Sugar Report at 14 December 2009

• Harvest results up to 5 December 2009.

• Weekly Report.

Harvest results up to 5 December 2009.

At 5 December 2009 the harvest results showed a production of 156 thousand 620 tons of sugar, a harvested area of 18 thousand 454 hectares and an industrialized volume of one million 772 thousand 228 tons of gross crushed cane in 20 mills in Mexico. At the end of the first week of December, the new figures show that sugar production on a national level has registered a 28 percent growth (equivalent to 34 thousand 441 tons) compared to the same week of the previous cycle. The information published by the Information System of the Sugar Agro-industry (SIAZUCAR-SAGARPA) indicates that the progress so far in the harvest is better than the same week of last year as the harvested area demonstrates a growth of one thousand 809 hectares compared to the 2008/2009 cycle and the amount of gross crushed cane is 463 thousand 524 tons more.

Information per State

The state of Veracruz once again stands out for producing the highest amount of sugar. It produced 38 thousand 462 tons or 24 percent of the national total with Jalisco in second place with a production of 26 thousand 831 tons and Tamauliplas in third place with 22 thousand 264 tons.

Table A.1 -PRODUCTION RESULTS PER STATE UP TO 5 DECEMBER 2009 (WEEK 10) Current Harvest vs Previous Harvest

The mills in Campeche, Michoacán, Nayarit, Quintana Roo, Sinaloa and Tabasco have not reported production figures as yet.

Participation by mills

The 20 factories in operation in the 2009/2010 harvest are: Aarón Sáenz, Adolfo López Mateos, Atencingo, La Abeja, Constancia, El Carmen, El Higo, El Mante, Emiliano Zapata, Huixtla, La Gloria, Melchor Ocampo, Pujiltic, Quesería, San Francisco Ameca, San Miguel del Naranjo, San Nicolás, Tamazula, Tres Valles and Zapoapita. The Tres Valles, Aarón Sáenz and Tamazula mills have jointly produced closed to 47 thousand tons of sugar, representing 30 percent of the national total.

Table A.2 -RESULTS PER MILL UP TO 5 DECEMBER 2009 (WEEK 10) Current Harvest vs Previous Harvest

We need to mention that this harvest is showing improved production figures on the last harvest. We need to remember that in the last cycle problems concerning high input costs and debts to cane producers caused a considerable delay in the starting process in mills in the whole country. If it is true that production figures of the present harvest are reported at the same date as the last harvest, then in this harvest starting conditions are more positive as from the start an agreement was reached as to the reference price of sugar for the payment of sugar cane. Also, work to modernize the collective work contract was carried out throughout the last period with an incentive toward the labor development in work processes.

The role of the ILO in terms of labor development was essential for the current harvest which is one month in the making, to show its first positive results in the quest for improving on the bad results of last year’s harvest. Therefore, in comparative terms, the figures showing better progress to date are a result of the higher number of mills in operation because in the previous harvest at the same date, only 13 mills had registered production compared to the 20 mills that are presently working.

Efficiency Parameters

Although things are looking good because of the number of mills in operation, the challenge this harvest will be to raise factory yield. In the week of 1 to 5 December, factory yield (which shows the conversion degree of the cane in sugar produced) is 8.83 percent, which means that 88.3 kilograms of sugar is produced from each ton of cane on a national level. In the same week of last year, close to 93 kilograms of sugar was produced for each ton of cane which means that in the present harvest almost 5 kilograms less sugar is being produced for every ton of cane. Although we are one month into the harvest and some mills have yet to begin production, the challenge will be to reach the historical national average of close to 110 kg of sugar per ton of cane. However, if mills have not adequately invested in better manufacturing processes, there could be obstacles to improving productivity.

Modernizing the sugar sector, the work of the ILO in Mexico

For the sugar agro-industry, 2009 was indicative for Mexican sugar mills. The International Labor Organization (ILO)¹ touched base with the Mexican Sugar industry in order to develop a series of projects, seminars and courses with the obective of stirring labor life in the sugar industry toward a new direction. In mid-May the ILO met with Felipe Calderon, the President of Mexico, Juan Cortina Gallardo, the President of the National Chamber of the Sugar and Alcohol Industry of Mexico, and Adrian Sanchez Vargas, the Head of the Union of the Sugar and Similar Industries (STIASRM), to sign a “National Productivity Agreement” and to pave the way to a series of seminars on “Social Dialogue, Decent Work and Competitivity Management” that was carried out one month later at the International Center of Formation of the ILO in Turin, Italy.

Eleven members of the National Union participated in this event, headed by Sanchez Vargas and Rene Martinez, the General Director of the CNIAA. Alvaro Castro, the Deputy Minister of the Labour Ministry attended on behalf of the Mexican government. The main objective of the reunion in Italy was to implement a modernization of the sugar industry and to reach concrete agreements in different aspects of labor life in the sugar mills (permanent jobs, productivity and compensations, health and job safety, environment, welfare and social commitment).

How does the ILO work in the industrial sugar scenario?

Representatives of this organization visited the sugar mills in the country to carry out an evaluation and impart the guidelines on auto-trainig and competitiveness evaluation (GAECs) for Security and Health in the Work Ambience and Preservation of the Environment. These tools interact in an environment of participation, integration, flexibility and inclusion, as well as their basic principles of measuring: reflection and proposals for improvement. The ILO says that “these activities suggested by the workers represent very important elements and can have an interesting impact that favors both the firm and the workers”. The result has been considered a success for the social-labor aspect of firms dedicated to sugar production given that all parts become integrated (workers, administrative staff, executives and upper management) in a favorable relationship in the working areas within the mills.

The ILO terms it “decent work”. The words of Juan Cortina Gallardo put into perspective the reality that sugar workers at the mills which participated in the ILO training are living at this time: “without dialogue it is not possible to listen, nor know, nor understand the difficulties, challenges or solutions in the context that the sector is dealing with”. The meeting which echoed the philosophy of the modernization of the ILO has shown up in the smaller presence of labor strikes throughout the 2008-09 harvest and has shown a positive outlook for the new crushing that is just beginning. The constant communication with the unions and the will to reach agreements has built up the social capital for the economic and social sustainability of the sugar industry.

Moving forward from dialogue to concrete actions has involved reaching integral incentives for all parts. The following stand out: the health program with more than 250 thousand appointments, the permanent training for competitiveness geared toward more than 500 certified workers by the end of 2009, the program of household integration that includes a program against addictions, and finally, projects an increase in productivity parameters, workplace hygiene and correct machine operating. The bottom line of the training, evaluation and certification course given by the ILO has resulted in 715 trained workers, 622 competent syndicated workers and 83 non-union workers. In each mill an average of 35 hours of training was invested with at least two groups per shift. On applying the GAECs SST and environmenal courses, there was a total of 773 proposals from workers for improvments obtained (one proposal per worker), of which 199 are being processed and 574 are pending. However, the important point is that the ILO has shown its commitment in the coming months to follow up in all improvements in the sugar mills and with workers.

The weekly market.

Week of price dips in sugar markets. Same as in previous days, we want to comment that the importing of the remainder of the sugar authorized by the Ministry of the Economy and the harvest that is one month into production seriously affected the prices in supply centers in the country. The markets are suffering the consequences of the urgency of traders in placing imported sugar in the markets, a situation which has not allowed for price stability in supply centers. Because of refined sugar prices being more competitive than the prices of new domestic production, Mexican mills which have already started harvesting are selling new sugar at import prices.

In the survey we carried out directly to intermediaries, wholesale prices of refined sugar were between 560 and 565 pesos per bulk. On comparing them to historical data, we can see that they have dropped close to 22.5 percent or 163 pesos since mid-September. The year is coming to a close and so is the limit for sugar imports resulting from the established quotas. The original amount authorized by the Ministry of the Economy was 550 thousand tons, but logistic barriers only allowed around 300 thousand tons. As a result, it is likely that the deadline will be extended to the end of January 2010.

The combination of more sugar imports and the beginning of the sugar harvest is leading to lower prices in different Mexican cities. Only from September 2009 to date, the price of standard grade sugar has fallen on average up to 110 pesos per bulk, from 650 pesos to 545 pesos that exist today for wholesale transactions. This is around 20% in a little more than two months.

Floor and Wholesale Prices

STANDARD SUGAR: The average fell 2.50 pesos and is now at 575 pesos retail per 50 kg bulk. STANDARD WHOLESALE. The wholesale price in the Federal District is 545 pesos and 520 pesos FOB at the mill. In Guadalajara the wholesale price is 555 pesos (541 pesos FOB at the mill).

REFINED SUGAR: The average of the four cities is 620 pesos per bulk. WHOLESALE REFINED: In the Federal District, the wholesale price is 560 pesos, 569 pesos FOB at the mill. The wholesale refined price in Guadalajara is 565 pesos, 587 pesos FOB at the mill.

The graph shows the evolution of floor, wholesale and FOB at the mill prices in the supply center of the Federal District. We can see how wholesale prices of refined sugar have fallen to levels below those of FOB at the mill since mid September. The FOB prices are theoretical calculations that zafranet.com makes with the aim of giving the user an idea of the price that is used to calculate the reference price of sugar for payments to sugar cane producers. Normally these theoretical prices are less than the wholesale prices, but given the higher sugar imports that have not yet reached the market and the harvest that is already generating an expectation of a sugar over-supply, the actual prices have fallen below those of FOB at the mill prices.

Sugar Report at 7 December 2009

• The exchange rate has an effect on prices in the USA and Mexico. Refined sugar is more expensive in the domestic market.

• Results up to 28 November 2009.

• Weekly Market. Imports have an impact on prices.

The peso-dollar exchange rate has been a fundamental factor in the decision to export Mexican sugar to the United States. The decision to export more than a million tons during the 2008/2009 harvest was owed to this element, given that the devalued peso allowed prices in the United States to be more attractive than in Mexico. In the following graph we can observe the exchange rate trend from October 2008 to November 2009 in monthly averages.

Using the trend of the exchange rate, we decided to graph the relationship between different variables – basically the price of sugar in Mexico against that of the United States. As can be seen in the graph above, if we look at the orange line, the exchange rate peaked (its greatest devaluation with respect to the dollar) between February and March 2009, when it shot to an average of above 15 pesos in February 2009. Mill owners made good use of this in order to close export contracts with the main traders operating in the country.

Very few mills have their own market penetration in the United States. Upon updating the same graph, we now find a larger margin in prices between both markets. In Mexican pesos, the ton of refined sugar in the United States is 11,500 versus 6,700 for Mexican refined and 5,500 for Mexican standard sugar. As the peso appreciated the price differential between both countries diminished, until from mid August to the beginning of September when the price differential went to zero. At that date, the exchange rate diminished to a range of 13.30 to 13.50 pesos per dollar. Then things changed: the domestic price of refined sugar reached the same level as the American refined at a range of 12,500 to 13,500 pesos per ton in both standard and refined qualities. Table 1 below shows the results. In the model of Domestic Price Trends that we published last week, we held that a novel way to forecast the price in the main domestic markets is to connect it as much with what occurs in sugar futures contracts as with price trends in the United States. We include the exchange rate as well as world inventories (which are in deficit at the moment) and the estimates of domestic sugar production for the 2009/2010 harvest.

