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USDA Sugar Outlook - October 2011

31 October 2011

USDA ERS

On October 12, 2011, the US Department of Agriculture (USDA) released its latest US and Mexico sugar supply and use estimates for fiscal year (FY) 2011 and projections for FY 2012 in the World Agricultural Supply and Demand Estimates (WASDE) report.

For FY 2011, the USDA reduced its projection of beet sugar production to 4.675 million short tons, raw value (STRV), a reduction of 125,000 STRV, or 2.6 percent, compared with last month’s projection. A late start to the 2011/12 harvest in the Red River Valley resulted in lower-than-normal sugar production in September, the last month of the fiscal year.

Given the elevated degree of uncertainty this harvest season, there was no offsetting increase made to the beet sugar production projection for FY 2012. For FY 2011, the USDA decreased its estimate of tariff-rate quota (TRQ) imports by 149,000 STRV, mainly reflecting the deferral of FY 2011 raw and refined sugar TRQ imports until the early part of the next fiscal year. On September 30, 2011, the USDA announced an increase to the FY 2011 refined sugar TRQ of 150,000 STRV and extended the date this sugar is eligible to enter the United States until November 30, 2011. The deferral of this sugar, plus the anticipated entry of FY 2011 TRQ raw sugar in October, is reflected in the 252,000 STRV increase to TRQ entries projected for FY 2012.

Estimated sugar imported from Mexico in FY 2011 was increased to 1.687 million STRV, reflecting actual entries recorded by the U.S. Customs Service prior to the release of the WASDE. Sugar use was increased by 100,000 STRV in both FY 2011 and FY 2012. Ending stocks for FY 2011 are estimated at 1.418 million STRV, implying an ending stocks-to-use ratio of 12.2 percent. For FY 2012, ending stocks are projected at 889,000 STRV, implying an ending stocks-to-use ratio of 7.7 percent.

In Mexico, estimated exports were increased by 58,000 metric tons, raw value (MTRV) to 1.540 million MTRV. This change was made because of the increase in recorded imports from Mexico by the United States in September. Because no other supply or use changes were made, estimated ending stocks for FY 2011 dropped by 58,000 MTRV to 720,000 MTRV. For FY 2012, the Interagency Commodity Estimates Committee (ICEC) for sugar assumes that ending stocks will equal 22.0 percent of expected sugar consumption, or 95 3,000 MTRV. The implication of this assumption is that exports are calculated residually, meaning that the FY 2012 exports are reduced by 58,000 MTRV to 1.055 million MTRV.

Sugar in the North American Free Trade Area (NAFTA)

On October 12, 2011, the USDA released its latest U.S. and Mexico sugar supply and use estimates for fiscal year (FY) 2011 and projections for FY 2012 in the World Agricultural Supply and Demand Estimates (WASDE) report.

Beet Sugar Production

The USDA reduced its projection of FY 2011 beet sugar production to 4.675 million short tons, raw value (STRV), a reduction of 125,000 STRV, or 2.6 percent compared with last month’s projection. Beet sugar production has totaled 4.436 million STRV through August. In Sweetener Market Data (SMD), beet processors forecast September 2011 production at 240,000 STRV, only 68 percent of the average September production for the last 5 years. In Crop Progress from the National Agricultural Statistics Service (NASS), the percentage of the 2011/12 crop harvested in the Red River Valley through October 2 amounted to only 14 percent. Last year the corresponding percentage was 32 percent, and the average for the previous 5 years is estimated at 25 percent. Given the elevated degree of uncertainty this harvest season, there was no offsetting increase made to the beet sugar production projection for FY 2012 – the forecast remains at 4.575 million STRV.

Cane Sugar Production

The FY 2012 cane sugar forecast is 3.360 million STRV, the same as last month. This is 211,600 STRV more than last year and is basically attributable to a return to a normal crop in Florida. FY 2011 production in Texas was increased to 145,793 STRV to reflect finalized production reported in SMD.

Trade

On September 30, 2011, the USDA announced an increase to the FY 2011 refined sugar tariff-rate quota (TRQ) of 150,000 STRV. The USDA has also extended the date this sugar is eligible to enter the United States to November 30, 2011. This sugar must have a sucrose content, by weight in the dry state, corresponding to a reading of 99.5 degrees polarity or more. The U.S. Trade Representative (USTR) allocated a total of 27,558 STRV (25,000 metric tons, raw value (MTRV)) of this amount to Canada and 122,443 STRV (111,078 MTRV) to be administered on a first-come, first-serve basis.

Earlier, on August 26, 2011, the USDA announced that sugar entering the United States under the FY 2011 raw sugar TRQ could enter U.S. Customs territory until October 31, 2011, a month later than the usual last entry date. Also, the USDA previously announced, on August 1, 2011, that sugar entering under the FY 2012 raw sugar TRQ could enter U.S. Customs territory beginning September 1, 2011, a month earlier than the usual first entry date of October 1. These announcements did not change the level of any U.S. sugar import TRQs.

