The Canadian Cane and Beet Sugar Industry (1 of 2)

Introduction

The Canadian Cane and Beet Sugar Industry comprises establishments primarily engaged in refining raw cane sugar and/or sugar beets to produce edible refined white sugar, brown sugar, icing sugar, liquid sugar and/or liquid invert sugar. Refined white sugar, produced from either sugar beets or sugar cane, is technically referred to as sucrose. The sucrose molecule is identical whether the sugar is made from cane or beets.

From the beginning of the sugar trade in Canada, an entrepreneur willing to further refine raw cane sugar ("raws"), could successfully undersell importers of refined sugar. The economic basis being imported raw cane sugar can be shipped in bulk, whereas refined sugar must be packaged and handled as a food product, and is therefore more expensive to transport.

The first known Canadian sugar refinery was established in Halifax, Nova Scotia in 1817. By mid-century, the government, through its tariff policy, applied preferential (lower) rates to raws, thereby further enabling the development of cane sugar refining in Canada.

Today, the Canadian industry consists of cane sugar refineries located in Montréal, Québec, Toronto, Ontario, and Vancouver, British Columbia, as well as a sugar beet plant in Taber, Alberta.

Structure

Canada's industry has evolved into two corporate entities - Lantic Inc. operating cane sugar refineries in Montréal, Québec and Vancouver, British Columbia and a sugar beet processing facility in Taber, Alberta; and Redpath Sugars with a cane sugar refinery in Toronto, Ontario. Share of production is split about 55 and 45% respectively. The two firms employ 1,500 Canadians nationwide.

The domestic market for refined sugar is divided into two distinct segments. About 82% of production is sold to industrial users comprised of food and beverage manufacturers of sugar-containing products (SCPs). Industrial users include confectioners, bakers, biscuit and breakfast cereal manufacturers as well as beverage and dairy processors. The remaining 18% of production is sold to retailers and food service industries. Despite the small size, this channel is a critically important market segment as it garners higher margins than industrial users.

Cane refiners import primary-processed sugar cane called "raws". By law, this product requires further purification and refining to be sold in Canada. Because it is semi-processed, raws have a high sugar recovery rate of about 93%.

Cane sugar refineries are located close to deep water ports where imported raws can be unloaded, stored and accessed. Situated in large metropolitan centres, these refineries are close to both major retail markets and clusters of food processing industries. In 2007, Canada imported 1,213,147 metric tonnes of raw sugar from countries like Brazil, Guatemala, and Australia.

The country's one remaining sugar beet facility in Taber processes about 6,000 tonnes of beets daily. It has the capacity to manufacture 150,000 tonnes of sugar products annually. Sugar beets are supplied by farms located in Southern Alberta. Once harvested and delivered to the plant, beets are stockpiled, cleaned, sliced and pulped. From that point, the beets are processed in a similar fashion to cane sugar refining.

During the 2007/2008 crop year, 853,669 tonnes of sugar beets were harvested from 34,067 acres. This produced 120,618 tonnes of refined sugar - representing a recovery rate of 14.1%. Typically, the recovery rate varies between 12 and 15% and factors affecting this yield include the quality (sugar content and non-sugar content of the beet), length of period beets are stored outdoors, and the variety of beet sown.

In both cane sugar refining and sugar beet processing, impurities are removed through the use of centrifugal separators. Thereafter, the sugar is either re-crystallized in vacuum pans, or sold as liquid sugar. Refined white crystalline sugar is also screened to make available various granulations to suit industry uses. The industry also refines raw molasses for table use and blends or otherwise chemically alters (invert) the sucrose molecule for specialty applications. Sugar refining is a capital intensive process.

Canadian refined sugar prices in Canada are based on world market raw sugar prices. World raw sugar prices are published daily under the Intercontinental Exchange (ICE) U.S. Sugar No.11 Futures contract. Even small fluctuations in world prices can have significant cost implications on large futures contracts.

The price of refined sugar is determined through negotiations between the sugar user and a sugar refiner. The refiner calculates a target list price for bulk refined sugar based on the landed raw sugar cost, plus a target margin which covers the cost of refining, selling and other expenses as well as an amount for profit. From the target bulk price, customers deduct a negotiated discount. Customer discounts consider a number of factors including, product type, customer size and location, market segment and market conditions. Alternatively, some customers negotiate a fixed margin which they pay on top of the refiner's landed cost of raw sugar - often called a "points over" agreement. Both pricing methods (discount or points-over), result in a base price for bulk sugar. The cost for other products (in pre-packaged quantities, liquid or specialty products) is determined by applying a "product differential" to the base price for bulk sugar.

Unlike other western countries, Canada has no price support or subsidy regimes for sugar. Imports of both raw and refined sugar are only subjected to minimal tariffs.
This allows Canadian refiners to purchase raws at world market prices which are substantially below supported prices in other markets like the European Union (EU) and the United States (US).