We can therefore observe that given the depreciation of the dollar against the majority of strong currencies, Obama’s government is trying to revive the competitiveness of US products with the aim of getting the motors of the US economy started once again in order for it to become the engine of world growth. The strengthening of the peso does not benefit US exports but it does benefit imports from the US. In the sugar environment, and within the trilateral agreements of NAFTA, the sugar produced in the USA could at any moment become more competitive than Mexican sugar.

But what interests us finally is the statistical and graphical observation which will help us to identify the level at which sugar prices could find themselves towards the end of the year, the first trimester of 2010 and even a trend for the whole of 2010. The following graph reflects the trend followed by sugar prices in Mexico, the United States and Sugar Futures in the United States and London.

It is noteworthy that prices in Mexico started to rise in March 2009 in accordance with the pressures exerted by cane producing groups in the country. Then towards the second half of the harvest, mill owners witnessed their main commercial partner, the United States, exhibiting the highest prices, which is why they put out their surpluses in order to have improved earnings (aside from the export quota). This quest for higher earnings in foreign markets caused a generalized expectation of a sugar shortage which meant that domestic prices overtook US prices and arrived at their highest levels in September 2009.

With the announcement that sugar would be imported and with the start of the harvest, prices have decreased although the price of refined sugar continues slightly above the price of refined in the United States. Currently the price of refined in Mexico is close to 13 thousand pesos, the price of standard is 12 thousand pesos and the price of refined in the US is 12 thousand 600 pesos. Sugar futures prices are at present at levels of 7 thousand and 9 thousand pesos. Conclusions about price trends can be obtained by analyzing the price differentials of the different sugar qualities.

We can observe the following interesting facts: On obtaining the price differentials for raw sugar in the United States and of standard sugar in Mexico, we see that from October 2008 to April 2009, raw sugar in the US had a differential (it was more expensive) of between 300 and 800 pesos per ton. Before that, halfway through the year, Mexican sugar started to get more expensive, reaching a level of 4 thousand 611 pesos last September.

The same price differential trend was followed for refined sugar in the two countries. Towards the end of the year, the difference in price had dropped to close to 3 thousand pesos per ton. A more constant price trend has been followed by the price of refined sugar against the refined sugar future in London (Sugar #5) which has fluctuated between 3 thousand 500 and 6 thousand pesos per ton. The very distinct global sugar deficit estimates do not allow for only one criterion for a 2010 forecast, as prices are expected to increase if the figure arrives at 10 million tons, or if prices take a different route then the deficit will be close to 3 or 4 million tons depending on the level of supply recovery in the fact of a growing global demand. Finally, if we compare the difference in price of refined sugar in Mexico with that of Sugar Future #5, we can see that during 2009 the price differential of refined in Mexico increased steadily to arrive at 6 thousand pesos in September.

We can see, looking at the above information, that the price in Mexico depends more on the price that exists in the United States than on that of prices in futures markets, and given the increasing probabilities of a recovery of the global economy, we estimate that there is a higher probability that the price in the United States will maintain levels of 12 thousand to 13 thousand pesos per metric ton towards the end of the year and at the beginning of 2010.

The estimates of the price of sugar futures contracts show a downward price trend in contracts towards 2011. It is then therefore possible to forecast that the price will tend downward in the second part of 2010. If we compare these conclusions with those of our last report, we find that a sugar price in the United States of 13 thousand pesos per ton would result in a price of 13,400 pesos per ton in Mexico, according to our model. This price, however, is not convenient for export, given the price differential.

The conclusion from our analysis is that the relatively constant behavior of our main variables, that is, the exchange rate and the world sugar deficit (estimated at around five million tons), leads us to believe that the under-supply of sugar in world markets will not be as bad as it was in 2009, when it led to a huge price increase. Given a horizontal trend in prices, domestic sugar mills will not find an attractive export market and, as a result, domestic demand should be met with ease in the fiscal year of October 2009 to September 2010.

This should hold even if we consider the low production level reached in the previous harvest. Although the ghost of insufficient supply will dissipate, import pressures could resurge somewhere around September and October of next year which could lead to the re-establishment of import quota for the fourth quarter of 2010. Nevertheless, even with an insufficient harvest and an exchange rate not more than 13.50 pesos per dollar, we should see an upward trend in prices toward the second half of next year. The Mexican niche in the USA market should not reach more than 400 to 450 thousand tons.

Harvest Results up to 28 November 2009

At 28 November 2009 an accumulated production in 13 mills has been recorded and at the end of the third week (the 9th official week), a harvested area of 11,046 hectares has been registered, an industrialized volume of 917,903 tons of gross crushed cane and a sugar production of 74,281 tons.

Information per State and on a National Level

Production data compiled in the third week of harvesting from the Aarón Sáenz, Adolfo López Mateos, Atencingo, El Carmen, El Higo, El Mante, Emiliano Zapata, Melchor Ocampo, Pujiltic, Quesería, San Miguel del Naranjo, Tamazula and Tres Valles mills show that production to date shows an improvement in production compared to the same period last year. At the end of the second official harvesting month, there is activity in mills in the states of Colima, Chiapas, Jalisco, Morelos, Oaxaca, Puebla, San Luis Potosí, Tamaulipas and Veracruz.

In spite of the liquidity problems in the mills at the start of the harvest, the first positive figures concerning area harvested, cane crushed and sugar produced on a national level have been issued. The recent data demonstrates that slightly more area was harvested than in the same period in the previous cycle. There is an industrialized area of 11 thousand 046 hectares (has) compared to the 10 thousand 956 has of last year – an addition of almost 90 has. The latest figure for gross crushed cane is 917 thousand 903 tons which is 95 thousand 330 tons more than the 822 thousand 72 tons recorded in the same week of last year.

Table A.1 -PRODUCTION RESULTS PER STATE UP TO 28 NOVEMBER 2009 (WEEK 9) Current Harvest vs Previous Harvest

Sugar production in the country reached a total of 74 thousand 281 tons compared to 68 thousand 789 tons last harvest. The current sugar production figure is 5 thousand 491 tons or almost 8 percent more than the total amount registered at the end of November 2008. The states of Tamaulipas, Jalisco and Veracruz head national sugar production with figures of 14 thousand 846, 14 thousand 530 and 12 thousand 502 tons respectively.

Nevertheless, we must point out that there is still a production delay of close to 48.57 percent in Veracruz as a total of close to 281.5 thousand tons of cane had already been processed in the same week of the previous harvest, resulting in a sugar production of 24 thousand 312 tons compared to the 12 thousand 718.95 tons this cycle. If we look at the initiations of operations in the majority of mills in Veracruz, the greatest sugar producer in Mexico, we can see a recovery greater than production levels and in the following days the new harvest will get sugar into the markets with greater fluidity. With this we foresee a continuation of the slow drop in prices in the different markets of the country.

Mill participation

The Aarón Saenz and Tres Valles mills had production levels of 11 thousand 900 and 10 thousand 420 tons of sugar respectively. The reason a higher production level has been reached in the current harvest is because the Aaron Saenz and San Miguel del Naranjo mills have registered production figures to date ten times better than those of the last year. This compensates the majority of the mills which have moderate production delays as compared to the 2008/2009 period.

Table A.2 -RESULTS PER MILL UP TO 28 NOVEMBER 2009 (WEEK 9) Current Harvest vs Previous Harvest

Efficiency Parameters

In comparative terms, an increase of 8.02 tons/ha in the amount of cane harvested per hectare can be witnessed. In this harvest, 83.10 tons/ha has been harvested compared to 75.08 tons/ha in the 2008/2009 cycle. Climactic conditions remain favorable to surpass the average of last year’s production levels in the field. However, the levels of sucrose (pol) in cane (%) have reached a national level of 11.52 compared to the 12.68 of the previous cycle. This signifies a 1.35 percent fall.

More cane with lower levels of sucrose does not satisfy production expectations. If we additionally take into account that in the conversion level of cane to sugar or factory yield there is a fall of 0.27 percent compared to the last cycle – although the 8.09 percent yield is very similar to the 8.36 of last year – we estimate that if the factory yield is not greatly improved, then in spite of there being an improved field yield, it will be difficult to produce much more sugar in keeping with the production estimate. The Karbe level registered to date in the average of the 13 working factories is 62.48 points, 10.44 points less than the level reached in Week 9 of the previous harvest.

Table A.3 -FIELD AND FACTORY. Main variables at 28 November 2009 (WEEK 9) 2008/2009 Harvest vs 2007/2008 Harvest

Sugar production per mill and quality of product refers to the fact that in the present period up to today’s date, a total of 42 thousand 652 tons of refined sugar and a total of 29 thousand 547 tons of standard sugar has been produced. The Aarón Saenz and Tres Valles mills have, up to Week 9, produced more than 11 and 10 thousand tons of refined sugar respectively.

The San Miguel del Naranjo and Atencingo mills are the highest producers of standard grade sugar, producing 7 thousand 487 and 6 thousand 388 tons respectively. Compared to last year, to date a total amount of 5 thousand 490 tons of sugar has been produced, with a shortfall of 4 thousand 247 tons of refined sugar.

Table A.4 -SUGAR QUALITY PER MILL AT 28 NOVEMBER 2009 (WEEK 9)

Weekly Market

At 4 December STANDARD. The average floor price of standard grade sugar in the four most important centers for sugar trading in the country continued on a downward trend, with a retail price of 589.75 pesos for a 50 kg bulk. The average of the four main centers in this report maintained a difference of 107 percent compared to the original price at the beginning of the year. The current average is 305.50 pesos higher. Local quotes are in the range of 575 to 594 pesos.

REFINED. The average is 660 pesos. The price of a bulk of refined has a 93 percent difference compared to the price registered in early January which is equivalent to 318 pesos of the original price.

It is important to point out that the prices currently being quoted in the supply centers refer to imported refined sugar quotes which have not yet arrived to the markets in a constant manner. For example, in the Central del Abastos supply center in Mexico City the SNIIM quotes the price of sugar Portero when in fact there isn’t any, which ensures a very high price. However, in the survey that zafranet.com carried out to wholesalers and traders, the price of domestic sugar is 10 to 15 pesos more than the price of imported sugar, which is between 565 and 575 pesos per 50 kg bulk wholesale price.

The moving average prices of sugar in the Federal District are at 580 pesos for standard on a negative trend and close to 670 pesos for refined on an “erratic” trend (as a result of there being no sugar in the Portrero mill yet in the new harvest and the little that there is, is being quoted very high). This therefore has a high erroneous projection in the supply center in the Federal District.

The wholesale price of refined sugar has fallen to levels below that of the FOB at the mill price since the last week of September (SEE PRICES OF REFINED IN THE FEDERAL DISTRICT AND GUADALAJARA). The FOB prices are calculated by zafranet.com with a view to giving our readers an idea of the price used to calculate the sugar reference value for payments to cane producers.

The FOB at the mill price for refined sugar is only a theoretical price at which domestic sugar can be purchased. However, the importing of refined sugar has an impact on the price of domestic refined sugar, making the market price extremely erratic. This will continue to be seen at least until the first trimester of the year.

Sugar Report at 30 November 2009

• 2009 – 2010 Price scenarios.

• Harvest results up to 21 November 2009.

• Weekly market.

2009 – 2010 Price scenarios

In the last 15 days, various official organs and private enterprises such as traders and sugar trading companies have made a series of estimates with relation to the size of the global sugar deficit for the 2009/2010 harvest. From the interpretation of these estimates, we have extracted two general conclusions which will in turn form the basis of our own analysis of domestic prices. The present analysis is carried out starting from the assumption that the world economy is in a process of recovery after having lived through one of the most severe economic crises of the last few decades. This scenario of global economic recovery benefits variable behavior in Mexico and although market opinion shows that Mexico still faces serious obstacles before being completely out of the crisis, global inertia helps us understand somewhat that marginal variable movements such as interest rates and exchange rates will not affect to any great degree the general standpoint of our analysis.

