Informe Semanal English Version

Sugar agro-industry at 27 April 2009

• Good prospects for sugar cane producers

• Importers are waiting for news

• Figures up to 5 million, off the record

• Preliminary report of the 2008/2009 harvest at 18 April

• Weekly market

One year ago, the average price of standard grade sugar in the four main markets of the country (DF, Guadalajara, Toluca and Puebla) was 279.50 pesos per 50 kg bulk, 22.49% less than the 330.88 pesos it was on Friday, 24 April 2009. A year ago, the average price of refined grade sugar in the same markets was 332.50 pesos – 9.91% less than the current average of 366.88 pesos. A year ago, the average price difference between refined and standard grade sugar was 53 pesos and 6 months ago it increased to 71 pesos but at the moment it is only 36 pesos. In one year, the average price difference between both grades dropped from 16.71% to 8.85%, 47% less at this time. These numbers lead us to believe that refined grade sugar is undervalued in relation to the price of standard grade, given that on average this difference should be between 10% and 12%.

Since sugar cane associations made the decision to “force” the sugar price to rise by taking over the bodegas belonging to sugar mills, the average price of standard grade sugar has risen by 51.88 pesos per 50 kg bulk and that of refined grade by 23.63 pesos. This is a 15.68% increase for standard grade and a 6.44% increase for refined grade. Six months ago at the start of the mobilization of the cane producers, the average floor price of standard grade was 279 pesos per 50 kg bulk while refined grade was 343 pesos. This price of standard grade is equivalent to 250-255 pesos per free on board bulk at the mill while at the present time the price is around 305 pesos per free on board bulk at the mill. In a period of six weeks during the time that the sugar cane producers decided to take their future into their own hands, the average price of sugar in this harvest gained almost 10 pesos, since 13 March of this year, the day on which the taking over of the mills’ bodegas. At that date, the average price was approximately 273.73 pesos while today it is 283.18 pesos. Current averages could reach near to 300 pesos free on board at the mill, which would be a recovery of an equivalent price for the sugar cane of the previous harvest and more so as the Federal Government has agreed to authorize a 1600 million peso subsidy, equivalent in approximate numbers (it depends on what the final production of net crushed cane will be, as well as the sucrose average in each of the mills) to 34 pesos per ton. As every sugar cane producing zone is different in terms of productivity, the greatest benefits will be had by the producers with the highest percentage of Karbe – Puebla and Morelos – and the lowest benefits by the producers in Campeche and Quintana Roo.

Another thing that has been helping to maintain the price at an average of 330 pesos per bulk is that entrepreneurs decided to honor their agreements of June 2008. This applies especially with respect to exports, given that, as we reported in our previous weekly report, the export drive that took advantage of the depreciation of the currency and the high demand for sugar in the United States, made sugar mills look more towards the US market. However, there were exports that since 2006 hadn’t met their deadlines and the provisions of the agreement and now the current circumstances are being taken advantage of and we find that at a general level, Mexican sugar mills have met with these provisions. This is in spite of the fact that not everybody has joined ranks with the agreement; however, those that have, ha made up for those that haven’t. Nevertheless, we still maintain our hypothesis that there is an over-exportation effort in the making and that this over reaction in exporting could put in danger domestic supply given as time goes by it is less and less probable that domestic production will reach even the most pessimistic of private estimates.

A few weeks ago, the sugar cane producers of the CNPR reported an estimate of less than 5.2 million tons on their internet site but then they immediately removed it. Everybody is talking about it off the record; however production could not possibly reach this figure, and some are talking about only 5 million tons, which could endanger local supply and cause a sudden intervention by the Federal Government to maintain supply. These subjects are now under discussion. International traders are doing their math and forecasting that the liberation of import quotas is imminent. The last time that this happened, and it seemed that there wasn’t even a need for imported sugar, some of these quotas were granted to businesses belonging to friends of President Fox, some of them businesses which had nothing to do with sugar and many of them had no idea of how to do business – all they understood was that there was money in those documents. A black market of purchase and sales quotas unfolded and finally everybody won – friends, traders, authorities, entrepreneurs and especially middlemen. In the end the big loser was the Mexican sugar market.

Preliminary report of the 2008/2009 harvest at 18 April
At 18 April 2009, an area of 546,794 hectares has been harvested with an industrialized volume of gross crushed cane of 37 million tons. At the present date a sugar production volume of 4.3 million tons has been registered, 125 million tons of molasses and 12 million liters of sugar cane alcohol.

Weekly market
In accordance with what we have reported on up to now, we believe that the price trend will be stable in the following weeks, showing lateral movements while there is sugar available to lubricate markets and while more realistic production figures are not known. In accordance with what sugar cane producers of the CNPR have published, pressure on some mills will continue to be exerted, although they have not verified the agreements between the FICO and firms that have channeled off sugar from assigned quotas to soft-drink producers on the open market, industries and retailers, at prices subsidized as much by tax payers as by sugar cane producers. We are also unsure about inventories, about which nothing has been said, even though an agreement was signed by sugar mills to audit existing inventories in bodegas in Mexico. In the next days the calamitous production figures from some mills which have already finished or are about to finish will be known, such as those from the La Margarita group, which will no doubt affect the expectations of the most active participants.