Four years after Mexico gained full access to the American sugar market, questions still abound about what that actually means on both sides of the border.
Imports from Mexico increased from 7,000 metric tons before 2008 to averaging more than 1 million tons annually since 2008. Surprisingly to some market watchers, that huge increase has not created significant market disruptions. Rather, the two markets seem to be fairly quickly and easily converging into a single market.
“Increasing demand made room for increased Mexican imports,” said Dan Colacicco, director of dairy and sweetener analysis for USDA Farm Service Agency. “Every ton of sugar from Mexico has been welcome.”
But with the U.S. market apparently headed toward a period of surplus sugar for the first time since full integration, the ‘new normal’ could be tested.
“If U.S. sugar prices drop close to forfeiture levels, would Mexican imports fall?” asked Colacicco.
That’s a question that has even more relevance this year with much of the U.S. corn belt suffering drought. Supplies of high fructose corn syrup are expected to be tight and prices are rising in response. That will have ramifications in Mexico which has seen imports of HFCS from the U.S. increase to account for 1 million tons or 30% of the Mexican sugar supply.
“Giving up 30% of your domestic market to an imported product is a very important thing,” said Humberto Torres with the Mexican Sugar Chamber. “China wouldn’t do that, India wouldn’t do that, Russia wouldn’t do that.“
One of the wild cards for Mexico is how much HFCS will replace sugar in their domestic market long-term. In the U.S., sweetener use is divided fairly evenly between sugar and corn syrup.
“We do not know where the line is. Where the end is at,” Torres said. “But we are not complaining. It’s too soon to tell what will happen.”
This year is not likely to clarify how much HFCS the Mexican market can absorb. Analysts are predicting HFCS into Mexico could reach US$0.35 per pound this year. Some believe that price will be high enough to choke off demand and push Mexico to utilise domestic sugar rather than HFCS. If that happens, less sugar should be available for export to the U.S. -- reducing the potential U.S. sugar supply and keeping prices higher.
Or maybe not. No one really knows and that is causing consternation amongst marketers who are trying to predict whether USDA will manage to keep supplies near the 15% stocks-to-use ratio or not.
“Mexico continues to flummox us,” said Barbara Fesco, FSA economist. “We’re still getting used to forecasting Mexico.”
Mills in Mexico are making independent decisions based on market signals, Torres said. But they need in-depth analysis and improved coordination between the U.S. and Mexico governments to better manage exports.
For example, when the USDA announced a tariff rate quota (TRQ) last April. U.S. markets interpreted the TRQ as an indication that sugar supply would be adequate and prices fell. Mexico interpreted the TRQ to mean that sugar supplies were tight and prices rose.
“In U.S., the TRQ was more important. In Mexico, scarcity was more important,” Torres said.
At other times, Mexico has more clearly understood market signals from north of its border. In the fall of 2010, the U.S. sugar futures contract #16 soared above the estandér price in Mexico. Very clearly, it made more sense for the U.S. to import estandér from Mexico and refine it to meet U.S. standards rather than importing refined sugar. Imports soared as a result.
But now that the Midwest refined sugar and Mexico refined price are nearly equal, there is no incentive to ship refined sugar to the U.S.
“I think this shows integration is working,” Torres said. “It just needs time to mature.”
One thing U.S. traders hope will change as the market matures is Mexico’s imports of sugar from the world market. Since 2008, Mexico has imported 1.5 million tons of sugar through its own TRQ to backfill its domestic sugar needs after importing sugar to the U.S.
Although some market data is still open for (mis)interpretation, other numbers indicate the markets are converging.
According to the FSA Dairy and Sweetener data, domestic producers accounted for 77% of domestic supply in 2008 with Mexico supplying 7%. Mexico ended the marketing year with a stocks-to-use ratio of 26.1% while the U.S. ended at 15.2%.
In 2011, U.S. beet and cane producers supplied 70% of domestic use with Mexico providing 14%. U.S. concluded the marketing year with a 12.7% S-U while Mexico was at 13.5%.
Even as ending stocks are narrowing, USDA officials have remained cautious when making supply projections since trade with Mexico became liberalised.
“Because of NAFTA, we have more sugar available in the market,” said Owen Wagner, senior economist with LMC, but how much more sugar remains largely unknown.
Craig Ruffolo, vice president with McKeany-Flavell Company, prefers to characterise the U.S.-Mexico market as codependent rather than harmonised or integrated. He thinks the question now isn’t whether the two markets have integrated or harmonised, but whether the U.S. can take 1.3 million tons of sugar from Mexico this year. Even if imports fall by 300,000 tons, as some suggested during the 29th International Sweetener Symposium, 1 million tons may still be too much.
McKeany-Flavell is projecting a mere 0.5% growth in sugar use for the coming marketing year. Growth in demand that opened the door to higher imports from Mexico, but will lower prices shut that door.
If imports from Mexico do not slow, the U.S.-Mexico market will be oversupplied. That’s not a new phenomenon: the U.S. plus Mexico market has only been undersupplied five times since the 1990s but not recently.
Fesco acknowledged that oversupply was expected to be a problem in 2008, but hasn’t proven to be an issue yet. “The market will react to price,” she said. “Hopefully we won’t have surpluses.”