Sweet outlook for sugar

(AgWeek) – FARGO, N.D. — North American sugar producers have a very bright future, according to a Mexican sugar official, speaking recently at the Red River Valley Sugarbeet Growers Association annual meeting in Fargo, N.D.

“I think it’s a rosy outlook in world markets going forward,” said Juan Cortina, president and chief executive officer of Grupo Azucarero Mexico and president of the Mexican Chamber of Sugar and Alcohol Industries. “We have a very bright future, especially in North America.”

Mexico is the world’s sixth-largest sugar producer. The country consumes 1.7 million tons of high fructose corn sweeteners and 3.8 million tons of refined sugar. Mexican sugar consumption has dropped as more than 1 million tons of high fructose corn sweetener has come in, mostly from the United States because of the North American Free Trade Agreement..

Mexican high fructose corn syrup use especially has jumped since 2008. Cortina expects Mexican high fructose corn syrup consumption to grow 5 percent annually for the next two years, but then stabilize. Most of the substitution of HFCS for sugar has taken place, and was fueled by a large price differentiation.

“Things are starting to slow down,” Cortina said of the substitution.

NAFTA integration

The NAFTA integration of the sweetener market has come so fast and successfully because of changes in consumer preferences and weather related issues. Mexico is working to emulate U.S. Sugar Associates’ efforts to promote sugar with consumers. This year, Mexico will ship 1.3 tons to the U.S. market, and it has happened quickly.

“A few years ago, nobody thought this could be possible,” Cortina said. “Logistics was a big issue. I heard a lot of people questioning whether Mexico was going to be able to ship more than 600,000 tons up north. Now, that’s a thing of the past. We really do have an integrated North American sweetener market.”

Cortina said U.S. and Mexican officials need to re-evaluate re-export programs under NAFTA.

“There are some loopholes that need to be understood and probably closed,” he said. “They haven’t been a problem in the past, given high world sugar prices, but obviously, given the volatility in prices and cyclicality that our industry has, it could come into play again in the future. We need to be able to maintain the stability in the market that we have been able to have in the last three years.”

He said the two countries need to better coordinate import quotas.

“I think in Mexico, we need to emulate more the way it’s done in the U.S.,” he said.

In mid-November, the national sugar committee proposed a government study to analyze the way the sugar program works in the U.S.

Mexico’s first estimate is for 5.3 million tons of production for its 2011 sugar crop, for which harvest started in November.

“My point of view is it might be on the optimistic side,” because of weather issues that would affect yields — a drought from October 2010 to June. Some areas had flooding. He said more reliable information will come in February.

Labor, pricing changes

Cortina said Mexico has changed its pricing structure for sugar since a 2008 crisis.

“Nowadays, the Mexican sugar cane price is based off of sugar prices in the domestic market. Growers can go on the Internet and calculate fairly easily what the sugar cane price is going to be for that year. We aligned, finally the interests between the grower and the industry, and we’re working together as a team.”

Mexican producer and processor groups are working together on research priorities to make the system more productive.

Labor has changed, too, Cortina said, without referring to a labor lockout at Crystal.

In Mexico, Cortina said, there is one single labor contract for the 57 mills. The old labor contract was “produced in a different Mexico, a different era,” Cortina said. “The labor contract brought things into it, built in over time, that at the end of the day resulted in an uncompetitive deal for the industry and for labor also.”

He says the crisis in 2008 brought about a sense of urgency, but also changing union leadership.

“Nowadays, we have a very different labor relationship. In fact, the international Labor Organization last year in Geneva . . . used the Mexican sugar industry as a showcase in how labor relations can change, which we are very proud of.

“We’re paying for skills,” Cortina said of the new deal. “There is worker flexibility. We have a flexible contract. Real wages are going up. We’re working together as a team. We’re capacitating and training our people — something that really didn’t happen in the past. As an industry, we’re also taking into account social aspects, and are having health programs for our workers, and education that really makes a big difference to our workers’ lives, and we’re really proud of that.”

At Crystal, union workers voted down a proposed five-year contract, for several reasons, but significantly because the company wanted workers to pay for a share of health care costs, which, up to now, had been paid for completely by the company.

Cortina said six or seven of the factories have electrical cogeneration capabilities.

“That will give them stability, going forward, when prices are not so good on the sugar side. Ethanol, I’m sure is going to come eventually. The price of gasoline in Mexico has to go up. Currently, they’re subsidized. When that disappears, obviously ethanol is going to be competitive.”

Looming Brazil

Brazil continues to be a huge factor in sugar, Cortina said. Brazil is slated for greater output, but that will require a huge investment. The country already accounts for 60 percent of world sugar exports, Cortina said.

“That’s quite a big number,” he said, and could account for 90 percent of sugar trade by 2030.

Costs are going up in Brazil: The country need to build 17 green field mills annually for the next 18 years to cope with potential demand. He said costs in Brazil will rise 85 percent in that time.

Currently, the Brazilian cost of producing sugar there is 22 cents a pound, which is why there has been a “strong floor in the world market, around that level.”

But Cortina said costs will rise to about 35 cents a pound by 2030. Close to $340 billion in investments must be done to allow the Brazilian sugar supply to flow into the world market by then. “That’s quite a big challenge for them,” he says. And if ethanol picks up, then the need for sugar cane would double in Brazil, which would push needed Brazilian investments to “half a trillion.”

David Berg, Crystal’s president, also addressed the Mexican factor, noting that on Jan. 1, the two countries will have marked four full years of entirely free trade in sweeteners, under the North American Free Trade Agreement.

“The rise in share of U.S. market taken by Mexico sugar companies over this time has been rapid,” Berg said. “It has grown much more quickly than our government’s coordination of sugar policies. And I think that might be a problem going forward.”

Berg noted that the U.S. sells about 1.5 million tons of corn fructose into Mexico, and Mexico ships nearly 1.5 millions into the U.S.

Changing prospects

Berg said the 3 million tons of cross-border sweetener trade was expected to have to caused “absolute turmoil” in both countries’ markets, but that has been blunted by rising U.S. sweetener consumption and sustained strength in world markets.

“This has meant that the large influx in Mexican sugar has been absorbed without causing price disruptions — yet,” he said.

Berg warned that if any of the positive fundamentals that have buoyed the market in recent years falters, it could have consequences.

“It could mean that we — both U.S. and Mexican producers — may still hit a NAFTA wall.” He said communication and coordination between the two countries on sugar policy is essential, and if either country chooses to neglect or disregard those responsibilities, the “repercussions for industries on both sides of the border would be dramatic and long-lasting.”

A return to more normal world market conditions “could provide an impetus for a much more bearish outlook” as Mexican sugar “grabs an increasing share of the U.S. market,” he said.