In the first place, if the total of the sugar deficit reaches the level of close to 10 million tons proposed by some of the big traders, then what can be expected is a level of elevated prices due to the difference between the supply and the greater demand for sugar, and the expectation of a lack of sugar in the markets. In this first supposition we consider that the main producers on a world level will not manage to recover the capacity of supply to cover the demand. Because of the above, it can be expected that the futures prices of sugar will follow an upward path.

In Mexico, if domestic prices get to the point where they drop so much that it would be a good idea to look outside of the country, then it will be very necessary for mills to seriously examine the possibility of exporting, as with the previous harvest when a considerable amount of sugar was exported principally to the USA.

The re-establishment of export quotas could once again cause short supply in the domestic market and the possibility of new quota allocations at the end of the 2009/2010 harvest. This will be the alternative to cover the possible sugar scarcity. In our second scenario, if the main countries manage to recuperate their supply capacity, with the reopening of credit as the economic crisis starts coming to an end, we would see the world sugar deficit diminishing, accompanied by a drop in prices in futures markets. Taking the above into account, those contracts would follow a downward trend with a fall in investment in said titles and in Mexico an international ambience of prices being adjusted downward, in relation to the level they reached during this year, would slow down sugar manufacturers and make them fulfill export quotas allocated and thus domestic supply could be satisfied.

Price estimates

Maximum levels were reached in September 2009 and since then floor prices in Mexico have been on a downward trend. We would like to point out that there are clear expectations of greater volumes of sugar in the markets because of the start of the harvest at the same time that there is sugar arriving for importing.

The following graph shows the price trend in the last sugar cycle. From March 2009, prices started to rise, due mainly to the fact that the pressure generated by the higher sugar payments sought by sugar producers impeded the free flow of sugar to the markets through the taking over of bodegas in the mills. This generated a speculative wave in the markets due to a lack of sugar. Once the harvest in Mexico finished, prices continued on an upward path, motivated on this occasion by expectations of scarcity generated by the departure of additional sugar abroad to the deficient US market, in similar amounts to that necessary for the protection of domestic supply. Towards the end of the year, prices have started to drop, motivated basically by the entry of sugar for import needed to cover the short supply, and by the start of the harvest which generates the perception of over-supply of sugar in the country.

To foresee a future trend, it is necessary to analyse the price direction in the United States, given that if international prices are more attractive than domestic ones, then mills should be seriously looking at exporting to this market once again.

On doing a comparative of Mexican and US prices, we can see that during the 2008/2009 harvest, prices in the USA remained constantly above domestic prices, a situation which was made the most of by Mexican mill owners looking for larger profits. It must be remembered that Mexican mills were coming out of a two-year period of consistent losses.

At the end of the third trimester of this year, the table shows that the price in the USA has reverted its trend and the Mexican price is now more elevated than the US price. The Model: To forecast data from a technical point of view, we have used a simple linear regression model. The dependent variable is the percentage change in the price of refined sugar in Mexico; the independent variable is the percentage change in the price of refined sugar in the United States. In other words, what we will try to forecast is the price that sugar would be in Mexico were there changes in the price of sugar in the United States; we know from the start that higher prices abroad are what sugar manufacturers are looking for in order to export. The basis of the analysis is Table 3 and we have chosen the columns with the price of refined sugar in both countries. On following the basis of the model we have obtained the following results:

The conclusions of the model show the following: a= -18180.86192 b= 2.427326645

With the knowledge that the last price registration in the USA for November was estimated at 12 thousand 600 pesos per ton, we calculate three different scenarios for prices in Mexico with three possible prices in the United States:

Scenario 1. If the price in the USA fixes itself at the equivalent of 13 thousand pesos per ton, the model demonstrates that the price in Mexico could be placed at close to 13 thousand 400 pesos per ton – a price which, for the margin of difference, is not very favorable for exportation. The interpretation of this first scenario tells us that given the more or less constant behavior of variables such as the exchange rate and a global sugar deficit of close to 5 million tons¹ , the expectation of sugar shortages on a world level will not be so strong as to radically increase prices. In the face of prices demonstrating a horizontal trend, it is not an attractive option for local mills to sell to external markets and therefore domestic demand could be wholly satisfied.

Scenario 2. If the price in the USA reaches 14 thousand pesos, the Mexican price could go up to 15 thousand 800 pesos. In this second interpretation, we can see that the price in the United States has increased because of a negative recovery expectation with respect to the supply potential to the world market of the main producers. The global sugar deficit could reach 10 million tons. Under these conditions sugar futures prices once again show an upward tendency and the mills decide to turn to the United States market to do business. With this scenario, the possible sugar shortage will cause prices to increase in Mexico.

Scenario 3. If the price falls to 11 thousand pesos per ton in the USA, the price in Mexico could react by fixing itself at only 8 thousand 500 pesos per ton. In this last scenario, the global sugar deficit is relatively low (3 million tons) which creates expectations of a full global supply. This would mean that international prices would tend towards a downward trend. Investments in sugar futures lessen as titles lose their attractiveness and on a domestic level the establshing of nothing more than the normal export quota guarantees a complete supply of sugar as well as a downward price trend in local markets.

¹Traders and official organizations at an international level place the global sugar deficit at between 3 and 10 million tons for the 2009-2010 season.

Conclusions: The selected model not only fits technical analysis but the simple linear regression also measures the correlation between variables that respond to proper market behavior. Although the model is restricted by the low number of variables, the results show that it reflects very closely market behavior.

Harvest results up to 21 November 2009

Production information for the new 2009/2010 harvest continues to arrive. By strictly taking the first week of October as the start of the new harvest, production data presented in this report correspond to week 8 of the official calendar. According to information from cane producing associations, the factories that are now in operation are Adolfo López Mateos, Atencingo, Aarón Sáenz, Casasano, Constancia, El Carmen, El Higo, El Mante, Emiliano Zapata, Huixtla, Melchor Ocampo, Zapoapita, Pujiltic, Quesería, San Miguel del Naranjo, San Francisco Ameca, San Nicolás, Tamazula and Tres Valles. There were expectations in the sugar agro-industry in October that the harvest would begin without any setbacks. Today, looking at real figures, we can observe a delay in production compared to the previous harvest and armed with the knowledge that said harvest was beset with problems as much in the field as in the factory, the information submitted should be interpreted as a reflection of possible problems which threaten to off-rail production forecasts in the country.

Although it is true that in the same week of last year only a little under 27 percent of sugar which has to date been harvested was produced (7 thousand 647.50 tons), these two weeks with negative differences lead one to believe that problems such as the mills’ lack of capital and the problems caused by the weather in various states are complicating the situation at the beginning of the harvest. This year, in contrast to last year, sugar is being produced in the states of Tamaulipas and Jalisco. However, in the last cycle (in contrast to this one), there were already production figures being reported from mills in Michoacan and San Luis Potosi.

Information per State

According to information from SAGARPA, at 21 November 2009 the following mills are crushing: Melchor Ocampo, Tamazula, Adolfo López Mateos, Aarón Sáenz and Tres Valles. They have recorded a Harvested Area of 3,889.97 hectares and an industrialized volume of 306,986.42 tons of Gross Crushed Cane, as well as a Sugar Production of 20,718.95 tons. To the list of Producer States published last week, we can add Veracruz and Oaxaca. However, the difference in production this cycle compared to the 2008/2009 is equivalent to (-) 7 thousand 647.50 tons of sugar as in the previous cycle they had already produced 28 thousand 366.45 tons. In the same way, a difference of (-) 1 thousand 560.88 harvested hectares and (-) 64 thousand 998 tons of crushed cane can be observed.

Table A.1 -PRODUCTION RESULTS PER STATE UP TO 21 NOVEMBER 2009 (WEEK 8.) Current Harvest vs Previous Harvest

Veracruz stands out, when looking at production per state, for having a delay of 62.59 percent in sugar production, since in the same week of last year it had already processed close to 121.1 thousand tons of cane, resulting in a production of 10 thousand 477 tons of sugar compared with the 3 thousand 919.85 tons of the new cycle.

Mill production

Compared to the previous harvest, in this crushing we already have figures from the Aaron Saenz mill in Tamaulipas. This factory leads domestic sugar production with close to 7 thousand tons of sugar, with Tamazula in Jalisco in second place, with a production of 4 thousand 500 tons. Tres Valles in Veracruz is in third place with 3 thousand 900 tons. We would like to mention that the Atencingo mill has not issued production figures for its new harvest; however there is sugar from this mill on the market already. While the Aarón Sáenz, Melchor Ocampo and Tamazula mills have advanced their harvests compared to last year, the Adolfo López Mateos and Tres Valles are behind with a sugar production of between 50 and 60 percent. The Lázaro Cárdenas, Pujiltic and San Miguel del Naranjo mills have not yet reported preliminary figures, in spite of having started production in Week 8 of the 2008/2009 cycle.

Table A.2 -RESULTS PER MILL UP TO 21 NOVEMBER 2009 (WEEK 8.) Current Harvest vs Previous Harvest

Efficiency Parameters

Within the efficiency data we find field yield and factory yield. In comparative terms, in this harvest there is an increase in the amount of cane harvested per hectare to the tune of 10.68 tons/ha. In the 2008/2009 cycle there was a total of 68.24 tons/ha harvested compared to the current 78.92 tons/ha. Climactic conditions at the start of the harvest have not been unfavorable, pointing to the overtaking of the production levels in the field. The mills that have already started working are already surpassing last year’s average. Mills in production have already produced molasses to the order of 7 thousand 134 tons. This figure is 973 tons less than that produced in the same week of last year. The average Karbe level to date recorded in the 5 factories in production is 70.76 points, 8.11 points less than the level reached in week 8 of the previous harvest.

Table A.3 -FIELD AND FACTORY. Main variables at 21 November 2009 (Week 8.) Comparison of 2009/2010 harvest vs. 2008/2009 harvest

Finally, as can be seen in the following table, sugar production per mill and quality of product refer to the fact that to date in the current period, a total of 18 thousand 589 tons of refined sugar and of 2 thousand 131 tons of standard sugar has already been produced in the Melchor Ocampo mill.

Table A.4 -SUGAR QUALITY PER MILL AT 21 NOVEMBER 2009 (WEEK 8.)

Compared to the total amount of sugar produced in the 2008/2009 harvest, there is a difference of (-) 7 thousand 646 tons of which (-) 6 thousand 402 tons are refined. It is expected that the production figures from mills in production but not yet registered will considerably increase production figures for the coming week. Finally, we note that sugar producing associations and the government estimate close to 5.1 million tons of sugar while the CNDSCA and Zafranet estimate around 4.97 million tons, this figure being perhaps the ceiling for production for this harvest. The data is becoming more dynamic at the onset of the 2009/2010 harvest.

Weekly market

In the domestic market there is almost no sugar in storage from the previous harvest, and the few bodegas that still have some inventory, only count on sugar of substandard quality (that is used mostly for recycling which corresponds to a very specific niche market). Even though this short supply suggests an increase in prices, the reality is that sugar imports have stopped prices from going up. Since October average standard and refined sugar prices at the four main supply centers in Mexico have dropped by close to 4 percent and only in the Central de Abastos supply center in the Federal District has the price of refined sugar dropped by 8 percent. We estimate a more accelerated price drop now that new production figures are being made known from most of the mills in the country and as inventories are filling up little by little in the various markets.

