Sugar Agro-industry at 22 June 2009
• Sweetener market remains stable
• Fructose producers will try to regain the market
• Huge economic loss for the agro-industry
• 2008/2009 Harvest results up through 13 June
• Weekly market
The sweetener market will surpass 6 million tons in total this year. It is estimated that next year the total consumption of sweeteners in Mexico will maintain similar figures albeit with a higher participation of high fructose corn syrup (HFCS). As we can see in the table below showing the balance of domestic consumption, sugar will participate with 90% of total consumption in this harvest but it could drop to 88% in the following harvest. This is owed to an estimated improved participation of HFCS in the local market (mostly by bottling companies) thanks to the prices being reached by sugar in the domestic market.
HFCS market growth was slower this year for two reasons: firstly, because of the high price of corn in the USA and globally, and secondly, because of the low sugar price in the domestic market the whole of last year and in the first trimester of this year. What fructose producers could not do this year they will attempt to do in the next fiscal sugar year for the same reasons but the other way round: a more accessible corn price and high sugar prices in the domestic market.
Huge economic loss
Although it is complicated to explain a loss (or at least a non-profit situation) throughout the entire productive chain in the sugar agro-industry, we will give it a try. As can be seen in the following table, we have listed the groups and sugar mills. In two columns we have placed the decline in production in tons with respect to the previous harvest and the estimated market value of what was not produced this year. The majority of the numbers are negative, that is, they represent either less or no sugar produced, while the red numbers are to be interpreted as a “missed” income, as it is an unregistered amount for any mill, sugar producer or supplier. Nevertheless, we observe two groups that actually did manage against all odds to produce more this year and thus they were able to avoid the losses absorbed by all others.
In order to calculate the market value of the amount of sugar that was never produced, we use the reference price set by the National Committee for Sustained Development of Sugar Cane (CNDSCA) for the prepayments of sugar cane. This was 275 pesos per bulk of 50 kg free-on-board (fob) at the mill. This means that the slightly more than 550 thousand tons of sugar that was not produced this year with respect to the previous harvest would have been worth three billion pesos. This monetary loss has to be distributed among all participants, assigning each his share. For example, the cane producer who suffered a decline in production, the transporter who could not participate in busing the sugar cane, or in the final product. At the same time, there were workers in the sugar mills who worked less hours and owners who lost the opportunity to produce more sugar with an idle installed capacity.
While it is true that there was a saving in inputs, the final result still reveals that not producing sugar that has been planned is a bad business. The country loses because it will now have to import sugar in order to satisfy demand and it will have to avoid an embarrassing start of the next sugar harvest. The sugar that was not produced as planned has left the sugar industry in a difficult position as an exporter, given that it will have to produce more than needed for domestic markets, which may not be available in the next cycle. As a result, the financial loss will be much higher and nobody seems to be worried.
2008/2009 Harvest results up through 13 June
At 13 June 2009, the harvest demonstrated a harvested area of 661,148 hectares (has), an industrialized sugar cane volume of 42,422,779 tons, the lowest since the 1999/00 harvest. A total of 4,953,724 tons of sugar cane has been produced, the lowest figure since the 2002/03 harvest, 1.5 million tons of molasses, the lowest figure in at least 11 years, and 40.5 million liters of alcohol, plus the 26 million tons not reported by the La Gloria mill. A total of 53 mills have finished harvesting and only the Tamazula mill in the state of Jalisco continues to crush.
Production estimates have remained unaltered since they were released prior to the start of the 2008/2009 harvest by the CNIAA, Sagarpa and sugar mill associations. It was only through private conversations, speeches and comments that it was known that production would not reach the targeted 5.4 million tons and that the harvest was not doing well. However, given that the numbers were estimates, they do not need to be definite or reachable. The same as in other countries, the numbers are updated as new information becomes available. Estimates are just a guide, not a rule. Only the CNPR dared to modify its initial estimate and publish it, something that everyone should do during the next harvest.
With only one mill to still complete the harvest, the figure of 42.42 million tons of crushed sugar cane will only be altered by a few thousand tons. This is a vast difference in comparison to the crushing of the previous harvest. There was not enough cane and not enough was invested in the field. Will it be possible to turn this situation around?
