Agrimoney.com - http://www.agrimoney.com/news/news.php?id=6297
US corn syrup groups face 'very tough' conditions
By Agrimoney.com - Published 20/09/2013

US corn processors face "very tough" conditions, thanks to threats in the important Mexican sweeteners market which could force them to close factories, Credit Suisse warned, downgrading its rating on shares in Tate & Lyle.

Low sugar prices are already encouraging sweetener users, such as food and drinks groups, to turn away from the likes of high fructose corn syrup (HFCS), values of which have been underpinned by relatively firm spot markets for the grain.

In Mexico, a key market for US HFCS producers, which also include Archer Daniels Midland, Cargill and Ingredion, consumption of the corn-based sweetener has fallen 10%, according to sugar consultancy Kingsman.

"Refined sugar prices have almost halved since their peak in October 2011 and sugar is taking market share from HFCS," Kingsman said last week, as it raised by 577,000 tonnes to 4.7m tonnes its forecast for Mexican sugar consumption in 2013-14.

Tax blow

And as a further blow, Mexico's soft drinks bottlers have pledged next year to boost their purchases of sugar by 50%, a move seen as an attempt by the soda industry to gain the support of the country's important cane lobby.

The Mexican sugar industry employs an estimated 450,000 people.

Soft drinks groups are attempting to battle a government plan to slap a tax of 1 peso per litre on sugary drinks, a proposal which goes before Mexico's Congress in November.

According to Emilio Herrera, who represents Mexican bottlers of drinks for companies including Coca-Cola and PepsiCo , the aim is to boost sugar to 70% of the sweeteners mix, from a current level estimated by the cane industry at about one-half.

Lesson from history

The shift leaves makers of HFCS facing a double whammy of lower levels of soft drinks consumption in Mexico, assuming the tax is approved, and of a shrinking share of the reduced sweetener demand, Credit Suisse warned.

"Either way volumes, and perhaps more crucially capacity utilisation, will be threatened," the bank said.

The Mexican dynamics, including a rise to 70% in sugar's market share, would appear to leave the North American HFCS industry running at less than 80% of capacity, from a current level of a "pretty reasonable" 88%.

"The last time capacity utilisation fell below 80% industry profitability collapsed as the traditional pricing discipline was undermined by some very aggressive price negotiations by the buyers," Credit Suisse warned, pointing to the slip by Ingredion, formerly Corn Products International, into the red in 1997.

The imminent annual round of price talks between major North American HFCS producers and consumers "look to be set against a very tough backdrop".

Tate downgrade

Credit Suisse flagged the potential for HFCS groups to reduce the impact from losses through axing factories.

"The HFCS industry has never been shy about mothballing plants to keep capacities tight, and with no small players around, as there were in 1996-7, we'd expect some addressing of this issue before it gets too bad."

And it acknowledged that "as ever in the sweetener industry there is some good political lobbying to be done to avoid the economic implications".

Nonetheless, the bank lowered to "neutral" from "outperform" its rating on Tate & Lyle shares, on which it cut its price target to 800p from 930p.

The shares stood at 763p in lunchtime deals in London, down 2.7%, recovering some ground from an eight-month low of 759p reached earlier.

© Agrimoney 2014