The January 1, 2008 completion of the 15-year transition under NAFTA to free trade in sugar between the U.S. and Mexico left trade watchers in both countries uncertain of the supply demand balance for each country. The latest report on production and consumption estimates for Mexico from the Economic Research Service of USDA indicates that the prospects are good for a reasonable balance over the next year. The longer-term issue remains how to operate individual country supply management and import control programs with free trade between the two countries.
USDA’s estimate of Mexican sugar production is 5.950 million metric tons raw value (MTRV) for the current 2007-08 crop marketing year (October through September), up 5.7 percent from the 2006-07 crop. The sugar crop in Mexico is harvested in November through May. The 2008-09 crop is projected at 5.850 MTRV, with acreage unchanged and yield closer to trend than the current year good crop and the prior two years of below trend crops. The U.S. agriculture attaché in Mexico City reports that the government run sugar production improvement program, known by the acronym PRONAC, has set a goal of 3.3 percent annual growth in output.
Deliveries of sugar for human consumption in Mexico for the 2007/08 marketing year are estimated by USDA at 5.35 MTRV, up 2.7 percent from last year. Projections for 2008/09 put deliveries at 5.43 MTRV. Consumption of high fructose corn syrup (HFCS) is expected to be stable at 800,000 metric tons (MT) per year, dry basis. Exports, almost all of which come to the U.S., are estimated at 530,000 MTRV for 2007/08, up sharply from 135,000 MTRV in 2006/07, and projections for 2008/09 put exports at 500,000 MTRV. End-of-year stocks in 2008/09 are expected to be 26.0 percent of consumption, just below the 10-year average of 26.7 percent.
From the summer of 2006 through the end of 2007 Mexican raw and refined sugar prices were substantially above U.S. prices. Prices in the two countries are now about the same as Mexican prices continued their slow decline and U.S. prices strengthened since the beginning of 2008. The ERS analysis notes that, “The low sugar prices in Mexico are part of the reason for HFCS not being used more in the Mexican beverage industry.” There were fears last year that increased HFCS use would result in more Mexican sugar moving to the U.S.
Increases in U.S. corn prices have affected U.S. prices for HFCS. The U.S. Bureau of Labor Statistics producer price index for corn sweeteners, with June 1985 equal to 100, averaged 132.2 in 2003-2005. The index increased to 149.7 for 2006 and 176.7 for 2007. It averaged 204.3 for the first four months of 2008, up 54.5 percent from the 2003-2005 average. The Mexican HFCS industry produces about 400,000-450,000 MT dry basis each year from 2.5 MMT of yellow corn, 80 percent of it imported from the U.S.
Sugar prices have not fully participated in the worldwide commodity price boom. For 1999 through 2004 world refined sugar prices based on the London futures market averaged 10.22 cents per pound, down from a 12-18 cents per pound range of yearly averages for 1991-1998. Prices averaged 13.19 cents per pound in 2005 and 19.01 cents per pound in 2006. World refined sugar prices declined to 14.00 cents per pound in 2007 and have averaged 15.86 cents per pound for the first four months of 2008. While the U.S. and Mexican markets are protected from world market prices with import quotas and the U.S. has domestic marketing allotments, U.S. and Mexican sugar prices are also influenced by world market activity.
As noted earlier, the Mexican government wants the sugar industry to continue to increase production. According to the U.S. agriculture attaché the new Sugar Law published in August of 2005 called for the creation of a Technical Committee for the sugar industry to coordinate all activities related to the Sugar Law including sugarcane price setting and trade. It includes sugar cane producers, mill owners, workers organizations, and the federal government. At the committee’s first meeting in March of this year, it agreed to pursue the four main strategies of the PRONAC to help improve competitiveness within the sector: strengthen trade policy, improve cane production, improve mill yields, and promote investment and employment.
The Mexican sugar industry is relatively high cost at $37-40 per ton of sugar cane compared to Brazil at $15 and $18 per ton. The government has talked of an ethanol industry based on sugar, but the high cost of sugar, the lack of a domestic market for ethanol and strong domestic demand for human consumption will likely prevent its development. Increase in sugar production that may occur due to government policies over the next few years will continue to enter the sweetener market. Mexico currently has 58 sugar mills in 15 of its 32 states, with 13 mills owned by the government that are to be sold to private interests. Most of the land used to grow sugarcane is owned by small individual farmers and communal ownership groups. The over 164,000 sugar farmers are represented by two major unions. The structure of the industry guarantees that government policy will continue to play a major role.
The positive short-term market view does not mean the potential for problems in other years has been removed. Both countries operate restrictive trade policies with other countries, while having open trade with each other. If those policies result in similar market prices, the potential for major disruptions for either country is reduced. Corn prices are expected to remain strong from demand for food, feed and fuel which should limit the supply of HFCS. The factor to be most closely watched is the growth in Mexican sugar production in comparison to the growth in the market.