Tables 1 and 2 detail sugar imports estimated for FY 2011 and projected for FY 2012. For FY 2011, the USDA decreased its estimate of TRQ imports by 149,000 STRV, mainly reflecting changes in the projection of deferred FY 2011 raw and refined sugar TRQ imports entering in the early part of the next fiscal year. Deferred raw sugar TRQ imports are estimated at 123,306 STRV, and deferred refined sugar TRQ imports are estimated at 150,635 STRV. The USDA also expects 46,897 STRV of sugar allocated to countries under the Dominican Republic/Central American Free Trade Agreement (CAFTA/DR) for calendar year 2011 to enter in the first quarter of FY 2012. FY 2012 TRQ sugar imports are projected at 1.636 million STRV, an increase of 252,000 STRV.

Estimated sugar imports from Mexico in FY 2011 were increased to 1.687 million STRV, reflecting actual entries recorded by the U.S. Customs Service prior to the release of the WASDE. Other program imports for re-export finished the fiscal year at 281,462 STRV. As explained below, sugar imports from Mexico projected for FY 2012 were decreased by the same amount as the import increase for FY 2011. The projected total is 1.155 million STRV.

Sugar Use and Stocks

Sugar deliveries for human consumption are unchanged from last month: 11.0 million STRV for FY 2011 and 11.125 million STRV for FY 2012. Also unchanged are sugar exports: 250,000 STRV for FY 2011 and 200,000 STRV for FY 2012, as well as other deliveries (re-export sugar for sugar-containing products, sugar for polyhydric alcohol, and sugar for livestock feed), which are still 235,000 STRV for FY 2011 and 190,000 STRV for FY 2012. USDA expects that miscellaneous items (refining losses, inventory adjustments, import trade data source differences between SMD and the WASDE) to finish the year at 100,000 STRV. This amount is carried forward to FY 2012 as well. These actions have the effect of increasing total use in both years by 100,000 STRV.

The net effect of all current-year changes is to decrease FY 2011 ending year stocks by over 327,000 STRV to 1.418 million STRV, implying an ending year stocks-to-use ratio of 12.2 percent. The ratio last month was estimated at 15.2 percent. Ending stocks projected for FY 2012 are decreased 238,000 STRV to 889,000 STRV. The implied stocks-to-use ratio is 7.7 percent, a drop of 2.1 percentage points from last month.

Sugar in Mexico

In Mexico, estimated exports were increased by 58,000 MTRV to 1.540 million MTRV. This change was made because of the increase in recorded imports from Mexico by the United States in September. Because no other supply or use changes were made, estimated ending stocks for FY 2011 dropped by 58,000 MTRV to 720,000 MTRV. For FY 2012, the Interagency Commodity Estimates Committee (ICEC) for sugar assumes that ending stocks will equal 22.0 percent of expected sugar consumption, or 953,000 MTRV. The implication of this assumption is that exports are calculated residually, meaning that the FY 2012 exports are reduced by 58,000 MTRV to 1.055 million MTRV.

The Comite Nacional Para El Desarrollo Sustentable de la Cana de Azuca (CNDSCA) has not announced its FY 2012 production forecast yet. The USDA still forecasts production at 5.650 million MTRV (5.330 million tonnes, tel quel).

The Potential of High Fructose Corn Syrup to Displace Sugar in Mexico

With the full implementation of the sugar provisions of the North American Free Trade Agreement (NAFTA) in 2008, sugar imported from Mexico has become an important source of supply to meet domestic sugar demand. These imports constituted 6.7 percent of demand in FY 2008 and grew to 13.5 percent in FY 2009. The FY 2011 share is estimated at 15.3 percent and the FY 2012 share, although projected lower, will still likely be above 10 percent.

Sugar export availability in Mexico depends on a number of factors. These include sugar production and research, Mexican Government sugar import policies, the development of marketing channels and transportation infrastructure, attention to sugar quality concerns, and demand for sugar in Mexico. This last item is the focus of this chapter. For a number of uses, high fructose corn syrup (HFCS) can substitute for sugar. Mexico already produces HFCS domestically (about 475,000 metric tons (mt), dry basis, annually) and imports even more from the United States. HFCS consumption in Mexico has grown from 335,000 mt in 2004/05 to an estimated 1.6 million mt in 2010/11.

Figure A-1 shows sugar and HFCS consumption in Mexico since 2004/05. As HFCS consumption has increased, sugar consumption has decreased – implying that there is more sugar available for export. Figure A-2 illustrates the important correlations between HFCS and sugar in Mexico. The upper trend line shows the strong inverse relationship between sugar and HFCS consumption, while the lower trend line shows that as HFCS consumption increases, sugar exports have grown as well. (The latter correlation is lower, however, indicating that there are also other factors at work).

