Sugar Trading Manual [Lslf ed.] 1855734575, 9781855734579

Citation preview

Sugar Trading Manual

STM Sugar Trading Manual

Edited by Jonathan Kingsman

Cambridge England

Published by Woodhead Publishing Limited, Abington Hall, Abington Cambridge CB1 6AH, England www.woodhead-publishing.com First published 2000 Second edition 2002 This edition published 2004 © complete work, Woodhead Publishing Limited 2004 © Chapter 4, LMC International 2004; © Chapter 19, Joan Noble Associates 2004 The authors have asserted their moral rights. This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. Reasonable efforts have been made to publish reliable data and information, but the authors and the publisher cannot assume responsibility for the validity of all materials. Neither the authors nor the publisher, nor anyone else associated with this publication, shall be liable for any loss, damage or liability directly or indirectly caused or alleged to be caused by this book. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming and recording, or by any information storage or retrieval system, without permission in writing from the publisher. The consent of Woodhead Publishing Limited does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obtained in writing from Woodhead Publishing Limited for such copying. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. ISBN 1 85573 457 5 ISSN 1476-7473 Typeset by SNP Best-set Typesetter Ltd., Hong Kong Printed by Astron On-Line, Cambridgeshire, England

Contents List of contributors Foreword by Dr Peter Baron Introduction Index

Part 1: The history of sugar 1 Early history Tony Hannah International Sugar Organization The spread of sugar westwards The colonial era Sugar and slavery The rise of beet sugar Technical innovation The social history of sugar

2 Sugar from the 1900s to the present day Tony Hannah, Sergey Gudoshnikov and Lindsay Jolly International Sugar Organization 1900–14: Rapid expansion 1914–18: Decline during the First World War 1919–39: Rapid growth and cane makes a comeback 1939–45: Decline in both beet and cane sugar production during the Second World War 1945–55: Rapid recovery, first post-war International Sugar Agreement 1955–65: The Cuban Revolution disrupts trade flows 1965–75: The 1974 price boom unleashes far-reaching structural changes for sugar Contents/page i

Contents 1975–85: The 1980 price boom reinforces the effects of the 1974/5 boom 1985 to the present day

Part 2: The global picture 3 The current world picture Jonathan Kingsman, Société J. Kingsman Tom McNeill, Sugar InSite Pty Ltd Structural change within the sugar market Future prospects – closer examination of three key producers The trading implications of recent changes

4 Costs of production Philip Digges and Dr James Fry LMC International Rationale behind production cost studies Choice of benchmark A comparison of cane and beet sugar production costs A comparison of sugar production costs for a group of selected cane and beet sugar producing countries Technical performance and its impact on costs Conclusion

5 Alternative sweeteners Lindsay Jolly International Sugar Organization Starch sweeteners High intensity sweeteners Conclusion Appendix: Characteristics of high intensity sweeteners and polyhydric alcohols References

6 World fuel ethanols – analysis and outlook Dr Christoph Berg F.O. Licht Contents/page ii

Contents Some basic concepts Success factors Ethanol support schemes – a regional analysis World ethanol trade flows now . . . . . . and in the future Conclusions

Part 3: Physicals 7 Sugar pricing Robin Shaw Samer Darwiche, Cargill International SA, Geneva The futures component Physical premiums or discounts

8 Freight Stephan Baldey O. P. Secretan Liner or tramp Voyage or timecharter Voyage estimate: dry cargo Charter party Trends

9 Statistical analysis Rod Boltjes Cargill Inc, USA The quarterly ‘S & D’ format Sources of information Quality conversions Other conversions How to use the database Relationships Significance of the fundamental range Conclusion Contents/page iii

Contents 10 The Sugar Association of London (SAL) and The Refined Sugar Association (RSA) Derek Moon SAL and RSA Why do trade associations exist? How are the two sugar associations managed? The regulatory organizations for the international trading of physical raw cane and beet sugar and physical refined white sugar How does the arbitration system work? Supervision of raw sugar cargoes delivered to the UK by The Sugar Association of London Other services to the trade

11 Supervision Robert G. Danvers International Commodity Control Services, Hamburg Definition Nomination Role of the supervisor Documentation Claims Arbitration/litigation Conclusion

12

Sugar quality Tom McNeill Sugar InSite Pty Ltd Quality aspects of raw and refined cane sugars The refining process Critical steps in refining sugar Utilization of sugar in food manufacturing Grades of raw sugar

Part 4: Futures 13 Futures and options James Cassidy and Michael McDougall Fimat, USA History and background Market participants Contents/page iv

Contents Option strategies Conclusion

14

The exchanges Doug Nicolson Sucden UK Ltd The New York Coffee, Sugar and Cocoa Exchange (CSCE) LIFFE The Tokyo Grain Exchange

15 Technical trading Jonathan Kingsman Société J. Kingsman Technical versus fundamental analysis Why does technical analysis work? The investment funds The tools of the technical trade Risk management and moral hazard Conclusion

Part 5: Administration and management 16

Payment and documents John Maton Coimex, Geneva Cash against documents (CAD) Letters of credit (L/C) or documentary credit (credit) Bid bonds (BB) and performance bonds (PB) and guarantees

17 Accounting Simon O’Mahony Sucre Export London Ltd Commercial approach Special features of sugar accounting Accounting principles Contents/page v

Contents Futures margins Positions Contract pricing Vessel accounting Futures accounting Despatch and demurrage Currencies Internal markets Quotas and licences

18

Finance and risk management Roger Bradshaw Rabobank, London Primary production financing Financing sugar factories and mills International sugar trade Managing risk

Part 6: Regional markets 19

The European Union Joan Noble Joan Noble Associates The EU sugar policy 2001–2006 Pressures for change: the EU sugar policy from 2006 The policy beyond 2006 Appendix A: EU sugar support prices Appendix B: Basic sugar, isoglucose and inulin quotas in the EU (tonnes) 2001/02 to 2005/06 Appendix C: Coefficients used to cut Member States’ quotas for sugar, isoglucose and inulin: applicable from 2004/05 Appendix D: EU production quotas for sugar, isoglucose and inulin Appendix E: Preferential sugar quotas for ACP and India

20 The United States Frank Jenkins Jenkins Sugar Group US sugar policy Tariff rate quota

Contents/page vi

Contents Sugar program apparatus Re-export programs The US sugar beet industry The US cane sugar industry Free trade

21

MERCOSUR and the Andean Community Leonela Santana-Boado UNCTAD MERCOSUR and the Andean Community Agreement Sugar in the MERCOSUR Agreement Impact of MERCOSUR on members’ sugar economies Sugar in the Andean Community Impact of Andean Community (CAN) on members’ sugar economies Conclusion Appendix A: Trade agreements in Latin America Appendix B: MERCOSUR and CAN in the world sugar economy Appendix C: Centrifugal sugar (thousand tonnes raw value): MERCOSUR members Appendix D: The sugar trade before and after MERCOSUR Appendix E: Ad valorem tariffs in MERCOSUR members Appendix F: Ad valorem tariffs in Andean group of countries Appendix G: Centrifugal sugar (thousand tonnes raw value) in the Andean Pact Appendix H: The sugar trade before and after the Andean Pact Appendix I: The MERCOSUR Agreement; from LAFTA to MERCOSUR Appendix J: First efforts to integrate the sugar sector

22

Sugar markets of the FSU countries Sergey Gudoshnikov International Sugar Organization Sugar production: trends and developments Sugar consumption: trends and developments Foreign trade in sugar: trends and developments National sugar policies and market structures Conclusion Appendix: Statistical analysis

Contents/page vii

Contents

Part 7: Appendices 1 Sugar No. 11 Rules 2 Sugar No. 5 Rules 3 Standard physical contracts 4 Sugar Charter-Party 1999 5 Sugar No. 14 Rules 6 Organic sugar – Demand potential and supply availability 7 Glossary of terms

Contents/page viii

Contributors Stephan Baldey Stephan Baldey is a chartering broker who has been involved in the international freight market for over thirty years. He is both a member of the LIFFE sugar market freight panel and of the Baltic Exchange. His company, O.P. Secretan, based in the City of London, is experienced in the chartering of ships to carry all dry cargo commodities specializing in the sugar trades.

Christoph Berg Christoph Berg is senior economist and deputy director at commodity analyst F.O. Licht. He graduated in Economics from Heidelberg University in 1989 and afterwards was Research Fellow at Victoria University, Manchester, UK. In 1993 he was awarded a Ph.D. in Economics at the Technical University of Berlin. In 1994 he joined F.O. Licht, where he is responsible for newsletters and reports on sugar, molasses and ethanol.

Rod Boltjes Rod Boltjes was born in 1944 near Platte, S. Dakota. Rod graduated with a B.S. degree from S. Dakota State University in 1967. He was drafted into the US Army while working on his master’s degree in economics at the same institution. After a year’s service in Vietnam, he joined Cargill in 1969. The early years at Cargill were spent on fundamental analysis for the grain, livestock and soybean processing divisions. In 1973 he joined the Cargill Sugar Division and created a fundamental data package to assist in analysing the volatile sugar market. Similar statistical packages were later created for cotton, molasses and coffee. From 1983 to 1987, he was manager of Cargill’s Technical Analysis department, where he developed technical trading systems and held technical seminars for the company’s trading divisions. Rod is currently senior economist at Cargill for the Sugar Business Unit.

Roger Bradshaw Roger Bradshaw started in sugar in 1977 as a floor trader on the Paris futures market. He then moved to London where he worked for Rionda Contributors/page i

Contributors de Pass as a trader until 1980 when he joined J.H. Rayner (Mincing Lane) Ltd. In 1985 he joined E.D. & F. Man Ltd. and was appointed as a director of E.D. & F. Man (Hong Kong) Ltd. He joined Rabobank in Hong Kong in 1991 and in 2000 relocated to Rabobank in London. Since January 2004 he has assumed responsibility for relationship management of UK food and agribusiness clients.

James Cassidy James Cassidy is Senior Vice President – Investments of Fimat USA in New York where he heads the sugar desk. After graduating from Fordham University with a double major in Finance and Economics, Jim has posted an 18-year career in the sugar business with a number of houses, including Thomson McKinnon, Prudential Bache, Paine Webber and Brody White. Jim has extensive experience in trading futures and options with an in-depth knowledge of the sugar industry. He has written numerous articles and journals on the futures side of the business and is an active representative of trade houses, producers and users in sugar derivative markets.

R.G. Danvers R.G. Danvers started his career in 1963 by joining Cargo SuperIntendents (London) Ltd (SGS Group), where he worked for nine years, involved in sampling, checking and weighing cargoes arriving from many different origins. In 1974, he joined Tradax (Cargill Group) in the UK and was responsible for UK Discharge Programme, including the appointment of Stevedores, Ship Agents and Cargo Surveyors as well as undertaking chartering activities. He also represented Tradax at the North American Shippers Association. In 1978, he was appointed Managing Director of Warriner Griffith International and travelled extensively overseas in developing the international trade in supervision/surveying services. Since 1981, Mr Danvers has been a Director of Control Union responsible for sales and marketing worldwide. In 1993, Mr Danvers moved from London to Hamburg and was appointed Managing Director of ICCS – International Commodity Control Services GmbH, a company within the Control Union World Group of Companies, with specific responsibilities for the marketing and execution of sugars and related business worldwide, in addition to developing the group’s expanding supervision interests in Eastern and Central Europe including the Former Soviet Union (FSU) and the Commonwealth of Independent States (CIS). During this period, Mr Danvers served as Chairman for two years on the Agricultural and Vegetable Oils Committee of the International Federation of Inspection Agencies Contributors/page ii

Contributors (IFIA) and currently continues to serve on this committee as a Senior Member. Additionally, Mr Danvers serves as Chairman on behalf of IFIA on the current Sub-Committee formed between the Refined Sugar Association (RSA) and the Sugar Trade Protection Club (STPC). During the course of his career, Mr Danvers has been called upon as a Professional Witness at various arbitrations in matters related to the supervision business.

Samer Darwiche Samer Darwiche entered the commodity industry in 1991 with Cargill International SA and held senior trading positions in Geneva in its Energy and Sugar Divisions until June 1998. In 1999 he co-founded and co-managed a global sugar trading team for Tradigrain SA. Thereafter he worked as a fund manager for Martin Group in Milan until 2001. Mr Darwiche rejoined Cargill in 2002 as Manager of their White Sugar Trading operations.

Philip Digges Philip Digges is Deputy Head of Sugar Reseach at LMC International’s Sugar and Sweeteners Research team, with particular responsibility for international market issues and issues relating to sugar policy, pricing, trade and production. He is also an editor of the monthly Sugar Bulletin and Sweetener Analysis, and of the LMC Sugar and Sweeteners Quarterly Report Service. In addition to his role in contributing to LMC’s work on sugar, Mr Digges has also played a lead role in the company’s leather and leather products team. Prior to joining LMC, he was a senior economist at the Natural Resources Institute where he specialized in crop marketing systems and trading strategies. This involved analysis of smallholder, national, domestic and international marketing systems for tropical crops, and the appraisal of storage and processing technologies.

James Fry James Fry is Managing Director of LMC International, and was one of the company’s founders in 1980, subsequently spending a great deal of time participating in the development of its work in the sugar and sweetener sectors. A particular area of professional interest for him is the preparation of production cost models for sugar and other agricultural commodities. Prior to joining LMC, he was a University EconomContributors/page iii

Contributors ics lecturer at Oxford University, England, and also at the University of Zambia and the Université Officielle du Congo, in Lubumbashi in the Democratic Republic of the Congo.

Sergey Gudoshnikov Sergey Gudoshnikov was educated in Moscow in international trade economics and has dedicated more than two decades of his professional career to the world sugar market. From 1978 to 1988 he worked as a trader and then as deputy director of the Sugar Department of V/O Prodintorg, Moscow. At that time Prodintorg was the sole sugar importer and exporter in the Soviet Union with an annual turnover exceeding six million tonnes of sugar. In 1988 Sergey joined the secretariat of the International Sugar Organization, London, as an economist. He has published many articles on different aspects of the world sugar economy with a particular emphasis on the sugar markets of Eastern Europe.

A.C. Hannah A.C. (‘Tony’) Hannah was educated in New Zealand in agricultural economics and was Trade Policy Research Centre Fellow at Cambridge University from 1970 to 1973. From 1973 to 1976 he was Commodity Specialist at GATT in Geneva, and in 1977 he was appointed Head of the Economics and Statistics Division of the International Sugar Organization. He has published many articles analysing the international sugar market with particular emphasis on the effects of structural changes in the market. In 1996 he co-authored the book The International Sugar Trade, published by Woodhead Publishing Ltd. Mr Hannah died in June 2001.

Frank Jenkins Frank Jenkins is President of Jenkins Sugar Group, Inc., a commodities brokerage located in Wilton, Connecticut. Mr Jenkins has worked in various capacities in the sugar industry since 1983, most recently as a Vice President with Merrill Lynch and previously with E.D. & F. Man in New York. He lives in Wilton, Connecticut, with his wife and three children.

Lindsay Jolly Lindsay Jolly is an economist working with the International Sugar Organization where he is responsible for conducting market research

Contributors/page iv

Contributors and analysis of the world sweeteners, molasses and ethanol markets. Mr Jolly has a wide experience in economic research into primary commodity markets. He has previously been employed at the Australian Bureau of Agricultural and Resource Economics in Canberra, Australia (1982–90 and 1992–95) and the Food and Agriculture Organization of the United Nations in Rome, Italy (1990–92).

Jonathan Kingsman Jonathan Kingsman began his career in sugar in 1978 with Cargill Inc., where he worked as a trader both in Europe and the United States before moving on to the brokerage side of the business with ContiCommodity Services and then Paine Webber. He now lives in France where he started his own physical brokerage and consultancy company in 1990.

John Maton John Maton is an Arbitrator for The Refined Sugar Association of London. He has worked in the sugar trade since 1978, firstly for Anglo Chemical Commodities in London and from 1981 to 2003 for Gill & Duffus in Geneva. He joined Coimex Geneva in November 2003. He is a technician with in-depth knowledge of contract terms.

Michael McDougall Michael McDougall, Senior Vice President of Fimat USA Inc. World Desk, joined Fimat in March 1995 as Managing Director until May when the international team was transferred to New York. The World Desk has been instrumental in developing hedging activities for commodity producers and consumers, with particular emphasis on the Brazilian sugar/alcohol industry. Michael lived in Brazil between 1984 and 1998.

Tom McNeill Tom McNeill is a director of the consulting firm Sugar InSite Pty Ltd in Brisbane, Australia. This chapter was written when he was Senior Analyst for Queensland Sugar Ltd. Prior to that Tom was marketing manager for Queensland Sugar Corporation. He has also worked in sugar mills and in export marketing for CSR Limited, and as a project manager for the Australian Meat and Livestock Corporation.

Contributors/page v

Contributors Derek Moon Derek Moon joined the Sugar Association of London and the Refined Sugar Association in 1963 as a Junior Clerk and was appointed Secretary to both Associations in 1985. He is a member of the Commercial Court Committee, the Chartered Institute of Arbitrators and a council member of the Federation of Commodity Associations.

Doug Nicolson Doug Nicolson is currently manager of the sugar futures desk at Sucden UK. He has had a long and varied career in most aspects of the sugar business, including physical trading, physical brokerage and futures trading both as a client and a broker.

Joan Noble Joan Noble is a highly respected expert on the European Union’s common agricultural policy and its impact on the food industry. Having worked for many years in the City of London for sugar traders S. & W. Berisford and E.D. & F. Man, she established her own consultancy, Joan Noble Associates Ltd*, in 1989. Her business is active in advising on agricultural, food and environmental legislation and related international trade policy. She is a well-known speaker at international conferences, is a member of the EU’s ‘Team Europe’ Speakers’ Panel and has had numerous articles published. *Joan Noble Associates Ltd, 5 Brunswick Gardens, London W8 4AS; Telephone: 020 7727 9345; Facsimile 020 7792 1992; e-mail: [email protected].

Simon O’Mahony Simon O’Mahony currently works as a trader for Sucre Export London Ltd. Simon qualified as a chartered accountant with Arthur Andersen in London before joining Philipp Brothers in 1979. He started on the sugar trading desk in 1984, specializing in both foreign exchange and EU sugar trading. He joined Sucre Export in 1990.

Leonela Santana-Boado Leonela Santana-Boado joined the United Nations Conference on Trade and Development in 1990. From March 1990 to December 1994, she worked as an economic affairs officer in the Commodities Division, Agriculture Products Branch. Since January 1995 she has been working at the Risk Management and Finance Unit of UNCTAD. She Contributors/page vi

Contributors has published various documents and has been a speaker at international conferences in the area of sugar and risk management and finance. Some of her most recent publications on sugar are: ‘Collateralized commodity financing with special reference to the use of warehouse receipts’, UNCTAD/COM/84, 1996; ‘Sugar and Customs Unions in Latin America: MERCOSUR and Andean Pact, 1997’; ‘Customs Unions and Free Trade: Mercosur and Andean Pact’, F.O. Licht’s World Sugar and Sweeteners Conference, 1998; ‘A survey of the impact of the Everything but Arms initiative in the sugar sector of LDCs’, 2003.

Robin Shaw Robin Shaw has been involved in sugar all his working life. He started with C. Czarnikow in 1966 before moving to Sucres et Denrees Paris in 1971, where, with one interruption, he worked until 1992. He was head of CR Sugar Trading in London from 1992 until its closure in 1999, when he started an Internet brokerage exchange. His travels on sugar business have given him a fairly deep knowledge of the main sugar countries, notably Russia (he speaks Russian) and China.

Contributors/page vii

Foreword The third edition of the Sugar Trading Manual appears only four years after publication of the first edition. This indicates the continued need for such a manual and reflects at the same time the dynamism of the world sugar industry. Dramatic change is taking place in the markets, the trading structures and patterns in the industry as well as in the commercial, policy and regulatory framework. These developments alone justify a regular updating. This third edition, however, is far more than a mere face-lifting operation. The historical part has been tightened up. Other parts like ‘The Global Picture’ and ‘Physicals’ as well as ‘Futures’ have been reworked and streamlined. The parts on ‘Administration and Management’ and ‘Regional Markets’ underwent a major rewriting to embrace the most recent developments and to take into account the rapid changes. The Sugar Trading Manual fulfils high expectations and remains the textbook of excellent standards, written by well-known and respected authors and orchestrated by an experienced editor. This combination makes the third edition of the Sugar Trading Manual an indispensable and absolutely essential tool for the increasing number of players in an expanding and growing world sugar economy. Dr Peter Baron Executive Director International Sugar Organization, London

Foreword/page i

Introduction The sugar trade houses have had such a difficult time over the last few years, it would be tempting to suggest that they needed some sort of manual to teach them how to trade. Even if that were true – and it is not – it is not the purpose of this work to teach anyone how to trade, nor, unfortunately, is it to provide solutions to all the problems that traders encounter. Its raison d’être is as a comprehensive reference and training manual for anyone involved in the international sugar trade. Its ambition is to find a permanent place among the half-empty coffee cups and general debris on the desk of every trader, broker, banker, forwarder and accountant in the sugar business. Where else, for example, would you be able to find, in one work, the world price of sugar in 1900, the correct method for accounting for options, the demurrage clause for the No.11 futures market, who pays what when documents are presented through a bank, or what exactly a doji star is? We believe that this manual fulfils its ambition because of the expertise of its contributors and all the hard work they have put into its preparation. Rather than try to write great chunks of the work ourselves, we preferred to ask for contributions from people who really know what they are talking about – people who have been working in their particular area for years and are happy to have this manual as a forum for passing on that acquired knowledge to young people entering the trade, or those requiring a strategic overview of the workings of the industry and its markets. The response to our initial request for contributions was tremendous and, despite our fears, that early enthusiasm translated into evenings spent in front of the computer screen, rather than in front of the television, and weekends lost to wives, families and golf courses. To all our contributors we pass on an enormous vote of thanks. To spouses, families and nineteenth-hole bartenders, we apologize for the time this manual has taken and we ask for forgiveness. We believe, however, that the end result is worth all the effort put into it. By its very nature as a multi-contributor work, the manual contains some imbalances. Some sections are longer than others and writing styles between contributors vary. We have, however, resisted the temptation to artificially harmonize the contributions, preferring to make a virtue of the variety inherent in the manual’s enormous breadth of coverage. Introduction/page i

Introduction After much reflection – and many false starts – we have split the manual into seven sections. Part One deals with the history of sugar and discusses the political nature of our commodity and examines how world trade has developed. Part Two explores, in detail, the background to the sugar trade with sections on current trade flows, relative costs of production, ethanol and alternative caloric sweeteners. Part Three looks at the heart of the physical trade. It begins by examining all the components that go into making up the price of sugar and then goes on to deal with the workings of the Sugar Association of London, how to set up a model for statistical analysis and the role of the cargo supervisor. Part Four looks in some detail into the workings of the futures market and the actors involved. Part Five deals with the back office with chapters on payments, banking and accounting. Part Six deals with government intervention and the place in the sugar trade of regional trade groupings. Finally, Part Seven, the Appendices, contains what we hope will be the ‘tool box’ for the sugar trade with examples of standard physical contracts and the rules of the New York and London futures exchanges. Throughout history, traders and merchants have traditionally made their money from the quality and rapidity of their information. The trade houses that exist today were built on the foundations of their communication and information networks. Even as little as 25 years ago, it was still necessary to book a telephone call to Moscow 24 hours in advance. Producers or buyers in far-flung places often had no idea at what price sugar was trading until they received their weekly market report each Monday morning. Communications were best by telex, and fax was in its infancy. Travel, particularly in the former USSR, was difficult. It was almost impossible to find out whether the Russian crop had failed unless someone from Prodintorg told you – and even then you were never sure they were telling the truth. Personal relationships were paramount and trade houses built up vast networks of offices and agents across the globe to maintain personal contacts and relationships with their clients. All this gave the trade-house professionals an important edge over the amateur speculators, an edge that is fast disappearing. Just as there is now a soft drink dispensing machine in every corner store in the world, there is a Reuters screen in every dusty sugar office in Brazil and a computer connected to the World Wide Web in every sugar factory in China. At the click of a button an Indonesian private buyer, for example, can check out not only the futures prices but also the physical premiums and container rates from any port in the world. News service reports have become so thorough that no corner of the trade is left undisturbed. It is not much of an exaggeration to say that there are no secrets any more. As for client relationships, communications have reached such an Introduction/page ii

Introduction advanced stage now that we even complain loudly if the call that we make on a mobile phone on the way to lunch fails to connect (at the first attempt) with a client who is also on a portable phone but in a night club in Thailand. We may think that we have a privileged relationship with a client but we have to accept that there are at least five of our competitors who also have the number of his portable phone – and they are probably less shy about using it than we are. Another related problem for the trade can be blamed, among other things, on Margaret Thatcher. Wherever you are in the world, reforms that she instigated may have lowered your taxes, but probably they have also reduced your profit margins. By catalyzing a wave of privatization that spread across the globe, people everywhere slowly found that they no longer worked for the government but for themselves. As such the money they were risking became their own. Price became the driving force. Perks, relationships and politics went by the board. Also, as the economies of developing countries have grown, the citizens of those countries have been empowered by a corresponding growth in education and knowledge. Twenty-five years ago, your Chinese client across the negotiating table probably left school at 14 years old. Today he may have graduated from Harvard. Twenty-five years ago a producer may have had a hard time grasping the concept of the futures market. Today we would probably have a hard time understanding the option strategy that a producer has just put on in the New York No.11 futures market. Finally, as consumer power and sophistication have grown, a vast financial services industry has grown to service it. Individual speculators have joined a million other like-minded souls in investment funds that now dwarf the traditional trade houses in their own markets. In 1974 a group of Russians wandered around London trying to convince anyone who would listen that, that year, Russia needed to import rather than export sugar. One trade house believed them and started a bull run that took the market to 66 cts/lb. If that happened today (which it would not because it would have been on the newswires the day before), the trade house buying would probably be filled in by a resting order that one of the big funds had forgotten to cancel. Trade houses have become small fishes in a large pond. Over the last 25 years, or so goes the argument, margins have disappeared, principle risk has increased, clients have become better informed and better educated, and traditional trade houses have been dwarfed by enormous and sophisticated investment funds. The end result of all these changes has been a further reduction in margins, leaving the trade houses moving sugar around the globe for little reward. However, that consensus is just too pessimistic. Although privatization has increased principle risk, it has also Introduction/page iii

Introduction widened the client base and given traditional trade houses many more opportunities. Twenty years ago, if a trader wanted to sell sugar to Russia he had no choice but to sell it to one central buying agency. Now he has quite a choice of trading partners although, of course, he will have to be careful who he trusts with his money or his sugar. In any case, he has the freedom to import and distribute the sugar himself, adding value and increasing the opportunities for profit. Similarly, 20 years ago, if a trader wanted to buy sugar from Brazil he had to deal with one central selling agency. Now he can buy directly from the mills, build and run his own terminals, deal in the domestic market and even invest in the production process. Admittedly it is risky – and the risks have to be priced accordingly – but the choice now exists where it did not before. Technology has increased the flow of information, but it was never information that was important anyway. Analysis has always been the key. Being able to work out how a particular news event will affect the market has always given some people an edge over others, and that is unlikely to change. Also, one of the side effects of this information flow is that there is now an information overload. Being able to filter out the noise and concentrate on the essential is more important than ever. Besides, it is not actually true that the flow of all information has increased. Try to get hold of up-to-date figures on Australian export numbers, and you will find that they have been classed as sensitive and are now withheld for a few months before publication. Try to get up-to-date South Brazilian production numbers, and you will be told that ‘they’ve got lost somewhere in UNICA’ and are only found a month or so later – when it is too late anyway. Finally, it has to be said that current information does not always help you to predict future events. One look at the different estimates for the upcoming year’s supply and demand highlights this. Better education as a result of increasing wealth in developing countries has increased the sophistication of both producers and consumers, but the world is a better place for it. To argue that wider education has reduced margins is to suggest that the cake is limited in size and that there is only a certain amount of wealth to go around (economists call this ‘the shortage fallacy’). Better education in itself increases a developing country’s growth and, incidentally, its sugar consumption. On the producing side, better education increases productivity; the use of best available management practices lowers production costs and increases net well-being all round. Also, having a well-educated and sophisticated negotiating partner should enable a trader to work together with him or her to reach solutions that are advantageous for both parties. This is much better than simply imposing what one side thinks is best. Admittedly margins are small, but then the commodities business has Introduction/page iv

Introduction always been a high-volume, low-margin business where rates of return have never been particularly sexy. However, although it may only be an impression, it seems that each time the trade houses have a bad year, they always go back to the basics of moving sugar from producer to consumer with no add-ons and no frills. If the market is bubbling, no one pays much attention, say, to Tunisia’s tender for a cargo of whites. However, if the market is flat and the Tunisian tender is the only thing happening at the time, then the offers will be more competitive and the margins smaller. (In a quiet market, lower margins can also reflect the lower risk of getting your hedges off at the right level.) However, there obviously comes a point where it is simply not worth doing the business. If enough trade houses took the conscious decision not to compete in a particular business then margins would inevitably rise. It is true that investment funds have swamped the trade houses in size but they have also opened up a whole new area of profitability. Devoting brain power to trying to work out the funds’ future behaviour has turned out in recent years to be probably the best time investment a sugar trader can make. And, as nearly all of these funds are trend followers, predicting their behaviour is not as impossible as some might think. Admittedly the days are gone when trade houses had a free hand to manipulate the futures, but then those times never really existed in the first place. There was usually another trade house of equal size willing to call the other one’s bluff. Besides, markets are efficient enough to ensure that manipulations are short-term affairs. Trade house access to finance has recently been reduced, but that could best be put down to the inability of the trade houses to price risk correctly. The fact that the banks are no longer willing to subcontract their role to the trade houses suggests that the trade houses have not filled that role successfully. In hindsight, traders have been too optimistic and too keen ‘to get the business done’, underestimating the risks involved and charging too small an interest rate differential. Bankers are a fickle lot and different areas of lending move quickly in and out of fashion. The commodity trade is now out of fashion, but that will not last forever. A scarcity in the supply of finance will eventually push differential rates higher to a level where risk is correctly priced. At that time, banks will be back knocking at the door. Having said all this, however, it is possible to argue that not only has there been a trend by trade houses to move up and downstream, but there has also been a move by producers and consumers to take over the role of the traditional trade houses. Middle East refiners have negotiated purchase contracts directly from Brazilian producers. Russian importers now buy fobs (free on board) and ship the sugar themselves. Brazilian producer groups have delivered their sugar to the New York futures exchange. As one observer put it recently, everyone now is in the DIY (do it yourself) trading business. All in all, the number Introduction/page v

Introduction of companies and individuals involved in the international sugar trade is growing, not shrinking. Traditional trade houses may be losing ground, but they are being replaced just as quickly by producers and consumers moving in towards the centre of the spectrum. The sugar trade will continue to evolve, and the speed at which it does so will probably accelerate. Technical change will alter the way sugar is grown, harvested, transported to the ports, freighted and discharged. White sugar is often moving in bulk – or at least in big bags – to the ports, and this trend is sure to continue. Vessel sizes for bulk sugar are increasing dramatically while there has been a marked shift towards shipping white sugar in containers. The quality of raw sugar – spurred on by restructuring in Brazil’s Proalcool programme – will continue to improve and refinery processes will adapt in consequence. However, it is the growth of computer technology and, in particular, the transmission of information that will have the biggest effect on the way the sugar trade is conducted. It is now possible to access most newspapers and journals from the World Wide Web – no matter where they are published. At the click of a button, sophisticated search engines can turn out articles on sugar from Thailand to Sao Paulo and the news – all the news – is accessible from the trader’s desk. As such, this reduces the need for trade houses to keep expensive local office networks that were built up over the years to source market information. The trouble is, of course, that there is now too much information and this creates the need for intermediaries – people or companies who can analyse and interpret the news, filter it and deliver it in a timely fashion to traders and producers around the world. This, of course, brings us back to this manual. Information and knowledge have to be gathered from many sources, structured into a readable form and then presented in a way that adds value to the lives of the people for whom it is intended. With the changes in the sugar trade over the last 25 years there are more new players in the market than ever before. There is, therefore, more need for a manual now than ever before. The traditional trade houses realize that and, as a result, have contributed so willingly to its production. We thank them for that. Jonathan Kingsman Société J. Kingsman

Introduction/page vi

Index AA (against actuals) trades, 7/3–4, 17/7 accounting, 17/1–33 accrual principle, 17/3 balance sheets, 17/3–4 contract pricing, 17/7–9 controls, 17/3 currencies, 17/13–14 demurrage and despatch, 17/11–13 forward trading of physicals, 17/1–2 futures accounting, 17/2, 17/4–5, 17/10–11 internal markets, 14/14–15 licences, 17/15–16 margin payments, 17/4–5, 17/11 matching principle, 17/2–3 narrow margins, 17/1 position sheets, 17/2, 17/5–7 presentation, 17/3–4 profit and loss accounts, 17/3, 17/17 prudence principle, 17/3 quotas, 17/15, 17/16 vessel accounting, 17/9–10 accrual principle, 17/3 acesulfame-K, 5/31, 5/33, 5/39, 5/45 ACP (African Caribbean and Pacific) countries, 19/9, 19/30 activated carbon, 12/9 affination, 12/2, 12/5–6 against actuals (AA) trades, 7/3–4, 17/7 agents, 8/7, Appendix 4/4 agricultural alcohol, 6/1 alcohol production agricultural alcohol, 6/1 anhydrous alcohol, 6/2, 6/7, 6/9–10 beverage alcohol market, 6/2 Brazil, 2/11, 3/11–12 hydrous alcohol, 6/2 synthetic alcohol, 6/1 see also ethanol production alitame, 5/31, 5/45–6 Andean Community (CAN), 21/2–4, 21/7–9, 21/11, 21/15–17 anhydrous alcohol, 6/2, 6/7, 6/9–10 annexed refineries, 12/1 appointing supervisors, 11/1–2 Arab Black List, Appendix 4/15 arbitration, 8/11, 10/2–4, 11/4, 11/5–6, 14/7 Brazilian standard terms, Appendix 3/6, Appendix 3/7–8 charter party terms, Appendix 4/14–15

European standard terms, Appendix 3/14 No. 5 rules, Appendix 2/21–2 No. 11 rules, Appendix 1/16–19, Appendix 1/20 Thai standard terms, Appendix 3/18–19, Appendix 3/25 Argentina, 5/15 Armenia, 22/4, 22/10, 22/18, 22/24 aspartame, 5/30–1, 5/32–3, 5/35, 5/39, 5/46 Australia delivery policy, 3/25 ethanol production, 6/18 futures and options trading, 13/13–14 production costs, 4/8, 4/9, 4/13 reporting conversions, 9/5 subsidies, 3/10 average pricing, 17/8–9 Azerbaijan, 22/4, 22/10, 22/18, 22/25 back-to-back letters of credit, 18/19–20 bagged cargoes, 3/28, 8/14, 11/2–3 bakery products, 5/7–8 balance sheets, 17/3–4 banks, 13/10–11 see also finance; payments Banque Indosuez, 18/19 Barbados, 1/4 Barbosa, Duarte, 1/1 Basel II, 18/22–4 basis trading, 7/6–12 beet sugar, 1/6–11, 2/1, 4/4–8 decline in production, 3/3, 3/4 quality conversions, 9/4 in the US, 20/1, 20/12–17, 20/23–4 Belarus, 22/3–4, 22/8–9, 22/17–18, 22/26–7 beverages market, 5/5–7, 5/10, 5/12–14, 5/23–4, 5/32–3, 5/41 alcohol, 6/2 bid bonds, 16/42–9, 18/21 bills of lading, 8/8, 8/9, 16/3–4, 18/19, Appendix 4/7–8 blending high intensity sweeteners, 5/39–42 BMF contract, 13/2–3 Bolivia, 21/4 bone char, 12/9 bounty system, 1/8, 1/10–11 box plots, 2/28–9

Index/page i

Index Brazil alcohol programmes, 2/11, 3/11–12, 6/2, 6/7 contract terms, 13/2–3, Appendix 3/1–2, Appendix 3/4–8 CPR finance system, 18/5–6 currency flotation, 3/30 ethanol production, 3/30, 6/2, 6/4, 6/7–11 expansion plans, 3/11–14 and FTAA, 20/29 futures and options trading, 13/11, 13/12–13 history, 1/4 land supply, 3/3 organic sugar market, Appendix 6/5 Proalcool programme, 6/2, 6/7 production, 2/11, 2/19–23, 3/11–14, 13/11 production costs, 3/12, 4/6–7 share of world exports, 3/6, 3/10 British Sugar Bureau, 10/6–7 Brussels Convention, 1/10, 2/4 bulk in bagged out (bibo), 8/14 bulking agents, 5/36–8 CAN (Andean Community), 21/2–4, 21/7–9, 21/11, 21/15–17 Canada, 5/33, 6/13 candle charts, 15/15–16 cane sugar, 1/1–6, 2/1–3, 4/4–8 in the US, 20/17–25 cane zoning, 18/4 CAP (Common Agricultural Policy), 19/1, 19/13 capacity utilization, 4/11–12 capital adequacy requirements, 18/22–4 carbon, 12/9 carbonatation, 12/6–7 carrying charges, 3/22, 3/23 cash against documents (CAD), 16/1–8 cash premium analysis, 9/7 centrifuging, 1/12, 12/4, 12/10 certificates, 8/12 certificates of quota exemption (CQEs), 17/16 CFTC (Commodity Futures Trading Commission), 13/3–4, 15/11 Chadbourne Agreement, 2/5 channels, 15/6–7 char filters, 12/9 charter party agreements, 8/5–13, Appendix 4/1–16 agents, 8/7, Appendix 4/4 arbitration, 8/11 bills of lading, 8/8, 8/9, 16/3–4, 18/19, Appendix 4/7–8 certificates, 8/12 commission payments, 8/12–13 demurrage and despatch, 8/9, 14/4–5, 17/11–13, Appendix 4/13

