THE NORTH AMERICAN SUGAR MARKET: RECENT TRENDS AND PROSPECTS BEYOND 2000
This was prepared by Mr Peter Buzzanell for the Sugar and Beverages Group, Commodities and Trade Division, FAO. Tables have been omitted due to space limitations and could be made available upon request.
Ladies and gentlemen it is an honor to be invited to speak at this important international conference focusing on sugar markets in Asia and the Pacific. The Fiji/FAO Organizing Committee has asked me to present my analysis of the North American market. Developments in North American both contrast and parallel emerging trends in production, consumption, trade patterns and regional trade arrangements in Asia and the Pacific. Of particular interest to you, I believe, is the North American Free Trade Agreement (NAFTA) and its sugar provisions. NAFTA provides a model of how sugar provisions can be worked into a regional trade agreement among three countries with very different sugar regimes. The Canadian-U.S. Free Trade Agreement provides a model of a bilateral trade arrangement. Special attention is also given to Mexicos large labor intensive cane sugar industry and how it is emerging from its privatization initiative.
The North American region consists of three countries, Canada, Mexico and the United States of America, (U.S.), with a combined population of just over 400 million. The region, as a whole, has been consistently a sugar deficit area, requiring more imports than exports to meet growing consumption needs. However, changes in the regions sugar industries are causing new trends to emerge. For example, Mexico has been a deficit sugar producer, but in recent years has shifted to surplus producer status. The U.S. produces a significant share of its sugar needs, but remains a major importer and at a higher level than expected a decade ago. In contrast, Canada produces only a small share of its needs, depending largely on imports. For 1997/98, Sparks Companies Inc.(SCI) forecasts total North American production at 11.95 million tons and consumption at 14.49 million with per capita use averaging 34 kilograms. Trade is expected to total 3.46 million tons of imports, with over 2 million tons going to the U.S. and over 1 million tons going to Canada, while exports are estimated at 1 million tons, the bulk of which will come from Mexico. Both sugar production and consumption for the region has been trending up over the last decade.
Trade, both imports and exports, however, has shown considerable year-to-year variation. Sugar trade among the countries of North America is currently relatively small, but this is expected to change under NAFTA in terms of exchanges between Mexico and the U.S. For related sugar containing products and sugar substitutes such as high fructose corn syrup, the trade is currently also relatively small but highly continuous.
In order to project where the region is headed beyond 2000, it is important to understand the changing structures and forces underpinning the emerging trends in the sugar industries in the region. With this accomplished, the implications of NAFTA among the countries of the region and prospects beyond 2000 can be better assessed.
The U.S. sugar market continues to be dynamic in size and structure. U.S. sugar is an important part not only of the U.S. agricultural sector, but also of the global sugar economy in terms of production, consumption and trade. Like most countries, there is considerable Government intervention in the U.S. sugar market - - a loan program and tariff-rate import quota system - - which affects domestic prices as well as U.S. producers, consumers and foreign suppliers.
Sugar Production: Recent Trends and Industry Structure
U.S. sugar production (including Puerto Rico) for fiscal year 1997/98 (October-September) is forecast by SCI at a record 6.87 million metric tons, raw value. Only the expected output in the combined European Union (EU) countries, India, and Brazil are forecast higher. U.S. sugar production, with major components of sugarbeet and sugarcane, outranks the only other major dual producer, China, by 40 percent.
Sugarbeets are grown as a rotation crop in 17 of the 50 U.S. states by an estimated 2,000 sugarbeet farmers. There are currently 10 sugarbeet processing companies with 30 processing facilities near growing areas. For 1997/98, SCI forecasts beet sugar production at 3.88 million metric tons, accounting for 56 percent of total production. Only beet sugar production in France is consistently higher.
Beet sugar production has expanded from around 2.7 million tons annually in the early 1980s when new U.S. sugar policies were implemented to an average 3.7 million in the early 1990s, up by over one-third. The beet sugar production growth trend is 100,700 metric tons per year over fiscal 1983-1996. Sugarbeet harvested area has expanded by over 80,000 hectares from 485,000 in the early 1980s to 567,000 hectares this year, with some year-to-year variations.. While some areas have experienced a decline, notably the state of California, this has been more than offset by expansion in the Upper Midwest states of Minnesota and North Dakota.
To accommodate the expanded area, U.S. beet processing firms have increased slicing capacity (tons of beets per day) to an average of 4,875 metric tons per factory, up by one-third from the early 1980s. In contrast to increased area in sugarbeets and capacity, sugarbeet yields have not trended upward, but vary widely from year to year due to weather. However, sugar per hectare has been rising, reflecting the growing of beet seeds bred for high sugar content, improved management techniques by farmers, and improved processing technology. For example processors have provided incentives to growers to raise crop quality (sugar versus tonnage). The improved management of nitrogen has been pivotal to this effort. Too much nitrogen costs growers twice-extra cost for unneeded inputs and lower extractable sucrose which reduces crop returns.
In addition, the beet sugar industry has benefited from investment in ion-exchange chromatographic separator technology which facilities the desugaring of beet molasses high in sugar content. Beet sugar production from the desugaring of molasses (included in the total forecast) is expected to total 227,000 tons in 1997/98 from six facilities now in operation, compared with under 50,000 tons from one facility in the late 1980s.
Sugarbeets, while expensive to grow, are generally more profitable than alternative crops in most areas where they are grown and, under the current U.S. government sugar program, sugarbeets are expected to remain more profitable. The goals of sugar policy are to support U.S. beet and cane sugar producer returns and stabilize supplies. This is accomplished by supporting producer prices for domestic sugarcane and beets above international prices, but at no Federal budget cost. This approach means that, except in years when the world price is usually high, consumer prices are above what they would be without the program.
The U.S. sugar program involve a series of regulations including price support loans and limits on U.S. sugar imports. Unlike most price-supported crops, price support loans for sugar are made available from the U.S. Department of Agriculture (USDA) to processors rather than directly to farmers. Raw cane sugar is supported at 18 cents per pound and refined beet sugar at 23.90 cents per pound for the 1997 crop. These loan rates are national levels and vary among regions of the country.
Processors who receive loans are obligated to repay the principle and interest before they sell the sugar. But if market prices are below the loan level, processors may transfer the sugar (pledged as collateral for the loan) to the USDA as full payment for the loan. Processors who choose to participate in the loan program are obligated to pay specified minimum prices to producers of beets and sugarcane that correspond with the loan rates for beet and cane sugar.
To insure that foreign sugar does not enter the U.S. market in such quantities that would potentially undermine the domestic support system, import quotas are imposed on foreign sugar. USDA sets the size of the import quota for each marketing year. The Office of the U.S. Trade Representative is responsible for allocating shares of the quota among countries eligible to export sugar to the U.S. A group of about 40 countries has access to the U.S. quota, and each ones share has been largely unchanged since 1982.
Sugarcane is grown in only 4 of the U.S. 50 states as well as Puerto Rico. The structure of the industry is characterized by a relatively small number of producing and processing firms with large scale operations, this has been especially true in the states of Hawaii and Florida. In contrast, Louisianas industry is characterized by a relatively large number of small growers and a sizable cooperative ownership of the raw cane milling sector. Cane sugar production grew at a trend rate of only 17,237 metric tons during 1983-96 as growth in Florida and Louisiana was largely offset by the sharp contraction of Hawaiis sugar industry. Over this period, national area in sugarcane has expanded by over 80,000 hectares, led by Florida and Louisiana. In contrast, area planted to sugarcane in Hawaii and Puerto Rico has declined sharply.
Florida has displayed strong production growth, underpinned by expanded area and generally improved yields and recovery rates. Production rose from 1.0 million metric tons in the early 1980s to around 1.6 million in recent years. Louisiana has experienced freezes, hurricanes, and periodic poor growing and harvesting weather, but area in sugarcane has been trending up and the state has enjoyed 1.0+-million-ton sugar production in each of the last four years. Texas has made incremental improvements in its field and factory efficiency and also has had production at record levels in recent years, though this year it is being affected by drought.
