The U.S. sugar market is largely insulated from world market conditions by tariff rate quotas (TRQ) on sugar imports, except for sugar from Mexico which enters duty free under NAFTA. Mexico also has TRQs on sugar imports and the U.S.-Mexican market operates mostly as one market. USDA announced the TRQs for raw sugar for fiscal year (FY) 2010, October 1, 2009 to September 30, 2010, at the WTO mandated minimum of 1.23 million short tons raw value (STRV). A refined and specialty sugar TRQ was set at 99,251 STRV including the WTO minimum of 24,251 STRV and 75,000 STRV for organic sugar for the organic food market. In a normal year with U.S. sugar prices held higher than world prices almost all of the TRQ would be filled, but USDA does not expect that to happen this year. Language in the 2008 farm bill allows for additional TRQs before April 1 only for a sugar supply shortfall caused by an emergency situation. Additional imports are allowed after April 1 if a shortage continues and the imports do not cause U.S. produced sugar to be forfeited to the Commodity Credit Corporation of USDA.
According to the ERS analysis, the tight supply situation in the U.S. had its beginnings in the winter of 2008. While domestic sugar producers are guaranteed an overall allotment quantity of at least 85 percent of estimated sugar consumption, land for sugar beets competes with other crops that are planted each year. In January-March of 2008 prices for sugar beets were relatively low while corn, soybean and wheat prices were setting new records. U.S. producers planted 1.09 million acres of sugar beets in 2008, 14 percent less than 2007 and the lowest since 1983. Combined cane and beet sugar production declined 7.7 percent for the 2008/09 marketing year to 7.57 million tons. In February of 2008 an explosion at a sugar refinery in Georgia took roughly 15 percent of the U.S. sugar refining capacity offline and caused wholesale refined sugar prices to increase relative to raw sugar. Monthly U.S. wholesale refined sugar prices have averaged above $0.30 per pound since June of 2008. Only five times in the last 50 years have U.S. annual wholesale refined sugar prices averaged above $0.30 per pound, the most recent in 2005/06 after hurricanes disrupted production and refining capacity.
U.S. sugar demand has added to the price challenges. For the 2008/09 marketing year that just ended refined sugar delivered for food use totaled 10.74 million tons compared to the average for the last ten years of 9.95 million tons. Part of that increase was due to relatively high prices for high fructose corn syrup (HFCS) caused by high corn prices. The gap between production and consumption in 2008/09 was filled by 3.1 million tons of imported sugar, with Mexico supplying a record 1.375 million tons. Mexican end-of-year stocks were one-third of beginning year stocks, the lowest in a decade, and Mexico will have less sugar to export to the U.S. for 2009/10.
The 2009/10 marketing year will be far from normal based on the ERS analysis. The beginning stocks-to-use ratio is estimated at 11.8 percent, the lowest in 33 years. Domestic production is expected to increase 6.1 percent to 8.03 million tons. The Imperial Sugar refinery in Georgia was at 25 percent of production in August and is expected to be at full production by the end of the year. Imports from Mexico will likely decline by almost two-thirds to 495,000 tons. That assumes that Mexico can import a record 782,000 STRV from a world short of sugar with high market prices. Mexico was a net sugar importer in 2002, 2003, 2004 and 2006, but did not import as large a volume. Total U.S. imports under the TRQs are estimated at 1.18 million STRV, over 200,000 STRV short of potential imports. Another 400,000 STRV will come in under the sugar re-export program. Total imports under all programs are expected to be 2.09 million STRV. Sugar deliveries for human consumption are projected at 10.14 million STRV, a decrease of 600,000 STRV from 2008/09. With all of those assumptions, sugar stocks at the end of the 2009/10 marketing year would be 844,000 STRV, a stocks-to-use ratio of 8.0 percent, the lowest ratio since 1958. With that scenario, domestic HFCS use would increase by 413,000 tons dry weight, a 5 percent increase from 2008/09.
The analysts from ERS note that “tight domestic supplies and a delayed supply response internationally to higher prices suggest that prices will remain elevated well into the coming 2009/10 marketing year.” That is an understatement if the 8.0 percent estimate of the end of year stocks-to-use ratio is accurate. They also note that these high prices will likely bring a worldwide supply response in 2010. That may be particularly true in the U.S. where prices for corn, wheat, soybeans and other crops are much lower than two years ago when sugar beets lost acreage.
Users of sugar in the U.S. may face two full years of refined wholesale sugar prices above $0.30 per pound. Users were already pushing for more imports before the USDA decision on TRQs on September 25. As noted earlier, that would have been of limited value unless U.S. sugar users were prepared to outbid other users.
Sugar prices would be high in the U.S. with or without a domestic sugar program and whether or not other countries intervened in markets. Sugar, like all raw agricultural commodities, is subject to price swings from weather and unexpected demand. What goes up in price also comes down quickly as many commodities learned over the past year. The more serious issue is how U.S. government policies respond to disruptions like the refinery fire in Georgia, problems that may develop this year in Mexico and the potential for extremely tight stocks at the end of this marketing year. Government managed prices prevent market adjustments and ultimately hurt producers and consumers. We have learned from other markets that trade encourages reallocation of production toward the most efficient producers while import control policies prevent those adjustments.