Sugar weighs on hopes for corn sweetener pricing

US corn millers will struggle in 2013 to win the same profits uplift from corn-based sweeteners as they have this year thanks to lower sugar prices, Credit Suisse said, flagging a further decline ahead for ethanol profitability too.

The likes of Archer Daniels Midland, Cargill and Tate & Lyle appear to have enjoyed stronger profits from high fructose corn syrup (HFCS) this year thanks both to a rise of some 15% in prices charged to big US buyers, such beverage groups Coca-Cola and PepsiCo, and to strong exports to Mexico.

While US use of high fructose corn syrup is in long-term decline, thanks to a switch from fizzy drinks to options such as fruit juices and water deemed healthier, exports to the growing market of Mexico have continued to increase.

Tate & Lyle's 2012 margins from US corn-based sweeteners should rise by some £15-20m this year, Credit Suisse said.

Sugar impact

However, sales to the Mexican market look set to be limited ahead by a drop in sugar prices, reflecting ideas of a global surplus of the sweetener, which have driven local prices to some 27 cents a pound.

This compares with a price of high fructose corn syrup delivered to Mexico of about 25 cents a pound, Credit Suisse analysts said.

"The HFCS suppliers might struggle to get much more than 2-3 cents increase on sales to Mexico under current market conditions," the bank said.

"We will see what the corn futures look like when it is time to contract, but any margin impact here looks pretty modest."

'Even lower production economics'

Corn processors still hold some bargaining chips with buyers, given the high corn prices, which hit a record $8.43 a bushel in Chicago in August, and supplies tightened by Mexican demand.

"Capacity utilisation today is as tight as it was last year when the sellers were able to increase their profits," the bank said, in comments ahead of the annual round of price talks expected to begin this month.

However, firm prospects for HFCS profits come against a background of weakened profitability for making corn for ethanol.

Gross margins on making the biofuel are currently about $0.80 per gallon, well below a peak of approaching $1.50 a gallon late last year, and on course to hit about $0.40 per gallon next month before staging a revival, market values imply.

"Forward [prices] suggest even lower production economics," Credit Suisse said, estimating that a gross margin of less than $0.60 per gallon signalled losses for operators, while a figure less than $0.90 per gallon "does not justify capacity investment".

Aflatoxin threat

Credit Suisse also flagged up the threat from aflatoxin, a toxic fungal residue, to the feed ingredients biofuel groups manufacture as byproducts from converting corn into ethanol.

Alfatoxin is being found in unusually high concentrations in this year's US corn crop, with drought-stressed plants offering reduced resistance to many infections.

"Aflatoxin could create an issue with selling gluten feed and meal a concern to the [corn] wet millers," the bank said.

"It is too early to tell how problematic this will be," with the US corn harvest still a long way from completion.

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