Index/page ii

deviations, 8/9 discharging, 8/7, 8/9, 10/5–6, Appendix 4/3, Appendix 4/8–9, Appendix 4/12–13 general average, 8/10–11 hold condition, 8/9 insurance, 8/10 International Safety Management (ISM) code, 8/13 laytime, 8/9, Appendix 4/11, Appendix 4/12–13 loading, 8/7, 8/9, Appendix 3/13, Appendix 4/3, Appendix 4/8–9, Appendix 4/11 mate’s receipts, 8/9, Appendix 4/7–8 notices and cancelling date, 8/8, Appendix 4/6–7 payment terms, 8/8, Appendix 4/5–6 riders, 8/12 satellite tracking, 8/11–12, Appendix 4/15–16 stevedores, 8/8–9, Appendix 4/7 sub letting, 8/11, Appendix 4/15 taxation, Appendix 4/4–5 taxes, 8/8 time bars, 8/11, Appendix 4/14 vessel condition, 8/9, 8/12 vessel description, 8/7, Appendix 4/1–2 vessel position, 8/7, Appendix 4/2–3 vessel readiness, Appendix 1/6 waiting times, 8/10, Appendix 4/13 see also payments; supervision charting see technical trading Chicago Board of Trade, 13/1–2 Chile, 21/2, 21/3 China ethanol production, 6/17 HFCS (high fructose corn syrup), 5/18–19 HIS (high intensity sweeteners), 5/34, 5/35–6, 5/45 history, 1/1 production costs, 4/8, 4/11, 4/13 claims settlements, 11/5 clarification, 12/2–4, 12/6–7 Clean Air Act, 6/12 Coffee, Sugar and Cocoa Exchange (CSCE), 14/1–11, Appendix 1/1–23 Colombia ethanol production, 6/19–20 external tariffs, 21/4 futures and options trading, 13/14–15 colonial era, 1/2–5 colour of bags, 3/28 colour measurement, 12/7–9 Columbus, Christopher, 1/3 commercial traders, 13/7–11 commission payments, 8/12–13

Index commitment of trades (COT) report, 13/3–4, 15/11–12 Commodity Futures Trading Commission (CFTC), 13/3–4, 15/11 commodity trading advisors (CTAs), 13/4–5 Common Agricultural Policy (CAP), 19/1, 19/13 Commonwealth Sugar Agreement (1951), 2/7, 19/9 concentration of exports, 3/4–6, 3/10 confectionery products, 5/7–8 consumer choice, 3/9 consumption ending stocks/consumption relationship, 9/6–7 in the Former Soviet Union, 22/7, 22/20–1 growth, 2/1, 2/14–18, 3/1–3, 13/16 of high fructose corn syrup, 5/2–3, 5/10–11 of high intensity sweeteners, 5/28–9 history of, 1/12–14 in India, 3/20–1 production/consumption relationship, 9/5–6 in the US, 20/1 container shipments, 8/2, 8/14 contract pricing, 3/29–31, 7/1–12, 17/7–9 contract terms, 3/25–9, 10/2 Brazil, 13/2–3, Appendix 3/1–2, Appendix 3/4–8 contract size, Appendix 1/4 Cuba, Appendix 3/2–3, Appendix 3/9–12 domestic contract (No. 14), 13/2, Appendix 5/1–16 Europe, Appendix 3/12–14 France, 13/2 Japan, 13/3, 14/21–3 London refined white (No. 5), 13/2, 14/10–21, Appendix 2/1–24 non-registered contracts, Appendix 2/23 premiums/discounts, 7/6–12 Thailand, Appendix 3/3–4, Appendix 3/14–25 verbal contracts, Appendix 1/3 world contract (No. 11), 13/1–2, 14/1–11, Appendix 1/1–23 controls, 17/3 conversion standards, 9/4–5 corn syrup see HFCS (high fructose corn syrup) costs of production see production costs counter-trade, 18/20–1 CPR finance system, 18/5–6 credit insurance, 18/18–19 crop cycles, 9/1–2 crop financing, 18/1–2

crushing, 1/11–12 crystallization, 12/4, 12/9–10 CSCE (Coffee, Sugar and Cocoa Exchange), 14/1–11, Appendix 1/1–23 Cuba, 1/3–4, 2/2, 2/4, 2/21, 3/29 contract terms, Appendix 3/2–3, Appendix 3/9–12 revolution, 2/8–9 currencies, 17/13–14 EU conversion policy, 19/4–6 matching, 18/9 cyclamates, 5/31, 5/33, 5/34, 5/38, 5/46 daily sentiment indicator (DSI), 15/14–15 damaged cargoes, 11/3–4 decolourization, 12/4, 12/7–9 default rules, Appendix 2/15–18 deficiencies and excesses, Appendix 1/20–1 deliverers’ obligations, Appendix 1/10–16 delivery grades, 14/3–4, Appendix 1/1–2, Appendix 2/2–3 delivery mechanisms, 3/25–9, 7/7–10, 14/4–6, 14/8–10 No. 14 rules, Appendix 5/5–6 No. 5 rules, Appendix 2/9–14 Thai standard contract, Appendix 3/14, Appendix 3/15–17, Appendix 3/20–2 delivery months, Appendix 1/4 demand, 2/14–18 for organic sugar, Appendix 6/3–4 supply and demand database, 9/1–8 demurrage and despatch, 8/9, 14/4–5, 17/11–13 accounting for, 17/11–13 Brazilian standard contract, Appendix 3/5 charter party agreement, Appendix 4/13 deviations, 8/9 dextran, 12/10 dextrose, 5/4 directional movement index (ADX), 15/14 discharging, 8/7, 8/9, 10/5–6 charter party agreement, Appendix 4/3, Appendix 4/8–9, Appendix 4/12–13 No. 14 rules, Appendix 5/9–10 discounts/premiums, 7/6–12 dispute resolution see arbitration; claims settlement documentary credits, 16/8–42 documentation, 11/4–5, 17/2 fraudulent amendment, 18/17 No. 5 rules, Appendix 2/14 No. 14 rules, Appendix 5/6–8 Thai standard contract, Appendix 3/17–18, Appendix 3/23–4

Index/page iii

Index Doha Development Agenda, 19/20, 19/21 doji star, 15/15 domestic contract (No. 14), 13/2, Appendix 5/1–16 draught surveys, 11/3 drying, 12/5 duties see tariffs and duties economic liberalization see free trade Ecuador, 21/4 ending stocks/consumption relationship, 9/6–7 energy qualities, 1/12 engulfing patterns, 15/15 environmental protection, 19/18 ethanol production, 6/1–24 in Australia, 6/18 in Brazil, 3/30, 6/2, 6/4, 6/7–11 in Canada, 6/13 in China, 6/17 in Colombia, 6/19–20 definition of ethanol, 6/1 in the European Union, 6/13–14, 6/21 feedstocks, 4/4–6, 6/1 futures market, 6/23–4 in India, 6/15–16 in Latin America, 6/19–20 in Peru, 6/19 political support, 6/6–7 and solvents, 6/2 subsidies, 6/7, 6/24 in Thailand, 6/16–17 trade flows, 6/20–2, 6/23 in the United States, 6/11–13 European Union, 19/1–30 Common Agricultural Policy (CAP), 19/1, 19/13 contract terms, Appendix 3/12–14 currency conversion policy, 19/4–6 domestic supply, 19/12–13 enlargement, 5/21–2 environmental protection, 19/18 ethanol production, 6/13–14, 6/21 export policy, 19/15–16 finance, 19/17–18 futures and options trading, 13/15–16 HFCS (high fructose corn syrup), 5/19–22 HIS (high intensity sweeteners), 5/36, 5/42 import policy, 19/8–12, 19/13–15 intervention prices, 19/16 isoglucose production, 5/21–2, 19/6–7, 19/24–9 licences, 17/15–16 MERCOSUR negotiations, 21/1, 21/3 organic sugar production, Appendix 6/5–6 production levies, 19/17–18

Index/page iv

production quotas, 5/21–2, 19/6–8, 19/24–30 carryover, 19/17 set-aside land, 19/17 sugar policy (2001–6), 19/1–18 sugar policy (2006–onwards), 19/19–22 Sugar Protocol, 19/9, 19/10, 19/20 support prices, 19/2–6, 19/23 evening star, 15/16 excesses and deficiencies, Appendix 1/20–1 exchange delivery settlement prices (EDSP), Appendix 2/4–6 exchange for physicals, 7/3–4, 17/7 executable orders (SEOs), 7/2–3, 17/7–8 exit positions, 15/4 exponential moving averages, 15/7 export credit agencies, 18/18–19 exports, 2/19–23, 3/23 concentration, 3/4–6, 3/10 European Union policy, 19/15–16 Former Soviet Union (FSU), 22/20–39 and production costs, 4/2 factories see refineries FAIR Act, 20/7–10 fair basis, 7/10, 7/11 farms crop cycles, 9/1–2 field performance, 4/9–11 financing, 18/1–6 feedstocks, 4/4–6, 6/1 field performance, 4/9–11 filtration, 12/4, 12/7 finance, 18/1–27 bid bonds, 16/42–9, 18/21 capital adequacy requirements, 18/22–4 counter-trade, 18/20–1 currency matching, 18/9 in the European Union, 19/17–18 factories and mills, 18/7–13 farms, 18/1–6 long-term finance, 18/12–13 performance bonds, 16/42–9, 18/21 plantations, 18/6–7 risk management, 15/16–17, 18/24–7 short-term finance, 18/9–11 tolling, 18/20 of trade houses, 18/14–15 see also payments Finland, 19/9 First World War, 2/1 flat prices, 3/29–31, 9/5–7 Florida, 20/17–18 food manufacturing, 12/10–11 force majeure, 14/7–8 Brazilian standard contract, Appendix 3/6, Appendix 3/8

Index charter party agreement, Appendix 4/14 European standard contract, Appendix 3/14 No. 11 rules, Appendix 1/19–20 No. 5 rules, Appendix 2/18–21 Thai standard contract, Appendix 3/25 forecasting, 9/2–3 Former Soviet Union (FSU), 2/14–18, 22/1–39 Armenia, 22/4, 22/10, 22/18, 22/24 Azerbaijan, 22/4, 22/10, 22/18, 22/25 Belarus, 22/3–4, 22/8–9, 22/17–18, 22/26–7 consumption, 22/7, 22/20–1 Georgia, 22/4, 22/10, 22/18–19, 22/27–8 HFCS (high fructose corn syrup), 5/22 Kazakhstan, 22/4, 22/10–11, 22/19, 22/28–9 Kyrgyz Republic, 22/4–5, 22/10–11, 22/19, 22/29–30 market structures, 22/12–19 Moldova, 22/3, 22/10, 22/30–1 production trends, 22/1–6 Russia, 2/18, 22/1–2, 22/8, 22/12–16, 22/32–4 sugar policies, 22/12–19 Tajikistan, 22/5, 22/11, 22/34–5 trade flows, 22/8–12 Turkmenistan, 22/5, 22/11, 22/35–6 Ukraine, 4/8, 4/11, 4/13, 22/2–3, 22/9, 22/16–17, 22/36–8 Uzbekistan, 22/5, 22/11, 22/38–9 forward trading of physicals, 17/1–2 France, 1/7, 13/2 fraud, 18/17, 18/21–2 free trade, 3/3–10 Andean Community, 21/2–4, 21/7–9, 21/11, 21/15–17 FTAA, 20/29, 21/1 Latin American, 21/1, 21/10 MERCOSUR, 21/1–7, 21/11–14, 21/18 NAFTA, 20/26–9 freight market, 8/1–14 bulk in bagged out (bibo), 8/14 container shipments, 8/2, 8/14 differentials, Appendix 2/7–8 liberty tweendecker ships, 8/13 liner services, 8/1–2 quantities shipped, 8/14 rates, 3/16 spreads, 7/10 timecharters, 8/4–5 tramping, 8/3–4 trends in, 8/13–14 vessel accounting, 17/9–10 voyage charters, 8/4 voyage estimates, 8/5, 8/6 see also charter party agreements

fructose see HFCS (high fructose corn syrup) FSU see Former Soviet Union (FSU) FTAA (Free Trade Agreement of the Americas), 20/29, 21/1 fuel ethanols see ethanol production fundamental analysis, 15/1–2, 15/17 supply and demand database, 9/1–8 funds, 13/4–6, 15/1, 15/4–6 futures trading, 3/22–31, 7/1–12, 13/1–19 accounting, 17/2, 17/10–11 against actuals (AA) trades, 7/3–4, 17/7 banks, 13/10–11 basis, 7/6–12 by Brazilian companies, 13/11 carrying-charges, 3/22, 3/23 commercial traders, 13/7–11 contract pricing, 3/29–31, 7/1–12, 17/7–9 delivery grades, 14/3–4, Appendix 1/1–2, Appendix 2/2–3 in ethanol, 6/23–4 executable orders (SEOs), 7/2–3, 17/7–8 fair basis, 7/10, 7/11 flat prices, 3/29–31, 9/5–7 freight spreads, 7/10 funds, 13/4–6, 15/1, 15/4–6 history, 13/1–3 by Indian companies, 13/11 inverted market structure, 3/22–4, 3/29 liquidity, 13/7 locals, 13/6–7 margin payments, 17/4–5, 17/11 non-commercial traders, 13/4–7 options on futures, 7/4–6 position information, 13/3–4, 15/11–12 by producing countries, 13/11–17 spreads, 3/22 strategies, 3/27–8, 7/11–12 trade houses, 13/8–10, 13/11, 13/17, 18/14–15 volumes, 13/7, 13/19 see also contract terms; delivery mechanisms; technical trading Gama, Vasco da, 1/1 general average, 8/10–11 Georgia, 22/4, 22/10, 22/18–19, 22/27–8 glucose, 5/1, 5/4 glycyrrhizin, 5/32, 5/46 grading, 12/5 Great Lakes, 20/14–15 Great Plains, 20/15–16 Greeks, 1/1 guarantees, 16/42–9, 18/16 Guatemala, 13/14–15 hammer patterns, 15/15 hanging man patterns, 15/15

Index/page v

Index Hawaii, 20/20–1 Hawley–Smoot Tariff Act, 2/5 HFCS (high fructose corn syrup), 5/1–28, 5/42–4 in Argentina, 5/15 in Asia, 5/15–19 in China, 5/18–19 consumption, 5/2–3, 5/10–11 in the European Union, 5/19–22 in the Former Soviet Union (FSU), 5/22 in Japan, 5/16–18 in Mexico, 5/12–14 outlook for, 5/22–8 prices, 5/9–10, 5/11, 5/24–8 production costs, 5/25 in South Korea, 5/16, 5/18 in Taiwan, 5/16, 5/18 in Thailand, 5/19 in the United States, 5/3–11, 5/22–5, 5/43–4 HIS (high intensity sweeteners), 5/1, 5/28–42, 5/44–5 acesulfame-K, 5/31, 5/33, 5/39, 5/45 alitame, 5/31, 5/45–6 in Asia, 5/30, 5/33–5 aspartame, 5/30–1, 5/32–3, 5/35, 5/39, 5/46 blending, 5/39–42 in China, 5/34, 5/35–6, 5/45 consumption, 5/28–9 cost savings, 5/40–1 cyclamates, 5/31, 5/33, 5/34, 5/38, 5/46 in the European Union, 5/36, 5/42 glycyrrhizin, 5/32, 5/46 isomalt, 5/46 lactitol, 5/46 malitol, 5/47 mannitol, 5/47 neohesperidine dihydrochalcon (NHDC), 5/47 neotame, 5/32, 5/45, 5/47 poly-ols, 5/1, 5/36–8 prices, 5/38–9 prospects for, 5/38–42 saccharin, 5/29–30, 5/34, 5/35–6, 5/38, 5/47 sorbitol, 5/37, 5/47–8 stevioside, 5/32, 5/39, 5/48 sucralose, 5/31–2, 5/39, 5/48 thaumatine, 5/48 in the United Kingdom, 5/41 in the United States, 5/32–3 xylitol, 5/48 history of futures trading, 13/1–3 history of sugar, 1/1–14 1900–39, 2/1–6 1939–85, 2/7–13 1985–present day, 2/13–33 beet sugar, 1/6–11, 2/1 bounty system, 1/8, 1/10–11

Index/page vi

cane sugar, 1/1–6, 2/1–3 colonial era, 1/2–5 First World War, 2/1 slavery, 1/5–6 social history, 1/12 technical innovations, 1/11–12 hold condition, 8/9 Holland, 1/4 Howard, Edward, 1/12 Hungary, 5/21 hydrous alcohol, 6/2 imports, 2/14–18 diversification, 3/4–6 European Union policy, 19/8–15 Former Soviet Union (FSU), 22/20–39 and production costs, 4/2 US policy, 20/1 see also tariffs and duties income growth, 3/2 India, 2/2, 2/20–1, 3/19–22 consumption/production mismatch, 3/20–1 ethanol production, 6/15–16 EU preferential quotas, 19/30 futures trading, 13/11 history, 1/1, 1/2 pricing system, 3/21–2 Indonesia, 3/10 information sources, 9/3 insurance, 8/10, 18/18–19 Brazilian standard terms, Appendix 3/6 charter party agreement, Appendix 4/14 No. 14 rules, Appendix 5/8–9 Thai standard terms, Appendix 3/17, Appendix 3/23 intensive sweeteners see HIS (high intensity sweeteners) internal markets, 14/14–15 International Safety Management (ISM) code, 8/13 International Sugar Agreements 1937, 2/6 1953, 2/7–8 1958, 2/9 1968, 2/10–11 1977, 2/12–13 1992, 2/31–3 International Transport Workers Federation (ITF), 8/4 intervention prices, 19/16 inulin, 19/6–7, 19/24–9 inverted market structure, 3/22–4, 3/29 investment funds, 13/4–6, 15/1, 15/4–6 ion exchange resins, 12/9 isoglucose production, 5/21–2, 19/6–7, 19/24–9 isomalt, 5/46

Index Jamaica, 1/4, 4/8, 4/10 Japan contract terms, 13/3, 14/17, 23–4 HFCS (high fructose corn syrup), 5/16–18 Java, 2/2 J. H. Rayner, 18/19 Jones-Costigan Act, 2/6, 20/3 Kazakhstan, 22/4, 22/10–11, 22/19, 22/28–9 Kyrgyz Republic, 22/4–5, 22/10–11, 22/19, 22/29–30 lactitol, 5/46 land supply, 3/3 last trading days, Appendix 1/6–7, Appendix 2/23, Appendix 5/4–5 Latin America ethanol production, 6/19–20 free trade agreements, 21/1, 21/10 laytime, 8/9, Appendix 4/11, Appendix 4/12–13 letters of credit, 16/3–4, 16/8–42, 18/15–16 back-to-back, 18/19–20 sight, 18/17 usance, 18/19 liberty tweendecker ships, 8/13 licences, 17/15–16 liner services, 8/1–2 liquidity, 13/7 litigation, 11/5–6 loading, 8/7, 8/9, Appendix 3/13, Appendix 4/3, Appendix 4/8–9, Appendix 4/11 loan programs, 20/1, 20/7–8 local traders, 13/6–7 Lomé Convention, 19/9 London International Financial Futures Exchange (LIFFE), 13/2, 13/15–16, 14/11–17 London refined white (No. 5) contract, 13/2, 14/10–21, Appendix 2/1–24 long-term finance, 18/12–13 Louisiana, 20/19–20 low calorie bulking agents, 5/36–8 Madeira, 1/3 malitol, 5/47 managed money, 13/4–6, 15/1 mannitol, 5/47 margin payments, 17/4–5, 17/11 market participants, 13/3–17 marking of bags, 3/28 matching principle, 17/2–3 mate’s receipts, 8/9, Appendix 4/7–8 MATIF contract, 13/2 melting, 12/2 Memo of Delivery, Appendix 1/21

MERCOSUR, 21/1–7, 21/11–14, 21/18 metric tonnes, 9/4 Mexico futures and options trading, 13/14–15 HFCS (high fructose corn syrup), 5/12–14 and NAFTA, 20/26–9 production costs, 4/8 subsidies, 3/10 US–Mexico trade dispute, 5/11–15 Middle Eastern refineries, 13/16–17 mills see refineries Moldova, 22/3, 22/10, 22/30–1 money flow index (MFI), 15/12–13 moral hazard, 15/16–17 morning star, 15/16 moving averages, 15/7–8 convergence divergence (MACD), 15/8 multinational producers, 3/8–9 NAFTA, 20/26–9 Napoleon Bonaparte, 1/7 narrow margins, 17/1 neohesperidine dihydrochalcon (NHDC), 5/47 neotame, 5/32, 5/45, 5/47 net trades, 9/7 New York Board of Trade, 13/1–2, 14/1 New York Coffee, Sugar and Cocoa Exchange (CSCE), 14/1–10, Appendix 1/1–23 non-commercial traders, 13/4–7 non-registered contracts, Appendix 2/23 notices and cancelling date, 8/8, Appendix 4/6–7 obligations of receivers and deliverers, Appendix 1/10–16 open interest, 15/10–11 open position reporting, Appendix 1/21–2, Appendix 5/15–16 operating currencies, 17/13–14 option trading, 13/7, 13/17–19 options on futures, 7/4–6 organic sugar, Appendix 6/1–8 demand, Appendix 6/3–4 supply, Appendix 6/4–7 original margins, 17/4–5 oscillators, 15/8, 15/13 overtime payments, Appendix 4/14 parabolic SAR system, 15/13–14 payments, 8/8, 16/1–49, 18/15–20, Appendix 4/5–6 bid bonds, 16/42–9, 18/21 Brazilian standard contract, Appendix 3/5, Appendix 3/7 cash against documents (CAD), 16/1–8 credit insurance, 18/18–19

Index/page vii

Index documentary credits, 16/8–42 freight differential, Appendix 2/7–8 guarantees, 16/42–9, 18/16 letters of credit, 16/3–4, 16/8–42, 18/15–16, 18/17, 18/19–20 No. 5 rules, Appendix 2/6–7 performance bonds, 16/42–9, 18/21 promissory notes, 18/16 Thai standard contract, Appendix 3/17 performance bonds, 16/42–9, 18/21 Persia, 1/2 Peru, 6/19 Philippines, 2/2–3 phosphatation, 12/7 plantations, 18/6–7 Poland, 5/21 polarization, 4/5, 9/4, 10/6, 12/6, Appendix 5/11 political environment, 2/23–5 Polo, Marco, 1/1 poly-ols, 5/1, 5/36–8 population growth, 3/1 Portugal, 1/3, 1/4, 19/9 position information, 13/3–4, 15/11–12 position limits, 14/3 position sheets, 17/2, 17/5–7 premiums/discounts, 7/6–12 presentation of accounts, 17/3–4 prices 1900–39, 2/3–6 1939–89, 2/7–13, 2/30 1990–present day, 2/18–19, 2/30–1, 3/10–11 contract pricing, 3/29–31, 7/1–12, 17/7–9 exchange delivery settlement prices, Appendix 2/4–6 forecasting see supply and demand database and free trade, 3/9 of HFCS, 5/9–10, 5/11, 5/24–8 of HIS, 5/38–9 long-run trend, 2/26–7 price dynamics, 2/18–19 and production costs, 4/2–4 support prices, 19/2–6, 19/23, 20/2, 20/7 volatility, 2/19–20, 2/25–31, 3/7–8, 3/31, 17/2 Proalcool programme, 6/2, 6/7 processing see refining process production costs, 4/1–14 beet sugar, 4/4–8 benchmarks, 4/2 cane sugar, 4/4–8 comparisons between producers, 4/4 country comparisons, 4/8 and exports, 4/2 and factory performance, 4/11–13

Index/page viii

and field performance, 4/9–11 of HFCS (high fructose corn syrup), 5/25 and imports, 4/2 and prices, 4/2–4 processing costs, 4/5 production finance, 18/1–7 production levies, 19/17–18 production quotas see quotas production statistics, 1/9–10 1900–39, 2/1–6 1939–85, 2/7–13 1985–present day, 2/13–33 First World War, 2/1 productivity, 3/3 profit and loss accounts, 17/3 promissory notes, 18/16 prudence principle, 17/3 Puerto Rico, 1/3, 20/21–2 quality, 3/9, 10/6, 12/1–11 Brazilian standard contract, Appendix 3/4 conversions, 9/4 delivery grades, 14/3–4, Appendix 1/1–2, Appendix 2/2–3 No. 14 rules, Appendix 5/11–12 quantities shipped, 8/14 quintals, 9/4 quotas, 5/21–2, 17/15, 17/16 carryover, 19/17 European Union, 19/6–8, 19/24–30 United States, 20/1–2, 20/3–6 raw sugar, 9/4, 12/11 re-export programmes, 20/10–12 receivers’ obligations, Appendix 1/10–16 Red River Valley, 20/16–17 Refined Sugar Association, 10/1–7, 11/1 refineries annexed, 12/1 capacity utilization, 4/11–12 financing, 18/7–13 Middle Eastern, 13/16–17 performance, 4/11–13 size, 4/11 stand-alone, 12/1 and trade liberalization, 3/4 United States, 20/22–5 refining process, 12/1–11 affination, 12/2, 12/5–6 carbonatation, 12/6–7 centrifuging, 1/12, 12/4, 12/10 clarification, 12/2–4, 12/6–7 costs, 4/5 crystallization, 12/4, 12/9–10 decolourization, 12/4, 12/7–9 drying, 12/5 filtration, 12/4, 12/7 grading, 12/5

Index melting, 12/2 phosphatation, 12/7 recovery boilings, 12/5 relative strength index (RSI), 15/12 Renewable Fuels Standard (RFS), 6/12 reported sales, Appendix 1/22 resistance levels, 15/8 riders, 8/12 risk management, 15/16–17, 18/24–7 role of supervisors, 11/2–4 Romans, 1/1 rural credit schemes, 18/2–3 Russia, 2/18, 22/1–2, 22/8, 22/12–16, 22/32–4 saccharin, 5/29–30, 5/34, 5/35–6, 5/38, 5/47 sampling procedures, 11/3–4 satellite tracking, 8/11–12, Appendix 4/15–16 sellers’ executable orders (SEOs), 7/2–3, 17/7–8 set-aside land, 19/17 shipping see freight market shooting star, 15/16 short tons, 9/4 short-term finance, 18/9–11 sight letters of credit, 18/17 size of refineries, 4/11 slavery, 1/5–6 Slovakia, 5/21 smuggling, 3/7 social history, 1/12 soft drinks market, 5/5–7, 5/10, 5/12–14, 5/23–4, 5/32–3, 5/41 solvents, 6/2 sorbitol, 5/37, 5/47–8 South Africa, 3/25, 3/29 production costs, 4/8, 4/13 South Korea, 3/17 HFCS (high fructose corn syrup), 5/16, 5/18 Spain, 1/3–4, 1/5 speculation, 13/4–6 spreads, 3/22 squeeze plays, 3/27–8 stand-alone refineries, 12/1 standard physical contracts see contract terms starch sweeteners see HFCS (high fructose corn syrup) stevedores, 8/8–9, Appendix 4/7 stevioside, 5/32, 5/39, 5/48 stochastic indicators, 15/13 strategies for futures trading, 3/27–8, 7/11–12 strikes, Appendix 4/14, Appendix 5/13 sub letting, 8/11, Appendix 4/15 subsidies, 3/10, 6/7, 6/24 sucralose, 5/31–2, 5/39, 5/48

sucrose yields, 4/9–11 Sugar Association of London, 10/1–7, 11/1 Sugar Bureau, 10/7 Sugar Industry (Reorganization) Act, 2/6 Sugar Protocol, 19/9, 19/10, 19/20 supervision, 10/4–6, 11/1–6 appointing supervisors, 11/1–2 claims settlements, 11/5 damaged cargoes, 11/3–4 dispute procedures, 11/4, 11/5–6 documentation, 11/4–5 draught surveys, 11/3 role of supervisors, 11/2–4 sampling procedures, 11/3–4 third party supervisors, 11/4 warehouse supervision, 11/4–5 supply, 2/19–23, 3/23 European Union domestic supply, 19/12–13 of organic sugar, Appendix 6/4–7 supply and demand database, 9/1–8 cash premium analysis, 9/7 crop cycles, 9/1–2 ending stocks/consumption relationship, 9/6–7 forecasting, 9/2–3 historical data, 9/1–2 information sources, 9/3 net trades, 9/7 production/consumption relationship, 9/5–6 quality conversions, 9/4 weight conversions, 9/4–5 whites premium, 9/7 support levels, 15/8 support prices, 19/2–6, 19/23, 20/2, 20/7 sweetener market, 3/2 see also HFCS (high fructose corn syrup); HIS (high intensity sweeteners) sweetness qualities, 1/12 synthetic alcohol, 6/1 Taiwan, 5/16, 5/18 Tajikistan, 22/5, 22/11, 22/34–5 tallymen, 8/8–9, Appendix 4/7 Tarafa Action, 2/4 tariffs and duties, 2/24–5, 3/9–10, 19/13–15 Andean Community, 21/15 Former Soviet Union countries, 22/12–19 MERCOSUR members, 21/14 US tariff rate quota (TRQ), 20/3–6 Tate & Lyle, 10/4, 10/5, 20/23 taxation, 8/8, Appendix 3/18, Appendix 3/24–5, Appendix 4/4–5, Appendix 5/13 technical innovations, 1/11–12

Index/page ix

Index technical trading, 15/1–17 candle charts, 15/15–16 channels, 15/6–7 commitment of trades report, 13/3–4, 15/11–12 daily sentiment indicator, 15/14–15 directional movement index, 15/14 money flow index, 15/12–13 moving averages, 15/7–8 convergence divergence, 15/8 open interest, 15/10–11 oscillators, 15/8, 15/13 parabolic SAR system, 15/13–14 relative strength index, 15/12 resistance levels, 15/8 and risk management, 15/16–17 stochastic indicators, 15/13 support levels, 15/8 trend lines, 15/6–7 volume, 15/9–10 tender days, Appendix 2/8–9, Appendix 2/23–4 testing see weighing and testing Texas, 20/21 Thailand, 3/14–19 contract terms, Appendix 3/3–4, Appendix 3/14–25 delivery mechanisms, 3/26 ethanol production, 6/16–17 farm finance risks, 18/4 freight rates, 3/16 futures and options trading, 13/14 HFCS (high fructose corn syrup), 5/19 industry outlook, 3/18–19 pricing system, 3/15–16 quality issues, 3/17 volatility in raw premiums, 3/17–18 thaumatine, 5/48 third party supervisors, 11/4 time bars, 8/11, Appendix 4/14 timecharters, 8/4–5 Tokyo Grain Exchange, 14/21–3 tolling, 18/20 trade associations, 10/1–7, 11/1 council members, 10/1 sugar-testing programme, 10/7 trade flows, 3/6–7 ethanol production, 6/20–2, 6/23 forecasting, 9/3 in the Former Soviet Union (FSU), 22/8–12 see also exports; imports trade houses, 13/8–10, 13/11, 13/17, 18/14–15 trade liberalization see free trade tramping, 8/3–4 transportation see freight market trend lines, 15/6–7 Turkey, 5/21–2 Turkmenistan, 22/5, 22/11, 22/35–6

Index/page x

Ukraine, 22/2–3, 22/9, 22/16–17, 22/36–8 production costs, 4/8, 4/11, 4/13 United Kingdom, 5/41 United States, 20/1–29 beet sugar industry, 20/1, 20/12–17, 20/23–4 cane sugar industry, 20/17–25 Clean Air Act, 6/12 consumption, 20/1 ethanol production, 6/11–13 FAIR Act, 20/7–10 Far West region, 20/13–14 Florida, 20/17–18 and FTAA, 20/29 futures exchanges, 13/1–2, 14/1–10 Great Lakes, 20/14–15 Great Plains, 20/15–16 Hawaii, 20/20–1 Hawley–Smoot Tariff Act, 2/5 HFCS (high fructose corn syrup), 5/3–11, 5/22–5, 5/43–4 HIS (high intensity sweeteners), 5/32–3 import policy, 20/1 industry structure, 20/22–5 Jones–Costigan Act, 2/6, 20/3 loan program, 20/1, 20/7–8 Louisiana, 20/19–20 and NAFTA, 20/26–9 organic sugar production, Appendix 6/5 production, 20/1 production costs, 4/8, 4/11, 4/13 Puerto Rico, 20/21–2 quotas, 20/1–2, 20/3–6 re-export programmes, 20/10–12 Red River Valley, 20/16–17 refineries, 20/22–5 Renewable Fuels Standard (RFS), 6/12 support programmes, 20/2, 20/7 Texas, 20/21 US–Mexico trade dispute, 5/11–15 unloading see discharging unmatched trades, Appendix 1/5 Uruguay Round, 2/23–5, 19/9–10 usance letters of credit, 18/19 USSR, 2/7, 2/9–13 see also Former Soviet Union (FSU) Uzbekistan, 22/5, 22/11, 22/38–9 vacuum pan, 1/12 variation margin, 17/5 Varthema, Ludivico di, 1/1 verbal contracts, Appendix 1/3 vessel accounting, 17/9–10 vessel condition, 8/9, 8/12 vessel description, 8/7, Appendix 4/1–2 vessel position, 8/7, Appendix 4/2–3 vessel readiness, Appendix 1/6

Index volatility of prices, 2/19–20, 2/25–31, 3/7–8, 3/31, 17/2 volume of trades, 13/7, 13/19, 15/9–10 voyage charters, 8/4 voyage estimates, 8/5, 8/6 waiting times, 8/10, Appendix 4/13 warehouse supervision, 11/4–5 weighing and testing, 10/5–6, 10/7, 11/2 conversions, 9/4–5 deficiencies and excesses, Appendix 1/20–1 No. 11 rules, Appendix 1/8–10

No. 14 rules, Appendix 5/10, Appendix 5/10–11 weighted moving averages, 15/7 West Indies, 1/4 whites market, 9/4, 9/7 No. 5 contract terms, 13/2, 14/10–21, Appendix 2/1–24 world contract (No. 11), 13/1–2, 14/1–10, Appendix 1/1–23 xylitol, 5/48 zoning, 18/4

Index/page xi

Part 1 The history of sugar

1 Early history Tony Hannah International Sugar Organization

The spread of sugar westwards The colonial era Sugar and slavery The rise of beet sugar Technical innovation The social history of sugar

Sugar cane, from which most modern sugar producing varieties are derived (Saccharum officinarum), is thought to have originated in New Guinea. It has been domesticated and cultivated there, for its sweet taste, for an estimated 9000 years. Botanists believe that there were three main introductions worldwide from New Guinea through migration; the first, to the Philippines and India, came 2000 years after its initial usage in New Guinea. Later, sugar cane was introduced further east to China and throughout the Polynesian tropical settlements. The first datable reference to sugar cane comes from Nearchus, a general of Alexander the Great, who wrote, in 327 BC, of ‘a reed in India that brings forth honey without the help of bees, from which an intoxicating drink is made, though the plant uses neither beans nor fruit’. Evidence of sugar making comes much later, around the beginning of the Christian era. There are some disputed references by Greek and Roman writers concerning that period. For example Dioscorides wrote: ‘There is a kind of concentrated honey, called saccharon, found in reeds in India and Arabia, with a consistency like that of salt, and brittle to be broken between the teeth, as salt is.’ The food historian R.J. Forbes wrote: ‘Sugar was therefore produced, at least in small quantities, in India and was just becoming known to the Roman world in Pliny’s day’ (the first century AD). Indeed, the first references to sugar in Indian writings date from approximately the same period. Sugar is mentioned in the medical work, the Chanaka, thought to have been written around AD 78 and the Susruta-Samtitas of about a century later. The first writings describing sugar in China date from the Liang Dynasty (AD 502–560). Between the first century AD and the arrival of the first Western European explorers, the sugar industries of India and China developed considerably. Sugar progressed from being a medicine to become a desired food condiment. Marco Polo (1254–1325) noted the extent of the industry in south east China and referred to the vast reserves in the region surrounding the mouth of the Yangtse River and of the region ‘opposite Taiwan’. In 1498, when Vasco da Gama landed at Calcutta in India, he noted large quantities of sugar. Ludivico di Varthema, who travelled to India in the years 1503–8, records that south of Goa, ‘there is a great abundance of sugar, especially sugar candied according to our way’. Indeed, Duarte Barbosa, visiting India in 1513, wrote: ‘In Bengal white and good sugar is manufactured, but they do not understand how to make it into the form of white sugar, but only as meal. It is packed in cotton sacks, enclosed in rawhide outer covers, carefully sown and shipped to many foreign lands’ (Sri Lanka and Arabia are mentioned). Chapter 1/page 1

Sugar Trading Manual During this period of development of sugar production in India and China, the method of production remained essentially the same, similar to the production of gur in present day India. The juice was extracted by pestle and mortar, or vertical or horizontal rollers, powered by humans or oxen. The juice was then boiled in open pans until it solidified.

The spread of sugar westwards The introduction of sugar cane into Persia from India is dated at the sixth century AD. The first mention of sugar as a product dates from AD 627 when the Roman Emperor Heraclius conquered a palace near Baghdad and sugar was listed in the inventory of valuables captured. It is probable that the Arabs acquired sugar cane and sugar making skills from Persia, through trade and conquest. What is true is that they brought sugar cane and sugar technology to the lands they conquered and left it as a legacy when they finally withdrew. The Arab expansion began in AD 636 with the defeat of Heraclius followed by the occupation of Persia and Syria. Egypt was conquered in AD 640, following which the Arabs spread along North Africa, reaching Morocco in AD 682. In AD 710 they crossed to Spain, where the Arab state they established did not fall until 1492. Of the islands of the Mediterranean, Cyprus was first occupied in AD 644, Sicily in AD 655, Crete in AD 823 and Malta in AD 870. The development of sugar industries in those lands followed rapidly. For example, the first mention of sugar being produced in Egypt dates from AD 700, only 60 years after conquest. In all, sugar industries were established by the Arabs in Cyprus, Sicily, Syria, Egypt, Morocco and Spain. (It is interesting to note that cane sugar production still survives in southern Spain today.) The Arab expansion into the Mediterranean was an immensely important development in the history of sugar. The establishment of thriving sugar industries in Sicily and southern Spain provided the basis for the subsequent massive expansion of sugar production during the colonial era. Just as important, the Arab occupation spread the taste for sweetness which began to penetrate Southern Europe and was also introduced into Northern Europe after the experiences of the medieval crusaders trying to reconquer Arab lands.

