USDA reallocation still leaves sugar supplies short

by Ron Sterk
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The U.S. Department of Agriculture last week moved to increase the 2011-12 U.S. sugar supply by about 450,000 short tons, raw value, through a combination of increased domestic allocations and reassignment of surplus domestic cane sugar allotments to imports. Despite the increase, U.S. sugar supply remains tight and the ending stocks-to-use ratio still is well below target. There was little reaction in the cash sugar market.

The U.S.D.A. raised the 2011-12 (fiscal year 2012) domestic Overall Allotment Quantity (O.A.Q.) by 51,000 tons and reassigned 420,000 tons of surplus domestic cane sugar allotment to tariff-rate quota (T.R.Q.) imports as of April 19.

“This T.R.Q. increase is not currently expected to increase FY 2012 domestic sugar supplies sufficiently to attain a level U.S.D.A. considers adequate,” the Department said. “U.S.D.A. used an ending stocks-to-use level of 14.5% in estimating the ‘reasonable ending stocks’ parameter for the most recent FY 2012 sugar market quarterly review mandated by statute. Significant uncertainties about FY 2012 Mexican imports, domestic refined and raw sugar demand, the early sugar beet crop and other market factors make it prudent for U.S.D.A. to not increase imported supplies further at this time.”

The U.S.D.A. in its April 10 World Agricultural Supply and Demand Estimates projected carryover of sugar on Oct. 1, 2012, at 797,000 tons, raw value, down 250,000 tons from its March projection and down 675,000 tons from 2011. That’s about a 25-day supply based on projected total use of 11,655,000 tons (31,844 tons daily) in 2011-12. The ending stocks-to-use ratio was projected at 6.8%, down from 9% in March and compared with 12.7% in 2010-11 and 13.2% in 2009-10. The net effect of the U.S.D.A.’s actions last week would be about a 450,000-ton increase in 2011-12 sugar supplies, which traders estimated would raise the stocks-to-use ratio to 10.7%, still well below the U.S.D.A.’s target of 13.5% to 15.5%.

The U.S.D.A. said it would re-evaluate market conditions in June and if appropriate would make an additional T.R.Q. increase to bring the stocks-to-use ratio within the targeted range. One trader suggested the U.S.D.A. may opt to increase the refined sugar T.R.Q. since it would be difficult to refine additional raw imports later in the year. Traders expect some increase in shipments from Mexico, although current strong prices in Mexico don’t encourage exports.

The announced increase falls far short of the amount hoped for by sweetener users who petitioned the U.S.D.A. shortly after release of the WASDE on April 10 for a “substantial and immediate increase in the tariff-rate quotas for raw and refined sugar, as well as a reallocation of existing T.R.Q.’s and other steps, in order to assure adequate supplies at reasonable prices during the balance of this fiscal year and into the next season.”

In their request, the Sweetener Users Association indicated an increase in the T.R.Q. of 982,000 tons was needed to bring the stocks-to-use ratio to 14.5%, and of 1,110,000 tons to bring the ratio to 15.5%. The group also urged that a “substantial portion” should be refined sugar. A large share of added refined imports was seen as critical to offset slower-than-expected shipments from Mexico, much of which is refined, and because of concerns U.S. cane refiners may lack capacity to handle sufficient additional volume of raw cane.

While the S.U.A. praised the U.S.D.A. for the T.R.Q. increase and the added transparency in target stocks levels, the group also said, “It would have been even more helpful had U.S.D.A. announced a quantity that would have, in itself, allowed stocks to reach U.S.D.A.’s target range.”

The U.S.D.A.’s well-known cautious approach was evident in last week’s adjustments that were less than half the amount sought by the industry and included no changes to the refined T.R.Q. The department has made the point publically multiple times that if it were to err it would be on the side of caution, avoiding the creation of a situation where imports were increased so much that prices fell to the point of forfeiture. The U.S.D.A. is required to operate the U.S. sugar program on a no-cost basis.

Sugar users long have contended the sugar program is far from no cost and in fact drives U.S. sugar prices higher by restricting domestic marketings as well as imports, with the exception of duty-free trade between the United States and Mexico under the North American Free Trade Agreement. Part of the problem this year is that Mexican production has been reduced by poor weather. Shipments to the United States in the first six months of 2011-12 (October through March) totaled only 524,321 tons, raw value, already 72% of the year’s projected total of 730,000 tons and down almost 30% from the same period a year ago.

Users may well have a point with current sugar prices in the United States below recent highs but still historically strong at around 51c a lb f.o.b. for 2012 and around 44@48c for 2013. Traders said last week’s U.S.D.A. actions had no immediate effect on cash prices and may have in fact stalled trading as buyers sought lower prices after the announcement while sellers maintained supplies still were tight and didn’t lower offers. There also was limited reaction since the amount of the T.R.Q. increase fell within most trade expectations, and because most sugar business for 2012 has been completed.

New York domestic raw sugar futures (No. 16) traded electronically on ICE Futures US tumbled about 5% to around 30.30c a lb and near 22-month lows on April 18, as might be expected due to the potential influx of more raw sugar. But New York world raw sugar futures (No. 11), which some thought may advance due to increased U.S. imports, also declined, dropping about 3% to around 22@22.30c a lb and near 11-month lows. Pressure on world sugar futures was attributed mainly to ample global supplies, fueled by the approach of new crop harvest in top-producing Brazil and talk India may export an
additional 1 million tonnes of sugar this year.
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