SCIs cane sugar production forecast for Hawaii is unchanged at 295,000 metric tons, which would be down 6 percent from the 1996/97 production. A decade ago, Hawaii was regularly producing a near 1 million tons per year. Costs for labor, transportation of sugar to the U.S. mainland, and environmental compliance are some of the leading causes for contraction of the industry. Since 1992, six out of 12 mills have closed with two of those closings occurring in 1996. Some of the currently operating mills also have been losing money in recent years and some additional contraction of the industry is expected. According to a leading spokesman for the Hawaiian industry, if there is no additional mill closures, production in calendar year 1998 is forecast to decline only modestly, ending a decade of rapid contraction of the industry.
Currently, the U.S. cane sugar industry has 34 raw cane mills distributed in the growing areas: Florida, 7; Louisiana, 19; Texas, 1; Hawaii, 6; and Puerto Rico 1. These facilities vary in capacity with the mills in Florida having an average daily crush capacity of 20,000 tons per day versus the mills in Hawaii which average under 10,000 tons. Moreover, the general trend in the industry is to have fewer but larger mills. For example, Louisianas industry 20 years ago had over 40 mills and now it has only 19, with the expectation that the state will have only 10 super mills in a few years, but will be producing sugar at record levels..
Unlike many areas in Asia and Latin America, cane sugar refineries in the U.S. have been largely stand alone operations located at port facilities. The melting capacity of U.S. cane sugar refineries at 12 plants is approximately 20,360 metric tons per day which equates to the ability to produce 6.0 million metric tons of refined sugar on a 270-day per year schedule.
A new trend in the U.S. is for cane producing and milling companies to invest in capacity to produce refined sugar at their existing raw mills. For example, U.S. Sugar Corporation in Florida, is currently putting on capacity to refine sugar for the first time. Other mill ownership groups are considering integrating their capacity in order to maximize use of their facilities, reduce costs and capture the refined sugar price premium in the U.S. market.
In another emerging trend in the industry, cane refining companies have been merging with beet sugar companies (for example, the merger of Imperial Holly with Savannah-Michigan). Also, multi-nationals have been investing in the U.S. industry with Tate and Lyle purchasing Domino (a cane sugar refiner), Western (a beet processor) and Staley (a corn wet-miller and producer of HFCS). (Tate and Lyle also has invested in the sweetener industries of Canada and Mexico.)
Sugar Consumption: Recent Trends Industry Structure
U.S. sugar consumption ranks third in the world behind India and the EU. The U.S. has the worlds third largest population of 274 million and the largest and most diverse food processing industry. Despite a trend toward greater self-sufficiency in sugar production, the U. S. remains one of the worlds largest net sugar importers - - only the Russian Federation and Japan are higher.
During the first half of the 1980s, sugar lost 2 million tons of the beverage market to lower-cost high fructose corn syrup (HFCS). Since 1986/87, with maturity of the HFCS market, sugar use has rebounded. For the decade of 1985/86 to 1995/96, U.S. sugar consumption growth was 1.9 percent per year. For the first five years (1985/86-1990/91) of the decade, the annual growth was 2.3 percent, while the second five years (1990/91-1995/96) has a growth of 1.4 percent. This resurgence largely reflects population growth (0.9% per annum), increases in the population of immigrants (many of their traditional diets are high in sugar), expansion of away-from-home food consumption, and increases in use by food processors.
The structure of demand in the U.S. differs from many countries. Only about 30 percent of demand is in the direct retail business while 70 percent is in the industrial processing sector. Leading sugar containing product manufacturers in the U.S. are the cereal/bakery product manufacturers and confectionery, ice cream and diary product manufacturers. Under 200,000 tons of sugar are now used annually by the U.S. beverage industry - - the bulk of that market is now sweetened by either high fructose corn syrup in nutritive or regular soft drinks or by aspartame in diet drinks.
Corn Sweeteners - Alternative to Sugar
Separate attention needs to be given to corn sweeteners, an important substitute for sugar in the U.S. due to its competitive pricing and product characteristics. The U.S. has the worlds largest corn sweetener production capacity and it is the largest market for the industrys dominant product, high fructose corn syrup (HFCS). The U.S. corn wet-milling or refining industry currently consists of 28 facilities in 15 states. HFCS production capacity for 1997 is estimated at about 24.1 billion pounds, dry weight, up from 19.6 billion in 1995 and 11.9 billion pounds a decade earlier.
The recent expansion in capacity temporarily has outpaced strong growth in HFCS demand, resulting in a fall off in plant utilization. HFCS capacity utilization is currently running at abut 70 percent, down from over 90 percent earlier in the 1990s.
HFCS deliveries in 1997 are expected to total 16.7 billion pounds, or 4.1 percent greater than 1996. Using deliveries as an indicator of consumption, this would equate to over 60 pounds per capita, up from 49.6 pounds in 1990 and 19 pounds in 1980. Total HFCS consumption is driven largely by HFCS-55 use in the soft drink beverage industry which normally accounts for 90 percent of its consumption. For 1997, deliveries of HFCS-55 are estimated at 10.0 billion pounds while HFCS-42 deliveries are estimated at 6.7 billion pounds. Low priced HFCS-42 continues to grow in demand, taking some additional markets from sugar whose price has been particularly strong this year. For 1998, deliveries are expected to continue their upward trend advancing a projected 4.5 percent to total 17.5 billion pounds.
U.S. trade in corn sweeteners has been relatively small compared with domestic production and utilization and has been largely confined to border trade with Canada and Mexico. Trade with Mexico has been generating considerable recent attention, particularly due to the prospect that Mexicos soft drink industry might switch from sugar to fructose as its sweetener of choice.
Sugar Trade: Recent Trends and Structure
The U.S. remains one of the worlds largest sugar importers, importing annually over 2 million tons of quota sugar and several hundred thousand tons of non-quota sugar for refining and re-export. In mid-September 1997, USDA announced the fiscal 1997/98 (October-September) tariff rate import quotas (TRQ) for raw, cane, refined and specialty sugar. The combined TRQ for 1997/98 totalled 1.825 million metric tons (2.012 million short tons), down 27 percent from the TRQ announced in September 1996. The sharp downturn in the combined quota reflects an increase in old-crop stocks and late arriving 1996/97 TRQ sugar carrying stocks coupled with a 5.3 percent increase in expected U.S. beet and cane sugar production for 1997/98.
As was the method last year, USDA is initially making 1.200 million metric tons (1.323 million short tons) of the raw cane sugar quota available to the market. The Office of the United States Trade Representative (USTR) has allocated the quota among 40 countries based on historic shares of the U.S. sugar import market using the base period of 1974-1981 with the high and low years taken out.
As the year progresses, USDA will allocate an additional quota tranche in January 1998 of 200,000 metric tons. This allocation will pivot on USDAs January World Agricultural Supply and Demand Estimates (WASDE) report for sugar. If the sugar stocks-to-use ratio in the WASDE report is less than or equal to 15.5 percent, the additional allocation will be released and the Office of the Special Trade Representative will allocate by country. If the ratio is greater than 15.5 percent, the allocation will be cancelled. The same process will occur with the March and May WASDE reports.
The current import quota system allows entry at the rate of 0.625 cents per pound, raw value basis. The duty is waived for sugar from beneficiary countries including Caribbean Basin Initiative (CBI), Andean Preference, and most Generalized System of Preferences (GSP) countries. During 1997 above quota raw sugar entering the United States for consumption is subject to a duty of 16.72 cents per pound and refined sugar 17.65 cents per pound. Under NAFTA, the duty for Mexican sugar entering the U.S. under the TRQ is zero. For 1996/97 and 1997/98, Mexico was determined to be a net surplus producer and can ship 25,000 tons of either raw or refined sugar to the U.S. Above quota duties for Mexico are on a declining scale, but still are high - - for 1997 they are 14.4 cents for raw sugar and 15.3 cents for refined sugar.
The North American Free Trade Agreement (NAFTA), implemented on January 1, 1994, does not affect the overall trade forecast. However, if Mexico is designated as a net surplus producer, it will receive an annual quota starting in 2000/01 of 250,000 tons per year. After year 2008, all barriers to sugar trade between the United States and Mexico are to be ended.
