Sugar agro-industry at 3 August 2009
• Sugar imports a definite yes
• Sugar Balance at 31 July
• Weekly market: New historical price highs
The Mexican Government finally decided that “temporary” exports made by Mexican firms in this harvest will be permanent. In order to not violate the spirit of NAFTA, Mexico by way of the Ministry of the Economy, will arrange tariff-quota as a supply mechanism through an auction. Given that all of North America is in short sugar supply, the new quotas for sugar imports will exert additional pressure on world market supply.
Sugar imports a definite yes
In the past few days we had said that government should take immediate action in order to guarantee the supply of sugar in the country. At last, the Ministries of Economy and Agriculture revealed the import mechanisms that are to be applied.
As a result, we anticipate that the price increases that we have been observing over the last ten weeks will come to an end, which should favor both the individual consumer and the sugar processing industry in the country. For the sugar industry, the supply deficiency means an increase in production costs and, as a result, a higher price in the final product that directly affects the individual consumer.
With the official acknowledgment that there is a lack of refined sugar supply at the end of the 2008/2009 and the beginning of the 2009/2010 harvests, the government is now clearing the way to break the pressure on domestic markets.
We must remember, as does the Technical Group of Trade Policy (GTPC) made up of specialists from the Ministry of the Economy and the Ministry of Agriculture, that the problem of an insufficient sugar supply was created by the fall in domestic production and by significant exports to the USA.
In order to not violate the terms of NAFTA, we have to look at paragraph 17 of Section A of Annexure 703.2 of the Treaty:
“With effect no less than six months after the signing of this treaty, Mexico will apply as the most favored nation clause a tariff-quota for sugars and syrups, in line with tariff rates not inferior to the least of those that correspond to:
a. tariffs from the most favored nation of the United States that are in force at the time that Mexico begins to apply the tariff-quota; and
b. tariffs from the most favored nation clause prevalent in the United States.” ¹
The GTPC, with the backing of judicial consultants and trade policy as well as specialists in foreign trade and customs, the Treasury Department, the Agricultural and Trade Department of the United States arrives at the conclusion that:
- The re-importation of sugar free of tariffs has no customs restrictions.
- Nevertheless it is a violation of the terms of NAFTA.
- The Ministry of the Economy finds inconsistencies and incongruencies in the mechanisms and positions of the Mexican government with that of the United States.
- If the re-importation of sugar is to the same country that carried out the original export, then it is not a violation of NAFTA.
- As a result, the Mexican Government does not support this mechanism
- The Mexican Government sees it as prudent to reclassify temporary exports as permanent exports.
- The Mexican Government proposes as a supply mechanism the arrangement of tariff-quotas by way of auction.
The Sugar Balance at 31 July
With updated and audited inventories, and the latest figures of exports and estimated domestic consumption, we have a new estimate as of 31 July of the domestic balance for the 2008/2009 harvest and a projection for the 2009/2010 harvest. The red numbers emphasize that in order to meet domestic demand, imports to the order of at least 310,000 tons will be necessary. This number varies through different estimates according to updated figures released by the government. In our daily reports we have been insisting that unless Mexico imports the same amount that was exported “temporarily”, the final sugar inventory will only last through October.
¹SICE : Sistema de Información sobre Comercio Exterior (TLCAN).
The GTPC decided at a meeting on 9 June 2009 that, consistent with the sugar balance at 31 May and according to audited inventories, the deficit of at least 393 thousand tons would have to be met through import quotas. The official balance states that together with a final inventory of around 571,000 tons, as of 31 September 2009, an optimal inventory of 1.027 million tons, necessary to meet total consumption throughout the last quarter of the year, can only be met with sugar imports through the above-mentioned quotas.
The GTPC decisions are as follows:
To propose to the Foreign Trade Committee:
1. Import quotas up to 393 thousand tons of refined sugar.
2. The quota will involve a tariff of 36 dollars per ton. Ten percent of the total amount will be assigned to Nicaragua sugar imports free of tariff.
3. The sugar quotas will be assigned through a tender system from August to November, together with a close monitoring of inventories and consumption, in order to avoid excessive imports.
4. The sugar imports that take place under the above mechanism will be evaluated by a workforce made up of different branches of the Ministry of Economy, representatives of the Ministry of Agriculture and by the National Committee of Sustainable Development of Sugar Cane.
5. The tender system that will be used should guarantee transparency and equity in the process.
Total Exports by domestic sugar mills
The GTPC-Economy-SAGARPA group has provided figures for total exports taking place by sugar mills between October 2008 and June 2009: close to 882,000 tons of both refined and standard grade sugar of which the major participants are FEESA (22.9%), Motzorongo (11.3%), independent mills (11.4%) and Zucarmex (9.2%).
The differential between refined and standard sugar has diminished
The price differential between refined and standard sugars has been narrowing as can be seen in the graph below. From 1 October 2008 through 31 July 2009, the average difference was 53.94 pesos per bulk, equivalent to 15.33 %. Theoretically, an accepted difference that covers refining costs fluctuates between 10 and 12 %. However, as we can see in the table below, the reported average at October 2008 was 69.11 pesos per bulk, equivalent to 20.49%.
The table shows monthly averages. We can see that from October 2008 through March 2009 the price differential remained above 16%. However, as a result of the sharp increase in prices for standard sugar due to the taking over of bodegas by the sugar cane producers, the margin dropped to 33 pesos, equivalent to a difference of 9% between the two sugar grades.
Between May and June of this year, the price differential returned to the norm while fluctuating around 12%. Nevertheless, the price of standard grade sugar started increasing again throughout July as a result of speculation that the domestic standard sugar supply was too low compared to refined sugar which, it was believed, would soon be imported. The price differential fell to an average of 6.7%, more or less 30 pesos bulk. However, during the last week of July the price differential narrowed further to 25.75 pesos, equivalent to 5.48%. The graph shows this “narrowing” and the upward trend of the price differential.
We anticipate that the price of standard grade sugar will continue to exert pressure on the price of refined sugar although with a narrowing of the gap between the two. It would not be unusual, as we witnessed in July and prior years, for the price differential to almost disappear. As a matter of fact, according to prices reported by zafranet.com, FOB prices at the mill for supply centers in the Federal District and Guadalajara reached a differential of 15 and 20 pesos respectively, below 5%.
Weekly Market: New historical price highs
STANDARD. Although at the end of the week there was no change in the price of sugar, the week ended with a general average of almost 444 pesos in the four main supply centers, with an upward trend toward 450 pesos. The general average price is now 160 pesos above that observed in the first few days of January and equivalent to 56% of the original quote.
REFINED. The general average has now reached 469 pesos although the reduced volatility observed in the last days demonstrate a stable to upward trend.
Now that sugar imports have become an official reality and import mechanisms have been established, it seems that market pressures will diminish now that domestic supply should be sufficient. Given the quota tender system established to avoid an oversupply between August and November, it seems that prices will tend to stabilize in the near future. Nevertheless, the prices observed in Mexico during this week reached historical highs.