Sugar Report at 13 July 2009
• Assessing the damage
• Higher and higher: The Domestic Average Weighted Price (PPN)
• Weekly market
Assessing the damage
What could be referred to as the “Chronicle of a bad crop foretold” finished with serious damages to the sugar industry in Mexico in the 2008/2009 harvest.
From the start of production at a national level, prices showed very little volatility, without exceeding 275 pesos for standard and 330 for refined grade sugar (both prices are quoted from the Federal District). It wasn’t until the sugar cane producers affiliated to the CNPR took desperate measures that caused prices to reach up to 50 pesos for standard and 30 pesos for refined in just one month. These measures included taking control of the bodegas of various sugar mills in the country, which made sugar distribution cumbersome and difficult. At the same time they caused uncertainty and speculation, which drove prices up.
A general review of sugar market behaviour reveals significant figures; from January to date the sugar price differential has reached 130 pesos; in other words, in the first days of the year the average general quote for a 50 kg bulk of standard grade sugar was 284 pesos and now it has increased almost 46%.
Although it is true that the winners throughout this time span were the sugar cane producers, not all was positive given that the harvest finished in red in production terms, which puts the domestic supply in danger. At the end of the crushing phase, the price of standard sugar increased and managed to surpass on average the 380 pesos per bulk in the four most important centers for sugar retailing in the country. As the sugar cane leader, Carlos Blackaller would say, “this was done the Mexican way”. This situation benefits them, given the future final adjustment to the settlement payment.
From the beginning of the 2008/2009 harvest, sugar prices maintained the same level until the sugar cane producers affiliated to the CNPR provoked speculation and uncertainty with the closure of various sugar mills. This caused sugar prices to rise which combined with low production numbers led to the ensuing sensation of a supply shortage. Prices increased to levels not seen since 2006. Today the price of standard grade sugar in the Federal District is 413 pesos and the price of refined is 440 pesos.
In comparison with the previous harvest, this harvest suffered a real loss of ten percent in production, a number accepted by all the sugar cane representatives in the country. This does not paint an attractive scenario given the probable lack of sugar supply at the end of the fiscal year¹.
As we already said, the environment of uncertainty and speculation has caused the sugar price to reach 413 pesos in the country’s capital. This market is considered to represent the floor price of the market. Given the size of this market in terms of supply and demand, it is the reference price for most retail centers in the country.
As if this wasn’t enough, the finished harvest has left many outstanding issues. The damage assessment points to the lack of technology in the sugar cane field causing a waste in its potential, something which businessmen and union leaders of the sugar sector are in agreement on.
The president of the National Chamber of the Sugar and Alcohol Industry (CNIAA), Juan Cortina Gallardo, accepted that the fall in production of approximately 10 percent compared to the previous year would put the supply of sugar for domestic consumption at risk.
Among the main causes of this decline are the lack of liquidity faced by industrialists in 2008, the high oil prices and the droughts registered in some zones within the state of Veracruz, where a large part of the fields depend on rainfall. Both Sagarpa and the Ministry of the Economy face a huge challenge as they have to guarantee supply and stop speculation regarding sugar.
According to statistics, only 38 percent of the Mexican sugar field has irrigation. This brings forth the urgency of strategies that will take agriculture to new levels of production, otherwise depending on rainfall, the next harvest will show even smaller production numbers. An analysis of the data of the National Sugar Balance that we publish on our website will suffice. In the recently concluded harvest, sugar production reached 4.96 million tons compared to the official estimate that anticipated at the beginning a production of 5.5 million tons. This estimate was revised downwards as the harvest developed and by the end of May it was only contemplating 5.01 million tons. Given that at the end it only reached 4.96 million tons, this means that there was 537,000 tons less than the original estimate, equivalent to 9.7% (rounding off to 10% less production).
Now, according to our calculations, we will be needing near 200 thousand tons in the last quarter to guarantee an approximate average consumption of 400 thousand tons per month. This leaves inventories at the start of the next harvest at 900 thousand tons; a level of 0.8 million tons less than that which existed at the beginning of the recently concluded harvest.
But not all is positive for the sugar cane producers because although the pressure that they exerted managed to drive prices up, they will be receiving 15% less in income compared to the previous harvest. This will happen unless they come to some type of an arrangement with industrialists and the government, given the lack of timely payments on the final settlements of the previous harvest. Only by using the 1.6 billion pesos approved for this purpose by the Congress for this year’s budget, will they come out of it without further damage.
¹ Fiscal year: In terms of Mexican sugar production, this is from October to September.
with industrialists and the government, given the lack of timely payments on the final settlements of the previous harvest. Only by using the 1.6 billion pesos approved for this purpose by the Congress for this year’s budget, will they come out of it without further damage.
