The generally complicated sweetener picture (sugar and corn sweeteners) appears to be entering 2014 with at least one aspect becoming clearer — corn sweetener prices will be lower than in 2013. That’s largely due to a record 2013 U.S. corn crop, but also contributing pressure are continued below-year-ago sugar prices, and uncertainty about sugar and corn sweetener demand in Mexico, and ethanol, which affects corn and sugar.
The U.S. Department of Agriculture in November raised its estimate of 2013 U.S. corn production to a record 13,989 million bus, with some in the trade expecting that number to push above 14,000 million bus when annual revisions are made in January. That’s up 30% from the drought-reduced 2012 crop of 10,780 million bus.
While there are numerous factors in addition to the cost of corn that determine the price of corn sweeteners, buyers largely have focused on the size of the corn crop and the price of corn, with nearby corn futures down more than 40% from last December and down nearly 50% from record highs set in August 2012.
In 2013 high-fructose and regular corn syrup prices were raised by about 2½c a lb and dextrose prices were raised about 1c from 2012 contracted levels. (The dextrose increase was moderated by a larger boost in 2012 from 2011.) One of the key arguments for higher prices in 2013 was that corn supplies were tight, especially in areas where the bulk of corn wet mills were located. When corn refiners issued their initial 2014 pricing letters in early November (prior to the U.S.D.A.’s crop forecast), most products were offered at 2c to 2¾c a lb below 2013 contracted levels. Some refiners noted that other costs, especially rail freight, were higher this year (increased demand due to larger crops) and offset some of the impact of
lower corn prices.
But buyers have shown little concern about the impact of transportation costs. Some are holding out for 3c- to 4c-a-lb reductions from 2013 contracted levels for 2014 corn sweetener prices. Before Thanksgiving there had been barely a trickle of 2014 contracting, with indications of a couple of deals down 3c a lb from 2013. At that point, most corn refiners still were not moving from their initial offers of 2c to 2¾c a lb lower. But since the holiday, it appears buyers may have dug in a little deeper to the idea they can do better than 3c lower. At the same time, there appeared some movement that would result in deals being completed at the 3c-a-lb discount to 2013, if for no other reason than to get contracts concluded before the Christmas break.
In some years, corn sweetener contracting for the next year is completed before Thanksgiving. In a few years it has continued into the new year. Buyers noted that in most recent years, the longer the negotiation period continues, the lower the prices they have been able to receive.
In addition to the corn crop size and price, buyers also have in their favor lower competing refined sugar prices than a year ago, and little prospect of higher sugar prices due to forecast ample supplies again in 2014. Refined sugar prices last year were down more than 40% from 2011 and currently are down about another 20% from 2012.
Also potentially impacting prices are questions about sugar and corn sweetener demand in Mexico because of a new sweetened beverage and snack tax that begins in January. Since the remaining tariff rate quotas restricting sales to Mexico ended on Jan. 1, 2008, in the North American Free Trade Agreement, U.S. exports of corn sweeteners, mainly 55% HFCS used in beverages, have soared, as have exports of Mexican sugar to the United States, with both able to cross the border duty free.
Although U.S. imports of Mexican sugar reached a record high 2,124 million tons in 2012-13 (October-September), a glut of sugar in both countries, and the world for that matter, resulted in multi-year low sugar prices. Another result was the first forfeitures in about a decade of sugar held by the U.S.D.A. as collateral for loans to U.S. sugar processors.
One of the responses to low sugar prices in Mexico has been a growing pushback against imports of U.S. HFCS, not unlike the pushback by U.S. sugar producers against U.S. imports of Mexican sugar. The U.S.D.A. earlier in the fall forecast Mexico would use about 10% less HFCS in 2014 than in 2013, and that was before the “fat” tax, which applies to both sugar and HFCS in Mexico. One may surmise the tax will have a greater negative impact on imported HFCS than on domestic sugar consumption in Mexico. And what impact lower HFCS prices may have in maintaining market share also is uncertain. The bottom line is, if Mexico imports less HFCS, the extra supply mostly stays in the United States.
U.S. consumption of HFCS has been in a decline since the late 1990s, but corn refiners have been able to offset much of that decline in recent years with increased exports to Mexico. Prices for HFCS, and other corn syrup products, typically have followed corn price and production levels, typically moving higher by showing declines in years following.
Then there’s the ethanol factor. The U.S. Environmental Protection Agency for the first time has proposed a reduction in the U.S. ethanol mandate, or the amount of ethanol that must be blended with gasoline. Between 35% and 40% of total U.S. corn production has been used to produce ethanol in recent years, with many attributing that use as the primary factor in pushing U.S. corn prices to a new “plateau.” While there is considerable debate about whether the lower mandate will have any negative impact on U.S. ethanol production, it has the potential to reduce corn demand, which may make more corn available for other uses, including corn sweeteners. Those who see no impact suggest ethanol production is driven by profit margins, which currently are the best they have been for months if not years, and any excess ethanol output will be exported, mainly to Europe. They also note that lower corn prices will increase demand from livestock and poultry feeders, which will compete with corn demand for other uses.
It’s complicated, but corn sweetener prices will be lower in 2014.