STANDARD. At the end of the week of 23 to 27 November, the average floor price of standard sugar in the four main centers for sugar trading in Mexico demonstrated a slight downward trend. It is retailing at 596 pesos per 50 kg bulk. The average of the four main supply cities in the report maintain a difference of 110 percent compared to the original price at the beginning of the year. The current average is 312 pesos higher. Local quotes are from 587 pesos to 600 pesos.

REFINED. The average price is 661 pesos. The price of a refined bulk today has not changed and still shows a difference of 94.5 percent compared to the price recorded in the first days of January, equivalent to 319.50 pesos of the original price. There is, however, an evident price deviation in refined sugar in the supply center of the Federal District, given that only refined from Portero is mentioned but in reality it is very scarce – there is practically nothing in existence. Therefore the small quantity that reaches this market is too highly priced compared to other markets in the country.

The moving average

price of sugar in the Federal District remains on a negative trend below 590 pesos for standard grade and on a horizontal trend at 660 pesos for refined sugar.

In the graph we can observe the behaviour of floor, wholesale and FOB at the mill prices of refined sugar in the Central de Abasto in Mexico City. Since mid-November, we can see a bigger gap between the wholesale and FOB at the mill price. We can interpret this as due to a greater pressure from expectations of sugar over-supply at the beginning of the harvest causing the WHOLESALE price to drop to levels below those of the THEORETICAL FOB AT THE MILL price which is normally less than the wholesale price. With inventories almost empty and with the expectation of the balance of sugar being imported, the price trend will show greater drops which could grow towards the first trimester of 2010 due to the greater supply in existence with the harvest at its peak.

Sugar Report at 23 November 2009

• First production estimate adjustment for the 2009/2010 harvest

• Advance of the harvest at 14 November 2009. Preliminary production figures

• Weekly market

First production estimate adjustment for the 2009/2010 harvest

As a result of a recent study regarding the conditions at the start of the harvest in Mexico, in this report we are publishing what we can call the first adjustment to production estimates in the new harvest, but also the second production estimate for 2009/2010.

The new information is very important, as it reflects a fundamentally downward trend compared to the first forecast published by the National Committee for the Sustainable Development of Sugar Cane (CNDSCA) a little more than a month ago although on a general level it demonstrates a slight recovery compared to the past cycle.

On 21 October the CNDSCA published its first production estimate for the 2009/2010 harvest. Using information one hundred percent from the mills, it painted a picture of significant cane and sugar production recovery compared to the previous cycle. At a domestic level, the first calculation forecast a production of 5 million 168 million 260 metric tons of sugar, the product of a factory yield of 11.73 percent. At that date, the Committee also released a forecast of 663,777 industrializable hectares, as well as a production of 44 million 075 thousand 290 tons of cane with a field yield of 66.40 tons per hectare. The new figures demonstrate a less encouraging picture, as a production of only 4.974 million tons of sugar is expected. This means a drop in comparison to the first estimate of 3.75 percent.

On carrying out the sugar production estimate, compared to the 2008/2009 cycle it will be equivalent to a slight recovery of only 0.24 percent. We must point out that at the start of this harvest, as with many other previous ones, problems are arising for many mills in Mexico because without liquidity and without capital, they are facing serious problems for their kick-off. This situation leads us to believe that this harvest will be much the same as the previous one. In the last sugar balance that zafranet.com published on 15 October, we estimated a production of 4.972 million tons of sugar, a figure only 10 thousand tons more than the final production of the 2008/2009 cycle.

With regard to the new estimate for industrializable area for 2010, it is expected that 642,970 hectares will be harvested, 20, 807 hectares less than the first estimate.

Compared to the previous harvest, the yield will be 20, 087 tons less, equivalent to 3.30 percent. Once again figures very close to last year’s are confirmed and explained in part as being due to bad climactic conditions, with flooding in the state of Tabasco, and droughts in other states. The factory yield is 11.69 percent, which is higher than the first estimate of 11.73 as well as being higher than the last harvest’s yield of 11.67 percent.

To carry out an analysis of the last piece of information: If a crushing of only 42 million 349 thousand 585 tons of cane is expected in the new estimate (3.92 percent less than the first estimate and 0.39 percent less than the previous year), and as we commented above, 4.977 million tons of sugar is expected to be produced, then the relation between the two makes us think that higher productivity is needed in the mills in order to produce more sugar from almost the same amount of cane.

However, not all mills in the country have carried out adequate steps to modernize their equipment so as to be more productive and reduce waste in the factories. For this reason we believe that this last sugar production estimate is sure to drop even more.

On the other hand, on calculating the figures for field yield (tons per hectare) for the 2009/2010 cycle, we estimate a fall of 2.20 tons per hectare in relation to the first CNDSCA estimate and an increase of 1.28 tons per hectare in relation to last year’s yield. We must take into account the fact that there will be a slight increase in the amount of cane harvested in most of the sugar cane producing zones in Mexico that do not suffer climactic ravages which could, in theory, be a strengthening factor at the start of the harvest in the whole country. Nonetheless, as we have commented in previous reports, the shortage of capital in mills could be an obstacle to the starting of operations in some mills.

The final interpretation of the new production estimates is “overly” positive, and on sounding out starting conditions in mills and in the Mexican field, figures at the end of the harvest could be lower than this forecast. The updating of information from the international and Mexican sugar trading industry is complementary to previous forecasts. Specifically for October we estimated that imports would be at 210,127 tons, of which 86 percent was for the importing of refined sugar and the rest was for standard grade (29 thousand tons). However it is necessary to clarify that the previous importation figures to October were calculated by ourselves, given that customs information has not been issued in an efficient way and there is no information from other official sources.

Advance of the harvest at 14 November 2009. Preliminary production figures

With the starting of activities of mills in Oaxaca, Tamaulipas and Jalisco, the preliminary production figures for the 2009/2010 harvest have been released.

Table A.1: ADVANCE PRODUCTION REPORT FOR STATES AT 14 NOVEMBER 2009 (WEEK 7) Current Harvest vs Previous Harvest

Although the Adolfo López Mateos and Tres Valles mills have begun the harvesting season, at 14 November 2009 only the Aaron Saenz Garza and Tamazula mills had registered production information. In aggregate terms, a Harvested Area of 856.29 hectares and an industrialized volume of 81,845.44 tons of Gross Crushed Cane, with a Production of 4,258.20 tons of sugar was reported. If we rigorously stick to the first week of October as being the start of the new harvest, then the first production figures correspond to Week 7, being the period 10 to 14 November. Compared to the same week of the previous cycle, it can be observed that last year, apart from mills in Jalisco, there were also figures issued by mills in Michoacan, San Luis Potosi and Veracruz.

Table A.2: ADVANCE REPORT of MILL PRODUCTION AT 14 NOVEMBER 2009 (WEEK 7) Current vs Previous Harvest

The difference in production this cycle compared to the last one is (-) 7 thousand 218.70 tons as in the previous harvest a production of 11 thousand 476.90 tons was realized. In the same way, a difference of (-) 2 thousand 347.99 hectares harvested and (-) 147 thousand 706 tons of crushed cane can be observed.

Table A.3: FIELD AND FACTORY. Main variables at 14 November 2009 (Week 7) Comparison of 2009/2010 harvest vs. 2008/2009 harvest.

With regard to field and factory, it can be seen that n the 7th week of the previous cycle, a cane crushing of close to 230 thousand tons had already been carried out while for the present cycle an amount of 82 thousand tons has not been exceeded.

Molasses production in the current period has reached 956 tons compared to almost 5 thousand 55 tons in the same week of the previous harvest. Finally, as can be seen in the following table, sugar production per mill and quality of product refers to the present period where, up to the present date, a total of 4 thousand 258 tons of refined sugar has been produced. As yet, there has been no registration of standard sugar.

However, compared to the 2008/2009 harvest, there is a difference of (-) 7 thousand 420 tons.

Table A.4: SUGAR QUALITY PER MILL AT 14 NOVEMBER 2009 (WEEK 7)

The production that has not yet been registered by certain mills will significantly boost production figures for the coming week.

Weekly market

STANDARD. At the end of week 16 to 20 November, the average of floor prices for standard sugar in the four main centers for sugar trading in Mexico reacted to the drop in Toluca and was at 599.50 pesos retail. The general average of the four main centers in this report maintained a difference of 111 percent with respect to the original price at the beginning of the year. The current average is 316 pesos higher. Local quotes are in a range of 592 to 606 pesos.

REFINED. The general average is 655 pesos. The price of a refined bulk arrived at 737 pesos and maintains a 92 percent difference compared to the recorded price in the first days of January, equivalent to 314 pesos of the original price. Sugar moving average prices in the Federal District were above 600 pesos for standard grade on a negative trend and 655 pesos for refined grade which demonstrated a slightly upward trend.

In the graph we can observe the behaviour of floor, wholesale and FOB at the mill prices of refined sugar in the Central de Abasto in Mexico City. In the last few days of September and up to the present date, the importing of sugar and the expectation of oversupply because of the start of the harvest have caused the WHOLESALE price to fall to levels below the THEORETICAL FOB AT THE MILL price which is normally less than the wholesale price. General market expectations are of greater falls which could be exacerbated by the higher supply at the peak of the harvest in the first three months of 2010.

Sugar Report at 17 November 2009

• Harvesting starts in various mills, the importation of high fructose could increase

• Updating of the United States Sugar Balance

• International estimates

• Weekly market from 9 to 13 November.

Harvesting starts in various mills, the importation of high fructose could increase

The 2009/2010 harvest has started. Various mills have started crushing sugar cane in the states of Tamaulipas, Veracruz and Jalisco, but there are no reports of production yet. This season there are many challenges and surpassing the results of the previous harvest will be the main objective although at the beginning of this cycle, as happens every year, problems are beginning to surface.

In our previous daily and weekly reports we have presented an exposé of conditions at the start of the harvest. A factor to take into serious consideration is that import sugar permitted to arrive up to the end of 2009 will be arriving at the worst time, being when the Mexican harvest is already producing sugar in the whole of Mexico.

With this in mind, sugar cane organizations and mills are asking what will happen to the price of cane and of sugar if imported sugar is going to be flooding the markets. The obvious response is that the price of sugar will spiral downwards due to over-supply and this will be to the detriment of both groups.

The main problem with imported sugar is that some of the large intermediaries, who were awarded quotas, brought in entire shipments in advance, and in some cases were even given preferential demurrage treatment in Mexican ports.

Our question is thus: Has all authorized sugar now entered the country, or is a large quantity still to be released from fiscal warehouses? In the beginning, the releasing of sugar from customs was very slow and the introduction into the market even slower.

We know that up to October the arrival of sugar for import climbed to 100 thousand tons of the 550 thousand tons authorized by the Ministry of the Economy (although fiscal data refers to a register of only 39 thousand tons up to October and through November).

If the amount of imported sugar that has already entered Mexican markets rises to the total amount of that of the first two quota auctions (100 thousand tons) and, if due to the logistical capacities of Mexico, only the arrival of 250 thousand tons more is estimated, then the maximum amount of sugar imported will be 350 thousand tons.

