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Global Commodities Forum

31 January - 1 February 2011

Sugar, Fuel Ethanol and Crude Oil

Prices

by

Mr Lindsay Jolly,

Senior Economist

International Sugar Organization

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GLOBAL COMMODITIES FORUM

Sugar, Fuel Ethanol andCrude Oil Prices

Mr Lindsay JollySenior Economist



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VVfor Volatility?for Volatility?

World Sugar PricesWorld Sugar Prices

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World Sugar PricesWorld Sugar Prices


Volatility over theVolatility over thepast year the resultpast year the result

of:of:

Supply shortfallsSupply shortfallstied to changingtied to changing

economiceconomic

incentives, weatherincentives, weather

disruptions, anddisruptions, andpolicy inducedpolicy induced

production cyclesproduction cycles

in several majorin several major

Asian sugarAsian sugar

producers.producers.

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Non-traditional

speculators have onlyfinancial motives and nointerest or knowledge ofthe underlying

commodities nor theirdelivery.

I know nothing aboutsugar fundamentalsand Ican prove it!

NewNew --Age Speculators Inc.Age Speculators Inc.


Sugar Price Volatil itySugar Price Volatil ity -- FinancialisationFinancialisation

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W orld Suga r, Crude Oi l and Ethanol Prices

0

20

40

60

80

100

120

140

160

2003

2004

2005

2006

2007

2008

2009

2010

USD/bbl

0

200

400

600

800

1000

1200

1400

USD

/m3

Crude Oil - WTI: USD/bbl

ICE No.11 in ethanol equ iv alent USD/m3


Broad correlation between sugar and crude oil.Broad correlation between sugar and crude oil.

But periods of significant disconnect since 2007.But periods of significant disconnect since 2007.

World Sugar and Crude Oil PricesWorld Sugar and Crude Oil Prices

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World Crude Oil, Ethanol and Sugar PricesWorld Crude Oil, Ethanol and Sugar Prices

World Sugar, Crude Oil and Ethanol Prices

0

20

40

60

80

100

120

140

160

2003

2004

2005

2006

2007

2008

2009

2010

U

SD/bbl

0

200

400

600

800

1000

1200

1400

USD/m3


Brazil anhydrous pr ice USD/m3US Ethanol price- USD/m3ICE No.11 in ethanol equivalent USD/m3

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Correlation Annual Prices

0.70Brazil

Ethanol

Crude Oil

0.75US EthanolCrude Oil

0.87BrazilianEthanol

Sugar

0.54US EthanolSugar

0.57Crude OilSugar

20012001--20102010

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World Crude Oil, Ethanol and Sugar PricesWorld Crude Oil, Ethanol and Sugar Prices

Past CoPast Co--integration studies show:integration studies show:

A causal chain running from crudeA causal chain running from crudeoil to ethanol and finally to sugaroil to ethanol and finally to sugarprices in Brazil;prices in Brazil;

Increased volatility in crude oilIncreased volatility in crude oilmarkets results in increasedmarkets results in increased

volatility in ethanol marketsvolatility in ethanol markets .. . an increase in ethanol prices. an increase in ethanol prices

volatility also impacts the sugarvolatility also impacts the sugar

market.market.

Wor ld Sugar, Crude Oil and Ethanol Prices

0

20

40

60

80

100

120

140

160

2003

200

4

2005

200

6

2007

200

8

2009

2010

U

SD/bbl

0

200

400

600

800

1000

1200

1400

U

SD/m3

Crude Oil - WTI: USD/bblBrazil anhydrous price USD/m3

US Ethanol price- USD/m3ICE No.11 in ethanol equivalent USD/m3

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World Fuel EthanolWorld Fuel Ethanol



World Fuel Ethanol Production

010203040

5060708090

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

blnlitres

USA Brazil Other

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Fuel Ethanol



Fue l Ethano l Prod uc tion ou ts ide Braz il and the

US

01

234

56

India

Thaila

nd

Chin

aEU

Australia

Cana

da

Colo

mbia

G

uatem

ala

Arge

ntin

a

blnlitres

2 008 2 009

2 010 e 2 011f

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Arbitrage windows crucial.Arbitrage windows crucial.

