Corn refiners found securing price increases for 2013 contracts for their various corn sweetener products an uphill battle over the past few weeks, not because of the long-running debate about health concerns or nomenclature but because of market conditions for their primary competitor — sugar.
Much of the business for corn sweetener products — 42% and 55% high-fructose corn syrup, regular corn syrup, dextrose and others — is done on an annual contract basis. A number of corn refiners send letters with initial offering prices to potential buyers early in the fall and the negotiating period begins. While dates and times may vary year-to-year based mostly on market conditions, both buyers and sellers generally hope to have new contracts completed before the Christmas break. For the most part, that timing played out this year, but the pricing aspect hit some bumps along the way.
Corn refiners sought price increases of about 4¼c a lb from 2012 contracted levels in their initial offer letters last fall. That equated to increases of about 15% to 20%, depending on the specific corn sweetener product and the region.
The lofty price increase request mostly was based on record high corn prices during the summer and uncertainty about milling quality of corn in some key production areas, especially Illinois. Nearby corn futures prices in mid-August soared to an all-time high of $8.43¾ a bu, up about $1.50 a bu, or more than 20%, from a year earlier after the U.S. Department of Agriculture’s August Crop Production report that reflected the devastating effects of the summer drought on the U.S. corn crop.
But a number of factors “conspired” against corn refiners’ efforts to secure their initial price offers. Corn futures prices quickly fell from their record highs, although they remained above year-earlier levels. By the time the initial corn sweetener offer letters reached buyers in mid-October, two more U.S.D.A. crop reports had been released indicating the size of the crop was far smaller than initially projected but at least was stabilizing near the August forecast. Corn futures prices from mid-August to mid-October tumbled about $1 a bu, or more than 10%, from the August record.
Perhaps sensing that support for the corn refiners’ increase was waning, most buyers balked at the initial offers, even letting a mid-November “deadline” pass after which one refiner indicated it would raise its corn sweetener prices another 1c a lb above the initial increase. Corn futures prices fluctuated but mostly continued to slide, starting 2013 down just shy of 20% from August highs and barely 5% above year-earlier levels.
But the greatest foil to corn refiners’ attempts to secure larger price increases came from the sugar market. The declines in corn prices paled in comparison to sugar, which ended 2012 at 4½-year lows, down nearly 40% from a year earlier. The weakness in the sugar market resulted from a combination of an untimely increase in import quotas by the U.S.D.A. in April 2012, when it was thought sugar supplies may be short, a bumper U.S. sugar beet crop and a larger U.S. sugar cane crop at a time when cane sugar supplies in Mexico and the rest of the world also were growing.
The result was refined sugar prices in both the United States and Mexico around 31c a lb f.o.b., which was below offering prices for some corn sweetener products, especially in Mexico, which has become a key outlet for U.S. HFCS as use in the United States steadily has declined over the years.
As the year wound down, most 2013 corn sweetener contracts were coming in with increases of 2@3c a lb, or about 10%, above 2012 contracted levels, an increase both sides appeared willing to live with, although a small minority of buyers held out for still smaller increases. As 2013 began, though, the vast majority of uncovered business, estimated at only around 10%, was mostly concluded.
Corn refiners late in 2012 had pushed for quick movement on 2013 contracting because of much uncertainty in the market. But some in the trade suggested they became willing to accept smaller price increases to protect market share, especially in Mexico where the beverage industry is under more pressure to use domestic cane sugar when prices to cane growers become low.
There also was talk of switching from corn sweeteners to sugar in the United States, but it appears little if any actually occurred. With sugar and corn sweetener prices relatively even, food and beverage manufacturers had to consider other costs, including label changes, that may be incurred in switching.
Further, although sugar prices appear they may remain in the low 30c-a-lb range into 2014, the prospect for corn is much different at this early point in the season. Analysts already are predicting record 2013 U.S. corn production, which is reflected in new crop corn futures prices about $1 a bu, or nearly 15%, below nearby prices. If a record large corn crop materializes, corn sweetener prices may retreat back below sugar prices next year, even if sugar values see little change.