Tuesday, June 5, 2007

USDA Report: Sweet For Sweetener & Ethanol Producers

The USDA released it's Sweetener Outlook yesterday at 4pm and if you are an investor at ADM (ADM), The Andersons (ANDE), Corn Products (CPO) or other HFCS producers, the news was indeed good.

Expect profits from HFCs to continue to rise. The Renewable Energy Act was signed in November 2005. I will be looking at it's effect on HFCS since them and take into account recent events in Mexico.

The Details

- Total deliveries of all corn sweeteners (HFCS & Dextrose) rose from 9,004,000 tonnes in 2005 to 9,084,000 tonnes in 2006.
- Percentage of total corn crop acreage dedicated to corn sweeteners dropped from 6.8% to 6%
- Total acres dedicated to corn sweeteners was flat at 758,000 acres
- Price of HFCS rose 32% from 11/2005 to 5/2007

Let's take a visit down memory lane to Econ 101. When you have decreasing supply of a product and increasing demand, what has to happen to price? It goes up. That has been precisely what has happened to date. Now we need to gaze into our crystal ball.


In July 2006 the US and Mexico settled a NAFTA dispute over sugar and HFCS. Under the agreement, Mecixo dropped an 20% tariff on all products made with US HFCS . From July to December 2007 US HFCS makers may export 500,000 tonnes of syrup to Mexico and in January of 2008, all restrictions are lifted. What does all this mean? First we need to look at HFCS demand in Mexico, since 2005, demand for the syrup has risen 112% to 750,000 tonnes a year. What has held back a further increase? Supply. With the new agreement that supply problem in now cured allowing this market to expand even faster.

When US producers export the 500,000 tonnes allotted this years that equates to an almost 6% decrease in available supplies in the US. Back to Econ 101, when you have stagnant levels of production inputs, decreasing supply of the finished product and constant or increasing demand you inevitably have? Increasing prices!

Expect more price increases for HFCS for the coming years and with the USDA projecting corn prices to begin a steady decline after 2008, HFCS production will become very profitable (I should say even more profitable that it is now). Now this also assumes no increase in the renewable fuels standard that I think we all know is coming which will further restrict corn available for HFCS production pushing prices higher. The also means investors in Coke (KO) and Pepsi (PEP) are looking at substantial cost increases without any real way to offset them.

More Good News?

The USDA also released the Crop Progress report yesterday and the corn progress (emerged) was at 94%, ahead of last years 93% and well ahead of the 2002-2006 average of 88%. What is important is that this is 94% of the largest corn crop since 1944. Even better news is that 78% of the crop is rated "good " to "excellent", well ahead of last years 71%.

All the economic and political factor are lining up perfectly for ethanol and HFCS producers. When you add the fact that many of these companies are currently selling at bargain valuations, the upside for shares is tremendous.

Expect corn prices to begin to fall as the record crop comes in and syrup and ethanol makers profits to expand further.

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