Sugar Market Outlook

Sugar Market OutlookPrepared for The American Sugar AllianceAugust 201711 Embarcadero West, Suite 200, Oakland, CA 94607 510 832 2866 mckeany-flavell.com Copyright 2017 McKeanyFlavell

Factors affecting the U.S. sugar marketSugar demand, totalFood 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 sideAvailability of refined sugar: Do we have enough?Is the call for non-GM sugar really affecting our refining capacity?Trade policyHow will the amendments to the Suspension Agreements change our market?Pricing scenariosA look at pricing scenario for cane, beet, and overall market2

Is USDA-projected 3.5 percent growth for 2016/17real?7%Sugar (Food) Deliveries, Annual Growth Rate6%5%4%3% 3.7% 3.5% 2.9%2%1% 1.0% 0.6%0%-1%-0.1%-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 sugarManufacturers casting for any way to cut calories while also staying “Natural”*EstimateSource: USDA, McKeany-Flavell3

Factors affecting sugar demandCane vs. beet: Between 2014 and 2016, concern over potentiallabeling 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 labelinglaws may see some demand switch back to beet sugar.Non-reporters may be holding massive inventories—currentlycounted as “deliveries” by USDA.“Added Sugars” campaign could negatively impact the public’sperception of sugar.4

Domestic beet & cane sugar deliveries755%6Million short stons raw 00%Beet sugar domestic consumpt ionGrowth insugar use overthe past threeyears appearsto have goneto canerefiners.Cane sugar domest ic consumption* Estimate5

Overview of growth in cane sugar deliveriesMillion short tons, physical 200820092010201120122013Cane Sugar Deliveries t o Cereal & Baked Goodst o Confect ioneryt o Dairy & Ice Creamt o Beveragest o Ot her Processed Foodst o All Other Food Uses201420152016Growth in cane sugar deliveries may be attributed to multiple factors, such asmore 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 marketshare since July 2016More competitivelypriced beet sugarand high raw sugarprices affectdeliveries forrefiners.600550Thousand short tons, raw value500450400Beet deliveries forthe first eightmonths of 2016/17are up 19 percentfrom the sameperiod last season.350300250200Beet Sugar Deliveries for Domestic ConsumptionCane Sugar Deliveries for Domestic Consumption7

How does the “man on the street” feel about thegenetically 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 ofproducts containing GM ingredients.8

Domestic sugar 50%Million 0%218%6%2%7%9%9%8%8%8%7%6%Share of domestic consumption7Despite shifts inconsumer opinion,the actions ofmany food andbeveragecompaniessuggest that costremains a chiefconcern.10%4%0%0Beet Sugar Domest ic ConsumptionCane Sugar Domestic ConsumptionPresumed Non-report er Deliveries* EstimateSource: USDA, McKeany-Flavell9

Impact of GM debate on specific categories ofmajor sugar use10

Cereals sectorAround 5 percent of sugar usage in this category has acane-only designationThis segment has seen its share of ingredient changes in the lastfew years:Industry-wide reduction of sugar content in cereal formulationsMove away from artificial coloring and flavoring for some products11

Bakery sectorSector is hard to track as 70 percent of this category may beconsidered artisanal productsOf the major brands, very little is labeled non-GM and typically fallsinto the organic categoryOur best estimate is roughly 1-5 percent of usage involves non-GMclaims12

Sugar deliveries to cereal & baked goods sector3,000,000Short tons, physical eliveries t o Cereal & Baked Goods, Beet SugarCane Sugar*Forecast based on year-to-date data (October through May)13

Confectionery sectorAround 30-35 percent of confectionery sugar usage has a cane-onlydesignation.This sector was one of the first to see significant switch to non-GMingredients.14

Sugar deliveries to the confectionery sector1,400,000Confectioneryhas traditionallybeen a largeuser of canesugar.Short tons, physical 00Deliveries t o the Confect ionery Industry, Beet SugarCane Sugar*Forecast based on year-to-date data (October through May)15

Ice cream & dairy sectorOver 60 percent of sugar usage in this category has a cane-onlydesignation when looking at manufacturers producing a variety ofdairy products, including ice cream.When narrowing the category to companies that manufacture icecream exclusively, however, cane-only sugar use drops to about 28percent.Keep in mind that in order for milk to be non-GMO, cows cannot begiven 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 sector900,000Eight years ofmovement awayfrom beet—could be anincrease indeliveries bythird-party meltstations.Short tons, physical ,000100,0000Deliveries t o Ice Cream & Dairy Indust ry, Beet SugarCane Sugar*Forecast based on year-to-date data (October through May)17

Who is your customer (food & beveragecompanies) marketing to?And who is sensitive to the GM food debate?

