The U.S. Department of Agriculture is offering to buy domestic sugar for the first time in 13 years in an effort to reduce the surplus that otherwise would most assuredly result in expensive industry forfeitures against government loans. The department’s initial efforts are aimed at reducing the sugar supply by exchanging a minimal amount of purchased sugar with a larger volume of future export credits, thus keeping with the proviso that the sugar program be operated at no cost to the federal government to the maximum extent possible.

The trade has offered mixed reactions to the U.S.D.A. efforts and initially indicated varying levels of participation. At a minimum, the short timeline will tell the trade how successful the U.S.D.A.’s initial efforts are by July 8.

One message has been clear from producers — additional initiatives likely will be needed to remove a “meaningful” amount of sugar from the market, and any later initiatives may be much more expensive. The U.S.D.A. said it hoped to buy about 85,000 tonnes of raw cane and/or refined beet sugar that through a system of exchanges for export credits would result in a reduction of 300,000 short tons of domestic sugar from the market. Most traders said at least twice that much sugar needs to be taken from the market to get the closely-watched sugar ending stocks-to-use ratio near 17%, which still is above the U.S.D.A.’s target of about 14.5% but much more manageable than the 19% forecast for Oct. 1, 2013, and the 22.4% projected for Oct. 1, 2014.

At the same time, sugar users who have been able to buy sugar at five-year lows also have been unified in their reaction that the potentially costly effort at reducing the surplus, or the costs involved with forfeitures, is yet another reason to overhaul the U.S. sugar program.

The U.S.D.A. on May 1 announced two waivers pro-visions in the Refined Sugar Re-export Pro-gram, temporarily permitting licensed refiners to transfer program sugar from their license to another refiner’s license through Sept. 30, 2013, and temp-orarily increasing their license limit from 50,000 tonnes, raw value, of credits to 100,000 tonnes through Dec. 31, 2014. Traders said these actions would have little if any impact on sugar supplies because no one was pushing up against the limits of their import licenses.

On June 17 the U.S.D.A. said it plans to buy 85,000 tonnes of domestic raw cane or refined beet sugar in exchange for Refined Sugar Re-export Program credits. The U.S.D.A. also said on June 17 that licensed refiners had 270 days, up from 90 days previously, to make required exports or sugar transfers under the Refined Sugar Re-export Program.

Then, on June 24, the U.S.D.A. said it would allow exporters to exchange valid Trade Promotion Agreement Certificates of Quota Eligibility granted under trade agreements with Colombia and Panama for U.S.D.A. sugar stocks, complementing the June 17 announcement for domestic sugar. There are 57,370 tonnes of sugar quotas issued to the two countries for 2012-13, which ends Sept. 30, 2013.

When Colombia and Panama were added, the deadlines for the initial 85,000-tonne purchase were extended to July 1 for quantity offered (June 24 initially), followed by a “catalogue” listing all offered quantities issued July 2 (June 25 initially). Price offers then must be submitted to the U.S.D.A. by July 8 (July 1 initially) and successful offerers will be notified July 9 (originally July 2).

While initial reactions to the purchase offer were mixed, traders now expect the tender will be fully subscribed, at least the domestic portion. In theory, one trader noted, the process may remove well more than the 300,000 tons targeted by the U.S.D.A., and/or it may lead to a second tender to buy sugar that would be exchanged for export credits, depending on initial success.

The “900-lb elephant” in the room is Mexico, which many traders expect will ship additional sugar to the United States should prices firm, thus usurping at least the initial reduction in supply generated by the U.S.D.A. Under terms of the North American Free Trade Agreement, sweeteners (sugar and high-fructose corn syrup mainly) may cross the border duty free in either direction, unlike sugar imports from most other countries that are limited by tariff rate quotas, usually set at agreed to World Trade Organization minimums. Mexico also is experiencing a massive sugar oversupply, as is the rest of the world, which leaves the United States as its primary outlet.

The U.S.D.A. fully expects the bulk of Mexico’s sugar excess will be shipped to the United States, based on projections in its June 12 World Agricultural Supply and Demand Estimates. The U.S.D.A. increased its forecast of 2012-13 U.S. imports of sugar from Mexico to 1,791,000 tons, up 7% from its May forecast and up 67% from 2011-12, and upped its projection of 2013-14 imports to a record 2,135,000 tons, up 21% from May and up 19% from 2012-13. Shipments from Mexico through the first eight months of 2012-13 (October through May) were up 47% from the same period a year earlier and have increased monthly since November 2012, according to U.S.D.A. data.

The U.S. sugar beet crop, though, is expected to be smaller in 2013 as some acreage in the key Red River Valley were not planted because conditions were too wet beyond the “last plant” date and condition ratings were not stellar in most states through mid-June.

Cash prices for bulk refined sugar in the United States have held mostly steady since mid-April at around 26½@27½c a lb f.o.b. Midwest for beet and 27@28c for cane, down about 37% from a year earlier, down nearly 60% from highs in September 2010 and the lowest since 24c a lb (beet sugar) in early 2008. Trading all dried up after the June 17 U.S.D.A. announcement as beet sellers became a bit firmer in their offering prices and buyers moved to the sidelines despite the fact the U.S.D.A. actions indicated more price upside than downside potential in coming weeks.

Meanwhile, nearby New York world raw sugar futures traded on ICE Futures U.S. rose to six-week highs just over 17c a lb last week on concerns unseasonal rains in Brazil will reduce sugar production and favor ethanol production of what was expected to be a bumper cane crop. Thinly-traded New York domestic raw sugar futures have been trading about flat at around 19.50c a lb.

While there are other options to further reduce the sugar surplus the U.S.D.A. may consider, the two most talked about are a payment-in-kind program and the Feedstock Flexibility Program. Under the former, the U.S.D.A. may offer sugar it buys (or is forfeited) in exchange for growers plowing under sugar beet acres expected to produce a like amount of sugar. Under the latter, the U.S.D.A. would buy sugar and resell it to ethanol producers “for what they can get,” which some say would be 10@12c a lb. Both options are viewed as considerably more expensive than the current efforts to exchange sugar for export credits.

By July 9 it will be known how successful the U.S.D.A. tender/export credit exchange effort was in reducing the sugar surplus, and more will be known about sugar beet planted area. Now the trade must wait for what the U.S.D.A. will do next, if anything, to stave off potential forfeitures against loans coming due over the next three months, if any still are looming, how Mexican refiners will react and how the 2013 U.S. beet crop develops during the growing season.