The goal of this chapter is to better understand the upward limit for the HFCS consumption in Mexico. This information is valuable when forecasting, both short- and long-term, the amount of sugar that can be imported from Mexico to meet domestic consumption needs. There are also strong implications for the competitive sugar environment for U.S. producers and other import suppliers. This chapter uses data from an international consultancy, Euromonitor International, along with USDA data, to examine the HFCS potential in Mexico. It first examines demand for HFCS in Mexican food manufacturing and then for HFCS in the soft drink beverage industry.

Maximum HFCS Use in the Mexican Food Industry

There are three steps involved in estimating the amount of HFCS that can be used in Mexican food manufacturing. The approach is to take what is known about the U.S. food industry demand for HFCS and sweeteners and then apply it to Mexico by adjusting for differences in the sizes of the sugar-using industries in both countries. This simple approach is a first pass and can be improved upon with availability of more and better data.

The first step is to calculate sweetener deliveries to U.S. sugar-using food sectors. These sectors are: bakery, cereal, and allied products; confectionery and related products; ice cream and dairy products; and canned, bottled, and frozen uses, plus all other food uses. Sugar deliveries to these food sectors are available from USDA’s Sweetener Market Data. The Sugar and Sweetener Team estimates HFCS deliveries to the same corresponding food sectors. Sugar and HFCS deliveries are summed and HFCS as a proportion of the total is calculated. These proportions, as shown in table A-1, will serve as the assumed maximum share that HFCS can constitute of sweetener use in corresponding Mexican food sectors.

The second step is to estimate the sizes of the four food sectors in Mexico relative to those in the United States. The goal is to estimate the size of sweetener deliveries to these sectors. The estimation is based on analysis of data available from Euromonitor International, a consumer-strategy research firm that provides detailed market analysis for 80 countries. These countries include both the United States and Mexico. Two of the aggregate sectors covered by Euromonitor International are packaged food products and soft drinks. Packaged food products include the subset of sweetener-using food sectors.


Table A-2 shows the product divisions within the sweetener-using food groups and the size of product sales for the United States and for Mexico. The sweetener-using food sectors in Mexico are substantially smaller than those in the United States. The United States has roughly three times the population of Mexico, and its food industries are much more highly developed. Although the Mexican bakery sector is 40 percent as large, the other sectors range only between 11 and 13 percent the size of their U.S. counterparts.

Each ratio is multiplied by the size the U.S. sweetener deliveries calculated in step 1 to approximate the level of sweetener deliveries to the corresponding Mexican sugar-using sectors. The HFCS ratios are then used to approximate the maximum level of HFCS deliveries to the sweetener-using sectors.

The third step is to use Euromonitor International food sector growth forecasts for projecting maximum HFCS consumption into future years. The right-hand panel of table A-2 shows sweetener-using food sector growth for Mexico and the United States through 2016. All food sectors in Mexico are projected to grow faster than those in the United States. Relative to the average for 2009-11, the aggregate size of sweetener-product sales for the four industries is about 36 percent higher (fig. A-3). The first data row of table A-3 shows the total maximum HFCS food sector use for the period 2012 through 2016.

Maximum HFCS Use in the Mexican Soft Drink Industry

Most HFCS is used as a sweetener in soft drink beverages. Unlike in food industry use, HFCS could theoretically constitute 100 percent of soft drink beverage sweetener use, although this level of use would not normally be expected. In the United States, for many years HFCS has constituted over 95 percent of sweeteners used in carbonated beverages, but sugar use in some carbonates and other beverages has been growing in recent years.

The method for estimating beverage sweetener use differs somewhat from that used for sweetener-using food sectors. The ERS Sugar and Sweetener Team multiplies Euromonitor International estimates/forecasts of Mexican beverage consumption volumes by corresponding sweetener-content coefficients (kilograms of sugar per liter of a particular beverage).1 Figure A-4 shows the product shares of averaged 2009-11 Mexican soft drink consumption. Total consumption is estimated at 21.3 billion liters, with about half being constituted by cola carbonates. Figure A- 5 compares estimated beverage sweetener use for 2009-11 with the forecast use in 2016. Sweetener use by the sector is expected to grow about 16 percent over the period.

The second data row in table A-3 shows projections of sweetener use in the Mexican beverage industry. As mentioned, these totals assume that HFCS could fully substitute for sugar. The two data rows are summed to provide an estimate of total HFCS consumption potential. The degree to which HFCS substitutes for sugar in the future will depend on relative prices, HFCS production capacity in the United States, development of enhanced transport systems for HFCS delivery, and taste and preferences in Mexico.

Conclusion

This exercise has shown that there is still a large potential to expand HFCS use in Mexico. Earlier work in USDA baseline projections had suggested lower limits than those shown here.2 More research needs to be done to evaluate whether this potential can be realized. An implication is that Mexico could supply more sugar to the United States as greater substitution of HFCS for sugar takes place in Mexico.

October 2011

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