The NAFTA Sugar Balance & Outlook Presentation to the International Sweetener Colloquium Orlando,...
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Transcript of The NAFTA Sugar Balance & Outlook Presentation to the International Sweetener Colloquium Orlando,...
The NAFTA Sugar Balance & Outlook
Presentation to the International Sweetener ColloquiumOrlando, Florida – February 9, 2009
by Dr. William TierneyLMC International Ltd, Washington, DC
Presentation Structure
• A look at the current environment of supply
and prices
• Short-term outlook: prospects for 2008/09 and
2009/10
• The longer-term outlook
• Conclusions
A Look at the Current Environment of Supply & Prices
The White Premium
• Stocks-to-use ratio for 2007/08 was tight initially
but recovered to 15.2% on the back of USDA
intervention
• S/U ratio doesn’t capture the split of white and raw
• White premium has averaged 12 cents per pound
since February (Savannah) and 15 cents per pound
since July
US White and Raw Sugar Prices and the White Premium
0
10
20
30
40
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Cen
ts/lb
White premium Raw Refined
The White Premium
The high white premium was driven by the perfect storm of:
1. A low share of beet sugar production2. A temporary loss of refining capacity3. limited displacement of Mexican sugar by HFCS4. Inability of USDA to act promptly to raise the TRQ (new Farm Bill measure)
Beet Sugar Share of Total US Sugar Supply vs. the White Premium
0
2
4
6
8
10
12
14
38% 40% 42% 44% 46% 48% 50%
Beet Sugar (%) Total US Sugar Supply
White
Pre
miu
m (ce
nts
/lb)
2005/06
2009/10
2008/09
The White Premium
• In most years, the white premium has a strong
correlation with the percent share of beet sugar
• This correlation is disrupted when refining
capacity is lost (like in calendar year 2008
through much of 2009)
• Lost refining capacity provides clear upward
pressure on prices, but this is difficult to model
econometrically because of lagged movements
upward (price discovery) and downward (price
stickiness)
Annual US Refining Capacity
4
5
6
7
8
9
10
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
Million tonnes
, raw
sugar
The White Premium
• White premium is the highest it has been since
Katrina
• Prices could have been higher this time
(because of the added element of reduced beet
plantings) but Mexico, with open access,
responded quickly with ramped-up exports
US White Premium and Sugar Exports from Mexico
0
25
50
75
100
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Sugar
exp
ort
s ('0
00 m
etric to
ns)
0
5
10
15
20
White p
remiu
m (cen
ts/lb)
White prem Refined Exports Raw Exports
End-of-Season Stocks-to-Use Ratios
8%
10%
12%
14%
16%
18%
20%
22%
96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09
Historical USDA target: 14.5%
Jan WASDE Forecast : 9.9%
The White Premium
• There remains a shortage of refined sugar in
the US market, resulting in high prices.
• Will the USDA increase TRQ imports on April
1st?
• Will they address the problem by increasing
the refined TRQ specifically? Little relief if
they increase raw TRQ.
• Where will the refined sugar come from
and what are the logistical difficulties?
Short-term Supply & Demand Outlook
The Short-term Outlook
• The short-term outlook hinges largely on
USDA’s response to a low projected s/u ratio
• The USDA’s current projection of less than 10%
has not been seen since 1974, a period of
worldwide sugar shortages. The coinciding
price spike that year led to the rapid
development of the HFCS sector in the US.
The Short-term Outlook
• There is a range of scenarios about how USDA could
address the shortages in refined sugar:
• Scenario 1
• USDA is slow to respond, allowing high prices to
endure. Shortfall could last through 2009/10 (Oct-
Sep), because NAFTA production of refined sugar will
likely not be sufficient. NAFTA capacity will increase
some in Jul ’09.
• Scenario 2
• USDA responds quickly to shortfall by adjusting TRQ
for refined sugar upward.
