Bakers will face a mixed bag when sourcing ingredients in 2010. Fortunately, flour supplies are ample, with one possible exception, and prices are down from a year ago. Sugar supplies are expected to be tight through much of the year, and prices currently are about 50% above year-ago levels. But cocoa powder supplies are severely tight, as reflected in current pricing that is more than double that of 2009. The situation for other ingredients such as egg and dairy products and bakery shortening should be more manageable for the year, but prices for most are expected to creep higher.

Price and supply situations for cocoa and sugar did not develop overnight, but the severity and longevity of historically high prices and tight supplies of each may have caught buyers who aren’t in the market regularly off guard. Buyers have found supplies hard to find at desired prices and, in the case of cocoa, at desired volumes. The situation in cocoa powder is further complicated by outside influences.

IMBALANCE IN COCOA. Cash cocoa powder prices reported by Milling & Baking News are the highest in records going back to the early 1980s, and the general consensus among market analysts is that prices could go higher. In the first quarter of 2010, basic 10-to-12% natural cocoa powder couldn’t be bought for under $2 a lb in most cases, which was more than double year-ago values.

“It doesn’t matter how much you’re willing to pay,” said a source at a major international cocoa processor, concerning the tight powder supply situation. Much of his company’s production of powder was sold out for 2010, although he noted most customers also were well covered for the year. He said he expects supplies will remain tight for the next six to nine months with still higher prices possible.

A source at a major chocolate manufacturer agreed that most users had good cocoa powder coverage for the year, but many chocolate users had only about three months coverage due to uncertainty about demand. Those needing to buy chocolate also will pay higher prices, according to this source.

Because both cocoa butter and press cake, which is ground into cocoa powder, result from grinding cocoa beans, processors must be able to sell both. But global economic conditions have weakened demand for cocoa butter, which is used in higher quality chocolate, and supplies are ample. At the same time, demand for cocoa powder, which typically is cheaper than cocoa butter, has been strong. But cocoa processors have cut back production because of excess cocoa butter stocks, which also reduced powder production and supplies. Several plants in Asia have been shuttered for months because of slow butter sales, and other plants only process cocoa beans as they make new sales of butter.

North American cocoa grind, an indication of demand, was down 1.5% from a year earlier in the fourth quarter and was down 5.4% for all of 2009 from 2008, according to data from the National Confectioners Association.

While world cocoa bean supplies are seen as adequate for demand in 2010, despite the butter-powder imbalance, some concerns remain, especially in the Ivory Coast, which accounts for 40% of world supply. Cocoa bean deliveries to ports were up more than 10% from a year ago from the beginning of the crop year Oct. 1, 2009, through early February. Last year’s deliveries started slowly and built momentum. This year, strong prices encouraged early sales, but deliveries tapered off much earlier. A fire at a cocoa warehouse in the Ivory Coast further tightened supply by destroying about 2% of that country’s cocoa bean and product exports, according to press reports.

Recent reports indicated strong cocoa bean prices have prompted Ivory Coast and other West African farmers to double their purchases of fertilizer, which could significantly increase cocoa bean output in one to two years. But a permanent increase in production would take longer since beans grow on trees that take several years to reach full production potential. Production in the top-producing country has been in decline for about five years, due to weak prices and the lack of sound farming practices, including fertilization. Higher prices also have encouraged increased plantings and potential future higher production in several other areas of the world, including Indonesia.

WORLD ORDER IN SUGAR. Second only to the rise in cocoa powder prices in recent months has been the increase in the price of sugar. Bulk refined sugar prices, offered at 53¢ a lb in February, were 50% above year-ago values and also the highest in Milling & Baking News data records going back to the early 1980s. But the situation seems to be somewhat less ominous for sugar than for cocoa powder because production can be adjusted more quickly. As an annual crop, sugar beet production can be changed from year-to-year in northern latitudes, while cane sugar production occurs almost year around in equatorial climates, even though cane has a 2-year growing cycle.

New York world sugar futures prices touched 30¢ a lb in January for the first time since January 1981. Prices were below 10¢ a lb as recently as June 2008. With the exceptions of 1974 when prices spiked above 60¢ a lb, 1980-81 when prices peaked just over 45¢ and late 2005 after Hurricane Katrina, world futures prices have been below 15¢ a lb at least since the early 1960s. Much of that time they were below 10¢, with multi-year periods even below 5¢.

For years — in fact, decades — world sugar prices, as well as world sugar supply and demand, had minimal effect on US domestic sugar prices due to an oversupply of world sugar most years and because of the federal Sugar Program, which set floors for US sugar prices and limited imports. But that began to change with the North America Free Trade Agreement, which allowed sugar to flow freely between Mexico and the US as of Jan. 1, 2008.

Then nature dealt a blow as the seasonal monsoon delivered inadequate rain to India’s sugar cane areas, resulting in about a 40% drop in sugar output in 2008-09 (October-September). As the world’s largest user of edible sugar, and usually a sugar exporter, India became an importer last year and will be again this year with production up only about 7%. As a result, world sugar futures prices broke above 15¢ a lb in April 2009 and marched steadily upward to 30¢ a lb. Domestic raw sugar futures, which are priced higher than world futures due to shipping and other costs, followed world prices higher, so foreign sellers would continue to ship supply to the US. Domestic cane refiners buy part of their supply on the world market because US growers don’t produce enough raw cane to meet demand.

Most traders don’t foresee a shortage of sugar in the US, although they also expect prices to remain strong through the end of the marketing year Sept. 30. The majority of industrial users (confectioners and bakers) are thought to have more than 90% of their needs covered for calendar 2010 (which includes the first quarter of marketing year 2010-11), with lighter coverage skewed toward the end of the year. But sources indicated retail and food service sectors have much lighter coverage than do industrial users, and brown sugar supplies were tight because of production issues at a major cane refinery.