The implementation of the Uruguay Round General Agreement on Tariffs and Trade (GATT) has not changed the basic features of U.S. sugar import or export regimes. The two-tiered TRQ system remained in place, and the low duty applicable to in-quota imports is unchanged. However under the Uruguay Round GATT Agreement, the United States agreed to maintain (bound) a minimum low-duty import level of 1.139 million metric tons, raw value (1.256 million short tons, raw value, annually, comprised of 24,000 tons of refined sugar, raw value, and 1.232 million tons of raw sugar.)
Sugar Prices: Recent Trends and Structure
U.S. sugar prices have been well above world prices since 1982. The main mechanism for maintaining U.S. sugar prices has been a restrictive import quota. The two key sugar prices in the United States are the raw cane sugar price and the refined beet sugar price. The raw cane sugar price is based on sugar delivered to New York, and is quoted on the New York Coffee, Sugar and Cocoa Exchange. There is no futures market for U.S. refined sugar, but a price for wholesale Midwest refined beet sugar, f.o.b. factory, is quoted each week in the trade publication Milling and Baking News.
Over the last decade (1987-1996), the U.S. raw sugar price averaged annually 22.2 cents per pound, ranging from a low of 21.3 cents in 1992 to a high of 23.3 cents in 1990, a spread of only two cents. For the first eight months of 1997 raw sugar prices averaged 21.9 cents per pound.
In contrast to raw sugar, refined beet sugar prices have been more variable. Refined beet sugar prices tend to drop when there is a large beet sugar crop and rise when beet sugar production declines. For example drought and other weather problems reduced the beet crops in 1988 and 1989, contributing to high refined sugar prices in those years. Over the last decade annual refined beet sugar prices averaged 26.5 cents, but ranged from a low of 23.6 cents in 1987 to 30.0 cents in 1990, a spread of 6.4 cents. For 1997, January-August prices have averaged 28.4 cents.
Weather has much less influence on raw cane sugar prices, since weather-induced shocks to domestic supply can be accommodated by changing the raw cane sugar import quota.
The margin between refined and raw sugar prices has also varied When this margin is low, cane refiners pay almost as much for raw sugar as they charge for refined sugar and are not able to cover their costs.
The HFCS product that is most substitutable for sugar, HFCS-55 (55 percent fructose, a liquid), is typically priced about 10 percent below the price of refined sugar. In addition to the price advantage HFCS has gained a reputation as a very consistent, quality, product reflecting its high-tech production techniques and specialized handling from plant to end user (i.e. use of temperature controlled rail cars). As a result, HFCS rapidly replaced sugar in a wide range of products, particularly soft drinks. HFCS-42 can also be substituted for sugar in a number of products. With very weak HFCS-42 prices in 1997 due to over-capacity in the industry coupled with high sugar prices, industrial users of sugar have been trying to search for way to increase their use of HFCS without adversely affecting the taste of their products.
The level of U.S. sugar prices will continue to be tied to the U.S. sugar program. Under the Federal Agricultural Improvement and Reform (FAIR) Act of 1996 the raw sugar loan rate is fixed at 18.00 cents per pound and the beet sugar loan rate is fixed at 22.90 cents per pound. The FAIR Act authorizes a 7-year sugar program.
U.S. Beyond 2000
The U.S. sugar sector is foreseen evolving into a much more consolidated, cost efficient, and productive industry in the years ahead. Area harvested for sugarbeets is projected to rise modestly to 611,000 hectares by 2005, up about 2,833 hectares per year, according to the USDAs sugar baseline. Sugarbeet yields are projected stable, while the beet sugar recovery rate is expected to rise gradually on trend. Sugarbeets for processing, which totalled 20.4 million tons in 1985 and 28.8 million in 1995, are projected to total 27.8 million in 2005. But with higher sugar recovery rates, beet sugar production has increased from 2.72 million tons in 1985 and 4.07 million metric tons in 1995, to a projected 4.24 million in 2005.
The beet sugar industry would expand even more rapidly, but investment is likely to be constrained somewhat by the risk of program elimination. Under USDA assumptions, beet sugars share of total domestic sugar production continues to grow from 49 percent in 1985, to 56 percent in 1995, and then to 58 percent in 2005. This assessment is underpinned by recent reports of significant expansion programs planned by beet producer-processor cooperatives in the Red River Valley of Minnesota and North Dakota.
Nationally, U.S. sugarcane area is projected to decline slightly from 1995 to 2000, then increase somewhat to 2005. National average cane yields, which have been falling due to loss of high-yielding Hawaiian area in cane, may increase slowly as research and development of better varieties proceeds and Hawaiian area stabilizes. The cane sugar recovery rate should rise on trend. For Texas, Louisiana and Florida, cane sugar production is expected to remain stable or grow slowly with Texas production projected at 136,000 tons by 2005, Louisiana production projected at 1.09 million tons, and Florida is expected to increase production to 1.59 million metric tons by 2005. Hawaiis sugar production is expected to stabilize at near 272,000 tons by 2005, with Puerto Rico expected to cease its sugar production by 2005.
U.S. cane sugar production is expected to total 2.88 million metric tons in 2000, and increase to 3.08 million by 2005, comprising 42 percent of total domestic production. This compares with 2.94 million in 1990 and 2.84 million in 1985 .
The projected growth rate of U.S. sugar consumption through 2005 is about 1.5 percent per year, down from the recent 2 percent average due to constraints on the ability of sugar to continue to displace other foods and some additional loss of market grown potential due to HFCS competition. However, sugar continues to benefit from increased U.S. public emphasis on the negative nutritional aspects of fats. Total sugar use (including transfers to sugar containing products for export) is likely to reach 9.54 million metric tons in 2000 and 10.16 million in 2005, up from 8.62 million in 1990 and 7.82 million metric tons achieved in 1985.
The gap between U.S. domestic sugar consumption and production are projected to widen gradually through 2005. If the TRQ is managed the same way as in the past, quota sugar imports are expected to total 2.32 million tons in 2000 and 2.48 million by 2005. Quota-exempt imports are expected to remain at around 410,000 tons with re-exports of refined sugar and sugar in sugar-containing products mirroring the level of non-quota imports for re-export.
It should be mentioned that there is increasing discussion in the U.S. of changing the sugar quota allocation system. This system was set up in the early 1980s, based on a countrys shipping performance to the U.S. market during the 1976-1981 base period. Several of the countries that received quota allocations are no longer net exporters. One solution being mentioned that could be administratively adopted by USDA would be to globalize the raw sugar quota above the GATT-WTO minimum.
Proponents of globalization argue that the change would achieve a more reliable supply of imported raw sugar and preserve U.S. cane sugar refining capacity which has been contracting. Cane sugar refining capacity acts as an important safety value which can compensate for variability in domestic beet sugar production and thereby, reduces the potential need for large volume imports of refined sugar. Moreover ,to increase the financial viability of the U.S. refining industry - - one-half of the refiners in the U.S. have closed since the early 1980s - -USDA could give U.S. cane sugar refiners the right to import the globalized portion of the overall import quota. This would have the effect of keeping some of the quota premium with U.S. refiners rather than giving all of it to foreign suppliers. In addition, it would reduce the average cost of raw sugar without undermining the sugar price support program.
The sugarcane-based sugar industry is Mexicos largest agri-industry, with an estimated 300,000 families depending on it as producers and mill workers. The milling sector spreads across 15 of Mexicos 23 states and is a key component of economic and social development in many rural areas in the country. The sugar industry provides a basic input into the growing Mexican beverage and food processing industry. Mexicos per capita consumption is traditionally high by world standards, both in the form of direct consumption and in processed food products, particularly beverages.
Over the years, the Mexican sugar industry has oscillated between periods of production surpluses relative to demand and production deficits. As recently as the early 1990s, Mexico was in a deficit situation as the largely government-run industry could not keep pace with the rise in demand caused by the rapidly growing Mexican economy. This situation led to Mexicos importation of record sugar imports. Most recently, the now privatized industry has been producing a surplus of sugar, reflecting some technical and administrative improvements in the industry coupled with good weather. Concurrently, the Mexican economy contracted sharply following the December 1994 peso devaluation. This contraction in the economy coupled with higher sugar prices, the new role of sugar companies in marketing sugar and the emerging substitution of corn sweeteners for sugar has caused a fall off in sugar consumption.
