Agricultural Outlook Forum 2008 Arlington, Virginia February 22, 2008 What Lies Ahead for the Sugar Market? Problems with the Re-Export and IMMEX Programs in an Integrated U.S.-Mexican Sweetener Market Jack Roney Director of Economics and Policy Analysis American Sugar Alliance 1
Problems with Re-Export and IMMEX Programs 1. U.S. Sugar Industry Status Effects of 22 years of steady prices Concentration, increased efficiency Flat consumption in recent years 2. Sugar and Products Relationship between wholesale producer prices for sugar and retail prices for sugar and products Factors in sweetened-product costs, location decisions 3. Erosion of U.S. and Mexican Sweetener Markets because of Re-Export and IMMEX Programs Encroachment of third-country sugar Contrary to NAFTA intent US and Mexican sugar industries concur the programs are disruptive to the NAFTA market and need modification 2
19 U.S. Raw Sugar Loan Rate, Nominal and Real, 1985-2007 17 Nominal Loan Rate: 18 cents 15 Cents per pound 13 11 9 Real Loan Rate -- Corrected for Inflation Last sugar loan rate increase: 1985 Inflation since 1985: 93% 9.34 7 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Data Source: Bureau of Labor Statistics --CPI-U. Annual averages, 1985-2007. 3 6d
U.S. Raw Sugar Prices, Nominal and Real, 1985-2007 24.00 22.00 Trendline Nominal Price 20.00 20.99 Cents per pound, raw value 18.00 16.00 Trendline Real Price -- Corrected for Inflation 14.00 12.00 Last sugar loan rate increase: 1985 Inflation since 1985: 93% 10.89 10.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Data Sources: BLS--CPI-U. USDA: Price delivered New York, duty-fee paid; Annual averages 1985-2007. 6e 4
U.S Wholesale Refined Sugar Prices, Nominal and Real, 1985-2007 34 32 30 28 Nominal Price 26 Trendline Cents per pound 24 22 20 Trendline Real Price -- Corrected for Inflation 25.06 18 16 14 12 Last sugar loan rate increase: 1985 Inflation since 1985: 93% 13.00 10 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Data sources: BLS -- CPI-U. USDA - wholesale refined beet sugar, Midwest markets; Annual averages 1985-2007. 5 6f
Since Last Sugar Loan Rate Increase in 1985: More Than Half of U.S. Sugar-Producing Operations Have Shut Down 1985 Total = 102 42 Beet Factories 2007 Total = 49 42 Cane Mills 23 18 Cane Refineries 18 8 Source: American Sugar Alliance 1985 2007 54o 6
Problems with Re-Export and IMMEX Programs Sugar and Products Misconceptions: Sugar as primary production cost Key driver of factory location decisions? Reduce sugar prices to give consumers a break Reality: Sugar only a relatively minor sweetened-product cost Key drivers: Other factors (wages, benefits, taxes, rent, construction costs, environmental compliance costs) Proximity to sources of other inputs, efficient transportation system, customers Disconnect between producer and consumer prices for sugar and products: Lack of passthrough when producer prices fall 7