Canada's open trading policy on sugar makes the industry vulnerable to foreign competition. However, when unfair trading practices are suspected, Canadian cane refiners and beet processors can refer such cases to the Canadian International Trade Tribunal (CITT). If dumped (imports sold below their domestic price) or subsidized product can be shown to be injurious to the domestic industry, the CITT can recommend the imposition of protective tariffs. This was the case in 1995, when such tariffs were imposed on imported sugar from the EU and US. The tariffs were subsequently renewed in 2000 and again in 2005 as a result of CITT-initiated expiry reviews.

A constant supply of high-quality, low-priced refined sugar has always characterized the Canadian market translating into important cost advantages for the domestic food industry. (See Figure 1.) In fact, price, quality, and reliability of domestic sugar continue to be important factors influencing food processors to manufacture sugar-containing products from Canadian locations.

Figure 1: Refined Sugar Price Comparison

Source: Global Agri-Business Solutions

The Canadian cane sugar refining and sugar beet processing industry has experienced significant corporate consolidation and plant rationalization in the past 25 years.
As late as 1981, there were five companies operating seven plants across Canada, including two beet processors. The most recent plant closures involved a Manitoba beet processing plant in 1996 and a New Brunswick cane sugar refinery in 2000. Factors influencing contraction included increased import competition, a flat domestic market, and a reduction in export opportunities. Rationalization also reflected the growth of High Fructose Corn Syrup (HFCS) and artificial sweeteners as substitutes in traditional sugar business markets such as the soft drink industry.

Canada's sugar industry has made a strong commitment to remain competitive. In the last decade, the industry has spent $200M expanding the capacity of facilities in Montreal, Toronto and Taber. These capital investments, along with plant closures, have improved economies of scale and increased capacity utilization making the firms involved more efficient and globally competitive.

Performance

With annual production volumes in the neighborhood of 1.2M tonnes, the industry has not experienced substantial growth for decades. (See Figure 2.) However, despite a flat domestic market in terms of consumer consumption, competition from other sweeteners, and reduced export opportunities for refiners, the industry remains strong. This can be attributed to the North American Free Trade Agreement (NAFTA) which acts as a double-edged sword for the industry. In 2007, the industry produced 1,230,909 tonnes of refined sugar valued at $792.5M.

Figure 2: Refined Sugar Production

Source: Canadian Sugar Institute

Although NAFTA provisions limit Canada's ability to trade refined sugar, it does allow for tariff-free access for most finished products to the US - the world's largest economy. The creation of a North American borderless market combined with a sugar pricing advantage made Canada a desired location for the manufacture of SCPs. NAFTA provisions led to an increase of exports of products containing Canadian sugar which compensated for challenges presented by consumer consumption, sweetener competition, and US sugar import restrictions.

Transportation costs and market access regulations limit Canada's ability to trade refined sugar. Consequently, non-US exports are normally restricted to "spot sales" in markets where shortages exist. In the past, such sales have been made to the Caribbean, Mexico and Russia. Since most refined sugar is traded on a regional basis, the US is the most practical destination for Canadian sugar exports. Despite the proximity, sales to the U.S. are hindered by a restrictive regulatory environment.

Introduced in 1989, Canada-United States Free Trade Agreement (FTA) eliminated tariffs on refined sugar-of-origin. Unfortunately, sugar derived from imported raws, representing over 90% of Canadian production, was not deemed sufficiently altered to qualify for this status. As result, only refined sugar made from Canadian sugar beets satisfied conditions for tariff-free access to the US market.

With US implementation of its WTO commitments in 1995, Canadian beet sugar became subject to a new global refined Tariff Rate Quota (TRQ) of 22,000 tonnes. Canadian exports fell to historical lows.

In 1997, Canada and the U.S. reached an understanding yielding a country-specific portion of the U.S. TRQ. Still in force today, the agreement guarantees Canada access for 10,300 tonnes of refined (beet) sugar and 59,250 tonnes of certain SCPs. These SCPs have particularly high sugar content and include products like iced tea, crystal drink mixes, and sweetened cocoa. Canadian firms must apply to the Department of Foreign Affairs and International Trade (DFAIT) for a license to export such products. Currently, DFAIT has issued 14 such licenses. Canada can also compete for the remaining portion of the global refined TRQ (7,090 tonnes). Otherwise, Canadian sugar refiners have no access to the U.S. market.

Sometimes, events alter traditional trading patterns. Such was the case in 2006, when Canadian exports grew to 74,885 tonnes. Although this compares favorably with previous years, it should be noted the spike was the result of American sugar shortages caused by Hurricane Katrina. To compensate, the US increased total refined sugar TRQ access to 579,631 tonnes including 35,300 tonnes for Canadian beet sugar. Canadian cane and beet sugar also competed for a share of the remaining global TRQ, accounting for the additional exports from Canada that year.