If from the remaining 250 tons that have been authorized, we subtract the 135 thousand tons of sugar from direct allocations to the industry (which we know will definitely be made), because it concerns sugar that processes sugar and which is used as raw material to be added to its products in what is left of the year, then approximately 115 thousand tons will still have to be imported.

Two reflections with respect to the last figure: The first: the greater part of this amount of sugar must be in the country and must already have been warehoused by traders. The second: At this moment they are trying to allocate it to the markets in any way possible or, in the case of there being a need for consumption due to a delay at the mills. In December, Mexico historically produces sugar which is supplied to markets in its entirety (in the 2008/2009 harvest, a total of 490 thousand tons was produced in December) and if in November at least twice the amount of authorized sugar is imported than was introduced in October (which would add up to 200 thousand tons), minus the 115 thousand tons of admitted sugar which the Ministry of the Economy has already auctioned in import quotas.

Therefore, towards the end of the year, we would see a market with close to 600 thousand tons or more – a figure 1.5 times the monthly sugar consumption in the country. However, we must explain that in addition to the problem of the imported sugar not yet in the market is the problem of undercapitalization of the mills. As in all years, they should start from zero to accommodate their installations and they should implement operating costs for the start of the harvest. As we have stated, many mills sold their sugar a long time before the explosive price rise in August this year, and now, being committed to paying the final adjustment to payments to sugar cane producers, they are feeling pressured to begin working on the start of the harvest in their mills as they do not have money to cover operative costs.

Unless financial institutions support frenzied labor, we will see a delay in operations in many mills, which will have repercussions on production estimates. This will possibly be the opportunity that traders are looking for to place imported sugar. To sum up, we can draft two scenarios, taking into account in both cases the additional problem of bad climactic conditions in Mexico (such as the floods in Tabasco and Veracruz) and droughts in other states:

- The first, with mills showing a sporadic start to the harvest and by December being in full operational swing, and contemplating the importing of the sugar that is short which could flood markets and send prices on a downward spiral.

- With the reduction in price, Mexican mills will favor the higher quotations and will increase their export quota to the USA. To counterbalance the high sugar prices, high fructose corn syrup will be introduced into the country at more accessible prices for the consumer industry.

- And the second, with a delay in operations because of decapitalization of the mills and with the arrival of the balance of imported sugar authorized up to December, which would compensate for the shortfall of sugar in Mexico, we will see similar prices and probably higher ones, given the adjustment to domestic production estimates and the international expectation of prices for the year to come.

Updating of the United States Sugar Balance

Production estimates in the United States for beet sugar for the 2009/2010 harvest have dropped 300 thousand short tons raw value (tcvc) or 272 thousand 155 metric tons raw value (tmvc) in November compared to the estimate for October.

The US Department of Agriculture (USDA) has published its latest World Agricultural Supply and Demand Estimates (WASDE) and the outstanding figures, apart from concentrating on beet sugar production, also focus on the increase in imports coming from Mexico. Production of beet sugar therefore dropped from an estimated 4.7 million tcvc (4.26 million tmvc) to 4.4 million tcvc (3.99 million tmvc) as a result of a lower beet production and a lower sugar yield. Sugar production estimates have also dropped.

Said estimates were calculated to be at 3.313 million tcvc (3 million tmvc) but have resulted to be 12 thousand short tons less than the previous estimate. This drop in sugar cane production is due principally to the fall in the production forecast in Hawaii (-17 thousand tcvc) compensated in part by the rise in production in Texas (5 thousand tcvc). Stocks forecast for the end of the harvest period have risen to 1,016 million tcvc (921 thousand 700 tmvc). We would like to mention that the USDA estimates refer to the possibility of Mexico coming out really well in the 2009/2010 cycle, with even more sugar being exported to the USA.

Last month the WASDE held that Mexico would export close to 495 thousand tons of sugar. This last amount is increased to 760 thousand tons although this figure is much less than the 1.37 million short tons or 1.24 million (tmvc) exports in the previous harvest, as calculated once again by the USDA. In Mexico, the CNDSCA fixed total exports at 1.03 million tons although initial forecasts could favor the USDA’s calculation.

In fact, zafranet.com put its estimate for the 2008/2009 harvest at 1.3 million tons, given that it is added to the reported figure. In the USDA document, there is no change to the tariff-free quota of 1.257 million tcvc, and tight supplies in the USA will allow Mexican mills to once again carry out important business with the USA. If the estimated amounts of high sugar exports to the USA become a fact, the industrial consumption of the country will be satisfied with the high fructose corn syrup. In order to strengthen the above argument, it is necessary to revise high fructose consumption figures in Mexico.

In our graph of National Consumption of Sweeteners for October, we estimate a preliminary figure of 682 thousand tons for the harvest that has finished, which represents 11 percent of the sweetener consumption in the country. From the total high fructose consumption, 337 thousand tons could come from abroad, and 332 thousand tons could have the USA as specific place of origin.

We calculate that, depending on the slow decrease of sugar prices and the gradual entry of high fructose corn syrup, consumption for the 2009/2010 cycle will grow to one million tons, this being provoked by price differences between sugar and high fructose. It appears that United States sugar consumption will benefit from the Mexican sugar scenario which is oriented to the consumption of high fructose and to the exporting of sugar to the United States.

International Estimates

Expectations for sugar production for the International Sugar Organization (ISO) will not be as negative as in the previous calculation.

Last week the ISO reduced its forecast for the world sugar deficit. In its last estimate, the organization placed the global deficit at 7.2 million tons, after having calculated the deficit to be 8.4 million tons in September. As far as the relationship between sugar stocks and global consumption is concerned, this will be reduced from a rate of 37 percent to 32 percent.

The ISO indicated that for the 2009/2010 harvest, there will be an increase in sugar production in Brazil, India and the European Union, which implies an easing off of the negative expectations of the last few months, and a relative recovery is expected in production estimates in both Brazil and India.

On the other hand, the Executive President of Imperial Sugar, John Sheptor, has stated that the USA and Mexico would have to import close to 3 million tons of sugar (2.72 million tons) because of a scarcity thereof in both countries. Sheptor forecasts that the USA would import 2 million tons, which would be “above the norm”.

For Sheptor, the US and Mexico will be competing for limited sugar supplies in the first and second trimesters of 2010, when the situation will be particularly tight, which could bring about a new price adjustment without the maximum levels expected from December to February 2010 having been presented yet.

The weekly market from 9 to 13 November

STANDARD. The average floor price of sugar in the four main supply centers for sugar trading in Mexico ended the week on a 1 percent (8 peso) low compared to last Friday. The general average of the four centers in this report has maintained a difference of 113 percent compared to the original price at the beginning of the year. The current average is 321 pesos higher. Local quotes are between 599 and 612 pesos.

REFINED. The average is 656.50 pesos. The price of a bulk of refined sugar arrived at 737 pesos and maintains a 92 percent difference compared to the price recorded in the first days of January, which was equivalent to 315 pesos of the original price.

Moving average prices of sugar in the Federal District were above 600 pesos for standard grade and at 660 pesos for refined. Both prices have been on a negative trend since the beginning of the month. Markets have seen an excess of sugar with imports still outstanding, the start of the new harvest and the sugar that is coming out of mill inventories. All these factors together can cause more drops in sugar prices.

In the graphs we can observe the behavior of the floor, wholesale and FOB at the mill prices in two of the most important centers for sugar trading in Mexico. The prices of standard sugar, as much in Guadalajara as in the Federal District, retain the logic of much higher wholesale prices FOB at the mill prices. However, regarding the price of refined sugar in the last days, the fluctuation caused by the importing of sugar has made the WHOLESALE price fall to levels below the THEORETICAL MARKET price.

Sugar Report at 9 November 2009

• The Macroeconomic outlook

• Downward trend for sugar prices: future scenarios

• The trend of average wholesale and market prices

November starts together with the new Mexican sugar cycle. Although the official start of the new crushing season is expected at the end of the month and the beginning of December, sugar price scenarios reflect that the next harvest (as many others) will be full of serious conflicts.

Using an analysis of the domestic macroeconomi situation, we have developed various sugar price scenarios under normal sugar harvest conditions. We have incorporated international price pressures and preliminary negotiations between traders and sugar mills within the country.

The macroeconomic outlook

In order to understand the conditions surrounding the agro-sugar industry in Mexico, it is important to trace the macroeconomic outlook of the country and then study the price trends for the market.

According to most media reports, the fiscal measures that were approved for the 2010 fiscal budget were lackluster in terms of what the country requires in terms of a true, serious and mature fiscal tranformation.

The approved fiscal budget highlighted the fact that once again political interests overshadowed the true economic needs of the country. The approved reforms were far removed from solving the structural problem inherent in public finances and thus has generated more social uncertainty.

As always, the captive fiscal contributor will continue to pay the larger portion of the fiscal bill; no new mechanism was approved that will simplify tax payments and no measures were introduced that will promote investment and employment creation.

Mexico was one of four OECD countries with higher inflation among 30 developed countries.

After the tax increases proposed by the Federal government and approved by the two majority parties in Congress, inflation expectations were revised upwards. This means that real salaries will continue to decline, in line with the trend that has been observed so far this year.

According to Zafranet, salaries have increased at an annual rate of 4%, while inflation has increased 4.9% so far this year and is expected to increase 6.2% next year.

Finally, data regarding the perception that Mexican consumers have in regards to the immediate future of the economy show a pessimistic sentiment impulsed by the low expectations of durable good purchases expected at this moment.

We consider that all market participants are incorporating a scenario of higher inflation, possibly derived from the inflationary impact of the fiscal reform.

It is important to highlight that the inflation figures in the country are allowing the creation of a potential environment of slow economic growth. If the policy of austerity continues to be applied to government expenditure in agriculture, it will be very difficult to trigger the necessary elements for the development of the domestic agricultural sector.

Downward trend for sugar prices: future scenarios

With the reading of the domestic economic environment we can carry out an analysis of the agro-sugar market that will allow us to draw out scenarios that show sugar price trends.

From the start, we know that the price bubble that led sugar prices to reach levels of 700 pesos for standard and 735 pesos for refined, has busted and now we see a downward trend, although prices keep differences around 95% with respect to those shown at the beginning of the year.

With this scenario of prices, we analyse production forecast: data from the National Committee for the Sustainable Development of Sugar Cane (CNDSCA) and Sagarpa reveal that the 2009/10 harvest will be very similar to the previous one. These organizations are highlighting a production forecast of 44 million tons, which is only 1,500 tons more than the previous harvest. Sugar production is expected to be near 5.17 million tons, only 4.15% above that registered in the 2008/09 havest.

Current rain conditions for the main sugar cane producing state in the country do not allow for the beginning of sugar cane cutting, given that fields are required that allow for an efficient manipulation of the product. The excess humidity in the fields could mean a delay in the start of the new harvest.

The scenarios

The first scenario implies normal operating conditions in sugar mills and considers that the sugar reference price of 6,579 pesos is a measure that shows 328 pesos per bulk of prices free on board at the mill (FOB) and also signals international prices near 500 dollars per ton or 337.50 pesos per bulk (this allowed the calculation of final payments and should only be used for payments to sugar mills).

Important traders are now negotiating with sugar mills sale price contracts for sugar at 650 to 700 dollars per ton FOB at the mill, equivalent to 450 to 470 pesos per bulk, considering an exchange rate of 13.50 pesos per dollar.

