Sugar Market Outlook - PDF Free Download

Factors affecting the U.S. sugar market Sugar demand, total Food deliveries: Is demand really growing? How have concerns surrounding genetically modified crops (GM vs. non-gm) affected sugar demand? What consumer are our customer, food and beverage companies, targeting? How costly is reformulation? What is the biggest threat to demand for sugar? Supply side Availability of refined sugar: Do we have enough? Is the call for non-gm sugar really affecting our refining capacity? Trade policy How will the amendments to the Suspension Agreements change our market? Pricing scenarios A look at pricing scenario for cane, beet, and overall market 2

Is USDA-projected 3.5 percent growth for 2016/17 real? 7% Sugar (Food) Deliveries, Annual Growth Rate 6% 5% 4% 3% 2% 1% +3.7% +2.9% +0.6% +3.5% +1.0% 0% -1% -0.1% -2% -3% -4% USDA showing 2016/17 deliveries up 3.5 over 2015/16 is this growth real??? Debate over guidelines for calories from added sugar Manufacturers casting for any way to cut calories while also staying Natural *Estimate Source: USDA, McKeany-Flavell 3

Factors affecting sugar demand Cane vs. beet: Between 2014 and 2016, concern over potential labeling laws and a push to All Natural supported cane deliveries, but did real growth happen? Large beet crops, higher prices for raw sugar, and delay in labeling laws may see some demand switch back to beet sugar. Non-reporters may be holding massive inventories currently counted as deliveries by USDA. Added Sugars campaign could negatively impact the public s perception of sugar. 4

Domestic beet & cane sugar deliveries Million short stons raw value 7 6 5 4 3 2 54% 53% 51% 56% 56% 54% 55% 46% 47% 49% 44% 44% 46% 45% 55% 56% 57% 58% 54% 45% 44% 43% 42% 46% 70% 60% 50% 40% 30% 20% Growth in sugar use over the past three years appears to have gone to cane refiners. 1 10% 0 0% Beet sugar domestic consumpt ion Cane sugar domest ic consumption * Estimate 5

Overview of growth in cane sugar deliveries 1.2 Million short tons, physical value 1.0 0.8 0.6 0.4 0.2 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cane Sugar Deliveries t o Cereal & Baked Goods to Dairy & Ice Cream to Other Processed Foods t o Confect ionery to Beverages to All Other Food Uses Growth in cane sugar deliveries may be attributed to multiple factors, such as more competitive pricing when raw sugar prices were around $0.2450 in 2013/14, combined with marketing decisions by end users. 6

U.S. sugar deliveries: beet sugar gaining market share since July 2016 Thousand short tons, raw value 600 550 500 450 400 350 300 250 200 More competitively priced beet sugar and high raw sugar prices affect deliveries for refiners. Beet deliveries for the first eight months of 2016/17 are up 19 percent from the same period last season. Beet Sugar Deliveries for Domestic Consumption Cane Sugar Deliveries for Domestic Consumption 7

How does the man on the street feel about the genetically modified organisms (GMOs) debate? Consumers: Have limited understanding of what genetically modified (GM) means. Nevertheless fear GM foods. Overwhelmingly claim to want transparency, such as labeling of products containing GM ingredients. 8

Domestic sugar deliveries Million STRV 7 6 5 4 3 2 51% 52% 49% 51% 52% 49% 50% 50% 51% 52% 54% 51% 43% 46% 47% 41% 41% 42% 41% 42% 41% 40% 39% 43% 60% 50% 40% 30% 20% Share of domestic consumption Despite shifts in consumer opinion, the actions of many food and beverage companies suggest that cost remains a chief concern. 1 0 6% 2% 4% 8% 7% 9% 9% 8% 8% 8% 7% 6% 10% 0% Beet Sugar Domest ic Consumption Presumed Non-report er Deliveries Cane Sugar Domestic Consumption * Estimate Source: USDA, McKeany-Flavell 9

