Mexico’s Sugar Industry Struggles to Remain Competitive

21 March 2018

A complex and heavily regulated sugar value chain and environmental vulnerabilities hamper the global competitiveness of Mexico’s sugarcane industry. Socio-economic benefits generated in Mexico’s sugar-producing municipalities do little to mitigate the persisting challenges. Mexico’s aging refinery infrastructure, increased demand for high-fructose corn syrup (HFCS), the need for better irrigation systems, and the lack of pro-business agricultural regulation leads to slow growth in the sector. Improvements in these key competitive advantages can make Mexico’s sugar industry more capable of providing import volumes needed in the United States (US) for 2017/18. According to United States Department of Agriculture Foreign Agricultural Service (USDA FAS), low US sugar beet and cane productivity will result in a 14.3 percent rise in US imports in 2017/18. Mexican exports will likely satisfy most of the 3.4 million tonne volume. Ramping up agricultural investments and modernizing its value chain will help Mexico meet the growing US and global demand for sugar.

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Socio-economic Benefits of the Sugar Industry
Value Chain Diversification
Mexico’s Aging Refineries
Regulation Cripples Refinery Innovation
High-Fructose Corn Syrup Seeps into Mexico
Poor Irrigation Slows Growth
Conclusions

Socio-economic Benefits of the Sugar Industry

Mexico’s top sugar producing area is in the Gulf states of Veracruz, Oaxaca, and Tabasco. This area produces on average 24 million tonnes of sugarcane annually. The second largest production area lies in the Pacific states of Nayarit, Jalisco, Michoacán, and Colima and produces an average of 11 million tonnes annually. Providing an annual $2.59 billion to the national economy, Mexico’s sugarcane industry has historically had a large net positive economic impact. Sugar generates 930,000 direct jobs and 2.2 million indirect jobs across 15 states and 227 municipalities. Sugarcane-producing municipalities have an advantage, and the largest benefit goes to the state of Veracruz generating an annual production value of approximately $896 million. The 227 sugar producing municipalities are home to 12 million people, and on average they contribute 7.1 percent of the national agricultural production value. Reduction in the rates of marginalization in Mexican municipalities that produce sugarcane has been demonstrated in the state of Veracruz. Rates of marginalization of certain sectors of a population can be assessed using a marginalization index. Municipalities within the state of Veracruz that produce sugarcane have an average marginalization index of -0.2 percent, while in those that do not produce sugarcane the marginalization index is roughly 1.1 percent. This demonstrates that sugarcane production raises incomes and improves access to housing and education.

Value Chain Diversification

Sugarcane is one of the the most profitable crops in Mexico, but low diversification within the sugarcane industry keeps it from competing with top sugar exporting countries. Diversified industries are those that transition the value of a crop from a single product into multiple products. Today’s Mexican sugar industry functions only to feed sugar refineries, but a transition to a more diversified industry could produce feed, compost, biofuels, ethyl alcohol, and other products. Critics of supply chain diversification warn that a national strategy might backfire. Volume disruption due to competition for raw sugarcane could reverse the precarious gains made in Mexico’s export market.

Mexico’s Aging Refineries

Of Mexico’s farms producing sugarcane, 76.3 percent are five hectares or less, 18.8 percent are between 5.1 and 10 hectares, and only 4.9 percent are larger than 10 hectares. Raw sugarcane produced on these farms is sold to refineries that earn the lion’s share of the export value of the refined sugar. Separation of sugarcane production and capital leads to disruption in social welfare for growers, reducing farmer land tenures, defined as the maintenance of private ownership of the parcel of land where crops are grown. But even these refineries are slow to innovate, and there is a lack of experienced workers able to impart best practices. The average age of a Mexican refinery is 77 years old, and inefficiencies caused by obsolete machinery keep Mexico’s sugar output below potential.

Regulation Cripples Refinery Innovation

While many national laws regulate Mexico’s sugar industry, La Ley de Desarrollo Sustentable de la Caña de Azúcar, enacted in 2005, has had the most impact. The law mandated that the grower receives 57 percent of the final reference price during the fiscal year. This was enacted to prevent refineries from creating monopsonies with their farmers supplying raw sugarcane. A monopsony is defined as a situation where there is only one buyer for a particular good in the market. Because of this law, sugarcane growers have the power to affect the price of sugar, leading to reference price volatility. For example, in 2007 growers increased the reference price by six percent which led to a concomitant increase in the export price. Setting profit controls disincentivizes refineries from upgrading because their profit percentage would fall below those of the other top sugar exporting countries like Brazil and the US.

High-Fructose Corn Syrup Seeps into Mexico

The US sugar and sweetener industry is divided between sugarcane, high-fructose corn syrup (HFCS), and sugar produced from sugar beets. But HFCS has penetrated the Mexican markets mostly because of its low price relative to refined sugar. Between the years 2009 and 2012, when the price of sugar soared above that of HFCS, Mexico quickly adopted HFCS as an alternative. The unit price of HFCS is more resilient than that of sugar to supply fluctuations caused by drought or annual reductions in planted area. HFCS increasingly fits the bill for Mexico’s procurement teams looking to establish a stable supply of cheap sweeteners.

Poor Irrigation Slows Growth

Sixty two percent of sugarcane production occurs in rainfed areas while 38 percent takes place in irrigated areas. Average daily water consumption ranges between 5.48 millimeters to 6.84 millimeters per day which equates to 2,000-2,500 millimeters of rainfall per year. Agricultural production may decrease by as much as 25 percent by 2080, and 80 percent of the agricultural losses will likely be caused by drought. Because of this threat, improvement in irrigation system technology is critical to the advancement of Mexico’s sugar industry. However, an analysis of Mexico’s agricultural strategy showed that it contradicts the goal of improving access and delivery of water by focusing more on new variety development and pest and disease control.

When droughts do occur, most sugarcane farmers are unable to recoup their investment in production. Only 14 percent of Mexico’s total insured acreage produces sugarcane. Of the 780,000 hectares planted with sugarcane in 2013, only 321,000 hectares were insured. And across the 14,000 hectares affected by drought each year, $15.1 million of revenue is lost annually.

Conclusions

When the sugar value chain of Mexico is compared to that of the US, stark contrasts emerge. Across the northern border, sugar is produced using the most up-to-date technology, grown by large corporate farms, and also refined by these same corporate entities. Similar to the US, Brazil’s network of consolidated crop production and refinery infrastructure also outclasses Mexico’s somewhat antiquated system. In 2017/18 Brazil’s production is forecast to rise by 1.1 million tonnes to a record 40.2 million tonnes due to good weather, improved agronomic efficiencies, and lower than average use of sugarcane for ethanol.

The enactment of the La Ley de Desarrollo Sustentable de la Caña de Azúcar was meant to ameliorate the effects of monopsony at the refinery level and to benefit smallholders, but it resulted in a situation where sugarcane farmers disrupt the sugar value chain through an established regulatory framework. The law also disincentivizes refineries from innovating and improving efficiencies needed to remain competitive. And as Mexico’s demand for HFCS increases, a domestic sugar value chain crippled by regulation will push Mexican sugar further out of favor.

Furthermore, to stay competitive with the US and Brazil in a world demanding more sugar, Mexico will have to restructure its regulatory framework while devising better strategies to adapt to a changing climate. To stay current on trends in the global sugar industry, Gro Intelligence subscribers can synthesize data from multiple sources as Mexican agriculture meets current and future challenges.

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