Sugar Agro-industry at 6 July 2009
• Differential in the price of refined in the USA and Mexico
• Prices in the USA influenced by Mexican exports
• The Domestic Weighted Average price
• Weekly Market
Although this graph may appear a little confused, what is relevant on the one hand is the differential in the price of refined sugar in the USA and Mexico – the blue and green lines – and on the other hand the trend that the price of refined sugar has followed in the USA, from October 2008 to June 2009, represented by the red line and calculated in cents to the per pound, as can be seen by the vertical axis on the right hand side of the graph. The huge price discrepancy in both countries largely explains the successful exportation of Mexican refined sugar to the USA. While the price in local markets maintained a level very near 300 pesos per 50 kg bulk FOB at the mill mark, from October 2008 to at least March 2009, it started from 457 pesos and in February 2009 reached 582 pesos per 50 kg bulk FOB at the mill, an average of 35.03 to 35.05 cents to the dollars per pound.
What is also very interesting is that after the rise comes a period of adjustment from May onwards, which follows a gradual downward trend until it hits the 500 peso mark, and from there returns to 550 pesos per 50 kg bulk, which is the price where it remains at present. This is interesting because while the price adjusted to a relative low in the US, in Mexico it tended towards an increase, passing the 317 peso mark in March and arriving at 406 pesos in June. It would seem that Mexican exports demonstrated both trends – the low price in the US and the high price in Mexico. We would like to explain that the total exported and forecast from Mexico to the US in this cycle calculated to be over one million tons – around 45% – will be refined quality sugar.
What is interesting is the contrast between the price stability observed in the United States in cents to the dollar per pound (which was stable from mid-October 2008 to May 2009), and the steep trend in pesos. This difference was due to the behavior of the exchange rate between the Mexican peso and the US dollar. In order to do this exercise, we calculated the price in cents to the dollar per pound at the corresponding exchange rate in each of the observed periods and found a very volatile trend which comes from the price in pesos of US refined sugar. The exporting thrust by domestic sugar refineries was rushed towards end of the export contracts when the exchange rate was higher, that is, when the peso price of the dollar was higher and the Mexican currency further depreciated.
As we can see in the table above, the difference in the price of refined sugar in the USA and Mexico reached 46% this year, an advantage of 268 pesos per 50 kg bulk of refined sugar for the USA. This is outrageous. Nevertheless, the gap seems to be closing precisely because of the pressure exerted by domestic refined sugar in the US market. In June the differential arrived at 140 pesos, 25.67%, when the peso also gained on the dollar. With regard to the gap that is closing, American importers, businesses and marketers will begin to lose interest in Mexican refined quality, unless it can be found to be on a par with it in it quality. The only way that Mexico can forge for itself a niche market in the United States in the future is to base its business on quality and efficiency.
Weighted Average Prices
Our website zafranet.com has just uploaded a new statistical table called “Weighted Average Prices” (PPN), found at the “statistics” tab. The idea is to give the user an idea of the Free on Board (FOB) at the mill price starting off from the average market price in the supply centers of the Federal District, Guadalajara, Toluca and Puebla. From the average of these reported prices made official by the National System of Market Information and Integration (SNIIM) we subtract 7.5% which is equivalent to the sugar shipping costs to the centers of consumption.
The National Committee for the Sustainable Development of Sugar Cane (CNDSCA) proposed calculating the price of sugar for the payment of sugar cane, the main raw material used in the manufacture of sugar, using this formula. The formula has not been well received, especially not by sugar cane organizations, which in spite of their leaders having backed it, renounced the selection of centers of consumption as well as the discount of 7.5% on the sugar floor price.
The above-mentioned selection probably has some explanation behind it. The main centers of sugar consumption in Mexico are the Federal District, Guadalajara, Puebla and Toluca and, as argued by the sugar cane producers, it is clear that they are not always the centers with the highest prices. They are also the destinations nearest to the sugar production centers and it is maybe because of this fact that this model was chosen to reflect the domestic weighted average price. The sugar cane producers would have liked to include other destinations in the model where, because of how far away the mills are, the prices are higher, as in Monterrey, Aguascalientes or Chihuahua. It would probably be interesting to add the center of Monterrey, given that it has become a strong sugar consumer.
Upon instruction from the CNDSCA, the SNIIM designed a format and formula to capture the domestic FOB at the mill price, which will from now on serve to calculate the price of sugar cane. Its novelty value is that it will be far more accurate because the same mills will have to capture this price in a system developed and designed by the SNIIM for that very purpose. Based on invoice prices, mills will commit to capturing these prices so that the SNIIM can give them back the average FOB at the mill prices. Obviously much more can be done with this mechanism but the mills don’t want to show anything but the lowest numbers. We don’t know if those domestic price averages will be released publicly in order for other interested parties to have access to them and for such parties to use them as a basis for sugar negotiation. Meanwhile, irrespective of whether they publish this information or not, we are publishing this useful statistic and the daily PPN data for our users on our web page of quote indexes.
Weekly market
An example of this PPN price is shown in the table below. As we can see, here the average sugar price for each destination is presented. We give our users the daily price, the price from the previous day, week, month, semester and from previous years, with the aim of giving a clear idea of the trend. And at the end we show the PPN which gives us an idea of the FOB price at the mill at a given moment in time. For example, the FOB price at the mill on 30 June of 369.65 pesos was for standard grade sugar and the price the week before closed at 354.74 pesos, which means that it rose almost 15 pesos in one week.
And it is not going to stop there. In one week the PPN price will reach 375 pesos and the average destination price must reach 420 to 425 pesos per bulk. The mills with low inventories which therefore do not want to sell have put the FOB at the mill price at around 390 pesos per bulk. This huge hike in the price of standard quality sugar has been exerting pressure on refined quality sugar, which although seemingly relatively stable, the market is showing signs of initiating an upward trend soon. Average prices of refined quality sugar close to 460 pesos per bulk are expected soon, something that is already almost observed in the city of Guadalajara.
