Outlook for MexicanSugar Industry

1

1. Beta San Miguel2. Impact of Suspension Agreements3. North American Supply & Demand4. Production Trends5. Outlook

Summary

2

Beta San Miguel

• Largest sugar producer in Mexico• Established in 1989• Eleven sugar mills• 1.33mm MT for 22% share• Refined, white, estandar and raw sugar

3

Suspension Agreements:Main terms of v3.0

• Refined Sugar > 99.2 dry pol• Other Sugar < 99.2 dry pol = raw sugar• Other Sugar = minimum 70% of shipments• Other Sugar can only be shipped in bulk in an

ocean going vessel• Other Sugar minimum price 23 c/lb FOB Mill• Refined Sugar minimum price 28 c/lb FOB Mill• Mexico gets first refusal on additional imports

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Impact of SA:Mexican legal framework

• Mexican Government has intregrated theSuspension Agreements into the legal framework of the industry to ensurecompliance.

• Complicated system of quotas and licenses

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Impact of SA: Sugar Quality

• Prior to the Suspension Agreements hardly anysugar was made below 99.5

• Now 70% of exports need to be raw sugar of a quality that cannot be marketed in Mexico

• This complicates production planning for changesin the quota and potential out of crop quotaincreases

• Unprecedented cooperation is required betweenmilling groups to consolidate raw sugar at exporting mills

• Treats Mexican raws differently from TRQ6

Impact of SA: Customers

• Mexican refined sugar had an unlimitednumber of potential buyers in the US – qualityon a par with US refined

• Estandar sugar had fewer potential buyers –customers making higher color products

• TRQ raw sugar has a small group of potentialcustomers

• SA raw sugar shipped in bulk ocean goingvessels has only four potential customers

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Overall Impact of AD/CVD case

• In the 25 years since NAFTA was signed therehave only been six years of free trade

• SA’s are eliminating a spectrum of small to medium sized sugar distributors in the US market

• Reduced US sugar users´ choice of sugar type• Introduced a new floor price for US sugar market• Added to political uncertainty for producers and

users in both countries

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USA:Supply & Demand

1,000

3,000

5,000

7,000

9,000

11,000

13,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

Cane Sugar Production

Beet Sugar Production

Imports

Sugar Use

9Source: USDA

Mexico:Supply & Demand

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18Est.

HFCS Consumption

Sugar Consumption

Sugar Exports

Sugar Production

Source: CNIAA 10

Mexico:Sugar Production & Cane Area

5,52

1

4,96

2

4,82

6

5,18

4

5,04

8

6,97

5

6,02

1

5,98

5

6,11

7

5,95

7

6,05

5

683

663

648

671

704

780 79

0

784

779

777

778

400

450

500

550

600

650

700

750

800

850

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Est.

Sugar Production Area Harvested (Ha)

11Source: CNIAA

Mexico: Field & Factory Yield

10.40

10.60

10.80

11.00

11.20

11.40

11.60

11.80

12.00

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Est.

Cane Yield Factory Yield Linear (Cane Yield) Linear (Factory Yield)

12Source: CNIAA

Pol in Cane & Factory Efficiency

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81.80%

82.00%

82.20%

82.40%

82.60%

82.80%

83.00%

83.20%

83.40%

83.60%

12.60%

12.80%

13.00%

13.20%

13.40%

13.60%

13.80%

14.00%

14.20%

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Est.

Pol in Cane Factory Efficiency Linear (Pol in Cane) Linear (Factory Efficiency)

Source: CNIAA

Conditions for growth• No more hectares needed, 7 million tons

achieved with same area in 12/13. • Canegrowers must be encouraged to renew

cane – big increase in financing required.• Major irrigation investments to counteract

apparent dry weather trend• De-bottlenecking mills• Political and trade stability• Will take time

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Alternative crops, ethanol and co-gen

• PRONAC law introduced in 2014 was supposed to stimulate cane production by 10 mm T, divertingsurplus cane to energy. Actual result is flat:– AD/CVD uncertainty held back investment– Energy prices have not supported ethanol and co-gen.

• Berries and Avocados are capturing hectares in Jalisco and Michoacan but potential for cane areagrowth exists in NE and SE

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USA: Caloric Sweetener Consumption

16

0

5,000

10,000

15,000

20,000

25,000

Others

HFCS

Sugar

Last 10 years´ consumption growth:Caloric Sweeteners = 0.00% paSugar = +1.97% paHFCS = -2.52% pa

Source: USDA

Mexico: Caloric Sweetener Consumption

17

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

HFCS

SugarLast 10 years consumption growth:Caloric Sweetener = +1.31% paSugar = +0.1% paHFCS = +10.98% paBut last 5 years:Caloric Sweetener = +0.73% paSugar = +1.10% paHFCS = -0.24% pa

Source: CNIAA

USA:Long term forecast

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 2027/28

Deliveries

TRQ

Mexico

Cane Sugar

Beet Sugar

2.0 mm STRV growthin imports

18Source: USDA

Outlook• US market will demand between 1 to 2 mm strv

annually of additional imports over the next 10 years even assuming further domestic productiongrowth.

• Mexican market will also demand 0.5 million MT more sugar assuming HFCS stays at 25%

• Mexico can supply a large share of this US growthbut there will be a leadtime. TRQ may grow first.

• Both industries need stability – not continuousreviews, renegotiation and threats of termination.

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Sugar in NAFTA• Current NAFTA sweetener provisions coupled with

Suspension Agreements benefit USA more than Mexico• For US, SA’s provide higher floor price than Farm Bill• Mexican sugar access to US is tightly managed• US HFCS enjoys unfettered access to Mexican market• Without NAFTA:

– US raw sugar prices would go down as TRQ is enlarged– Corn wet millers would have to find new homes for

previously exported HFCS– Mexican sweetener market would be balanced

• Nonetheless we support the status quo.

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Slide Number 11. Beta San Miguel�2. Impact of Suspension Agreements�3. North American Supply & Demand�4. Production Trends�5. Outlook�Slide Number 3Suspension Agreements:� Main terms of v3.0Impact of SA: �Mexican legal frameworkImpact of SA: Sugar QualityImpact of SA: CustomersOverall Impact of AD/CVD caseUSA:� Supply & DemandMexico:� Supply & DemandMexico:�Sugar Production & Cane AreaMexico: �Field & Factory YieldPol in Cane & Factory EfficiencyConditions for growthAlternative crops, �ethanol and co-genUSA: �Caloric Sweetener ConsumptionMexico: �Caloric Sweetener ConsumptionUSA:� Long term forecastOutlookSugar in NAFTA