The resulting surplus production has been largely exported. But these exports have been undertaken largely at a financial loss and were done mainly to relieve the country of burdensome stocks that could have depressed domestic prices. Currently, the Mexican industry is now in a much stronger position to produce sugar than in the early 1990s, but, owing to competitively priced corn sweeteners, they face potentially stiff competition in domestic markets. As a result, the Mexican industry and government is increasingly looking to the sugar provisions provided by the North American Free Trade Agreement (NAFTA) with the U S. to market its sugar at prices comparable to those enjoyed in the U.S. market.
Sugar Production: Recent Trends and Industry Structure
Sugarcane is one of Mexicos most widely grown crops with production in 15 out of the countrys 23 states. Nearly two-thirds of the total production is concentrated in five states (Veracruz, Jalisco, Oaxaca, Michoachan and San Luis Potosi) that form an arc that stretches across Central Mexico. Veracruz alone accounted for an average of 38 percent of the countrys total sugarcane production for the period 1993/94-1995/96, with the crop processed at the states 22 sugar mills.
While the milling sector with its 30,000 workers is at the core of the industry, mill companies in the various states do not own land for sugarcane production. Instead, they depend on independent growers to service the mills with cane. Currently, there are approximately 140,000 cane growers in Mexico and they are represented by two politically influential groups. The large cane growers, numbering about 60,000, are represented by the National Union of Cane Growers (Union Nacional de Caneros). The second group, representing some 80,000 small "ejido" growers (growers using communal lands), is the National Sugarcane Growers (Nacional Caneros de Azucarera). Typically, each Mexican mill has about 2,500 growers cultivating sugarcane on 16,000 hectares (average of 6.4 hectares per grower), which seasonally grinds around 850,000 tons.
Sugarcane harvested area totalled 223,515 hectares in Veracruz in 1995/96, up 15 percent from 1993/94 and accounting for nearly two-fifths of the national total. Veracruz is the only state with more than 100,000 hectares harvested in 1995/96; the next highest were San Luis Potosi at 61,775 hectares and Jalisco at 56,831 hectares. In these pivotal sugarcane producing states, the expansion in area in cane has been encouraged by higher cane prices and aggressive expansion by some of Mexicos stronger mill ownership groups: Escorpion, Machado, Beta San Miguel, and Grupo Azucarero Mexico (GAM).
Sugarcane yields in Mexico vary considerably from year to year and between regions. About two-thirds of the growing areas, including nearly all of Veracruz, is rainfed, about 25 percent is irrigated mainly in January-May, and 10 percent is irrigated only on an emergency basis two or three times a year. Over the last three seasons (1993/94-1995/96), national cane yields per hectare averaged 72.6 tons, but oscillated between a low of 69.3 tons in 1993/94 to a high of 78.0 tons in 1994/95. Over the last five crop years, yields averaged 74 tons versus 69 tons for the preceding five crop years.
On a state level, rainfed dependent Veracruz averaged 70 tons per hectare. Jalisco and San Luis Potosi, both with some irrigation, averaged 86 and 59 tons, respectively. Sharply contrasting yields were those of Morelos (107 tons per hectares), and Puebla (116 tons) versus Quintna Roo (57 tons) and Campeche (42 tons). Morelos and Puebla benefit from good growing weather, highly fertile soils and irrigation. In contrast, Quintana Roo and Campeche have less favorable climates and soil condition for sugarcane cultivation and little irrigation.
On the quality side, Mexicos sugar recovery rates the last three years have averaged 10.6 percent and sugar per hectare of 7.7 tons. The significant differences for the seven states in terms of sugarcane yields per hectare also show up in quality indicators. The average sugar recovery and sugar per hectare for the seven selected states are as follows: Veracruz, 10.8 percent and 7.6 tons, respectively; Jalisco, 11.5 percent and 9.9 tons; San Luis, 11.3 percent and 6.7 tons; Morelos, 10.9 percent and 11.7 tons; Puebla, 11.0 percent and 12.8 tons; Quintana Roo, 9.4 percent and 5.4 tons; and Campeche, 9.5 percent and 4.1 tons.
For 1996/97, SCI estimates Mexicos cane yields, recovery rates, and sugar per hectare for the crop harvested November 1996 through June 1997 at 69.7 tons of cane per hectare, its recovery rate at 11.6 percent, and its sugar produced per hectare at 8.12 tons. These estimates indicate another outstanding crop, revealing an industry that is generally productive by world standards and improving.
Reflecting an upturn in cane production the last three years, Mexicos sugar production averaged 4.6 million tons, raw value. For the preceding five years, production shifted from a low of 3.1 million tons in 1989/90 to a high of 4.3 million in 1992/93 and averaged 3.7 million tons - -900,000 tons below output of the last three years.
Mexicos sugar industry produces several types of sugar. Because its sugar refining is integrated with its cane mills, refined sugar is produced at many of the countrys cane mills. For the last three seasons, the Mexican industry produced between 1.7 and 1.8 million tons of refined sugar (99.9 pol.), which is 42 percent of the total production. This compares with 1.2 million and 34 percent of the total in both 1986/87-1988/89. Over one-half of Mexicos annual production in recent years has been "standard sugar" (estandar) (99.6 pol.). In recent years, very little raw sugar (mascabado) (96 pol.) has been produced in Mexico.
Mexico currently has 61 mills spread across the 15 producing states. Veracruz alone has 22 mills; Jalisco has 7; Michoacan, 5; and San Luis Potosi, 4. Three mills have closed since the early 1980s.
The cane milling industry currently has a 333,000-ton per day grinding capacity. The total national capacity has changed little since the late 1980s, but a number of mills have increased capacity as others have declined or closed.
The Mexican industry is characterized by a relatively large number of medium- to small-sized mills. Thirty-eight mills are between 4,000 and 8,000 tons of grinding capacity, 17 below 4,000 tons, and four are between 8,000 and 12,000 tons, and only two are above 12,000 tons daily grinding capacity.
Mexican milling industry production data for the period 1993/94-1995/96 reveals that nearly 60 percent of the mills produced between 25,000 and 75,000 tons and one-third produced about 75,00 tons. Compared with the earlier time period (1986/87-1992/93), there has been a general trend toward higher annual production in a larger number of mills.
In the late 1980s and early 1990s, Mexicos cane sugar milling sector passed from largely government control to private ownership through a government approved privatization program. Mills were sold in groups and a pattern of mill ownership emerged.
As of mid 1997, there were 17 groups of owners, the largest among them were as follows: Escorpion with nine mills, followed by Machado and Mexicano with seven each, and Beta San Miguel and Grupo Azucarero Mexico (GAM) with five each.
In addition to these numbers, some of the groups dominate the production of refined sugar. In 1996/97, for example, the Escorpion group produced 43 percent of Mexicos refined sugar (753,500 tons out of a national total refined production of 1.77 million tons, standard basis). The five largest groups produced a combined 2.62 million tons in 1996/97, 58 percent of total production.
Early in 1997, there were several sales of mills reported. The Santos Group bought the Plan de Ayala and Cosamaloapan mills and the Grupo Azucarero Mexico (GAM) bought the Grupo Multiple mills San Pedro and San Francisco mills. According to industry sources, over the next several years, the wave of ownership consolidations is likely to increase as more financially viable mill groups take over the weaker ones.
It is apparent from examining the capacity by mills that several key groups have been investing capital in mills to expand capacity. Most of these investment funds have come from within Mexico. The only significant foreign investor is the British-based Tate and Lyle Company that has a 49 percent interest in the Saenz Group that owns the Aaron Saenz and El Monte mills in Tamaulipas and the Tamazula mill in Jalisco.
Sugar Demand: Recent Trends and Structure
Sugar consumption growth was strong in the early 1990s but has trended downward over the last several years. The recent contraction in domestic sugar use reflects a combination of factors including the general economic downturn caused by the peso devaluation of December 1994, an upturn in sugar prices, and the growing substitution of fructose for sugar in the beverage market. For 1996/97, SCI forecasts Mexicos sugar consumption at 4.2 million tons (raw value). With production forecast at 4.6 million tons and consumption at 4.2 million, the implied 1996/97 surplus is 500,000 tons. This situation is forcing the sugar industry into policy decisions that aim to reduce price-depressing stocks in the country.
