Managing carryover stocks is a challenge for all agricultural commodities.  Markets need to limit use through higher market prices when supplies are tight and to create incentives to hold stocks when production is large.  Government programs with high price support loans in relation to market prices can result in the government becoming the stockholder of last resort through loan defaults.

The 2008 farm bill provides for the Commodity Credit Corporation (CCC) of USDA to make loans to processors of raw cane sugar at $0.1875 cents per pound and refined beet sugar at 128.5 percent of the loan rate for raw cane sugar, $0.2409 cents per pound.  Loans are for a maximum term of 9 months and must be liquidated, along with interest charges and other expenses, by the end of the fiscal year, September 30. The loans are nonrecourse and the CCC must accept the sugar pledged as collateral as payment in full at the discretion of the processor.

A year ago the U.S. and world sugar markets were worried about stock shortfalls.  According to estimates by the Foreign Agricultural Service of USDA, world carryover stocks at the end of the 2008/09-2010/11 marketing years were relatively low at 30.5 million metric tons (MMT) raw value (RV), 28.9 MMT RV and 29.9 MMT RV.  U.S. stocks were correspondingly low at 1.4 MMT RV, 1.4 MMT RV and 1.3 MMT RV.  World prices peaked in February of 2011, but prices stayed high until late summer of 2012.  Global production in 2011/12 reached a record of 172.0 MMT RV.  Consumption increased, but carryover increased to 35.3 MMT RV near the low end of the normal range.  U.S. production increased to 7.7 MMT RV and carryover stocks increased to 1.8 MMT RV, near the top end of the normal range.

When the world price of sugar peaked in February 2011, U.S. wholesale beet sugar was $0.54 per pound, near the high set for this cycle of $0.595 per pound.  In April of 2012 the wholesale beet sugar price still averaged $0.5025 per pound.  In April of this year beet sugar averaged $0.2663 per pound.  The price signal in the spring of 2012 in the U.S. and globally was to produce a larger crop and limit use to build stocks.  U.S. sugar users were pushing USDA to allow more sugar imports to relieve the relatively high sugar prices.  U.S. prices were sticky on the high side as the market was adsorbing the larger supplies for 2011/12.

In 2012/13 production added to the supply, storage and pricing problems.  Global production reached another record at 174.5 MMT RV and carryover stocks are expected to increase to 38.4 MMT RV, near the upper end of the normal carryover range.  U.S. production increased 0.5 MMT RV to 8.2 MMT RV in 20012/13 after increasing 0.6 MMT RV in 2011/12, and U.S. carryover stocks are expected to increase to 2.0 MMT RV.  Mexico also had a large crop of 6.2 MMT actual weight.  Mexico has a sugar supply management program similar to U.S. and under NAFTA Mexico can export an unlimited amount of Mexican produced sugar to the U.S.    Exports to the U.S. are projected at 1.4 MMT actual weight in 2012/13, up from 0.9 MMT actual weight in 2011/12.

The recent projections by FAS for the 2013/14 marketing year show only marginal changes.  Global production will be up slightly at 174.9 MMT RV, with growth in production in Brazil and Thailand more than offsetting a decline in India.  Carryover stocks will be down slightly at 38.2 MMT RV.  U.S. production will decline 0.4 MMT RV to 7.8 MMT RV as beet acreage declines slightly and yields return to trend.  U.S. carryover stocks remain unchanged at 2.0 MMT RV.  Mexican production is expected to be down 0.4 MMT actual weight to 5.8 MMT actual weight on lower yield, but production will remain well above production for the years prior to 2012/13, and carryover stocks will be down marginally at 1.1 MMT RV.  Exports to the U.S. are expected to be up 0.1 MMT actual weight to 1.5 MMT actual weight as other markets become less profitable than the U.S. market.

This scenario indicates no relief for the U.S. sugar market.  Stocks will be about 0.5 MMT RV higher than levels in recent years that have been associated with market prices above the CCC price support loan rate.  Under a more market oriented stocks policy imports from countries with tariff rate quotas would decrease and U.S. prices would decline enough so that Mexican sugar exports would be more profitable moving to other markets rather than continuing to come to the U.S.  The cash refined sugar price would decline low enough in relation to that of futures market prices to pay holders of sugar stocks, including users of sugar, for carrying stocks into future time periods.  Of course, cash market prices could go low enough that sugar cane and beet producers and refiners with fixed contracts to buy raw sugar could incur substantial losses.  That is what the current sugar program was created to avoid.

The current projections for U.S. and Mexican production could be too high.  Late planting of sugar beets caused by the late spring in the Midwest could result in lower than expected yields.  Growing seasons in other parts of the world could be less favorable.  Mexican sugar cane production could be closer to the pattern before 2012/13.  Lower global sugar prices could result in higher usage than the current projections, such as more sugarcane in Brazil used for ethanol.  Most important of all, these lower prices may encourage holding of stocks for future use and cause high cost producers outside the U.S. to divert land, labor and capital to other crops.

The 2008 farm bill established a Feedstock Flexibility Program to avoid sugar loan forfeitures by diverting sugar to ethanol production.  On September 1, one month before the end of the marketing year, the Secretary of Agriculture would announce the amount of sugar for the CCC to purchase and sell to ethanol producers.  The most talked about is a plan to purchase 0.4 MMT of sugar to reduce stocks enough to increase sugar prices above the loan rate for cane sugar and beet sugar to encourage processors to repay loans rather than forfeit to the government.  That would reduce the carryover from 2.0 MMT RV to 1.6 MMT RV which should move the market prices high enough to avoid forfeitures.   The upfront costs of probably $200 million would be less than the costs of loan defaults and storing sugar.

Some analysts have rightly been critical of the sugar to ethanol program, but any commodity program with a high price support must have some built-in inventory management program to remove supplies when large carryovers accumulate.  The ethanol program should achieve that objective for the sugar program.

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org). Follow us: @TruthAboutTrade on Twitter | Truth About Trade & Technology on Facebook.