Informe Semanal English Version

Sugar Report at 28 September 2009

• The effect of the authorization of additional quotas and speculation.

• Domestic balance updated.

• International Markets.

• Weekly Market.

The announcements of additional quotas and speculation about those who have cornered the market and have to now get the sugar out are factors which have mobilized Mexican markets. In the interests of the mills who process the sugar and the final consumer, the fourth week of September has demonstrated daily average falls in price of one percent although evidently this is still not enough to sidestep the problems of increased production costs. The Ministry of the Economy announced that it could consider not issuing more import quotas as there is a drop in quotes; however the initial fluidity of imported sugar and a mild rebound in domestic prices at the weekend do not indicate a totally downward trend.

The effect of the authorization of additional quotas and speculation

The assignation of import permits for 550 thousand tons of sugar and the appearance of sugar which in the face of the fall in price has appeared as if by magic are factors which have in one week provoked an accumulated fall of 28 to 30 pesos for the averages of both qualities of sugar. However, the trend has not been completely downward as quotes return to the same levels as at the beginning of the month when, in full ascent, refined sugar was averaging 700 pesos in Mexican cities without yet having reached its historic maximum. The average price of standard quality sugar at the four main supply centers for domestic sugar trading is 650 pesos. And the Ministry of the Economy reported that it was necessary to take the decision to not continue issuing sugar import quotas in the light of the falling price.

Yes, the data is showing a downward tendency but drops were not significant enough to argue that the announcements concerning the emission of additional import quotas are continuing to cause the fall in prices. The self-same mill owners and intermediaries who concealed the product and are now, on witnessing the situation, trying to place it by any means necessary, are the ones who have in fact dropped their prices the most.

By taking the above measures, the Ministry of the Economy has managed to lower the price of sugar to a degree. Since 14 September, the average price of standard sugar in the four main cities in Mexico has dropped 5 percent from 700 pesos. The fall in the price of refined sugar has meant a drop of near to 4.5 percent from almost 738 pesos.

What we need to recognize is that the drops in price and the announcements to stop importing sugar arrive in the market like signals of price equilibration for the good of the industry which processes the sugar although the final consumer continues to be one who is going to assume the elevated costs of the sugar.

On the other hand, sugar cane producers and private sugar mill owners have made clear their position on not being in agreement with the possible emission of more quotas towards the end of this month. The possibility of increasing sugar supply in the market which will cause an increase in the price of sugar has brought about an intense lobbying activity. For the time-being, we should pay attention to the market reaction that so far has seen that the price is no longer falling.

The leader of the National Chamber of the Sugar and Alcohol Industry, Juan Cortina Gallardo, held that there is now sufficient sugar in the market, both from domestic production and imported, to supply the market for the rest of the year. Cortina Gallardo (who is also president of the Grupo Azucarero Mexico) had already argued this point; however sugar disappeared with the rise in price and mills and traders sat on their inventory with only the emission of quotas managing to get it into the bodegas once again.

With respect to the above, Manuel Enriquez Poy, Chief Executive of the National Chamber of the Alcohol and Sugar Industry, advised that the surplus of quotas authorized by the Ministry of the Economy could cause the warehousing of 800,000 tons of sugar which would set off a crisis in the sector because of the lack of a way to trade it.

We forecast that the logistics of the country do not permit the movement of this amount of sugar to all the markets in Mexico. What we do calculate is that the short October to November and December harvest can produce around 500,000 tons and with 50 to 60 percent of import quotas already assigned, the 800,000 tons necessary to guarantee sugar supply in the country can be raised.

Sugar balance updated

We present the update of the esimated balance for the 2008/2009 cycle to 28 September and the projection for 2009/2010. As can be appreciated, we will end September with less than one million tons in inventories, for which reason it is expected that imports of at least 300,000 tons will enter the country. This means that there will not be a short supply during November. We forecast that the short harvest, from October to December 2009, as stated beforehand, will produce at least as much as the previous cycle – a little more than 500,000 tons. This will guarantee that inventories finish off 2009 with the bare minimum and start off 2010 moderately well.

