Uncertainty exists in the U.S. sugar market due to the opening of duty free trade with Mexico on Jan. 1 and the lack of a final version of a new farm bill with its requisite sugar program. But what is clear to the market is sugar supplies will be ample if not burdensome in 2008.
In its latest supply/demand report, the U.S. Department of Agriculture projected a stocks-to-use ratio of 19.4% for 2007-08, which even more bullish traders said was high. That compares with 17.2% in 2006-07 and 16.2% in 2005-06. U.S. sugar production was forecast at 8,562,000 tons, raw value, imports at 2,244,000 tons and total supply at 12,600,000 tons, up more than 3% from 2006-07 and 2005-06. Total use for 2007-08 was projected at 10,550,000 tons, up about 1% from both previous years.
"The U.S.D.A. numbers are pretty reasonable," said Tom Earley, executive vice-president of PROMAR International, an Alexandria, Va., consulting company. A large Mexican cane crop could add as much as a half million tons of potential exports to the U.S., he said.
The next "big event" in sugar is the elimination of tariffs on trade between the U.S. and Mexico on Jan. 1 under the North American Free Trade Agreement. With advance knowledge of the change, U.S. sugar companies have scrambled to establish a presence south of the border so they may have some control over sugar movement between the two countries.
American Sugar Refining, Inc. in early December said it acquired Ingenio San Nicolas S.A. de C.V., a Veracruz, Mexico, sugar mill and refinery. Also in December the Imperial Sugar Co. said it formed a joint sugar marketing venture with Mexico’s Ingenios Santos, S.A. de C.V. American and Imperial are major U.S. cane sugar refiners.
London-based global trading company E D & F Man in October said it signed an agreement with Tate & Lyle P.L.C. for the purchase of its 49% share in Grupo Industrial Azucarero de Occidente, S.A. de C.V. Minneapolis-based Cargill has had a presence in the Mexican sugar market for some time. Some other major companies also have a presence in Mexico, mostly from a marketing standpoint.
Some traders contend the open borders will result in excess sugar available in the United States and that prices that have hovered near 25c a lb, f.o.b. Midwest beet, throughout 2007 could sink to forfeiture levels, along with cane sugar, if much supply is added.
"The government is going to own sugar next year," a trader at a major sugar company said, referring to the potential for cane and beet sugar to be forfeited under the U.S.D.A. loan program.
Sugar users in the U.S. have bought little sugar the past few months after an initial flurry earlier in the year, preferring to wait and see if an influx of Mexican sugar occurs and pressures prices after the first of the New Year.
While imports of Mexican sugar appear to be a given by the industry, the timing and volume are less clear. Imports from Mexico, projected by the U.S.D.A. at 475,000 tons in 2007-08, could increase if Mexico has a 5.8 million tonne crop, Mr. Earley said. A strike by Mexican cane growers that delayed deliveries of new crop cane to refiners could delay the amount of sugar available for export, he added, although that volume could be made up quickly. And sugar prices in Mexico, which were near or above U.S. prices earlier in the year, also will affect shipments, traders said. U.S. sugar could just as easily move south if prices are higher in Mexico.
In addition to the Mexico situation, the new farm bill could have a significant impact on the U.S. sugar market, or at least returns for producers. Between the House and Senate versions of the farm bill are provisions for increased non-recourse loan rates, which was a big win for producers, and a new provision for turning excess domestic sugar production into ethanol, a plan that critics said would be more costly than the government’s current loan program. What the final impact on sugar will be depends on what language comes out of the House-Senate conference committee after the first of the year.
"If the farm bill is passed with the ethanol diversion program, sugar prices could move up a couple cents a lb," Mr. Earley said. "Sugar prices could be 26½@27c a lb (f.o.b. Midwest) in March."
But if the farm bill is passed with an extension of the current program, or if it is vetoed, also extending the existing program, and Mexico has a crop of 5.8 million tonnes, high imports could force prices down and the U.S.D.A. would intervene, he said.
Mr. Earley also said an ethanol diversion program would "cost a lot of money" and could be combined with other steps, such as a payment in kind program similar to those popular for some grains more than 20 years ago.
"The odds are that some version of the farm bill will be passed," Mr. Earley said. But he and others in the trade were less certain of what that version would look like for sugar. Coupled with the trade’s general lack of faith in market data from Mexico, uncertainty will be the rule for a while longer in the sugar market.
This article can also be found in the digital edition of Food Business News, December 25, 2007, starting on Page 24. Click