Sugar agro-industry at 21 September 2009
• The threat of too much sugar without clear implications for the market.
• Auction comparison.
• The results.
• Weekly market.
The Ministry of the Economy, in order to address the sugar demand and guarantee its domestic supply, reported on 18 September that apart from the programmed sugar import quota auctions for 150 thousand tons, an additional quota of 300 thousand tons would be added.
The Ministry has been up and down in its decision-making. On the one hand, it has shown a clear intention of stopping the continuing increases in sugar prices with the threat of over-supplying the market. But on the other hand, the mechanism that it has chosen to assign quotas continues to privilege traders and not consumer-manufacturing companies.
Let us analyse this problem: the official optimum inventory is 2.5 months of sugar supply in the market from the first of October until the new harvest starts. The CNDSCA has asked for inventories of around two million tons at the end of May, while the average monthly consumption is near 400 thousand tons. This means that sugar will only last until the end of October, which clearly shows that the excess supply sold to the United States (taking advantage of the favorable exchange rate) makes up the difference that will be missing by year-end.
The Ministry of the Economy and Sagarpa realized very late that it was necessary to accept this short supply and they took a decision to issue more import quotas. However, because Mexico receives preferential treatment from the USA because of NAFTA, the US Department of Trade and US industry expressed their dissention with the fact that Mexico is allowing sugar to enter without having to pay any tariffs. For this reason the Mexican government decided to allow the importation to countries of Central and South America at a preferential rate, and without the payment of tariffs from Nicaragua.
Nonetheless, prices continued their accelerated growth rate. This unleashed a wave of speculation which carried the price of standard sugar to 700 pesos per bulk and that of refined to 737 pesos per bulk.
Firstly, with its measures to authorize import permits for an amount that was in excess of what was necessary for domestic consumption, and with the aim of slowing down the indiscriminate sugar price rice, the Ministry of the Economy has achieved very little. If the threat to flood the market serves to curb speculation (which the Ministry has from the beginning not recognized the existence of) then the plan has not turned out as expected – in the last weeks we have observed a fall in prices, quotes have rebounded again and have returned to the same levels of just two weeks ago. In short, the fall in price has not been felt by either the consumer or by the manufacturing companies.
Secondly, the idea of stabilizing the market in an effort for more sugar to be imported up to 31 December 2009 is from the start a very difficult situation to carry through. As we have mentioned in our daily reports, the capacity for market mobilization and the tight world supply of sugar does not favor the need of importing the already assigned quota amounts of 550 thousand tons.
On 15 September the Ministry of the Economy published the rules for allowing an additional 143 thousand tons if necessary.
In previous presidential administrations, like the Salinas government, too much sugar was allowed to be imported which caused a crisis in the sugar agro-industry which is still showing its effects. It seems that the same situation is repeating itself.
Thirdly, the Ministry has not had sufficient tact to assign import quotas and so with respect to the auctions that have already been held, it is the big traders who are winning in this whole situation.
In the first auctions (see the report of 7 September), Cargill was the big winner with an assignment of 18,500 tons, followed by Dispromat with 16,725 tons and Sucden with 10,000 tons.
In the auction held last weekend, the average bid was much lower than that of the first two auctions held on 2 September. In the auction where the first 90,000 tons were assigned via the mechanism of bidding and open origin of the product, the minimum bid was 37,700 pesos and the maximum bid was 50,000 per lot of 25 tons. The auction of 10,000 tons of sugar originating in Nicaragua registered bids of 19,824 pesos per lot¹.
From this information we can put forward a number of interpretations and scenarios.
Much less was bid per lot than in the previous auctions. The intermediary should be sure that the short supply scenario is not as alarming as speculated. The market has realized or should realize that the proclaimed security of supply on the part of the Ministry of the Economy is part of an effort to contain prices through a policy which could be qualified as speculative. This is so because from the word go it is impossible for the amount of sugar planned by the Ministry to be introduced into the country by 31 December.
