Sugar markets still volatile even as supply improves

by Ron Sterk
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A 300,000-ton increase in the tariff rate quota (T.R.Q.) at the beginning of July may have improved the sugar supply situation for U.S. food processors, as reflected in the July 9 World Agricultural Supply and Demand Estimates, but the impact on 2009-10 bulk refined sugar prices was nil and 2010-11 prices actually moved higher.

At face value the U.S. Department of Agriculture’s 300,000-ton increase in the raw sugar T.R.Q. — meaning it may be imported with low duties — appears significant and an answer to sugar users’ pleadings for additional supply. It was the second increase in the T.R.Q. this year, the first being 200,000 tons on April 27. The additional 500,000 tons brings the 2009-10 T.R.Q. to 1,731,497 tons, up from the initial level of 1,231,497 tons set Sept. 25, 2009. The total amount must be imported by the end of the sugar marketing year on Sept. 30, 2010.

But some traders saw the T.R.Q. boost nearly as a “nonevent” because refiners may already have imported a large amount of the increase as

above-quota or tier two sugar and would have brought the remainder in anyway. The spread between nearby New York domestic raw sugar futures (No. 16) and world raw futures (No. 11) had been wide enough to cover the import duty of more than 15c a lb plus other costs, which made refiners willing to import above-quota supply. The September No. 16 contract plunged about 4c a lb and No. 11 contract prices increased a couple days after the T.R.Q. increase, narrowing the price spread and making it unprofitable to import above quota sugar.

“It just switches the funds from the U.S. treasury to foreign treasuries,” one trader said concerning tier two versus T.R.Q. imports, with the United States collecting more on tier two imports.

Traders also noted there was no guarantee the full amount of the T.R.Q. increase could be delivered by Sept. 30. In its June 9 WASDE, the U.S.D.A. appeared to agree, raising forecast T.R.Q. imports only 270,000 tons, rather than 300,000 tons. Traders also were unsure if all the

countries allocated the increased exports actually had enough sugar to ship. Exporters are required to ship their own production to the United States, although they may import sugar for domestic use to replace the exports.

There was no immediate impact on cash sugar prices after the T.R.Q. increase. Bulk refined sugar offering prices remained firm at 53c a lb, f.o.b., for both cane and beet sugar. Some beet processors already were sold out of 2009 crop sugar and others have minimal supply left. Some traders also questioned whether there was enough cane refining capacity to handle a surge in imports.

Prices for 2010-11 (October-September) and in some cases through December 2011 were raised to 43c a lb f.o.b. after the T.R.Q. announcement. Some beet processors already have sold a significant amount of their potential 2010 crop production for the 2010-11 marketing year.

Also a factor in the firm pricing has been continued strong demand, which some traders maintain has been consistently underestimated by the U.S.D.A. Demand has been boosted by ongoing switching from high-fructose corn syrup to sugar by many food processors and some beverage manufacturers. Most recently Dr Pepper Snapple said it would temporarily switch back to sugar from HFCS from July through early September to celebrate the 125th anniversary of Dr Pepper. PepsiCo also offers sugar-sweetened Throwback versions of its Pepsi and Mountain Dew products, but both PepsiCo and Coca Cola Co. still use HFCS in their primary products.

A final piece of the supply puzzle lies in Mexico, which may ship unlimited quantities of sugar duty free to the United States under the North American Free Trade Agreement. In 2008-09 exports to the north soared to 1,402,000 tons, but this year shipments have plunged, with the U.S.D.A. in its July WASDE forecasting exports to the United States of only 430,000 tons, down 110,000 tons from its June forecast and down nearly 70% from 2008-09. Two consecutive smaller-than-expected cane crops in Mexico left domestic sugar supplies tight and even drove that country to import some supply the past two years. Refined sugar prices there had been nearly even with U.S. prices through April, but since then prices have fallen about 20%, once again making it profitable to ship to the United States.

It remains to be seen if

the Mexicans are comfortable enough with domestic supply and prices to increase exports. U.S. sugar users would welcome additional supply from Mexico or anywhere.

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