The colonial era At the beginning of the colonial era in the fifteenth century, the emerging powers had inherited a thriving sugar industry, plus technology and skills from the Arabs. Furthermore, the taste for sweetness, at least among aristocrats and merchants, had been firmly established. It was Chapter 1/page 2

Early history only natural then that, in extending their territory westwards, firstly to the islands off Africa and then to the New World, they should take sugar cane and sugar production with them. The expansion of sugar production under colonization begins with Portugal colonizing Madeira in the 1420s. Colonization was undertaken by Prince Henry the Navigator and, in 1425, he had the first cane sent to the island from Sicily. Production in Madeira grew rapidly and eventually began to undermine the sugar industries of Spain and Sicily. Questions were raised in the Spanish Cortes in 1472 and again in 1491 about the level of imports from Madeira and the level of the duty applicable. Portuguese colonization of Sao Tomé began in earnest in 1493 and, by 1520, there were 60 sugar factories operating in the territory. After the conquest of the Canary Islands in the 1490s, Spain introduced sugar cane to Palma in 1491. Development was rapid and by 1526 there were 29 factories in the islands. The spread of sugar manufacture to the islands off Africa was an important transitional step between the established Mediterranean industry, which went into decline, and the discovery and colonization of the New World. Sugar cane made its entry to the New World early. Columbus himself introduced sugar cane to Hispaniola on his second voyage in 1493. Although the canes brought by Columbus grew well, the first factory was thought not to have been established until 1506. Although the first record of sugar being shipped to Spain from Hispaniola dates from 1516/17, they were small quantities sent as gifts to the Emperor. The first record of a substantial quantity was of three ships arriving in Seville loaded with sugar in 1525. In 1530, 12 ships arrived in Spain unloading 1500 tonnes of Hispaniola sugar. In 1546 there were a total of 24 sugar mills on the island. The first sugar factory was built in Puerto Rico in 1523. Although sugar cane was taken to Cuba by Velasquez in 1511, development of the industry was slow. Although in the following years various schemes were floated for producing sugar, the first record of sugar production appears in 1576, when three mills near Havana were making concentrated juice cast in the form of flat cakes. However, it was in eastern Cuba that the sugar industry of Cuba made its first substantial growth. A mill was established at Guiacanamao in 1598. By 1617 there were 37 mills in the region producing annually 300 tonnes of sugar. Until the end of the eighteenth century there was little further development of the Cuban industry but, from 1820 onwards, production began to increase rapidly and this development persisted almost continuously until the break up of the Soviet Union in 1991. In 1770 Cuba produced 10 000 tonnes of sugar; in 1870, 726 000 tonnes; and in 1970 production was 7 559 000 tonnes. The rapid expansion of the Cuban industry Chapter 1/page 3

Sugar Trading Manual in the nineteenth and twentieth centuries was encouraged by the rapid growth of the US as a natural market for Cuba. Sugar cane was carried to the American mainland by the conquistadors. Cortes himself established a mill near Veracruz, Mexico, in 1529. Subsequently, sugar industries were established by the Spanish conquerors in Peru and Argentina. During the sixteenth century, while Spain was expanding its sugar industry in the Caribbean and the American mainland, Portugal was developing a major industry in Brazil. At this time, Portugal was the world’s largest sugar producer, through its possession of Madeira and Sao Tomé. The date of the first introduction of sugar cane to Brazil is not known. However there is a record of Brazilian sugar paying duty in Lisbon in 1526. It is thought that factories were first constructed in Pernambuco around 1520. A factory was established near Santos, Sao Paulo, in 1533. Development was rapid and, by 1610, 400 factories were producing 57 000 tonnes of sugar. England was a late entrant in the sugar colonization of the New World, but it is important because the West Indies, particularly Jamaica, became (in the nineteenth and twentieth centuries) one of the main sugar exporting regions. Cultivation of sugar began in Barbados around 1640. Development was rapid and, by 1655, Barbados was exporting to England almost 7000 tonnes of sugar, mainly muscavado. Although the Spanish produced sugar during their occupation of Jamaica in the sixteenth century, major development of the sugar industry did not take place until British colonization, which began systematically in 1664. By 1673 there were 57 mills producing 670 tonnes of sugar. In 1684 production had risen to 3500 tonnes and, by 1739, exports to England were almost 20 000 tonnes. Until around 1750 production stayed at around 20–30 000 tonnes, rising to 70 000 tonnes by 1800. Although they set up sugar industries in their Caribbean and South American colonies, and developed the sugar industry of Brazil during their occupation, the Dutch had relatively little permanent impact in the region. However they left a colonial sugar legacy of great importance in their development of the sugar industry of Java. Java became an important player in the world sugar economy in the late nineteenth century and the first half of the twentieth. When the Dutch arrived in Java in 1596 there was an existing sugar industry in the hands of Chinese immigrants. The Dutch began to develop the sugar industry themselves from 1619, finding markets in Persia and Japan. Development was slow during the seventeenth and eighteenth centuries, due to the difficulty of finding economic markets since Javan sugar could not compete with Brazilian and Caribbean sugar in Europe because of the shipping cost. In the second half of the nineteenth century, however, there was rapid expansion, and producChapter 1/page 4

Early history tion reached 534 000 tonnes in 1896, making Java second only to Cuba as a world cane sugar producer. The colonial era, from the fifteenth century to the nineteenth century, proved to be a spectacular period for the expansion of sugar production and the geographical dissemination of sugar cane. However, the rapid increase in supply had, of course, to be matched by demand in the colonial powers. Not only did the taste for sweetness spread from Southern to Northern Europe during this period, but also sugar progressed from being a medicine to a condiment and, finally, to a staple. At the same time, the industrial revolution led to sugar consumption moving through the strata of society – it went from being an aristocrat’s luxury item to the food of the working class, providing energy as well as taste.

Sugar and slavery The history of sugar would be incomplete without reference to slavery as the two are inextricably linked. Slavery was an immensely important demographic movement, even if involuntary, which still has major political and social ramifications today. The great expansion in sugar production in the New World required a heavy input of labour – sugar was a labour intensive crop in cultivation, harvesting and manufacture – and local populations were not deemed ‘suitable’. Although other plantation crops required slave labour, sugar was the principal user. Sugar and slavery became linked by the Arab expansion through the Mediterranean. There is no doubt that the Arabs used slaves for their North African sugar industries, particularly in Egypt and Morocco. The Portuguese imported African slaves to their plantations and factories in Madeira and Sao Tomé in the late fifteenth century. Alarmed at the depletion of the indigenous population, King Ferdinand of Spain authorized the importation of slaves to Hispaniola in 1509. At first Indians from the region were sought but, in 1510, the first importation of African slaves to Hispaniola occurred. In 1516 the first cargo of slaves to Cuba took place. The first importation of slaves to the English West Indies – to Barbados – took place in 1627. With the growth of the sugar production in the seventeenth and eighteenth centuries, the slave trade also increased. The ‘triangular trade’ became famous – textiles from London, Bristol or Liverpool to West Africa in return for slaves, slaves to the West Indies in return for sugar, and sugar back to London, Bristol and Liverpool. The fact that sugar was the prime product in slavery is supported by figures quoted by Deerr for Brazil, which had the largest individual slave trade. From 1600 to 1699 a total of 350 000 slaves were imported, employed almost exclusively in the sugar industry. From 1700 to 1852 a total Chapter 1/page 5

Sugar Trading Manual of 2 950 000 slaves were imported, of which 1 000 000 were for the sugar industry, 600 000 for the mineral industry, 250 000 for coffee and 1 100 000 for other various industries. In the second half of the eighteenth century, opposition to the slave trade grew in the European colonial powers. This anti-slavery movement gathered force in the nineteenth century. In 1807 the US abolished the slave trade. In 1814 it was abolished in Holland, in 1820 in Spain, in 1830 in France, and in 1834 in Britain.

The rise of beet sugar The parent beet plant from which all modern commercial varieties are derived occurs naturally in Sicily and both sides of the Mediterranean. It is known by various names, e.g. Beta cicla, Beta maritima and Beta vulgaris. Although it was recognized as a source of sweetness for many centuries, the sugar yielding form, the white Silesian beet (the source of all today’s commercial varieties) was only developed by Achard and Von Koppy in the early years of the nineteenth century. The pioneer of the production of sugar from beet was Marggraf (1709–82), working in Berlin, who, in 1747, published a thesis on deriving sugar from various plants, including beet. Marggraf’s research was not followed up and it was left to his pupil, Achard, to develop the work. Achard obtained an interview with the King of Prussia in 1799 and convinced him to support the establishment of a beet industry. With grants from the King, Achard built the world’s first beet sugar factory at Cunern in Silesia, which opened in 1802. Achard’s factory was bankrupt after only one year of operation, but further development took place and factories were built elsewhere in Silesia and around Magdeburg. By 1836, Germany was producing 1400 tonnes of sugar. The impetus to develop the European beet industry further came from France, as a consequence of the Napoleonic wars. In 1811 a chief army officer paid a visit to Germany to investigate the beet industries of Krayn and Von Koppy. An article describing the visit was published in Le Moniteur on 2 March 1811. The article contained a justification for the production of sugar from beet by Von Koppy, in spite of a higher cost than cane sugar, that is worth repeating: ‘That the culture of beetroots, far from diminishing that of wheat, contributed to procure for him more abundant crops than he obtained before, first, because in employing for beets only the lands left previously to fallow, his wheat occupied the same area as it did before he thought of making sugar; and second because beets furnish, besides sugar, a large mass of food for cattle and sheep.’ He was able, without enlarging his domain, to double the number of his cattle, to obtain more manure and, with the aid of this manure, to obtain larger quantities of wheat. He admitted that: ‘he owed to the war Chapter 1/page 6

Early history a large portion of the profits given him by sugar that the people were obliged to use in place of cane’. However, he asserted that: ‘should he, in times of peace, obtain from his factory only the cost of cultivation of the beet crop, then he would guard himself from abandoning it, so as not to renounce the prosperity it had given him, and which it would always preserve on this domain’. Clearly the arguments and justifications between beet and cane sugar production, still heard today, started early in the history of beet sugar. On 10 March 1811, Montalivet, the minister of the interior, reported to Napoleon that sugar was being produced in France in the departments of the Roer and Rhine, and Moselle. Napoleon was concerned at the cost of sugar imports, owing to the war and in particular the English blockade. He acted swiftly. On 11 March 1811, Napoleon himself issued his first decree dealing with sugar. Relevant paragraphs were: 1 Plantations of beetroot, proper for the manufacture of sugar, shall be formed in our Empire to the extent of 32 000 hectares. 7 The Commission shall before the 4 May fix upon the most convenient place for the establishment of four experimental schools for giving instruction in the manufacture of beet sugar, conformably to the process of chemists. 10 Messrs Barruel and Ismard, who have brought to perfection the process for the extraction of sugar from the beetroot, shall be especially charged with the direction of two of the schools. 12 From 1 January 1813, and upon a report to be made to our minister of the interior, the sugar and indigo of the two Indies shall be prohibited and considered as merchandise of English manufacture, or proceeding from English commerce. Progress was swift following the decree. By 1813 France was producing 3500 tonnes of sugar from 334 factories. The French industry went into decline immediately after the Napoleonic wars ended with the opening up of French ports to colonial imports, but soon revived again. By 1826, 100 factories were producing 24 000 tonnes of sugar. During the first half of the nineteenth century, major beet sugar industries were also set up in Austria/Hungary, Russia and Belgium. Beet industries flourished in continental Europe for a variety of reasons. In spite of a higher cost of production than cane sugar, beet sugar was attractive to land-locked countries, countries without sugar producing colonies, or countries at war. Consequently, the second half of the Chapter 1/page 7

Sugar Trading Manual Table 1.1 Production of beet sugar in major European producers (tonnes)

Germany Austria/Hungary Russia France Belgium

1850

1900

53 349 16 805 13 100 76 151 11 604

1 984 287 1 083 328 893 500 1 040 294 325 000

Source: Deerr.

nineteenth century saw an exponential growth in beet sugar production in Europe, as Table 1.1 shows. Such was the growth of the beet industry that, by 1880, it had overtaken cane as the main source of sugar. By 1899, world beet sugar production had reached 5.4 million tons, compared to 2.9 million tons from cane (see Table 1.2). The rise of the sugar beet industry during the second half of the nineteenth century was not simply confined to production. Much of the production from Europe was exported and beet sugar came to dominate trade, as well as production. The reason for this was the bounty system applied to exports of beet sugar. The bounty dates from 1684 when France instituted primes d’exportation whereby refined sugar exported from France received a drawback of the duty paid on importation. The basis of the calculation of the drawback was a raw yield of 44.44% of refined sugar. If a refiner obtained a yield of more than 44.4% he received, as a bonus, the difference in duty. A similar system operated in England in the nineteenth century. Beet producers adopted similar systems. For example, in Germany, from 1885, roots paid a fixed tax, and a drawback or refund of tax was allowed on exported sugar, based on a yield from the beet of 8.51%. Any yield over 8.51% gave an unearned profit to the producer in excess of the drawback and allowed the export of sugar at less than the cost of production. Bounty systems were operated by all the major European beet sugar producers, such as Austria/Hungary, Russia, Belgium, France and Holland. As a result of the bounty system, cane sugar from the colonies found it difficult to compete, and the industry and exports went into a decline as the nineteenth century progressed. At the same time, opposition to bounties began to grow, especially in countries with colonial possessions producing sugar. France was the first country to act, calling for an international conference on the problem. In 1863 France, Belgium, Holland and Great Britain met at the invitation of France, and this was Chapter 1/page 8

Early history Table 1.2 World sugar production (tons), 1840–99 Year

Cane

Beet

Total

Share of cane

1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 1856 1857 1858 1859 1860 1861 1862 1863 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888

788 000 829 000 840 000 909 000 961 000 1 003 000 1 017 000 1 067 000 1 008 000 1 070 000 1 043 000 1 186 000 1 167 000 1 284 000 1 301 000 1 243 000 1 195 000 1 220 000 1 358 000 1 438 000 1 376 000 1 466 000 1 363 000 1 334 000 1 333 000 1 506 000 1 544 000 1 499 000 1 759 000 1 728 000 1 662 000 1 697 000 1 805 000 1 848 000 1 883 000 1 816 000 1 792 000 1 770 000 1 873 000 1 908 000 1 883 000 1 806 000 2 079 000 2 210 000 2 225 000 2 300 000 2 400 000 2 541 000 2 359 000

48 198 50 919 41 240 46 911 53 458 60 857 80 004 96 346 79 885 110 737 159 435 163 757 202 810 194 893 176 210 246 856 276 702 370 004 409 614 387 539 351 602 413 671 474 719 457 146 474 719 680 685 671 810 687 281 760 025 821 141 939 096 976 915 1 128 918 1 198 463 1 284 586 1 377 336 1 085 204 1 385 828 1 615 934 1 459 385 1 857 210 1 831 847 2 173 409 2 322 736 2 549 672 2 172 200 2 686 700 2 367 200 3 555 900

830 198 879 919 881 240 955 911 1 014 458 1 063 857 1 097 004 1 163 346 1 087 885 1 180 737 1 202 435 1 349 757 1 369 810 1 478 893 1 477 210 1 489 856 1 471 702 1 590 004 1 767 614 1 825 539 1 727 602 1 879 671 1 857 719 1 791 146 1 837 719 2 195 685 2 215 810 2 186 281 2 519 025 2 549 141 2 601 096 2 673 915 2 933 918 3 046 463 3 167 586 3 193 336 2 877 204 3 128 828 3 488 934 3 367 385 3 740 210 3 637 847 4 252 409 4 532 736 4 774 672 4 472 200 5 086 700 4 908 200 5 914 900

93.0 94.2 96.3 95.0 94.7 94.2 92.5 91.7 92.3 90.7 86.5 87.6 85.2 86.9 88.2 83.5 81.3 76.7 76.8 78.8 79.7 78.1 74.3 74.5 74.3 69.5 69.8 68.4 69.8 68.0 64.0 63.5 61.5 60.7 59.1 55.1 62.4 56.2 53.7 56.7 50.2 48.3 48.9 48.7 46.6 51.4 47.2 51.7 40.0 Chapter 1/page 9

Sugar Trading Manual Table 1.2 (cont.) Year

Cane

Beet

Total

Share of cane

1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899

2 138 000 2 597 000 3 502 000 3 040 500 3 561 000 3 531 000 2 840 000 2 842 000 2 869 000 2 995 000 2 881 000

3 536 700 3 679 800 3 480 800 3 380 700 3 833 000 4 725 800 4 220 500 4 801 500 4 695 300 4 689 600 5 410 900

5 674 700 6 276 800 6 982 800 6 421 200 7 394 000 8 256 800 7 060 500 7 643 500 7 564 300 7 684 600 8 291 900

37.7 41.2 51.6 47.3 48.2 42.7 40.2 37.2 38.0 38.5 34.7

Source: Deerr.

followed by further conferences in 1864, 1871, 1873 and 1875. The results of all these conferences were inconclusive, as they concentrated on devising acceptable means for valuing sugar, rather than directly attacking the problem of bounties. Further international conferences were held in 1887 and 1888. France by this time was opposed, having become a major exporter of beet sugar. However, the 1888 agreement was signed by Austria, Belgium, Germany, Great Britain, Holland, Italy, Russia and Spain. The first article declared that: ‘The High Contracting Parties engage to take such measures as shall constitute an absolute and complete guarantee that no open or disguised bounty shall be granted on the manufacture or exportation of sugar.’ However, Great Britain failed to ratify the agreement owing to opposition from the jam and confectionery industries, which benefited from cheap bounty-fed imports, and the agreement was never fully implemented. Finally, the bounty system was ended by the Brussels Convention, signed in 1901 (and this time ratified by Great Britain), which entered into force in 1903. The convention stated that: ‘The High Contracting Parties engage to suppress from the date of coming into force of the present Convention, the direct and indirect bounties by which the production or exportation of sugar may profit, and not to establish bounties of such a kind during the whole continuance of the said Convention.’ The convention was set to run for five years, with annual renewal. Austria, Belgium, France, Germany, Great Britain, Holland, Hungary, Italy, Norway, Spain and Sweden all ratified it. This therefore included all the major beet sugar exporters except for Russia, which joined in 1907.

Chapter 1/page 10

Early history Deerr lists eight consequences of bounties, which clearly had a profound effect on the development of sugar production and consumption: 1 Between the years 1850 and 1904 a quantity of sugar to the order of 60 000 000 to 65 000 000 tons was placed on the market at less than the cost of production. 2 The premium paid by the producing countries had varied within wide limits and, as railway rebates, shipping subsidies and other hidden forms of bounty entered, it is impossible to estimate what the total bounty was. Probably it did not average over the whole period less than 30 shillings per ton of sugar, making the cost to the producing countries engaged to the order of £100 000 000. 3 In the participating countries there was developed an improved system of agriculture, reflected in an increased output of grain and the cultivation of lands which otherwise would have been unproductive. 4 The increased supply of sugar, combined with its sale below cost of production, effected a continuous fall in price. 5 The greater portion of the surplus beet sugar was absorbed in Great Britain and in the USA. The price of sugar in London declined from 25.5 shillings per hundredweight in 1872 to 8.5 shillings per hundredweight in 1903, a decline of 66%. 6 While the bounties afforded the purchasing countries a valuable foodstuff at less than the cost of production, the development of agriculture was arrested, and the English sugar colonies, not yet recovered from the combined effects of the abolition of slavery and competition with slave-produced sugar, drifted into a state of decline and distress. 7 The British refining industry suffered severely and many houses were forced into liquidation. 8 At the same time, and based on supplies of sugar sold at less than the cost of production, a large industry in jam, marmalade, confectionery, chocolates and sweet biscuits developed in Great Britain.

Technical innovation The nineteenth century was not only the century of explosive growth in beet sugar production, but also the century of important technical innovation in the way sugar was extracted and produced. The first half of the century saw a stream of innovations in techniques for crushing cane and diffusing beet. By 1850, sugar factories and mills had taken much of their current shape, in terms of crushing and diffusing.

Chapter 1/page 11

Sugar Trading Manual More important than the steady improvement in crushing, particularly for the quality of the final product, were the invention of the vacuum pan and the centrifuge. In 1813 Edward Howard patented the vacuum pan, which revolutionized the crystallization process. The vacuum pan was rapidly adopted by the industry. In 1837 the centrifuge was patented by Penzoldt (France), but was only used for the drying of textiles. The invention of the first centrifuge specifically for sugar production is attributed to Seyrig (France, 1843). Up until the adoption of the centrifuge the only means of separating the crystals from the mother liquor was by drainage. The improvement in milling capacity, and the invention of the vacuum pan and the centrifuge, enabled the huge expansion in production of the nineteenth century to take place along with a significant improvement in the quality of the final product.

The social history of sugar Readers should already be convinced that sugar is a special product, with strong social, political, geographical and emotional attributes. So, how has sugar come to be the product that we know today? The purpose of this section is to place sugar in its social and political context. Sugar performs many roles, but the two that stand out are as a sweetener and as a source of energy (calories). Sweetness is a very basic sense for the human palate, with a strong emotive quality. Sweetness is pleasurable and is first encountered early in life in breast milk (through lactose). Before 1650, the main sources of sweetness were honey and fruit. Up to that time, sugar had been known (in Western Europe since the Dark Ages) as a rare spice, used to change the taste of food but not sweeten it in the modern sense. As a source of energy sugar remains important. Table 1.3 shows the energy content of 1990 world food output, and it can be seen that, in 1990, sugar was the fourth largest provider of calories. Sugar retains its fourth place in spite of declining per capita consumption in some industrialized countries. In developing countries, sugar is still used as both a sweetener and an energy source, and is particularly important in some areas, e.g. Central and South America, with per capita consumption levels of 44 kg and 43 kg respectively recorded in 1994. How did sugar reach this position in the world’s diet? The history of sugar production has already been discussed but, following Mintz, we will look briefly at the development of sugar consumption in Britain, a path which was paralleled in other developed industrial countries. In Britain in 1650, when most of the population was rural, the diet of the mass of the population was meagre and unpalatable, based around Chapter 1/page 12

Early history Table 1.3 Energy content of 1990 world food output

Wheat Rice Cassava Sugar Meat Milk Oilseeds Fruits and vegetables Pulses Potatoes Other

Production (million tonnes)

Energy content (million calories)

601.7 521.7 150.8 123.4 176.6 537.8 75.5 795.9 58.8 268.1 345.4

2413 1847 530 460 387 349 313 235 200 165 409

Source: Waggoner.

cereals supplemented, when available, by wild animals and domestic chickens. Wealthy people knew sugar as a spice and a luxury. From the mid-seventeenth century, Britain began to acquire and develop colonies in the Caribbean and sugar cultivation and production became the major plantation crop, especially in Barbados and Jamaica. The supply of sugar to Britain by the colonies increased one hundred-fold from 1660 to 1750. Sugar consumption among the labouring classes began in the eighteenth century with sugar as a sweetener associated with three other exotic imports – tea, coffee and chocolate. Since these were not at first sweetened and were bitter to taste, the wealthy early users had started to add sugar. By the time tea drinking became common, it was served hot and sweet. Of the three beverages, tea was the one to be drunk universally because it was cheaper to produce and a little went a long way. Among the poorer classes tea was also used to moisten bread – which was often stale – to make it more palatable. Sugar was used on porridge (as sugar or treacle) again to make a relatively tasteless food palatable. By the mid-eighteenth century the quantities of tea (and sugar) imported were so high and the price had fallen so much that it reached the point where tea, and its condiment sugar, had penetrated fully the working-class market. By the mid-nineteenth century, when import duties were lifted, sugar had begun to take on a further role as an energy provider. Jams, jellies and puddings, all using sugar, became common among the labouring classes now urbanized by the Industrial Revolution. The evolution of sugar consumption in Britain can therefore be summarized as follows: Chapter 1/page 13

Sugar Trading Manual 1650–1750: Sugar is a spice, a luxury, available only to the upper classes, a symbol of wealth and power. 1750–1850: Sugar enters the working-class diet, mainly as a sweetener. The process is accelerated by the Industrial Revolution. 1850–1950: The addition of jams, jellies and puddings adds the energy-providing dimension, and sugar becomes a necessity. By 1900, sugar is providing one-sixth of calorie intake. Sugar was at first a symbol of colonial power, encompassing plantations, slavery, wealth (early capitalism) and the exploitation of the colony by the metropolitan power. Its demographic effect on the world must not be underestimated. The importation of slaves, largely for sugar plantations, has created large African populations in the Caribbean, USA and Central and South America whose social conditions and rights remain an issue today. Sugar was transformed by the spread of its consumption and the Industrial Revolution into a means of power over the working class – tea and sugar was kept cheap and readily available and kept the workers fed well enough to work hard.

Chapter 1/page 14

2 Sugar from the 1900s to the present day Tony Hannah, Sergey Gudoshnikov and Lindsay Jolly International Sugar Organization

1900–14: Rapid expansion 1914–18: Decline during the First World War 1919–39: Rapid growth and cane makes a comeback 1939–45: Decline in both beet and cane sugar production during the Second World War 1945–55: Rapid recovery, first post-war International Sugar Agreement 1955–65: The Cuban Revolution disrupts trade flows 1965–75: The 1974 price boom unleashes far-reaching structural changes for sugar 1975–85: The 1980 price boom reinforces the effects of the 1974/5 boom 1985 to the present day Demand Price dynamics Supply Political environment

World sugar prices – back to volatility? Long-run trend Volatility ‘Golden era’ for sugar prices, 1988–97 The 1992 International Sugar Agreement

The twentieth century has witnessed a great expansion in sugar production and consumption. Between 1900 and 1924 sugar production doubled, from 11.26 million tonnes in 1900 to 23.21 million tonnes in 1924, an annual growth rate of 3.06%. Sugar production doubled again, from 1924 (23.21 million tonnes) to 1957 (43.58 million tonnes), an annual growth rate of 1.93%, slower because of the setback during the Second World War. World production doubled again between 1957 and 1977, from 43.58 million tonnes to 90.35 million tonnes, a growth rate of 3.53% over the 20 years. From 1977 to 1997 the growth rate slowed, but nevertheless world production had reached 125.13 million tonnes by 1997 at an annual growth rate of 1.64%. Overall, sugar production and consumption achieved an eleven-fold increase from 1900 to 1997. During the century two periods of rapid growth stand out. The interwar years, between 1918 and 1939, had an annual growth rate of 3.16%, and an annual growth rate of 7.24% was recorded during the period of recovery and expansion after the Second World War, from 1945 to 1960.

1900–14: Rapid expansion Between 1900 and 1914 world sugar production increased from 11.26 million tonnes to 18.21 million tonnes, an annual growth rate of 3.5%. Cane sugar expanded faster than beet sugar, growing from 5.25 million tonnes in 1900 to 9.9 million tonnes in 1914. However, in spite of the Brussels Convention (1901, entering into force in 1903), which banned the bounties that had subsidised beet sugar exports and undermined prices, beet sugar production also expanded during this period; from 6 million tonnes in 1900 to 8.3 million tonnes in 1914.

1914–18: Decline during the First World War European beet sugar production fell steeply during the years of the First World War, particularly in those countries involved – Russia, Germany, Austria/Hungary and France. World beet sugar production fell from 8.3 million tonnes in 1914 to 3.3 million tonnes in 1919, a fall of 60%. However cane sugar production continued to increase steadily as it was unaffected by the war, and rose from 9.9 million tonnes in 1914 to 11.86 million tonnes in 1919. Consequently, the share of cane sugar in world production rose steeply, from 54.4% in 1914 to 78% in 1919. Chapter 2/page 1

Sugar Trading Manual

1919–39: Rapid growth and cane makes a comeback The inter-war years saw a rapid expansion of world sugar production. The annual growth rate over the 20-year period was 3.16%. Beet sugar production recovered rapidly from the ravages of war. By 1924 world beet sugar production had reached its pre-war level of 8.3 million tonnes, from only 3.35 million tonnes in 1919. Beet sugar production continued to grow thereafter, reaching 11.9 million tonnes by 1930; it remained at around the level of 11–12 million tonnes, except in years of bad weather in Europe, up to 1939. However, the main factor behind the inter-war growth was a rapid increase in cane sugar production. World cane sugar production increased from 11.86 million tonnes in 1919 to reach 19.39 million tonnes by 1939, an annual growth rate of 2.5%. The main factors were the introduction of new varieties of cane, particularly in Java, and the expansion of cane areas in new or infant industries in countries like India, South Africa, Australia and the Philippines. Particularly important for the growth of world cane sugar output during this period were the expansions of production in Cuba, Java, India and the Philippines. Production in Cuba, encouraged by the rapidly growing demand from the expanding United States economy, had grown swiftly from 1900 onwards. Production in 1900 was 284 thousand tonnes and, by 1910, it had risen to 1.804 million tonnes. By 1918, production was 3.44 million tonnes and it continued to rise steeply in the first half of the 1920s, reaching 5.16 million tonnes in 1925. Production in Java also recorded a steep rise after the First World War, confirming Java as the world’s second largest producer and exporter after Cuba. Production was 1.34 million tonnes in 1919, rising to 2.9 million tonnes in 1928. Java’s main market during this period had been India, where only a small centrifugal sugar industry had existed since 1900. Production of sugar in India was concentrated on the traditional open pan sugars, gur and Khandsari. However the introduction of a duty on imported white sugar in 1932 led to the establishment of a major centrifugal sugar industry in India which grew quickly. In 1932 India’s white sugar production was only 290 thousand tonnes. By 1939 it had reached 1.24 million tonnes. The establishment of a major centrifugal sugar industry in India was an extremely important event in the twentieth century. Today India is a giant, consistently the world’s first or second sugar producer with a production of 15–17 million tonnes, whose sugar cycle has an immense impact on the world sugar economy. Production in the Philippines in 1919 was 411 thousand tonnes; by 1933 it had more than Chapter 2/page 2

Sugar from the 1900s to the present day tripled to 1.43 million tonnes. The growth in the Philippines’ production was, like Cuba, fuelled by demand from the USA. The faster growth of cane sugar production in the inter-war period led to a reversal of the domination of beet. During the second half of the nineteenth century the majority of the world’s production of sugar had come from beet, and the cane industry had gone into decline because the bounties on beet sugar had depressed prices. Cane sugar production had fallen to 35% of total world sugar production by 1899. At the beginning of the First World War, cane sugar’s share had risen to 54%. Discounting the war years, when beet sugar production declined severely, the share of cane sugar continued to increase in the inter-war period, reaching 64% by 1929 and 67% by 1939. Cane would never again relinquish its position as the dominant source of sugar. The rapid rise in world sugar production during the inter-war period led to overproduction and, as Table 2.1 shows, the eventual collapse of prices. In turn this led to international action to attempt to rectify the situation. A coincidence of good crops in various parts of the world in 1924/5 raised supplies far above immediate demand and pushed prices back Table 2.1 World raw sugar prices, 1919–39 (US cents/lb) 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

7.59 9.49 3.14 2.82 5.11 4.06 2.44 2.46 2.78 2.36 1.77 1.27 1.13 0.78 0.86 0.92 0.88 0.88 1.13 1.01 1.43

Source: ISC. Chapter 2/page 3

Sugar Trading Manual to pre-war levels, signalling the onset of the inter-war crisis in the world sugar economy. Cuba, which had produced a record harvest of 5.3 million tonnes in 1924/5, roughly a quarter of global productivity, unilaterally restricted its three subsequent crops and tried to persuade other major producers to exercise similar restraint. In what became known, after the Cuban negotiator, as the Tarafa Action of 1927/8, the sugar industries of Czechoslovakia, Germany and Poland agreed to support Cuba’s adjustment policy, although only Czechoslovakia took a tangible step and reduced its beet area. More seriously, echoing Russia’s intransigence in 1901 in not joining the Brussels Convention, the Dutch interests in control of Java’s industry now refused to play. The market east of Suez had not yet deteriorated to the same extent as that west of Suez, and Java was riding the crest of a revolution in cane yields following the introduction of the famous POJ2878 variety. On the importer side, the United Kingdom undermined the Tarafa Action by revising its sugar duties in order to protect British refiners against white and refined imports. New peaks of world production in 1927/8 and 1928/9 brought a further build-up in stocks and drop in prices – and an inquiry by the Economic Committee of the League of Nations. This saw the solution in an output freeze (whether by all important producers or just by the major exporters was left open) to be dealt with at an industry rather than governmental level. Much of the thinking of the day was still imbued with the notion of the ‘battle between beet and cane sugar’ – portrayed as a fight against an unfair, and indeed immoral, attempt to replace a product of innate natural superiority by the artificial creation of protectionism – which obscured the autarkic impulses and imperial preferences mainly responsible for the excess of both. Without waiting for the committee’s report, from which they evidently expected little, Cuba, Czechoslovakia, Germany and Poland, now joined by Belgium and Hungary, negotiated a new accord at a quasiofficial level in the summer of 1929, setting themselves export limits on the assumption that their production would also keep within certain agreed amounts. It was recognized, however, that supply and demand could not be wholly balanced without the co-operation of others, particularly Java, the Dominican Republic, Peru and the Philippines. The report of the Cuban delegation concluded, ‘that the conditions in which the world’s cane and beet sugar is produced are too diverse, and the natural, economic and political factors involved so opposed, that the interests of the various countries are in practice irreconcilable’ (Pérez-Cisneros, 1957). Cuban initiatives thus far had formed part of a package of measures motivated also by a domestic concern to ensure that the older, smaller and more vulnerable Cuban-owned mills survived the adjustment process alongside the fitter American-owned sector. The Wall Street Chapter 2/page 4

Sugar from the 1900s to the present day crash in October 1929, followed by the Hawley–Smoot Tariff Act of 1930, which raised the US duty on Cuban sugar to two cents a pound, equivalent to an ad valorem rate of 160% of that year’s world market price, augured the imminent collapse of all. Significantly, a New York lawyer, Thomas L. Chadbourne, became the central figure in the ensuing negotiations, and the agreement concluded in Brussels in 1931 bears his name. The Chadbourne Agreement reunited the participants of the 1929 Accord. The important addition was Java, at last willing to join, since current world prices even put most of its sugar companies in the red. Peru and Yugoslavia subscribed later. The pact was signed by producer organizations, but clearly could not function without government cooperation and national legislative backup. Formally respectful of the aversion to state intervention shown by the League’s Economic Committee, it was an odd hybrid: neither a commercial treaty between governments nor strictly a cartel of private producers. In essence, the signatories agreed to keep their exports within specified amounts during the five years to 1 September 1935 and to limit production so that segregated surplus stocks would be gradually cleared. An International Sugar Council was established in The Hague to administer the pact. Judged against its aim of restoring world sugar prices to a ‘normal’ level, the Chadbourne Agreement failed utterly. Far from rising, prices fell further, despite the fact that members actually exported considerably less than their quotas, drastically cut total output over the period of the agreement, and substantially reduced their stocks, though not as much as hoped. But the agreement could do nothing about the real problems. Consumption stagnated or declined in many parts of the world owing to the Great Depression. Lower production in the Chadbourne countries was partially offset by higher output in the rest of the world. The growth under tariff protection of centrifugal sugar industry in India virtually put paid to Java’s Indian market, and its Japanese market shrank owing to increased production in Taiwan. Cuba had to cede ground on the US market to mainland beet sugar producers and the Philippines. For all their sacrifices, the Chadbourne countries appear to have received little benefit, unless they gained something from apportioning market shares among themselves. It is hard to imagine that unbridled competition could have driven world prices lower and protective barriers higher, and the argument that the situation would have been much worse without the scheme begs the question – for whom? Not surprisingly, the Chadbourne Agreement was not renewed. In any event, the deliberations on co-ordination of production and marketing of primary products, including sugar, during and after the World Monetary and Economic Conference of 1933 had created the climate Chapter 2/page 5

Sugar Trading Manual for a broader approach. Moreover, conditions were ripe to bring the centres of the two great sugar empires into an international arrangement. With the Jones–Costigan Act of 1934, new ground rules were established for domestic and foreign suppliers of the US market, while in Britain, the Sugar Industry (Reorganization) Act of 1936 set a limit on the volume of subsidized domestic beet sugar. Meanwhile, on the world sugar market, the fundamental situation had improved by the mid-1930s, as far as consumption and stocks were concerned, but prices remained relatively low in the presence of huge excess capacities. This was the setting for the International Sugar Agreement of 1937, negotiated under the auspices of the League of Nations, the direct lineal ancestor to the sugar agreements since the Second World War. Later instruments replicated its basic characteristics although, like the progeny of intensive breeding in other fields, they became more highly strung. Henceforth they would be formally negotiated between governments, not producer associations, and would include importers as well as exporters. They would distinguish between the free market and preferential markets. Their main operational objective would be to promote an orderly relationship between supply and demand in the free market. The main mechanism to this end would be the regulation of exports through adjustable quotas, supplemented by provisions concerning stocks. And they would set a price objective, defined in 1937 as ‘a reasonable price, not exceeding the cost of production, including a reasonable profit, of efficient producers’, and 40 years later as ‘remunerative and just to producers and equitable to consumers’ (see below for further comment on the impact of international sugar agreements). Implicit in the 1937 agreement was a concern to guard against further shrinkage of the free market, and this was met by British and American pledges to maintain the status quo. Short-term perceptions of the balance of costs and benefits determined governmental attitudes towards international sugar agreements, and that the United Kingdom and USA were willing to give such undertakings reflected the mixture of their interests as exporters as well as importers and as centres of large trading blocs. Concern over the size of the free market also illustrated another lasting behavioural trait: the seemingly overriding preoccupation of exporting countries with volume rather than value. This gave negotiations about basic export tonnage and quota adjustments an exclusively quantitative flavour, yet a narrow, essentially static approach to quotas and the extent to which they could be cut in the face of surpluses. This may not have maximized average revenues. How well the 1937 agreement might have worked will never be known because its economic provisions had to be suspended after only two years at the outbreak of the Second World War. Chapter 2/page 6

Sugar from the 1900s to the present day

1939–45: Decline in both beet and cane sugar production during the Second World War World sugar production fell dramatically as a result of the conflict. In 1939 world sugar production amounted to 30.5 million tonnes; by 1945 it was down to 18.185 million tonnes, a fall of 40%. Obviously, being mainly grown in Europe, the decline was greater for beet sugar, which fell from a level of 11.12 million tonnes in 1939 to only 5.37 million tonnes in 1945 (52%). Not only were some important producing areas fought over (e.g. Ukraine) but there was also a severe shortage of labour to produce sugar. Cane sugar production fell from 19.4 million tonnes in 1939 to 12.8 million tonnes in 1945 (34%). Wartime shortages of sugar led to rationing in most major consuming countries.

1945–55: Rapid recovery, first post-war International Sugar Agreement Post-war recovery, particularly in Europe, was spectacularly fast. Beet sugar production regained its pre-war level in 1949, when 10.7 million tonnes were produced, double the 1945 output of 5.37 million tonnes. Beet sugar production continued its rapid increase after 1949 and, by 1955, had reached 15.6 million tonnes. Cane sugar also recovered quickly and, by 1959, had reached 19.5 million tonnes, its pre-war level. Total world sugar production in 1955 was 38 million tonnes, more than double its 1945 level and 25% higher than the pre-war peak. The volatility endemic in sugar prices continued after the war, as Table 2.2 shows, with prices first rising owing to shortages, then peaking in 1951 at 5.7 cents/lb owing to the Korean War commodity price boom. After 1951 prices fell steeply, losing 40% of their value by 1953 (3.41 cents/lb). The continued instability of sugar prices led to international pressure for stabilization through international co-operation and, in 1953, the Second International Sugar Agreement (ISA) was negotiated under the auspices of the United Nations. The 1953 ISA was designed to stabilize prices in the ‘free market’, which was defined as world sugar trade less imports by the USA, imports by the USSR from Czechoslovakia, Hungary and Poland, and imports by the UK under the Commonwealth Sugar Agreement (1951). The countries joining the 1953 ISA represented 84% of net exports to the free market and 54% of imports from the free market. The basic Chapter 2/page 7

Sugar Trading Manual Table 2.2 World raw sugar prices, 1945–60 (US cents/lb, fob Cuba) 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960

3.10 4.18 4.96 4.24 4.16 4.98 5.70 4.17 3.41 3.26 3.24 3.47 5.16 3.50 2.97 3.14

Source: ISC.

instrument used for stabilization was the export quota, adjusted according to price conditions and backed by stocking regulations by which it was hoped to regulate production indirectly. Production was to be adjusted during the term of the agreement so that stocks did not exceed 20% of annual production. There was also a minimum stocking requirement of 10% of the basic export tonnage in order to create a reserve in case quotas were raised. The objective of the 1953 ISA was to stabilize prices in a range of 3.25 cents/lb to 4.35 cents/lb. Judging by its price objective, the 1953 ISA was very successful, with prices straying significantly outside the range in only one year, 1957, when they rose to 5.16 cents/lb. The agreement expired at the end of 1958 and was immediately succeeded, back to back, by the 1958 ISA.

