Here’s How The U.S.-Mexico Sugar Deal Will Impact Coca Cola

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After months of deliberations, the U.S. and Mexico announced an agreement, in principle, on sugar trade between the two countries. While this agreement is not yet being supported by the U.S. sugar industry, the government was positive that the Mexican side had agreed to every request made by the U.S. industry to address the issues in the current system. This agreement is crucial for sugar buyers such as The Coca-Cola Company (NYSE:KO) who rely on sugar imports to meet their requirements. Production of sugar in the U.S. is not sufficient to meet the requirements of these companies and hence a smooth trade agreement with Mexico (which is a major exporter of sugar to the U.S.) is crucial for Coca-Cola to ensure that its sugar supply is not impacted.  The current deal entered into by the two countries avoids steep U.S. import duties on sugar imports from Mexico, ensuring that raw material costs for Coca-Cola are not significantly increased.  According to Coca-Cola, an agreement between the two countries was essential so that it could continue to “expand the range of affordable food and beverage choices available to customers.” Although the industry believes that sugar imported from Mexico is priced 80% higher than the world price, this agreement will ensure that the supply of sugar continues without steep taxes and a likely retaliation, allowing Coca-Cola to expand its beverage line-up smoothly.

Coca-Cola One Of The Largest Consumers Of Sugar

Coca-Cola is one of the largest consumers of sugar in the world with the company consuming around 14% of the total sugar traded globally. Most of the company’s products contain sugar and while it is working on several product formulations with low sugar (as it adapts its products to customer preferences towards healthier lifestyles), sugar still remains a critical raw material for Coca-Cola. Higher sugar prices, due to the lack of a smooth trade agreement between the U.S. and Mexico, can impact the margins of the company adversely.

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According to our estimates, Coca-Cola’s namesake brand which is its largest division operates at a gross profit margin of around 60% and we expect this number to increase to around 63% by the end of our forecast period.

Higher raw material costs can impact these margins adversely if the company is unable to pass on the increase in costs to customers. Raising beverage prices might not be an option for Coca-Cola, given the intense competition from PepsiCo, especially in the healthy beverages segment.

The agreement between the U.S. and Mexico on sugar trade is a positive development for Coca-Cola. While several issues still need to be ironed out, supply of sugar to the U.S. is crucial for Coca-Cola’s growth.

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