The NAFTA Sugar Balance & Outlook

1. The NAFTA Sugar Balance & Outlook Presentation to the International Sweetener Colloquium Orlando, Florida – February 9, 2009 by Dr. William TierneyLMC International Ltd, Washington, DC

2. Presentation Structure • A look at the current environment of supply and prices • Short-term outlook: prospects for 2008/09 and 2009/10 • The longer-term outlook • Conclusions

3. A Look at the Current Environment of Supply & Prices

4. The White Premium • Stocks-to-use ratio for 2007/08 was tight initially but recovered to 15.2% on the back of USDA intervention • S/U ratio doesn’t capture the split of white and raw • White premium has averaged 12 cents per pound since February (Savannah) and 15 cents per pound since July

5. US White and Raw Sugar Prices and the White Premium

6. The White Premium The high white premium was driven by the perfect storm of: • A low share of beet sugar production • A temporary loss of refining capacity • limited displacement of Mexican sugar by HFCS • Inability of USDA to act promptly to raise the TRQ (new Farm Bill measure)

7. Beet Sugar Share of Total US Sugar Supply vs. the White Premium

8. The White Premium • In most years, the white premium has a strong correlation with the percent share of beet sugar • This correlation is disrupted when refining capacity is lost (like in calendar year 2008 through much of 2009) • Lost refining capacity provides clear upward pressure on prices, but this is difficult to model econometrically because of lagged movements upward (price discovery) and downward (price stickiness)

9. Annual US Refining Capacity

10. The White Premium • White premium is the highest it has been since Katrina • Prices could have been higher this time (because of the added element of reduced beet plantings) but Mexico, with open access, responded quickly with ramped-up exports

11. US White Premium and Sugar Exports from Mexico

12. End-of-Season Stocks-to-Use Ratios Jan WASDE Forecast : 9.9%

13. The White Premium • There remains a shortage of refined sugar in the US market, resulting in high prices. • Will the USDA increase TRQ imports on April 1st? • Will they address the problem by increasing the refined TRQ specifically? Little relief if they increase raw TRQ. • Where will the refined sugar come from and what are the logistical difficulties?

14. Short-term Supply & Demand Outlook

15. The Short-term Outlook • The short-term outlook hinges largely on USDA’s response to a low projected s/u ratio • The USDA’s current projection of less than 10% has not been seen since 1974, a period of worldwide sugar shortages. The coinciding price spike that year led to the rapid development of the HFCS sector in the US.

16. The Short-term Outlook • There is a range of scenarios about how USDA could address the shortages in refined sugar: • Scenario 1 • USDA is slow to respond, allowing high prices to endure. Shortfall could last through 2009/10 (Oct-Sep), because NAFTA production of refined sugar will likely not be sufficient. NAFTA capacity will increase some in Jul ’09. • Scenario 2 • USDA responds quickly to shortfall by adjusting TRQ for refined sugar upward.

17. Projected US Sugar Import Requirements in 2008/09 and 2009/10 (‘000 mt)

18. The Short-term Outlook and the Raw/White Split • Reduced refining capacity places a constraint on how much the US can import as raw sugar • Refined sugar imports represent the balance between the US total import need and our estimates of maximum potential raw sugar imports • Under either scenario, the US will need to import an estimated TRQ of 1.1 million metric tons of ROW refined sugar to secure adequate stocks of useable sugar by Q3 of 2010 • Under Scenario 2, refined TRQ is adjusted upward quickly, allowing for 733 million metric tons of ROW refined sugar in the country for 2008/09 • However, given the logistical challenges associated with importing refined sugar from the world market, it is uncertain how effective this will be in quickly restoring the white premium to its historical level

19. Projected Composition of US Sugar Imports in 2008/09 & 2009/10 (‘000 mt)

20. The Longer-Term Outlook – 2015

21. There is a widening gap in the US between domestic production and consumption that is being met with increased imports.