“The deficit in sugar is not going away,” said Jonathan Williams, Americas director for European trading company C. Czarnikow Sugar Ltd., speaking at the recent International Sweetener Colloquium sponsored by the International Dairy Foods Association. When sugar reached highs in the 1970s and 1980s, consumption declined, but current high prices do not appear to have reduced demand, according to Mr. Williams. He predicted world sugar supplies would be short of demand this year (2009-10), remain extremely tight next year and not move to surplus until 2011-12.

Soaring prices obviously will hardest hit food manufacturers that use large amounts of both products — cocoa and sugar — especially chocolate. While most of the grain-based bakery indexes were down from a year ago because of lower flour prices, the Milling & Baking News “devil’s food cake” index, the only one that includes cocoa powder, was up 26%. But more modest gains are expected for most other ingredients, with lower flour prices helping to mitigate some of the price impact.

contrasts IN EGG, DAIRY. Egg product prices were mixed at the end of January, compared with a year ago. Prices for whole dried eggs were about even with the same time last year, while frozen whole eggs were up about 15% and liquid whole up more than 20%. But dried white and yolk prices were down 20% from a year ago, frozen white and yolk prices down 15%, liquid yolk down 12% and liquid white values were about even.

Compared with other ingredients, egg production can be altered quickly, which was the case in the first two months of the year when egg producers cut output and held eggs off the market to push prices higher. In its February World Agricultural Supply and Demand Estimates (WASDE) report, USDA forecast 2010 egg production about 0.5% higher than in 2009 and up 0.7% from 2008. Prices for grade A large eggs were forecast to average higher by 8¢ a dozen, or 8%, than the 2009 average of $1.03 but well below the 2008 average of $1.28 a dozen. Egg prices typically are highest in the first and fourth quarters of the year, falling after Easter. Prices for breaking stock eggs, used by processors, are lower than for graded eggs but typically follow similar price movements.

Prices for milk and most dry dairy products rose consistently for most of last year and early this year as dairy farmers culled herds and reduced milk production in an attempt to return to profitability after seeing severe red ink during much of 2008 and 2009. USDA in its Jan. 31 Cattle report estimated the number of milk cows in the US on Jan. 1, 2010, was down 3%, or about 250,000 head, from a year earlier. The department expected the number of milk cows will continue to decline in 2010, even though the number of heifers kept for milk cow replacement was up 2% as of Jan. 1. In February, USDA projected 2010 milk production at 188.9 billion lb, up 500 million lb from its January projection due to the increased number of heifers held back. Still, this year’s milk outturn is expected to be down 400 million lb, or 0.2%, from 2009, and down 1.1 billion lb, or 0.6%, from the recent peak of 190 billion lb in 2008.

MOSTLY GOOD NEWS IN GRAINS. The bright spot for bakers in 2010 should be in their most-used ingredient — flour — although prices were mixed compared with 2009. Supplies of hard winter and spring wheat were ample in 2009, and exports currently are lower because of large global wheat production. Grain prices were below year-ago levels at the start of the year. Plantings of hard winter wheat for harvest in 2010 were down from 2009 and the lowest since 1913, but plantings of hard spring wheat could be higher, based on USDA predictions in mid-February. USDA forecasts all wheat prices to average around $4.85 per bu in 2009-10 (marketing year ending May 31), nearly 30% below the 2008-09 average.

Prices for bakers’ standard patent (bread flour) in Kansas City were about $1 a cwt, or 7%, below year-ago levels in mid-February, according to Milling & Baking News. Spring standard patent flour was down 25¢ a cwt, or about 1%.

But the story is somewhat different for soft wheat and soft wheat (cracker and cake) flour. The 2009 soft red winter wheat crop now being used had high incidence of vomitoxin in several states, which in effect reduces the useable amount of wheat available for food use. As a result, soft wheat prices, reflected in Chicago futures prices, are nearly even with hard winter wheat futures prices traded in Kansas City; usually, Kansas City prices are at a 50¢ or so premium per bu. Soft winter wheat plantings for harvest in 2010 were down 17.5 to 25% from a year earlier, indicating supply will tighten, although the new crop could be more useable if the weather cooperates and vomitoxin levels are lower than in 2009.

The soft wheat supply situation was reflected in flour prices, with cracker flour, basis Chicago, nearly $1 a cwt, or 8%, above year-ago levels in mid-February. The price of fancy cake flour was up about 7%.

Prices for other grain products such as corn meal and corn and soy flour were below year-ago levels early in 2010. Record large 2009 corn and soybean production in the US, and ample world supplies, have kept a lid on grain and oilseed prices, although export demand has been strong for both. At its annual Outlook Forum Feb. 18-19, USDA forecast large production for both crops again in 2010. In late January, corn meal prices reported by Milling & Baking News were down about 8% from a year earlier, and soy flour prices were down about 5%.

Bakery shortening prices could be higher this year, however, despite large supplies of their base oils. Strong export sales and potential demand for use of soybean oil in the production of biodiesel have kept prices higher than many traders expected so far this year. Soybean oil yield from crushed soybeans also has been below year-ago levels, thus limiting soybean oil production despite the record large soybean crop.

The wide variation in commodity and product prices in early 2010 and expectations for the year will require close vigilance on the part of ingredient buyers. In some cases such as with cocoa and sugar, high prices and tight supplies will be a reality for several months, with little relief until 2011. But most other products should be readily available and price increases modest or even lower than year-earlier levels for most grain products.