1955–65: The Cuban Revolution disrupts trade flows Between 1955 and 1965 world production continued to grow strongly. World production in 1955 was 38 million tonnes and it had reached 63.72 million tonnes by 1965, an annual growth rate of 5.3%. With the continuing expansion of the beet industry in both Western and Eastern Europe, beet production grew faster than cane production, recording an annual growth rate of 5.76% over the period, to reach a level of Chapter 2/page 8

Sugar from the 1900s to the present day 27.325 million tonnes in 1965 compared to 15.6 million tonnes in 1955. Cane sugar production grew at an annual rate of 5% over the period, reaching 36.4 million tonnes by 1965. By far the most important event for sugar in the 1955–65 period was the Cuban Revolution in 1959, which had a massive impact at the time and its effect still reverberates today. In the five years up to and including 1959 Cuban exports to the USA averaged 2.86 million tonnes annually. In 1960 the USA placed an embargo on imports from Cuba. This had two main repercussions. The USA, which had hitherto received 75% of its supplies from Cuba, had to develop new sources of sugar imports to fill the gap left by Cuba. These new sources were found in Latin America and the Philippines, where an expansion of production took place in order to meet the increased demand. Cuba, meanwhile, was aided by the USSR and, to a lesser extent, China, which agreed to import the displaced sugar. Production had in any case been expanding in the USSR and, in spite of consumption increasing to high levels, the USSR found itself with a surplus, which was re-exported to developing countries as white sugar. Therefore, the reaction of the US to the Cuban Revolution had disrupted the world’s largest trade flow dating back to colonial times, diverting it to the USSR, its satellites and China, while creating a surplus of sugar in the world. This had a depressing effect on world prices, as Table 2.3 shows. The 1958 ISA was unable to cope with the new situation, and ceased operation in 1961. The surplus was temporarily relieved in 1963 after a disastrous crop in Cuba sent prices to 8.34 cents/lb, but the general surplus situation soon reasserted itself and, by 1965, prices had fallen to 2.08 cents/lb.

Table 2.3 World raw sugar prices, 1955–65 (US cents/lb) 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965

3.29 3.51 5.20 3.55 3.02 3.12 2.75 2.83 8.34 5.77 2.08

Chapter 2/page 9

Sugar Trading Manual

1965–75: The 1974 price boom unleashes far-reaching structural changes for sugar After the rapid growth of the 1955–65 period, 1965–75 saw a considerable slowing down in the face of expansion. World sugar production grew from 63.725 million tonnes in 1965 to 78.842 million tonnes in 1975, an annual growth rate of 2.15%. The situation of the previous decade was also reversed whereby cane sugar production grew faster, at 2.7% per annum, than beet sugar production, which grew at an annual rate of 1.36%. As discussed in the previous section, the surplus situation in the world sugar economy had reasserted itself by 1965. It is worthwhile to repeat the reasons. The US embargo on Cuban imports resulted in: 1 An increase in production in alternative US suppliers. 2 The diversion of Cuban sugar to the USSR, its satellites and China. 3 Large re-exports of white sugar by the USSR. The ensuing surplus continued to depress world prices throughout the rest of the 1960s, as Table 2.4 shows. From 1965 to 1968 the raw sugar price averaged only 1.93 cents/lb and, over the whole period up to 1970, only 2.43 cents/lb. The depressed prices of the mid- to late 1960s led to pressure, particularly from exporters, for a new ISA and, in 1968, a new ISA was duly ratified. The 1968 ISA was similar in structure to its predecessors – the basic

Table 2.4 World raw sugar prices,1 1965–75 (US cents/lb) 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1

2.08 1.81 1.92 1.90 3.20 3.68 4.50 9.27 9.45 29.66 20.37

ISA daily price (average of NY No. 11 and London Daily Price or lowest + 5 points). Source: ISO.

Chapter 2/page 10

Sugar from the 1900s to the present day instrument was the export quota, raised or lowered according to the price conditions and backed up by minimum and maximum stock provisions. The price objective was set at a range of 3.50–5.25 cents/lb. It should be noted that the average price from 1965 to 1968 was lower than the agreed minimum price, at 1.93 cents/lb. The agreement therefore began by attempting to raise prices in the face of the surplus. At first the 1968 ISA was successful in that prices rose to 3.2 cents/lb in 1969, to 3.68 cents/lb in 1970 and to 4.5 cents/lb in 1971. From 1972 the 1968 ISA was overtaken by events beyond its control. In 1972 Cuba had a poor crop, 1.3 million tonnes down on the previous year. The USSR had had a poor crop in 1971 and came to the free market for additional supplies. World stocks fell and world raw sugar prices rose to 9.27 cents/lb, 2.02 cents/lb (38%) above the maximum price designated by the ISA. In 1973 came the first oil price shock, which set in motion a general commodity price boom. Sugar was particularly vulnerable owing to the already tight supply situation. Prices in 1973 rose again to 9.45 cents/lb, 80% higher than the ISA maximum price. In 1974 the USSR had another poor crop and by then the commodity price boom had really taken hold. The average price for 1974 was 29.66 cents/lb and the daily price for raw sugar reached a spectacular 64 cents/lb in October 1974. Clearly the price and the world sugar economy were out of any control, and the 1968 ISA ceased operation in 1973 and was not renewed. Prices continued at high levels in 1975, averaging 20.37 cents/lb for the year. It is impossible to overestimate the profound effect that the 1974/5 commodity price boom had on the world sugar economy, and still has today. Of many effects, four stand out: 1 The high prices led to the establishment of an HFCS industry in the US and, to a lesser extent, Japan, which eventually displaced sugar from consumption in soft drinks, its main use, in the US. Sugar now had to learn to live with a competitor for the first time. 2 Because the US introduced quotas to control imports with the effect that the adjustment to lower consumption was borne by imports and not domestic production, developed country imports fell sharply and developing countries began to dominate the import market. The higher price elasticity of developing importers eventually led to a more stable market and a decade of relative price stability from 1988 to 1998. 3 Brazil established its alcohol programme, which more than tripled its cane area, giving it the potential to swamp the sugar market if it transferred cane from alcohol to sugar production. 4 The EU raised quota levels to the point where it eventually (by 1980) became a major net exporter, having been a net importer of sugar up to 1974. Chapter 2/page 11

Sugar Trading Manual

1975–85: The 1980 price boom reinforces the effects of the 1974/5 boom The growth rate of sugar production slowed further between 1975 and 1985, to 2.2%. After 1975 prices fell back sharply, as Table 2.5 shows. Another consequence to the high prices of 1974/5 was a stagnation in consumption and a strong increase in production leading to another surplus in the world sugar economy. The decline in prices again brought calls for an ISA, and a new ISA was ratified in 1977. The 1977 ISA was like its predecessors, based on export quotas and minimum and maximum stocks, with the addition of a special stock provision of 2.5 million tonnes to protect the upper limit of the price range. The price range was set at 11–21 cents/lb with quotas lifted at 15 cents/lb. Once again the price range had been set above the prevailing price. In the first year of operation prices fell to 7.81 cents/lb (1978) from 8.1 cents/lb in 1977. In 1978 prices rose to 9.65 cents/lb, still below the minimum price of the range. Then, again, an ISA was overtaken by events beyond its control. In 1979 and 1980 the USSR had poor crops and again this coincided with a poor crop in Cuba in 1980. The USSR entered the free market for large

Table 2.5 World raw sugar prices,1 1975–89 (US cents/lb) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1

20.37 11.51 8.10 7.81 9.65 28.69 16.83 8.35 8.49 5.20 4.06 6.04 6.75 10.20 12.82

ISO daily price (average of NY No. 11 and London Daily Price or lowest + 5 points). Source: ISO. Chapter 2/page 12

Sugar from the 1900s to the present day qualities to make up the shortfall in supplies. In 1980, additionally and again in parallel with 1974, the second oil price hike had generated a general commodity price boom and once more tight supplies made sugar particularly vulnerable. Prices rose steeply and the average for 1980 was 28.69 cents/lb, the daily price reaching 47 cents/lb in October. Once more the supply response to the high prices was swift. Prices fell to 16.83 in 1981 (above the range), and then to 8.35 cents/lb in 1982, 8.49 cents/lb in 1983 and 5.2 cents/lb (all below the range) in 1984, the last year of the agreement. Such was the build-up in stocks in response to the 1980 price boom that prices in 1985 averaged only 4.06 cents/lb, probably the lowest ever annual average in real terms ever recorded. In terms of its price objective the 1977 ISA failed. The annual average price was never within the range during its whole term. The principal reason for its failure was the non-membership of the EU, then in an expansionary phase. The ISA could not have contained the commodity price boom, but might have held prices up during 1982–4 if the EU had been a member. But the members were not in a mood to restrict production and exports with a major, expanding producer outside the agreement. Technical factors also contributed to the failure. Only around 2 million tonnes of the special stocks of 2.5 million tonnes were in place when prices began to rise and the release mechanism was cumbersome and slow, so that stocks were still being released in 1981 when prices had already begun to fall sharply. The 1980 price boom had similar origins to the 1974/5 boom both inside sugar (production shortfalls in Cuba and USSR) and exogenous to sugar (a general commodity price boom triggered by an oil price hike). The effects, too, were similar; giving further impetus to HFCS, reinforcing the domination of developing country importers and leading to a further increase in the EU support price.

1985 to the present day Growth in world production slowed again after 1985; the annual growth rate for 1985 to 1990 was 2.4%. Nevertheless production in 1990 reached 107.184 million tonnes. Most of the growth from 1985 was in cane sugar production, which reached 70.195 million tonnes in 1990, when cane sugar’s share of world production rose to 63.3%, compared to 46.6% at the beginning of the century. World prices remained depressed for the most of the 1980s but at the end of the decade due to two consecutive seasons of world deficit and considerable reduction of world sugar stocks prices improved considerably. In 1989 the ISA annual average was as high as 12.82 cents/lb compared to 4.06 cents/lb only in 1985. Chapter 2/page 13

Sugar Trading Manual The remainder of this section is dedicated to discussion of continuing structural changes in the world sugar market in the 1990s with a particular focus on the shape in which the global sugar economy has entered into the third millennium. It draws on material from the forthcoming publication The World Sugar Market by Sergey Gudoshnikov, Lindsay Jolly and Donald Spence (Woodhead Publishing, 2004).

Demand Over the past three decades global consumption growth has demonstrated a stable increase at an average rate of around 2% per year. In 2001 consumption reached 130.9 million tonnes, raw value. Population growth remains the key driver of world sugar consumption, explaining about 85% of growth in sugar consumption at the global level. Figure 2.1 illustrates major changes in world sugar consumption since 1985. The trend of stagnating demand in the developed countries and growing consumption in the developing countries established since the mid-1970s has resulted in a steadily growing dominance of developing countries in world sugar consumption (Fig. 2.2). Since the beginning of the 1990s their global consumption share has grown from 72% to 75%. The consumption trend was mirrored by sugar import dynamics (see Fig. 2.3). Developing countries’ share in world imports grew throughout the 1990s. This growth in imports was by no means relentless. At the beginning of the decade imports of the Former Soviet Union (FSU)

6.00

135,000.00 130,000.00

4.00

120,000.00 115,000.00

2.00

110,000.00 105,000.00

0.00

100,000.00 –2.00

19

8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 01

95,000.00

2.1

World consumption

Growth rate in %

Linear (growth rate in %)

Linear (world consumption)

Changes in world sugar consumption, 1985–2001.

Chapter 2/page 14

% per year

000 mtrv

125,000.00

Million mtrv

Sugar from the 1900s to the present day 100 90 80 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Consumption in developed market economies Consumption in developing countries including economies in transition

2.2

Structure of world sugar consumption, 1990–2001.

30 Million mtrv

25 20 15 10 5 01

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

19

19

90

0

Developed economies Developing countries including economies in transition Linear (Developing countries including economies in transition)

2.3

Structure of world sugar imports, 1990–2001.

suffered a considerable setback reflecting the cost of transition from subsidized and government-controlled purchases to market-oriented imports. In the second half of the 1990s the developing countries’ import expansion was interrupted by the financial crisis in Asia. Nevertheless, in the long run, the bulk of the increases in the world imports have come from the developing countries. Their import share has increased from 62% in 1990 to 74% in 2001. The 1990s proved to be a time of considerable change in the geographical and product structure of world sugar imports. The transformation in the geographical structure of world imports is illustrated in Table 2.6. By the end of the decade the abovementioned slump in the FSU imports was over and the region’s purchases rose above the level of

Chapter 2/page 15

Sugar Trading Manual Table 2.6 Imports by selected destinations, 1992–2001 (in million tonnes, raw value)

FSU South East Asia North Africa & Middle East Sub-Saharan Africa USA Western Europe

FSU South East Asia North Africa & Middle East Sub-Saharan Africa USA Western Europe

1992

1993

1994

1995

1996

7.42 6.19 5.81 1.84 2.05 2.23

7.32 5.38 5.31 1.65 1.83 2.28

3.59 7.24 5.84 1.57 1.60 2.40

5.08 9.07 6.73 1.66 1.64 2.81

5.17 8.25 6.94 1.71 2.87 2.73

1997

1998

1999

2000

2001

4.82 8.23 7.90 2.07 2.95 2.49

5.51 8.19 7.74 2.73 2.06 2.23

8.68 7.92 7.94 2.20 1.59 2.28

7.30 7.73 7.82 2.14 1.37 2.31

8.42 8.33 7.99 3.18 1.26 2.28

the first post-Soviet years. Deliveries of sugar from Ukraine, the main sugar supplier of Russia and other FSU countries during the Soviet era, were completely replaced by imports from the world market. Ukraine itself also became a net sugar importer. The FSU regained the leading place in the world importers’ league. South East Asia demonstrated a remarkable growth in imports in the first half of the 1990s but since 1996 the level of annual imports has stagnated at around 8 million tonnes. The most dynamic and consistent importing regions are North Africa and the Middle East (which are counted as a single region) and SubSaharan Africa. In 2001 the two regions imported 11.2 million tonnes, which accounts for nearly one-fourth of the world total imports. From 1991 to 2001 total Arab region imports grew at an average annual rate of 9%. During the same period the total imports of Equatorial and Southern Africa grew on average by 13% a year. This is set against world average annual growth rate of 3% over the same period. Finally, imports by Western Europe remained flat, showing only marginal year-to-year changes while sugar deliveries from the world market to the US shrank from more than 2 million tonnes in the early 1990s to 1.3 million tonnes in 2001. Moving on to the world sugar trade’s product structure changes, we can note a growing dominance of raw sugar in world turnover. The share of raw imports in the world total grew from about 50% at the beginning of the 1990s to nearly 60% in 2001. Characteristically, Chapter 2/page 16

Sugar from the 1900s to the present day 25 Million mtrv

20 15 10 5 0 1992

1993

1994

1995

1996

1997

White sugar imports

2.4

1998

1999

2000

2001

Raw sugar imports

Distribution of world imports between raw and white sugar, 1992–2001.

Table 2.7 Changing structure of import demand, world’s largest importers, 1992 and 2001 (in 000 mtrv) Raw sugar

White sugar

1992

2001

1992

Russia USA Japan EU

2872 1994 1821 1705

Russia EU Japan S. Korea

5708 1647 1568 1516

S. Korea WORLD

1229 1544

Malaysia WORLD

1230 2217

TOTAL Share of world total %

4 62

TOTAL Share of world total %

8 45

Russia Iran Nigeria Saudi Arabia Jordan WORLD TOTAL Share of world total %

2001 2 272 736 697 521

Persian G Algeria Nigeria Syria

924 900 893 874

472 14 055

Indonesia WORLD

840 15 339

33

TOTAL Share of world total %

29

the volume of white sugar trade has remained practically unchanged (Fig. 2.4). According to market commentators, it is often more cost effective to transport raw sugar in bulk and refine it at destination than to ship it in refined form in bags. Over the last decade refineries have been built all over the world, including Algeria, Saudi Arabia, Dubai, Nigeria and Indonesia. Another feature of world imports that emerged in the 1990s was the dispersion of import demand. While in 1991 the world’s ten largest importers absorbed 63% of world imports, by 2001 the share of big players had reduced to 45% of total trade. Table 2.7 illustrates the changes in annual import volumes of both Chapter 2/page 17

Sugar Trading Manual raw and white sugar by top five participants in 19921 and 2001. The dispersion has affected both raw and white sugar buyers. The share of leading importers of raw sugar reduced from 62% to 45% while that of leading white sugar buyers fell from 33% to 29%. While examining the dispersion of import demand, it is worth keeping in mind that imports of white sugar are traditionally much less concentrated than those of raw sugar. Looking at the changes in geographical distribution of imports, the special role of Russia as the world’s leading import power is clear. Since the collapse of the Soviet Union, Russia topped both raw and white sugar import league tables. The 1990s saw the rise of Russia as the dominant raw sugar importer, and by 2001 absorbed more than a quarter of all raw sugar traded internationally. Meanwhile, in the white sugar sector Russia replaced imports of whites from the neighbouring Ukraine by imported raw sugar tolling and, as a result, since the mid1990s Russia has practically disappeared from the white sugar market as an importer.

Price dynamics Throughout most of the 1990s there existed a popular theory that the increasing dominance of the developing countries together with greater liberalization of national sugar markets should bring more stability to the world sugar price. This belief rested on the assumption that the developing countries are more price-sensitive and adjust the quantity they purchase to the pertinent price conditions. It was also expected that greater price stability would vastly improve the ability of producers to plan their investments to keep pace with demand growth, which, in turn, would feed back into even further increases in this stability. The market developments throughout the 1990s generally bore out this theory. Indeed, from 1988 to 1998 world market prices remained remarkably stable by sugar standards (sugar is considered the most volatile commodity traded internationally). World market prices for raw sugar during this period rarely exceeded 14 cents/lb or fell below 8 cents/lb (see Fig. 2.5). The situation, however, changed dramatically 1

1992 is chosen as a basis year as it was the first year after the collapse of the Soviet Union. The disintegration of the Soviet internal sugar market and the COMECON system, which supported preferential imports from Cuba, was the most dramatic politically driven structural change in the world sugar economy since the introduction of the UN embargo on Cuba in the early 1960s. During the Soviet era all the inter-republic deliveries were considered as internal trade and were not included into the international trade statistics (in 1991 Ukraine alone exported nearly 2 million tonnes of sugar to other republics of the Soviet union). This makes post-1991 statistics poorly compatible with data for earlier years.

Chapter 2/page 18

Sugar from the 1900s to the present day 22

Cents/lb

18 14 10 6

LDP (white)

2.5

2001

1999

1997

1995

1993

1991

2

ISA daily price (raw sugar)

World market sugar prices, 1991–2001.

towards the end of the decade. By late 1998 world market prices collapsed below 7 cents/lb, reflecting increasingly bearish global fundamentals (considerable production gains in a number of key producing countries not supported by parallel growth in import demand and the consequent dramatic pile-up of stock). In April 1999 raw sugar prices were as low as 4.78 cents/lb, a level not seen for more than thirteen years, since January 1988. The fall of white sugar prices was not much better. The new millennium brought some relief to exporters. Given the severe drought in Brazil coupled with the unfavourable weather conditions and plant diseases in Thailand and Australia, it seemed likely that the world sugar economy would swing into a deficit phase. In July 2000 raw sugar prices regained a 10 cent/lb level, kept rising in the second half of 2000 and by mid-October were just short of 12 cents/lb. This level, however, proved unsustainable, when the extent of Brazil’s productive recovery in 2001/2 became apparent. During the following two seasons world market values lost all the ground gained earlier. In summer 2002 raw sugar prices fell well below 6 cents/lb level and only stopped a hair’s breadth away from 5 cents/lb. In the second half of 2002 and beginning of 2003 prices improved slightly but stayed well below the level of the early to mid-1990s. Thus, the price dynamic at the dawn of the new millennium had failed to support early expectations of higher price stability and declining volatility (having said that, in absolute terms the current variations in world market prices are significantly lower than those of the 1970s and early 1980s).

Supply How can a new wave of price instability be explained? Probably not by looking at demand. Can the new shape of supply explain it? In Chapter 2/page 19

Sugar Trading Manual

000 mtrv

135,000 125,000 115,000 105,000

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01

95,000

2.6

World sugar production, 1991–2001.

contrast to consumption, where there has been relatively stable growth over the last fifty years, production remains extremely volatile. As can be seen in Fig. 2.6, during the 1990s global output twice fell by 5 million tonnes or more from one year to the next (in 1992/93 and 1999/2000), once grew by as much as 9.1 million tonnes (1998/99) and experienced a couple of plateaus (in 1996–98 and in 2000–1). Sugar is an agricultural product. In spite of all technological advances in field practices, unfavourable weather can still severely impact on sugar production even in the most efficient industries. Yields may vary very substantially from year to year solely owing to differences in weather patterns and the incidence of disease. As a considerable share of the world production is designated for export, climate-driven changes in production are reflected by world price dynamics. At the world level, however, local impacts of cataclysmic weather conditions are smoothed over because sugar production is so geographically spread out, and years when output drops simultaneously in many producing countries are thankfully few and far between. The new remarkable feature of the world sugar economy, which has surfaced in the 1990s, is the sharp growth in the concentration of sugar production. At the beginning of the 1990s world sugar production was about 114 million tonnes, raw value (an average for 1991–932). With the onset of the new millennium it nearly reached 132 million tonnes (an average for 1999–2001). Thus, global sugar output during ten years only increased by 18 million tonnes. Notably, just two countries account for the bulk of the increase. Currently Brazil’s production averages nearly 20 million tonnes, as against less than 10 million tonnes at the beginning of the 1990s. During the same period sugar production in India 2

In order to reduce the influence of crops particularly affected by extreme weather conditions we have used here a three-year average rather than figures for individual years. Chapter 2/page 20

Sugar from the 1900s to the present day Table 2.8 Sugar production in selected countries, 1991–2001 (in 000 tonnes, raw value) 1991–1993

1999–2001

Increase in 1000 t

Increase in %

Brazil India EU15 USA China Thailand Mexico Australia Cuba Pakistan

9 825.3 12 911.8 16 826.6 6 775.6 7 966.7 4 383.5 4 040.1 4 015.5 6 232.6 2 506.7

19 148.6 19 186.4 17 361.6 8 032.6 7 767.9 5 661.0 5 153.1 4 899.6 3 893.4 2 827.4

+9 323.3 +6 274.5 +535.0 +1 257.0 -198.8 +1 277.6 +1 113.0 +884.2 -2 339.3 +320.7

+95 +49 +3 +19 -2 +29 +28 +22 -38 +13

WORLD

113 904.0

131 886.0

+17 982.0

+16

grew by more than 6 million tonnes from about 13 million tonnes to nearly 20 million tonnes. Other key producers failed to match such vigour in sugar production, and in some cases sugar production even declined (see Table 2.8). As a result of growing concentration of production, the share of the five largest sugar producers in the world total increased considerably, from 46% in early 1990 to 53% in 1999–2001. Contrary to popular belief, concentration in sugar production was not mirrored by concentration of exports. The share of top exporters in world trade totals has remained practically unchanged. At the beginning of the 1990s the bulk of the world sugar supply came from a handful of dominant exporters, with Cuba leading the pack. Today the league of top exporters includes the same countries and their combined supply power (measured as a share in total world exports) remains, generally speaking, untouched. What has changed is the leader. If in 1993 Cuban exports accounted for about one quarter of total world exports while Brazil was only the fourth largest exporter, responsible for 6% of sugar traded internationally, nowadays the South American giant stands as the indisputable export leader. Meanwhile, Cuba has been steadily dropping further and further down and is now just the fifth in the top exporters’ league. There are no dramatic changes in the relative importance of the other leading exporters (Table 2.9). The dominance of few exporters and, hence, the dependence of the market on the supplies from a limited number of producers, explain the continuing vulnerability of world prices to crop developments in key regions throughout the 1990s. In answer to the growing demand for raw sugar exporters have Chapter 2/page 21

Sugar Trading Manual Table 2.9 World’s largest sugar exporters, 1991–2001 1991–1993

1999–2001 Exports (1000 t)

Share of world total (%)

Cuba EU Thailand Australia Brazil Subtotal

6 674.7 5 065.6 3 025.9 2 810.8 1 842.1 19 419.2

23 17 10 10 6 67

World total

29 194.3

Exports (1000 t)

Share of world total (%)

Brazil EU Australia Thailand Cuba Subtotal

10 045.8 5 783.1 3 865.9 3 711.8 3 200.1 26 606.8

26 15 10 10 8 68

World total

39 058.4

Table 2.10 Changing structure of export supply, world’s largest exporters, 1992 and 2001 (in 000 mtrv) Raw sugar

White sugar

1992

2001

Cuba Australia Thailand Brazil Mauritius World Total Share of world total %

5860 2878 2422 681 633 1544 4 77

Brazil Australia Cuba Thailand Guatemala World Total Share of world total %

1992 7 085 3 453 2 926 2 239 1 276 22 600 75

EU China Brazil Thailand Ukraine World Total Share of world total %

2001 4 784 1 808 1 592 1 297 970 15 661 67

EU Brazil India Thailand Turkey World Total Share of world total %

6 060 4 083 1 209 1 125 1 000 18 297 74

increased considerably the share of the latter in their export programmes. Gross exports of raw sugar have grown by 35%, from about 16 million tonnes at the beginning of the 1990s to nearly 21 million tonnes (an average for 1999–2001). By 2001 the share of raw imports rose to nearly 60% of world turnover (Table 2.10 illustrates the major changes in geographical structure of white and raw sugar exports during the 1990s). Brazil replaced Cuba as by far the mightiest raw sugar exporter. Moreover, Brazil also significantly strengthened its position in the white sugar exporters’ league, becoming by the end of the Chapter 2/page 22

Sugar from the 1900s to the present day twentieth century the second largest after the EU as supplier of white sugar to the world market. Another important change in the geographical supply structure is the already mentioned disappearance of Ukraine as a major white sugar exporter. The world’s largest beet sugar producer in the 1980s and still the fifth world’s largest white sugar exporter at the beginning of the 1990s eventually became a net importer of sugar.

Political environment Finally, what were the main developments in sugar politics during the 1990s? Overall, the decade was characterized by accelerated liberalization of several important national sugar markets and curtailment of preferential trade. In discussing the deregulation of domestic markets, one cannot omit the full liberalization of both sugar and ethanol markets in Brazil (currently the world’s leading sugar exporter) and the transition of the sugar sectors from centrally planned to free market-oriented in Eastern Europe and the FSU (particularly in Russia, the world’s largest sugar importer). In recent years the sugar market of India (the world’s largest sugar consumer) has also undergone significant deregulation. It is important to note, however, that liberalization and deregulation of domestic markets do not necessarily guarantee easier access to these markets for imported sugar or, for that matter, a lower level of export support. The example of Russia in the late 1990s shows that liberalized national sugar markets could remain as protected as they had been under full government control. During the last two or three centuries one significant characteristic of the world sugar market has been the share of total trade accounted for by special arrangements, with quantities and prices fixed at government level. The collapse of the USSR and the COMECON system, which subsidized Cuban sugar exports, together with the modifications in the US sugar programme, have resulted in a further shrinkage of preferential trade, which fell from 10.3 million tonnes in 1991 down to just 3.2 million tonnes in 2001. As a result the share of preferentially traded sugar in the global turnover shrivelled from 35% at the beginning of the last decade to just 8% at the beginning of the current one (see Table 2.11). While on the subject of the political environment, the Uruguay Round negotiations on agriculture ought to be mentioned. The Round of the GATT/WTO multilateral trade negotiations was concluded on 15 December 1993 and the Final Act signed in Marrakech in April 1994. The Round for the first time included negotiations on agriculture in general and sugar in particular. The principal Uruguay Round reforms relating to agriculture were the market access commitments, concessions on lower tariffication and domestic support for agriculture, and Chapter 2/page 23

Sugar Trading Manual Table 2.11 Summary of special arrangements and their market share in 1991 and 2001 (in million tonnes, raw sugar) 1991 US TRQ imports EU sugar imports under ACP, SPS and MFN arrangements Cuban exports to USSR China North Korea Central Europe USSR sugar intra-trade Total Share in world trade in % World total exports 1

2001

1.732 1.626

1.154 1.647

3.835 0.797 0.025 0.058 2.273

0 0.359 0 0 0

10.346 35 29.5351

3.160 8 40.897

Including 2.273 million tonnes of the USSR sugar intra-trade.

subsidized exports. Signatory countries agreed to import a minimum share of 3% of their domestic market in 1995, rising to 5% by late 2000. Apart from that they agreed to replace non-tariff barriers and variable import levies by a base rate tariff and to reduce tariffs progressively over the implementation period (until the end of 2000 for developed countries and the end of 2004 for developing countries) by an average of 36% across all commodities, with a minimum reduction for any individual commodity of 15%. According to the ISO’s calculations, in the case of sugar, the average reduction in the tariff rate for raw sugar adds up to 24% – the weighted average base level of 93% had to fall to 72% by the final year of implementation. For white sugar the agreed reduction in the weighted average tariff was 22%, the decline from base tariff level of 100% to 88%. Despite a seemingly considerable drop in tariffs the reductions in real-life tariff levels were on the whole quite small – ceiling bindings were generally set at rates much higher than the existing applied tariffs. This permitted some countries actually to raise tariffs over the implementation period, even though negotiated reductions in bound rates remained in effect. Perversely, the level of border protection actually rose as a result of the Uruguay Round. If truth be told, in the case of sugar, the commitments made under the Uruguay Round did little to achieve the objectives of GATT/WTO – freeing up world trade through more open and less distorted national

Chapter 2/page 24

Sugar from the 1900s to the present day markets. Nevertheless, the Round did bring sugar into the mainstream of the WTO multilateral regulatory system. Frameworks were established for tariffication (a small but important step towards reducing protection) and the treatment of all forms of distortion, which fall into the categories of market access, domestic support and export subsidies. In practical terms, a modest agreed reduction in subsidized EU exports, a lowering of the Japanese tariff on sugar and a modest increase in access to some countries’ markets might slightly reduce sugar surpluses, but not enough to cause a measurable impact on world prices. Thus, the world sugar economy at the boundary of two millennia is characterized by the growing dominance of the developing countries in the world sugar consumption and imports. Also notable is the rising importance of raw sugar in the global turnover. Contrary to the widespread expectations of the first half of 1990s, the increasing prominence of developing countries together with the progressive liberalization of national sugar markets did not bring more stability to the world sugar price. In terms of the world market prices, sugar remains one of the most volatile commodities. In contrast to consumption, where relatively stable growth has taken place over the last fifty years, production remains extremely volatile. As already stated, despite all the technological advances in field practices, unfavourable weather can still severely affect sugar production even in the most efficient agricultural industries. The dependence of the market on supplies by a limited number of leading producers explains a continuingly high level of vulnerability of world prices to crop developments in key origins throughout the 1990s. The emerging dominance of Brazil as the key world supplier of both raw and white sugar became the most prominent market feature at the turn of the millennium. Although during the 1990s in most countries governments ceased to directly regulate the industry, partly or fully liberalized domestic markets driven by market forces rarely provide better access for imported sugar or lower the level of export support. Even though the Uruguay Round brought sugar into the mainstream of the GATT/WTO multilateral trade negotiations, the Round itself did not deliver any significant reform of protectionist or interventionist sugar policies.

World sugar prices – back to volatility? The world sugar market has historically been viewed as a volatile residual market, which tended to be oversupplied except when a coincidence of bad weather and low stocks led to a sharp increase in world prices. This long-term volatility is readily evident in world prices, as can

Chapter 2/page 25

Sugar Trading Manual 40 35 Raw

US cents/lb

30

White

25 20 15 10 5

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

0

Year

2.7

Nominal annual raw and white sugar prices, 1951–2002.

be seen in Fig. 2.7, for both raw and white sugar. UNCTAD’s volatility indices (calculated as the percentage deviation from an exponential trend line) shows sugar during the period 1998–2001 to display an index of 19.2, as against 6.6 for corn, 5.7 for soybeans, 5.4 for rice, and 4.1 for beef. Crucially, recent world price developments, as described in this section, have done little to dispel this view of the market, despite a belief that emerged during the mid-1990s that significant evolution in the structure of the world sugar market – with many industries having undergone deregulation and therefore reacting to and also influencing the world price – meant that the world market had become less marginal and at the same time more stable. Indeed, a period of relative stability during 1987–98, when prices ranged between 8 and 15 cents/lb, and a time when there were not the price spikes or troughs that characterized the market during the preceding three decades, led many analysts at the time to consider if world market prices had moved up to a ‘new’ higher average level, exceeding 10 cents/lb. However, the price crash of 1998/99 proved that this was not the case, as will be discussed later in this section. Long-run trend The long-run trend in raw sugar prices can only be considered when the distortionary effects of inflation have been removed from the annual Chapter 2/page 26

Sugar from the 1900s to the present day 120 100

US cents/lb

80 60 40 20

Raw

2.8

Year Deflated

Expon. (deflated)

Nominal and deflated raw sugar prices, 1951–2002.

world price series.3 The long-run trend in annual real sugar prices is shown in Fig. 2.8. There has been a gradual underlying fall in real prices at a rate of close to 2% each year over the past 50 years, as estimated by ‘fitting’ a trend line to the price data. This underlying trend is important because it illustrates the pressures facing export-orientated producers to achieve constant gains in productivity to maintain revenue in real terms. Volatility Volatility in commodity prices, including sugar, arises as a direct consequence of shocks in the underlying demand and supply conditions, and is affected also by policy measures implemented at the national level. In tight markets, a sudden rise in consumption induces a sharp temporal rise in prices, but in a slack market, the impact of the shock induces the release of stocks, which dampens prices for long periods. This gives rise to price cycles with sharp spikes followed by flat tails. Some sugar analysts during the late 1980s and first half of the 1990s argued that the sugar market had become characterized by less volatil3

The deflator was the US consumer price index, although a deflator that also captures the impact of currency movements could be used, such as the G-5 Manufacturing Unit Value Index prepared by the World Bank. Chapter 2/page 27

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

0

Sugar Trading Manual 35

US cents/lb

30 25 20 15 10 5 0 1951–60

2.9

1961–70

1971–80

1981–90

1991–00

Nominal raw sugar price, 1951–2000.

120

US cents/lb

100 80 60 40 20 0 1951–60

1961–70

1971–80

1981–90

1991–00

2.10 Real raw sugar price, 1951–2000.

ity because of policy reform and deregulation, ensuring faster and broad-based adjustments to production and demand shocks. The precipitous relative decline in the share of developed countries in world imports, from two-thirds in the 1970s to less than 40% since 1995 has also been identified as contributing to the increase in price stability. Analysis of price variability can be shown using box plots, as shown in Figs 2.9 and 2.10 for nominal and real raw sugar prices. Box plots provide a graphical representation of variability in terms of quartiles. A quartile is a statistic that divides the price data for each decade into four intervals, each containing 25% of the data. Lower, middle and upper quartiles are derived by sorting the annual price data from the lowest to the highest, and then identifying the values below that fall 25%, 50% and 75% of the data. The bottom and top edge of each box shows the position of the lower and upper quartile, and the height of the box indicates the ‘spread’ of 50% of the price data. In 1951–60, Chapter 2/page 28

Sugar from the 1900s to the present day 50% of nominal annual prices fell between 3.3 US cents/lb and and 4.05 cents/lb; during 1961–70, between 1.96 cents/lb and 3.56 cents/lb; during 1971–80, between 7.40 cents/lb and 18.15 cents/lb; during 1981–90, between 6.22 cents/lb and 11.96 cents/lb; and 1991–2000, between 8.93 cents/lb and 11.81 cents/lb. What is clear is that the variability of sugar prices peaked in the 1971–80 period. From Fig. 2.10, it is readily evident that real prices during the 1991–2000 period have not only been the most stable but the lowest over the past 50 years. Simple statistical analysis reinforces this view, as shown in Table 2.12. In this table world prices over each of the past five decades are analysed to characterize any changes in their average level and volatility. The most common measure of variability is standard deviation. Complementary descriptions of the price data include skewness and kurtosis. Skewness is a measure of symmetry. In a normal distribution, skewness is zero. Negative values indicate that observations are skewed leftwards (i.e. more downwards spikes than upward spikes). A positive value shows that there were more upward spikes than negative ones. Of interest is the fact that for both raw and white sugar the most recent decade shows a negative skewness whereas the previous decades showed a positive skewness. That is, in the period 1991–2000 there were more instances of downward price movements than upward movements. Kurtosis measures whether the distribution is different from the normal distribution (kurtosis is 3 in this case). Price distributions with a ‘flat top’ at the mean have a low kurtosis value, instead of the high sharp peaks that are associated with a higher kurtosis value. Again, there appears to be a different distribution of prices in the most recent decade, with both raw and white sugar prices showing a low kurtosis. This implies that large price movements were common for sugar in the previous decades relative to the 1991–2000 period. Furthermore, the coefficient of variation is a measure of relative dispersion and is given by: Coefficient of variation = standard devia-

Table 2.12 Basic statistics: sugar (2002) prices by decade Raw sugar

1951–60 1961–70 1971–80 1981–90 1991–2000

White sugar

Average

Std dev.

Skewness

Kurtosis

Average

Std dev.