Projected US Sugar Import Requirements in 2008/09 and 2009/10 (‘000 mt)
Scenario 1 Scenario 2
2005/06 2006/07 2007/08 2008/09 2009/10 2008/09 2009/10
Beginning Stocks 1,208 1,540 1,632 1,503 973 1,503 1,430
Production 6,712 7,662 7,394 7,076 7,388 7,076 7,388
Beet Sugar 4,032 4,543 4,283 3,833 4,028 3,833 4,028
Cane Sugar 2,681 3,119 3,111 3,243 3,361 3,243 3,361
Total Imports 3,124 1,887 2,377 2,264 3,075 2,722 2,617
Mexican Imports 692 79 630 572 550 572 550
ROW Imports 2,432 1,808 1,747 1,693 2,525 2,150 2,067
Total Supply 11,044 11,088 11,402 10,843 11,437 11,300 11,435
Total Use 9,503 9,456 9,900 9,870 9,988 9,870 9,988
Exports 184 383 184 154 181 154 181
Ending Stocks 1,541 1,632 1,503 973 1,448 1,430 1,447
S/U ratio 16.2% 17.3% 15.2% 9.9% 14.5% 14.5% 14.5%
The Short-term Outlook and the Raw/White Split• Reduced refining capacity places a constraint on how much the US can
import as raw sugar
• Refined sugar imports represent the balance between the US total
import need and our estimates of maximum potential raw sugar
imports
• Under either scenario, the US will need to import an estimated
TRQ of 1.1 million metric tons of ROW refined sugar to secure
adequate stocks of useable sugar by Q3 of 2010
• Under Scenario 2, refined TRQ is adjusted upward quickly, allowing
for 733 million metric tons of ROW refined sugar in the country for
2008/09
• However, given the logistical challenges associated with importing
refined sugar from the world market, it is uncertain how effective this
will be in quickly restoring the white premium to its historical level
Projected Composition of US Sugar Imports in 2008/09 & 2009/10 (‘000 mt)
Scenario 1 Scenario 2
2005/06 2006/07 2007/08 2008/09 2009/10 2008/09 2009/10
Annual Refining Capacity
4,848 5,169 4,636 4,836 5,169 4,836 5,169
Domestic Cane Sugar 2,681 3,119 3,111 3,243 3,361 3,243 3,361
Refining Capacity for Imported Raws
2,167 2,051 1,525 1,593 1,809 1,593 1,809
Total Imports 3,124 1,887 2,377 2,264 3,075 2,722 2,617
Raw Sugar Imports 2,208 1,722 1,879 1,517 1,723 1,517 1,723
Mexican Raws 120 21 443 100 51 100 51
World Market Raws 2,088 1,701 1,436 1,417 1,672 1,417 1,672
Refined Sugar Imports 916 165 498 747 1,353 1,205 894
Mexican Refined 572 58 186 472 499 472 499
World Market Refined 345 107 311 276 854 733 395
The Longer-Term Outlook – 2015
There is a widening gap in the US between domestic production and consumption that is being met with increased imports.
0
1
2
3
4
5
98/99 00/01 02/03 04/05 06/07
Import
s (m
illion m
etric to
ns)
0
1
2
3
4
5
6
7
8
9
10
Pro
duictio
n, C
onsu
mptio
n (m
illion m
etric tons)
.
Imports Production Consumption
The Longer-term Outlook – Beet Sugar
Beet sugar production over the last two years has taken a beating
on the back of high alternative crop prices:
• 2008/09 production was 2nd lowest since 1994/95
• Gross margins for major field crops were better than for
beets across all growing regions of the US
• Brawley (CA) closed in August and rumors of Sidney going
out raise questions of competiveness of beet in some regions
• Once a factory shuts, history suggests it won’t reopen
Beet sugar production will rebound in 09/10 on the back of high
sugar prices and falling margins for competing crops.
