Informe Semanal English Version

Sugar Report at 20 July 2009

• Sugar scenario from bad to worse

• Perspectives from the global sugar market

• India, Mexico and Russia are the hubs

• Weekly Market

International sugar markets have endured another week of great pressure because of the apparent global sugar deficit; in fact, for the past few weeks the agricultural office of the United States (one of the main sugar consumer countries in the world) has been publishing its forecasts which leave no doubt that the lack of supply is not something to be taken lightly.

In accordance with the July 2009 forecast of the United States Department of Agriculture (USDA), initial inventories for the next cycle will be 1.1 million tons raw value, 558 thousand less than in the previous cycle. The production estimate for the 2009/2010 cycle is 8 million tons, 554 thousand tons less than in the previous harvest. Beet sugar production stands out with a 500 thousand ton increase owing to a possible drop in production in Florida to the tune of 81 thousand tons.

The USDA is forecasting an import figure of only 1.2 million tons due to an estimated fall of 495 thousand tons less in domestic consumption than in the cycle which will end in October of this year. Even so, with the expected increase in domestic production and an estimated drop in consumption, final inventories are expected to be the lowest ever at only 359 thousand tons, 743 less than in this cycle, 3.4% inventories against consumption. It is hoped that this percentage will reach almost 10% in this harvest. It is possible that the fall in consumption for the next cycle is being overestimated in the same way that the import demand is being underestimated. It is obvious that more sugar will be imported than has been estimated which will mean that international prices will continue on an upward trend.

On the basis of these numbers, we must hope that the USDA decides to issue additional import quotas of at least 700 thousand tons, in order to balance out its final inventories to over one million tons. Mexico will not have enough of an exporting dynamic to help to improve the position of inventories in the United States. It is estimated that sugar coming from Mexico will reach only 165 thousand tons crude value against the 1.3 million tons crude value which they exported in 2008/2009. Although it is hoped that because of the skyrocketing prices of sugar in the domestic market, high fructose corn syrup (HFCS) will forcefully penetrate the bottling industry, thereby displacing domestic sugar, which could be sent to the deficit-showing US market.

And as if that wasn’t enough, the position of the international sugar market now has more presence in the price ascent of sugar futures contracts.

As can be seen in the graph, in the case of contracts for the month nearest to sugar futures 11 and 14 operated in the US market, one can see the trend of price growth and acceleration in the last few months. In the case of future 11, the price has gained 46 percent respect to data at the beginning of the year and 36 percent respect to July 2008. With regard to future 14, the price has rallied by 15 percent since January 2009 although at the same time last year the price was 6.5 percent higher. The moving average for both contracts reflects a growth trend since the beginning of June.

Both countries had “reduced harvests”, although it is now known that large-scale traders have sugar from Guatemala and Colombia in bonded warehouses, these being countries which have retained stocks in order to satisfy anticipated demand as much in the USA as in Mexico.

Nevertheless, the situation is worse for Mexico. If the Federal Government is going to announce the issuing of import quotas, we will find a market on the rise, under pressure and probably with very high transport costs to boot. On 17 July the market price of refined no. 5 from London was 458.2 dollars per ton, quoted 20 dollars more than in May, and 100 dollars more than the price registered at the beginning of the year.

The graph shows the price evolution of the quote for the future 5 sugar contract in London for October. On carrying out a comparative study, at the beginning of the year it reached close to 360 dollars per ton; currently the 17 July register is at 458.2 dollars per ton, being an equivalent of 28 percent more than its original value. The poor world harvest and the high level of consumption are to blame for the increase in price of this derivative product.

The increase in price of refined sugar in London is indicative that the sugar entering the country in the following weeks, as defined by final sugar inventories in Mexico, will arrive at a price equal to or higher than 400 pesos per 50 kg bulk. By way of an exercise, we consider that the contract price of sugar no. 5 up to October this year will be almost 530 dollars per ton at the Mexican port. If we were to take extra handling and treatment costs of the merchandise into account, the price would increase to 570 dollars, and on doing the respective conversions, we would have a price of 385 pesos per 50 kg bulk. For the contracts in the coming months, the price would remain at between 410 and 420 pesos per bulk, depending on the exchange rate, which has lately had a tendency to be extremely volatile.

