Coca-Cola will be more expensive due to the high price of commodities, or so said CEO of The Coca-Cola Company, James Quincey, who in an interview with CNBC confirmed that the company will soon have to raise the price of its products.
“We are well-hedged in ’21, but there’s pressure built up for ’22, and so there will have to be some price increases,” Quincey said referring to the company’s financial pressures. The CEO also added, “We intend to manage those [costs] intelligently, thinking through the way we use package sizes and really optimize the price points for consumers.”
During 2020 Coca-Cola saw its sales drop due to repeated quarantines, forcing it to remove more than 200 products from its portfolio. In 2021 the problems come from the supply side, with a more expensive supply chain putting upward pressure on commodity prices, including a crucial grain for the manufacture of the carbonated beverage: corn.
Increasing price of corn
Although the belief still persists that Coca Cola in the United States is a sugary drink, the truth is that the syrup that sweetens the soft drink is not made from sucrose (the sugar molecule), but from corn fructose.
In 1982, President Ronald Reagan imposed quotas on sugar imports to protect American sugar mills from competition from the southern hemisphere, which had cheaper labor. This decision drove up sugar prices due to a more limited supply controlled by the cartel of American producers.
Faced with the rising price of sugar, Coca Cola decided to produce its beverages with corn, a cheaper substitute, abundant on American soil and highly subsidized by the federal government.
By 1984, Coca Cola had its own corn-based syrup recipe, which substituted for sugar, but retained the sweet taste that accompanies the carbonated sensation in the classic soft drink. Corn-based syrup continues to sweeten every Coca Cola bottled in the United States.
Why is corn becoming more expensive?
From the beginning of the pandemic to the present, the price of corn derivatives has risen by 63%, which has made the entire value chain around this grain more expensive.
A supply chain constrained by the pandemic is coupled with a rapid increase in demand from China, which has become the main buyer of U.S. corn with more than 24 million metric tons from March 2020 to March 2021. This leaves Mexico behind, which used to be the leading buyer of corn at 12 million metric tons per year.
China has a structural deficit of 30 million tons of corn, so despite the tariffs imposed by the government of former President Donald Trump, it has decided to import it massively from the United States. China’s average corn imports are 40 million tons per year.
Not just because of China
At the moment it is not only the price of corn that has been affected, in general the price of commodities has increased across the United States, as well as the costs faced by suppliers.
Nor has the massive money printing driven by the Federal Reserve helped, which has already pushed up the prices of many commodities and assets due to the dollar’s increasing devaluation. Many analysts expect that the U.S. will soon experience more inflation because of the amount of money in circulation.
With its announcement, Coca-Cola joins the growing number of companies such as Kimberly-Clark and J. M. Smucker’s announcing that they will soon have to raise prices due to increases in raw material costs.