Cost United States Mexico Canada Item Unit 1 Chicago, IL, Holland, Mi. Juarez Montreal Labor: Wages $ / hr 14.04 15.50 0.56 12.50 Health Care Insurance $/worker/yr. 2,400 2,256 360 605 Taxes: Federal & State % 42% 40% 9% 31% Electricity: 2 Demand $/KW/mo. 11.00 8.60 2.38 11.97 Use $/KW/hr. 0.042 0.048 0.04 0.0372 Land: Construction $/sq.ft. 50.0 30.0 25.5 37.0 Rental $/sq.ft. 10.0 2.5 4.0 4.6 Refined Sugar 3 Cents/lb. 28.30 27.60 18.03 21.00 1 $ Pesos 9.48 to U.S. $ 1.00; $ Canadian 63.8 to U.S. $ 1.00. 2 KWh is a measure of use of 1,000 watts of electricity for one hour; KW is a measure of demand during a specific time period, such as a month. Cost Comparisons for Confectionery Industry: Many Costs Lower in Mexico, Canada 3 Mexico: Maquiladora and re-export program price; actual domestic price about 28 cents/lb. Source: "North America's Confectionery Industries: Structure, Trade, and Costs and Trends in Sugar Demand," Peter Buzzanell & Associates, Inc., March 24, 2003. 121 8
100% Sugar Cost as % of Retail Product Price - Sugar Share Mostly Insignificant - 90% 80% 70% 60% 50% 40% 30% 20% 10% 13.13% 7.81% 1.20% 1.73% 1.90% 1.99% 2.08% 2.45% 2.54% 2.80% 2.96% 3.13% 3.60% 0% Klondike Bars Edy's Vanilla Baby Ruth Bar Hershey Bar Nestle Crunch Life Savers Breyers Vanilla M & M's Hershey Kisses Jello Jolly Ranchers 9 Pillsburry Cake Mix Brachs Star Brites Source: American Sugar Alliance survey of retail products at a Safeway store in Arlington, VA, July 2006. 114
Wholesale Sugar Price Declines Have Little, If Any, Effect on Retail Sweetened Product Prices -- Even Assuming Manufacturers/Retailers Pass 100% of Savings to Consumers -- 6 5 Actual Retail Product Price If Sugar Cost Fell 10% If Sugar were Free 4.89 4.88 4.83 5.39 5.38 5.25 4 3.69 3.68 3.58 Dollars 3 2 1.99 2.00 1.98 1.94 1.98 1.84 2.19 2.18 2.11 1 0.720 0.719 0.708 0.790 0.720 0.788 0.718 0.765 0.700 1.19 1.17 1.03 0 Hershey Bar M&M's Jello Brachs Star Brites Live Savers Pillsbury Cake Mix Jolly Ranchers Hershey Kisses Klondike Bars Breyers Vanilla 10 Source: American Sugar Alliance calculations based on survey of retail products, July 2006. Assumes CY2005 average wholesale refined sugar price of 29.54 /lb, as reported by USDA. 114
Department of Commerce Candy Study 1 : Questionable Findings DOC LMC International 2 Number of U.S. jobs in sugar industry 2,260 146,140 Promar International 4 Value of SCP imports in 2004 $18.7 billion 3 $5.4 billion ASGA retail-product survey 5 Sugar share of candy cost No figure given 4.52% average Buzzanell study 6 Candy company wages "Hard to compare" -per hour- Chicago? $14.04 Mexico? $0.56 1 "Employment Changes in U.S. Food Manufacturing: The Impact of Sugar Prices," U.S. Dept of Commerce, February 14, 2006. 2 "The Importance of the Sugar and Corn Sweetener Industry to the U.S. Economy," LMC International, Oxford, England, August 2001. 3 DOC cites a USDA report that contains no value figures, only volume. 4 Promar International compilation of Customs data for more SCP-product imports than covered by USDA, March 2006. 5 Survey of retail candy products, American Sugarbeet Growers Association, 2000. 6 "North America's Confectionery Industries: Structure, Trade, and Costs and Trends in Sugar Demand," Peter Buzzanell & Associates, Inc., March 1124, 2003.