The composition of sugar consumption can be divided into household use (47 percent) and industrial use (53 percent). The major industrial user of sugar in Mexico is the soft drink industry. Currently, well over 1.0 million tons of refined and standard grade sugar is used by the industry annually. While continued growth of the soft drink industry is a certainty, the industrys choice of sweetener-sugar or corn sweeteners is an increasingly topical issue.
Mexicos soft drink industry produces about 3.5 billion gallons of soft drinks or (39 gallons per capita). According to beverage industry sources, Mexico ranks second only to the United States in per capita soft drink consumption.
A key reason for the traditionally high soft drink consumption in Mexico is its young population. More than one-half of the population is under 21 years old, the largest consumer sector. Other factors favoring growing consumption are climate, the potable water problem and nutritional factors, particularly the importance of the calorie contribution from nutritive soft drinks to the average consumers diet.
The marketing of consumer packaged sugar and sugar-containing beverage and food products is concentrated in Central Mexico where about 50 percent of the population resides. Before privatization, the Governments marketing arm, Azucar S.A., marketed all the sugar within Mexico. Since privatization, various milling and refining groups market the sugar with the aid of international firms such as E.D. & F Man, Louis Dreyfus, and Czarnikow-Rionda as well as domestic food distributors such as Ortega.
Sugar Trade: Recent Trends and Structure
Mexicos trade in sugar has shown significant long-term variations between net exports and imports:
In the 1960s and 1970s, Mexico imported no sugar, while it exported several hundred thousand tons per year.
Stagnant production and growing consumption reduced exports in the late 1970s. In the first half of the 1980s, Mexico exported in one year out of five while imports grew.
Mexico did not import sugar in 1985-88, exporting a record 1 million tons in 1988 due to reduced consumption reflecting a slow down in the domestic economy.
A reversal of the supply-demand situation caused substantial import volumes in 1989, 1990 and 1991. In the early 1990s, trade in both imports and exports was reduced to minimal amounts as Mexico became relatively self-sufficient in sugar.
In the last three years 1994/95-1996/97, Mexicos sugar balance shifted to a net exporter status. Large amounts of exports have been shipped under the Mexican Governments Temporary Export Program (TEP) which was announced in April 1995. The program waived an export tax of $260 per ton (11.8 cents per pound) if exporters pledged to re-import an equivalent amount of sugar within six months. The re-import requirement is waived if the Government of Mexico determines that the sugar will not be needed domestically.
Mexicos Sugar and Alcohol Chamber has encouraged its members to take advantage of TEP. The aim has been to reduce the price-depressing surplus of sugar in Mexico even though many of the groups export at a loss. However, these losses are offset by higher domestic prices, reduced costs and interest payments for domestically stocked sugar, and the availability of increased operating revenue.
On the import side, Mexico is estimated to have imported small volumes of sugar in recent years. Key suppliers were Guatemala, Costa Rica and Columbia, reflecting recent trade agreements between the Mexican Government and these countries which provide for limited duty free access for their sugar into Mexico. Much of this and other world price sugar is used in Mexicos re-export program for products - -PITEX (Program for Temporary Imports for Export in Products). This program is similar to the U.S. re-export program for products. PITEX imports are exempt from paying the current import duty of $395 per ton (17.9 cents per pound).
For 1996/97, SCI forecasts net exports of 450,000 tons (exports of 550,000 tons and imports of 100,000 tons). A share of the exports are regular exports while the rest will again go out under the TEP, with the aim being to reduce the level of price-depressing stocks in Mexico. A small volume, 25,000 tons, will enter the U.S. under Mexicos NAFTA quota.
U.S. Mexico Corn Sweetener Trade and Trade Issues
U.S. trade in corn sweeteners has been relatively small compared with domestic production and utilization and has been largely confined to border trade with Canada and Mexico. Trade with Mexico has been generating considerable attention, particularly due to the prospect that Mexicos large soft drink industry might switch from sugar to fructose as its sweetener of choice.
Mexicos soft drink industry is one of the worlds largest and the countrys per capita use of soft drinks is the second highest in the world after the U.S. The Mexican soft drink industry utilizes about 1.6 million tons of sugar annually. Corn sweeteners provide a viable alternative sweetener to sugar owing to the increasingly high price of sugar in Mexico. Corn sweeteners are available to the Mexican soft drink industry either through trade with the U.S. or, more recently, from domestic sources.
U.S. corn sweetener exports to Mexico have been rising every year since 1990/1991, and in 1995/96 reached 89,200 metric tons, dry basis. The largest corn sweetener export to Mexico has been HFCS-55 at 47,273 tons in 1995/96. For the first nine months of 1996/97 (October 1996 to June 1997), HFCS-55 exports to Mexico had already reached 112,007 tons, more than double the total for last year . Some of the expansion of U.S. HFCS capacity in the last few years reportedly was intended to be earmarked for the expanding Mexican market. Moreover, the annual growth in trade has been facilitated by a 1.5 percent annual decline in Mexicos tariff on HFCS resulting from NAFTA.
However, potential growth in exports was stymied by the maxi-devaluation of the Mexican peso in December 1994 and the subsequent contraction in the Mexican economy. More recently, the future of U.S. HFCS exports has been clouded by trade disputes between the U.S. and Mexico. In December 1996, Mexico raised the tariff on HFCS from 10.5 percent to 12.5 percent in partial retaliation over a U.S. decision to raise import duties on Mexican-made corn brooms shipped to the U.S. Under the NAFTA schedule, the HFCS tariff on imports from the U.S. would have fallen to 9 percent in 1997. In early 1997, the Mexican Government initiated an anti-dumping investigation against HFCS imports from the U.S. at the request of the Mexican sugar industry. On June 25, Mexico imposed provisional dumping tariffs on U.S. imports ranging from 3 to 6 cents per pound for HFCS-42 and 3 to 8 cents per pound for HFCS-55. Hearings on the case were the week of August 25 at Mexicos Trade and Commerce Ministry (SECOFI). The Mexico Trade Secretariat is expected to decide whether to make the tariffs permanent by December 1997.
If the tariffs are sustained, the U.S. corn sweetener industry is expected to take the dispute to a WTO or NAFTA trade dispute panel. The U.S. Senate has already passed a resolution calling for Mexico to review its anti-dumping case against U.S. HFCS in the context of WTO trade rules. Also in early September, the Office of the U.S. Trade Representative announced that the U.S. had requested WTO dispute settlement consultations regarding actions by Mexico in its anti-dumping investigation on HFCS.
Mexico also has capacity to produce corn sweeteners domestically. Currently, two facilities are producing HFCS from imported U.S. corn which also have benefited from increased access to the Mexican market under NAFTA. These two facilities, with a combined annual capacity of between 250 and 350 million pounds or 125,000 - 175,000 short tons, dry basis, are the result of recent foreign and Mexican investment. The first facility to begin HFCS production in Mexico was ALMEX in Guadalajara in 1995. The facility is owned by Tate and Lyle, A.E. Staley, and Archer Daniels Midland (ADM). The second facility is the Arancia/CPC plant located in San Juan del Ray near Mexico City which began HFCS production in late 1996. Both facilities are dependent on imports of U.S. No. 2 yellow corn to run their operations (Mexico produces mainly white corn for human consumption). The Mexican Government currently provides quarterly import permits to these companies for access to U.S corn. Until last year, the permits were granted on an annual basis.
In an agreement that was made public on September 9, the Mexican sugar industry has apparently successfully lobbied the soft drink industry to cap the use of HFCS. According to press reports, the soft drink bottlers have agreed to limit the use of HFCS to 350,000 tons per year, of both domestic and imported HFCS, for a three-year period. The U.S. corn sweetener industry is expected to protest the legality of the pact.
Sugar Prices: Recent Trends and Structure
Historically, the Government of Mexico controlled the internal wholesale and retail prices of sugar. These prices were calculated and published by the Secretariat of Commerce and Industrial Development (SECOFI). In August 1995, the government announced a price liberalization program for sugar. It was agreed, together with the sugar industry, wholesalers and retailers, that prices would increase on a monthly basis until early 1996, at which time prices would be determined solely by market forces.