22. The Longer-term Outlook – Beet Sugar Beet sugar production over the last two years has taken a beating on the back of high alternative crop prices: • 2008/09 production was 2nd lowest since 1994/95 • Gross margins for major field crops were better than for beets across all growing regions of the US • Brawley (CA) closed in August and rumors of Sidney going out raise questions of competiveness of beet in some regions • Once a factory shuts, history suggests it won’t reopen Beet sugar production will rebound in 09/10 on the back of high sugar prices and falling margins for competing crops.

23. Beet Sugar Production Area up 4.4%

24. Alternative Crop Prices

25. The Longer-term Outlook – Cane Sugar Incident at 800,000 metric ton Savannah refinery – 15% of total US capacity – highlighted the tightness in refining capacity in the US. • Slated to resume full production of crystallized sugar at the end of June LSCPI, Cargill and Imperial partnership is still a possible go, despite credit crunch • Wouldn’t be ready until 2011 at the earliest • The extra 1 million metric tons would go a long way to provide slack in capacity, reducing the volatility, and possibly the value, of the white premium The outcome of USSC will have tremendous repercussions for the US sugar sector: • As an inland refinery, loss of accompanying cane acreage would leave the value of that asset in question – could it function as an inland cane refinery? • A potential loss of 11% of domestic sugar production • What will become of offer from the Lawrence Group?

26. The Longer-term Outlook – Mexico Ability of Mexico to send sugar to the US is contingent on level of HFCS adoption • At 50% adoption of HFCS in the Mexican beverage sector would allow export 800,000 mt by 2014 • At 95% adoption of HFCS, akin to levels seen in the US, they could double that • After large shipment of Mexican sugar to the US post-Katrina, Mexican imports of US HFCS surged. This could recur as Mexican prices track ascension of US prices PRONAC (Mexican govt’s sweeteners policy) calls for increased investment in Mexican sugar industry and exports of 840,000 mt by 2012 • Increased investment in production of “refinado” and infrastructure could go a long way in alleviating US difficulties of importing refined sugar There is a remarkable degree of substitutability in Mexico between “refinado” and “estandar”. • Mexico will send available “refnado” to the US to meet demand

27. Mexican Exports of Refined Sugar and US Exports of HFCS

28. Potential Surplus of Mexican Sugar (assuming 50-75-95% HFCS adoption)

29. Mexican Refinado Production and Demand

30. Summary & Conclusions

31. Summary US sugar stocks are tight and will fall below 10% for the first time since 1974 without a TRQ increase by the USDA. Tightness is most acute in the refined sugar sector due to low beet plantings and lost refining capacity. This may appear to be a short-lived imbalance, but other problems loom on the horizon – USSC, beet factory closures? Mexico is the logical source to fill supply shortfalls in the US but… Mexico is unlikely to flood the US with sugar in the near term

32. Conclusions If the US is to dig its way out of current sugar deficit, it may need to import total of 2.7 million mt sugar in ‘08/09 & similar amount in ‘09/10 • Assuming imports of Mexico of just over a half million mt, the USDA would need to increase TRQ to over 2.1 million mt. Restricted refining capacity & limited supply from Mexico suggests that much of the sugar will have to come as refined sugar from world market. • Because the consistency of ROW imports is questionable, there hasn’t been a rush to invest in infrastructure to import ROW refined sugar, leading to logistical difficulties and higher cost. • Therefore, an increased TRQ may not alleviate high white premium as much as one might expect.

33. Conclusions Longer term, the US may rely increasingly on imports Some or all of the increase in imports will come from Mexico, depending on the degree of HFCS substitution • However, there will need to be increased investment in infrastructure to handle increase imports of Mexican refinado • Additional capacity to handle more refinado will help only if supplies from this origin grow Otherwise, new refining capacity may prove to be the better solution

34. Thank You! • wtierney@lmc-dc.com • (202) 349-9860 • www.lmc.co.uk