Perspectives from the global sugar market
The United States Department of Agriculture (USDA) will probably establish an import quota for white or refined sugar, with immediate delivery, and it is possible that once the final sugar inventory figures are known in Mexico, new import licenses will be expedited for a minimum of 150 thousand tons of the product.

On the other hand, it has been forecast that, due to the strong demand from India because of their terrible harvest, sugar futures contracts will reach their maximum levels here at the end of the year.

These perspectives point to a continued upward trend in the sugar market. It is, however, a similar scenario to the survey carried out in January which weighed up India’s needs, those being the most important in the consumer world. Nevertheless, it is expected that the situation will improve next year.

The global sugar deficit for the London International Financial Futures and Options Exchange (LIFFE) is expected to fall to an average of 4.2 million tons in 2009/2010, as compared to a deficit of 8.8 million tons in 2008/2009.

The Reuters poll forecast a sugar deficit moving average of 5 million tons in 2009/2010 for January, compared to a moving average deficit of 3.75 million tons in 2008/2009, and global sugar production is expected to have a median of 157.7 million tons in 2009/2001, compared to a median of 151.2 million tons in 2008/2009.

Consumption in 2009/2010 is forecast to be at an average of 163 million tons compared to 160,75 million tons in 2008/2009.

India, Mexico and Russia are the hubs
As the experts see it, India, Mexico and Russia will be hubs in terms of sugar demand, while Brazil will be key in terms of supply.

A recovery is anticipated in production in Asia – India, Pakistan, China, the Philippines and Thailand – although there will be a decline in Brazilian production in 2010 owing to the negative impact of the contraction of credit in Brazilian crushing.

One of the main uncertainties in Brazil will be what proportion of cane is to be assigned for the manufacture of bio-fuels like ethanol and what proportion is to be assigned for sugar. This will depend in part on the raw price trend.

Market analysts are of the opinion though that the USA and Mexico could run the consumer market. “For the first time in many years the world sugar market can be driven by the evolution in the US market”.

Currently, because of poor harvests, both countries are finding themselves without sugar. Mexico has made large-scale exports to the United States and now it is necessary to import refined sugar to satisfy the demand of industrial users before the next harvest, which should in principle start mid- to end-October. Nevertheless, a big deficit has been forecast in standard grade sugar which has all but disappeared from the market.

Weekly market

The expected has happened. Refined sugar has gone in the same direction as standard grade sugar and at the end of the week the increase arrived at 20 pesos in the Federal District to reach an average of 460 pesos in the main supply center (Central de Abasto) of Mexico City.

It is the general trend of refined sugar quotes in the Federal District to respond to market pressure and they now continue in the same vein as standard grade sugar in the same city. In fact, the price stability registered the last two weeks has just been broken, and what with the strong adjustment on the weekend, refined sugar now has a price differential of 6 percent above that of standard grade sugar (10 percent being the normal differential range between qualities). It is worth mentioning that the price of 460 pesos per bulk is now, same as in the case of standard, a record, and is equal to 33 percent more than that registered at the beginning of the year.

In the above table, please note how the increase in floor prices from one month ago to the present date represents very important adjustments, as in all cases they represent adjustments from 10 to 17 percent for standard grade sugar and from 5 to 10 percent for refined.

Although the market in Mexico City, the country’s capital, is a reference for many centers of the country, it is clear that Guadalajara, Toluca and Puebla reach similar levels. In our statistical analysis we have estimated adjustments of 5 to 10 pesos in coming days.

The average of the four supply centers is, however, close to 456 pesos. This is motivated by the huge adjustment in the Federal District, although the other centers remained stable and the trend points to their reaching 460 pesos at the beginning of next week.

On analyzing the weighted average price (PPN), standard grade sugar is about to reach 400 pesos and refined is heading for 425 pesos per bulk, with an adjustment of 14 percent respect to last month for standard and 7 percent for refined grade sugar.