With only one mill still harvesting in Jalisco, the fall in the crushed cane national average compared to the previous harvest was -13.68%, higher than the sugar production low of -11.28% at the present date. The greatest fall of -35.57%, however, was in Oaxaca, followed by San Luis Potosi with -29.13%, Michoacan with -23.23% and Sinaloa with -20.63%. However, in absolute numbers Veracruz crushed -2.5 million tons less than in the 2007/2008 harvest, San Luis Potosi almost 1.0 million tons of sugar cane and Sinaloa -366 thousand tons. Only Chiapas and Tabasco managed to crush more cane than in the previous harvest. A result of the fall in sugar cane yield per hectare was that the harvested area at a national level fell -20 hectares. At the present date the drop in sugar production is -599 thousand tons.
The fact that production fell short of more than 550 thousand tons leaves the industry in uncertainty. The economic value that was lost is easily more than three billion pesos. The entire chain of the sugar agro-industry shares in the loss. Nevertheless, most of the damage without a doubt falls upon the sugar cane producers. We will now have to wait and see if the support arrives in time in order to avoid a new disaster in the next harvest.
In spite of the fact that no great investments have been made in sugar mills, factory yield has improved. The quality of the sugar cane was superior to that of the previous harvest but not so its volume. Great strides are being made in reducing fuel consumption in the factories, which has meant a huge saving for the industry.
On finishing week number 31 at 13 June 2009, only 7,291 tons of sugar was produced, of which 5 thousand tons was refined and 2,200 was standard grade. Only 50,430 tons of sugar cane was ground. The yield trend in the factories kept improving every week, in contrast to field yield.
We have not seen such a bad sugar cane crushing result since the harvest of 1999/2000. The average yield of 64 tons per hectare was the lowest observed over the past eleven years. Last week, we commented on the urgency of complying with the correct timing of the harvest, given that 62% is rain dependent. Given this dependency, the timing must be right in order to carry out the harvest and apply the inputs at the right moment. Last Friday we were asking in our daily report what would arrive first? Would it be the necessary support and investments in the field or would it be the rain?
At 13 June only the Tamazula mill belonging to Grupo Saenz in Jalisco continues to produce. The rest of the figures are final production numbers of the mills and sugar groups relating to harvested area, gross crushed cane, total sugar volume, molasses and alcohol. In addition to the 14.5 million liters that are reflected as the final figure, we must add an approximate 26 million liters that was distilled by the La Gloria Mill, the main producer of sugar cane alcohol in the country, which for unknown reasons were not reported in this or in the previous harvest.
The only number to change will be that of refined sugar, given that the Tamazula mill continued to crush cane. It is not known if this refinery will recover from the accident that occurred on its premises two months ago, but to date it has produced 148,300 tons, a total of 6,200 less than in the previous harvest. To reach this number, Tamazula would have to make up the difference in refined sugar of “only” 34,200 tons between this harvest and the last one. We await the final report.
Weekly report
In the week of 15 to 19 June, market prices averaged at 380 pesos in the four main commercial centers of the country – the Federal District, Guadalajara, Toluca and Puebla – 1.33% more than at the close of the previous week. In one month, the price has risen 12.72%. From December to the present, the price has increased by 35.65% and one year ago the market was 51.7% below what it was at 19 June 2009.
A number of market participants have started to ask whether these prices have reached a certain “ceiling” that would allow for some type of planning. We do not think so as of yet. Firstly, the harvest is not fully concluded which means that an evaluation of the national sugar balance has to be carried out at the end of this month. Once done and with the final figures in hand, the CNDSCA will have to evaluate whether sugar imports are really needed or not. Up until now based on what is known and on the extra-official numbers that are circulating, it seems that the federal government, authorities and leaders involved in the industry will be able to decide whether or not domestic supply is enough and if domestic inventories need reinforcing. There has been a lot of lobbying both here and abroad working toward having the government favor a certain sector in order to manage sugar imports. However, the transparency involved, the methods used and the controls imposed, will determine whether the market will work on its own or whether a chaotic situation will prevail with the next harvest barely four months away from starting.
The future of prices will depend on this very important decision. Economic policy instruments could slow down increases that would benefit consumers, but that will not affect sugar cane producers or industrialists. Warning lights have been switched on by the sugar market, given that if price increases are not slowed down, this bubble could burst in the moment when industrial consumers are looking toward corn syrup as a more profitable option. That price – which can be considered as a natural ceiling to sugar prices- is not too far away, as well as the price at which USA retailers would enter the domestic market. The floor price would be that set by imports arriving in domestic markets.
- Production figures and current harvest results can be consulted in the statistics section in Excel.