Brazil has lost to the US its position as the most competitiveBrazil has lost to the US its position as the most competitive

supplier to the global trade since November 2009.supplier to the global trade since November 2009.

World Fuel EthanolWorld Fuel EthanolWorld Fuel Ethanol Exports

0

1,000

2,000

3,000

4,000

5,000

6,000

2003 2004 2005 2006 2007 2008 2009

mlnlitres

Other

United States

Europe (including re-exports)

CBI Countries

Brazil

World Fuel Ethanol Imports

0

1,000

2,000

3,000

4,000

5,000

6,000

2003 2004 2005 2006 2007 2008 2009

mlnlitres

Other

EuropeUnited States via CBI

United States duty paid

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Arbitrage Window closes between Brazil and USArbitrage Window closes between Brazil and US

Due to saturated US market as approach E10 blend wall.Due to saturated US market as approach E10 blend wall.

E th a n o l P ric e s : US A a n d B R AZ IL e x p r e s s e d in US D

2 0 0 .0 0

3 0 0 .0 0

4 0 0 .0 0

5 0 0 .0 0

6 0 0 .0 0

7 0 0 .0 0

8 0 0 .0 0

9 0 0 .0 0

1 0 0 0 .0 0

Year

2005

2006

2007

200

8

2009

2010

Pricein

USD

U S C hi c a g o E th a n o lB r a z i l E t h a n o l A n h y d ro u s


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ETHANOL EU vs Brazil Ethanol P rices e xpre ssed in E UR

0

100

200

300

400

500

600

700

800

900

2005

2006

2007

2008

2009

2010

PriceinEU

R/

EU T2Brazil Anhydrous

Brazil Anhydrous + Tariff

International Sugar Organization Arbitrage Window closes between Brazil and EU.Arbitrage Window closes between Brazil and EU.


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Ethanol Prices: EU, USA, BRAZIL expressed in USD

20 0

30 0

40 0

50 0

60 0

70 0

80 0

90 0

1000

Year

2005

2006

2007

2008

2009

2010

Price

inUSD/m

E U Ethanol T2

US Chica go Ethanol

B razil Ethanol Anhyd rous


Arbitrage Window opens between US and the EU.Arbitrage Window opens between US and the EU.

US a more competitive supplier to world market.US a more competitive supplier to world market. US production overcapacity exacerbated by the 10% blend wall.

US Ethanol is moreUS Ethanol is morecompetitive than Braziliancompetitive than Brazilian

EthanolEthanol


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Fuel Ethanol Prices and DriversFuel Ethanol Prices and Drivers

United States EU Brazil

Case Studies

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United States: blend wall blues

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US: RFS #2

US fuel ethanol production and

consumption

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010e 2011f

consumption Production

Key components of the RFS

0

5

10

15

20

25

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

blngallo

ns

Renewable

Advanced

Cellulosic

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US Fuel EthanolUS Fuel EthanolUS fuel e thanol prices - monthly - USD/gallon

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

S.F.

Chicago

Indianapolis

New York

Houston

Gulf

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United States: Confluence

RINS

Corn vs

Ethanol Prices

Fuel

EthanolPrices

Production

Ethanol demand RFS#2 mandate

EPA Blend Wall

Blend Credit

CapacityUtilisation

BlendingEconomics

RFS#2

ArbitrageWindow

Brazil/EU

RFS#2 carbonfootprint

standards

Gasoline Price

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US Fuel EthanolUS Fuel Ethanol

M onth ly Prices fo r Gasoline VS Ethanol VS Corn 19 98 - 2010

0

0.5

1

1.5

2

2.5

3

3.5

4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

YEAR

Gasoline/EthanolPrice

USD/gallon

0

1

2

3

4

5

6

7

Corn-USD/bushell

Etha nol f ob Gulf USD/gallon

Gaso line US Gulf Spot Price (USD/gallon)

