Sugar Market Outlook Prepared for the American Sugar Alliance August 2017

Sugar Market Outlook Prepared for The American Sugar Alliance August 2017

Sugar demand, total Food deliveries: Is demand really growing? How have concerns surrounding genetically modified crops (GM vs. non-GM) affected sugar demand? What consumer are our customer, food and beverage companies, targeting? How costly is reformulation? What is the biggest threat to demand for sugar? Supply side Availability of refined sugar: Do we have enough? Is the call for non-GM sugar really affecting our refining capacity? Trade policy How will the amendments to the Suspension Agreements change our market? Pricing scenarios A look at pricing scenario for cane, beet, and overall market

2 Is USDA-projected 3.5 percent growth for 2016/17 real? 7% Sugar (Food) Deliveries, Annual Growth Rate 6%

4% +3.7% +3.5% +2.9% 3%

2% +1.0% 1% +0.6%

0% -0.1% -1%

-2%

-3%

-4%

USDA showing 2016/17 deliveries up 3.5 over 2015/16—is this growth real??? Debate over guidelines for calories from added sugar Manufacturers casting for any way to cut calories while also staying “Natural” *Estimate Source: USDA, McKeany-Flavell

3 Factors affecting sugar demand

Cane vs. beet: Between 2014 and 2016, concern over potential labeling laws and a push to “All Natural” supported cane deliveries, but did real growth happen? Large beet crops, higher prices for raw sugar, and delay in labeling laws may see some demand switch back to beet sugar. Non-reporters may be holding massive inventories—currently counted as “deliveries” by USDA. “Added Sugars” campaign could negatively impact the public’s perception of sugar.

4 Domestic beet & cane sugar deliveries

7 70% Growth in 58% 57% sugar use over 55% 56% 54% 6 56% 56% 54% 55% 60% the past three 54% 53% 51% 46% years appears 49% 45% 44% 43% 5 47% 46% 42% 50% 46% 44% 44% 45% to have gone to cane 4 40% refiners.

3 30%

2 20% Million shor tst ons r awvalue

1 10%

0 0%

Beet sugar domestic consumption Can e su gar d omest ic consump t i on

* Estimate

5 Overview of growth in cane sugar deliveries

1.2

1.0

0.8

0.6

Million short tons, physical value physical tons, short Million 0.4

0.2

0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cane Sugar Deliveries to Cereal & Baked Goods to Confectionery to Dairy & Ice Cream to Beverages to Other Processed Foods to All Other Food Uses Growth in cane sugar deliveries may be attributed to multiple factors, such as more competitive pricing when raw sugar prices were around $0.2450 in 2013/14, combined with marketing decisions by end users.

6 U.S. sugar deliveries: beet sugar gaining market share since July 2016

600 More competitively

550 priced beet sugar and high raw sugar 500 prices affect

450 deliveries for refiners. 400 Beet deliveries for 350 the first eight 300 months of 2016/17 are up 19 percent Thousand short tons, raw value raw tons, short Thousand 250 from the same 200 period last season.

Beet Sugar Deliveries for Domestic Consumpt ion Cane Sugar Deliveries for Domestic Consumption

7 How does the “man on the street” feel about the genetically modified organisms (GMOs) debate? Consumers: Have limited understanding of what “genetically modified” (GM) means. Nevertheless fear GM foods. Overwhelmingly claim to want transparency, such as labeling of products containing GM ingredients.

8 Domestic sugar deliveries

Despite shifts in 7 54% 52% consumer opinion, 51% 51% 60% 6 50% the actions of 52% 49% 50% 51% 49% 51% many food and 52% 50% 5 beverage

47% companies 43% 46% 43% 40% 4 41% 41% 42% 41% 42% 41% 40% 39% suggest that cost remains a chief 30% 3 concern. Million STRV Million 20% 2 Share of domestic of domestic consumption Share 7% 9% 9% 8% 8% 8% 1 6% 8% 7% 6% 10% 4% 2% 0 0%

Beet Sugar Domest ic Consumpti on Can e Sugar Domest ic Consump t io n Presu med Non -repo rt er Del iver ies * Estimate Source: USDA, McKeany-Flavell

