Sugar and HFCS.
Unlike Sugar Cane Production that is spread out all over the world, a small pocket of corn acreage (the US Midwest) is responsible for a large portion of the supply.
Recently in North-America, corn has shown these trends: high yield per acre, high profit/acre, and extreme seasonality causes by drought, weather, tremendous demand (exports and ethanol boom and bust).
Nearly 13 MMTPA or 5 percent of the U.S. crop, is used to produce high-fructose corn syrup.
CORN: A SUGAR TASTE.
Ethanol and grain exports received a lot of exposure while usage of Corn as a sweetener/starch is very overlooked.
Starch industry is a 200 years old business while High Fructose Corn Syrup (HFCS) business has appeared in the 70’s.
This is only a quick overview of the sugar trade policy in the U.S, EU and Canadian markets.
- In the European Union (EU), HFCS production is subject to a production quota so wide-scale replacement of sugar with HFCS has not occurred in the EU. See http://www.forbes.com/sites/timworstall/2012/03/21/hfcs-versus-sugar-a-modest-proposal-for-a-solution/
- In the U.S , cane sugar quotas raise the price of imported sugar hence; domestically produced corn syrup and high-fructose corn syrup (HFCS) are less expensive alternatives that are often used in American-made processed and mass-produced foods, candies, soft drinks.
- In Canada, the government’s main sugar policy has aimed at protecting Canada’s domestic raw cane sugar refining industry has maintained generally low tariffs on raw and refined sugar imports. Nonetheless, high quality sweeteners derived from corn are still competitive because of his reliability.
Because of the trade policies, most of the time in North-America, HFCS is for food-processors a cheaper solution than sugar.However it doesn’t mean that Corn exhibit less price volatility than the world sugar. HFCS really does (you will get it later in the text).
HFCS has also highly desirable chemical properties;
- its relative sweetness is comparable to sugar,
- it’s a liquid form (easier to blend, transport and store), it is more soluble than sugar.
Most of the time HFCS remains the preferred choice for Pepsi and Coca-Cola.
The question is what if the long-term HFCS discount vs Sugar ceases to exist because of an increase volatility in the corn market, and a subsidized ethanol demand ? see http://www.beveragedaily.com/Markets/Sugar-is-much-much-bigger-Rocketing-HFCS-prices-don-t-spook-Coke-CEO
Let’s do a thorough analysis of the situation.
Price Relations Graph 2012-13
Click on the Graph to Enlarge
- Can you see the amazing stability of the HFCS price in the Midwest, and how little is the spread vs Sugar. (blue vs red line)
- In the U.S, it costs less to transform corn into sugars than importing raw sugar from other countries.
WET Corn Crush Spread in the Midwest.
Wet milling facilities can make a variety of corn-based products such as sweeteners and gluten feed while dry milling facilities are more commonly dedicated to ethanol production.
The Crush Spread is the margin to “crush” the corn into products. This Spread depends on both the configuration of the plant and sales products margin.
One Bushel of corn= 33 lbs of sweetener+ 12,4 lbs of 20% protein feed gluten+ 3 lb of 60% protein gluten meal+ 1,5 lbs of Corn Oil *
We could also add a quantity of steep water which has some nutritional value ( may be sold as a liquid feed ingredient) or as an alternative to salt during during winter seasons.
WET Corn Crush Spread proposed formula= [(33*HFCSprice) + (12,4*GFprice) + (3*PGMprice)+ (1,5*RCOprice)] – BUprice/56.
HFCSprice; “High Fructose Corn Syrup 55” price
GFprice=Gluten feed, 20% protein price ( gluten feed is a feed ingredient for poultry)
PGMprice=Protein Gluten Meal, 60% protein price
RCOprice; Refined Corn Oil price
BUprice= 55,96447 pound of Corn price
Notice that you can also use this formula to derived Price Assessments in a spreadsheet.
For instance you know that the crush is stable at 1$ and you know your daily or last day trade HSFCprice, RCOprice, PGMprice.
The plant’s configuration are assumed stable, only daily corn price (input) and products output prices varies and this week you do not have the GFprice since you did no sales and/or you are located in a Region where the price transparency is limited.
You can use the Wet Milling No.2 corn crack spread to inferred the GFprice before quoting your local price to a Feeder/Reseller.
HFCSprice= 39,45 cents, PGMprice= 26.5 cents, RCOprice= 48 cents, BUprice= 893 cents, Last trade Wet Milling No.2 corn crack spread= 893 cents
So what’s the implied GFprice ?
You want to use
Wet Milling No.2 corn crush spread= [(33*HFCSprice) + (12,4*GFprice) + (3*PGMprice)+ (1,5*RCOprice)] – BUprice.
Gluten Feed price= 10 cents/pound (200$/MT)
Click on this link to download the spreadsheet
Wet Milling No.2 Corn Crush Spread Midwest
As you can see the Corn, No.2 yellow Wet Milling Crush Spread amply cover productions costs because of the strong demand for HFCS and its co-products. The Wet Corn Crush Spread pays well and provides a natural hedge because of its product sales components (see above)
For February, the Monthly Product Gross Margin achieved was nearly 93 cents/Bu. or 52$/MT
The Midwest environment, the U.S Trade policy and Agricultural policies allow this kind of margins in the market.
It is a very lucrative activity run by 4 players; Tate & Lyle Americas, Ingredion Incorporated, Cargill, Incorporated, Archer Daniels Midland Company and their customers (Food and Beverage company) have found their sweet spot as well.
Meantime the Ethanol Crush Spread is much much volatile and a stumbling business ! ( coming up in the Part II).
In conclusion, high corn prices don’t mean high HFCS prices as demonstrated above. The North America Food Industry seems to appreciate low volatile HFCS over cheaper sugar, at least for now, they won’t buy sugar and adapt their blending/Recipe ( the trade-off is not worth the cost because of the trade policy and the uncertainty of the world sugar market).
Sugar has a Price Floor in the U.S whereas HFCS has a price Cap.
To be continued…
-The Trade, Shipping and Finance Wizard.