With this information, together with expenditures and profit margins of retailers, we can expect sugar prices at supply centers to easily be around 500 pesos per bulk. This price is almost final, given that a lower price would imply that sugar mills or distributors would be selling without a profit.

A second scenario takes into account the influence of international prices. The adverse climatic conditions in Brazil (the main sugar producer in the world) and the dry spell in India (the main sugar consumer in the world) that led to a bad harvest, have caused future prices in international markets to increase.

This year sugar futures in the main markets have reached historical highs and the forecasts of the International Sugar Organization foresee a continuation of high prices throughout 2010. Today sugar prices in international markets are near 485 dollars per ton (crude #11 USA) and above 580 for refined sugar per ton (#5 London).

In order to complete the analysis of the second scenario, we can look at the following table that shows a calculation of the international price of sugar in areas different to that of NAFTA. In addition to being a reflection of a current import prices, it is a reference that the sugar mill should check in order to determine whether to sell in domestic or foreign markets.

The table shows that the price per ton of imported sugar would be around 530 pesos per bulk. If we add the retail margin, the price at supply centers would be near 560 to 570 pesos. Up until now, it is more convenient to sell here.

If domestic prices decline at a faster rate, below 530 pesos per bulk, selling in domestic markets stops being a good business. This means that sugar exports will pick up and high-fructose syrup imports will increase. This means that sugar mills and sugar manufacturers would not like to see prices below 550 pesos, given that this will produce an additional incentive for exporting.

A third scenario could be characterized by a rescue effort on behalf of domestic and foreign financial institutions to Mexican sugar mills. As is well known, the sugar industry represents a high risk and as a result few – if any – institutions provide resources to finance sugar mill activities.

In our daily blog we have commented that many sugar mills are under-capitalized, which represents not only a risk toward meeting financial obligations, but also a source of pressure at the start of each harvest; by selling most of the sugar harvest before the price explosion, mills do not have enough liquidity to meet payments.

For sugar mills the beginning of each harvest means starting from scratch, given the obsolete technology in their installations. If they do not obtain resources quickly, they operate with many problems and are forced to sell their sugar prematurely. This could well mean that an excess supply causes a downward trend in prices, which only complicates the sugar mills’ problems.

Unless sugar mills obtain financing quickly, prices could drop rapidly from the current levels above 600 pesos per bulk. With average daily price declines of one percent, we would be observing refined sugar prices near 550 pesos at the end of this month, which would probably apply also to standard sugar prices.

We also consider that refined sugar imports have not reached potential, something that should be considered as an additional element that will bring pressure to markets. The start of the harvest and domestic sugar production should cause an over-supply that will bring about a sharper decline in prices.

What was a very normal uncomplicated start of harvest just a month ago, has now started to become complicated. We think that certain domestic groups have started negotiations with foreign organizations to obtain liquidity, through pre-sales of sugar and/or sales of stock. It should not be a surprise to see in the upcoming months a further integration of domestic sugar manufacturers with foreign counterparts, either with NAFTA countries, Colombia or Brazil.

The trend of average wholesale and market prices

3 to 6 November 2009

In spite of the fact that both sugar qualities maintained certain stability over the past two weeks, there is no guarantee that this trend will continue. The environment at the start of the harvest together with the lack of capitalization of sugar mills that has forced them to sell off inventories, could well lead to a further decline in sugar price quotes over the next couple of weeks.

Standard. The average market price of standard sugar at the four main supply centers in the country has fallen slightly more than 2.50 pesos. Local quotes are in a range of 609 to 618 pesos and still show a difference of 116% with respect to the original price observed at the beginning of the year; the current price is 329 pesos higher.

Refined. The average price is at 663 pesos following two consecutive weeks of decline after six weeks of lateral movements. The price per bulk reached 737 pesos and still shows 94% difference with respect to the price observed at the beginning of the year, equivalent to 321 pesos above the original price.

The average moving price of sugar in the Federal District was above 10 pesos for standard and below 670 pesos for refined.

Our comparative analysis of market prices, wholesale and FOB at the mill for the Federal District and Guadalajara show that the trend for market prices for standard por both supply centers was below 620 pesos, while wholesale prices were slightly above 580 pesos and FOB at the mill near 560 pesos.

In the case of refined prices, during October and what we have seen of November, wholesale prices have remained below FOB at the mill prices. Normally wholesale prices are above the theoretical FOB at the mill prices, but recently price fluctuation brought about by sugar imports have caused wholesale prices to decline below the theoretical market prices.

In fact, in Mexico City wholesale prices are at 595 pesos and FOB at the mill at 613 pesos, maintaining a difference of 18 pesos per bulk of 50 kilograms. In Guadalajara the difference is 6.50 pesos wholesale at 590 pesos and FOB of 596.50 pesos.

Sugar Report at 26 October 2009

• Confirmation of the criteria to determine the reference price.

• The final domestic sugar balance (2008/2009 harvest).

• Adustments to production estimates.

• Evolution of average wholesale and floor prices.

Two important documents were issued by the National Committee for the Sustainable Development of Sugar Cane (CNDSCA) – the first one, the Confirmation of the Criteria which will be applied for the Determination of the Reference Price of Sugar which will establish the payment of sugar cane for that period, and the second one, the final Domestic Sugar Balance for 2008/2009.

With these elements we will in coming days see the figure becoming official. They will also serve as a reference for prepayments to cane producers in the following cycle.

The Committee prepares the information concerning the final price, the industry wants certainty and the producer wants his money. Using information provided by 100% of the sugar mills in Mexico, sugar cane and sugar production forecasts for the following harvest are defined. With information from 56 mills, including La Gloria, and San Gabriel which, it is predicted, will not harvest, the CNDSCA underlines a possible sugar production recovery of close to 200 thousand tons. As we have stated, according to our estimates, this coming harvest will be very similar to the previous one.

Confirmation of the criteria to determine the reference price

The criteria that will be applied to determine the reference price of sugar payment to sugar cane producers has been published on the CNDSCA’s website.

These not only show the route to be followed, but also establish beyond doubt that the agreements reached by all parts involved in June of last year will be respected. The minutes of the Third Extraordinary Session of the Board of Directors of the CNDSCA indicated that for the calculation of the final adjustment, in every October of the years to come, the final price will be calculated using as a basis the report of the National Sugar and Sweeteners Balance corresponding to the end of the cycle and applying the methodology of the payments of the period.

The weighted average price (PPN) will be calculated from the monthly analysis of prices published by the National System of Information and Market Integration (SNIIM) from the four main cities that trade sugar in Mexico (Federal District, Guadalajara, Toluca and Puebla), minus 7.5% for shipping from the mills to destination markets. The definition of the reference price contemplates that this expense should not be included as it is not absorbed by the sugar cane producer. Nevertheless, the basis for the calculation of this FOB price will be re-examined for the 2010 to 2011 harvest as agreed by members of the CNDSCA.

In the case of the export reference price, future prices #14 and #11 for sugar in New York are considered, from October of the previous year to September of the current year. ¹ In previous analyses, zafranet.com has published that its estimate for the reference price should be between 6,500 and 6,600 pesos per ton or 325 to 330 pesos per 50 kg bulk. With this, considering that the price is one thousand pesos higher than the definite one registered for prior payments, the sugar cane producer should receive between 62 and 63 pesos per ton of sold sugar.

If we furthermore take into account that 42,517 million tons of cane was crushed in the 2008/2009 cycle, then the final adjustment for cane producers will increase to close to 2,630 and 2,680 million pesos. Veracruz, the most successful sugar producing state in the country, is set to receive close to half of these resources.

The Final Domestic Sugar Balance (2008/2009 harvest)

The formalization by the CNDSCA of the National Sugar Balance (shown below) indicates the model to follow in order for the reference price of sugar to be announced in the next days. This price will be the base for determining the final adjustment of the payment of sugar cane for the 2008/2009 harvest.

¹To determine the export price, the FIX exchange rate as defined by the Bank of Mexico is taken into account.

In the balance the already published figure of 4.962 million tons of sugar produced in the previous harvest stands out. The amount of total imports (35 thousand tons) of which 90.3 percent was refined quality and 9.7 percent was standard quality is also highlighted.

The total supply of sugar in the 2008/2009 harvest conforms to the 4.96 million tons produced in the country, a figure which is 10 percent less than the previous period. The supply was completed with initial inventories of 1.86 millions and imports of 34,950 tons.

Of the total sugar imported, 72.5 percent was purchased from non-NAFTA countries with the remaining 27.5 percent coming from Nicaragua, with whom Mexico has a trade agreement.

At the end of the 2008/2009 cycle, 72 percent of sugar imported by Mexico came from countries where sugar is not favored with a preferential tariff. Only 28 percent (9,614 tons) was imported without tariff payments from Nicaragua.

On the demand side, it was calculated that Mexican sugar exports climbed to 1 million 30 thousand tons, a figure which was possible because of the huge demand from the USA and because of the benefits arising from the peso-dollar exchange rate on the carrying out of export deals.

It is important to mention that slightly more than 90 percent of Mexican sugar was exported by the mills themselves, and the remaining 10 percent by sugar trading companies. The portion of domestic sugar sold to IMMEX companies should be considered as having been exported, given that this is sugar which is exported as a part of the Mexican products sold abroad, containing sugar produced in Mexico. This therefore brings exports to more than 1.3 million tons.

The total sugar demand had as a main destination the consumer in the country (4.99 million tons) while around 1.03 million tons (16 percent of the total demand) went towards exports. Added to this was 251 thousand tons destined for companies in the manufacturing and “maquiladora” industry and to export services (IMMEX) which was also exported.

The difference between total supply and demand or Final Inventory was 587,893 tons, a figure which when compared with optimum inventory of 2.5 months (1,085 million tons) showed a deficit of 497,3 thousand tons which will have to be made up with the rest of the quotas authorized to this end.

Adjustment to Production Estimates for the 2009/2010 forecast.

The CNDSCA adjusted the information regarding sugar cane and sugar production estimates of the 56 mills in the country for the 2009/2010 harvest with the inclusion of figures from the La Gloria mill in Veracruz.

With less than 15 days to go before the start of the 2009/2010 harvest in the different states of the Mexican Republic, the CNDSCA has modified the detailed information related to variables such as industrializable area, amount of gross crushed cane and expected field and factory yield as well as the amount of sugar forecast to be produced by each of the mills which published their statistics.

On incorporating La Gloria mill’s statistics, the sugar production figures forecast for the state of Veracruz have adjusted to 1.931 million tons and the national figures to 5 million 1568 thousand 260 tons.

The final figures for the first estimate of the 2009/2010 forecast demonstrate the expectation of a 4.15 percent recovery in domestic sugar production on the heels of a 10.11 percent fall in the previous cycle.

Evolution of Average Wholesale and Floor Prices

The unusual behavior of the wholesale prices of refined sugar continues. Same as in the previous week, the reaction of wholesale prices to the arrival of import sugar and the uncertain environment combined to produce the apparent oversupply in the market, with the new harvest about to start. At the end of the week and with the reference price of sugar for the final payment to sugar cane producers about to be announced, prices maintained a level above 600 pesos in the Federal District and 590 pesos in Guadalajara.

In the above graph and the graph below it can be observed that since the beginning of the month, the wholesale price of refined sugar has on different days been fixed below the theoretical FOB at the mill prices. Logic dictates that wholesale prices are normally higher. The chief reason for the uncommon price evolution is that wholesale prices have reacted to the arrival of import sugar and to the uncertain environment which have combined with the apparent oversupply in the market, now that the new harvest is about to start.