9 Impact of GM debate on specific categories of major sugar use

10 Cereals sector

Around 5 percent of sugar usage in this category has a cane-only designation This segment has seen its share of ingredient changes in the last few years: Industry-wide reduction of sugar content in cereal formulations Move away from artificial coloring and flavoring for some products

11 Bakery sector

Sector is hard to track as 70 percent of this category may be considered artisanal products Of the major brands, very little is labeled non-GM and typically falls into the organic category Our best estimate is roughly 1-5 percent of usage involves non-GM claims

12 Sugar deliveries to cereal & baked goods sector

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

Short tons, physical value physical tons, Short 500,000

Deliveries to Cereal & Baked Goods, Beet Sugar Cane Sugar

*Forecast based on year-to-date data (October through May)

13 Confectionery sector

Around 30-35 percent of confectionery sugar usage has a cane-only designation. This sector was one of the first to see significant switch to non-GM ingredients.

14 Sugar deliveries to the confectionery sector

1,400,000 Confectionery 1,200,000 has traditionally been a large 1,000,000 user of cane 800,000 sugar.

600,000

400,000 Short tons, physical value physical tons, Short 200,000

Deliveries to the Confectionery Industry, Beet Sugar Can e Sugar

*Forecast based on year-to-date data (October through May)

15 Ice cream & dairy sector

Over 60 percent of sugar usage in this category has a cane-only designation when looking at manufacturers producing a variety of dairy products, including ice cream. When narrowing the category to companies that manufacture ice cream exclusively, however, cane-only sugar use drops to about 28 percent. Keep in mind that in order for milk to be non-GMO, cows cannot be given bovine growth hormone (rBST/rBGH). Dairy was an area where re-melters were able to gain market share.

16 Sugar deliveries to ice cream & dairy sector

900,000 Eight years of 800,000 movement away 700,000 from beet— 600,000 could be an 500,000 increase in 400,000 deliveries by third-party melt 300,000 stations. 200,000 Short tons, Short tons, physical value 100,000

Deliveries to Ice Cream & Dairy Industry, Beet Sugar Cane Sugar

*Forecast based on year-to-date data (October through May)

17 Who is your customer (food & beverage companies) marketing to? And who is sensitive to the GM food debate? The role of demographics in buying patterns

Millennials...and Gen-Xers...and Baby Boomers...and the Greatest Generation Those with college degree more likely to view GM favorably New mothers Men (47 percent favorable) vs. women (28 percent favorable) Urban vs. suburban vs. rural Variations by race, ethnicity 50 percent of consumers always or sometimes read food labels

19 Willing to pay for non-GM?

67 percent of consumers are not willing to pay a premium. 11 percent are willing to pay a premium. Millennials are most likely to pay a premium.

20 Challenges to reformulation

Domestic availability of ingredients Complexity of ingredient statement End-product category Plant location Depth of supply chain

21 Case study 1: baked goods, bread

Ingredient Possible Alternate Price Non-GM Ingredient Price per lb, FOB Replacement per lb, FOB

Basic Ingredients for a Loaf of Bread Bleached enriched flour $0.13 n/a $0.13 Sugar (beet) $0.30 Sugar (cane) $0.35 Soybean and/or canola oil $0.34 Palm oil $0.39 Wheat gluten $0.93 n/a $0.93 Salt $0.10 n/a $0.10 Total $1.80 $1.90

Delta between using GM and non-GM ingredients $0.10 n/a: non-GM ingredient not applicable

22 Case study 2: confectionery, chocolate

Ingredient Possible Alternate Price Non-GM Ingredient Price per lb, FOB Replacement per lb, FOB

Basic Ingredients for a Chocolate Bar Sugar (beet) $0.30 Sugar (cane) $0.35 Milk chocolate $2.20 n/a $2.20 Cocoa butter $2.85 n/a $2.85 Lactose $0.27 n/a $0.27 Milk fat $2.25 n/a $2.25 Soy lecithin $1.65 Non-GM soy lecithin $3.30 Total $9.52 $11.22

Delta between using GM and non-GM ingredients $1.70 n/a: non-GM ingredient not applicable