DOC Candy Study*: U.S. Sweetened-Food Production Growing Twice as Fast as Non-Sweetened Food Products, 1997-2002 10.5% 5.2% SCP Production Growth Non-SCP Production Growth * "Employment Changes in U.S. Food Manufacturing: The Impact of Sugar Prices," U.S. Department of Commerce, International Trade Administration, February 14, 2006. 12 121
54 From 2006 to 2007: Producer Prices for Sugar Fall, But Consumer Prices Rise 52 50 48 Consumer Price: Retail Refined Sugar 51.30 Cents per pound 46 44 42 40 38 36 34 32 30 46.10 34.50 Producer Price: Wholesale Refined Sugar Wholesale-Retail Price Gap Widens from 12 cents in 2006 to 27 cents in 2007 Sugar Producers Lose; Grocery Chains Increase Profits; No Benefits to Consumers 28 26 24.50 24 Jan '06 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan '07 Data: USDA/ERS Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 13 17
From 2006 to 2007: Farmer Prices for Sugar Fall, But Consumer Prices for Sugar & Products Rise 11.1% Consumer Prices Rise Raw Cane Sugar Wholesale Refined Sugar 3.8% 3.4% 3.5% 2.2% -5.2% Retail Refined Sugar Cereal Candy Cookies, Cakes Ice Cream Farmer Prices Fall -24.0% Changes in prices from 2006 annual average to 2007 annual average. Raw cane: duty-free paid, New York. Wholesale refined beet sugar: Midwest markets. Retail prices: Bureau of Labor Statistics consumer price indices. Data source: USDA. 14 13d
From 1990 to 2007: Farmer Prices for Sugar Fall, Consumer Prices for Sugar & Products Steady or Higher* Consumer Prices Rise 55.4% 56.5% Farmer Prices Fall 20.4% 40.0% 40.2% 44.6% Raw Cane Sugar Wholesale Refined Sugar -9.8% -16.4% Retail Refined Sugar Cereal Candy Cookies, Ice Cakes Cream Other Bakery Products * Change in annual average prices from 1990-2007. Raw cane: duty-fee paid, New York. Wholesale refined beet sugar: Midwest markets. Retail prices: Bureau of Labor Statistics consumer price indices. Data source: USDA. 15 13c
10.5 U.S. Sugar Consumption, 1985/86-2007/08 10.0 9.5 Million short tons raw value 9.0 8.5 8.0 7.5 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Proj. Data source: USDA Sugar Situation and Outlook Reports and February 2008 WASDE 39 16
Problems with Re-Export and IMMEX Programs How the programs work: US Re-Export Program: US cane refineries import subsidized world market sugar for reexport as refined sugar or as products. US refined sugar is substituted for most of these imports and exported to Mexico The imported world market sugar is sold in the US The re-exported US sugar is sold to Mexican maquiladora plants at a price higher than the world market price but lower than the Mexican market price US beet processors export blocked stocks to Mexico via swaps with cane refiners Mexican IMMEX Program Mexican sugar producers balance the Mexican market by selling sugar to maquiladora plants as a higher-priced alternative to selling surplus sugar on the world market Maquila plants convert US and Mexican sugar to products, export to the US Some re-export and IMMEX sugar and maquila products leak into Mexican market 17
Mexican Sugar Prices Generally Higher than U.S.; World Dump Market Sugar Prices Generally Lower than U.S. HFCS 43 41 39 37 35 33 31 Mexican Wholesale Refined Sugar 26.91 29 Cents/pound 27 25 23 21 19 17 15 U.S. HFCS-55 U.S. Wholesale Refined Sugar 25.00 24.13 15.17 13 11 9 7 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 World Dump Market Refined Sugar Data Sources: Mexican sugar -- Servicio Nacional de Informacion de Mercados SNIIM-ECONOMICA, USDA/ERS; U.S. sugar -- Midwest markets; world sugar - - London #5 contract; HFCS -- Industry estimates; dry (sugar equivalent) basis, Midwest market. Prices through January 2008. 18 31C
40 35 U.S. and Mexican Refined Sugar Prices and Mexican IMMEX Prices 36.01 (Cents/lb, FY 2001/02-2007/08) 33.64 31.75 30 Mexican Refined 27.30 27.51 27.91 27.70 25 25.37 25.49 U.S. Refined 27.02 23.66 25.63 25.73 22.79 20 22.11 19.13 15.49 15.42 16.33 15.88 15 Mexican IMMEX 10 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Sources: USDA; McKeany-Flavell Company, Inc., "U.S.-Mexican Re-Export Sugar Programs," June 2007. 134a 19