Impact of GM debate on specific categories of major sugar use 10

Cereals sector Around 5 percent of sugar usage in this category has a cane-only designation This segment has seen its share of ingredient changes in the last few years: Industry-wide reduction of sugar content in cereal formulations Move away from artificial coloring and flavoring for some products 11

Bakery sector Sector is hard to track as 70 percent of this category may be considered artisanal products Of the major brands, very little is labeled non-gm and typically falls into the organic category Our best estimate is roughly 1-5 percent of usage involves non-gm claims 12

Sugar deliveries to cereal & baked goods sector 3,000,000 2,500,000 Short tons, physical value 2,000,000 1,500,000 1,000,000 500,000 0 Deliveries t o Cereal & Baked Goods, Beet Sugar Cane Sugar *Forecast based on year-to-date data (October through May) 13

Confectionery sector Around 30-35 percent of confectionery sugar usage has a cane-only designation. This sector was one of the first to see significant switch to non-gm ingredients. 14

Sugar deliveries to the confectionery sector Short tons, physical value 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Confectionery has traditionally been a large user of cane sugar. Deliveries t o the Confect ionery Industry, Beet Sugar Cane Sugar *Forecast based on year-to-date data (October through May) 15

Ice cream & dairy sector Over 60 percent of sugar usage in this category has a cane-only designation when looking at manufacturers producing a variety of dairy products, including ice cream. When narrowing the category to companies that manufacture ice cream exclusively, however, cane-only sugar use drops to about 28 percent. Keep in mind that in order for milk to be non-gmo, cows cannot be given bovine growth hormone (rbst/rbgh). Dairy was an area where re-melters were able to gain market share. 16

Sugar deliveries to ice cream & dairy sector Short tons, physical value 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 Eight years of movement away from beet could be an increase in deliveries by third-party melt stations. 0 Deliveries t o Ice Cream & Dairy Indust ry, Beet Sugar Cane Sugar *Forecast based on year-to-date data (October through May) 17

Who is your customer (food & beverage companies) marketing to? And who is sensitive to the GM food debate?

The role of demographics in buying patterns Millennials...and Gen-Xers...and Baby Boomers...and the Greatest Generation Those with college degree more likely to view GM favorably New mothers Men (47 percent favorable) vs. women (28 percent favorable) Urban vs. suburban vs. rural Variations by race, ethnicity 50 percent of consumers always or sometimes read food labels 19

Willing to pay for non-gm? 67 percent of consumers are not willing to pay a premium. 11 percent are willing to pay a premium. Millennials are most likely to pay a premium. 20

Challenges to reformulation Domestic availability of ingredients Complexity of ingredient statement End-product category Plant location Depth of supply chain 21

Case study 1: baked goods, bread Ingredient Price per lb, FOB Possible Non-GM Replacement Alternate Ingredient Price per lb, FOB Basic Ingredients for a Loaf of Bread Bleached enriched flour $0.13 n/a $0.13 Sugar (beet) $0.30 Sugar (cane) $0.35 Soybean and/or canola oil $0.34 Palm oil $0.39 Wheat gluten $0.93 n/a $0.93 Salt $0.10 n/a $0.10 Total $1.80 $1.90 Delta between using GM and non-gm ingredients $0.10 n/a: non-gm ingredient not applicable 22

Case study 2: confectionery, chocolate Ingredient Price per lb, FOB Possible Non-GM Replacement Alternate Ingredient Price per lb, FOB Basic Ingredients for a Chocolate Bar Sugar (beet) $0.30 Sugar (cane) $0.35 Milk chocolate $2.20 n/a $2.20 Cocoa butter $2.85 n/a $2.85 Lactose $0.27 n/a $0.27 Milk fat $2.25 n/a $2.25 Soy lecithin $1.65 Non-GM soy lecithin $3.30 Total $9.52 $11.22 Delta between using GM and non-gm ingredients $1.70 n/a: non-gm ingredient not applicable 23