In 2007, Canada exported 32,066 tonnes of refined sugar and the US accounted for 43.9% of that total. During that year, exports represented about 2.9% of all Canadian refined sugar shipments. (See Figure 3.)

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Figure 3: Refined Sugar Exports

Source: Statistics Canada

Historically, refined sugar imports came from the U.S. and Europe. However, as result of bi-lateral trade agreements, Central American countries are starting to penetrate the Canadian landscape. Though relatively low in volume, refined sugar products from these countries are making their way into the retail environment where margins are more profitable. Historically, these countries are commodity trading nations. However, as they enhance refining capacity, so will their ability to compete in foreign markets like Canada. This is a concern to the Canadian industry that cannot offset lost domestic market share given trade barriers in the US and other export markets. In 2007, 43,545 tonnes of refined sugar was imported into Canada representing about 3.5% of the domestic market. (See Figure 4.)

Figure 4: Refined Sugar Imports

Source: Statistics Canada

As is the case in most years, Canada had a negative trade balance of (11,479) metric tonnes in 2007. (See Table 1.)

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Significance

From a statistical perspective, Canada's cane sugar refining and sugar beet processing industry accounts for less than 1% of the value of domestic food and beverage manufacturing. However, that statistic can be misleading as the sub-sector is critically important to the viability of industries using refined sugar as an ingredient. Dairy processors, confectioners, bakers, biscuit, breakfast, and beverage manufacturers, and fruit preservers all recognize Canadian refiners as significant value-chain stakeholders. The combined value of shipments of these sub-sectors is in excess of $45B/year.

Challenges

Changes to the North American landscape may result in a more competitive environment for Canadian refiners. As of 2008, Mexican sugar has tariff-free access to the US market. Increased Mexican exports (into that market) may put downward pressure on US domestic refined sugar prices. However, this may not be probable in the near to medium term as the Mexican sugar industry still has infrastructure, ownership and sugar quality challenges.

Also, as a result of increased global demand caused by factors that include the growth of the ethanol industry, the world price of raws is trending upward The increased cost to Canadian refiners purchasing raws will put upward pressure on domestic refined sugar prices. If these influences result in the erosion of sugar price advantages over American competitors, it could influence the location of product-mandating for multi-nationals with facilities in Canada. A decrease in production volumes of SCPs would have a negative impact on the Canadian industry.

Food processors continue to manufacture products that respond to the exigencies of demanding retail distribution channels and sophisticated health-conscious consumers. Often, such products feature the reduction or elimination of ingredients that may be perceived as unhealthy. The sugar industry will have to adapt to these supply chain influences.

Bilateral trade agreements have resulted in the evolution of freer trade in sugar on a regional basis. Such agreements, specifically those involving sugar-producing countries in the Americas, will increase pressure on Canadian refiners to maintain levels of scale that allow them to succeed in this competitive landscape. A successful conclusion to the WTO Doha round will be important to expand US TRQs and grow export opportunities for refined sugar and SCPs in the US and other markets.

Although, refined sugar provides a processing functionality that cannot be duplicated by other products (e.g. bulking agent, shelf life extension, improvement to product texture and appearance); artificial sweeteners continue to garner a measure of market share in certain food processing industries. Examples of such sweeteners include saccharin, aspartame, neotame and sucralose.

Opportunities

Incremental growth may be obtained through the industry's ability to secure partnering opportunities with companies not yet manufacturing in Canada. This strategy could include the search for food processors as well as firms with non-traditional requirements for sugar. Recently, one company built a bio-refinery in Alberta using sugar beet juice from the Taber facility as a feed stock for the manufacture of aspartic acid. This green-field investment benefits all stakeholders through the entire value chain. There may be other opportunities for similar collaboration.

Irrespective of caloric intake concerns, there is a consumer shift to seek out and purchase food products made with natural ingredients. Since many foods require sweeteners in their preparation, this does present opportunities for products made with sugar as opposed to artificial sweeteners.

Under current market conditions, Canadian sugar refining remains, for the most part, a domestic industry. However, tariff-free access to the US would allow the Canadian industry to compete more effectively with American refiners. To this end, Canadian refiners must continue to collaborate with government on the goal of achieving a freer North American market.

Contact Information

Association
Canadian Sugar Institute
10 Bay Street, Suite 620
Toronto, Ontario M5J 2R8
Telephone: 416-368-8091
Facsimile: 416-368-6426
Email: info@sugar.com

Departmental Contact
Bill Goodman
Food Value Chain Bureau
Agriculture and Agri-Food Canada
1341 Carling Avenue, Tower 5, 2nd Floor
Ottawa, Ontario
K1A 0C5
Telephone: 613-773-0189
Facsimile: 613-773-020
Email: bill.goodman@agr.gc.ca