Corn Cash Price Mid West (USD/bushel)

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US Fuel EthanolUS Fuel EthanolU n ite d S t a t es : I N D E X E t h a n o l/ G a s o lin e / C o r n

0

1

2

3

4

5

6

7

2002

2003

2004

2005

2006

2007

2008

2009

2010

Ye a r

IndexValu

E th a no l G a s o l in e C o r n G U L F

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Ethanol-Gasoline Price Rela tionships 2005-2010

Index 2002=1

y = 0.2365x + 1.2781

1

1.5

2

2.5

3

3.5

4

1.5 2.5 3.5 4.5 5.5 6.5

Gasoline Index

Et

hanolIndex


May-July 2006

Feb May 2010

March-June 2005March-June 2005

March-June 2005

March-June 2005


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US Fuel EthanolUS Fuel EthanolMo n th ly Pr ice s for Eth an ol VS Co rn 1998 - 2010

0

0. 5

1

1. 5

2

2. 5

3

3. 5

4

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Y E A R

Gasoline/EthanolP

r

USD/gallon

0

1

2

3

4

5

6

7

Corn-USD/bush

Ethan ol f ob Gulf USD/gallon

Corn Cas h Pric e Mid We st (USD/bu she l)

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Ethanol-Corn Price Relationships 2005-2010

Inde x 2002 = 1.

y = 0.2009x + 1.7858

1

1.5

2

2.5

3

3.5

4

1 1.5 2 2.5 3 3 .5

Cor n Index

E

thanolInde


Jan-July 2005

May-July 2006


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US Fuel Ethanol


United States: RFS#2United States: RFS#2

In addition toIn addition to conventionalconventional biofuelsbiofuels

mandatesmandates (corn and cane ethanol can fulfill(corn and cane ethanol can fulfillthese mandates), there are alsothese mandates), there are alsoadvancedadvancedbiofuelsbiofuels mandatesmandatesdefined in RFS#2defined in RFS#2

Cane ethanol is eligible forCane ethanol is eligible foradvancedadvanced biofuelsbiofuelsmandatemandate, but not corn ethanol., but not corn ethanol.

Means US could be obliged to importMeans US could be obliged to import BrazilianBrazilianethanolethanol , to fulfil l this mandate., to fulfill th is mandate.

Brazilian ethanolBrazilian ethanol could gain a premiumcould gain a premium

compared to corn ethanol.compared to corn ethanol.

BrazilBrazil s cane ethanol also qualifies unders cane ethanol also qualifies underCaliforniaCalifornia s LCFS but corn ethanol may not.s LCFS but corn ethanol may not.

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EU: Fuel Ethanol

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Ethanol productionEthanol productionforecast to reach 5.3forecast to reach 5.3

blnbln litres in 2011 (uplitres in 2011 (up18%).18%). France, GermanyFrance, Germany

and UK will accountand UK will accountfor >50%.for >50%.

EU countriesEU countriesmandating highermandating higher

inclusion. E10 ininclusion. E10 inGermany.Germany.

EU : Consumption and Production

EU Fuel Ethanol Consumption

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2006 2007 2008 2009 2010 2011

mlnlitres

Imports

Production

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E U F u e l E th a n o l P r ic e

0

2 00

4 00

6 00

8 00

1000

1200

1400

2006

2007

2008

2009

2010

T2

FobRotter

E U R / to n n e

U S D / to n n e


EU Fuel EthanolEU Fuel Ethanol

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EU: Confluence

Fuel

EthanolPrices

Production Capacity

Utilisation

Feedstock vs

Ethanol Prices

Fuel EthanolDemand

ArbitrageWindow

Brazil/US

E10 phase-in

Fuel QualityDirective

Member StateNREAPs

RED

REDsustainability

Criteria

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No correlation between EU ethanol and grain prices.No correlation between EU ethanol and grain prices.