The role of demographics in buying patternsMillennials.and Gen-Xers.and Baby Boomers.and the GreatestGenerationThose with college degree more likely to view GM favorablyNew mothersMen (47 percent favorable) vs. women (28 percent favorable)Urban vs. suburban vs. ruralVariations by race, ethnicity50 percent of consumers always or sometimes read food labels19

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 reformulationDomestic availability of ingredientsComplexity of ingredient statementEnd-product categoryPlant locationDepth of supply chain21

Case study 1: baked goods, breadIngredientPriceper lb, FOBPossibleNon-GMReplacementAlternateIngredient Priceper lb, FOBn/aSugar (cane)Palm oiln/an/a 0.13 0.35 0.39 0.93 0.10Basic Ingredients for a Loaf of BreadBleached enriched flourSugar (beet)Soybean and/or canola oilWheat glutenSalt 0.13 0.30 0.34 0.93 0.10Total 1.80Delta between using GM and non-GM ingredients 1.90 0.10n/a: non-GM ingredient not applicable22

Case study 2: confectionery, chocolateIngredientPriceper lb, FOBPossibleNon-GMReplacementAlternateIngredient Priceper lb, FOBSugar (cane)n/an/an/an/aNon-GM soy lecithin 0.35 2.20 2.85 0.27 2.25 3.30Basic Ingredients for a Chocolate BarSugar (beet)Milk chocolateCocoa butterLactoseMilk fatSoy lecithin 0.30 2.20 2.85 0.27 2.25 1.65Total 9.52Delta between using GM and non-GM ingredients 11.22 1.70n/a: non-GM ingredient not applicable23

What is the biggest threat to sugar demand?24

The industry chases the consumerNov. 2016: Cook County ApprovesSweetened Beverage TaxDec. 2009: General Mills to ReduceSugar in Kids’ CerealsJun. 2016: Philadelphia Passes 2016: Kraft Switches More TopSodaTax Measure on Third Try Products to Cane Sugar, Organic2014: MexicoSweetenedBeverage & Junk Food Taxes2016: WorldMay 2016: FDA’s New NutritionDec. 2016: Nestle Pledgesto CutHealth Organization20-50 Percent Sugar TaxesLabel Identifying Added SugarsSugar by 40 PercentBacksby 2018Apr. 2016: Mars to Cut AddedSugar in 3 Yrs. for Select ProductsApr. 2015: Chipotle MakesNov. 2016:& Hershey to Move toNov. 2014:GMO-FreeBerkeley,AnnouncementsCA SodaTax SF, Oakland, Albany,Dec. 2015:Boulder Pass Soda Taxes Cane Sugar in Major Products25

“The new tobacco?”Source: Google

Class action law suits – money bag for lawyersFood marketing class actions increased from 20 in 2008 to over 425 activecases 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 sugarLawyers’ filed over 50 ECJ lawsuits between 2012 and 2014. Many are activeagain based on May 2016 FDA guidance, finding that describing sweetenersmade from sugar cane on food labels as “ECJ” is false or misleadingAugust 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 productswith 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 complaintalleges that Subway “Footlong” sandwiches were less than 12 inches long.Source: U.S. Chamber Institute for Legal Reform, Feb. 201727

Sugar or beverage taxes around the worldSugar or beverage taxes in place orannouncedSugar or beverage taxes under recentDenmark repealed 80-year old fat and sugar taxes in 2013 and 2014.considerationIreland and the UK’s soda taxes will go into effect in 2018.28

Sweetener & soda taxes in the U.S.Berkeley, CABoulder, COSan Francisco, CAAlbany, CAOakland, CAPhiladelphia, PACook County, IL (Chicago)Seattle, WASanta Fe, NM? Voters rejected this taxPortland, OR? Connecticut?Arkansas adopted a tax on all soft drinks in 1993.29

Sugar supplyIs the U.S. market in balance?Is there enough refining capacity and raw material to capture all themove to non-GMO?What is Mexico’s role within the U.S. sugar market?

Do we have enough non-GM refined sugar tomatch demand?Deliveries of cane sugar increased by nearly 654,000 STRV from2012/13 to 2015/16Total deliveries of cane sugar in 2015/16 equaled 6.12 million STRV31

Is enough non-GM sugar available?2015/16 SeasonNonGMSugarSupply,59%GMSugarSupply,41%Cane deliveries in 2015/16totaled 6.12 million STRVCombined domestic rawproduction and imports of 7.21million STRVOn paper, the supply of canesugar is adequate—however, notall imports ended in the hands ofcane refiners*Domestic raw sugar represents 53percent of non-GM supply to U.S.refiners, and imports are the remaining47 percent, so imports are critical tocane refiners maximizing capacityChart excludes carryover stocks32

Monthly cane sugar deliveries vs. capacity700120%589,000 STRV total monthly 90%89%89%89%88%88%87% 80%86%86%84%82%81%81%80%79%80%76%75%Thousand short tons, raw onPercent monthly capacity utilization100%20%10000%Cane Sugar Deliveries for Domest ic Consumpt ionDomestic Cane Sugar Capacit yCapacity is based on a operating schedule of 10 days on, 4 days off33

How are imports set under the amendedSuspension Agreements?Export Limit set at 80 percentof target volume based on Dec.WASDE.On Oct. 1, the minimumBase Export Limit is set at70 percent of expectedneed for Mexican sugar asof July’s WASDE forecast.Only 30 percent of that limitmay enter between Oct. 1and Dec. 31.OctNovDecThe full Export Limit is assigned basedon the March WASDE, effective Apr. 1Before Apr. 1, USDA can ask DOCto increase the Export Limit if asugar shortage is anticipated.*After Apr. 1, the remaining volumeof the Export Limit may enter theU.S.Up to 55 percent of thatlimit may enter beforeApr. 1.JanFebMarAprMayJunJulAugSepU.S. BeetU.S. Beet (California)U.S. CaneMexicoKey:PlantingHarvestNote: sugarcane has a multiyear planting cycle.July’s WASDE forecast sets the Base Export Limit for thenext season.* USDA may request an increase after Apr. 1, from Mexico first, from other countries if needed.Source: McKeany-Flavell34