expanding production at its largest plant. But supplies likely will remain tight from processors with no change in capacity.
B vitamin prices higher
Major B vitamins used in the baking industry have seen moderate to sharp price increases so far this year, some due to supply issues caused by a June flood in China that severely damaged facilities where vitamins B1 and B6 are manufactured, said John Ripley, president of Charles Bowman and Company, Holland, Mich., one of the major suppliers of nutritional ingredients in the United States.
“Prices for vitamin B1 (thiamine mononitrate) have more than doubled in the last four months,” Mr. Ripley said.
“B6 (pyridoxine Hcl) prices are up over 150% since the beginning of the year,” Mr. Ripley said. Most B6 producers have not quoted prices for B6 for more than two months. The world’s largest producer of B6 is presently shutdown for maintenance and repairs. New offers are expected when they resume production, which will likely be mid to second half of September, he said.
Other major fortification vitamins used in food processing have seen more modest price increases so far this year.
Prices for vitamin B2 (riboflavin) are up about 20% since the first of the year, Mr. Ripley said. Most riboflavin is produced from corn starch, and corn prices, although down about 10% from June highs, are up more than 70% from a year ago, trading above $7 a bu last week, based on nearby Chicago futures.
Vitamin B3 (niacin) has seen a “couple price increases” on the feed side this year, Mr. Ripley said, which mainly are the result of increased production costs related to energy and raw materials.
“Many food premixers have booked B3 for the year and were covered,” Mr. Ripley said. “But when they rebook they most likely will face a 10% to 15% price increase.”
Folic acid has been relatively stable with about a 5% increase since the first of the year, Mr. Ripley said
While some relief is expected once the Chinese manufacturer recovers from the June flood, the effects of higher raw material costs, energy costs and exchange rates will continue to impact B vitamins prices going forward.