Brazil Conference: Trends Support Tight Sugar Supply-Demand Balances

Sugar producers, traders, policy makers and investors from around the world gathered recently at F.O. Licht’s 6th annual Sugar & Ethanol Brazil conference. The conference provides analysis of the Brazilian sugar market and related developments across Latin America.

Among the presenters was Patrick Henneberry, senior vice president and chief of commodities management for Imperial Sugar Company. Speaking remotely from Imperial Sugar headquarters in Sugar Land, Texas, he discussed sugar trade between the U.S. and Mexico, U.S. sugar demand trends, and the current state of U.S. GMO sugar beet production.

Pat Henneberry, Imperial Sugar Company

According to Henneberry, sugar trade between the United States and Mexico didn’t kick in until it was forced to by Hurricane Katrina in the summer of 2005. The resulting crop damage drove up prices and drew 866,000 tons of sugar imports from Mexico in 2005/2006. Imports increased again to 1.3 million in January 2008, when tariffs on sugar were eliminated through NAFTA (North American Free Trade Agreement).

“The market really connected between the U.S. and Mexico because of necessity more than a result of the treaty,” said Henneberry. “The treaty came into effect on January 1 and our refinery in Georgia exploded on February 7. Over the next 18 months we imported an awful lot of sugar from Mexico.”

Henneberry pointed out the two countries suffered all of the normal integration issues faced by markets trading together for the first time.

One such issue is that sugar must be repacked before it can be sold easily in either market. Sugar in the U.S. is sold to industrial customers in bulk railcars, bulk or liquid trucks, and in 50- and 25-pound paper bags. In Mexico, sugar largely is sold in 50-kilo poly bags (110 pounds), 1-ton totes and some via liquid trucks.

Most U.S. firms won’t allow a bag weighing over 50 pounds on their property because of the associated injuries and Workers Compensation Insurance policies.

So how do you get a 110-pound bag of sugar into the U.S.?

A mini-industry has sprung up around sugar transfer stations. There, 1-ton totes and 50-kilo poly bags are opened and the sugar is fed into a machine that loads a railcar. The sugar is then brought into the U.S. and either used directly by customers or made into liquid sugar.

“Part of the problem we’ve run into is if you don’t open the bags carefully, you can generate some poly fibers that end up in the sugar,” said Henneberry. “And for that reason, a lot of it goes through liquid facilities, where we filter out any fibers and clean up the sugar.”

There’s also the issue of quality and food safety. One plant or product may be in compliance with food safety laws in Mexico but not in the U.S. Henneberry said that getting companies to go down and inspect sugar producers and their facilities in Mexico is a fairly new process, but factories are being visited and making any necessary changes to get approved.

In late 2007, Imperial Sugar formed a joint venture based in Monterrey, Mexico, to help move sugar back and forth across the border. The company, Comercializadora Santos Imperial, now serves more than 100 customers on both sides of the border with Mexican origin sugar.

Both the U.S. and Mexico have tight supply/demand balances for sugar this year.

Henneberry painted a multi-faceted picture of trends affecting demand in the U.S., that for the most part, contribute to sugar demand growth.

Sugar has been gaining share relative to high fructose corn syrup (HFCS) – a trend Henneberry believes is based on consumer preference. Ocean Spray, Snapple and Jones Soda have removed HFCS from their products and replaced it with real sugar. Pepsi is doing test markets with its sugar-based Pepsi Throwback and Mountain Dew Throwback, and there’s sugar-based Heritage Dr. Pepper.

Another – perhaps longer-term – trend is the reduction of sugar in some cereals and beverages. General Mills announced it would reduce the amount of sugar in Coco Puffs by 25 percent, and Pepsi announced it would reduce sugar in its products by 25 percent over a period of 10 years.

“For now, we’re still seeing sugar demand growth,” Henneberry said. “We haven’t seen the full impact of some manufacturers’ plans to reduce the overall sugar content of their products.”

Henneberry closed his presentation with an update on GMO sugar beet production.

GMO Sugar beets have been grown in the U.S. only since 2008 and have attained a near total market share against traditional seed stock. Yet fears of cross pollination and accidental dissemination of GMO beets have led to a study on the environmental impact of this crop.

According to a current court ruling, GMO seed may be planted for the production of sugar but not for seed. That could change when a final ruling is made in the summer. In the meantime, sugar from GMO beets continues to be sold.

Summing it up, Henneberry said: “Worldwide sugar supply has been very tight this year. Sugar prices went up to just over 30 cents a pound in the March contract and now they’re back down to 17 to 18 cents.

“India’s production is up from their earlier expectations, but they still need to import about 5 million tons of sugar to meet their own demand. The thought is that next year they’ll produce a surplus. Brazilian production is being estimated higher, but it is difficult at this early stage to know with any certainty what the crop will yield.”

F. O. Licht, part of Agra Informa, monitors the global soft commodities markets. It reports regularly on sugar, coffee, tea, molasses, ethanol and biofuels.