In August 1995, the wholesale price of standard sugar, f.o.b. mill, was 2,397 pesos per ton or 17.55 cents per pound (exchange rate 6.191 pesos = 1 US$); in January 1996, it was 2,966 pesos per ton (exchange rate 7.4730), equal to 18 cents per pound; and in September 1996 it was 3,525 pesos per ton (exchange rate 7.5330), or 20 cents per pound. The most recent announcement by the government for 1996/97 pegged the wholesale sugar price at 3,340 pesos per ton (exchange rate 7.815), equal to 19.4 cents per pound. By government decree, wholesale sugar prices are linked to the sugarcane price for the duration of the season, but refined sugar prices are allowed to float freely. According to Mexican industry data, the price of refined sugar as of January 1997 was 22.2 cents per pound, f.o.b. mill and 24.5 in September 1997. As a result, Mexicos prices currently are somewhat below the United States, but well above the world price.
Under the current Government scheme, sugarcane prices to growers are determined monthly, based on a percent of the monthly wholesale price of standard sugar times KARBE, kilograms of standard quality sugar recovered at the mill. KARBE data includes sucrose content, juice quality of cane, and efficiency of the mill. In the 1993/94 season, the cane price as a percent of standard sugar was 53 percent; in 1994/95, 54 percent; and in 1995/96, 56 percent. For the 1996/97 crop year, producers received 57 percent.
In January 1997, sugarcane growers and processors agreed to raise the sugarcane price for the 1996/97 season by about 26 percent to 1,903 pesos. This was equivalent to U.S. $243.50 per ton at current exchange rates, or 11 cents per pound. The cane price is 57 percent of the new wholesale sugar price of 3.340 pesos per ton (U.S. $464.86 tons per ton or 21 cents per pound). Growers had originally asked for an increase of 30 percent while the processors offered 21 percent. The final agreement leans more toward the grower-side and the price was retroactive, applying to all cane cut for the harvest that began in November. The 26 percent increase is 9 percent above the 15 percent inflation level projected by the Mexican Government for 1997.
The long-standing issue of paying individual growers on the basis of quality (i.e., percent sucrose in cane) remains unresolved. In the early 1990s, implementation of this method of payment was being encouraged as a means, as demonstrated in other countries such as Australia, South Africa, and the Untied States, to provide growers with an economic incentive to raise the quality of their cane (i.e., manage the crop to maximize sucrose content not just weight). Demonstrations of U.S. "core sampling technology" were provided to the industry with test models set up at key mills. The plan was to have the technology in place within two years. Despite this planing, the project has gone nowhere due to differences between growers and mill owners. Grower groups say that mill companies have complained of logistical problems with the new payment system because there are so many small growers, but the growers believe the real reason mills balked at installing the system was because the "mill processing loss issue" has not been resolved. In contrast, millers say that growers do not want the system because it will identify good growers versus poor growers. Without the system, however, good growers will continue to subsidize poorer ones and neither good nor poor growers will have incentives to improve the quality of cane provided to mills.
The North American Free Trade Agreement (NAFTA) became effective on January 1, 1994, and will eliminate most trade barriers between Canada, Mexico and the U.S. over the next 15 years. NAFTA does not address sugar trade between the U.S. and Canada which is largely covered by the Canadian-U.S. Free Trade Agreement signed in 1989.
For purposes relating to access of the other countrys sugar market, a formula defines Mexico or U.S. net surplus production at roughly equal to projected sugar production minus projected domestic consumption. If this formula yields a positive number, the country is a net surplus producer. According to a late revision in the original NAFTA text (termed "side letter"), the two governments agreed that HFCS would be included in the formula, but on the consumption side only. Thus, a country would have to produce sugar in excess of its consumption of both sugar and HFCS in order to attain net surplus producer status.
As part of the NAFTA consultation process related to sugar, representatives of the two governments meet annually to exchange information related to each others net surplus producer status. At these meetings, Mexico has been designated as a net surplus sugar producer for 1996/97 and 1997/98 (Oct-Sept). Accordingly, Mexico can ship 25,000 tons of duty-free to the U.S., either as raw or refined sugar. As the NAFTA sugar provisions are reciprocal, the U.S. has been designated a deficit producer in 1996/97 and 1997/98.
The chronological provisions of NAFTA in terms of Mexican access to the U.S. market are as follows:
In years 1-6, Mexico will have duty-free access for sugar exports to the U.S. in the amount of its net surplus production, up to a maximum of 25,000 metric tons, raw value. If Mexico is not a net surplus producer, however, it will have duty-free access for 7,258 metric tons, or the "minimum boatload" amount authorized under the U.S. tariff-rate quota.
In years 7-15, Mexico will have duty-free access to the U.S. sugar market for the amount of its net surplus production, up to a maximum of 250,000 metric tons, with minimum duty-free access still at the "boat load" amount.
Sugar tariffs between the United States and Mexico are scheduled to decline by 15 percent over the first six years and to zero by year 15. By the end of year six, Mexico is committed to install a tariff-rate quota system, with a second-tier tariff applicable to all other countries that is equal to the U.S. second-tier tariff.
Given that NAFTA is reciprocal, the same barriers for Mexican sugar access to the U.S. market also apply to U.S. sugar access into the Mexican market. Since the U.S. is not likely to attain net surplus producer status, especially with a GATT-bound minimum import level, U.S. sugar will not have duty-free access (except for a boat load quantity) to the Mexican market until the year 2008. Without these trade barriers, more U.S. sugar would be sold into Mexico. For example, there might be cross-border trade from U.S. production facilities near the border. Also, sugar quality is important to many buyers, and the U.S. has a comparative advantage in high-quality types of sugar.
There is also a provision in NAFTA that allows U.S. sugar refiners to import raw Mexican sugar, outside the TRQ, for refining and re-export back to Mexico. This allows U.S. refiners to utilize their excess capacity and Mexican companies to receive quality refined sugar for targeted export markets in northern Mexico.
Mexico Beyond 2000
The direction of Mexicos sugar and HFCS supply and demand balance in the coming years is extremely difficult to forecast. Many factors could push production to either expand or contract. For example, Mexico has additional sugarcane land that could be brought into production. More remunerative prices could raise the use of yield increasing inputs. Modifications in the land tenure system are likely to foster amalgamation of land units, leading to greater efficiencies. All of these factors would combine to spur production advances. In contrast, sugar production could stagnate or decline due to producer prices below expectations, which would foster a shift to more remunerative crops.
Concurrently, the sweetener of choice for Mexicos large soft drink industry appears to be in transition and this evolution will significantly affect the level of sugar and HFCS consumption. If the current effort to cap the use of HFCS is successful, by2000/01, SCI foresees Mexicos production at a maximum growth of 5.2 million tons and sugar consumption at a moderate growth rate to 4.5 million tons. Production of HFCS in Mexico would be 300,000 tons from the recently installed capacity, while HFCS imports would be negligible, reflecting efforts to cap total HFCS growth. This scenario would result in a sugar surplus of 700,000 tons and a NAFTA-based surplus of 400,000 tons. Under this scenario, Mexico would be eligible to ship 250,000 tons of sugar annually duty-free to the U.S.
Beyond 2000/01, the direction of sugar consumption will continue to depend on the mix between HFCS and sugar in the beverage market. However, with a rapidly increasing population and assuming a healthy economy, Mexicos off-take of sugar in other use categories besides beverages should grow substantially. This is what has happened in the U.S. as sugar has many functional characteristics which make it the sweetener of choice independent of price. On the production side, the Mexican industry clearly will need substantial investments to make itself more cost efficient and like the U.S. and Canada, there is likely to be some segments of the industry that will contract. Assuming that there is no change in the U.S. price structure, Mexicos increased trade access under NAFTA to the higher priced U.S. market after 2000 should also help the long-term financial viability of the Mexican industry and encourage both Mexican and foreign investment in the sugar industry.
In contrast to the U.S. and Mexico, Canada has a small domestic sugar production base. Most of the countrys demand needs are met by raw sugar imports that are processed by Canadas refineries. Canadian - U.S. border trade in sugar, corn sweeteners and sugar containing products is relatively small in volume but important to the industries in both countries. This trade has not always gone smoothly and there have been a number of recent bilateral trade disputes. Trade is also influenced by the Canada-U.S. Free Trade Agreement signed in 1989 and the NAFTA signed in 1994.