Floor prices at 23 October.

STANDARD.

The average of the floor prices of standard grade sugar in the four main cities for sugar trading finished the week of 19 to 23 October on an even keel. Domestic quotes were in a range of 610 to 625 pesos and averaged 619 pesos. They continue to show a 118 percent difference compared to the original price at the beginning of the year. The current average is 336 pesos higher.

REFINED

The limited price mobility ensures that the general average price stays close to the level of the previous week. The price registered at the end of the week was 662.50 pesos and is 94 percent more expensive than the price at the beginning of January.

The moving average prices of sugar in the Federal District were above 620 pesos for standard grade and 665 pesos for refined. There was a lateral trend for both qualities in the last 7 days.

Sugar Report at 19 October 2009

Production forecast for the 2009/2010 harvest.

• Field yield: a different situation.

• The wholesale price responds to quotas.

Weekly market.

The National Committee for the Sustainable Development of Sugar Cane (CNDSCA) published its latest detailed production forecast for sugar cane and sugar for the next 2009 to 2010 harvest on its internet website. With this information and with data produced by the National Information System of the Sugar Agro-industry (SIAZUCAR), zafranet.com carried out a projected and historical analysis of the main variables of the sugar sector in Mexico. In this presentation we include an analysis of the floor, FOB at the mill and wholesale prices which have, in the last few weeks, reacted with great sensitivity to the arrival of sugar for importation.

Production forecast for the 2009/2010 harvest

The CNDSCA, on its website, has published cane and sugar production estimates for the 55 mills in Mexico for the 2009/2010 harvest. This includes their forecast for the La Gloria mill in Veracruz. With at least 15 days to go before the various states of Mexico kick off the 2009/10 harvest, the CNDSCA has published a series of detailed reports concerning variables such as industrial space, the amount of gross crushed cane, expected field and factory yield and total sugar which will have to be produced by each of the mills that have reported their statistics to the Committee.

Sugar Production

From a mill by mill analysis, it is clear that factories such as San Cristóbal (Veracruz), Tres Valles (Veracruz), Tala (Jalisco) and Atencingo (Puebla) are in the top spot with an estimated production of 200,000 tons each. Mills like el Higo, Puga, Emiliano Zapata, Adolfo López Mateos, Tamazula, La Gloria, El Potrero, San Miguel del Naranjo and Pujiltic place their forecasts at between 140,000 and 175,000 tons each. The CNDSCA underlines that the La Concepcion and Independencia mills, which were inactive in the last cycle, started up again although the forecast states that La Concepcion will realize close to half of the level attained in the 2007/2008 harvest.

The explanation should be found in the lack of adaptation efforts in installations, representing an obstacle to production. The state of Veracruz has 21 sugar mills in operation and expects to produce 1.93 million tons of sugar. After a decline in production of 10.54 percent in the previous harvest, it expects to recover 4.3 percent although this amount will still be less than that achieved two harvests ago, when the state managed to produce 2.07 million tons. Jalisco, the state with the second highest national sugar production, estimated a production of 681.8 thousand tons which is equal to a 4 percent advance after a fall of 6.4 percent in the previous cycle.

Puebla and Morelos stood out with high levels of recovery in production – in the 2008/2009 harvest these states fell 4.5 and 6.9 percent respectively. It is estimated that for the next cycle they will reach levels of 220,000 and 202,000 tons, the equivalent of a rice of 9 and 13.4 percent respectively. Quintana Roo with only one mill, the San Rafael Pucté, expects a 21.1 percent growth which will fix the total amount produced at 133.900 tons.

The graph shows the distribution of production in the producing states of the Mexican Republic. In first place is Veracruz with a production estimate of 38 percent of the sugar in the country. Jalisco, which will produce 13 percent, is in second place and San Luis Potosi is in third place with 9 percent of the national total.

A production of 5,173,529 tons is expected at a national level. This signifies an increase of 4.25 percent after a fall of 10 percent in the previous harvest. However, zafranet.com estimates a production similar to that of the last cycle due to the lack of investment and drought.

The CNDSCA forecast for the 2009/2010 harvest shows a 4.25 percent growth after having fallen 10 percent in the 2008/2009 harvest. The calculation by the Committee shows 5,173,529 tons of sugar. This number is still far from the 5.52 million ton production of the 2007/2008 harvest.

Factory yield

The positive figures for factory yields reflect results of a combined effort between workers and owners to modernize the industry. Through the efforts made by the International Labor Organization OIT-SIMAPRO, in the last years there has been an increase in the yield levels of crushed cane in sugar mills at a national level. The objective of the modernization plans, besides increasing work satisfaction, is that firms carry out an adequate planning of their efforts and, if possible, create firms that are self-sustaining with the benefits involved.

The numbers are as follows: in the last cycle, in spite of a fall in sugar production, the factory yield increased to 11.67 percent from 11.43 percent and it is expected to increase again to 11.71 percent in the next harvest. The conversion rate of gross crushed cane to produced sugar has been increasing since the 2006/2007 harvest as a result of the investments in infrastructure and the training programs within the manufacturing complexes. On the other hand, an analysis of factory yield shows information that allows us to see that the work carried out in the last years has allowed an increase in the progress of sugar cane crushing in national mills.

A note: in the last cycle, although there was a drop in sugar production, field yield increased from 11.43 percent to 11.67 percent and an increase to 11.71 percent is expected in the next harvest. That means that the degree of conversion from gross crushed cane to sugar produced has risen since the 2006/2007 harvest. This is because of the investment in infrastructure and the training programs in the manufacturing complexes.

Proof that the will to invest in and train workers continues in the sugar mills is evident in that a few days ago a 4.5 percent wage increase was announced for sugar workers.

This averted a strike from the National Union of Workers in the Sugar, Alcohol and Similar Industries. The “silent revolution” which is being experienced in the mills is now showing positive results, now that the tense negotiations between traders and workers, which were a constant factor in the industry, have not arisen again. The boost to the joint work of mill workers and owners has allowed productivity levels to be bettered, with improvements in work conditions, salaries and the level of factory yield on a national level all showing an upward trend.

Taking all of this into account, there is a strong possibility of a normal start to the harvest, although there are still many problems between workers and owners which need to be overcome.

Field yield: a different situation

The relationship that exists between total processed sugar cane and the quantity of sugar cane per hectare, as opposed to levels of production and levels of factory yield, have fallen since the 2004/2005 harvest. In the last harvest, it fell to its lowest level in 34 years by reaching a national average of only 64 tons per hectare. This number is far from that registered in the 1991/1992 cycle when an average of 78 tons per hectares was reached.

In the last period, the fall in sugar cane crushing did not go lower than 42 million tons. However, if we compare this with previous years, we had production declines of close to 15 percent (the 2004/2005 cycle vs. the 2008/2009 cycle). These lower levels of crushed cane were due to problems related to a late starting date of the harvest, the high costs of fertilizers and inputs for the field, and to the low support afforded to agricultural development in the last period, among other factors.

With the outlook of better conditions at the start of the harvest and without adverse climatic conditions, we should expect to recover part of the loss.

The CNDSCA estimates that the average yield will increase to a range of 66 to 68 tons per hectare. In the following graph we can observe that the fall during the 2008/2009 harvest reached near to 20,000 cultivatable hectares. This was accompanied by a fall in the average yield that went from 71 to 64 tons per hectare. A recovery is expected in the next harvest to reach 66 tons per hectare.

With an improved outlook of higher prices, better climatic conditions and expectations of a higher price adjustment in payments to sugar cane producers, it is expected that harvest yields increase and revert the previous downward trend by growing up to 66.5 tons per hectare after having fallen to 64 tons per hectare in the past.

The wholesale price responds to quotas

This week, some wholesale prices of standard and refined sugar have behaved differently. Since the beginning of the month, refined sugar wholesale prices have been below the theoretical FOB at the lab prices, while the norm is that wholesale prices are logically usually higher. The main reason for this uncommon behavior is that wholesale prices have reacted to new sugar imports and the uncertainty that has prevailed given the apparent over-supply in the market before the new harvest commences.

Nevertheless, the product takes too much time between customs and its destination markets. This has provoked sharp ups and downs in prices which have not allowed an adequate downward trend in the sugar prices. This is contrary to what the Ministry of the Economy expected.

Weekly Report

In the week of 12 to 16 October, the average of STANDARD SUGAR in the Federal District was 621 pesos (without change); in Guadalajara it was 615 pesos (+5 pesos); in Toluca the price was fixed at 622 pesos (-4 pesos) and in Puebla it was at 626.50 pesos per 50 kg bulk.

STANDARD WHOLESALE.

The price in the Federal District was 605 pesos (FOB at the mill 575 pesos) and in Guadalajara the wholesale price was quoted at 595 pesos (FOB at the mill 569 pesos).

REFINED SUGAR.

In Guadalajara and Toluca the prices registered last Thursday were maintained at 650 pesos and 660 pesos respectively. In the Federal District the price rose from 13.50 pesos to 660 pesos. In Puebla the price rose 1 pesos to finish at 684 pesos per bulk.

REFINED WHOLESALE.

In the Federal District the wholesale price rose 5 pesos to settle at 605 pesos (610 pesos FOB at the mill). The wholesale price of refined sugar in Guadalajara is fixed at 590 pesos (601 pesos FOB at the mill). At the end of the previous week, the phenomenon of lower wholesale prices than the FOB at the mill price have been observed in the refined sugar registers in the Federal District and in Guadalajara.

Sugar Report at 12 October 2009

• Another conflict arises: Sugar cane producers don’t want a weighted price.

• US Sugar balance and estimates for Mexico.

• Weekly market.

A new conflict has arisen in the domestic sugar industry. The setting of the sugar reference price so as to establish the payment of the final adjustment to sugar cane producers is the topic of the day.

Even with no date having been established for the convening of the National Committee for the Sustainable Development of Sugar Cane, talk is revolving around the methodology which will have to be employed to define the price of sugar. This will also be used for the pre-payments of the next cycle which is due to start in a month.

The USDA published its latest figures for sugar supply and use and a drop in supply and demand was highlighted. The projection made by the USDA for Mexico is in line with the forecasts made here.

Another conflict arises: Sugar cane producers don’t want a weighted price
Industry and sugar traders have been the winners with the high sugar price. The cane industry wants its share as well. Since last week, voices from the Mexican Senate have stopped listening to the urgency of granting the 1,600 million pesos approved by Congress for the sugar cane field.

Farmer organizations know that that they will not get assistance easily from Congress because the inflated prices are precisely the reason why resources have not been made available. However, even so, sugar cane producers want the most they can get from the inflationary sugar bubble.

Farming organizations have started negotiations knowing full well that the reference price of sugar is not calculated using an average weighted price but rather an unweighted average price. They know that in this way they will be at the receiving end of a real adjustment.

The table above shows the evolution of the unweighted average price and the weighted average price during the 2008/2009 harvest. The table highlights the fact that the unweighted average price of the whole cycle is 355.37 pesos per bulk. This value is 8 percent more than the weighted average price. Sugar cane producers want an adjustment to the unweighted average price, which will be higher at the end of the entire period as the 7.5 percent of the cost of transport of the sugar to its destination has not been deducted.