EU Fuel EthanolEU Fuel EthanolE U E th a n o l P r ic e a n d F e e d s to c k C o s ts

30 0

35 0

40 0

45 0

50 0

55 0

60 0

65 0

70 0

2005

2006

2007

2008

2009

2010

fobT

2eth

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

EUR/tonneFeedWheat(

T2 fob Et hanol

Feed s tock c os t (Whea t )

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Typically a strong correlation between EU and BrazilianTypically a strong correlation between EU and Brazilian

prices. Because EU is a net importer (needs Brazilian/ USprices. Because EU is a net importer (needs Brazilian/ USethanol).ethanol).

EU: Fuel EthanolE U a n d B r a z ilia n E t h a n o l P r ic e s : E U R / m 3

3 0 0

3 5 0

4 0 0

4 5 0

5 0 0

5 5 0

6 0 0

6 5 0

7 0 0

2005

200

6

200

7

2008

200

9

2010

EUT2

Ethanol

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

7 0 0

8 0 0

BrazilianAnhydrousEthan

E U T 2

B r a z i l A n h y d ro us

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Brazil: ethanol - sugar nexus

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.. Bulk of cane.. Bulk of cane

increase wentincrease wentto sugarto sugar

production inproduction in

2009/ 10, but2009/ 10, but

shared betweenshared betweensugar andsugar and

ethanol inethanol in

2010/11.2010/11.

Brazil Fuel Ethanol

-5

0

5

10

15

20

25

30

%

Ethanol Sugar

Brazil: Annual Growth in Sugar and Ethanol Production

2007/08

2008/09

2009/10

2010/11e

2011/12f

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Brazil: Sustainable Growth?

Brazil: sugarcane production

0

100

200

300

400

500

600

700

90/91

92/93

94/95

96/97

98/99

00/01

02/03

04/05

06/07

08/09

Mlntonnes

Brazil Sugar and Ethanol Production

0

5

10

15

20

25

30

35

40

90/91

92/93

94/95

96/97

98/99

00/01

02/03

04/05

06/07

08/09

mlntonnes

0

5

10

15

20

25

30

blnlitres

Sugar

Ethanol

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Bra z il - E tha no l p rod uction

0 .0

4 .0

8 .0

1 2 . 0

1 6 . 0

2 0 . 0

2 4 . 0

2 8 . 0

3 2 . 0

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11e

2011/12f

b

illionlitr

A nh y d ro u s H y dr o u s T ota l


-

-

Brazil: Expanding FFV Fleet

Sales of ethanol-fueled andflex ifuel vehicles in Braz il

0

50000

100000

150000

200000

250000

300000

350000

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Unit

s

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Brazil Fuel EthanolBrazil Fuel Ethanol

Brazil - Wholesale ethanol prices, Centre/South

0.000.20

0.40

0.60

0.80

1.00

1.201.40

10/05/2002

10/11/2002

10/05/2003

10/11/2003

10/05/2004

10/11/2004

10/05/2005

10/11/2005

10/05/2006

10/11/2006

10/05/2007

10/11/2007

10/05/2008

10/11/2008

10/05/2009

10/11/2009

10/05/2010

10/11/2010

BRL/litre

hydrous

anhydrous

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Brazi l: Confluence

Hydrous vsGasohol Price

Fuel Ethanol Prices

Fuel Ethanol Demand

Fuel Ethanol

Production

Sugarcane Price

Anhydrous

inclusion limit in

gasohol (25%)

Relative Taxation

CIDEPIS/COFINS

FFV Fleet

Ethanol vs Sugar

Arbitrage Window

US/EU

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Brazil Pump PricesBrazil Pump PricesBrazil: Hydrous Ethanol and Gasohol - Pump Price s

y = 0.1711x + 2.2503

2.40

2.45

2.50

2.55

2.60

2.65

2.70

1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00 2.10

Hydrous Ethanol

Gasohol

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Brazil Fuel EthanolBrazil Fuel Ethanol

Brazil: Sao P aulo Cane Price Vs Hydrous Ethanol Price

y = 0.0019x + 0.2021

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

150.00 200.00 250.00 300.00 350.00 400.00

BRL/tonne

BRL/litre

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Sugar and Ethanol Prices become delinked.Sugar and Ethanol Prices become delinked.