Sugar Production: Recent Trends and Industry Structure
Canadas domestic sugar production is based on sugarbeets. Production takes place in the provinces of Alberta and Manitoba. For 1997/98, Canadian beet sugar production is estimated at 110,000 from 750,000 million tons of beets expected to be harvested from 6,100 hectares. Since 1980/81, Canadas beet sugar production has ranged from a low of 92,000 tons to a high of 171,000 tons. Production is concentrated in the province of Alberta this season due to the recent closure of the sugarbeet processing plant in Manitoba.
As with the U.S. and Mexico, the structure of the Canadian sugar industry has been changing. Until recently, the Canadian sugar industry consisted of two beet sugar factories and four cane sugar refiners, with ownership in the hands of two companies. The vast majority of industry capacity is controlled by BC Sugar, which owns the countrys two beet sugar factories in Alberta and Manitoba, which serve the Canadian Prairie market, and three of Canadas four cane sugar refineries. In 1995, the company united its cane and beet sugar operations in western Canada under a single brand and operating name, Rogers Sugar. Meanwhile, BC Sugars refineries at Montreal and St. John continue to operate under its Lantic Sugar Division. Until recently, the BC Sugar Company also owned the Refined Sugars Inc.(RSI) refinery in Yonkers, New York. Canadas fourth sugar cane refinery, at Toronto, is owned by Tate and Lyle, through its Redpath Sugars subsidiary.
This past winter, Rogers Sugar Ltd. announced that it would permanently close its Winnipeg, Manitoba, beet sugar processing operation. The Winnipeg operation was termed not economically viable as a result of the loss of the U.S. market that absorbed 60 percent of the plants output. In 1994, the U.S. switched to a global quota for refined sugar and Canada lost its allocation. In addition, the closure was apparently also caused by general over capacity in the Canadian industry due to significant expansion of the Redpath refinery.
Because of the closure of the Winnipeg, Manitoba plant, no sugarbeets were planted in Manitoba this year. Sugar beet growers in Alberta this season planted an estimated 5,500 hectares. In an interesting new development, in Ontario province, farmers are growing sugarbeets, about 1,200 hectares this season, to be processed in the U.S. in the neighboring state of Michigan for the U.S. company, Michigan Sugar.
Over the last decade, the Canadian government has supported sugar beet farmers, not by import protection, but through a system of direct income payments to growers. Under the National Tripartite Stabilization Program (NTSP) for sugar, beet farmers have received a form of deficiency payment. This income support program has been funded equally by producers, the federal government and the governments of the beet producing provinces of Alberta and Manitoba. In operation since 1987, the program has guaranteed a return equal to a calculated support price. For example, sugarbeet farmers are supported with a deficiency payment in any year that the price paid by the beet sugar processor falls below a target level. Sugarbeet growers are taxed to help replenish the fund when the price paid is above the target level. The aim is for the fund to be self-financing.
The NTSP for sugarbeet growers in Manitoba terminated with the 1996 crop. Alberta growers opted out of NTSP at the end of the 1995 crop year. While the program offered substantial payouts to producers in the mid-1980s, there were no payments since the 1991 crop. Agriculture Canada reports that the programs accounts will close in late 1997 with surplus funds, a portion of which are normally returned to premium paying participants. It is not clear what will replace the tripartite program.
Sugar Consumption: Recent Trends and Structure
Sugar consumption in Canada for 1997/98 is forecast at 1.25 million tons, with domestically produced sugar accounting for only about 9 percent of the total. For a population of 29.4 million, per capita sugar consumption is estimated at 39.7 kilograms, nearly double the world average. Over the last decade, sugar consumption and per capita use has averaged 1.11 million tons and per capita consumption has averaged 37.6 kilograms.
About 40 percent of annual sugar use goes for home use while industrial use by the food and beverage industry takes nearly two-thirds of the total. Like the U.S., Canada has domestic HFCS available as a substitute for sugar. Use is concentrated mainly in the soft drink manufacturing sector. Canada has several HFCS plants all owned by CASCO whose parent company is CPC International. While the U.S. soft drink market now uses HFCS exclusively, a small segment of the Canadian industry uses a blend of sugar and HFCS with the share shifting with price. In general, HFCS in Canada is priced just below sugar to maintain a market price advantage in the liquid sweetener market.
A sizable portion of Canadas HFCS production is marketed in the U.S. by CPC International, the owner of CASCO. The heavily populated Northeast U.S. is part of its natural marketing territory. At the same time, other U.S. HFCS companies market some of their output in Canada.
Sugar Trade: Recent Trends and Structure
With annual domestic consumption in excess of 1.2 million tons and domestic production providing under 10 percent of annual needs, Canada must depend heavily on imports. The bulk of these imports come into Canada in the form of raw sugar and are processed into refined products at the countrys four refiners. White or refined sugar imports have been supplied principally from the U.S.
The bulk of raw sugar imports coming into western Canada for processing come from Australia while the big supplier into eastern Canada is Cuba with which Canada has maintained good trade relations. According to the International Sugar Organization, in 1996 Canada imported a total of 1.26 million tons of which 1.23 million was raw sugar and the remaining 30,000+ tons was refined sugar. Australia shipped 64 percent of the raw sugar total; Cuba, 12 percent; and Brazil, 11 percent. Other important shippers to Canada have been Belize, Guyana and Swaziland. Under the old Commonwealth Sugar Agreement, these countries along with Australia were given priority to export their sugar to Canada.
With respect to tariff structure, Canada has maintained generally low tariffs on raw and refined sugar imports. The governments main sugar policy has aimed at protecting Canadas domestic raw cane sugar refining industry. As a result, higher tariffs are imposed or refined sugar than raw sugar. Refined sugar imports from Most Favored Nation (MFN) countries pay a duty of C $30.86 per ton or U.S. $ 22.00 per ton or about 1 cent per pound, whereas raw sugar from MFN countries pay C$ 22.05 to C$25.57 per ton or U.S. $15.80 to U.S.$18.30 cents per ton or 0.717 cents per pound or 0.830 cent per pound, depending on the polarization of the sugar.
In recent years the bulk of refined sugar imports have come into Canada on a declining tariff schedule as determined by the Canada-U.S. Free Trade Agreement.
Canada - U.S.: Free Trade Agreement, NAFTA and Related Trade Issues
Canada and the U.S. entered into a Free Trade Agreement (FTA) effective January 1, 1989, and tariffs on sugar are scheduled to decline to zero in 1998. At the start of the agreement period in 1989, the U.S. duty on Canadian refined sugar was 0.60 cents per pound, and the Canadian duty on U.S. refined sugar was 0.78 cents per pound. The U.S. also had an import fee of 1 cent per pound on refined sugar applied under Section 22 of the Agricultural Adjustment Act of 1933.
In October 1990, the United States replaced the eight year-old quota system with a tariff-rate quota. The implementation of the U.S. tariff-rate quota was complicated by the FTA, which prohibits the application of the higher rate of duty to Canadian sugar. However, Canadian sugar exports to the U.S. were expected to remain close to 1.l percent of the "low-duty allocations" under the tariff-rate quota.
The NAFTA has not changed U.S.-Canadian sugar tariffs, but requires that Canadian sugar entering Mexico be given Mexicos Most-Favored Nation (MFN) over-quota customs duty. The NAFTA allows Canada to apply a duty on Mexican sugar equal to the Mexican duty on Canadian sugar.
Despite the various trade agreements between Canada and the U.S., the two countries have continued to have a series of trade disputes over sugar and sugar-containing products to the U.S. and the level of U.S. sugar exports moving into Canada.
In mid-1995, Canada was shipping about 40,000 tons annually of its domestic beet sugar production to the U.S. The duty paid on this sugar was 0.20 cents per pound, as specified in the Canada-U.S. Free Trade Agreement and NAFTA, plus a 1-cent per pound fee. But this treatment changed with the adoption of the new U.S. tariff schedule to implement the Uruguay Round GATT agreement. While the low duty schedule was not affected, the new tariff schedule put limits on Canadian low-duty sugar access to the United States.
