Sugar agro-industry at 27 July 2009
• Sufficient domestic sugar supply: Sagarpa and the CNDSCA
• To infinity and beyond?
• Price estimate for October
• High fructose syrup is becoming more attractive
• Weekly market
In trying to induce more certainty to the domestic market, the National Committee for Sustainable Development of Sugar Cane (CNDSCA), requested an inventory audit of the sweetener for the sugar mills at 31 May 2009. At the conclusion of the last meeting of the Committee it was announced that sugar production of the 2008/2009 harvest was 4.9 million tons and inventories at end-May were 2 million tons. According to government officials, this figure allows domestic supply to meet demand. Nevertheless, the market has ignored these figures and continues with price increases that threaten to reach previous high akin to those of 2006.
Sufficient domestic sugar supply: Sagarpa and the CNDSCA
Sugar mill audit results show that physical domestic inventories of sugar are 2 million 7,069 tons, certified by independent auditors accredited by the Public Function Ministry. This number is limited to bodega inventories and thus does not include stocks held by sugar traders. The figure does not cover “temporary” sugar exports that must be re-imported to Mexico.
An updated version of the domestic sugar balance published on our site shows the following description: firstly, the 2008/2009 sugar cycle started with an inventory of 1.86 million tons of sugar; secondly, after multiple revisions to domestic sugar production levels, the CNDSCA is providing a final estimate of 4.9 million tons, while our own estimate places the figure at 4.96 million tons. Final total supply will reach 6.938 million tons, after considering sugar imports from the US market at 111 thousand tons. Finally, on the demand side, domestic consumption is estimated to have reached 4.995 million tons, which together with external demand of 1.17 million tons, arrives at 6.174 million tons.
According to our calculations, the final inventory of this harvest and the start of the next is 764 thousand tons of sugar at the end of September. It is evident that we are in short supply. The historic domestic consumption of sugar is 400 thousand tons per month. This year numbers should satisfy demand through October and maybe part of November, leaving sugar supply short and very expensive.
October and November are relatively idle months, in which sugar mills start operating, carry out tests and seldom start any type of production. For this reason, no solution is evident for the possible scarcity in new production. We hope that the sugar that has not been put into inventory and which is in the hands of traders will be sufficient to make up for the possible shortage, now that we know that the sugar for temporary export will not be returned unless the Ministry of the Economy authorizes it, a scenario which we see as very problematic.
The Economy Ministry together with the Treasury and Agricultural Ministries will be keeping an eye on the market in order to determine whether domestic inventories are sufficient, despite their optimistic views that supply will meet demand. The panorama looks bleak and import quotas could help guarantee sufficient inventories on the run up to the next harvest which normally begins somewhere in October. In certain parts of the country, though, sugar producers hope to meet their targets and have said that they will begin production towards the end of November or beginning of December. The Agriculture Ministry (SAGARPA) has said that the next harvest should start between September and October. Nevertheless, we do not know what the basis of this statement is.
To infinity and beyond?
No, this is not an allusion to a fictitious topic, it is a reference to the increase had from sugar market prices. Because Mexico does have sufficient sugar for the domestic market (for which reason a rise in price of this product is ruled out in the basic basket, as assured by the head of Sagarpa, Alberto Cardenas Jimenez), prices have now reached historic levels and threaten to arrive at 2006 levels and if they continue with this trend, it seems they will go beyond the reach of consumers.
What has been heralded as an environment of uncertainty and speculation is confirmed in many regions of the country. In fact, prices per bulk of standard grade sugar to the final consumer are now around 433.50 pesos (8.67 pesos per kilogram) in the main supply center of Mexico City (Central de Abasto). In the supermarkets, the price is from 12 to 13 pesos per kilogram.
Proof of better prices can be had in the whole of Mexico: bottling companies, the bread-making industry, the canning and preserving industry and the candy-making industry to mention some have been complaining to the Economy Ministry that it carry out its duty to stop speculation that has been hitting production costs hard. If the Ministry does not react, the final consumer and employment will be affected. This makes the Central Bank’s job of controlling inflation much more difficult.
The following graphs show the price evolution of standard and refined sugar from March 2009 onward, a month in which sugar cane producers affiliated with the CNPR decided, as stated by Carlos Blackaller Ayala, to make the price go up “in the Mexican way” by taking over the bodegas belonging to mills in various regions of the country, which possibly provoked “an apparent scarcity” in the market, elevating quotes of standard grade sugar to 330 pesos in only one month.
This path that prices took lasted until the end of May and beginning of June. From this date onward, with the end of the harvest just around the corner, with export quotes completely met with and with bad preliminary harvest results, speculation was stimulated and once again the apparent short supply forecast for the last months of the year made prices follow an upward trajectory.
At the present date, there is no import quota decision to reimburse temporary exports (around 300 thousand tons), which will be necessary to cover the domestic demand of sugar to December this year. However, reintegrating this sugar into the domestic market would be extremely expensive. A poor international cycle, with India issuing import quotas and with the huge deficit in the United States market, have meant that the rise in futures contract prices in international markets have reached historic levels. The reaction in the domestic market was certainly not expected: only this weekend the price of standard grade sugar closed at 435 pesos, 151 pesos more than at the beginning of the year.