What is the biggest threat to sugar demand? 24

The industry chases the consumer Nov. 2016: Cook County Approves Dec. 2009: General Mills to Reduce Sweetened Beverage Tax Sugar in Kids Cereals Jun. 2016: Philadelphia Passes 2016: Kraft Switches More Top 2014: Mexico Soda Sweetened Tax Measure on Third Try Products to Cane Sugar, Organic Beverage & Junk Food Taxes May 2016: FDA s New Nutrition Dec. 2016: Nestle Pledges 2016: World to Cut Health Organization Label Identifying Added Sugars Sugar by 40 Percent Backs by 2018 20-50 Percent Sugar Taxes Apr. 2016: Mars to Cut Added Sugar in 3 Yrs. for Select Products Apr. 2015: Chipotle Makes Nov. 2014: GMO-Free Berkeley, Announcements CA Soda Nov. 2016: Tax SF, Oakland, Albany, Dec. 2015: & Hershey to Move to Boulder Pass Soda Taxes Cane Sugar in Major Products 25

The new tobacco? Source: Google

Class action law suits money bag for lawyers Food marketing class actions increased from 20 in 2008 to over 425 active cases in 2015 and 2016. 75 percent of these cases are filed in four states: California, 36 percent; New York, 22 percent; Florida, 12 percent; and Illinois, 7 percent. Suits generally fall in 10 categories; all natural ECJ and added sugar are three that certainly impact sugar Lawyers filed over 50 ECJ lawsuits between 2012 and 2014. Many are active again based on May 2016 FDA guidance, finding that describing sweeteners made from sugar cane on food labels as ECJ is false or misleading August 2016 Law Office of Jack Fitzgerald field class actions asserting excessive consumption of added sugar is toxic to the human body and. Under California s Unfair Competition Law, cereal makers marketing of products with added sugar is likely to deceive consumers and is immoral, unethical, unscrupulous, or substantially injurious to consumers. Example of how frivolous these class actions are: one active complaint alleges that Subway Footlong sandwiches were less than 12 inches long. Source: U.S. Chamber Institute for Legal Reform, Feb. 2017 27

Sugar or beverage taxes around the world Sugar or beverage taxes in place or announced Sugar or beverage taxes under recent consideration Denmark repealed 80-year old fat and sugar taxes in 2013 and 2014. Ireland and the UK s soda taxes will go into effect in 2018. 28

Sweetener & soda taxes in the U.S. Berkeley, CA Boulder, CO San Francisco, CA Albany, CA Oakland, CA Philadelphia, PA Cook County, IL (Chicago) Seattle, WA Santa Fe, NM? Voters rejected this tax Portland, OR? Connecticut? Arkansas adopted a tax on all soft drinks in 1993. 29

Sugar supply Is the U.S. market in balance? Is there enough refining capacity and raw material to capture all the move to non-gmo? What is Mexico s role within the U.S. sugar market?

Do we have enough non-gm refined sugar to match demand? Deliveries of cane sugar increased by nearly 654,000 STRV from 2012/13 to 2015/16 Total deliveries of cane sugar in 2015/16 equaled 6.12 million STRV 31

Is enough non-gm sugar available? 2015/16 Season Non- GM Sugar Supply, 59% GM Sugar Supply, 41% Cane deliveries in 2015/16 totaled 6.12 million STRV Combined domestic raw production and imports of 7.21 million STRV On paper, the supply of cane sugar is adequate however, not all imports ended in the hands of cane refiners *Domestic raw sugar represents 53 percent of non-gm supply to U.S. refiners, and imports are the remaining 47 percent, so imports are critical to cane refiners maximizing capacity Chart excludes carryover stocks 32