Beet Sugar Production
3.4
3.6
3.8
4.0
4.2
4.4
4.6
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10
0.40
0.42
0.44
0.46
0.48
0.50
0.52
0.54
0.56
0.58
Plan
ted area (m
illion acres)
Beet Sugar production Beet Planted Acreage
Bee
t su
gar
pro
duct
ion (m
illion m
etric to
ns)
Area up 4.4%
Alternative Crop Prices
0
2
4
6
8
10
12
14
Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08
US$
/bush
el
Corn Wheat Barley Soybeans
The Longer-term Outlook – Cane Sugar
Incident at 800,000 metric ton Savannah refinery – 15% of total US capacity –
highlighted the tightness in refining capacity in the US.
• Slated to resume full production of crystallized sugar at the end of June
LSCPI, Cargill and Imperial partnership is still a possible go, despite credit crunch
• Wouldn’t be ready until 2011 at the earliest
• The extra 1 million metric tons would go a long way to provide slack in capacity,
reducing the volatility, and possibly the value, of the white premium
The outcome of USSC will have tremendous repercussions for the US sugar sector:
• As an inland refinery, loss of accompanying cane acreage would leave the value
of that asset in question – could it function as an inland cane refinery?
• A potential loss of 11% of domestic sugar production
• What will become of offer from the Lawrence Group?
The Longer-term Outlook – Mexico
Ability of Mexico to send sugar to the US is contingent on level of HFCS adoption
• At 50% adoption of HFCS in the Mexican beverage sector would allow export 800,000
mt by 2014
• At 95% adoption of HFCS, akin to levels seen in the US, they could double that
• After large shipment of Mexican sugar to the US post-Katrina, Mexican imports of US
HFCS surged. This could recur as Mexican prices track ascension of US prices
PRONAC (Mexican govt’s sweeteners policy) calls for increased investment in Mexican sugar
industry and exports of 840,000 mt by 2012
• Increased investment in production of “refinado” and infrastructure could go a long
way in alleviating US difficulties of importing refined sugar
There is a remarkable degree of substitutability in Mexico between “refinado” and
“estandar”.
• Mexico will send available “refnado” to the US to meet demand
Mexican Exports of Refined Sugarand US Exports of HFCS
0
10
20
30
40
50
60
70
80
90
Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08
'000
met
ric to
ns
Mexican Refined Sugar Exports to US US HFCS Exports to Mexicao
Potential Surplus of Mexican Sugar(assuming 50-75-95% HFCS adoption)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010 2011 2012 2013 2014
'000
met
ric to
ns
HFCS 95% HFCS 75% HFCS 50%
Mexican Refinado Production and Demand
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2003 2004 2005 2006 2007 2008
Million m
etric to
ns
Refined Sugar Exports Refined Sugar Production
Summary & Conclusions
Summary
US sugar stocks are tight and will fall below 10% for the first time
since 1974 without a TRQ increase by the USDA. Tightness is
most acute in the refined sugar sector due to low beet
plantings and lost refining capacity.
This may appear to be a short-lived imbalance, but other
problems loom on the horizon – USSC, beet factory closures?
Mexico is the logical source to fill supply shortfalls in the US but…
Mexico is unlikely to flood the US with sugar in the near term
Conclusions
If the US is to dig its way out of current sugar deficit, it may need to
import total of 2.7 million mt sugar in ‘08/09 & similar amount in
‘09/10
• Assuming imports of Mexico of just over a half million mt, the
USDA would need to increase TRQ to over 2.1 million mt.
Restricted refining capacity & limited supply from Mexico suggests
that much of the sugar will have to come as refined sugar from world
market.
• Because the consistency of ROW imports is questionable, there
hasn’t been a rush to invest in infrastructure to import ROW
refined sugar, leading to logistical difficulties and higher cost.
• Therefore, an increased TRQ may not alleviate high white
premium as much as one might expect.
Conclusions
Longer term, the US may rely increasingly on imports
Some or all of the increase in imports will come from
Mexico, depending on the degree of HFCS substitution
• However, there will need to be increased
investment in infrastructure to handle increase
imports of Mexican refinado
• Additional capacity to handle more refinado will
help only if supplies from this origin grow
Otherwise, new refining capacity may prove to be
the better solution
Thank You!
[email protected](202) 349-9860www.lmc.co.uk