Evaluation meetings for the setting of the sugar reference price for the final adjustment for the payment of sugar cane and for pre-payments have never been plain sailing. During the last harvest, sugar cane leaders, mills and officials of the federal government reached an agreement using, as a start-off point, the agreement notes from June 2008 (where the general features for the determination of said price were established). In this document, it is established that in order to determine the sugar reference price, preliminary domestic sugar and sweetener balances must be audited as must sugar price averages of exports and of local markets from October (the start of the harvest) to September of the following year (the end of the harvest). However, calculating the prices is not a simple matter as the National Weighted Average Price (PPN) must be taken into account in the workings.

If we compare the weighted average price with an unweighted average price, we can see that the difference is in the 7.5 percent deduction for shipping from the mill to the destination market. And although this cost influences the sugar price, it is not given to the producer who farms it.

Clearly the sugar cane producing sector wants to take advantage of the high prices that were constant from July up through the end of the 2008/2009 cycle in September. If the sugar cane producers can obtain even higher prices, this will be in spite of the fact that they signed the agreement that explains the mechanism.

To re-calculate:

If we consider that in our first calculation (in the weekly report of 5 October 2009), the internal demand for sugar should be valued at 6,560 pesos per ton and the price of exports at 6,280 pesos per ton, then respecting the proportions of sugar use, the weighted average price of sugar should be 6,500 pesos per ton. This is the final result.

If we now calculate a non-weighted average price, domestic sugar demand should be at 7,160 pesos per ton and with the same price of the exports of 6,280 pesos per ton, the final result, respecting the proportions of use, will be 6,980 pesos. That is, 480 pesos higher than the first result.

Will that be enough for the sugar cane producer?

We know that their complaint regarding the speculative sugar bubble is also because farmers have not had public support and much less so private support in order to improve the sugar cane field.

The debate has not yet begun and things are already tense.

NOTE: The exchange rate used in this report is equal to the weekly FIX average published by the Bank of Mexico: From 5 – 9 October = 13.444 pesos per US dollar.

US Sugar balance and estimates for Mexico
In it last update of the sugar balance for the USA, the USDA lowered its sugar supply estimate for the 2009/2010 cycle. In this way the picture changes from a September supply estimate of 11.419 million short tons, raw value (mmtcvc) to 11.411 mmtcvc in October.

Sugar production in the period that has ended dropped 63,000 tons due mainly to lower beet sugar production. Imports have dropped by 34,000 short tons, raw value since the last forecast. The sugar demand in the USA for the 2008/2009 cycle is 11.040 short tons, raw value and it is forecast that next year it will close at 10.575 short tons, raw value. Moreover, the USDA states in its last Sugar and Sweeteners Outlook Report that the adjusted domestic supply in the USA and the slow international supply response will cause prices to remain high until well into 2010. In fact, current sugar futures contract quotes show a trend of prices staying close to or above prices seen in the last months.

The continuing high prices into next year could mean a higher sugar production as much at a domestic level as at an international level especially if sugar prices continue looking attractive compared to prices of other crops (for example, beet sugar vs. other alternative crops in the USA, or sugar vs. ethanol in Brazil).

The USDA has altered its sugar supply estimate for Mexico for 2009/10. It states that it will drop 120,000 metric tons (raw value) as a result of a 20,000 metric ton drop in initial inventories and of a 100,000 metric ton (raw value) drop in domestic production in line with forecasts in Mexico.

In this way the USDA estimates that Mexican sugar production will stay at 5.4 million tons (raw value) and consumption at 5.54 million tons which could be balanced by 710,000 tons of imports.

The weekly market
The general average floor price of standard sugar in the four main cities for sugar trading in Mexico finished the week of 5 to 9 October at 608 pesos. There is a difference of 324 pesos compared to the price recorded at the beginning of the year. The difference before represents 114 percent of the original value at 3 January.

The general average floor price of refined sugar is 664 pesos and continues on a negative trend. The difference between this price and the price recorded in the first days of January is 322 pesos and the average of refined is still 94 percent higher than the original price.

The expectation for the week 12 to 16 October is that there will be a strong rebound in the price. The difficulties that the intermediaries are having in freeing sugar for import which are causing a situation of short supply in the country will be an important factor in price increase.

Without having defined a date, the CNDSCA will have to convene to determine the sugar reference price in order to define the final adjustment to sugar cane producers’ payments, a situation which adds pressure to the market as the cane producing sector wants to take advantage of the high prices of the last part of the 2008/2009 cycle.

The moving averages of standard and refined sugar in the Federal District which were on a downward slide recovered and are now at 610 and 670 pesos respectively for the two qualities.

Sugar Report at 5 October 2009

• The sugar reference price for sugar cane.

• Sugar futures after the last harvest.

• Conclusions.

• Weekly sugar market.

The 2008/2009 sugar cycle officially finished on 30 September. This opens the way for the National Committee for the Sustainable Development of Sugar Cane (CNDSCA) to define the reference price for sugar that will be used for the final settlement with sugar cane producers and for prepayments of the next 2009/2010 harvest.

The CNDSCA, comprising the Ministry of Agriculture, the Minsitry of Economy, the Finance Ministry, the Labour Ministry, the CNC, the National Union of Sugar Cane Producers, the National Union of Sugar Cane, the CNPR and the National Chamber of Sugar and Alcohol Industries will have to set the sugar reference price after analysing the domestic market from October 2008 to September 2009 and export prices during the same period.

Recently the CNDSCA released the Sugar Balance at 31 August 2009. It contains estimates of foreign trade data for the last month of the 2008/2009 cycle based on preliminary information up through 20 September.

Table 3 shows the part of the balance that contains the estimate of the 2008/2009 harvest.

The Domestic Sugar Balance and the Sweeteners Balance form the basis for calculating weighted average prices (PPN) and function as the base for the Sugar Reference Price that will be used for paying for the sugar cane.

This year the lack of sugar supply in international markets, bad sugar cane harvests and excess sugar exports from Mexico to the United States which resulted in a domestic sugar deficit were all instrumental in causing the domestic sugar shortage. The late evaluation by authorities who did not know how to efficiently diagnose the siuation resulted in speculation by traders and mills which led the price of sugar to historical highs, a situation that absolutely benefits the sugar cane producing sector.

In the last harvest, the prepayments for sugar cane were based on a reference price of 5,500 pesos per ton of sugar or 5.50 pesos per kilogram. Today FOB at the mill prices of standard sugar in Mexico City have reached 11,500 pesos per ton and 11.50 pesos per kilogram.¹

The following analysis corresponds to price revisions calculated FOB at the mill of the four main cities for sugar trading in Mexico. The daily prices of standard sugar in the supply centers of Mexico City, Guadalajara, Toluca and Puebla are used to determine these prices.

The daily calculation of the weighted average price provides the numbers shown in Table 1. We can see three distinct moments: The first is the trend from the start of the harvest in October 2008 up through March 2009 where a margin of 247 a 268 pesos per 50 kg bulk was maintained.

¹The FOB at the mill price of standard sugar in the Mexico City market is a theoretical calculation that zafranet.com makes with the aim of determining the price of sugar which will be the basis for the determination of payments per ton of sugar cane.

In March the taking over of mills by sugar cane producers in most of the country caused a feeling of uncertainty in the market that caused an upward trend in the PPN price. This second moment lasted up through the end of the harvest in June 2009. Between April and June the PPN remained in a range of 304 to 347 pesos.

Finally, the domestic supply problems and high international prices of the 2008/2009 harvest caused a third moment in which the domestic weighted average price increased to a range of between 391 to 611 pesos by 31 September 2009.

In other words, the PPN price increase in the second moment compared to the first was 21 percent while the third compared to the second was 56%. The sugar cane producers received a large benefit from the price increases in the last three months of the sugar cycle. The PPN from October 2008 to September 2009 increased by 328.70 pesos per 50 kg bulk or 6.56 pesos per kilogram and 6,560 pesos per ton.

For some sugar cane associations in the country, the price is now near 10 pesos per kilogram and our calculations will surely disappoint them although in our analysis we have not included export prices. Instead we have included an analysis of sugar futures prices in the United States.

Sugar futures in the last harvest
Sugar Future 16 has substituted Sugar future 14 and now is used to determine the average price for sugar exports from Mexico to the United States. The November contract for Sugar 16 at the end of September reached a record price of 683.33 dollars per ton.

From October 2008 to September 2009 the average of Sugar 16 reached close to 485 dollars. The CNDSCA has established that 6 percent must be added to this price and that 50 dollars must be subtracted. This means that the sugar export price calculated within the framework of NAFTA and IMMEX firms should be reaching 465 dollars per ton. If we use the FIX exchange rate published by the Bank of Mexico which is 13.5051 pesos per dollar, the ton of exported sugar will be near 6,280 pesos per ton.

The total estimate of sugar demand is near 6.237 million tons of which close to 11.75 percent was exported under the NAFTA framework and 3.82 percent for IMMEX firms. The sale of sugar in domestic markets is estimated at 79.74 percent of total demand. This leads us to believe, without knowing the exact mechanisms under which CNDSCA operates, the following:

Conclusions
- Approximately 15.6 percent of demand – 971,968 tons – should be valued at 6,280 pesos per ton (6.28 pesos per kilogram).

- The domestic sale of 4.974 million tons (79.74 percent) should be valued at 6,560 psos per ton (6.56 pesos per kilogram).

- The domestic sugar balance that the CNDSCA is contemplating includes inventories outside of the country of 291,720 tons (4.67 percent), which we can assume will be valued as the same as exports at 6,280 pesos per ton.

- Rounding off, 80 percent of domestic sugar demand was valued at 6,560 pesos and the remaining 20 percent (exports) at 6,280 pesos per ton.

This means that the calculation of the price per kilogram of sugar could finish at 6.50 pesos or 6,504 pesos per ton. This figure is 1,000 pesos higher than that set in June 2008 when that harvest finished.

The Ministry of the Economy gave a big gift to most of the sugar cane producers which helped the agro-industry as a whole but at the end meant that the final consumer would be the one to pay. Once we add in the profits from intermediation and transportation costs this implies an almost certain floor price of between 450 to 500 pesos per bulk for the next harvest.

The Weekly Market
STANDARD SUGAR. The week ended with new downward adjustments in two out of the three most important cities in Mexico. In this last session, suppliers of the Central de Abasto in Mexico City averaged 625 pesos per 50 kg bulk. This price, however, has fallen 13 pesos with respect to yesterday’s price. In Toluca the average price fell 5 pesos and is now at 635 pesos for retail. In Guadalajara the price remained at 600 pesos and in Puebla we saw a slight increase of 2 pesos leaving the average at 629 pesos.

WHOLESALE STANDARD. The wholesale price in Mexico City is obtained from a survey carried out by zafranet.com and applied to mills and traders. This fell 15 pesos and stands at 595 pesos (578 pesos FOB at the mill). In the supply center of Guadalajara, the average wholesale price reached 582 pesos (555 pesos FOB at the mill).

REFINED SUGAR. After yesterday’s prices stayed the same as Wednesday’s, the Federal District and Guadalajara markets saw prices drop by 8.50 pesos and 5 pesos respectively to reach 681.50 and 640 pesos per 50 kg bulk. Traders in Puebla are offering their product at 725 pesos and in Toluca the same price as yesterday remains: 700 pesos.

WHOLESALE REFINED. In the Federal District, the wholesale price stands at 620 pesos, 5 pesos less than yesterday (630 pesos FOB at the mill) and in Guadalajara the price is 590 pesos (592 pesos FOB at the mill).