Monthly cane sugar deliveries vs. capacity 700 120% Thousand short tons, raw value 600 500 400 300 200 100 98% 92% 93% 95% 94% 95% 93%93%93% 86% 82% 84% 86% 88% 89% 80%76% 81% Monthlycapacity utilization 589,000 STRV total monthly capacity 88% 90%93% 89% 98%98% 94% 92% 79%80% 75% 89% 87% 81% 100% 80% 60% 40% 20% Percent monthly capacity utilization 0 0% Cane Sugar Deliveries for Domest ic Consumpt ion Domestic Cane Sugar Capacit y Capacity is based on a operating schedule of 10 days on, 4 days off 33

How are imports set under the amended Suspension Agreements? On Oct. 1, the minimum Base Export Limit is set at 70 percent of expected need for Mexican sugar as of July s WASDE forecast. Only 30 percent of that limit may enter between Oct. 1 and Dec. 31. Export Limit set at 80 percent of target volume based on Dec. WASDE. Up to 55 percent of that limit may enter before Apr. 1. The full Export Limit is assigned based on the March WASDE, effective Apr. 1 Before Apr. 1, USDA can ask DOC to increase the Export Limit if a sugar shortage is anticipated.* After Apr. 1, the remaining volume of the Export Limit may enter the U.S. Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep U.S. Beet U.S. Beet (California) U.S. Cane Mexico Key: Plant ing Harvest Note: sugarcane has a multiyear planting cycle. July s WASDE forecast sets the Base Export Limit for the next season. * USDA may request an increase after Apr. 1, from Mexico first, from other countries if needed. Source: McKeany-Flavell 34

U.S. monthly imports of Mexican sugar Metric tons, raw value 300,000 250,000 200,000 150,000 100,000 Approximately 65 percent of imports have gone to cane refiners in recent years Highest import volumes of Mexican sugar are seen between February and May 50,000 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 2012/13 2013/14 2014/15 2015/16 2016/17 Source: USDA 35

Breakdown of imports of Mexican sugar Million metric tons, raw 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 25% 11% 24% 38% 23% 41% 26% 67% 53% 42% 39% 37% Approximately 65 percent of imports have gone to cane refiners in recent years New amendments to the Suspension Agreements place Mexico as the defacto largest rawsugar-quota holder, limiting refined imports Estandar Imported from Mexico Refinado Imported from Mexico Total U.S. Sugar Imports * Estimate Source: USDA 36

Domestic ending stocks by feedstock 1.4 Million short tons raw value 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Cane refiners carryout expected near 15-year lows All Beet Processor Stocks All Cane Processor and Refiner Stocks * Estimate Source: FSA, McKeany-Flavell 37

The U.S. does require imports: Where are they coming from? 4.0 3.5 Million STRV 3.0 2.5 2.0 1.5 1.0 0.5 - U.S. Imports of Mexican Sugar Other Imports * Estimate Based on projections prior to added TRQ and Mexico quota 38

With stocks-to-use projected at 8.8 percent, USDA acts 4.0 3.5 Additional Mexico Quota 3.0 Additional Tariff-Rate Quota Million short tons raw value 2.5 2.0 1.5 1.0 Imports from Mexico Other Program Imports Tariff-Rate Quota Imports 0.5 0.0 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17* 2017/18* Will sugar be delivered against the new quotas? For TRQ, mostly. For Mexico, likely little or none. * Estimate Source: USDA, McKeany-Flavell 39

Domestic sugar market timeline: contracted share of industrial use 100% 80% 60% 40% 20% 0% 2015 2016 2017 2018 2019 Source: Trade sources 40

Market pricing

Impact on domestic beet sugar industry based on managed supply 65 60 Projection 55 Cents per pound 50 45 40 35 30 25 20 Refined Beet Sugar, FOB Mill Mexico Floor Price (delivered, Chicago) Beet Loan Rate Projected Beet Sugar, FOB Bulk Projected Cane Sugar, FOB Bulk Refined Cane Sugar, FOB mill * Estimate 42