Skewness

Kurtosis

25.22 19.07 42.54 15.19 11.79

6.73 12.59 29.05 7.46 2.75

1.38 1.89 1.46 1.64 -0.51

1.30 3.22 1.89 3.77 -0.24

na na 52.97 20.16 15.8

na na 33.90 8.57 3.76

na na 1.58 1.58 -0.4

na na 2.35 3.16 -0.79

Chapter 2/page 29

Sugar Trading Manual Table 2.13 Coefficient of variation, 1951–2000

1951–60 1961–70 1971–80 1981–90 1991–2000

Raw

White

0.26 0.66 0.68 0.49 0.23

Na na 0.64 0.43 0.24

tion/mean. It is generally expressed as a percentage, and as can be seen in Table 2.13, the most recent decade displays the lowest value. ‘Golden era’ for sugar prices, 1988–97 The graphical and statistical analysis above, showing a return to much greater price stability during the most recent decade, reveals only part of the story, as will now be explained. For many of the world’s sugar exporting countries there was what can now be viewed as a ‘golden era’ for sugar prices between 1988 and 1997, with prices at a comfortably high level (12–13 US cents/lb) and showing a degree of stability unseen in the previous two decades. However, this golden era ended abruptly in 1998 when prices crashed to levels not seen for more than a decade. The extent and speed of the crash caught many analysts by surprise. With hindsight, prices were simply too high over the previous decade not to draw a response from producers, and export-orientated producers in particular. Especially in the Americas and the Pacific Rim, production capacities had been expanded over recent years without regard to demand. Between 1994/95 and 2000/01 world sugar production grew by 16%, whereas consumption increased by only 11%, leading to a substantial build-up in stocks. By August 2000, surplus stocks had risen to 18 million tonnes, an all time high. Production increases in Latin America were particularly strong – up 25% in the second half of the 1990s, representing 8.7 million tonnes of new production. The region’s consumption grew at around 12% over the same period. Asia was the only region where consumption grew at a more rapid pace than production. Prices recovered in 2000 – in fact they doubled – but the key driver was weather-related shortfalls in production (primarily the droughtaffected crop in Brazil) rather than any underlying market response to the price fall. Indeed, driven by expectations for a long-awaited drawdown in world stocks, prices doubled from a low set in February 2000 to a peak monthly average of 10.75 US cents/lb in October 2000. In Chapter 2/page 30

Sugar from the 1900s to the present day 18.00 16.00 14.00

US cents/lb

12.00 10.00 8.00 6.00 4.00 2.00

ISA

1989–97

1998–2003

19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03

0.00

2.11 Monthly ISA price, 1989–2003.

the event, however, despite the weather-driven fall in global sugar production, a small statistical surplus arose (0.38 Mt) and prices steadily weakened during 2001 to average only 6.79 cents/lb in October 2001, the start of the next crop cycle. Since that time, however, world market prices for both raw and white sugar have remained under downward pressure, and, as shown in Fig. 2.11, monthly prices since 1998 have persistently remained below the 1989–97 average of 11.34 cents/lb, and have averaged around 7.8 cents/lb since that time, below the production costs of many exporters and generally perceived to reflect oversupply on the world market. Importantly, however, volatility in monthly world market prices appears to have changed little. The coefficient of variation is 0.17 for the 1989–97 period, and it is only slightly higher at 0.20 for the 1998–mid-2003 period. The key issue is the lower average level of prices since 1998 rather than any sense of heightened volatility.

The 1992 International Sugar Agreement The International Sugar Agreement 1992 (ISA92) did not include economic clauses designed to defend a price range. Instead, the objectives are given in Article 1: To ensure enhanced international cooperation in connection with world sugar matters and related issues; To provide a forum for intergovernmental consultations on sugar and on ways to improve the world sugar economy; Chapter 2/page 31

Sugar Trading Manual To facilitate trade by collecting and providing information on the world sugar market and other sweeteners; and To encourage increased demand for sugar, particularly for nontraditional uses. The ISA92 has been extended four times, and membership has expanded to 63 countries, including: Argentina, Australia, Belarus, Belize, Brazil, Colombia, Costa Rica, Côte d’Ivoire, Cuba, Dominican Republic, Ecuador, EC (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom), Egypt, El Salvador, Ethiopia, Fiji, Guatemala, Guyana, Honduras, Hungary, India, Iran Islamic Republic, Jamaica, Kenya, Korean Republic, Latvia, Malawi, Mauritius, Mexico, Moldova, Nigeria, Pakistan, Panama, Philippines, Romania, Russian Federation, Serbia & Montenegro, South Africa, Sudan, Swaziland, Switzerland, Tanzania, Thailand, Trinidad & Tobago, Turkey, Ukraine, Vietnam, Zambia, and Zimbabwe. The member-countries of the ISO represent (based on data for 2002) 80% of world production, 63% of consumption, 35% of imports and 91% of exports. The reasons in brief for there being no economic provisions in the ISA92 lie in lessons from the past: first, the overriding objective of price stability cannot be achieved; second, politically negotiated price ranges normally do not reflect market realities, tend to be too narrow to cope with the volatility of commodity prices, and are sending the wrong signals to producers and exporters; third, no effective sanctions are negotiable for non-fulfilment of commitments; fourth, participation of all key players on the exporting and importing side, which would be a precondition for a proper functioning, cannot be achieved; and, last but not least, as a consequence of privatization the gradual withdrawal of governments from the formulation and execution of commodity policies makes those intergovernmental agreements an unworkable option. Besides these reasons in an era of privatization, globalization and liberalization international commodity agreements with economic provisions are generally considered to be outdated instruments unable to contribute to a sustainable and positive development of commoditydependent economies, particularly in developing countries. Driven by the articles of the ISA92, the ISO pursues four key outcomes: • Members benefit from improved transparency in world sugar trade; • Members are fully informed about key drivers and emerging issues impacting the world sugar and sweeteners economy; Chapter 2/page 32

Sugar from the 1900s to the present day • Members are provided with effective fora for debate and dialogue regarding global sugar and sweetener issues; and • Developing countries and economies in transition have access to Common Fund for Commodities (CFC) financing for projects to help facilitate their strategies to improve competitiveness of their sugar industries. In short, instead of defending price ranges, the ISA92 works to help member governments and the private sector of their sugar industries to understand the key drivers of the world sugar and sweeteners markets (economic and policy related), but just as importantly to help them prepare their national sugar industries for the climate of continuing change that shapes the world sugar and sweeteners economy.

Chapter 2/page 33

Part 2 The global picture

3 The current world picture Jonathan Kingsman Société J. Kingsman

Tom McNeill Sugar InSite Pty Ltd

Structural change within the sugar market Consumption growth Economic liberalization Declining beet production Increased trade in raw sugar Export concentration and import diversification Trade flows become more market orientated Increased ‘disappearance’ Declining volatility Multinational sugar producers and users More choice for the consumer and better quality Lower prices Economic liberalization is not a one-way street

Future prospects – closer examination of three key producers Brazil Thailand Big 2002/03 crop sparks system review Freight differentials and the meaning of a deficit Volatility in Thai raw premiums Outlook India

The trading implications of recent changes The spreads Contract terms The flat price

Given the vagaries of the publishing process, any chapter on the current world picture risks being out of date by the time it is eventually read. For this reason we have decided to split the chapter into three parts. The first will concentrate on structural change within the sugar market over the last few years. The second will take a closer look at the three key producers in the world market (Brazil, Thailand and India) and discuss their prospects for further expansion. The third will then briefly examine some of the implications of all these changes for the world market in terms of spreads and flat price.

Structural change within the sugar market Over the last few years, the principal drivers behind the changed patterns in world trade have been the growth in consumption and economic liberalization.

Consumption growth There are three principal factors behind the continuing growth in consumption, as shown in Fig. 3.1. • Population growth: The way it affects consumption depends on individual country growth rates. India, for example, has higher population growth, and higher per capita sugar consumption than China. Many developed countries have little population growth and are close to saturation in terms of sugar usage.

160 140

100 80 60 40 20 0 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Million mtrv

120

3.1

Annual rate of growth of world consumption since 1955. Chapter 3/page 1

Sugar Trading Manual • Income growth: As per capita incomes rise, sugar consumption rises in most countries. There are exceptions – for example, Chinese consumption has been artificially restrained by substitution of saccharin. The relationship normally holds and is demonstrated well by Russia in the early 1990s where consumption growth slumped in line with incomes. • Price of sugar and price of substitutes: The percentage of the growth in sweetener demand captured by sugar depends on the price of sugar relative to substitutes. The best example of this is the USA where sweetener demand rose but sugar has lost market share to substitute sweeteners, such as high fructose syrup made from corn. From 1945 to 1950, world consumption grew at an annual rate of 9% as the world recovered from the chaos and misery of war. In the 1950s, the rate of growth in consumption slowed to an annualized rate of 5% while in the 1960s it slowed further to 3% as the world grew richer and concern grew over the health aspects of sugar. Since then the rate of growth has stabilized at around 2% per year. In 2002, the rate of consumption growth was around 3%, and it is expected to continue to rise at 1.5–2.5% annually as world GDP continues to rise. In Fig. 3.2 three different scenarios for consumption growth are presented: low growth (1.5%), moderate growth (2.0%) and moderate growth including trade reform (2.5%), estimating (or rather guessing) that agricultural trade reform could add one half percentage points to consumption growth. The results are quite staggering, particularly when you look at them in cane tonnage terms. If consumption is going to increase, production will by definition have to increase with it. The sugar will come from two sources: extra acreage

190 Low growth rate

180

Million mtrv

Moderate growth rate Mod. growth + trade reform

170

Mod. growth + reform + ethanol 160 150 140 130 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13

3.2

Projected consumption increase.

Chapter 3/page 2

The current world picture and higher productivity. The obvious candidate for both is Brazil, where there is plenty of land still to be brought into production – over 100 million hectares by conventional wisdom – and gains to be made in productivity, particularly in terms of irrigation. Although Brazil could possibly supply 60/70% of the anticipated increase in production, other efficient cane producers will also have to expand. There is also scope for rebuilding the beet industries in Eastern Europe at least to meet domestic demand. As far as productivity gains are concerned, there is a very large gap between efficient and less efficient cane and beet producers. In cane this may vary from 50 mt/hectare cane in poorly producing countries or regions to over 100 t/ha in high producers. At least some of the increased consumption requirement can come from improved productivity in poorer-yielding countries, while some of the better performing countries should continue to push the productivity boundary outwards. While genetically modified food crops are not currently accepted in many countries, this barrier may be slowly whittled away, particularly for low-risk foods such as sugars, starches and oils.

Economic liberalization The other main driver behind the sugar market is economic liberalization: the lowering of tariff barriers, reduction in producer subsidies, privatization and the exit of government from the sugar business. Of course, consumption growth and liberalization are interrelated. Liberalization impacts on consumption by (a) stimulating economic growth, particularly in poorer countries, which are big exporters of agricultural products; and by (b) changing the relative prices of sugar and sugar substitutes. In many countries, the price of sugar is held at significantly higher levels to provide support for local producers. This constrains consumption, and leads to the substitution of other sweeteners. By reforming trade, sugar becomes a more competitive product. Declining beet production One manifestation of trade liberalization has been the decline in beet production and an increase in cane production (see Fig. 3.3). In a report published in 2000, LMC International found that the world average cost of producing refined sugar from cane is 50% (or less) of the world average cost of producing beet white sugar. As government support programmes have been withdrawn in Eastern Europe, beet production as a percentage of total world production has fallen from 36% in 1990 to around 23% currently. The prime example of this is Russia, where beet production halved through this period. Chapter 3/page 3

Sugar Trading Manual 78 76 74 % cane sugar

72 70 68 66 64 62 60 58 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04

3.3

Declining share of beet production.

Increased trade in raw sugar Over recent years refineries have been built in Algeria, Saudi Arabia, Dubai, Nigeria and Indonesia. During that time only one significant world market-based refinery has closed – in Singapore. It is often more cost effective to move sugar in bulk and refine and pack it at destination, rather than ship it as a refined product in bags. Trade liberalization has also occurred and beet sugar production has fallen as a proportion of total world production – white export volumes have also fallen (see Fig. 3.4). Additionally some developing countries would rather pay domestic workers in refineries than pay an additional premium in scarce foreign exchange for sugar refined elsewhere. In 1995 raw sugar accounted for 47% of total world trade – this has now risen to over 55%. We would expect this trend to continue. As we have seen, sugar produced from cane is about half the price of sugar produced from beet. The EU is under increasing pressure to reduce or end subsidized white sugar exports both externally and even within the EU (see Fig. 3.5). If producers are forced to stop such exports, beet sugar production would then be limited to cover domestic consumption only. This, coupled with the growing use of differential tariff structures for raws and whites, should further support the trend to expanded world trade in raws. Export concentration and import diversification Another consequence of trade liberalization is the growing concentration among exporting countries and dispersal among importing counChapter 3/page 4

The current world picture 65 % White exports % Raw exports

60 55 %

50 45 40 35 30 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 3.4

Declining share of white sugar trade.

180 160 140 US$/mt

120 100 80 60 40 20 0 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03

3.5

Whites premium over recent years.

tries (see Table 3.1). In 2003, the top five exporters will account for around 70% of world sugar exports. This increasing concentration means that prices are much more vulnerable to supply developments in just a few countries. On the demand side, we have to add together the import requirements of over 100 countries before we reach the export capabilities of the top five exporters. Furthermore, 80% of world import demand now comes from developing countries. This increases the price sensitivity of import demand. Chapter 3/page 5

Sugar Trading Manual Table 3.1 Top five exporters and importers for 2002/03 (000 mtrv/Oct–Sept) Exporters

Quantity

Importers

Brazil EU Thailand Australia India

12 750 5 050 4 690 3 947 1 950

Russia EU Indonesia Japan Korea, Rep

Total

28 387

Total

Quantity 4 815 2000 1 845 1 515 1 400 11 575

As production expands to meet growing consumption, Brazil, the lowest cost producer, will take an increasing share of world exports, further increasing export concentration. But even leaving Brazil out of the equation, the trade liberalization policies put in place over the last ten years should in themselves result in continuing export concentration. The countries with a comparative advantage in growing sugar should continue to expand production at the expense of those whose resources are better used in other activities. Trade flows become more market orientated As governments have given up monopoly controls over import and exports in every country except Australia and Cuba, trade flows have become less determined by protocols and long-term contracts (see Fig. 3.6). They respond more to market signals. This sometimes leads to peculiar results. For example, half a million mt of Thai sugar moved from the Far East to the Black Sea in the first half of 2002 because of the way that the Russian import tariffs were structured. That outflow was replaced by an inflow from Brazil in the second half of the year. Although these trade flows may from the outside look irrational no one has yet found a more efficient method of allocating resources than the market. As such these flows are efficient within the context of the market in which they occur. But even the centrally managed exporters are becoming more market orientated. Again during 2002, Cuba took advantage of the inverse structure of the market by exporting more raws in the first half of the year and replaced them with imports of whites from Brazil in the second half of the year. And, with the reduction in Queensland production, that Australian state’s central marketing desk has become less Chapter 3/page 6

The current world picture 25 24

%

23 22 21 20 1995

3.6

1996

1997

1998

1999

2000

2001

Total free market exports as % of world production.

concerned with finding homes for all its sugar and now concentrates more on maximizing returns. Less of its sugar is now going to Canada and the Middle East, for example, and more is staying in the Far East. Increased ‘disappearance’ The privatization of the sugar trade has made it harder to keep track of world sugar statistics. Where there was once only one importer in a country, there are now many. As a result, each transaction is smaller. Not surprisingly, white sugar is increasingly being moved in containers, and these sometimes go unrecorded. The trend for importers to disguise the sugar in ‘blends’ exaggerates the difficulty. Similarly, the ‘democratization of corruption’ has meant more sugar is being smuggled than ten years ago. All this makes it difficult to keep track of trade flows and has led some observers to argue that global consumption is much higher than previously thought. Indeed, this was one of the primary reasons given for the market’s strength at the end of 2002. Declining volatility Twenty-five years ago, developed countries, largely the US, Japan and Canada, dominated the import market. These countries have a low price elasticity of demand and care little about price. When the two price spikes occurred in 1974 and 1980 (see Fig. 3.7), these countries did not reduce their imports, and this helped to exaggerate the price rise. Longer term, however, these price spikes had a negative effect on sugar demand as they created the necessary political landscape that Chapter 3/page 7

Sugar Trading Manual 70 60

US cents/lb

50 40 30 20 10 0 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

3.7

NY11 futures values from 1967.

permitted the introduction of high minimum domestic prices. High prices not only promoted domestic production but also reduced sugar consumption and allowed alternative sweeteners to take market share from sugar producers. In the USA particularly – and Japan to a lesser extent – high minimum sugar prices backfired by creating a guaranteed profit margin for the high fructose corn syrup industry, allowing the new industry elbow room to undercut sugar prices and capture market share. The consequent decline in Japanese and US sugar imports, together with the more rapid rise of consumption in the Third World, has made the developing countries the main force on the world sugar market. These poorer countries have higher price elasticity of demand. Added to this, the collapse of communism has made the countries of the FSU more price-sensitive than they used to be. As a result of these changes, overall sugar price volatility has declined since the 1980s. Multinational sugar producers and users Deregulation and privatization of sugar industries in certain countries has provided investment opportunities for sugar producers in other countries. The obvious example is investment by the EU producers into the Eastern European countries. There are other examples: French producers are investing in Brazil; Belgian producers have invested in Australia. Sugar producers are becoming multinational. The investment potential and role of multinational producers has gone hand in hand with the expansion of multinational sugar users. Chapter 3/page 8

The current world picture While the new investors are facilitating the improvement in productivity and quality, harmonization of quality standards and improvement in logistics and handling of sugar has been spurred on by multinational sugar users. The combination of these two forces should continue to accelerate technological change within the sugar economy, as it is with most other commodities and foods. More choice for the consumer and better quality Over the last few years we have seen the trade in raw sugar become differentiated by quality. The liberalization of the Brazilian sugar economy has provided a supply of high polarization, low colour raw sugar. Other producers have risen to the challenge. South African raw sugar is usually of 1500 / 1700 ICUMSA units with polarization around 99 degrees. Queensland has no fewer than four grades of raw sugar including a new product, QHP, of approximately 99.7 degrees pol and 600 to 700 ICUMSA colour. The Thai industry is also making progress towards improving the quality of its sugar and is now guaranteeing a minimum polarization of 98.5 degrees on some of its production. As for whites, they are becoming like many other consumer products where the brand becomes more important than the product itself. We have seen this particularly in the Far East where grain size, bag colour and brand have been added to the traditional criteria of polarization and sugar colour. Lower prices Promoters of free trade will argue that liberalization and the increased competition that it brings should result in lower prices. While it is difficult to separate out the effect of increasing efficiency in commodity industries generally, it appears that the expected impact of continued liberalization is having the desired effect on sugar prices. Figure 3.7 shows the long-term decline in nominal prices – this price decline is even more dramatic if real prices are used.

Economic liberalization is not a one-way street During the last decade and more, the combination of the collapse of communism and the Asian economic crisis gave the IMF and other international financial institutions leverage to impose import tariff reductions on a number of sugar importing countries, most notably in Indonesia and Russia. In hindsight, it was perhaps a little naive of those importing countries to agree to dismantle their tariff protection without a corresponding reduction in tariff barriers and subsidies in the EU, USA or Japan. Chapter 3/page 9

Sugar Trading Manual Many countries have now seen the error of their ways and, under pressure from their local sugar industries, governments have put various import controls in place. The most notable of these have been Russia and Indonesia, who have not only increased tariff protection but have also differentiated between raws imports and whites imports. Many countries now operate a two-tier tariff policy aimed at encouraging raw sugar imports and discouraging white sugar imports. Other countries have resorted to non-tariff barriers. There has also been a renewed move to domestic subsidies. In Australia these have been small, but sufficient to take the edge off Australia’s free trade rhetoric. India (another member of the free tradeadvocating Global Alliance) has introduced several subsidies on exports to try to reduce domestic stocks, and the government is now meeting mill payment arrears to farmers. In Indonesia the government is under ongoing pressure to subsidize agricultural inputs and raise import tariffs. Meanwhile, the difficulty that domestic producers have in competing against marginally priced exports has led to bankruptcies and the government coming back into the business. The best example is Mexico – temporary nationalization of part of the industry, which may last a while. A slowing of liberalization should lead to higher domestic prices and a shift in power from consumer to producer. The obvious example of this is in Russia, where the domestic price is now €200 per mt higher than it would be without tariff protection. Lastly, increased export concentration should lead to a rise in price volatility. In 2001, poor weather in just one country (Brazil) led to the doubling of the world sugar price in a short time – with almost as rapid a decrease as the weather improved. With Brazil forecast to take an ever increasing share in world sugar exports, the world price is likely to become even more sensitive to potential supply disruptions in that one country or to its will not to export at low prices.

Future prospects – closer examination of three key producers There are a number of reasons behind the low world sugar prices that prevail at the time of writing (October 2003) – larger than expected Thai, Indian and Chinese crops, disappointing offtake and fund selling are some of the culprits. However, at the heart of the price weakness is the continued expansion of cane in the Centre-South of Brazil and a concern it will swamp the market. While that is good news for buyers, most producers view the current market with concern. Not only are world prices falling below breakeven cost in many countries (excluding Chapter 3/page 10

The current world picture protected producers), but appreciating exchange rates are further eroding returns for many producers.

Brazil Brazilian expansion plans relate to new projects based mostly in the north and west of Sao Paulo state – where there is ample cleared grazing land available, sugar cane is the most profitable crop. Many established mills also have their own expansion plans – additional land, increased yields, additional milling capacity, or an upgrade of distilling capacity. The bigger milling groups in CS Brazil have attempted to control their expansion, because they realize the importance of maintaining a remunerative price on the world market. But new entrants and smaller expansionary groups, as well as co-operatives producing other crops, see the large profits the alcohol and sugar producers are making, and want to participate (Fig. 3.8). Profitability in the alcohol and sugar industry in Brazil reached alltime highs in early 2003. Over the past year, both domestic alcohol and sugar prices have been high and the industry made exceptionally good returns. Brazil’s Centre-South industry, through UNICA, has a broad business plan that encompasses the following: • promote fuel alcohol usage in other countries and boost trade opportunities for alcohol (e.g. Japan and India) • encourage the Brazilian government to further promote fuel alcohol usage domestically, as a substitute for imported oil

Million mt

400 350

Centre-South

300

North North-East

250 200 150 100 50 0 90/91

3.8

92/93

94/95

96/97

98/99

00/01

02/03

Brazil cane production, 1990–2003. Chapter 3/page 11

Sugar Trading Manual • nurture the world sugar market, as it is currently the most important variable in the equation • promote export industries that add value to raw products such as sugar, in order to broaden the revenue base. The Brazilian government is keen to support fuel alcohol usage. In 2003 it put in place an alcohol stock fund of R$500 million (US$175 million) at reduced interest rates. It has encouraged car manufacturers to recommence the production of alcohol cars, and has been a strong advocate of the flex-fuel vehicles now being manufactured by a number of auto companies in Brazil. It has participated in industry efforts to boost fuel alcohol usage in other countries and is following through WTO trade challenges instigated by the previous Cardosa government. But it appears to have few solutions for an industry that is expanding aggressively without sufficient outlets for its production. With Brazil’s cane production cost the lowest in the world, and the industry efficient, its vast areas of agricultural land should underwrite continued expansion of the cane industry. But such expansion is not limitless, and will occur at a rate determined by the market. Brazil has sizeable potential to grow more cane, and its costs are low. It is important, though, not to fall into the trap of simply extrapolating the present exceptional growth rate a long way into the future. Figure 3.9 plots the year-on-year changes in production for the North North-East and Centre-South of Brazil. The NNE has been highly variable over the period since 1991/92, fluctuating between 34 and 56 million mt of cane with average growth around 1%. The Centre-South meantime has been characterized by steadier growth averaging 4.6%, on a much higher base tonnage. The major drop in 2000/01 and recov-

NNE change

CS change

40

20

%

0

–20

–40 91/92

3.9

93/94

95/96

97/98

99/00

01/02

Annual change in Brazil cane growth by region.

Chapter 3/page 12

93/04

The current world picture 500 Total Brazil Aggressive expansion

450

Linear trend Million mt

400 350 300 250 200 90/91

94/95

98/99

02/03

06/07

10/11

3.10 Brazil cane growth scenarios.

ery the following year are important features of the growth of CS cane production. Further rapid expansion is probable, but media and industry reports sometimes exaggerate the pace of expansion, making it appear much larger than actual growth. It is important to keep a longer-term perspective on growth. The long-term average growth rate is shown in Fig. 3.10 by the trendline through the historical data. If this 14-year average growth rate is extended forward, the ‘Linear trend’ line results. There is no doubt that the CS Brazil cane industry has grown at a rate higher than the longer-term average in the last three years. But this average growth rate of 3.6% is also influenced by a rebound in production following the sharp fall in production in 2000/01. The ‘Aggressive expansion’ line shown in the chart projects growth at a significantly faster expansion path than the historical linear trendline. The ‘Aggressive expansion’ line has Brazil exceeding 400 million mt of cane by the 2008/09 processing year, whereas the Linear trend line growth shows Brazil reaching this point in 2012/13, five years later. The growth rate will ultimately be determined by many factors, some outside the scope of this chapter. For example, Brazil’s rapid currency devaluation in 2002 and 2003 has given Brazilian producers a large boost in competitiveness. If the Brazilian economy is able to revert to better growth, the currency is likely to appreciate, which will take away part of this competitive boost. Ethanol legislation and usage in other countries will also be an important factor, as will the rate at which trade liberalization occurs. The historical data in Fig. 3.10 above illustrates the dangers of extrapolating short-term trends. The history of agricultural production Chapter 3/page 13

Sugar Trading Manual shows that weather and disease tend to intervene with monotonous regularity. CS Brazil may be less prone to crop fluctuation than NNE Brazil or some other producers, but it is not immune to droughts, frost or disease. The world sugar market is also a strong regulating factor. Brazil is the lowest cost producer of sugar and ethanol worldwide, but the assistance it has received from a sharp currency devaluation is not a guaranteed factor in its competitiveness equation. These factors will temper the straight line projections being used by optimists, but the end result probably isn’t in question – CS Brazil will be the centre of growth of cane production for both sugar and alcohol in the next 10–20 years at least.

Thailand By comparison to Brazil, Thailand might be a small producer, but it is an important supplier to the Asian region, and one of the few producers offering freely traded sugar to the world market. Thai producers have been able to continue to expand production even in the face of low world prices in the past few years (see Fig. 3.11). In 2001/02 and 2002/03, Thai producers harvested substantially more than had been generally expected, owing to an increase in planted area and good rainfall through the growing season. In 2001/02, a 22% increase in cane led to a 23% increase in sugar, and the following year, a 25% increase in cane yielded a 19% increase in sugar produced. In neither year did Thai industry forecasts indicate that a significant increase was expected. Most of the production increase has

80

8 Cane production

70

7

60

6

50

5

40

4

30

3

20

2

10

1 –

0 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03

3.11 Thailand production cane and sugar. Chapter 3/page 14

Million tonnes sugar

Million tonnes cane

Sugar production

The current world picture 3500 3000

00/01

01/02

02/03

000 mt

2500 2000 1500 1000 500 0 North

Central

East

North-east

3.12 Thai sugar production by region.

come from Thailand’s NE region, which is the largest producing region (see Fig. 3.12). In 2002/03, yield suffered because cane was harvested early, and mills had insufficient capacity in some regions to cope with the increase. This heavy early cane supply also led to quality problems in sugar – so much so that the growing trade to Russia was jeopardized by the shipment of poor-quality sugar. Receivers reported problems with removing sugar from ships and railcars, and processing in factories was difficult. On the face of it, the higher production is a huge success for the Thai industry. Beneath the surface, however, the Thai industry is a victim of its own success. The bigger crop has brought with it bigger problems. Big 2002/03 crop sparks system review The cane price paid to Thailand’s growers has been provisionally fixed prior to harvest, based on a combination of Quota A domestic fixed prices, and the price obtained for the 400 000 mt of Quota B sugar sold by the Thai Cane and Sugar Corporation. The TCSC holds tenders to sell the physical sugar to trade houses and then prices the corresponding futures against New York futures. Mills try to match or ‘mirror’ these prices in order to obtain the same – or better – returns as the TCSC. In 2002/03, by the time the mills realized that the crop was so much bigger, the world price was declining. Mills had no way to match the TCSC prices – even though they still had to pay farmers the provisional price for the cane. By selling their sugar at the cheaper Chapter 3/page 15

Sugar Trading Manual prevailing market prices, the mills would have locked in a loss. This in turn meant repaying commercial bank financing at a loss. So rather than sell the sugar and be unable to fully repay the loans, the mills held off from selling the sugar for longer than normal, until they took the view that it was unlikely that storing it any longer would have resulted in better returns. Thai banks managed to restrain some sales until very late in the year, hoping that the market would revert to higher prices, but this did not happen. As a result, the government has decided to implement fixed prices for cane, and commenced a review of the whole sales system, including the system of auctioning B quota tonnage in October or November each year. At the time of writing no major changes had been announced. Freight differentials and the meaning of a deficit Thai raws have usually traded at premiums to Western Hemisphere sugar for a number of reasons. The most important of these is that the Far East has traditionally been a deficit area. Regional producers have in the past been ‘protected’ by their freight advantage in the area. The freight rate from Brazil to China for a 30 000 tonne cargo would normally be around $35 per mt based on a load rate of 6000 mt per day. This compares with a freight rate from Thailand to China based on a load rate of 1500 mt per day of around $16 per mt – a difference of around $19 per mt or 0.85 c/lb. If the Far East in deficit, Thai sugar should therefore be worth at least 0.85 c/lb more than Brazilian sugar. By increasing their production in the last two years, the Thais have pushed the Far East into surplus. The freight differential portion of the premium has disappeared. When the Far East is not in deficit, Thai sugar has had to find alternative homes in the Western Hemisphere. In 2002 about 500 000 mt was shipped across into the Black Sea and in excess of 700 000 mt was shipped there in 2003. For larger vessels, the freight from Thailand to Black Sea has usually been less (by about $2.0 per mt) than for Cuba or Brazil to the Black Sea based on similar (or 3000 mt per day) load rates. On a like-for-like basis, therefore, Thai raw sugar should still trade at a (small) premium to Western Hemisphere sugar regardless of whether the Far East is in surplus or not. Brazilian sugar now trades based on a load rate of between 4000 and 10 000 mt per day. The NYBOT has increased the load rate on the futures contract from May 2003 to 3000 mt per day. The sugar that has been moving to Russia from Thailand has been bought from the Thai mills at these load rates or higher. However, the standard TCSC terms still trade basis 1500 mt per day – and in Kohsichang at 1000 mt per day. The issue of load rates is one that still needs to be addressed by the Thai industry. Chapter 3/page 16

The current world picture Quality problems are another thorny issue for the Thai industry. The general trade in raw sugar has become differentiated by quality. High polarization, low colour sugars with low levels of other undesirable quality features may cost more to produce, but they also cost less to refine and are therefore generally worth more. The Thai industry has had little incentive in the past to improve production quality. Not only has it been protected by the higher freight rates and longer voyage times into its region but it also had a captive audience in Japan and South Korea where import legislation has restricted imports to relatively low polarization sugar. South Korea has increased its polarization limit in recent years but Japan still insists that imported sugar should have a polarization lower than 98 degrees. Now that Thai sugar has to find homes outside the region, the incentive exists for the industry to lift raw sugar quality. Some milling groups are moving in this direction and will now guarantee a minimum polarization of 98.5 degrees for some buyers. However problems with starch, colour and dextran still need to be addressed, particularly after the complaints from Russian buyers in 2002 and especially in 2003. The severe caking of Thai sugar has caused substantial logistic delays and increased handling and processing costs. Unfortunately, this differentiation by quality and by load rates does fragment the market and reduce what was the Thais’ greatest attribute – their uniformity or homogeneity, which made them widely tradable. In the past, the second-hand market in Thai sugar has been both liquid and transparent. A buyer would often pay more for fobs Thais than, say, for the equivalent sugar on a cost and freight basis, because of the ability to trade out of the position if either the trade house or buyer changed their mind. A buyer committed to take sugar on a cost and freight basis from, say, Australia, knows that if the sugar is not required, it would most likely have to be sold back to the seller. If it was Thai sugar, it could be sold to a variety of buyers in the inter-trade market. Over recent years, liquidity in the inter-trade market has declined for various reasons. An inter-trade market on Thai raws still exists, even if the liquidity is greatly reduced, and although not perfect, it is still better than nothing. Volatility in Thai raw premiums Over the last ten years Thai premiums have ranged from a high of over 200 points or US 2 cents/lb (well above any possible freight differential) to a low of a discount below New York futures prices. The reason for such high premiums is that on more than one occasion in the past, trade houses have sold Thai raws with the idea of squeezing them into the New York futures. On one occasion in particular, they miscalculated, sold more than existed and were instead squeezed themselves. Chapter 3/page 17

Sugar Trading Manual 250 200

Points

150 100 50 0 –50 91

92 93

94

95

96

97

98

99

00

01

02

03

3.13 Thai raw sugar premium.

As per Fig. 3.13, Thai sugar traded at huge premiums in 1995 when China was a major sugar buyer. At that time there were a number of active importers rushing to be the first to get their sugar to the domestic market. As a result, the time element and shorter voyage time became worth a lot. The discounts to futures in 1999 occurred because of the incompatibility of Thai terms and New York terms. This has once again become an issue with load rates on Thai sugar at 1500 mt per day compared to 3000 mt per day under New York contract terms. Even when the Far East is in deficit the premium can disappear if the New York futures are squeezed. This happened on the May 2001 expiry when Thais traded into 15 points premium over May in the last days prior to expiry. This is largely a technical situation: relative to the following month the Thai raws maintained their premium. Outlook The Thai industry is being forced to undergo intensive soul-searching and is questioning all elements of the country’s sugar policy – including the way that the cane price is calculated and the very existence of the TCSC. A review was carried out during 2003 of all aspects of the industry. However, it should not be forgotten that the country has a number of important advantages over its competitors: • a freight advantage over most other origins to most major importers of both raws and whites • tremendous flexibility over whether it produces raws or whites – and when • low labour costs Chapter 3/page 18

The current world picture • a history of strong financial and regulatory support from government • a budding ethanol programme, which should reduce its dependence on world sugar exports. With reasonable price incentives, and farmers with a known capacity to expand the industry, it could be expected that sugar quality improvement and changed trading terms will be the next focus for Thai millers. But if several years of low world sugar prices and severe quality problems in 2003 in Russia have not provided an incentive to change, the Thai industry is in for further tough times. If it can make the changes required, and quickly, it stands a chance of regaining its standing as the primary tradable sugar in the Far East and further afield. And that could be bad news for its competitors.

India Interest in the machinations of the Indian sugar industry tends to be quite limited, particularly when account is taken of its vast size and possible export potential. Its cane production is second only to that of Brazil, and it is the world’s largest consuming nation. Its ‘partial’ involvement in the world sugar market in the past has led some analysts to downplay its importance as a factor in world prices. There may be good reason for this – India has turned from being a cyclical importer/exporter to a hesitant exporter in the last few years (see Fig. 3.14). Stocks have burgeoned, but exports have not measured up to the industry’s plans, or their potential. Parts of the industry have lurched from crisis to crisis, as mills defaulted on payments to cane growers,

2000 Net exporter

Trade balance

1500

500 Net importer

000 mtrv

1000

0 –500 –1000

02/03

01/02

00/01

99/00

98/99

97/98

96/97

95/96

94/95

93/94

92/93

91/92

–1500

3.14 Indian sugar exports/imports. Chapter 3/page 19

Sugar Trading Manual and the government grudgingly financed mill payment defaults to sustain the industry. But just as the industry’s political leverage should not be underestimated, neither should its future ability to export under the right conditions. India has long been used to carrying strategic stocks, to cope with the cyclical nature of its sugar production. As Fig. 3.14 shows, throughout the 1990s, India fluctuated between net exporter and net importer, and the cycles had an element of predictability about them. Low domestic prices led to government intervention and production cutbacks, which then led to higher prices and production increases, which led to a further slump in prices, mill payment defaults, and so on. Two or three years in five, India was a net exporter – the other years an importer. But this has changed recently – not even poor monsoons seem able to constrain the production surge. As shown, net exports have been a constant feature over the most recent three years – reaching as high as 1.8 million mt in 2002/03. It is highly unlikely that India will need to import sugar in the next three to four years (or maybe more) unless there is a dramatic change of sugar policy. Consumption of sugar in India is relatively high compared with other Asian countries, and it continues to increase (see Fig. 3.15). As per capita income increases, the popularity of non-centrifugal sugars (gur, khandsari) is falling, and consumption of centrifugal sugars increasing. Additionally, although the availability of cheap sugar through ration shops has declined, the circumvention of government quota controls in recent years pushed prices lower and led to an increase in the affordability of sugar.

24 Production 22

Consumption

Million mtrv

20 18 16 14 12 10 91/92

93/94

95/96

97/98

3.15 Indian sugar production/consumption. Chapter 3/page 20

99/00

01/02

The current world picture W'sale USD/t Traded 100 ICUMSA Traded Thai raws

360 320

USD/t

280 240 200 160 120 Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

3.16 Indian sugar prices.

This flood of sugar on to the domestic market, pushing prices lower, has only recently been stemmed. This is one factor that indicates that India’s sugar stocks are overstated. For almost two years the government has been unable to rein in these ‘excess’ domestic market sales as mills obtained court orders to circumvent the bureaucracy and red tape imposed by various layers of government. It was only in the second half of 2003 that central government was able to reimpose control on these sales, with a resultant increase of several rupees per kg, but these levels are still well below prices that prevailed during 2001 and 2002 (see Fig. 3.16). The root cause of the large mismatch between sugar production and consumption in India is government regulation of the cane price. Indian politicians show little willingness either to deregulate cane prices or reduce them to levels that would ‘balance’ the equation and reduce the enormous stock levels in the country. Compounding the difficulty has been intervention by both central and state governments – the Indian government sets the statutory minimum price (SMP) and states set the state advised price (SAP), which have been 20 to 25 per cent above the SMP. In 2002 an inter-ministerial group of secretaries on sugar said that the states were acting illegally in setting an SAP and should cease the practice. The Indian government in September 2003 announced an INR 6.09 billion (US$133 million) sugar cane assistance package for farmers. Various states are working to bail out co-operatives in serious financial difficulties caused by paying a higher regulated cane price than the revenues available from the production, storage and sale of sugar. And so Chapter 3/page 21

Sugar Trading Manual the cycle continues – politicians regulate high cane prices to capture farm votes, giving the farmers incorrect market signals, production expands, sugar is sold at a loss both domestically and more so internationally, and politicians then set about propping up mills in a financial mess that the politicians initially created.