23 What is the biggest threat to sugar demand?

24 The industry chases the consumer

Nov. 2016: Cook County Approves Dec. 2009: General Mills to Reduce Sweetened Beverage Tax Sugar in Kids’ Cereals Jun. 2016: Philadelphia Passes 2016: Kraft Switches More Top 2014: MexicoSoda Sweetened Tax Measure on Third Try Products to Cane Sugar, Organic Beverage & Junk Food Taxes

May 2016: FDA’s New NutritionDec. 2016: Nestle Pledges2016: World to Cut Health Organization Label Identifying Added SugarsSugar by 40 PercentBacks by 2018 20-50 Percent Sugar Taxes Apr. 2016: Mars to Cut Added Sugar in 3 Yrs. for Select Products Apr. 2015: Chipotle Makes GMO-Free Announcements Nov. 2014: Berkeley, CA SodaNov. 2016:Tax SF, Oakland, Albany,Dec. 2015: & Hershey to Move to Boulder Pass Soda TaxesCane Sugar in Major Products

25 “The new tobacco?”

Source: Google Class action law suits – money bag for lawyers

Food marketing class actions increased from 20 in 2008 to over 425 active cases in 2015 and 2016. 75 percent of these cases are filed in four states: California, 36 percent; New York, 22 percent; Florida, 12 percent; and Illinois, 7 percent. Suits generally fall in 10 categories; “all natural” “ECJ” and “added sugar” are three that certainly impact sugar Lawyers’ filed over 50 ECJ lawsuits between 2012 and 2014. Many are active again based on May 2016 FDA guidance, finding that describing sweeteners made from sugar cane on food labels as “ECJ” is false or misleading August 2016 Law Office of Jack Fitzgerald field class actions asserting “excessive consumption of added sugar is toxic to the human body” and…. Under California’s Unfair Competition Law, cereal makers’ marketing of products with added sugar is likely to deceive consumers and is “immoral, unethical, unscrupulous, or substantially injurious to consumers. Example of how frivolous these class actions are: one active complaint alleges that Subway “Footlong” sandwiches were less than 12 inches long. Source: U.S. Chamber Institute for Legal Reform, Feb. 2017

27 Sugar or beverage taxes around the world

Sugar or beverage taxes in place or announced Sugar or beverage taxes under recent consideration Denmark repealed 80-year old fat and sugar taxes in 2013 and 2014. Ireland and the UK’s soda taxes will go into effect in 2018.

28 Sweetener & soda taxes in the U.S.

Berkeley, CA Boulder, CO San Francisco, CA Albany, CA Oakland, CA Philadelphia, PA Cook County, IL (Chicago) Seattle, WA Santa Fe, NM? Voters rejected this tax Portland, OR? Connecticut?

Arkansas adopted a tax on all soft drinks in 1993.

29 Sugar supply

Is the U.S. market in balance? Is there enough refining capacity and raw material to capture all the move to non-GMO? What is Mexico’s role within the U.S. sugar market? Do we have enough non-GM refined sugar to match demand? Deliveries of cane sugar increased by nearly 654,000 STRV from 2012/13 to 2015/16 Total deliveries of cane sugar in 2015/16 equaled 6.12 million STRV

31 Is enough non-GM sugar available?

2015/16 Season Cane deliveries in 2015/16 totaled 6.12 million STRV Combined domestic raw production and imports of 7.21 GM million STRV Non- Sugar On paper, the supply of cane Sup p l y, GM sugar is adequate—however, not Sugar 41% all imports ended in the hands of Sup p l y, cane refiners 59%

*Domestic raw sugar represents 53 percent of non-GM supply to U.S. refiners, and imports are the remaining 47 percent, so imports are critical to cane refiners maximizing capacity

Chart excludes carryover stocks

32 Monthly cane sugar deliveries vs. capacity

700 120%

589,000 STRV total monthly capacity 600 100% 98% 98%98% 95% 95% 93% 94%93%93%93% 93% 94%92% 500 92% 90% 88% 89% 88% 89% 89% 86% 86% 87% 84% 80% 82% 81% 80% 79%80% 81% 76% 400 75%