Price estimate for October
Meanwhile in Mexico the strategy to follow has not been defined and the rise in the price of sugar seems unstoppable, with everything pointing to this fact. The hike in the price of sugar seems to be headed in the direction of surpassing 2006’s record prices.
As a way of exercise, we carried out a least squares regression in order to determine the probable trend of sugar prices.
Taking into consideration the information from our historic archive as well as the weekly averages for sugar trade from our four main centers in the Republic since May (Federal District, Guadalajara, Toluca and Puebla), this being the month that the point of inflection or change in price trend was introduced, the forecast result shows that we can expect prices in the region of 435 to 440 pesos per bulk in August; 445 to 450 pesos per bulk in September and 453 to 458 pesos per bulk of standard grade sugar in October. However, this method appears to be far off the trend which prices have in fact followed.
From June to the present date, prices of standard grade sugar have risen on average by 2.65 percent per week, and refined has risen by 1.7 percent on average per week.
On the other hand, if we only take into account the price evolution in this last month, the price increase is 3 percent each week for standard grade sugar and 18 percent for refined.
From these calculations we can conclude various scenarios:
1. In the first scenario, which we can label as having a moderate character and as having an average weekly evolution of two months (June and July), the prices of standard grade sugar can be placed at between 432 and 440 pesos for August, between 444 and 450 pesos for September and between 455 and 465 pesos per bulk for October.
2. In the case of refined sugar, if we take the same moderate scenario, quotes of between 463 and 470 pesos can be defined in August; between 471 and 476 pesos in September and between 480 and 485 pesos per bulk in October.
3. But if we only consider the price evolution in the last 4 weeks we can distinguish another scenario, one that is a little stronger than the previous one. In the case of standard sugar the prices that we could find in August would be between 434 and 440 pesos per bulk; in September between 447 and 452 pesos and in October prices could be between 460 and 466 pesos per bulk.
4. For refined sugar considering increases of 1.8 percent, we could observe prices above 464 pesos for standard grade in August, above 472 pesos in September and above 481 pesos in October.
5. Nevertheless, the calculations made follow a more or less constant growth rhythm and from what we have seen in the past few weeks, prices have overtaken growth rhythms of 4 and 5 percent, a situation which would lead us to describe a scenario comprising great highs and which would take the standard grade average to 468 pesos in August, to 492 pesos in September and to 516 pesos in October.
6. For refined sugar with a high growth level, we could consider quotes of 508 pesos in August, 534 pesos in September and 560 pesos in October.
High fructose sugar is becoming more attractive
With all that has been said before, the question being asked in the market is the following: At what refined sugar price level does it suit bottling companies and other sugar consuming industries to change to high fructose corn syrup? The graph below illustrates this. In relation to refined sugar, the breaking point is given at 6,500 pesos per ton, or 330 pesos per 50 kg bulk. For a long time now the companies that have facilities for the receiving and processing of syrup have been contacting fructose producers and carrying out tests on the syrup in the face of incessant sugar price increases.
As we can see in the graph, the price of refined sugar surpassed 8000 pesos per ton in June 2009 – 400 pesos per 50 kg bulk. (In July the price is above 435 pesos per bulk FOB client in domestic markets). Corn syrup seems to have stabilized on a band between 6,500 and 7,000 per ton, with an exchange rate of around 13.50 pesos per dollar. In fact, the weakening of the dollar has facilitated a more competitive position of syrup imported and/or produced on domestic soil.
Unlike a few years ago, when the legal impossibility of exporting sugar surpluses limited the national sugar agro-industry, the commercial opening within the framework of the Free Trade Agreement now makes it possible for high fructose corn syrup to position itself in the domestic industry. In virtue of possible price advantages, Mexico could in turn export its sugar surpluses which have been displaced in their natural market, and redirect such surpluses to the loss-making markets of our main commercial partners. In this way, exports of domestic refined sugar could well continue in the same condition in the next sugar cycle.
Weekly Market
In this past week, interesting figures have been issued concerning the behavior of the sugar price in the main centers of the country.
Once again record figures were anticipated and the price differential between the general average quote of the four markets reached 151 pesos compared to 284 pesos observed in January of this year.
STANDARD. Due to the fact that adjustments in the different centers of the country for most of the week were at an average of 435 pesos, the final trend for next week demonstrates prices equal to or more than 440 pesos.
REFINED. The volatility of prices did not allow for a clear increase, placing the weekend average quote of the four markets at 463 pesos. However, the market pressures will likely lead to further increases over the next weeks.
Moving averages
A slightly upward trend exceeding 433 pesos can be observed for the moving average of standard grade sugar while the moving average of refined sugar has reached 460 pesos. Its growth rhythm, which was reactive in past days, is also now stable.
National weighted average prices are at 402.61 pesos for standard grade sugar and 428.51 pesos for refined. We would like to mention that these prices can be taken as a reference to determine the reference price for sugar settlement payments.