The trading implications of recent changes The spreads One of the main features of the sugar market during the first half of 2003 was the way that the futures board flattened on both raws and whites. At the start of the year the July 03 / July 04 spread in New York was trading at inverse of around 135 points while in London the August 03 / August 04 spread was valued at close to $25.0 per mt. By the middle of the year the July 03 / July 04 spread had narrowed to under 10 points while the August equivalent in London was trading at under $10.0 per mt. To explain this apparent structural change it is necessary to try and understand why sugar spreads have historically traded at an inverse. Colleagues in the grain trade have always had a hard time understanding the structure of the sugar board. A conventional configuration for a commodity board is a ‘carrying-charge’ that broadly reflects the cost of carrying that commodity over time. Those costs include warehouse rent, insurance and interest charges – as well as some element to take account of the cost of keeping the commodity in good condition or an adjustment to allow for any quality deterioration during storage. When a commodity is plentiful, then futures spreads should more or less reflect the real economic costs of carrying (storing) that commodity. When there is an abnormal surplus, warehouse space may be limited and long holders may be willing to discount spot prices further than the real cost of carry in order to free up space for, say, the new harvest. At such a time the spot month may ‘disconnect’ from the economic reality of the cost of carry and decline to such a level where other market participants are prepared to take over the storage of the commodity in their own warehouses (for example in importing countries) or where the price declines sufficiently to prompt an increase in demand for spot consumption. In a time of tight supplies, buyers may find themselves in a bidding war to obtain their needs. In the case of raw sugar, it can be expensive to close a refinery for a short period, and it may make sense to bid up values in order to ensure supply. Similarly for white sugar, the

Chapter 3/page 22

The current world picture elasticity of demand is low and most consumers are insensitive to the price of it. (This is primarily because sugar purchases make up such a small percentage of total consumer expenditure.) As such, consumers have plenty of economic room to bid up prices to ensure that they keep their families supplied. In times of tight supply, spot prices may be bid up to levels where producers are encouraged to advance production or to reduce their own domestic (pipeline) stocks to below ‘normal’ levels. Alternatively, if the spot price rises significantly, other importers or consumers may be persuaded to reduce their purchases or delay their imports. So far, any grain trader reading this would say, ‘Fine, I understand all that, but sugar has been in excess supply for pretty much the last fifteen years. I still don’t understand the inverses.’ To gain a better insight into that, we have to look beyond the simple textbook theory. The move from carrying charges to inverses in the sugar market coincided with the collapse of communism and a surge of liberalization in the world economy. The two are related. Historically, the sugar trade had usually been carried out by governments. One of the principal historic trade flows in sugar was from Cuba to Russia, with deals done on a long term basis between two state-run government organizations. Another was from Cuba to China. Until the mid-1980s in Brazil, the IAA (a quasi-government agency) was the sole exporter. And in many importing countries, particularly in the Middle East but also in Indonesia (the world’s biggest whites importer), the government was always the principal player. In all of these cases, price was less important than supply and the imperative was to ensure adequate supply. As a result, deals were done long in advance. Liberalization changed that. Producers suddenly had to learn not only how to market their sugar but also to finance their business. The preferred solution was to sell production as far forward as possible and then take the sales contracts to the local banks to obtain crop finance. Meanwhile, importers, now private independent businesses, became less interested in ensuring adequate supplies for the general population and more interested in turning a profit. It became too risky to buy supplies too far forward; it was much better to respond quickly to spot price signals, importing only when domestic prices were above world prices, allowing a profit in the process. The result of these changes was to create a situation where producers sell forward while consumers (importers) buy spot. In terms of order flow this lends itself, obviously, to an inverted market structure. However, it is still not enough in itself to explain the inverses. After all, if it was only a question of order flow, there would be plenty of arbitragers out there to take the other side and compensate for the time differential in pricing.

Chapter 3/page 23

Sugar Trading Manual Another reason often given for the inverse structure in sugar is the activity of investment funds. It is argued that funds traditionally target the front month – because that is where the volume is – and buy more often than they sell. This in turn distorts the structure of the market by ‘over-valuing’ the spot month relative to the forward positions. At the end of 2002 and the beginning of 2003 the funds built up massive positions in sugar, peaking at over five million tonnes in mid-February 2003. Their ensuing liquidation was obviously one factor behind the flattening of the futures curve. Fund buying and holding in the spot month can distort the market for a while by creating an ‘artificial’ demand for spot sugar. However, funds never (or very rarely) take delivery but roll forward their longs. Logic would therefore dictate that any distortion would be temporary and resolved at each expiry. In other words, if fund activity was the reason for the inverses in sugar then those inverses should disappear at each expiry; each spot month should expire at a level that reflects real economic conditions. However, this hasn’t happened and spot months have continually expired at premiums. As such, one has to look elsewhere for an explanation. The real reason why sugar has traditionally traded in an inverse can be found where the technicalities of the futures contracts meet the structure of world trade flows. Although that sounds complicated, it isn’t. For many years, the Far East has been a deficit area for raw sugar that has required inflows from the Western Hemisphere. Because of the additional freight cost of moving sugar into the area, sugar already in the region has traditionally traded at a premium to Western Hemisphere origin. This premium has been roughly equivalent to the freight differential adjusted for differences in quality, shipment periods, voyage times etc. The traditional indicator for this differential has been the Thai premium in the inter-trade market – although of course other producers in the area (Australia and South Africa) have also benefited (Fig. 3.17). At times of relative excess supply in the Far East, Australia helped to make sure that the premium was maintained by moving enough sugar out of the region to keep it in deficit. This strategy began to fall apart a few years back with an inflow of first Guatemalan and then Brazilian sugar as the freight economics changed and boats got bigger. (Return voyage rates from Central America to South Korea were particularly low.) Even more recently, Brazilian terminal operators have begun to ‘coat’ their sugar with syrups, reducing the polarization enough to meet Japan’s stringent import regulations. However, having said all that, the Far East was in deficit more years than not, keeping Thai premiums high enough to bring in sugar from the Western Hemisphere to balance the situation. Chapter 3/page 24

The current world picture 250 200

Points

150 100 50 0 –50 91

92

93

94

95

96

97

98

99

00

01

02

03

3.17 Thai raw premiums.

Contract terms Future contracts are traditionally a hedging and pricing mechanism. Most markets have a delivery mechanism, but delivery is usually – and purposely – inconvenient and considered as ‘a last resort’. No delivery mechanism can be perfect; first, because it takes time for rules to be changed and to be kept up to date with changing trade flows; second, because there is always something that will favour either the deliverer or receiver at one time or another. Sugar has in a way been an unusual commodity in that very little of world supply could actually be delivered against the expiry futures contract. Cuba, for many years the world’s biggest exporter, has always been excluded for political reasons. Australia has never delivered its production – partly for political reasons and partly to preserve the premium for sugar in the region. South Africa was for many years excluded on the grounds of politics. Since the end of apartheid that is obviously no longer the case, but the industry has never delivered into New York – for reasons similar to those of Australia. However, all this sugar is priced against New York futures and those short hedges have to be brought back prior to the spot month expiry. This obviously helps support the inverse going into a delivery (the order flow argument we made above), but more importantly it reduces the supply of sugar that is technically deliverable against the exchange. There are reasons other than politics for not delivering. New York rules require that the deliverer keeps the sugar available at seven days’ notice for a period of 75 days. In some cases this is very difficult. In Colombia, for example, a lack of warehouse space sufficiently close to the ports makes it almost impossible for producers there to meet the Chapter 3/page 25

Sugar Trading Manual delivery requirements. As such, the Colombians prefer to sell on a 30day shipment window, even if it means that their sugar is worth a discount to New York futures. Terminal operators in Brazil also like to sell on a 30- or even 15-day window. They have such a large throughput that they need to plan and space their shipments carefully. If too many vessels arrive at the same time they can’t load them quickly enough and demurrage payments rise. If insufficient vessels turn up, they run out of warehouse space and the harvest backs up deep into the country. Thailand is one exporter whose sugar is deliverable both in London and New York. Thai raw sugar historically trades on a 75-day shipment window and, unlike Australians or South Africans, is freely traded on the inter-trade market. However, as we saw above, Thai sugar is usually worth a premium to sugar from the Western Hemisphere. For Thais to be delivered the premium has to be reduced to zero. This happened very rarely, and in the period from 1994 through to the end of 2001 less than 100 000 mt of Thais were delivered into New York (out of a total delivered tonnage of over five million mt) (Fig. 3.18). What is true for New York is also true for London, but for slightly different reasons. Only refined sugar from a narrow range of origins can be delivered against London. However, a lot of the world’s trade in white sugar is in lower qualities – 150s, 100s and even 60 ICUMSA sugars. These lower quality sugars were traditionally hedged against London, and those hedges needed to be bought back prior to expiry – leading to the same problems of order flow. More important, however, was the actual supply and demand of sugar technically deliverable. The inverses in the London market have been a function of the relative

80 70 60

US$/t

50 40 30 20 10 0 –10 –20 93

94

95

96

97

3.18 Thai whites premiums. Chapter 3/page 26

98

99

00

01

02

03

The current world picture tightness of refined sugar that can technically be delivered. Even when the world whites market has been in surplus, high quality refined sugar has often been scarce and the futures inverses have reflected that tightness. Over the last ten to fifteen years the futures markets have been ‘biased’ towards the receiver. Even in times of excess world production, there has often been a deficit of sugar that can technically be delivered against the futures. A surplus in world production has often hidden a deficit of deliverable supply, and this deficit has driven the inverses in New York futures values. From a trader’s point of view, there has always been more upside in being long of futures than being short of them. The upside has been to ‘squeeze’ Thais into the tape, or to force Brazilian terminal operators to ‘surrender’ their flexibility by giving a 75-day shipment window. And in the order flow process, it was always fun to ‘squeeze’ the futures shorts, the Cuban, Australian and South African hedges that had to be bought back in New York and the lower quality whites hedges that had to be bought back in London. Even at times when the deficit of deliverable sugar has been marginal, it could be exaggerated by creating demand. Trade houses were able to transfer demand for non-deliverable sugar into demand for deliverable sugar by discounting prices at destination, establishing a sales book and then buying futures, and effectively sourcing the sugar from the exchanges. Even if non-deliverable sugars (Cubans in the case of Russia or Thai 100s in the case of Indonesia) were trading at discounts to the futures, traders stayed long of the futures, pushing the spreads out in the process. One of the consequences of playing the technical nature of the futures markets has been that there has been a disconnection between the value of deliverable sugar and nondeliverable sugar. A lack of deliverable sugar coupled with the Far East premium has at times been an explosive mixture. During 2003, however, a number of expiries failed to explode. This is partly because holders of nondeliverable sugars have wised-up, taking avoiding action ahead of time by rolling their hedges forward earlier – or, in some cases, not hedging their sugar at all. It is also because deliverers have frustrated potential squeezes by using the technicalities of the contracts against the receivers. Finally, and most importantly, it is because the structure of the market has changed. We will take each one in turn. Market participants have become used to technical squeezes on the futures markets and have begun to take avoiding action before the full effect of a squeeze sets in. They roll forward their hedges well in advance. Or they have used an alternative hedging medium. This is particularly the case of the August London – often a target in the past. When exports began to pick up from South Brazil in the early 1990s, Chapter 3/page 27

Sugar Trading Manual the position was used as a hedge for non-deliverable lower quality Brazil whites. However, after a couple of years of being squeezed, traders began to hedge more of that sugar in New York and the August squeezes pretty much ended. Another reaction has been not to hedge the sugar at all. After all, low quality whites buyers often trade basis flat price. And now, with India a big supplier of low quality whites on a flat price basis, hedging low quality whites has become more risky than not hedging them. In this sense, the white sugar business is becoming more like the rice business, where there is no futures market. Over the last few years, traders have frustrated a number of squeeze plays by exploiting the technical nature of the delivery mechanism. Sugar is fairly special in the world of commodities in that the futures delivery mechanism is not based on warehouse receipts but vessel presentation. Deliverers do not have to prove that the sugar is available at the time of delivery. Instead their obligations consist of loading the receiver’s vessel in a timely fashion when it is presented at load port. This distinction is particularly important at the start of a harvest. We have seen cases in the last few years where deliveries have been made of sugar that had not been produced at the time of the futures contract expiry but was going to be produced during the delivery period. As long as the deliverer has enough sugar to load one vessel at the relatively slow contractual rate, the delivery obligations are met. When this was perceived to be happening, receivers have tried to place the deliverer in default, arguing that the sugar was not available at the time of delivery. However, so far all arbitrations have ruled in favour of the deliverer. At times of relative shortage, or when there is a time restraint such as a Russian import quota time deadline, the receiver will want to have the sugar loaded as quickly as possible at the start of the shipping period. If the receiver knows, for example, that the May expiry sugar will only be loaded in July, then it is difficult to argue that it is worth a premium to July. The attractiveness of taking delivery of the spot month at a premium to the second month has been reduced. On the whites, deliverers have begun to use a different technicality to frustrate receivers. Under LIFFE rules as they stand (at the time of writing), deliverers are not obligated to provide any marks on the bags, nor to ensure that the bags are uniform in colour (apart from for each 50 mt lot). By charging high prices to mark bags for the receiver, the deliverers can increase the cost of taking delivery. By providing the sugar in various colour bags, they can reduce the value of the sugar actually delivered. Not only that, but because a potential receiver does not know in advance what the charges will be, it is much harder to value the sugar. This uncertainty obviously reduces the attractiveness of taking delivery. From an order flow perspective any reduction in the quantity of nondeliverable sugar that is hedged in futures will reduce the extent to Chapter 3/page 28

The current world picture which an expiry can be squeezed. The collapse in Cuba’s sugar production has obviously reduced the quantity of futures hedges that have to be bought back or rolled forward at each expiry. The same applies to Australia, which has suffered from poor weather over the last few years and also to South Africa, which is selling more of its production as white sugar to neighbouring countries and so needs to hedge less of its production in New York. If you take 2003, the reduction in exports from South Africa, Cuba and Australia could be as much as two million mt compared to 2002. This is two million mt less futures that have to be bought back or rolled in New York. On the other side of the coin, there has been an expansion in the quantity of sugar that can be delivered. We mentioned earlier that the Brazilians don’t like to deliver their sugar because it creates logistical difficulties at the ports. However the expansion in the number of export terminals (with accompanying warehouse space) in South Brazil has made it easier for them to deliver sugar into a 75-day window. (It’s still not that easy, but it’s easier.) They might need to be paid to do it, but a small inverse may be enough now to make it worth their while. The biggest difference, however, has been the expansion in Thai production, which has not only increased the supply of deliverable sugar but also buried the Far East premium by swinging the region into structural surplus. If there is no Far East premium, there is no incentive to try and squeeze Thais into the tape. And any attempt to source other origins through the exchange will be frustrated by massive deliveries of Thais. If, as we believe, the inverse structure in the world sugar market has been caused by a deficit in supply of deliverable sugars, then that situation is now over. Increased production in Thailand coupled with infrastructure changes in South Brazil have combined to increase supply of deliverable sugar. Even if it hadn’t, with the Far East moving into surplus, the incentive even to try a squeeze play has been removed. As such, the futures spreads should now more closely reflect the supply and demand of all sugars, including non-deliverable ones, and respond more to the straight economics of warehouse costs and interest rates. This doesn’t mean that inverses are a thing of the past. At times of tightness, importers will still be prepared to pay more for spot arrivals and producers will need to be encouraged to advance harvests or run down pipeline stocks. But all these will be based on fundamental considerations rather than technical ones.

The flat price The flat or futures price of raw sugar has obviously declined in both real and nominal terms since 1999. During the 1990s, futures (nominal) prices average around 10.5 c/lb, and spent most of the time trading Chapter 3/page 29

Sugar Trading Manual 16 14

US cents/lb

12 10 8 6 4 90

91 92

93

94

95

96

97

98

99

00

01

02

03

3.19 World market prices 1990–2003.

between 7 and 16 c/lb. This changed coming into the new millennium, as Brazil became a driving force in world sugar production. At the same time, Brazil floated its currency, with an immediate fall in the value of the real. The combination of a lower currency and a more vigorous drive for exports in Brazil sent the price of sugar crashing to lows not seen since the mid-1980s when subsidized sugar from the EU sent the market into a downward spiral. As a result, raw sugar prices since 1999 have averaged around 7 c/lb (see Fig. 3.19). The competitiveness of the Brazilian sugar and ethanol sector is driven by many of the factors listed above. But the devaluation of the currency has had a major impact, as it fell from 1.20 per US dollar to almost 4 in the space of only four years. It has since recovered, but the impact of such a dramatic devaluation has left many other producers in a difficult position. With a very low currency, many Brazilian mills have an average cost of production less than 6 c/lb, and a marginal cost of production less than 5 c/lb. Even their most efficient competitors cannot come close to these numbers – most have costs of production between 7 and 10 c/lb. Others such as Cuba have production costs well above 10 c/lb, and this has resulted in rapidly declining production in the last five years. The constant oversupply of sugar to the market in the past three to five years has kept prices under pressure. Ethanol usage in Brazil and exports to other countries has been lower than anticipated, which is beginning to result in higher ethanol and sugar stocks. The outlook for the sugar flat price is critically related to the following: Chapter 3/page 30

The current world picture • world consumption, which is recovering only slowly from a world recession, but is estimated under normal conditions to be between 1.5% and 2% • trade liberalization, which could open up larger markets • ethanol usage and the extent to which sugar and sugar-related products are used in its manufacture. This, in turn, depends on the extent to which governments adopt measures to reduce global warming and are prepared to shift subsidies from agricultural production for food to agricultural production for fuel • the value of the Brazilian currency, and the extent to which new technologies reduce costs of production further. Volatility in the futures price has been reduced overall in recent years because of the oversupply and the extent to which the futures market represents the value of Brazilian sugar. There is a risk, however, for the market in relying too heavily on one single supplier. If CS Brazil were to have a sizeable drought, frost or cane disease, the market would react very rapidly to such an event. This was evident in 2001, when the price doubled in the space of several months, and the market’s reliance on Brazil has increased since then. Unless such events occur, the sugar market seems doomed to trade at low levels until a change occurs in one of the four factors mentioned above. Until then, prices will continue to reflect the marginal cost of the lowest cost producer – Brazil.

Chapter 3/page 31

4 Costs of production Philip Digges and Dr James Fry LMC International

Rationale behind production cost studies Choice of benchmark Comparing sugar production costs with the world sugar price Comparing sugar production costs with other sugar producers

A comparison of cane and beet sugar production costs A comparison of sugar production costs for a group of selected cane and beet sugar producing countries Technical performance and its impact on costs Field performance Factory performance

Conclusion

In this chapter, we introduce the concept of sugar production costs and demonstrate how an assessment of production costs can form a valuable component of any analysis that seeks to assess the international competitive position of a national sugar industry. We divide the chapter into five main sections: • We begin with a brief assessment of the rationale for analysing production costs. • This is followed by a comment on the choice of benchmark when conducting production cost exercises. • In the third section, we introduce the distinction between cane and beet sugar production and provide a broad overview of their relative competitiveness. • In section four, we undertake a comparative analysis of sugar production costs for five cane sugar producing countries and five beet sugar producing countries. • Finally, we draw upon the analysis of production costs for the selected list of cane and beet sugar producing countries, and examine how technical performance impacts upon production costs and the competitive position of an industry.

Rationale behind production cost studies The main objective in making estimates of sugar production costs is usually to establish a basis for international comparisons of competitiveness in production. The concern of decision-makers, whether within individual sugar companies, at the industry level or within government, is to arrive at a method that generates an unbiased ranking of countries producing the same product under very different circumstances, so that they can determine whether or not the domestic production of sugar represents an efficient use of resources. However, conducting a rigorous cost of production exercise that generates an unbiased estimate of production costs is not an easy task. Indeed, it is precisely the difficulty of overcoming some of the methodological problems faced when estimating production costs, which leads many analysts to compare industries on purely technical terms: for example, they make comparisons on the basis of measures such as the number of tonnes of sugar produced per worker; the rate of use of energy per tonne of output; or the yield of beet, cane or sugar per hectare (or per hectare per year). While a comparison of the technical performance of sugar industries is an important aspect of assessing the relative competitive position of Chapter 4/page 1

Sugar Trading Manual a sugar industry, economic theory tells us that this represents only part, if an important part, of the full story. In the final analysis, the best guide to the efficiency of production in a specific context is the demands that production places upon scarce resources. Prices represent the simplest, and best, way to take adequate account of the relative values of different scarce resources. Ultimately, therefore, the comparison of production costs can be defended as an appropriate means – and even as the sole justifiable means – for assessing one country’s competitive advantage vis-à-vis another.

Choice of benchmark Having made a case in favour of the merits of conducting cost of production studies, an important aspect of any cost study is to choose an appropriate benchmark against which to judge the competitive position of an industry. Two possible benchmarks, the merits of which we discuss below, are: • the world sugar price; • the production costs of other sugar producers.

Comparing sugar production costs with the world sugar price An argument that is often heard against the use of the world sugar price as an appropriate benchmark against which to judge the competitive position of an industry, is that the world sugar market is a residual market in which sugar prices are distorted by the protectionist policies of national governments. This, it is argued, makes the world sugar price an inappropriate basis on which to judge the competitive position of the industry. However, to counter this argument, one can argue that many, if not most, of the world’s sugar producing countries are obliged to take into account the long-term trend in world market prices in some aspects of their decision-making. In exporting countries, production for export can only be justified if the returns from export sales can be expected to cover the costs of producing the sugar for export. In importing countries, investments designed to expand domestic output often have to be justified in terms of the long-term savings that they promise in relation to the alternative strategy of importing sugar from the world market. To test the claim that world sugar prices provide a poor basis for gauging the competitive position of an industry, in Fig. 4.1, we compare Chapter 4/page 2

Costs of production 500 450 400

2001 US$/tonne

350 300 250 200 150 100 50 0 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 Real world cane sugar production costs

4.1

Long-run trend world raw sugar price

Real world cane sugar production costs and the long-run trend in the world raw sugar price, 1980/81–2001/02.

LMC’s estimates of the world average cane sugar production costs over a 20-year period, with the long-run trend in the world raw sugar price.1 If the claim that the world sugar market provides a poor benchmark for assessing the competitive position of an industry is accurate, one would expect world sugar prices to bear little or no relation to the average cost of producing sugar. However, there is in fact a surprisingly strong link between the international sugar prices and production costs. Figure 4.1 indicates that average costs have been only slightly higher than the long-run trend price, and both exhibit a downward trend. This observation has several important implications. It raises doubts about the validity of the argument outlined above, and suggests that sugar prices and production costs are, after all, related to one another. Moreover, it implies that approaching half of world cane sugar output is produced at a cost that is below the long-run average world raw sugar price. Thus, if an individual producer, or a whole industry, has costs that are in the bottom half of world sugar production costs, it should be confident of its ability to survive in the long run at world sugar prices. It also implies that the world sugar price is an appropriate benchmark against which sugar producers should compare their costs when 1

The costs presented in Fig. 4.1 represent the weighted average of cane raw sugar production costs, expressed on a bulk, ex-factory basis, as reported in LMC’s regular survey of sugar and HFCS production costs. The weightings used to establish the world average figures are each country’s output of cane sugar. The long-run trend price is a linear trend that has been fitted to real (inflation-adjusted) raw sugar prices over the period 1962 to 2001. Chapter 4/page 3

Sugar Trading Manual deciding whether or not to expand output, either to generate more sugar for export or to displace imports. Another important point to note about Fig. 4.1 is that there is a discernible downward trend in real prices and production costs. This implies that producers must work continually to lower their costs if they are to maintain, and moreover improve, their competitive position in the international arena.

Comparing sugar production costs with other sugar producers In recognition of the misgivings that are sometimes levelled against using the world sugar price as a choice of benchmark, an alternative, but by no means mutually exclusive benchmark is the production costs of other producers. Those within the sugar industry or within government are much more likely to be persuaded to provide protection and assistance to a sector that can produce at a cost below that of a large proportion of the world’s producers than they are to one which appears costly in international production cost comparisons. This argument is reinforced by the current moves towards greater liberalization of international trade. As barriers to trade are reduced, the world sugar market should become an increasingly free one, in which government support of national producers becomes less and less significant. If so, growers and processors will increasingly have to be able to cover their production costs, or else go out of business.

A comparison of cane and beet sugar production costs An important distinction that needs to be made at the outset when comparing costs of production, is the distinction between cane and beet sugar producers. Sugar is an unusual commodity in that it can be produced from two completely different agricultural crops that are grown under different climatic conditions. Therefore, the production processes in the field and in the factory are also different, and it will come as no surprise to learn that the basic economics of the production of beet sugar and cane sugar are different as well. Before examining the relative competitive position of cane and beet, it is necessary to point out the methodological problem of how one compares the costs of producing cane raw sugar with beet white sugar. In order to compare like with like, it is necessary to allow for the cost of upgrading cane raw sugar into white sugar. Two factors need to be taken into account: Chapter 4/page 4

Costs of production 80 70 60

%

50 40 30 20 10 0 Field

4.2

Factory

Total

World cane sugar production costs expressed as a percentage of world beet sugar production costs, average 1999/00– 2001/02.

• The first step is to make an allowance for the cost of the change in polarization that occurs during refining. Given that our cane sugar production has been estimated on the basis of raws with a polarization of 96 degrees, we first multiply our raw sugar production costs by the widely accepted adjustment factor of 1.087, which assumes that 1.087 tonnes of raw sugar are equivalent to one tonne of refined sugar. • Unfortunately, there is no simple means of assessing the process costs incurred in refining on a consistent basis for all countries. This is because not all countries process part of their raw sugar output into white. Moreover, among those that do, some produce mill white sugar, while others produce refined sugar. In the absence of a country-by-country solution, we have chosen instead simply to add a fixed cost of US$65/tonne, which equates to our estimate of the world average cost of upgrading raw sugar to refined sugar in autonomous refineries, in which most of the world’s refined sugar is still produced. In broad terms, the production of beet sugar is less competitive than cane sugar. This is illustrated graphically in Fig. 4.2, in which we express the weighted average of worldwide cane sugar production costs as a percentage of worldwide beet sugar production costs. A distinction is made between costs in the field, factory and total costs. Figure 4.2 reveals that the weighted average of world cane sugar production costs, at both the field and the factory level, is substantially below the weighted average world beet sugar production cost. At the Chapter 4/page 5

Sugar Trading Manual 210 190 170 Rate of decline = 1.6%

Index

150 130 110 Rate of decline = 3.8% 90 70 50 1980

1982

1984

Beet sugar

4.3

1986

1988 Cane sugar

1990

1992

1994

Beet sugar trend

1996

1998

2000

Cane sugar trend

Real world white sugar production costs.

field level, cane field production costs are approximately half the level of beet field costs. At the factory, the cost advantage is less pronounced. Taken together, the weighted average world cane sugar production cost is estimated to be around 60% of the world beet sugar production cost. An analysis of the trends in cane and beet sugar production costs worldwide also suggests that the cost advantage enjoyed by the cane sector has also improved over time. This is illustrated in Fig. 4.3, where we depict the evolution of real costs of production for cane sugar and beet sugar worldwide over the period between the 1980/81 and 2001/02 crop years. We have added the year-on-year trend in refining costs to cane raw sugar costs, so that both beet and cane sugar costs are expressed on the same basis (i.e. white value). The numbers which are printed on the diagram represent the average yearly rates of decline in these real costs. These reveal that the average decline in the real global production cost of cane sugar fell by an average annual rate of approximately 3.8%. By contrast, the corresponding decline for beet sugar was 1.6% per annum, 2.2% slower than the cost reductions achieved by cane sugar producers. Part of the explanation for the greater decline in cane sugar production costs has been the dramatic growth of sugar production in the Centre-South of Brazil, a low-cost sugar industry. From around 9% of global cane sugar output in the early 1980s, the Centre-South of Brazil now accounts for approximately 17% of global cane sugar output. As we shall demonstrate, this combination of low costs and expanding output has lowered significantly world average cane sugar production Chapter 4/page 6

Costs of production 120

Real costs (1979 = 100)

110 100 90 80 70

4.4

2 /0

0

01 20

99 19

/9

/0

8

6 97 19

95

/9

4 /9

/9

93 19

91

Averages using fixed weights

19

2

0 19

/8

89 19

87 19

/9

8

6 /8 85

/8

4 19

2 /8

83 19

81 19

19

79

/8

0

60

Averages using actual weights

Weighted averages of real cane sugar production costs using actual and fixed output weights.

costs, owing to the increased weighting that Brazil’s low costs have in the global average. In order to demonstrate the impact that these changes have had on world cane average production costs, we have prepared Fig. 4.4. This expresses the weighted average world cost of cane sugar production, in index form, using two different methods of weighting individual producer’s costs. One method weights each country’s costs according to its level of sugar production in each year. This measure we refer to as averages using actual weights. In Fig. 4.4, we set the world average cost of production in 1979/80 equal to 100. The other measure has been derived by weighting each producer’s costs by its sugar output in 1979/80. In other words, we have fixed each producer’s weight on the basis of its output in the first year for which costs are presented. We have labelled this measure averages using fixed weights, and have again set the world average cost in 1979/80 equal to 100. This simple piece of analysis reveals that the averages using actual weights are either similar to or less than the averages using fixed weights. This reflects the fact that sugar producers with below-average costs of production have, on average, expanded their output more rapidly than producers with above-average costs. The dramatic divergence between these two cost measures in the 1990s is explained in large part by the surge in sugar production in Centre-South Brazil. Chapter 4/page 7

Sugar Trading Manual 300 250

%

200 150 100 50 0 Australia

C/S Brazil Field

4.5

Jamaica Factory

Mexico Total

South Africa

Raw cane sugar production costs expressed as a percentage of the world cane average, 1997/98–2002/03.

A comparison of sugar production costs for a group of selected cane and beet sugar producing countries Having demonstrated the relative cost advantage of cane over beet, when viewed on a world level it should be remembered that these figures conceal an enormous difference in cane and beet sugar production costs between and also within countries. This is illustrated in Fig. 4.5, in which we present a comparison of cane sugar production costs for a selected group of cane sugar producing countries expressed in relation to the world cane average. A comparable diagram for beet sugar is presented in Fig. 4.6. In our list of cane sugar producing countries Jamaica has the highest level of costs, with costs at the field and factory level well in excess of the world cane average. By contrast, Australia, the Centre-South of Brazil and South Africa all achieve field and factory costs below the world cane average, while Mexico sits broadly in line with the world cane average. For our five beet sugar producing countries, the Ukraine is the highest cost producer with field and factory costs well above the world beet average. China has lowered its costs significantly in recent years as output has increased. The US beet industry is the lowest cost producer overall out of our sample of beet sugar producing countries. Chapter 4/page 8

Costs of production 180 160 140 120 %

100 80 60 40 20 0 China

EU Field

4.6

Poland Factory

Ukraine Total

US beet

Beet sugar production costs expressed as a percentage of the world beet average, 1997/98–2002/03.

Technical performance and its impact on costs Cost competitiveness is influenced by a whole range of factors. This includes the price industries pay for their inputs, such as wages and fertilizer prices, the exchange rate as well as the technical performance of the industry. In this section we will confine our analysis to the technical aspects of performance and how this impacts on production costs.

Field performance Sucrose yields are arguably the single most important indicator of field performance, as they take into account not just cane or beet yields and sucrose content, but also the efficiency of cane and beet harvesting and transport. The latter is reflected in sucrose yields, because cane and beet is sampled for quality either when it arrives at the mill or enters the factory, and the length of time that elapses between harvesting and sampling has a significant bearing on the sucrose content of both beet and cane. Figures 4.7 and 4.8 summarize the average sucrose yield per hectare per year for our list of cane and beet sugar producing countries, respectively. Australia stands out as having the highest sucrose yields among this group of countries. This high level of performance in the field contributes to Australia’s low field costs. Chapter 4/page 9

Sugar Trading Manual 11

Tonnes per hectare per year

10 9 8 7 6 5 4 3 Australia

4.7

C/S Brazil

Jamaica

Mexico

South Africa

Sucrose yields per hectare per annum for selected cane countries, 1998/99–2002/03.

12

Tonnes per hectare per year

10

8

6

4

2

0 China

4.8

EU

Poland

Ukraine

US beet

Sucrose yields per hectare per annum for selected beet countries, average 1998/99–2002/03.

At the other extreme is Jamaica, which is the only country in our sample which has field costs significantly above the world average. A sucrose yield of less than 7.0 tonnes per hectare partly explains Jamaica’s relatively high field costs.

Chapter 4/page 10

Costs of production 12000

Tonnes cane per day

10000 8000 6000 4000 2000 0 Australia

4.9

C/S Brazil

Jamaica

Mexico

South Atrica

Factory size in selected cane countries, average 1998/99–2002/03.

The EU and the US beet sugar industries stand out as having highly efficient field sectors, which helps both achieve field costs well below the world average. By contrast, the Ukraine and China fare less well and achieve comparatively poor sucrose yields. The impact is particularly pronounced in the Ukraine where field costs are well in excess of the world beet average. However, China manages to keep field costs below the world average despite the poor level of field performance, owing to the cheap cost of labour.

Factory performance For the factory sector, we have chosen to present two indicators of technical performance, despite the fact that factory costs generally make up the smaller part of an industry’s total production costs. The two performance indicators that we have chosen are: • Average factory size, which we express in terms of daily milling capacity (Figs 4.9 and 4.11). This indicates the extent to which an industry is able to exploit economies of scale, which are an important determinant of unit capital and labour costs. • Capacity utilization, which we measure in terms of tonnes of sugar produced per tonne of installed daily cane or beet milling capacity (Figs 4.10 and 4.12). This performance indicator measures how extensively an industry utilizes its processing capacity. However, it measures more than just how many net days its factories operate

Chapter 4/page 11

Tonnes sugar per tonne of daily milling capacity

Sugar Trading Manual 30 25 20 15 10 5 0 Australia

C/S Brazil

Jamaica

Mexico

South Africa

4.10 Capacity utilization in selected cane countries, average 1998/99–2002/03.

10000 9000

Tonnes beet per day

8000 7000 6000 5000 4000 3000 2000 1000 0 China

EU

Poland

Ukraine

US beet

4.11 Factory size in selected beet countries, average 1998/99–2002/03.

for, because it is also influenced by the tonnes beet or cane/tonnes sugar ratio, which is determined, in turn, by the quality of beet/cane (principally its sucrose content) that mills receive and their efficiency at recovering sucrose in the form of sugar. Chapter 4/page 12

Tonnes sugar per tonne of daily slicing capacity

Costs of production 25

20

15

10

5

0 China

EU

Poland

Ukraine

US beet

4.12 Capacity utilization in selected beet countries, average 1994/95–1998/99.

As can be seen from Figs 4.9 and 4.10, Australia, the Centre-South of Brazil and South Africa stand out as having relatively efficient factory sectors and this helps to explain their relatively low processing costs. Jamaica faces greater cost pressures as a consequence of having relatively small under-utilized mills. Figs 4.11 and 4.12, illustrating factory size and capacity utilization, demonstrate how the US beet sugar industry stands out as having a highly efficient factory sector. A relatively large average slicing capacity, coupled with a high rate of capacity utilization, ensures the US beet sugar industry achieves factory costs well below the world beet average. The EU also fares relatively well. Although factory capacity utilization is well below that of the US, the industry benefits from a large average factory capacity, which helps to lower processing costs. The Ukraine and China fare less well. Both countries suffer from having small beet factories. Furthermore, the Ukraine also suffers from a relatively low rate of capacity utilization. As a result, it is no great surprise to find that factory costs for the Ukraine and China are well in excess of the world average of beet sugar producers.

Conclusion In the course of this chapter we have introduced the concept of the cost of production, and have demonstrated the potential merits of this approach as a means of assessing the competitive position of an industry. Chapter 4/page 13

Sugar Trading Manual We have demonstrated the competitive advantage of cane over beet, when viewed at a world level, a feature being reinforced by the faster rate of decline in cane costs versus beet costs over time. However, we also demonstrate that an aggregate view of the world is too simplistic and that production costs vary considerably between cane sugar producing countries and beet sugar producing countries. Finally, we have highlighted the downward trend in real sugar prices over time and shown that producers must work continually to lower costs if they are to maintain, let alone improve, their competitive position.

Chapter 4/page 14

5 Alternative sweeteners Lindsay Jolly International Sugar Organization

Starch sweeteners High fructose corn syrup (HFCS) World review Americas: sugar and HFCS United States: historical perspective Factors supporting development of HFCS in the United States Net costs for corn sweeteners not expected to weaken HFCS production/consumption falling again in 2003 Price outlook 2004 HFCS exports falter under US–Mexico sweeteners trade dispute Other Americas Mexico Sweeteners agreement remains elusive Argentina Asia: sugar and HFCS Japan South Korea Taiwan Other Asian countries Thailand Europe: sugar and HFCS European Union European Union – enlargement will not boost isoglucose production Former Soviet Union Summary: short-term outlook Longer-term potential for HFCS to further substitute for sugar HFCS prices in the United States Costs of HFCS production Sugar prices

High intensity sweeteners Global perspective By major HIS Saccharin Aspartame Cyclamates New sweeteners HIS by major country/region United States Asia Sugar and saccharin in China Europe Intense sweeteners and low calorie bulking agents (poly-ols) Prospects for intense sweeteners Sweetener blends HIS blends Synergies from blending HIS with sugar Sweetener cost savings from blending Powerful market impact in the UK Sugar/HIS blending in other markets European regulations on blending

Conclusion HFCS and sugar HIS and sugar

Appendix: Characteristics of high intensity sweeteners and polyhydric alcohols References

As a nutritive sweetener, sugar competes with starch-based glucose and fructose, the most important of which is high fructose syrup (HFS), also widely known as high fructose corn syrup (HFCS) since nearly all of the world’s HFS is made from corn (maize). HFCS, where it is priced lower than sugar to end users, has readily been a substitute for sugar in liquid applications, particularly in soft drinks. Over the past decade, HFCS has gained market share from sugar on a global basis. The solid form starch sweeteners (e.g. dextrose and crystalline fructose) are more expensive to manufacture and, because they cannot match sugar in its functionality, have not been substitutes for sugar to any great extent. Poly-ols are sugar alcohols and have a sweetness level similar to sugar. These exhibit similar bulking characteristics in food and beverage applications. Over recent years, poly-ols have been increasingly used as bulking agents in conjunction with intense sweeteners in food applications, to meet growing consumer demand for low calorie (lite) products. Intensive sweeteners are mainly synthetic and have many times the sweetening power of sugar, but with much lower caloric value. There are two main attractions of intensive sweeteners. Firstly, they are a cheap alternative to sugar (expressed in sugar equivalent terms) and, secondly, they are a calorie-free sweetener for consumers of diet and lite foods and beverages. In this chapter the recent development of alternative sweeteners to sugar is reviewed and examined with a view to identifying the key factors that have determined the extent of their substitution for sugar since the 1980s. The review is conducted on a country/regional basis and also by major sweetener type. Issues critical to the prospects for further substitution of alternative sweeteners for sugar are identified.

Starch sweeteners The development of enzymatic extraction techniques and microbial processes has allowed sweetness to be derived from many plants with high starch content – corn, wheat, potatoes, rice and tapioca, as shown in Table 5.1. HFCS-42 consists of 42% fructose, 50% dextrose and 8% higher saccharides. HFCS-55 consists of 55% fructose, 40% dextrose and 5% higher saccharides. By 1972 the US corn wet milling industry had developed the technical ability to commercially produce HFCS-42. Further technological development of the process led to HFCS-80 and HFCS-90, but then later blending with HFCS-42 led to the commercial production of HFCS-55 (as sweet as sugar) around 1977 (Gray et al, 1993). HFCS is produced in liquid form, making it particularly suitable as a sweetener in the soft drinks sector. At the same time it makes it Chapter 5/page 1

Sugar Trading Manual Table 5.1 Starch sweeteners Sweetener

Origin

Sweetness relative to sugar

HFCS-42

Corn, wheat, potatoes, rice, tapioca as above Invert sugar Cereals Chicory

0.7

HFCS-55 Fructose Glucose/dextrose Inulin

0.95 1.1–1.4 0.1–0.5 0.9

costly to transport. It is important to note that HFCS and sugar are not perfect substitutes. For instance, sugar has a number of bulking, texture and browning characteristics that make it preferable for confectionery, bakery and cereal industries. So, on a worldwide scale, HFCS is primarily competing with liquid sugar (invert sugar). Since HFCS basically has the same features as invert sugar, the choice between the two sweeteners is largely a function of relative prices. While HFCS is seen as a less expensive replacement for sugar (where technically feasible), sweetness is a secondary consideration in the case of fructose syrup and dextrose in food and beverages. This is because their primary use is to improve a food’s desirable characteristics, such as texture and appearance.

