More sugar than ever keeps pressure on prices

by Ron Sterk
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Little more than a year ago U.S. bulk refined sugar prices had peaked at a one-year high, and even earlier this year concern about tight sugar supplies prompted the U.S. Department of Agriculture to allow increased imports under its tariff-rate quota system. But the situation has changed in fairly short order as sugar supplies in the current 2012-13 marketing year may be the largest ever and prices have fallen to three-year lows with no signs of rising.

The large supply is good news for sweetener users at a time when many ingredient prices have been rising, although not all may be able to benefit because they booked earlier at higher price levels.

In its Nov. 9 World Agricultural Supply and Demand Estimates, the U.S.D.A. projected total sugar supply in the United States in 2012-13 (October-September) at a record 14,081,000 tons, raw value, up 613,000 tons, or 5%, from its October projection and up 590,000 tons, or 4%, from 13,491,000 tons in 2011-12, which also was raised 1% from October.

Supplies of sugar from all sources became ample at the same time while deliveries (use) took a slight dip from forecast levels. U.S. beet and cane sugar production, Mexican sugar production and exports to the United States and global sugar supplies all were forecast to increase from 2011-12. Because estimates for the same categories were increased for 2011-12 in the Nov. 9 WASDE, projections are from a higher base, somewhat amplifying the surplus.

The seemingly good news for sugar buyers was somewhat muted by two realities. First, much of the ample supply already was priced into the market, indicated by beet sugar prices struggling to stay above 35c a lb f.o.b. Midwest in the past few weeks. Thus, there was little immediate major impact to 2012-13 sugar prices, although the data certainly intensified the “soft” tone in the market.

Second, many buyers covered most of their 2012-13 sugar needs several months ago, when prices were much higher. So rather than buying 35c-a-lb sugar they may be taking delivery of sugar costing 38@45c-a-lb or even more. For any users not well covered or who need fill-in supply, current prices certainly should be attractive even if there may be a bit of downside potential left. Some traders have suggested buyers should lock in current pricing for some of their 2014 needs, but there have been few indications of much activity that far out, possibly because some who bought 2013 far in advance turned out to be on the high side of the market and now are cautious.

Further, though down about 40% from a year ago and a seeming bargain from the current era high of 64c a lb in September 2010, current prices around 35c a lb still are historically high compared with values in the mid-20c a lb range during much of the 1980s and 1990s and as recent as January 2008.

But the expected supply glut may play better into the hands of sugar program proponents (sugar producers and refiners), who have opposed free sugar trade with Mexico under the North American Free Trade Agreement, if large shipments of sugar from Mexico further pressure sugar prices in the United States.

The weakness in sugar prices may have a spill-over benefit to corn sweetener buyers who have gone from potentially paying 20% or more above 2012 contracted levels for 2013 high-fructose corn syrup and other products to likely paying much smaller increases. Initial offer letters from corn refiners issued in the last half of October called for increases of about 4.25c a lb on most products, the result of drought-reduced U.S. corn production and record corn prices during the summer. Though still about 15% above year-ago levels, corn prices have dropped considerably from their highs as corn production estimates stabilized and high prices rationed demand.

At the same time, the drop in sugar prices has put sugar at nearly on par with specific corn sweetener products in some regions of the United States (and even more so in Mexico, the major foreign buyer of U.S. HFCS), erasing price as the traditional major selling point for corn products over sugar.
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