There are a lot of outstanding issues and, it seems, little resolve to deal with them immediately. The government has to start operating the Center of Scientific and Technological Research of the sugar sector, approved in the sugar cane law, and the field productivity programs started by the National Committee for Sustainable Development of Sugar Cane (CNDSCA), as well as other measures. These will allow Mexico to position itself competitively at an international level and in a sustainable way in order to satisfy domestic sweetener demand and also satisfy the emerging bio-fuels market (which is a different issue). What was carried out was the fulfilling of export quotas from the production surplus.
In the same vein, if we truly wish for the development of the sugar sector, all and not just a few sugar mills in the country should start producing sub-products of sugar cane and should start co-generating electricity. This way they can guarantee power in the communities where they are installed.
Obviously, as stated at the beginning of each harvest, we still lack a solid public policy for sugar that works and looks towards the future. Federal and state governments continue the same talk of helping producers improve yields in the sugar cane fields, diversifying, applying advanced technology, and of organization. Sadly however, the resources, the inputs and the technology do not arrive, and when they do, it is always in an untimely fashion. It is yet to be seen where this important national industry is going.
Higher and higher: The Domestic Average Weighted Price (PPN)
Industries and the final consumer are feeling annoyed that the price of sugar keeps increasing. From the daily household consumption to food producing firms, which includes bread, candy and soft drink production, we can already hear protests against the sugar price increase.
As if the problem of the bad harvest in the country wasn’t enough, a similar situation is observed on a global level. Starting with an estimate of production of 169 million tons for the 2008/2009 harvest, only 158.8 million tons will be reached; that is, 10.2 million less, a situation which helps explain the price increase in Mexico.
Prices of sugar in different regions throughout Mexico have not stopped rising since March 2009. In the damage assessment, the poor production and price increases (which in some states have been around 50% compared to October last year) could increase production costs. At the end it will be the final consumer who will bear this cost. How can the Bank of Mexico control the general increase in prices?
As we recently mentioned in this weekly report, we have started publishing a statistical table called the Domestic Weighted Average Price (PPN), with the aim of giving our users an unofficial idea of the Free on Board (FOB) price at the sugar mill. This is constructed with average prices of markets at the supply centers of the Federal District, Guadalajara, Toluca and Puebla. We subtract 7.5% from the average of the prices reported officially by the National System of Information and Market Integration (SNIIM), which is a proxy for the sugar shipping costs to the supply centers.
At the beginning of the harvest in October 2008, the PPN was at 248.40 pesos for standard sugar and 312.22 pesos for refined sugar. Today the PPN of standard sugar has increased 50 percent while the PPN of refined sugar has increased by 30 percent.
Observe the inflexion point for both time series that starts in March of this year. This taking over of bodegas by sugar cane producers managed to make prices rise steeply, something that continues to date. In percentage terms, the PPN of standard sugar has jumped 50 percent since the beginning of the harvest while the PPN of refined sugar has increased 30 percent up through mid-July.
Without discarding the importance in the decline of worldwide sugar inventories, in Mexico it seems that we experiencing a slowdown in decision-making regarding the strategy to guarantee domestic consumption. Industrialists exported quantities of sugar that surpassed expectations, taking advantage of competitive sugar prices in the midst of a currency depreciation. Now the problem that presents itself is that part of the sugar – that which was temporarily exported – is precisely that which makes up the lack of supply for industry and households in Mexico. Another problem that arises from the unstoppable price increases of sugar in Mexico, now approaching international levels (specifically those of the USA), is that the industry is now nearer to starting the consumption of more high fructose corn syrup.
As the larger sugar traders are now bringing sugar from Central and South America, it is expected that these imports will be enough for the average monthly consumption of 400 thousand tons for the remaining three months of the fiscal year. It is a fact that imports will not be cheap which means that negotiations will have to take place in order to avoid a major impact on firms and households.
In conclusion, it is urgent that the formula for import quotas should be established as soon as possible. The Agricultural Ministry (SAGARPA), under pressure from sugar industrialists and sugar cane organizations, affirms that there is enough sugar. At the same time the Ministry of the Economy is under pressure from the large consumers and households that are resentful of the price increases in their daily consumption.
Shortly the National Committee for the Sustainable Development of Sugar Cane (CNDSCA) will define the volume of imports needed to meet domestic demand. As long as the amount that will be imported is not established, pressure from all those involved will continue causing increases in the price of sugar.
The Weekly Market
Just as we anticipated last week, the PPN prices have reached the threshold of 375 pesos and have easily continued to increase reaching 384 pesos for standard grade sugar. Although the reaction hasn’t been as drastic for refined sugar, it is above 414 pesos.
The upward price trend is expected to continue and should soon register a quote of 430 pesos for standard grade sugar which implies PPN prices of 440 pesos per bulk.