In addition, U.S. imports of some sugar-containing products, including those from Canada, were constrained by quotas to protect the U.S. sugar program. As of January 1, 1995, the U.S. placed several categories of sugar-containing products into tariff categories with tariff-rate quotas (i.e., fixed amounts that can be imported at low tariffs while additional quantities face higher tariffs). Canada had been rapidly increasing exports of these products, such as powered-drink mixes. They now are limited to a tariff-rate quota of about 72,000 tons (64,000 metric tons), which is well below the amounts Canada had been exporting to the U.S.
Concurrently, a wave of U.S. sugar shipments to Canada under the re-export program led to the imposition of anti-dumping duties on refined sugar imports into Canada from the U.S. and EU from July 1995, and these are due to last until late 2000.
More recently, Canada and the U.S. reached some accommodations on these sugar-related issues. As of early September 1997, Canada and the U.S. reached an agreement over a long-running dispute regarding sugar-containing product trade. The agreement avoids the dispute going to a NAFTA settlement panel. The deal results in Canada dropping its challenge of the U.S. re-export program for sugar-containing products. In return, Canada now will receive guaranteed access to the U.S. market for a minimum of 10,300 metric tons of refined sugar and 59,250 metric tons of sugar-containing products, under the TRQ for edible preparations (i.e., dry crystal mixes, cake decorations, confections). The standing U.S. TRQ for edible preparations (HTS 1701.91.5400) is 64,709 metric tons. Canada can compete for the balance of the quota (5,459 tons) on a first-come, first-served basis. To be eligible for the access, U.S. Customs must designate the sugar-containing products "as a product of Canada."
Sugar Prices: Recent Trends and Structure
Pricing for individual refined sugar products in Canada is based upon the bulk refined granulated sugar price, which, in turn, is based upon the New York No. 11 daily futures contract for raw sugar price plus a margin for refining services. An additional amount, or differential, is then added for each particular product and packaging configuration. From this daily list price, discounts are negotiated which reflect supply and demand conditions in the domestic market.
Domestic refined sugar prices also are affected by the presence of import competition. Refined sugar imports had faced no quantitative restrictions and only low levels of import duties. A second source of price competition for sugar is from alternative sweeteners, mainly high fructose corn syrup which is a close substitute for refined sugar in a range of uses. As a result, refined sugar prices in Canada reflect domestic and imported refined sugar price competition as well as price competition from alternative sweeteners. These factors, taken together, explain why Canadian sugar prices have tended to remain below both those of the U.S. and Mexico.
Canada Beyond 2000
Given recent history and the lack of processing capacity, it appears unlikely that domestically produced beet sugar will expand significantly in Canada. SCI projects that Canadian beet sugar production will remain in the 110,000 to 150,000-ton range in the years ahead. It will be interesting to watch whether the Rogers Sugar facility in Winnipeg will reopen and how much sugarbeet agriculture will grow near the U.S. border in the Ontario province to service the needs of the Michigan Sugar Company.
With population growth expanding slowly and competitively priced sugar available to households and industrial users, SCI forecasts sugar consumption in Canada growing to 1.325 million tons by 2000/2001 and 1.45 million by 2005. Concurrently with this consumption growth will be the need for incrementally more imports, the dominate share of which will continue to be raw cane sugar. Import needs are projected to be 1.2 million tons in 2000 and 1.33 million in 2005. Australia is expected to remain the dominate supplier in western Canada, while Cuba (supplemented increasingly by other suppliers) will service the increasing needs of refiners in eastern Canada.
North America Beyond 2000
North Americas large and diverse sugar production agriculture and processing industries, organizational structures, consumption patterns, and trade flows are in transition. These recent trends and current developments also offer signs to potential future outcomes:
Production: North Americas sugar production is forecast at a record 11.95 million tons for 1997/98. Prospects are strong that this production level will be exceeded in the decade ahead. Mexicos cane sugar industry is expanding with increased area in production and better yields underpinned by better management and increased investment levels. The U.S. beet and cane sugar production base also is expected to expand, assuming no major change in the price support level; however, the growth likely will be uneven as higher cost areas of both beet and cane production contract while lower cost areas expand. The growth of production will be particularly interesting to watch in the sugarbeet area of the Red River Valley and the cane area in Louisiana. In contrast, Canadas beet sugar production base is likely to remain small as farmers in western Canada concentrate on more remunerative grain crops.
Technology will play a key roll in expansion reflecting improvements in the field and factory. Higher yielding beet seed will be available to farmers in the U.S. and Canada. New cane varieties will be coming on line in the U.S. and Mexico. Management of the sugar crops in these countries will strive to establish a balance between tonnage and sugar content. To achieve its potential, Mexico will need to devise a system that provides incentives to produce for quality, i.e. higher sugar content. This will require investment in monitoring systems acceptable to both growers and processors. At the factory, new technologies, such as the desugaring of beet molasses, will be fine tuned and new systems such as membrane filtration systems at cane mills, will foster higher pol sugar.
Organization Structure: North Americas sugar industries are undergoing significant changes in structure that have important implications for the future. In Mexico, the new land law allows greater concentration of holdings and reduces fragmentation that has led to lower yields, difficulty in applying new production input technologies, and logistical problems at harvest. In the U.S., the cooperative grower processor movement is very strong and is expanding, led by the grower cooperatives in the Red River Valley that account for over 50 percent of the U.S. total beet sugar production. In Canada, the U.S. and Mexico, sugar companies are merging to aid in creating production efficiencies and larger marketing organizations. For example, traditional regional companies such as Imperial-Holly in the U.S. are moving to be a national marketer given their recent merger with Savannah-Michigan. Mexicos milling sector has gone from largely government owned to a privatized industry. In Mexico, the U.S. and Canada, the trend toward larger and fewer sugar companies is expected to continue with the more financially viable firms flourishing. In addition, the strength of cross-national sugar firms such as Tate and Lyle with interests in Canada, the U.S. and Mexico is likely to increase as will the trend of Canadian firms, such as B.C. Sugar, investing in the U.S. (i.e. Refined Sugars Inc. in New York) or U.S. firms investing in Mexico.
Consumption: Sugar consumption growth in the region is expected to continue to outpace production expansion. In 1997/98, North Americas population is estimated at 403 million and with a per capita consumption of 33.6 kilograms that equals 14.46 million tons of sugar use. By 2005, North Americas population, according to the World Bank, will be 424 million (U.S. 286.70 million, Mexico at 106.72, and Canada at 30.70 million). Assuming the per capita use rate does not change, North America will be consuming 15.24 million tons of sugar, raw value, in 2005, up nearly 800,000 tons or 5.4 percent from the 1997/98 forecast. This projection assumes that the current sugar price structures in the U.S., Mexico, and Canada, remain unchanged. Only incremental growth is foreseen in sugars chief substitute, corn sweeteners. The HFCS liquid sweetener markets in the U.S. and Canada are already mature. The key looming question is the future growth of HFCS as a substitute for sugar in Mexico - - that question is extremely difficult to gage at this point as it involves social as well as economic issues.
Trade: With the gap between sugar demand and regional production expected to widen, net sugar imports into North America are expected to expand. Canada is projected to need 1.1 to 1.3 million tons of annual imports, again mainly raw sugar coming from traditional origins. U.S. imports of tariff rate quota (TRQ) sugar are also expected to grow to 2.48 million by 2005. The composition of TRQ imports is likely to change as pressure is building that the current system of allocations is dated and the move to a partial globalization of the raw sugar quota would be a viable solution.
Mexicos import and export future levels are again difficult to judge as much depends on the financial health of the industry and this, in turn, pivots on the potential level of impact of HFCS on the Mexican sugar sector.
Clearly, the level of sugar trade between Mexico and the U.S. will grow reflecting the current NAFTA access schedule and declining tariff levels as the region moves toward becoming a "customs union." The trade between Canada and the U.S. will remain small but important to the respective industries, especially the volume of sugar-containing products crossing the respective borders. Moreover, as the region has recently experienced, viable trade dispute mechanisms need to be in place to resolve inevitable trade disputes relating to the marketing of sugar and sugar containing products.