500 450 Mexican PITEX/IMMEX Program Use and Sugar Sources (Thousand metric tons) 437 400 350 Large Mexican Crop 339 335 300 266 250 200 150 100 50 0 193 110 131 98 29 33 IMMEX Total From U.S. 214 210 211 186 27 171 170 From Mexican Mills 164 120 39 40 44 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Source: McKeany-Flavell Company, Inc., "U.S.-Mexican Re-Export Sugar Programs," June 2007. 125 206 81 139 127 Poor U.S. Crop (hurricanes) 98 65 20 270 134b
Problems with Re-Export and IMMEX Programs Consequences for US and Mexican Markets The Mexican IMMEX program and U.S. participation within it (through the U.S. re-export program) have become a disruptive influence to the domestic markets for sugar in the United States and Mexico. Sugar sellers have used this program to liquidate burdensome stocks. The result of these sales has been a growing speculative interest by a few companies to take advantage of buying cheap sugar and passing along some of these savings to customers while reaping large profits themselves. --McKeany-Flavell Company, Inc. Analysis for American Sugar Alliance June 2007 21
Problems with Re-Export and IMMEX Programs Consequences for US and Mexican Markets Ending the IMMEX/Re-Export programs between the U.S. and Mexico would remove this speculation and provide a competitive environment for all sugar suppliers to participate. Keeping with the intent of NAFTA. --McKeany-Flavell Company, Inc. Analysis for American Sugar Alliance June 2007 22
Problems with Re-Export and IMMEX Programs Consequences for US and Mexican Markets Amount of sugar consumption that would move from the IMMEX program back to the general market: In a balanced market: +250,000 metric tons When US or Mexican market is in surplus: +400,000 mt Additional US sugar consumption: 100,000-200,000 mt Additional Mexican sugar consumption: 150,000-250,000 mt --McKeany-Flavell Company, Inc. Analysis for American Sugar Alliance June 2007 23
Problems with Re-Export and IMMEX Programs US and Mexican Sugar Industries Joint Recommendation Modify, not eliminate, re-export and IMMEX programs. Programs continue, but re-export and IMMEX sugar, and products produced with that sugar, can be exported only to third countries. Consistent with NAFTA intent: NAFTA designed to benefit U.S. and Mexican sweetener producers, not subsidized third-country producers Reclaim 250,000-400,000 tons of US-Mexican sugar market for US-Mexican sugar producers. US cane refiners still able to use re-export program to maintain throughput; will have larger US-Mexican market to sell into. Maquilas can still: Take advantage of re-export and IMMEX sugar, and of lower costs, such as cheap labor, to export products to third countries; Use US or Mexican sugar, at US and Mexican market prices, to sell products into the US and Mexican markets under NAFTA rules. Sugar s small share of production costs: Maquilas should continue to operate 24
U.S. and Mexican Sugar Consumption; Potential Gains Absent Re-Export/IMMEX Trade (Million metric tons, raw value) 10.0 U.S.: Plus 100,000-200,000 mt/yr* 9.0 8.0 7.0 6.0 Mexico: Plus 150,000-250,000 mt/yr* 5.0 4.0 3.0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 * Sources: Historical Data, USDA; Potential gains, McKeaney- Flavell estimates., "U.S.-Mexican Re-Export Sugar Programs," June 2007 39 25
Problems with Re-Export and IMMEX Programs Conclusion 1. US sugar industry more concentrated, efficient, following 22 years of flat prices 2. Lack of growth in US consumption a concern Leakage of third-country sugar via re-export/immex programs a factor 3. Modifying re-export/immex to operate as NAFTA intends = Reclaim 250,000-400,000 tons of US- Mexican market for US and Mexican producers Should not harm sweetened-product manufacturers Cane refiners grow domestic market; retain re-export program for third-country exports 26