High fructose corn syrup (HFCS) World review On a global basis, HFCS (including small volumes of HFS from other starch rich sources) is capturing an increasing share of the world sweetener market. However, a striking slow down in HFCS offtake since 1999 (partly because of low world sugar prices) has seen the share of HFCS in the combined markets for sugar and HFCS stagnate at around 9.6%. Even so, as can be seen in Table 5.2, during the early 1990s HFCS was accounting for as much as 30% of the annual growth in nutritive sweetener consumption. Over the past five years, annual growth in HFCS consumption has averaged 2.3%, while growth in sugar demand has been slower at around 1.7% annually. Importantly, the strong growth in HFCS consumption/production over the past decade is not a feature of all sugar producing and consuming countries. Instead, HFCS is produced and consumed in large volumes in a few countries only, typically those with high domestic sugar prices, although there are some notable exceptions (discussed below) – see Chapter 5/page 2

Alternative sweeteners Table 5.2 World HFCS and sugar consumption – 000 tonnes white value HFCS

1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/01 2001/02

6 843 7 186 7 220 7 548 7 795 8 128 8 422 8 928 9 427 9 771 10 409 10 920 11 043 11 361 11 437 11 665

Sugar

94 077 98 018 98 049 100 196 100 833 101 831 104 894 104 045 105 387 108 800 112 035 114 935 114 581 117 997 118 544 121 879

Sugar & HFCS 100 921 105 204 105 269 107 743 108 628 109 959 113 316 112 973 114 815 118 570 122 445 125 855 125 624 129 358 129 981 133 544

%HFCS

7.3 7.3 7.4 7.5 7.7 8.0 8.0 8.6 8.9 9.0 9.3 9.5 9.6 9.6 9.6 9.6

Annual growth HFCS

Sugar

na 5.0 0.5 4.5 3.3 4.3 3.6 6.0 5.6 3.6 6.5 4.9 1.1 2.9 0.7 2.0

na 4.2 0.0 2.2 0.6 1.0 3.0 -0.8 1.3 3.2 3.0 2.6 -0.3 3.0 0.5 2.8

Source: F.O. Licht and International Sugar Organization.

Table 5.3. Because of the technical properties of HFCS, there is no world trade, apart from small volumes of land-based trade in North/Central America. Also, little HFCS is stored from year to year; therefore, production levels approximate consumption in most regions and countries. The US is the dominant world producer, accounting for around 72% of the world total (see Fig. 5.1) at 8.43 million tonnes (dry basis) in 2000/01. Japan is the distant next largest producer, at 0.74 million tonnes, accounting for a further 6.5% of global production. Other significant HFCS producing countries include Turkey (2.6%), Canada (2.4%), Argentina (2.2%), South Korea (2.3%) and the European Union (2.6%). Together, these countries account for most of world production (91%). Because of the dominance of so few countries, any analysis of the world HFCS market is best conducted on a country-by-country basis.

Americas: sugar and HFCS The United States HFCS sector dominates developments in the Americas (see Table 5.4). For much of the past two decades the US sector has been an ‘engine of growth’ but during the past two years an oversupplied US sweetener market, overcapacity within the HFCS Chapter 5/page 3

Sugar Trading Manual Table 5.3 World HFCS production – tonnes dry basis 1986/87 Belgium Finland France Germany Greece Italy Netherlands Portugal Spain United Kingdom European Union Bulgaria Hungary CIS ex-Yugoslavia Poland Slovakia Turkey Europe Egypt/ Africa Argentina Canada Mexico USA Uruguay Americas China India Indonesia Japan Malaysia South Korea Taiwan Thailand Asia Australia/Oceania World

1987/88

1988/89

1989/90

72 250 7 000 19 855 35 684 750 20 438 5 686 322 82 993 27 305 272 283 0 46 000 0 60 000 0 0 0 378 283 0 169 000 237 000

72 248 7 000 20 022 35 509 2 692 19 359 8 414 370 82 990 26 974 275 578 15 303 40 000 0 40 000 0 0 0 370 881 30 000 164 000 240 000

72 250 8 000 19 986 35 679 6 357 20 115 9 175 389 82 976 27 483 282 410 14 673 40 000 5 000 27 300 0 0 0 369 383 38 000 146 000 240 000

72 250 8 000 20 022 35 662 7 440 20 463 9 175 1 276 82 973 27 356 284 617 12 359 40 000 5 000 25 300 0 0 0 367 276 48 340 157 000 240 000

5 158 000 0 5 564 000 10 000 3 000 15 000 688 006 16 000 148 000 15 000 3 000 898 006 3 000 6 843 289

5 396 000 6 000 5 806 000 10 000 3 000 18 000 728 977 16 000 178 000 19 000 3 000 975 977 3 000 7 185 858

5 392 000 10 000 5 788 000 10 000 3 000 16 000 712 244 16 000 198 000 51 000 15 000 1 021 244 3 500 7 220 127

5 597 000 18 000 6 012 000 30 000 3 000 15 000 742 410 16 000 220 000 67 000 18 000 1 116 410 3 500 7 547 526

1990/91

1991/92

1992/93

72 252 9 000 20 022 35 684 9 795 20 463 9 159 5 214 83 000 27 469 292 058 6 845 40 000 8 000 10 000 0 0 0 356 903 40 310 175 000 250 000 0 5 745 300 18 000 6 188 300 30 000 3 000 14 000 782 788 16 000 225 000 110 000 20 000 1 025 788 3 500 7 794 801

71 668 15 000 19 926 34 496 12 334 20 439 9 176 6 609 82 999 27 432 300 079 5 348 40 000 8 000 8 000 0 0 0 361 427 39 600 180 000 250 000 0 6 053 750 18 000 6 501 750 30 000 5 000 12 000 794 405 18 000 213 000 125 000 24 000 1 221 405 3 500 8 127 682

72 250 20 000 20 022 35 684 11 711 20 476 9 174 7 899 82 992 27 397 307 605 5 000 40 000 10 000 5 000 0 0 0 367 605 51 240 188 000 255 000 0 6 331 350 18 000 6 792 350 35 000 5 000 10 000 746 889 18 000 199 000 165 000 28 000 1 206 889 3 500 8 421 584

sector together with a flat offtake of soft drinks (the industry’s single largest customer), have led to only sluggish growth in output. United States: historical perspective Glucose and dextrose were the main corn sweeteners produced prior to the advent of HFCS but, with the expanding use of HFCS, consumption of these two sweeteners has shown little growth (see Fig. 5.2). Around 80% of glucose syrup and dextrose is used in commercially prepared foodstuffs. Crystalline fructose is a comparatively recent entrant to the US corn sweeteners market (around 1987). In 2000, total starch sweeteners consumption reached 12.2 million short tons, up from 9.2 million short tons a decade earlier. Chapter 5/page 4

Alternative sweeteners

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/ 2000

2000/01

2001/02

72 250 20 000 20 022 35 684 12 736 20 475 9 175 9 261 83 000 27 303 309 906 5 000 40 000 10 000 10 000 0 0 0 374 906 69 387 210 000 260 000 0 6 769 526 20 000 7 259 526 35 000 5 000 14 000 727 416 20 000 215 000 173 000 30 000 1 219 416 5 000 8 928 235

72 250 11 930 20 022 35 684 12 985 20 490 9 175 10 000 83 000 27 318 302 854 15 000 104 000 10 000 25 000 0 0 0 456 854 73 196 205 000 255 000 0 7 071 624 25 000 7 556 624 50 000 5 000 14 000 805 819 25 000 213 000 180 000 42 000 1 334 819 6 000 9 427 493

66 725 12 425 20 000 35 684 12 985 21 213 8 956 10 000 83 000 26 778 297 766 20 000 117 000 10 000 30 000 0 0 0 474 766 93 000 190 000 255 000 25 000 7 333 805 20 000 7 823 805 70 000 5 000 25 000 783 621 28 000 221 000 195 000 50 000 1 377 621 1 500 9 770 692

72 091 11 930 20 022 35 328 13 000 20 465 9 174 10 000 83 000 27 016 302 026 10 000 130 000 15 000 30 000 0 0 0 487 026 94 000 210 000 265 000 125 000 7 750 000 0 8 350 000 85 000 5 000 30 000 878 461 28 000 231 000 165 000 54 000 1 476 461 2 000 10 409 487

72 232 11 930 20 022 35 684 13 000 20 468 9 140 10 000 83 000 27 245 302 721 10 000 130 000 30 000 25 000 0 15 000 35 000 547 721 94 000 220 000 260 000 240 000 8 218 000 0 8 938 000 85 000 5 000 25 000 789 000 22 000 213 000 155 000 44 585 1 338 585 2 000 10 920 306

72 250 11 930 20 022 35 684 12 997 20 470 9 175 10 000 83 000 27 483 303 011 35 000 135 000 20 000 10 000 10 000 28 253 85 000 626 264 93 000 230 000 255 000 255 000 8 273 755 0 9 013 755 90 000 5 000 20 000 760 000 22 000 218 000 153 000 34 000 1 302 000 8 000 11 043 019

72 250 11 930 20 022 35 684 13 000 20 470 9 175 10 000 83 000 27 478 303 009 30 000 130 000 20 000 8 000 20 000 41 664 120 000 672 673 86 000 235 000 260 000 350 000 8 414 123 0 9 259 123 95 000 5 000 22 000 755 000 25 000 240 000 155 000 38 000 1 335 000 8 000 11 360 796

69 394 11 400 19 258 34 405 12 534 19 737 8 846 9 642 81 174 26 387 292 777 30 000 130 000 30 000 10 000 40 000 43 429 220 000 796 206 91 000 280 000 265 000 360 000 8 262 840 0 9 167 840 95 000 5 000 18 000 741 000 25 000 265 000 170 000 55 000 1 374 000 8 000 11 437 046

71 592 11 872 19 846 35 389 12 911 20 274 9 099 9 700 82 400 27 237 300 320 30 000 135 000 35 000 12 000 50 000 52 000 300 000 914 320 100 000 260 000 280 000 220 000 8 431 278 0 9 191 278 110 000 5 000 20 000 761 000 25 000 295 000 175 000 60 000 1 451 000 8 000 11 664 598

Production of HFCS commenced in 1967 but it was the extremely high sugar prices of 1974, together with the expiration of patents on HFCS production technology in 1975, which provided the impetus for the development of large-scale production, along with the maintenance of high domestic sugar prices relative to world market levels. Growth in HFCS production and consumption was rapid during the 1980s, as it quickly became a substitute for sugar in liquid applications, particularly in the US soft drinks sector (see Fig. 5.3). Liquid sugar was all but replaced by HFCS by 1985. Since 1995, sugar’s use in the beverage sector has remained between 165 000 and 196 000 short tons. Domestic use of HFCS and other corn sweeteners grew larger than sugar use for the first time in 1986 and, in 1995, accounted for around 54% of the caloric sweetener market (including honey & edible Chapter 5/page 5

Sugar Trading Manual Table 5.4 HFCS and sugar consumption: The Americas (000 tonnes, white value)

United States

Canada

Argentina

Mexico

Other

Total Americas

HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS

HFCS

HFCS

HFCS

HFCS

HFCS

HFCS

1986/87

1987/88

1988/89

1989/90

1990/91

1991/92

1992/93

5 197.3 6 890.4 12 087.7 43.0 125.0 1 065.8 1 190.8 10.5 169.0 1 066.4 1 235.4 13.7 0.0 3 286.7 3 286.7 0.0 0.0 11 394.4 11 394.4 0.0 5 491.3 23 703.7 29 195.0 23.2

5 413.2 7 024.3 12 437.5 43.5 125.0 1 047.0 1 172.0 10.7 164.0 885.1 1 049.1 15.6 0.4 3 473.2 3 473.6 0.0 6.0 12 139.2 12 145.2 0.0 5 708.6 24 568.8 30 277.4 23.2

5 395.9 7 082.8 12 478.8 43.2 125.0 1 028.0 1 153.0 10.8 146.0 837.8 983.8 14.8 0.4 3 711.8 3 712.2 0.0 10.0 11 560.4 11 570.4 0.1 5 677.4 24 220.8 29 898.2 23.4

5 601.0 7 302.4 12 903.4 43.4 126.1 981.3 1 107.5 11.4 157.0 972.2 1 129.2 13.9 3.9 3 729.2 3 733.1 0.1 18.0 12 550.8 12 568.8 0.1 5 906.0 25 536.0 31 442.0 23.1

5 720.7 7 489.8 13 210.5 43.3 165.3 981.3 1 146.6 14.4 175.0 1 018.0 1 193.0 14.7 8.6 4 267.4 4 276.0 0.2 18.0 11 466.2 11 484.2 0.2 6 087.6 25 222.7 31 310.4 24.1

6 080.9 7 551.7 13 632.6 44.6 140.7 1 028.0 1 168.8 12.0 180.0 1 138.1 1 318.1 13.7 17.9 4 045.7 4 063.6 0.4 18.0 12 926.5 12 944.5 0.1 6 437.5 26 690.1 33 127.6 24.1

6 383.9 7 567.9 13 951.8 45.8 122.6 1 046.7 1 169.4 10.5 188.0 1 097.1 1 285.1 14.6 30.0 4 020.0 4 050.0 0.7 18.0 13 073.8 13 091.8 0.1 6 742.5 26 805.6 33 548.0 25.2

Source: F.O. Licht and International Sugar Organization.

9

Million tonnes, dry basis

8 7 6 5 4 3 2 1 0 Europe

USA 1998/99

5.1

Other Americas 1999/00 2000/01

World HFCS production.

Chapter 5/page 6

Asia 2001/02

Other 2002/03

Alternative sweeteners

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/2000

2000/01

2001/02

6 769.5 7 656.2 14 425.7 46.9 142.7 1 074.8 1 217.5 11.7 210.0 1 121.5 1 331.5 15.8 67.2 4 157.7 4 224.9 1.6 20.0 13 169.3 13 189.3 0.2 7 209.5 27 179.4 34 388.9 26.5

7 071.6 7 901.1 14 972.7 47.2 201.5 1 098.1 1 299.6 15.5 205.0 1 211.2 1 416.2 14.5 49.8 4 084.3 4 134.2 1.2 25.0 13 539.5 13 564.5 0.2 7 552.9 27 834.3 35 387.2 27.1

7 333.8 8 019.0 15 352.8 47.8 178.8 1 121.5 1 300.3 13.7 190.0 1 261.7 1 451.7 13.1 102.7 4 133.9 4 236.6 2.4 20.0 13 897.8 13 917.8 0.1 7 825.3 28 433.9 36 259.1 27.5

7 750.0 8 131.9 15 881.9 48.8 202.9 1 144.9 1 347.7 15.1 210.0 1 259.3 1 469.3 14.3 313.5 3 952.2 4 265.7 7.3 0.0 14 494.8 14 494.8 0.0 8 476.4 28 983.1 37 459.5 29.2

8 218.0 8 224.3 16 442.3 50.0 272.9 1 144.9 1 417.8 19.2 220.0 1 224.2 1 444.2 15.2 398.6 3 954.2 4 352.8 9.2 0.0 15 094.8 15 094.8 0.0 9 109.5 29 642.4 38 751.9 30.7

8 273.8 8 457.3 16 731.0 49.5 238.9 1 121.5 1 360.4 17.6 230.0 1 261.7 1 491.7 15.4 434.3 4 012.3 4 446.6 9.8 0.0 15 523.8 15 523.8 0.0 9 177.0 30 376.6 39 553.6 30.2

8 414.1 8 473.4 16 887.5 49.8 223.6 1 121.5 1 345.1 16.6 235.0 1 355.1 1 590.1 14.8 497.8 4 112.1 4 609.9 10.8 0.0 15 997.1 15 997.1 0.0 9 370.5 31 059.2 40 429.7 30.2

8 262.8 8 458.9 16 721.8 49.4 207.3 1 154.2 1 361.5 15.2 280.0 1 387.9 1 667.9 16.8 477.1 4 317.0 4 794.1 10.0 0.0 16 296.5 16 296.5 0.0 9 227.2 31 614.5 40 841.7 29.2

8 431.278 8 541.1 16 972.4 49.7 225.7 1 158.9 1 384.6 16.3 260.0 1 420.6 1 680.6 15.5 255.7 4 539.0 4 794.7 5.3 0.0 16 508.9 16 508.9 0.0 9 172.7 32 168.4 41 341.1 28.5

000 short tons, dry basis

10 000 8 000 6 000 4 000 2 000 0 1975

1978

1981

1984

Dextrose

5.2

1987

1990

Glucose

1993

1996

1999

2002

HFCS

US: consumption of corn sweeteners.

syrups). This figure is estimated to have reached 55% by the year 2000. This loss of the beverages market to HFCS did not reduce sales of domestic sugar. Instead, because the United States was in a sugar deficit, sugar imports took the brunt of the decline. HFCS is used predominantly in the beverages sector but also finds applications in the baking and confectionery sectors. HFCS-55 is the dominant sweetener used in soft drink manufacture and this normally Chapter 5/page 7

Sugar Trading Manual

000 short tons, dry basis

12 000 10 000 8 000 6 000 4 000 2 000 0 1975

5.3

1978

1981

1984

1987

1990

Sugar

HFCS

1993

1996

1999

2002

US: sugar and HFCS consumption.

accounts for around 90% of its use. In contrast, HFCS-42 relies on the beverage sector for only 45% of its use. It is more important in other food categories, especially in processed foods, cereal and bakery products. HFCS (and other corn sweeteners) have been making inroads into other sugar markets because US food processors have had an economic incentive to use substitutes, as shown by the ‘sugar to corn sweetener’ price relationship (discussed later). Under present conditions, HFCS has captured all of the potential market in the soft drinks sector. Among other industrial end users, HFCS’ share is rising to a ceiling of around 30%. By 2002, HFCS-55 use reached 5.6 million short tons and HFCS-42 use totalled 3.7 million short tons. US production of HFCS at 9.4 million short tons exceeded domestic consumption, however, because exports to the neighbouring countries of Canada and Mexico reached 326 thousand short tons. See Fig. 5.4 for US–Canada HFCS trade. Factors supporting development of HFCS in the United States A key factor supporting HFCS producers has been US sugar policy. In particular, the sugar programme has provided a floor for sugar above the cost of producing liquid HFCS and thereby guaranteed that sugar could not be price competitive with HFCS. Lord (1995) argued that the sugar programme’s guaranteed price floor for sugar stimulated investment in HFCS facilities and allowed a more rapid acquisition of share in the US sweetener market. Furthermore, higher HFCS revenues also allowed the funding of substantial research and development in the corn wet milling industry, which also benefited other products made from corn starch, particularly ethanol. Fundamental to the growth of the corn sweetener industry in the United States has been an abundant supply of corn at a relatively low Chapter 5/page 8

Alternative sweeteners 300

Metric tons commercial basis

250 200 150 100 50 0 –50

–100 –150 –200 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Exports

5.4

Imports

Canada’s HFCS trade with the United States.

cost. The cost of corn can be seen on either a gross or net basis. As sales of the three by-products of the wet milling process (corn gluten feed, corn gluten meal and corn oil) generate revenues, they reduce the gross cost of corn. Factors supporting the development of the HFCS sector in the United States are examined further below when the future prospects for the sector are discussed. Net costs for corn sweeteners not expected to weaken Net corn sweetener costs are not expected to retreat far during coming months from the relatively high levels seen during the first half of 2003. Indeed, the July level of 3.50 cents/lb remained well above the average annual value of 2.98 cents/lb seen over the previous five years. Firm corn prices due to a smaller 2002/03 crop mostly explain the continuing high net corn sweetener costs over recent months, but a modest decline in revenue from by-products (corn oil, corn meal and corn gluten feed) also contributed. Over coming months corn prices are not anticipated to weaken much, despite a USDA projection for a record corn output from the 2003 crop. The USDA puts 2003/04 production at 10.064 bn bushels, 1 bn bushels above 2002/03. Cash prices, Central Illinois, which had ranged between US$2.30 and US$2.40 a bushel during the first six months of the year, fell to US$2.13/bushel in July in reaction to the expectations of far greater availability during the 2003/04 marketing year. However, Chapter 5/page 9

Sugar Trading Manual they have since strengthened because the month of August was extremely hot and dry across much of the Midwest corn belt. Analysts therefore expect the USDA to pare back its crop forecast in its September crop prospects report. The potential for higher corn prices than initially expected is shown by developments in futures prices. Prices for the nearby contract on the Chicago exchange weakened considerably during early August (to as low as US$2.06/bushel), but have since regained much of the lost ground to be around US$2.34/bushel. The USDA in August put farm level prices for the 2003/04 season to range between $2.00 and $2.40/bushel, as against the 2002/03 level of US$2.30. In short, net corn sweetener costs are expected to remain firm (and may increase if revenues from by-products weaken any further) during coming months, and there is little chance of them returning to the average levels seen during 1999–2001. HFCS production/consumption falling again in 2003 Calendar year 2002 was initially hoped to have marked a turning point in the fortunes of the HFCS industry with the resumption of growth after production declined in both 2000 and 2001. However, writing in 2003, this is not expected to be the case, as the USDA is forecasting a fall in production and offtake for calendar year 2003. The USDA now puts deliveries at 9160 short tons, dry weight, down 1.45%, and in stark contrast to the growth of almost 1.6% seen in 2002. The general malaise in sweetener consumption in the United States since 2000 therefore appears to be continuing. Most critically for HFCS, the market for carbonated soft drinks (CSD) has been plagued by sluggish growth over recent years. Data compiled by the Beverage Marketing Corporation (as reported in F.O. Licht, 2003, ‘World HFS production falls for the first time in history’, F.O. Licht’s International Sugar and Sweetener Report, Vol. 135, No. 18, 17 June) show that CSD sales rose by less than 1% during 2002. More importantly, on a per capita basis consumption of CSD fell for the fourth consecutive year, in part reflecting competition from non-carbonated beverages. No upsurge in CSD sales is expected during the short term. A recent dynamic in the US sweeteners market is the onset of declining or at best stagnant consumption of sugar and sweeteners. After experiencing strong and steady growth during the 1990s (after the US beverages sector completed its conversion to corn sweeteners), US consumption of sugar has stagnated since fiscal year 2000 (FY 2000) – October 1999/September 2000. Sugar deliveries for domestic food and beverage use for FY 2001 were estimated at 9.998 million STRV, little changed from the FY 2000 level. For FY 2002 the USDA estimates 9.7 million STRV (note however that the USDA forecasts a Chapter 5/page 10

Alternative sweeteners 1% rise in deliveries for FY 2003, at 9.8 million STRV). Furthermore, per capita consumption of all sweeteners tracked by the USDA reached an estimated high of 68.7 kg in 1999, whereas the 2001 estimate was 66.7 kg (a fall of almost 3%). Both sugar and high fructose corn syrup consumption fell. (Source: Haley et al, 2002a.) The USDA has observed that there have been no satisfactory explanations for the decline in sugar and overall sweetener consumption. The decline coincided with a fall in US economic activity, suggesting that aggregate disposable income and sweetener consumption could be related. Consumption of sweeteners was also adversely affected by the events of September 2001, with the monthly consumption level estimated to be the lowest in over ten years. Another factor could be a change in dietary habits, while analysts also point to the possibility that sugars contained in imported products have increased sufficiently to negatively affect domestic deliveries. In short, more sugar enters the US than explicitly allowed for under the tariff rate quota scheme. A recent analysis conducted by the USDA (Haley, S., 2003, ‘Measuring the effects of imports of sugar containing products on US sugar deliveries’, SSS237-01, USDA, September), shows that the sugar contained in imported products increased from 111% to 124% between 1995 and 2002, and yearly increases have been between 38 500 and 48 000 short tons. Price outlook 2004 Despite the lacklustre demand outlook, HFCS producers are reportedly looking for higher prices in 2004 for annual supply contracts with major users. Increases of between $1.00 and $2.00/hundredweight (cwt) are being sought on the back of expectations for continuing relatively high net corn costs, consolidation of the supply base, and the potential for wet millers to divert additional capacity to ethanol. HFCS exports falter under US–Mexico sweeteners trade dispute With production capacity surging ahead of sales, US producers began looking for additional markets, and the geographical proximity of Mexico offered great potential. That potential reflected the fact that Mexico has the second largest soft drinks consumption per capita in the world after the US. Sugar use in that sector amounts to around 1.4 million tones, equating to one-third of annual domestic deliveries for Mexico’s sugar sector. However, the US HFCS industry’s desire for greater access to Mexico’s carbonated soft drinks sector has been frustrated since February 1997 when Mexico enacted anti-dumping duties, as discussed in the next section. Chapter 5/page 11

Sugar Trading Manual Other Americas

Mexico Two Mexican companies – affiliated with US HFCS producing companies – started production of HFCS in 1996/7: the Almidones Mexicans (Almex plant), a joint venture between Archer Daniels Midland and A.E. Staley, with an annual capacity of 150 000 tonnes; and Arancia Corn Productions, a joint venture between CPC International and the largest local wet corn millers Arancia, producing also around 150 000 tonnes annually. Initially both plants used imported corn, sourced from the United States under the NAFTA tariff rate quota. The United States began to export HFCS to Mexico in the early 1990s and reached around 67.2 thousand tonnes, dry basis, in fiscal 1994 (October/September). The trade jumped markedly in fiscal 1996 to around 89.2 thousand tonnes. At that time HFCS imported from the United States did not have to compete with local origin HFCS, as Mexico had no indigenous production capacity until 1997. HFCS imports rose sharply again and reached 188.5 thousand tonnes in fiscal 1997, according to USDA figures (see Fig. 5.5) (although there were claims, early in 1998 by Mexico’s sugar industry, that imports were in fact much higher than this, at around 300 000 tonnes). The surge in imports of US origin HFCS was perceived by Mexico’s sugar industry as a clear threat and steps were taken to extinguish the potential for HFCS to displace significant volumes of domestic sugar in Mexico’s soft drink sector. In February 1997, Mexico’s National Sugar

200 000 180 000

Metric tons, dry basis

160 000 140 000 120 000 100 000 80 000 60 000 40 000 20 000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

5.5

US exports of HFCS to Mexico.

Chapter 5/page 12

Alternative sweeteners Industry Chamber, the association of Mexico’s sugar producers, accused US corn wet millers of dumping HFCS on Mexico’s sweetener market. This action was followed by the Mexican government initiating an anti-dumping investigation. Mexico’s Commerce Secretariat, SECOFI, responded by imposing temporary tariffs on US HFCS on 25 June 1997. The temporary tariffs were set at specific rates ranging between US$66.57 and 175.50 per ton for HFCS-42 and HFCS-55 from each supplying company including Cargill Inc, A.E. Staley Manufacturing Co, CPC International Inc and Archer Daniels Midland Co. Permanent duties were announced by SECOFI on 23 January 1998, after a formal investigation, at a level between US$55.40 and $175.00 per ton. Faced with the duties on HFCS, the United States referred a complaint to the WTO dispute settlement panel in October 1998. In a ruling released 28 January 2000, the panel determined that Mexico’s antidumping measures were inconsistent with the WTO Antidumping Agreement. In response, Mexico, on 20 September 2000, released an analysis of the economic factors more properly establishing injury, as required under the WTO Antidumping Agreement, and confirmed the application of the countervailing duties from January 1998. However, the United States argued that the duties were still in violation of free trade rules and referred the matter back to the WTO. A WTO Ruling released 22 June 2001 confirmed that the steps Mexico had taken to comply with the earlier WTO panel ruling (January 2000) were insufficient. In response to the adverse rulings of the WTO, on 22 April 2002, the Secretariat of Economy announced that it was establishing a tariff rate quota for HFCS imports. For marketing year 2001/02 (October– September), the in-quota amount would be limited to 148 000 tonnes (dry weight) at a 1.5% duty, mirroring ‘tonne for tonne’ the level of Mexico’s access to the US sugar market. HFCS imports into Mexico outside of the quota face a tariff of 210%, the same level as already applying to imports from non-NAFTA countries, and the maximum allowable under the WTO. Shipments of US HFCS to Mexico have slumped since implementation of the duty – see Fig. 5.6. Furthermore, Mexico’s government in January 2002 implemented a 20% tax on beverages that contain HFCS, and although it was suspended by presidential decree in March, the tax was reapplied in July 2002 when Mexico’s Supreme Court of Justice voted to nullify the President’s decision to suspend the tax. In December 2003 the tax was extended for a further year. Mexico’s consumption of HFCS slumped in response to the 20% tax on soft drinks. As a result of the tax all bottling companies in Mexico that were using HFCS in their products switched to usage of cane sugar in their product formulas. Almost no HFCS has since been sold to soft

Chapter 5/page 13

Sugar Trading Manual 700

000 tonnes, dry weight

600 500 400 300 200 100 0 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03

5.6

Mexico’s HFCS consumption.

drink bottlers since the tax was first introduced. USDA estimates show HFCS use in Mexico’s soft drink industry at 450 000 tonnes for the 2001 fiscal year (Oct.–Sept.), whereas in the following fiscal year use was confined to the October–December period and amounted to 112 500 metric tons. Use of HFCS in soft drinks is expected at zero for fiscal 2001. HFCS demand in other sectors, primarily for industrial use (bakery, food processing, fruit and canning, and yoghurt industries), is forecast at 150 000 metric tons. Developments in total HFCS consumption are shown in Fig. 5.6. Crucially, the slump in HFCS use has led to a commensurate increase in sugar offtake by the soft drinks industry. The USDA balance estimates issued in early 2003 indicated a 600 thousand tonne (raw value) rise in deliveries to industrial end users between FY 2001 and FY 2003. While part of this growth could be attributed to growth in income and population, most of the growth stems from reduced HFCS consumption owing to the 20% tax (Haley et al, 2003). Furthermore, the USDA’s January 2003 balance sheet for Mexico indicated that Mexico would not be a net surplus producer under the USDA formula (Mexico’s projected sugar production less projected consumption of sugar and HFCS). Indeed, no raw sugar TRQ allocation was made for Mexico for fiscal year 2002/03 and again in 2003/04. Sweeteners agreement remains elusive US and Mexico negotiators had not reached agreement in the sweeteners dispute by early March 2004. During the second half of 2002, Chapter 5/page 14

Alternative sweeteners expectations were heightened that a deal was being framed that would give Mexican sugar producers increased access to the US sugar market in return for similar access for US-made HFCS in the Mexican market. In July the US proposed allowing duty free access of 275 000 tons for both Mexican sugar and US HFCS annually, increasing by 25% of any growth in the US sugar market over the life of the agreement. The deal would be a temporary measure while the countries negotiated a long-term solution to the dispute. Early in September Mexico reportedly counter-offered allowing duty free access of 300 000 tons for both Mexican sugar and US HFCS annually. However, negotiations thereafter appeared to stall, in part because of disagreement over how to deal with Mexico’s sugar imports over and above the duty free quota (i.e. the US was wanting to limit the volume of Mexico’s sugar that could enter the US at the high-tier tariff under NAFTA). Very significantly, however, the January 2003 announcement of the revised OAQ effectively increased supplies to the domestic market (by increasing allotments together with the sales of CCC stocks, as discussed above), leaving no room for a large Mexican quota; perhaps an unsurprising move given the expectations of only a small surplus production in Mexico, as estimated by the USDA.

Argentina Production of HFCS declined during the 1980s, but has grown since the mid-1990s, fuelled by increasing soft drinks consumption. According to F.O. Licht, there are presently three companies producing HFCS: Ledesma (Glucovial), Productos de Maiz and Arcor. High corn prices in 1996/7 and a drop in demand for soft drinks, owing to a general economic recession, impacted adversely in that year but HFCS production soon recovered. Lower internal prices for sugar in 1994 (owing to government reform of sugar policy), and again in 1999, acted to discourage substitution of HFCS for sugar. Even so, HFCS accounts for around 5% of the combined HFCS/sugar market. Today, HFCS producers benefit from corn prices similar to the world market level, but profitability is heavily influenced by the level of domestic sugar prices.

Asia: sugar and HFCS Asia’s sweetener market is dominated by sugar and, although consumption of starch-based sweeteners is expanding, they still account for less than 3% of the combined HFCS/sugar market (see Table 5.5). Asia accounts for 12% of global HFCS production, of which Japan is the dominant producer and consumer (consuming around 760 000 tonnes dry weight). The region’s other major HFCS industries are found Chapter 5/page 15

Sugar Trading Manual Table 5.5 HFCS and sugar consumption: Asia (tonnes, white value)

Japan

South Korea

Taiwan

Other Asia

Total Asia

HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS HFCS Sugar Sugar & %HFCS

HFCS

HFCS

HFCS

HFCS

HFCS

1986/87

1987/88

1988/89

1989/90

1990/91

1991/92

1992/93

688.0 2 529.6 3 217.6 21.4 148.0 668.4 816.4 18.1 15.0 495.0 510.0 2.9 52.0 27 949.4 28 001.4 0.2 903.0 31 642.5 32 545.5 2.8

729.0 2 529.6 3 258.6 22.4 178.0 727.0 905.0 19.7 19.0 505.1 524.1 3.6 55.0 28 978.1 29 033.1 0.2 981.0 32 739.9 33 720.9 2.9

712.2 2 529.6 3 241.9 22.0 198.0 769.2 967.2 20.5 51.0 490.6 541.6 9.4 65.0 28 868.2 28 933.2 0.2 1 026.2 32 657.6 33 683.8 3.0

742.4 2 529.6 3 272.0 22.7 220.0 770.1 990.1 22.2 67.0 509.6 576.6 11.6 87.0 30 065.3 30 152.3 0.3 1 116.4 33 874.7 34 991.1 3.2

782.8 2 529.6 3 312.4 23.6 225.0 788.6 1 013.6 22.2 110.0 526.9 636.9 17.3 88.0 31 251.6 31 339.6 0.3 1 205.8 35 096.7 36 302.5 3.3

794.4 2 529.6 3 324.0 23.9 213.0 802.6 1 015.6 21.0 125.0 498.3 623.3 20.1 94.0 32 683.6 32 777.6 0.3 1 226.4 36 514.1 37 740.5 3.2

746.9 2 529.6 3 276.5 22.8 199.0 803.6 1 002.6 19.8 165.0 494.1 659.1 25.0 96.0 33 564.7 33 660.7 0.3 1 206.9 37 392.1 38 599.0 3.1

Source: F.O. Licht and International Sugar Organization.

in South Korea and Taiwan where annual production and consumption is around 290 000 and 175 000 tonnes respectively. All three countries are net importers of both sugar and grains. In effect, governments have chosen to use tariffs and taxes to encourage importation of grain (for HFCS production) rather than of sugar – a strategy that helps to redress a trade imbalance with the United States. Historically, Japan was a pioneer in the development of the enzyme technology critical to the initial success of HFCS. In consequence, Asia’s share of global HFCS output was higher in the early 1980s. More recently, Japan’s consumption of HFCS has stagnated, reflecting changing consumer preferences in the beverages market. However, in South Korea and Taiwan, the market for HFCS appears to have expanded further (see Fig. 5.7). In 1998, the HFCS sectors suffered from the adverse impact of the financial crises and economic turmoil afflicting the region. In particular, currency devaluations increased the cost of imported corn feedstock. South Korea and Taiwan experienced strong growth in 1999/2000, bouncing back after the region’s economic crises. Japan Japan’s production and consumption of HFCS has shown little growth during the 1990s (see Table 5.5). Around 65% of HFCS is used in the beverage industry where soft drinks account for 40% of the Chapter 5/page 16

Alternative sweeteners

1993/94

1994/95

1995/96

1996/97

1997/98

1998/99

1999/2000

2000/01

727.4 2 529.6 3 257.0 22.3 215.0 796.4 1 011.4 21.3 173.0 494.1 667.1 25.9 104.0 34 960.2 35 064.2 0.3 1 219.4 38 780.4 39 999.8 3.0

805.8 2 529.6 3 335.4 24.2 213.0 883.1 1 096.1 19.4 180.0 494.1 674.1 26.7 136.0 36 492.5 36 628.5 0.4 1 334.8 40 399.4 41 734.2 3.2

783.6 2 529.6 3 313.2 23.7 221.0 973.2 1 194.2 18.5 195.0 494.1 689.1 28.3 178.0 37 525.6 37 703.6 0.5 1 377.6 41 522.6 42 900.3 3.2

878.5 2 529.6 3 408.1 25.8 231.0 1 034.1 1 265.1 18.3 165.0 494.1 659.1 25.0 202.0 39 147.5 39 349.5 0.5 1 476.5 43 205.4 44 681.9 3.3

789.0 2 529.6 3 318.6 23.8 213.0 1 040.2 1 253.2 17.0 155.0 494.1 649.1 23.9 181.6 39 399.8 39 581.4 0.5 1 338.6 43 463.8 44 802.4 3.0

760.0 2 529.6 3 289.6 23.1 218.0 921.4 1 139.4 19.1 153.0 494.1 647.1 23.6 171.0 39 137.0 39 308.0 0.4 1 302.0 43 082.2 44 384.2 2.9

755.0 2 529.6 3 284.6 23.0 240.0 903.0 1 143.0 21.0 155.0 494.1 649.1 23.9 185.0 40 742.5 40 927.5 0.5 1 335.0 44 669.3 46 004.3 2.9

741.0 2 529.6 3 270.6 22.7 265.0 945.6 1 210.6 21.9 170.0 494.1 664.1 25.6 198.0 42 110.4 42 308.4 0.5 1 374.0 46 079.8 47 453.8 2.9

30 25

%

20 15 10 5 0 Japan

South Korea 1999/2000

5.7

Taiwan 2000/01

Other Asia

Total Asia

2001/02

Asia: share of HFCS, in total sugar and HFCS consumption.

sector’s output. Carbonated soft drinks are becoming less popular with consumers compared to other beverages, particularly canned coffee and tea. The HFCS sector operates within a sweeteners regime that provides little incentive for expansion of output. Japan’s government has recently introduced measures to reduce the wholesale price of Chapter 5/page 17

2001/02 761.0 2 529.6 3 290.6 23.1 295.0 1 015.0 1 310.0 22.5 175.0 494.1 669.1 26.2 220.0 43 502.1 43 722.1 0.5 1 451.0 47 540.8 48 991.8 3.0

Sugar Trading Manual sugar, which will act to reduce the price competitiveness of HFCS. Another factor that acts as a disincentive to HFCS production is the way in which HFCS producers are required to tie the purchase of dutyfree imported corn (from a semi-annual import quota) to the purchase of local starch (potatoes), in a ratio of 11 to 1. This effectively requires 1/12 of starch used by HFCS producers to be supplied from local starch sources. Bound to take the local starch (in order to access the duty-free corn imports), the HFCS producer has to find a use for it, adding to their production costs. Surcharges are applied by the government to HFCS producers in order to prevent HFCS from disrupting the sugar market. Furthermore, the Ministry of Agriculture, Forests and Fisheries calculates quarterly target volumes for each manufacturer. This policy has acted to keep output broadly stable over the recent past. The HFCS market in Japan is mature and little growth is expected for the future. South Korea As in Japan, demand for caloric soft drinks waned during the second half of the 1990s. Consequently, HFCS output increased only modestly and its share of the combined HFCS/sugar market stagnated at around 17–18%. However, soft drinks consumption has resumed growth over more recent years: in 2002 reflecting higher offtake of soft drinks during the Football World Cup. As is the case in Japan and Taiwan, development of an HFCS industry relies on an advantageous tax and import regime for grains as against sugar. There is no domestic sugar industry so sugar prices to consumers are high. Taiwan The government of Taiwan also intervened in the sweetener market to ensure HFCS was treated favourably. With a 30% discount against sugar, HFCS use had risen to over 26% of the combined HFCS/sugar market by the mid-1990s. However, both sugar and HFCS use have changed little over the past five years. The industry faces increased competition from imported sugar over the coming years. Other Asian countries Conditions for the development of HFCS sectors in other Asian countries have not been sufficiently favourable over the past decade. Analysts have often pointed to the potential for China to significantly expand HFCS output and consumption (e.g. Fry, 1996), citing a low rate of utilization of existing HFCS facilities (located in the southern coastal provinces), expected improvements in distribution systems and its Chapter 5/page 18

Alternative sweeteners rapidly growing soft drinks sector, and a ready market for the main byproducts of corn wet milling. In June 2002, Cargill started to produce HFCS locally in a joint venture with Global Biochem (F.O. Licht, 2003), triggering a decision by Coca-Cola to switch to HFCS (instead of sugar) at several of its plants. Thailand Thailand’s production and use of starch sweeteners has also grown but continues to represent a very small component of the total sweeteners market. There is one plant producing HFCS from tapioca starch. Nearly three-quarters of output is consumed in the beverage industry. Given Thailand’s status as a large surplus producer of sugar, the HFCS sector was initially expected to have difficulties expanding, but the government is allowing more factories to produce HFS from cassava starch. Production was 60 000 tonnes in 2001/02, but is estimated to have reached 100 000 tonnes in 2003.