World Fuel EthanolWorld Fuel EthanolBrazil: Hydrous Ethanol vs Sugar Prices

-

5.00

10.00

15.00

20.00

25.0030.00

35.00

07/03/2007

07/06/2007

0

7/09/2007

07/12/2007

07/03/2008

07/06/2008

07/09/2008

07/12/2008

07/03/2009

07/06/2009

07/09/2009

07/12/2009

07/03/2010

07/06/2010

07/09/2010

UScents/lb

Hydrous Ethanol: NY11

EquivalentSugar: NY11

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Understanding the EthanolUnderstanding the Ethanol --Sugar LinkSugar Link

Price Arbitrage crucial to date.Price Arbitrage crucial to date. Brazil : long term most competitive supplier toBrazil : long term most competitive supplier to

the world market.the world market. US and EU Legislation creates significantUS and EU Legislation creates significant

demand for sugar cane ethanol (lower carbondemand for sugar cane ethanol (lower carbonfootprint).footprint).

Brazil is key to the worldBrazil is key to the worlds crude oils crude oil --ethanolethanol --sugar nexus.sugar nexus.

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EthanolEthanol SugarSugar

In Brazil, years of high global sugar prices see aIn Brazil, years of high global sugar prices see alimited reallocation of cane away from ethanol.limited reallocation of cane away from ethanol.

BrazilBrazils expanding FFV fleet makes global sugars expanding FFV fleet makes global sugarsupply potentially more flexible in the short term.supply potentially more flexible in the short term.

World sugar market may have to keepWorld sugar market may have to keepbuying backbuying back

ethanol from Brazilethanol from Brazils FFV fleet.s FFV fleet. Potential for Brazil to destabilise both ethanol andPotential for Brazil to destabilise both ethanol and

sugar markets via supply shock.sugar markets via supply shock.


Understanding the EthanolUnderstanding the Ethanol --Sugar LinkSugar Link

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Broad correlation between sugar, ethanol and crude oil.Broad correlation between sugar, ethanol and crude oil.

But periods of significant disconnect.But periods of significant disconnect.

World Fuel EthanolWorld Fuel EthanolW orld Su gar, Crude Oi l a nd Ethano l Pr ices

0

20

40

60

80

100

120

140

160

2003

2004

2005

2006

2007

2008

2009

2010

USD/bb

0

200

400

600

800

1000

1200

1400

USD/m

Crude Oil - WTI: USD/bblBrazil anhydrous price USD/m3

US Ethanol pr ic e- USD/m3ICE No.11 in ethanol equivalent USD/m3

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Sugar Price Volatil itySugar Price Volatil ity

Volatility of M acro influencesVolatility of Macro influences e.ge.g exchange rates.exchange rates. FinancialisationFinancialisation..

Volatility of the fundamental analysis.Volatility of the fundamental analysis. Volatility in perceptions of the market fundamentals.Volatility in perceptions of the market fundamentals. Bull markets and high prices go hand in hand w ith hugeBull markets and high prices go hand in hand w ith huge

volatility?volatility?

World Sugar Production and Consumption - 1984 to 2009

80

90

100

110

120

130140

150

160

170

1984

1987

1990

1993

1996

1999

2002

2005

2008

milliontonnes(rawvalu

e)

consumption

production

World Sugar, Crude Oil and Ethanol Prices

0

20

40

60

80

100120

140

160

2003

2004

2005

2006

2007

2008

2009

2010

USD/bbl

0

200

400

600

800

1000

1200

1400

USD/m3


ICENo.11 in ethanol equivalent USD/m3

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Thank You!!

5-8 March 2011:6th ISO/EGYPT Conference, ISIS Island Hotel, Aswan EgyptNew Role for the World Sugar Economy in a Changed Political andEconomic Environment

18 May 2011:5th ISO/DATAGRO New York Sugar and Ethanol ConferenceWaldorf Astoria Hotel, New York

www.isosugar.org

Documents

Gcf2011 A2 Jolly.en