U.S.D.A. faces dilemma with sugar quota

by Ron Sterk
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KANSAS CITY — “Buzz” at the International Sweetener Colloquium last week was whether the U.S. Department of Agriculture would announce an increase in the tariff rate quota (T.R.Q.) for raw sugar imports in the hope of relieving current tight supplies. In a scenario similar to last year, albeit with a couple of significant differences, the result was the same — no U.S.D.A. announcement.

Whenever domestic sugar prices rise and stay high, the U.S.D.A. is peppered with requests from sugar users, who make up the majority of Colloquium attendees, to increase import quotas. Meanwhile, sugar producers invariably, and usually almost immediately, push back with requests to hold the quota steady and not establish a new precedent.

That was the scenario described by U.S.D.A. Undersecretary for Farm and Foreign Agricultural Services James Miller at last week’s meeting. He and other U.S.D.A. speakers never played their hand while acknowledging the tight supply and assuring attendees the department was “watching the market very closely.” At the same time, the U.S.D.A. speakers also said they evaluated whether to increase the import quota more on supply than on price and that it was unclear as to what constituted an “emergency” that would allow a quota increase before April 1. Further, the department has made no secret it prefers to err on the side of caution rather than make an irreversible change that could lead to millions of dollars in charges to the “no cost” Sugar Program should an oversupply of sugar result before the marketing year ends.

When talk of raising the T.R.Q. began a year ago, domestic bulk refined sugar prices had moved to 35c a lb, up about 25% from a year earlier, largely as the result of lost cane refining capacity after the explosion of the Imperial Sugar Co. plant in Georgia, which did not constitute an emergency that warranted raising the quota before April 1. In the U.S.D.A.’s defense, sugar imports from Mexico were entering the United States at a record pace at the time. Later last summer when prices climbed to 39c a lb and Mexican shipments were slowing, the U.S.D.A. stayed on its conservative course and made no changes, even though the critical April 1 deadline had passed.

The plan worked as Mexico ultimately shipped about twice as much sugar as anyone expected to the United States in 2008-09 (ended Sept. 30, 2009). What had prompted the influx of shipments was an extremely weak peso compared to the dollar at the time, and Mexican refiners needed pesos to pay cane growers. In fact, they exported so much sugar to the United States that a shortage resulted in Mexico, which was filled by importing sugar from the world market late last year. Contributing to the shortfall was lower-than-expected sugar production from Mexico’s cane factories.

But there are significant differences this year. U.S. sugar prices are up another 50%, with spot sugar trading at 53c a lb, the highest level in decades.

Perhaps more importantly, Mexico already is in short supply and their crop appears to be getting smaller by the month. U.S. analysts and representatives from Mexico at the Colloquium were unanimous in their comments that 2009-10 Mexican sugar production would fall further from recent forecasts. Milling yields have been lower than a year ago and have been falling as the season progresses. Shipments of sugar from Mexico to the United Sates so far this year have been sharply below year-ago levels, with some buyers already forced to turn to U.S. suppliers at current market prices. Further, the dollar/peso relationship also has changed from last year, which makes it much less beneficial to ship sugar north, although sources indicated that if the peso weakened to last year’s levels, Mexican producers would “find” sugar to export.

With the high unlikelihood that Mexico may bail out the U.S.D.A. this year, the department has a dilemma. Do they declare an emergency and increase import quotas before April 1, or do they take another chance and let the market work? There were indications the market may do just what they hoped early last week as New York world sugar futures (No. 11) prices declined and domestic raw futures (No. 16) increased, with the spread approaching what was needed to cover the above quota U.S. import tariff and shipping costs that would prompt U.S. cane refiners to buy on the world market. As the week ended, prices for both futures contracts declined.

The debate wasn’t settled at last week’s Colloquium and sugar users went home disappointed with the assurance the U.S.D.A. was closely watching the market. On the other hand, April 1 is just around the corner but far enough away to buy the U.S.D.A. a few more weeks to see if the market may work out a solution to the supply situation without declaration of an “emergency” should it still choose to raise the import quota. Stay tuned.

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