Europe: sugar and HFCS Europe has shown one of the lowest rates of HFCS penetration (see Table 5.6), partly because in the European Union, the sugar regime has ensured that binding production quotas apply to HFCS. In the eight

Table 5.6 European Union HFCS and sugar consumption (tonnes white value)

1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01

HFCS

Sugar

Sugar & HFCS

%HFCS

272 276 282 285 292 300 308 310 303 298 302 303 303 303 293

12 691 12 677 12 730 12 897 12 905 12 925 12 904 12 747 12 798 13 283 13 439 13 247 13 247 13 615 13 110

12 963 12 953 13 012 13 181 13 197 13 225 13 212 13 057 13 101 13 581 13 741 13 550 13 550 13 918 13 403

2.1 2.1 2.2 2.2 2.2 2.3 2.3 2.4 2.3 2.2 2.2 2.2 2.2 2.2 2.2

EU-15 1994/95 onwards. Source: F.O. Licht and International Sugar Organization. Chapter 5/page 19

Sugar Trading Manual East European and two Mediterranean countries acceding to the European Union in May 2004, imposition of production quotas will stifle growth. European Union The European Union produces a variety of cereal-based sweeteners, including glucose, dextrose, maltose, fructose syrups and polyalcohols. As in the United States, not all of these can be truly regarded as sugar substitutes, since some of their use is driven by factors other than sweetness (bulking properties, control of crystallization and maintenance of humidity). Producers of cereal sweeteners are entitled to export refunds, but typically not for HFCS as its physical properties limit trade (see earlier discussion). Each member state of the European Union faces an isoglucose production quota as part of the sugar regime (isoglucose is the way HFS is described in EU regulations). These quotas were imposed in response to the competitive threat of HFS to the EU sugar industry. Child (1996) noted that the sugar industry realized that HFS production in Europe could cause a catastrophic reduction in sugar consumption, resulting in factory quota reductions. The beet sugar lobby informed the authorities of the implications, stressing the fact that HFS was derived from imported corn. Starch production refunds were withdrawn from isoglucose and the product was brought within the EU sugar regime where it was subjected to production levies, effectively rendering output uneconomical. After a battle with the community authorities and in the Court of Justice, HFS producers managed to overturn these prohibitive arrangements but a highly restrictive quota system was instead imposed. Output of HFS typically equates to the maximum allowable under the quota system, presently around 303 000 tonnes, dry basis, 42% fructose equivalent. This definition also acts as a major disincentive to producing HFS of higher fructose content. Furthermore, any excess production above the quota must be exported, without subsidy, on to the world market – not a viable option as it is logistically difficult to ship HFS long distances and because HFS costs in the EU are high, reflecting the relatively high EU grain prices as against world market levels. There is another high fructose syrup produced in the European Union – inulin syrup – produced from chicory and Jerusalem artichoke. Production of this syrup is also subject to quotas, presently granted to three countries: Belgium, France and The Netherlands. The quota in 1999/2000 was set to 323 160 tonnes, white sugar/isoglucose equivalent (total of A and B quotas). Farmers have consistently not grown chicory for the B quota. Consequently, inulin syrup producers in Belgium and The Netherlands have never produced to the limit of their Chapter 5/page 20

Alternative sweeteners A quota total of 254 570 tonnes, production in 1999/2000 being around 230 000 tonnes. Table 5.6 shows EU HFCS and sugar consumption. In order to comply with its WTO obligations, the EU for fiscal 2000/01 cut its production quotas for sugar, isoglucose and inulin syrup in total by 498 800 tonnes, dry basis. The reduction for isoglucose was 9931 tonnes to 293 084 tonnes and for inulin syrup was 10 592 to 312 458 tonnes. Although output of HFCS and inulin syrup consequently fell in 2000/01, institutional prices have not been touched and producers continue to achieve profitability as fructose prices trade at only a modest discount to the high EU sugar process. There was also a need to cut production quotas in 2001/02 and 2002/03. European Union – enlargement will not boost isoglucose production Of the ten countries set to accede to the EU in May 2004, three were given isoglucose quotas (the same as HFCS), as shown in Table 5.7. In most cases, the final quotas were less than the quantities being sought by the candidate countries. Indeed, the European Commission’s initial offers were much below what the countries were anticipating. Slovakia was requesting a 60 000 tonne quota and saw the EC’s calculation as faulty when it offered a quota based on average production in the 1995–99 period when production there started only in 1997. Its final quota of 42 547 tonnes is against production of 52 000 to 53 000 tonnes in the past two years. Similarly, in Poland, where Cargill had invested in an isoglucose plant, the initial quota offered by the EU was only 2500 tonnes. However, Poland had success in negotiating a much larger quota of over 26 000 tonnes, as against production in the past two years of 50 000 tonnes. Hungary’s quota, on the other hand, appears to reflect its recent production history, achieving 136 000 tonnes in 2002/03. Elsewhere, Turkey’s production and use of HFCS has grown strongly over recent years, starting in 1997/98 at 35 000 tonnes and increasing to 300 000 tonnes in 2001/02. According to F.O. Licht, there are three international and two local companies producing starch-based Table 5.7 Final isoglucose quotas (tonnes HFCS-42, dry matter) Country

A-quota

B-quota

Total

Hungary Poland Slovakia

127 627 24 911 37 524

10 000 1 870 5 023

137 627 26 781 42 547

Total

190 062

16 893

206 955

Chapter 5/page 21

Sugar Trading Manual sweeteners, with a total annual capacity of 900 000 tonnes. However, the industry faces two major obstacles to utilizing that capacity. First, the government has approved high duties on imported corn, raising the cost of starch sweeteners, and second, the government determines an annual HFS production quota, as part of the country’s Sugar Law. The quota was set at 351 150 tonnes in 2002/03. Former Soviet Union In the FSU, some analysts over recent years have mooted plans in Russia (a large sugar-deficit country) to increase the output of starch sweeteners which, if implemented, would lead to the establishment of a HFCS industry using domestic corn and wheat as feedstocks. Presently, however, such a development looks remote in the near term in light of Russia’s economic malaise.

Summary: short-term outlook In the United States, the two-decade-old HFCS industry has already displaced sugar in many markets. The substitution process is therefore coming to an end and demand will grow more sluggishly than previously. The industry is suffering from a general malaise evident throughout the US caloric sweetener sector, and growth prospects over the short to medium term remain subdued. Several producers are already attempting to focus on higher-value niche markets, such as speciality starches, and there will continue to be a diversion of wet milling capacity to fuel ethanol production. In Europe, production quotas will continue to constrain isoglucose output levels in the enlarged European Union. The only country in Europe where production could continue to flourish is Turkey, but prospects will depend on the industry’s success in negotiating annual production quotas with government. In Asia, prospects are firm, but growth will be slow because of needed investments in infrastructure. Even so, international investors appear to have at last begun building up a HFCS infrastructure in China.

Longer-term potential for HFCS to further substitute for sugar Although the short- to medium-term outlook suggests modest growth only in the world HFCS sector, taking a longer-term perspective raises the possibility of sugar and sweetener policy reform, which as in the case of the United States had supported HFCS production, but as in the case of the European Union has limited the size of the sector. From the preceding review of the world HFCS industry, it would appear that differences in the level of penetration of HFCS in a Chapter 5/page 22

Alternative sweeteners country’s sweetener market can largely be explained by the level of domestic sugar prices. Most of the countries where HFCS has taken a significant share of the market have, or have had, relatively high domestic sugar prices, suggesting that domestic sugar policies have played a major role in the expansion of HFCS. Prospects for HFCS in both existing producing countries and in potential producing countries therefore depend, to a large degree, on future developments concerning domestic sugar prices and their relationship to the costs of HFCS production (which is a direct function of the price of starch raw material). As the United States is the country where HFCS has most penetrated the sweetener market, analysts frequently turn to evaluate the particular conditions in this country that allowed HFCS to become established and to flourish, in order to try to determine the potential for HFCS to expand in other countries. Buzzanell (1995) argues that the US HFCS sector illustrates all of the prerequisites needed for successful development of an HFCS industry, including the following: 1 2 3 4

A domestic deficit of sugar and a high internal sugar price. Sufficient supplies of starch. A well-developed food production and consumption infrastructure. The availability of capital for investment in research and development and plant and equipment. 5 A favourable government policy. Vuilleumier (1997) extends this list to include a large soft drinks industry; a skilled labour force that can be trained to use sophisticated production equipment; and enzymes, processing chemicals, fresh water and energy sources that are readily accessible. Not only are these conditions met in the United States, but also in Japan. The US, as the world’s largest corn producer has a ready supply of starch for the production of corn-based sweeteners. Japan’s starch feedstock comes from domestically produced potatoes and large-scale imports of corn from the US. Both the US and Japan also have a welldeveloped handling system for liquid sweeteners, and a significant portion of total sweetener consumption is in industrially prepared beverages and foods (Buzzanell, 1995). Government support was also an important factor in both countries. In the US the price support policy for sugar led to high and stable domestic sugar prices. This allowed an expanding supply capacity for HFCS to develop. At the same time there was continuing research and development on production quality and consumer acceptance. The switch from sugar to HFCS in the majority of carbonated soft drinks was achieved in two major stages. In January 1980, HFCS was approved as 50% of the sweetener content of the drink Coca-Cola. In April 1983, HFCS was approved as 30% of the sweetener in the drink Chapter 5/page 23

Sugar Trading Manual Pepsi-Cola. In November 1984, the 100% level of HFCS was approved for both colas. In the European Union all of the prerequisites for the successful development of a large-scale HFCS industry existed, but for one – favourable government policy. As identified above, the EU Commission continues to impose restrictive production quotas on HFCS, effectively limiting production and consumption.

HFCS prices in the United States Prior to 1995, when excess production capacity began to blight the sector, the dynamics of HFCS pricing on an annual basis could be closely modelled. HFCS prices showed a strong correlation with net corn sweetener costs and the refined beet sugar price. Regression analysis showed that three-quarters of the year-to-year variation in the HFCS-42 list price could be explained by movements in these two factors alone (see ISO 1995). HFCS-55 and HFCS-42 have consistently sold at discounts to wholesale refined beet sugar prices (typically around 30%), ensuring a competitive advantage. Prices for HFCS collapsed in early 1997 and, as can be seen in Fig. 5.8, the dynamics of HFCS pricing have changed fundamentally since that time. During the early 1990s, list prices for HFCS followed a regular seasonal pattern, with high prices prevailing in the hot summer months when consumer demand for carbonated soft drinks surged. But in 1995 the typical peak in HFCS prices faltered and in 1996 list prices showed no movement. In fact, because HFCS producers did not change their list prices for over 12 months, a general opinion emerged among analysts that these prices had become an unreliable indicator of the values at which HFCS was being traded (in fact the USDA ceased publishing list prices). Consequently, attention has focused on the spot price for HFCS (available for HFCS-42 since

35 US cents/lb

30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sugar HFCS-42 HFCS-55 Spot

5.8

US HFCS and sugar prices.

Chapter 5/page 24

Alternative sweeteners 1995 only). Between the HFCS price collapse of 1997 and early 2002, spot prices typically represented only 37–47% of the refined beet sugar price (wholesale) – a far cry from the much higher levels for the first six years of the 1990s. With the onset of oversupply in the US sweeteners market late in 1999, sugar prices collapsed, sending the HFCS/sugar price ratio back up to 60%. The ration has averaged 52% during 2001 and 2002.

Costs of HFCS production In the United States, HFCS production costs are estimated to be lower than the world sugar price except if circumstances force world sugar prices to artificially low levels. Haley (2001), in reporting estimates of average HFCS production costs compiled by LMC International, showed that HFCS-42 costs in the United States ranged from 9.8 to 14.5 cents/lb during the period 1994/95 to 1998/99. The average level of HFCS production costs for the 15 major producing countries was considerably higher, ranging between 11.8 and 16.8 US cents/lb. Further analysis showed that both processing costs and net corn costs were significantly lower in the US than in non-US producers. The US net corn cost was estimated to be less than 40% of the non-US average. This advantage was argued to stem from abundant corn supplies and efficient production and marketing of non-HFCS starch, oil and feed products. Table 5.8 shows costs of production by selected categories of world producers.

Sugar prices In order to determine the extent to which HFCS might penetrate individual country sweetener markets, these production cost estimates must be seen against the future level of both domestic and world sugar prices (note, technical advances in HFCS production are not likely to lead to a significant reduction in costs over the longer term). In an environment of increasing agricultural policy reform, domestic prices for sugar and starch sources, such as corn, would increasingly reflect world market developments. In Japan and the US – where the HFCS industry developed under the protective shield of sugar support policies – the longer-term reform of those sugar policies is likely to hold negative impacts on their respective HFCS sectors. However, the cost estimates above suggest that, because the average level of world sugar prices is expected to increase if agricultural protection (including sugar) diminishes, then there would be greater incentive for other countries to invest in HFCS production capacity. If the policy reform process proceeds more rapidly for starch sources (cereals) than for sugar, then the price relativity between sugar and starch-based sweeteners will be a key issue (Ross, 1996). Chapter 5/page 25

Sugar Trading Manual Table 5.8 Averaged costs of producing raw cane sugar, beet sugar and high fructose corn syrup, by selected categories of world producers Category

1994/95 1995/96 1996/97 1997/98 1998/99 Cents/pound1

Raw cane sugar producers Low-cost producers2 Major exporters3 Cane sugar White value equivalent Low-cost producers2 Major exporters3 Beet sugar, refined value Low-cost producers4 Major exporters5 High fructose corn syrup6 Major producers7

7.43 10.37

8.1 10.6

8.18 10.72

7.78 10.52

7.58 9.73

11.02 14.23

11.75 14.48

11.84 14.61

11.41 14.38

11.19 13.53

21.31 25.47

23.16 26.87

23.09 25.9

21.21 23.56

22.67 24.75

13.45

16.78

13.57

12.86

11.76

1

Measured in current US cents per pound, ex mill, factory basis. Average of five producing regions (Australia, Brazil-Centre/South, Guatemala, Zambia and Zimbabwe). 3 Average of seven producing regions (Australia, Brazil, Colombia, Cuba, Guatemala, South Africa and Thailand). 4 Average of seven countries (Belgium, Canada, Chile, France, Turkey, United Kingdom and United States). 5 Average of four countries (Belgium, France, Germany and Turkey). 6 Cents per pound, HFCS-55, dry weight. 7 Average of 19 countries (Argentina, Belgium, Canada, Egypt, Finland, France, Germany, Hungary, Italy, Japan, Mexico, Netherlands, Slovakia, South Korea, Spain, Taiwan, Turkey, United Kingdom and United States). 2

In the short term, US HFCS production would not decline without the US sugar programme. The variable costs of HFCS production are estimated to be below the world price of refined sugar seen during the 1990s and, as shown in Fig. 5.9, HFCS spot prices, although historically low, have typically been less than the world sugar price since 1995. While HFCS-55 list prices have averaged much higher during the 1990s (except for the period of very low world market prices in 1999 and 2000), this in part reflects the fact that substantial discounts against these list prices were made to large commercial buyers, perhaps as much as 8 cents/lb (Buzzanell, 1995). Therefore, with so much investment in fixed capacity, HFCS producers would be likely to maintain their market share regardless of US sugar policy and price, by reducing their prices and still being able to cover variable costs. But, in the long run, sugar prices closer to world market levels could see contraction of the sector and sugar regaining some liquid sugar markets. Chapter 5/page 26

Alternative sweeteners 30

US cents/lb

25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 LDP fob

5.9

HFCS-42

HFCS-55

Spot

US HFCS prices as against world market sugar price.

There will be another factor to consider, as agricultural policy reform and liberalization of the sugar market are expected to lead to an increase in the average level of world sugar prices – although the magnitude of this increase is the subject of considerable debate. To the extent that prices move beyond the range of 9–13 cents/lb (raws) in a liberalizing market, then the negative impacts of sugar policy reform on existing large producers of HFCS will be lessened. At the same time, the stimulus to increase HFCS production in other countries will be on average greater than during the 1990s. In fact, some analysts argue that too rapid a reform of the world sugar market could lead to significant sugar price rises, opening the door to substantial HFCS production and large displacement of sugar over the longer term (e.g. Hannah, 1997). It is well established that the use for HFCS and its substitution for sugar was boosted by the sugar price peak of 1974 and also the rise in sugar prices that followed in 1980, which would have influenced expectations for future sugar prices. The boost for HFCS was maintained by high domestic sugar prices (particularly in the United States and Japan). Had domestic sugar prices not been protected, then HFCS production and consumption would still have expanded in the US, but it would have been much slower. Even assuming a greater average incentive for HFCS production through higher average world sugar prices, the liquid nature of HFCS and the required efficiency in transport will only be achieved in most developing countries at high costs, acting as a disincentive for the establishment of a HFCS industry. It is also evident from recent history that, although HFCS use has spread to countries that are large sugar Chapter 5/page 27

Sugar Trading Manual producers and exporters, such as India, Argentina and Thailand, the HFCS industries have had difficulty expanding.

High intensity sweeteners During the past two decades, high intensity sweeteners (HIS) have emerged as another important group of sweeteners. HIS have a sweetness far stronger than sugar and are typically used to lower the caloric value of food and beverages as most of them are non-caloric. The most well-known HIS are saccharin, aspartame, acesulfame-K and cyclamate, but there are also others (see Appendix for a description of each HIS and its main properties and uses). The use of alternative sweeteners in food and beverages is typically controlled by governmental food and drug regulations, so not all HIS are available for the same applications in all countries. International authorities include the UN’s Joint Expert Committee for Food Additives and the EU’s Scientific Committee for Foods, which examine food additives and fix acceptable daily intakes. In the United States, some substances have taken years to pass the rigorous testing and procedures required by the Food and Drug Administration (FDA). Analysis of the world HIS market is frustrated by a dearth of up-todate published statistics reflecting commercial sensitivities. Despite this frustration, analysts generally agree that HIS have gained an increasing share of the global sweeteners market (see Table 5.9), rising from 6.9% in 1985 to 8.8% in 1995 and 9.6% in 2000. During the 1990s HIS consumption rose at around an average rate of 5% annually. This compares favourably with HFCS at 4.2%, but far exceeds the average annual growth of sugar consumption over the same period, which was around 1.6%. The demand for HIS can be considered in terms of two main segments: first, HIS use in the ‘lite’ or low calorie food and beverages

Table 5.9 The global sweeteners market* Sweetener

Unit

1985

1990

1995

2000

Sugar (white value) High Fructose Syrup High Intensity Sweeteners Total HIS share HFS share Sugar share

Mt Mt Mt Mt % % %

91.5 6.2 7.2 104.9 6.9 5.9 87.2

101.5 7.6 8.5 117.6 7.2 6.5 86.3

108.9 9.7 11.5 130.1 8.8 7.5 83.7

118.5 11.4 13.8 143.7 9.6 7.9 82.5

* excluding glucose/fructose. Chapter 5/page 28

Alternative sweeteners sector and, second, use in blends with other sweeteners in order to lower sweetening costs for non-lite or regular foods and beverages. It is in this smaller latter segment that sugar competes directly with intensive sweeteners.

Global perspective Global consumption of HIS in total is estimated to have grown from around 8.5 million tonnes sugar equivalent in 1990 to 13.8 million tonnes in 2000 – an increase of around 62%. All categories of HIS have shared in the gain, but consumption remains dominated by saccharin (see Figs 5.10 and 5.11). On a regional basis, Asia dominates consumption (50% of global consumption), mainly because of its large use of saccharin (in China). North and South America account for 30% (largest users of aspartame). Europe follows at 17%, while Africa accounts for only 3%.

By major HIS Saccharin Saccharin is the oldest high intensity sweetener (developed in 1897), and it has dominated global use of high intensity sweeteners with an estimated share of around 68% in 2000, amounting to around 9.0 million tonnes of sugar equivalent. Since 1995 consumption has risen by around one million tonnes. Saccharin has a bitter and metallic aftertaste, but it can be manufactured relatively easily and at low cost. The

Europe

1995

2000

Africa

Americas

Asia

0.0

10.0

20.0

30.0 Percent

40.0

50.0

60.0

5.10 Global HIS consumption by region, 1995 and 2000. Chapter 5/page 29

Sugar Trading Manual

Million tonnes sugar equivalent

10 9

1985

8

1995 2000

7 6 5 4 3 2 1 0 Saccharin

Aspartame

Cyclamate

Others

5.11 Global consumption of HIS.

price per unit of sweeteners is also very low, thereby making it attractive to price-sensitive food and drink manufacturers in developing countries (saccharin is 300 times as sweet as sugar). Asia is the major market for saccharin, where it is a cheap substitute for sugar (especially in China), and where its use continues to increase. Saccharin, just as importantly, is the preferred sweetener in many traditional Asian foodstuffs such as pickles and pastes. Asia’s saccharin consumption reached about 6.1 million tonnes se (sugar equivalent) in 2000. Within Asia, China dominates, with an estimated consumption of around 4.5 million tonnes se. There is evidence, however, that consumption fell substantially in 2001 to only 2.4 million tonnes se in response to government-mandated measures to curtail consumption of the sweetener. In developed countries, particularly North America and the EU, the use of saccharin appeared to stabilize in the mid-1990s, as aspartame became the preferred HIS in diet beverages. Gains in non-food uses, such as in pharmaceutical products, ensured a continued demand for saccharin, however. More recently, the practice of blending saccharin with other caloric and high intensity sweeteners, particularly in the European Union, is ensuring a bright future for saccharin. In Asia and other developing countries, the gains in saccharin use do not always reflect use in diet and lite products, but instead use in food and beverages in place of sugar, often on an unauthorized basis. Aspartame Aspartame is the next largest HIS and after its introduction in the United States in 1981, made rapid growth in use to reach 2.4 million tonnes Chapter 5/page 30

Alternative sweeteners se in 1995 and almost 3.0 million tonnes in 2000. However, growth has slowed considerably since the mid-1990s, reflecting a slowing in demand for diet soft drinks in the US (see later discussion – the US accounts for almost three-quarters of global aspartame consumption). The growing practice of using HIS blends (because of blending synergies and cost and functional gains), rather than aspartame solely, is also acting to slow aspartame’s gains, to the benefit of saccharin and acesulfame-K.

Cyclamates Cyclamates, which are rarely used alone because of their taste limitations, have also shared in the general growth in HIS over the past decade. However, use is focused in Asia, where cyclamates are typically used in blends with saccharin. Cyclamate use reached 0.9 million tonnes se in 2000, of which 0.5 million tonnes was in Asia. Consumption of cyclamates in Europe and America has shown little growth during the 1990s. The saccharin/cyclamate blend was successful in the US soft drinks market during the 1960s but disappeared from the US market after concerns were expressed about its possible harmful effects on human health. Even so, there is a petition before the FDA to reapprove cyclamates.

New sweeteners Of the new sweeteners, acesulfame-K has shown rapid growth, but its use remains limited relative to aspartame and saccharin. Its use in 1995 reached around 150 000 tonnes and was consumed chiefly in Europe and North America. By 2000, consumption is estimated to have more than doubled to around 300 000 tonnes. Importantly, where approved, the sweetener is blended with aspartame in soft drinks. In Canada, both major cola manufacturers quickly switched to the aspartame/acesulfame-K blend. The US FDA approved acesulfame-K for use in soft drinks on 6 July 1998, which has boosted its demand but with negative impacts for aspartame use. The popularity of acesulfame-K/aspartame blends is likely to grow further. Sucralose and alitame, approved for use well after aspartame and acesulfame-K became established, have both faced difficulties in capturing a slice of the HIS market. Even so, the list of countries that have received regulatory approval for these two sweeteners is growing. Sucralose (made from sugar) was first approved by Canada in 1991 as a table top sweetener, competing with aspartame and sugar. Sucralose was approved on 1 April 1998 by the US FDA for use in soft drinks and other foods, and is facing a brighter future with more Chapter 5/page 31

Sugar Trading Manual countries (around 50) giving approval for its use, including the EU in September 2000. Stevioside and glycyrrhizin (see Appendix at the end of this chapter for a description) have made limited inroads in Asia and amounted to less than 200 000 tonnes se in 2000. Neotame is a new-generation sweetener with the potential for a significant demand. It is forty times sweeter than aspartame and 7000 to 13 000 times sweeter than sugar. The US FDA approved the use of Neotame as a general purpose sweetener in July 2002. It is also approved for use in Australia and New Zealand.

HIS by major country/region United States North America consumes around 3.8 million tonnes of intense sweeteners (sugar equivalent) annually, accounting for almost 28% of global consumption. Around 40% is aspartame (see Fig. 5.12), making the US the dominant world consumer, accounting for around 45% of global aspartame consumption. Aspartame was introduced in the mid-1980s and quickly displaced saccharin in diet soft drinks and in tabletop sweeteners, leading to strong growth in its consumption. However, by the mid-1990s, more moderate rates of demand were evident, suggesting the aspartame market had reached maturity. By 2000, aspartame use had stagnated, and fell from 1.6 million tonnes in 1998 to 1.4 million tonnes in 2002. A fall in demand for diet beverages (which rely on intense sweeteners) is a major factor contributing to the fall-off. The use of aspartame in this sector approached 1.0 million tonnes in sugar equivalent terms by 1998.

Others

2000 1995

Cyclamate

Aspartame

Saccharin 0

0.5

1 Million tonnes wse

1.5

5.12 North America’s use of intense sweeteners. Chapter 5/page 32

2

Alternative sweeteners However, the share of diet carbonated soft drinks in the US carbonated soft drinks market is declining, limiting growth in the use of aspartame in the sector over recent years. At the same time a rise in consumption of ‘new age’ beverages such as sports drinks and ready-to-drink teas has been attributed by some analysts to depriving the lite drinks sector of market growth. More recently, the US CSD sector has suffered a general stagnation, compounding the other factors limiting offtake of aspartame. Furthermore, the trend towards blending HIS has seen the use of saccharin and acesulfame-K increase at the expense of aspartame (see later discussion on prospects for HIS). Aspartame is also used in the manufacture of tabletop sweeteners, frozen desserts, yoghurt and sweets. A new encapsulated form of aspartame was approved late in 1995 by the US FDA for baking. Encapsulation protects aspartame to high heat and releases it during the final stage of baking. Also, in mid-1996, the FDA approved the use of aspartame as a general purpose sweetener, extending its use as a sweetener in all foods and beverages including syrups, salad dressings and certain snack foods where prior approval had not been granted. Most of the aspartame used in the US is produced domestically (the NutraSweet brand), although imports from Japan are growing in importance. In Canada, growth in demand for aspartame has also slowed in recent years because of the growing practice of blending sweeteners. During 1995 large soft drink manufacturers (Coca-Cola Company and Pepsi-Cola) switched from using aspartame-only formulations to using aspartame/acesulfame-K blends in diet drinks. Cyclamate has been banned in the US since 1970, therefore its use in North America is confined to Canada, but remains small. Acesulfame-K has broad approval for use in Canada, but in the US was approved for only a small number of food products, such as baked goods, yoghurt, dry drink mixes and as a tabletop sweetener until July 1998, when FDA approval was granted for its use in soft drinks, through the growing popularity of acesulfame-K/aspartame blends. The saccharin market in the US is well established. Even so, increased blending of caloric and high intensity sweeteners could now result in greater use of saccharin. This reflects the fact that saccharin was removed from the list of products reasonably anticipated to be a carcinogen by the Ninth Report on Carcinogens of the National Toxicology Program. Asia The use of high intensity sweeteners in Asia is growing rapidly, keeping pace with growth in sugar use and capturing a larger market in Asia than starch sweeteners. As a proportion of global demand for high intensity sweeteners, Asia’s share rose from 33% in 1980 to 46% by Chapter 5/page 33

Sugar Trading Manual

Others

2000 1995

Cyclamate

Aspartame

Saccharin

0

2

4 6 Million tonnes wse

8

5.13 Asia’s use of high intensity sweeteners.

1995 and 50% by 2000, clearly dominating global consumption. In absolute terms, Asia’s consumption of high intensity sweeteners has grown from 1.5 million tonnes, expressed in sugar equivalent terms, in 1980 to around 5.3 million tonnes in 1995 and 6.9 million tonnes in 2000. Saccharin is the most popular artificial sweetener in Asia, reaching around 5.9 million tonnes (accounting for over half of world saccharin consumption) – see Fig. 5.13. The very low cost of saccharin (on a sugar equivalent basis) means that its cost to industrial users can be equivalent to as little as 10% of the price of sugar. China’s use of saccharin is high for this reason and is often seen as illegally substituting for sugar in soft drinks. Saccharin is also favoured in Asia because of its previously mentioned valued role in many traditional Asian pickles and pastes. In China, falling domestic sugar prices in 1999 prompted the government to introduce a set of measures to help support prices, including a declaration to increase efforts to curb production of saccharin. Such goals have been announced before, but have proven difficult to put into practice (see below). Asia is also the world’s largest consumer of cyclamates (around 70% of world use) but cyclamate consumption is very modest compared to saccharin, at around 0.5 million tonnes. Importantly, cyclamates are mostly used in blends with saccharin because blending achieves further cost savings by reducing the quantity of each sweetener to achieve a desired level of sweetness. China has boosted production and exports of cyclamate over the past two years, in part due to the fact that cyclamates are not subject to the same government controls as saccharin. Chapter 5/page 34

Alternative sweeteners Aspartame use in Asia is minimal, reflecting the continuing bias for low-cost saccharin and increasing use of two of the so-called newgeneration sweeteners – stevioside and glycyrrhizin (see Appendix) – which account for the bulk of the remaining high intensity sweeteners use (0.4 million tonnes). These two sweeteners are preferred for use in Asian pickled foodstuffs, pastes and sauces. The technical properties of aspartame often mean that it is not suitable for use in these foodstuffs in any case.

Sugar and saccharin in China Sugar consumption is complicated by an extraordinarily heavy intake of saccharin. Production of saccharin boomed over the 1995–99 period, rising from 10 000 to 30 000 tonnes. The saccharin industry was originally founded by the government in a drive to increase export income. In 1998, around 55% of production was exported, leaving 13 000 tonnes available for domestic use. This volume of saccharin would have displaced between 2.6 and 3.9 million tonnes of domestic sugar consumption, depending on assumptions regarding its sweetening potency (200–300 times as sweet as sugar). When considered in light of China’s annual sugar consumption – around 8 million tonnes wse, the magnitude of the competition between sugar and saccharin is readily visible. Considered another way, if half of saccharin consumption was switched to sugar, then the large domestic stockpile of sugar afflicting the local industry would have been run down within a year. This view, however, needs to be tempered by the fact that there is unlikely to be an immediate substitution of saccharin by sucrose with falling saccharin availability because of the huge difference in the price of the two products to food and beverage manufacturers. China’s government in 1999 issued new regulations in an attempt to circumvent further inroads by saccharin. A licensing system was introduced to manage saccharin production. Production quotas issued in May 1999 limited output to 24 000 tonnes of which only 8000 tonnes were allowed for domestic use, with the remaining 16 000 tonnes to be exported. The government also set out to limit local saccharin consumption by first attempting to increase consumer awareness of the health risks associated with the widespread use of artificial sweeteners in food processing and soft drinks, and also changing food-labelling rules to ensure that the use of artificial sweeteners is clearly marked. Furthermore, procurement of saccharin by food manufacturers is now made through state-approved enterprises, which are monitored by the State Administration of Light Industry. Despite this three-pronged strategy (production cuts, increased exports, and consumption limits), by late 2000 it emerged that only four small saccharin factories had been closed, removing around 3000 Chapter 5/page 35

Sugar Trading Manual tonnes of production capacity. There was also little evidence of lower saccharin consumption, and few food manufacturers appeared to be adhering to the new labelling rules. During 2001, targets were outlined to reduce domestic consumption from around 13 000 tonnes to just 3000 tonnes, with production at no more than 19 550 tonnes. Again, however, production was higher at 22 862 tonnes, of which around 6000 tonnes was consumed domestically. In response, the government in March 2002 formed the State Sweetener Production Investigation Group to enforce the government’s objectives – specifically that production and sale of saccharin is limited to designated factories and that production does not exceed the official target. This was not the first time the Chinese government sought to limit saccharin production and consumption. In 1992 it aimed to limit saccharin output to 12 000 tonnes but the quota system failed. One key factor that undermined the quota plan was that saccharin use proves too tempting to food and beverage manufacturers when it offers such a marked cost advantage relative to sucrose. Europe Europe accounted for around 20% of world HIS use in 1995 (1.9 million tonnes se) but this share had fallen to 16.7% by 2000. The implementation of the EU Sweeteners Directive at the start of 1996 – which harmonized regulatory approval for HIS use – but which also limited the use of all artificial sweeteners, encouraged the blending of sugar with HIS, even in regular (non-diet) products – see later discussion. This has boosted HIS demand in the United Kingdom, which is expected to become a feature of HIS use in other EU countries. After China, the EU is the second largest consumer of saccharin and this sweetener dominates the region’s HIS consumption (67% in 2000, see Fig. 5.14). Recently saccharin has been used in increasing quantities by the soft drinks sector (in sweetener blends), so there is scope for growth in its use over coming years should the practice of blending spread more widely. Elsewhere in Europe, demand for high intensity sweeteners has also risen in countries such as Bulgaria, Romania and Russia. Users have been attracted by low costs and changes in national regulations that now permit the use of HIS.

Intense sweeteners and low calorie bulking agents (poly-ols) Intense sweeteners are unable to replace sugar’s bulk, which has important ramifications on the structure and ‘mouth-feel’ of food products. This limitation of intense sweeteners explains their major use in Chapter 5/page 36

Alternative sweeteners Saccharin Aspartame Cyclamates Others 5%

5%

23%

67%

5.14 Europe’s consumption of HIS, 2000.

the soft drink sector where water provides the bulk otherwise provided by sugar. However, over recent years, low calorie bulking agents have begun to be used in conjunction with intense sweeteners in food applications. In particular to meet growing consumer demand for low calorie (lite) products, a greater quality and range of bulking agents are now available to food manufacturers. The most widely produced bulking agents are polyhydric alcohols (poly-ols). Polyhydric alcohols are bulk sweeteners derived from carbohydrate sources such as starch, sucrose and birch wood. The poly-ol family includes sorbitol, mannitol, lactitol, maltitol, isomalt and xylitol. The sweetening power of poly-ols is less than that of sugar, as described in the Appendix. A major attraction of these bulking agents to food manufacturers, but particularly the confectionery sector, is their non-cariogenic property – that is, they do not contribute to tooth decay. In addition, several impart a cooling sensation in the mouth, which is useful to confectionery manufacturers. However, a drawback of high levels of consumption is flatulence and a laxative effect. Because poly-ols are less sweet than sugar, and typically have characteristics that users perceive as benefiting their products, then this category of sweetener is not really seen as taking market share from sugar directly. Sorbitol has many non-food uses and does not typically involve intensive sweeteners. In contrast, growth in the use of the other poly-ols as bulking agents has arisen from the rising popularity of ‘lite’ confectionery. This is particularly so in the United States and Western Europe. The range of permitted poly-ols open to the EU food industry increased with the adoption of the Sweetener Directive in 1996. Child (1996) argued that poly-ols in general could be likely to enjoy increasing demand in the EU in the years ahead. Importantly, demand is strong Chapter 5/page 37

Sugar Trading Manual because of the wide differential between the support price for EU sugar and the costs of alternative products and because of the quotas applied to production of high fructose syrups.

Prospects for intense sweeteners The factors contributing to general growth in demand for sweeteners (economic development, population and income growth) will underpin future growth in HIS, particularly in parts of Asia, Africa and Eastern Europe, where there is further potential for dynamic rates of growth in the soft drinks sector. In the United States and Europe, any slowing in HIS demand growth arising from the declining share of diet beverages in the total beverage market, evident since the early 1990s, could be offset by increased use of HIS/caloric sweetener blends, suggesting an increasing competitive threat to sugar from HIS over the longer term (and to HFCS in the United States). In sugar equivalent terms, intense sweeteners have been able to undercut sugar prices throughout the past decade. Table 5.10 gives HIS prices in the United States in se terms. Saccharin’s low production costs are well known and its market price has been roughly one US cent/lb se for many years. The price of cyclamates, while not as low as saccharin at roughly 6 to 7 cents/lb se, still remains the second cheapest of the intensive sweeteners. Cyclamates are mainly used in blends with saccharin, which lowers the overall cost of the blend while contributing to an improved sweetness profile to the end product. In the European Union, saccharin–cyclamate sweetened soft drinks have been produced in Germany for many years, and the implementation of the European Sweetener Directive at the beginning of 1996 has opened the entire EU market to cyclamate use.

Table 5.10 US prices for selected high intensity sweeteners Sweetener

Saccharin Aspartame Cyclamates

cents/lb se 1995

1999