The fundamental difference between the two production cycles is that Mexico has moved from being an important exporter to the USA to an important importer of Guatemalan, Colombian, Nicaraguan and Brazilian sugar. If the Mexican government auctions off more import quotas the sugar industry could advance without a hitch in 2010. We forecast that the domestic mill production in the following harvest will be practically the same as the production that finished in June, given that there was a drought, the field wasn’t looked after in the way it should have been and the mills’ infrastructure continue to be the same. The area to be harvested will not change substantially.

International Sugar Markets

In August and September the ICE New York sugar futures market had hisotrical results. For the period August to September, raw sugar future Sugar 11 broke twenty-eight years’ of records and was quoted at close to 538 dollars per ton. Among the determining factors of the prices have been expectations of a greater global demand, the concerns about supply from the big producers, India and Brazil, and the accelerated buying and selling of options.

In this way, sugar futures rose supported by the increase in oil, the stability of shares and an extensive increase in raw materials brought about by the optimism of a global economic recovery.

The maximum record reached in two months of Sugar 11 by the contract closest to expiring has been 537.93 dollars per ton (24.40 cents per dollar per pound). After dropping to 460 dollars per ton at the beginning of September, prices continued on the up and reached 499 dollars when unrefined sugar was subjected to sharp pressure because of renewed positions from October to March.

Sugar Contract No. 16 serves to cover the needs of the sugar producers of the USA, the final users and the sugar traders. The contract started taking effect on 26 September 2008 and substitutes Sugar No 14. During the last two months, there was a rise in the trend and in the last month a price of 640.88 dollars per ton was recorded.

Moreover, in the week that just finished, the sugar market saw price increases as a result of foreign markets. Energy and commodity prices increased and the Trading Corporation of Pakistan announced that they will be looking for 100,000 tons of sugar. The white sugar contract in London for the next month advanced 2.20 dollars compared to the record of Friday, 18 September. In the last session on 25 September it advanced 6.30 dollars to arrive at 577.70 dollars per ton.

With this contract price of 577 dollars per ton of Sugar 5 to December, and doing a quick calculation for the possible purchasing of sugar to be sold in Mexico by intermediaries, we have the following results:

To sum up, the sugar entering the country will not be sold for less than 523 dollars. This price does not take into account the intermediary’s profits which we calculate to be an additional minimum margin of 100 pesos added to the previous price which would make the selling price to the consumer between 623 and 630 pesos per bulk. However, this price could adapt to the possible continuing drop in price in the markets and the approving of the next sugar import quotas.

The weekly market

Sharp falls slowed down in standard grade sugar and mixed prices in refined

Slight falls in the price of standard sugar compared to the week before are shown in the locations that form part of our analysis. In this way, at the end of the fourth week of September, the price of standard grade sugar in the Federal District fell 3.50 pesos to settle at 666.50 pesos. In Toluca and Puebla slight increases of 1.50 pesos and 1 peso put the average prices at 670.50 and 642 pesos per bulk respectively. Guadalajara maintained an average retail price of 630 pesos. In the Federal District and Toluca, the price per bulk of refined sugar was fixed at 701 pesos and 720 pesos respectively, while in Guadalajara a rebound of 20 pesos put the average at 650 pesos. In Puebla a drop of 32.50 pesos put the average at 705 pesos per bulk which now places it on a par with the market.

Average standard. The average of the four main cities for sugar trading was fixed at 652 pesos, after a negligible variation in local prices. However, this price shows a difference of 368 pesos compared to that recorded at the begnning of January. The current price is 129.50 percent higher.

Average refined. A 3 peso drop put the average at 694 pesos. It is underlined that the floor price in Guadalajara managed to recover yesterday’s loss and return to a level of 650 pesos. The Ministry of the Economy announced that if necessary, it would take the decision to stop issuing sugar import quotas.