In getting all of the sugar into the markets, the lack of control in domestic production due to over-supply will not be long in coming. The new harvest and additional sums imported will make prices fall, causing damages to the industry as a whole.
Even if the sugar producing sector is calm at this time because of the sugar price and prepayments made, one can be sure that it will be the first to raise its voice when the price drops. The consumer, at the end of all of this, is the last to see the profits of the economic policy of this essential productive zone.
In the auctions held last Friday, companies like Czarnikow, Sucden, Domino Sugar of México, Westway, Prodeocam, Riesgo Empresarial & Creatividad Group, the Hafazo group and the Society for Rural Development and Community Supply were awarded the maximum of 20,000 tons and between them have quotas of 6,400 lots or 160,000 tons (35.50 percent) of the 450 thousand tons assigned.
¹The exchange rate used in this report corresponds to the exchange rate issued by the Bank of Mexico. In the week of 14 to 18 September, the dollar averaged 13.30 pesos.
Table 1.1 describes the results of the import quota auction for up to 150 thousand tons of refined sugar. The quotes started at 16,500 pesos per lot of sugar free of origin and at 7,112 from Nicaragua.
In the auctions held from 2 to 18 September, two big traders, Sucden and Cargill, were awarded an accumulated total of 57,000 tons which is 11.3 percent of the total of 550,000 tons of sugar allocated to date.
A sample of how disproportionate the quota assignment is, is that while some companies were allocated 20 thousand tons, others were only awarded one lot of 25 tons. However, they paid 50 thousand pesos for tender rights and 16,500 pesos towards the value of the quota. Quota winners will have to enter the market attempting to recover their investment costs. On making a quick calculation of acquisition costs, we can see that we are talking about a concrete selling price of 500 pesos per bulk minimum which means that the difference between current price is even more than 200 pesos and the big winners once again become intermediaries.
In sum, import quotas 004 and 005 show interesting results. The auction defined that for each bulk of imported refined sugar without origin restrictions and for the public en general, a right must be paid for almost 734 pesos per ton (36.79 pesos per bulk). In the case of sugar coming in from Nicaragua, the right is 385 pesos per ton and 19 pesos per bulk of 50 kilograms.
Direct assignments to consumer-manufacturers were the most benefited, given that they will only have to pay the importer one peso per bulk or 20 pesos per ton. In contrast the direct assignment of sugar import quotas without origin restrictions have to be at 33 pesos average per bulk. One hundred percent of the import quotas were assigned.
The week ended with a drop in the price of standard sugar and with a rebound in quotes for refined sugar.
STANDARD SUGAR. The week ended with lows in the Mexico City supply center. With a 5 peso drop, the average price offered was 683 pesos per 50 kg bulk. In Guadalajara, yesterday’s price was maintained (660 pesos) while in Toluca a price rise of 2.50 was recorded, putting the average price at 694 pesos. In the Puebla supply center the price was 687 pesos, 11 pesos less than the day before.
WHOLESALE STANDARD. In the Mexico City Market the theoretical wholesale price was fixed at 661 pesos (632 pesos FOB at the mill). In the Guadalajara supply center, the wholesale price was fixed at 634 pesos (610 pesos FOB at the mill).
REFINED SUGAR. A price rebound in two cities reflects the fact that the measures for additional import quotas have not had the desired effect looked for by the Ministry of the Economy. In addition, it seems that imported sugar leaving Mexican ports has not been very efficient.
In the Federal District and Toluca prices were set at an average of 730 pesos. These cities had adjustments in their increases of 12 and 10 pesos respectively. In Guadalajara and Puebla the prices were 680 pesos and 755 pesos retail, the same as yesterday.
WHOLESALE REFINED. The theoretical wholesale price in the Federal District was 695 pesos, 5 pesos more than the price the day before (644 pesos FOB at the mill). The wholesale price in Guadalajara was 654 pesos (639 pesos FOB at the mill).