Cash sugar prices firm despite 3% increase in supply

by Ron Sterk
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Ron Sterk

The U.S. Department of Agriculture on July 24 took actions involving both domestic marketing and imports of sugar intended to boost supply in the United States by 3% in the current 2016-17 marketing year, which ends Sept. 30. The move had an immediate pressuring effect on domestic raw cane sugar futures but refined sugar prices held firm.

The U.S.D.A. increased the amount of sugar U.S. producers can market, known as the overall allotment quantity (O.A.Q.), by 187,000 tons, raw value, reassigned 175,423 tons of beet sugar marketing allotments among U.S. beet processors, reassigned surplus domestic cane sugar marketing allotments of 870,000 tons to imports, and increased the U.S. raw sugar tariff rate quota (T.R.Q.) by 269,724 tons on July 24. The U.S.D.A. also requested the U.S. Department of Commerce increase the 2016-17 Mexico export limit, as determined under the U.S.-Mexico anti-dumping and countervailing duty suspension agreements, by 103,932 tons, and asked the Office of the U.S. Trade Representative to reallocate the expected shortfall of 95,344 tons in the 2016-17 raw sugar T.R.Q.

Under the U.S. sugar program, domestic marketings may not exceed 85% of estimated total domestic human sugar consumption as published in the World Agricultural Supply and Demand Estimates report, with the remainder allocated to imports, mostly filled by Mexico but also by commitments under World Trade Organization agreements. Domestic production typically falls short of the 85% target, especially the refined cane sugar share. The 2016-17 O.A.Q., initially set at 10,268,000 tons, raw value, was increased to 10,455,000 tons, to reflect increases in estimated sugar consumption in the July WASDE.

Commodity trading
The U.S.D.A. increased the amount of sugar U.S. producers can market.
 

The reassignment of 175,423 tons of beet sugar marketing allocations from processors with inadequate supplies to other processors with excess supplies eliminated surplus beet sugar allotment, the U.S.D.A. said. Earlier in the year, there were concerns about excess beet sugar supplies.

The reassignment of 870,000 tons, raw value, of the domestic cane sugar shortfall included: 103,932 tons to imports from Mexico; 269,724 tons to an increase in the U.S. raw sugar T.R.Q.; and the remaining 496,344 tons to imports already expected.

The 2016-17 raw cane sugar T.R.Q., originally set in May 2016 at the 1,231,497-ton minimum committed to W.T.O. agreements, now will be 1,501,221 tons. Sugar entering under the revised T.R.Q. will be allowed to enter the United States through Oct. 31, 2017, one month beyond the end of the fiscal year. Global sugar supplies are ample, and traders expect exporters, especially Brazil and the Philippines, will easily fill the higher T.R.Q.

The U.S.D.A. expects the sum of the actions to result in a net gain of 414,000 tons, or 3%, to the U.S. sugar supply this marketing year, with imports having an extra month to enter the United States.

Chart: U.S. No. 16 raw sugar futures price
 

The nearby domestic raw sugar future (the New York No. 16 contract) tumbled about 2c a lb, or about 7%, in the past two weeks and was trading near 25c a lb last week, the lowest since October 2015. The futures price typically reflects what domestic cane refiners have to pay for raw sugar.

Some in the trade expected cash refined cane sugar prices to decline as well, but that was not the case last week. In fact, beet sugar prices have firmed, and refined cane sugar prices have held steady.

Several factors appear to be supporting cash sugar prices. Perhaps most importantly for refined cane sugar are indications that refiners may be opting to increase margins rather than “chase” market share by lowering selling prices, according to some in the trade. It may well be more profitable to sell less sugar at a higher price than to sell more sugar at a lower margin, especially considering demand for beet sugar has soared and beet sugar prices have been rising to close the historically wide discount to refined cane sugar prices that developed last year when it appeared food made with beet sugar would have to be labeled as containing a bioengineered ingredient.

Some in the trade also question whether Mexico will be able to fill its increased export quota. Sugar supplies in Mexico are tight, and refined cane prices are at least as high as in the United States. Once revised suspension agreements were signed early in July, traders said shipments of sugar from Mexico dropped sharply, and some suggest exports may not increase substantially until the Mexican cane harvest begins later in the fall.

The last time the U.S.D.A. took such significant action to increase the U.S. sugar supply was in April 2012 when refined beet and cane sugar prices were around 51c a lb. The closely watched sugar ending stocks-to-use ratio in the U.S.D.A.’s WASDE in April 2012 was 6.8%, well below the 13.5% seen as the minimum for adequate sugar supplies. The 2016-17 ending stocks-to-use ratio in the July 2017 WASDE was 11.4%, with the projected ratio for 2017-18 at 9%. Refined beet sugar prices were 33c a lb and refined cane sugar ranged from 34c to 36c a lb.

While the current numbers (stocks-to-use ratios and prices) weren’t as dramatic as in 2012, there was little opposition in the industry to the idea additional sugar was needed to ease supply tightness this year.

Ron Sterk

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