U.S. and Mexican Sugar Production and Consumption

U.S.-Mexican sugar trade has been an ongoing issue under NAFTA and warnings about more problems were raised when trade became free on January 1, 2008. Economic factors inside and outside the industries have helped to avoid some of the problems and will again in 2009, but conditions may be less favorable in 2010.

According to the late-January USDA Economic Research Service “Sugar and Sweeteners Outlook”, U.S. sugar production for fiscal year (FY) 2009 (October 1, 2008-September 30, 2009) is estimated at 7.8 million short tons raw value (STRV), down 4.3 percent from FY 2008, with cane sugar at 3.6 million STRV, up 4.2 percent, and beet sugar at 4.2 million STRV, down 10.5 percent. The February World Agricultural Supply and Demand Estimates from USDA made minor changes, but did not change the supply/demand balance in the U.S. Record high per acre beet yields, attributed partly to better weed control with glyphosate-tolerant beets, could not offset the lowest beet acreage since 1961, down 14.0 percent from FY 2008, as more profitable crops squeezed sugar beet acreage. Acreage planted this spring may be higher with refined beet sugar currently at $0.35 per pound and price expectations for other crops much lower than a year earlier.

Sugar imports in FY 2009 are projected by USDA at 2.496 million STRV. Tariff rate quota (TRQ) imports are estimated by USDA at 1.511 million STRV with refined sugar imports of 286,418 STRV. Sugar imports from Mexico are projected at 630,000 STRV, and sugar imports for re-export are expected to be 345,000 STRV. Total imports will be lower than FY 2008, but larger than FY 2007. U.S. sugar exports are projected at 170,000 STRV, mostly re-exports of imported sugar.

Projected U.S. sugar deliveries for domestic food and beverage use for FY 2009 are 10.5 million STRV, down slightly from FY 2008, with the actual level to be influenced by relative prices for refined sugar and high fructose corn syrup (HFCS). HFCS deliveries in FY 2008 were 8.15 million tons, down from an average of 8.8 million tons in 2003-2005 as HFCS prices were high relative to refined sugar prices. Implied end of year U.S. sugar stocks are projected at 1.1 million STRV, a low end-of-year stocks-to-use ratio of 9.9 percent. USDA is committed to making adjustments in sugar program operations to maintain adequate supplies of sugar.

USDA projections of Mexican sugar production for FY 2009 are 5.9 million metric ton raw value (MTRV), unchanged from FY 2008. Food and beverage consumption is estimated at 5.4 million MTRV, and exports, almost all to the U.S., are estimated at 575,000 MTRV, about 64,000 MTRV less than in FY 2008. Consumption of HFCS is expected to be 820,000 metric tons, dry weight, 2.5 percent higher than FY 2008. About half the HFCS is produced in Mexico and the other half is imported from the U.S. Ending stocks are expected to be 1.03 million MTRV, a 19.1 percent yearly-consumption-to-stocks ratio, also a historically low level.

Mid-January wholesale prices for refined sugar in Mexico City were relatively low at $0.214 per pound. The value of the Mexican peso has declined from 10.1 pesos per U.S. dollar in August 2008 to 14.0 pesos in mid-January and 14.8 pesos recently. Those two factors should encourage movement of sugar to the U.S. That movement will be tempered by expectations of limited carryover supplies at the end of the FY 2009 marketing year. USDA may have to provide additional TRQ supplies from other countries later this year to meet consumer demand.

According to the U.S. Agricultural Attaché in Mexico City, the Mexican government continues to work on increasing efficiencies and output with the sugar industry. The strategy focuses on cane production, mill yields, investment, employment and trade policy. The government sets a price for sugar cane and the percentage that goes to growers. The mills have disagreed with the price for FY 2009 and have been promised money from the federal government to offset the higher payments to growers. While the industry continues to improve, production is not expected to move significantly higher unless good weather adds to yields.

As FY 2009 progresses some factors may point toward larger supplies of sugar in the U.S. and Mexico relative to demand for 2010. Slowing economic activity in the U.S. and Mexico may take a slight edge off demand. Sugar beet area in the U.S. could expand because alternative crop prices are less favorable than a year earlier. If glyphosate-tolerant sugar beets do lower production costs and improve yields that would be an added incentive to switch back to sugar beets. Yields per acre for sugar beets were record large in FY 2009 and a return to more normal yields may limit production. Sugar cane has a sideways yield trend which is not expected to change and acreage will likely continue its slow decline.

Lower corn prices could lead to lower HFCS prices in both the U.S. and Mexico and increase usage in both countries. Corn acreage planted in the U.S. in April and May is expected to be down from last year which could support corn prices and limit production of HFCS. Weather stress on the corn crop this summer could also limit yields to below trend and result in stronger corn prices than now expected.

The U.S. and Mexican sugar markets could also be helped by demand in the rest of the world. According to the January ERS analysis, India may import sugar for the first time in three years. Indian sugar production follows a 6-8 year cycle and for the past couple of years has been on the production downside. Recent media reports indicate that India will import sugar. India is also increasing ethanol production from sugar. Chinese sugar production is projected to be down modestly this year and Chinese traders have purchased 500,000 metric tons of sugar from Brazil for the first time since 2006.

While sugar production and trade are heavily controlled by the federal government in the U.S. and in Mexico, production, consumption and trade in sugar and sugar substitutes respond to market forces. Market participants are well aware that the supply/demand balance could easily shift from the low carryovers at the end this fiscal year to larger supplies in FY 2010 which will encourage them to help keep supply and demand in balance.