60%

300

40% 200 Monthlycapacity utilization Thousand short tons, raw value raw tons, short Thousand Percent monthly capacity utilization capacity monthly Percent

20% 100

0 0%

Cane Sugar Deliveries for Domestic Consumption Domestic Cane Sugar Capacity

Capacity is based on a operating schedule of 10 days on, 4 days off

33 How are imports set under the amended Suspension Agreements?

Export Limit set at 80 percent The full Export Limit is assigned based of target volume based on Dec. on the March WASDE, effective Apr. 1 WASDE. Only 30 percent of that limit Up to 55 percent of that Before Apr. 1, USDA can ask DOC to increase the Export Limit if a On Oct. 1, the minimum may enter between Oct. 1 limit may enter before sugar shortage is anticipated.* Base Export Limit is set at and Dec. 31. Apr. 1. After Apr. 1, the remaining volume 70 percent of expected of the Export Limit may enter the need for Mexican sugar as U.S. of July’s WASDE forecast. Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep U.S. Beet U.S. Beet (California) U.S. Cane Mexico

Key: Pl ant i ng Har vest Note: sugarcane has a multiyear planting cycle.

July’s WASDE forecast sets the Base Export Limit for the next season.

* USDA may request an increase after Apr. 1, from Mexico first, from other countries if needed. Source: McKeany-Flavell

34 U.S. monthly imports of Mexican sugar

Approximately 65 300,000 percent of imports have gone to cane 250,000 refiners in recent years 200,000 Highest import volumes of Mexican 150,000 sugar are seen between February and May

Metric tons, raw value raw tons, Metric 100,000

50,000

0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

2012/ 13 2013/ 14 2014/ 15 2015/ 16 2016/ 17

Source: USDA

35 Breakdown of imports of Mexican sugar

Approximately 65 3.5 percent of imports have gone to cane 3.0 refiners in recent 2.5 years 67% 2.0 53% New amendments to the Suspension 1.5 41% 42% 39% Agreements place 38% 37% 1.0 25% 26% Mexico as the de- Million metric tons, raw tons, metric Million 23% 24% facto largest raw- 0.5 11% sugar-quota holder, 0.0 limiting refined imports

Estandar Imported from Mexico Refinado Imported from Mexico Total U.S. Sugar Imports

* Estimate Source: USDA

36 Domestic ending stocks by feedstock

1.4

1.2

1.0 Cane refiners’ 0.8 carryout expected near 15-year 0.6 lows…

0.4

Million short tons raw value raw tons short Million 0.2

0.0

All Beet Processor St ocks All Cane Processor and Refiner Stocks

* Estimate Source: FSA, McKeany-Flavell

37 The U.S. does require imports: Where are they coming from?

4.0 Million STRV 3.5

3.0

2.5

2.0

1.5

1.0

0.5

U.S. Imports of Mexican Sugar Other Imports

* Estimate Based on projections prior to added TRQ and Mexico quota

38 With stocks-to-use projected at 8.8 percent, USDA acts 4.0

3.5 Additional Mexico Quota

3.0 Additional Tariff-Rate Quota

2.5 Imports from Mexico

2.0 Other Program Imports

1.5 Tariff-Rate Quota Imports Million short tons raw value 1.0

0.5

0.0 2011/ 12 2012/ 13 2013/ 14 2014/ 15 2015/ 16 2016/ 17* 2017/ 18*

Will sugar be delivered against the new quotas? For TRQ, mostly. For Mexico, likely little or none. * Estimate Source: USDA, McKeany-Flavell

39 Domestic sugar market timeline: contracted share of industrial use

100%

80%

60%

40%

20%

2015 2016 2017 2018 2019

Source: Trade sources

40 Market pricing Impact on domestic beet sugar industry based on managed supply 65 Pr oj ect i on

40 Cents per pound per Cents 35

Refined Beet Sugar, FOB Mill Mexico Floor Price (delivered, Chicago) Beet Loan Rate Pr oj ect ed Beet Sugar , FOB Bulk Projected Cane Sugar, FOB Bulk Refined Cane Sugar, FOB mill

* Estimate