World sugar prices set 29-year highs in response to dry weather in India last summer and wet weather in Brazil that caused difficulties in harvesting and reduced yields of sugar, but world prices have declined in recent weeks. The U.S. market is somewhat insulated from world market activity by an import quota system that holds U.S. prices above world market prices much of the time. The USDA managed domestic market has had its own price problems recently as carryover supplies are reduced and imports from Mexico fall short of earlier expectations.

The 2008 farm bill requires USDA to set the Overall Allotment Quantity (OAQ) for marketing of domestically produced sugar at no less than 85 percent of estimated domestic sugar consumption. For fiscal year (FY) 2010 (October 1, 2009-September 30, 2010) the OAQ was set at 9.24 million short tons, raw value (STRV). Imports of raw sugar were set at the WTO minimum tariff rate quota (TRQ) of 1.23 million STRV. USDA can allow additional imports if necessary after April 1 of the fiscal year; additional imports earlier in the year can be authorized only in an emergency. USDA is charged with managing the program without causing forfeitures to USDA of domestic sugar under the price support program.

The February 2010 estimates for U.S. sugar for FY2010 from the World Agricultural Outlook Board of USDA reported beginning stocks of 1.45 million STRV, down from 1.66 million STRV a year earlier and the lowest since 1.33 million STRV in FY2006. Total sugar production is projected at 7.97 million STRV, up 0.49 million STRV from a year earlier. With the domestic marketing allotment at 9.24 million STRV, refiners of domestic sugar can sell into the market all the sugar they can process. Total consumption is estimated at 10.53 million STRV.

The difference between domestic production and consumption will be met by imports and a drawdown of stocks. Imports for FY2010 are projected at 2.16 million STRV, down 0.92 million STRV from FY2009. TRQ imports are projected at 1.26 million STRV, down from 1.37 million last year. Other program imports are estimated at 0.35 million STRV, up from 0.31 million STRV last year. Mexican imports to the U.S. of 0.54 million STRV for FY2010 are down from 1.40 million STRV in FY2009. Carryover supplies for FY2010 need to decrease to 1.06 million STRV. The end-of-year stocks-to-use ratio would decline to 10.0 percent compared to 13.5 percent in FY2009 and the lowest since 12.6 percent in FY2005.

Under NAFTA, Mexican sugar enters the U.S. market tariff free and U.S. sweetener products, mostly high fructose corn syrup (HFCS), can freely enter the Mexican market. Mexico has a domestic sugar program similar to the U.S. in restricting imports to hold up market prices. Mexican sugar production varies based on weather conditions and input decisions by producers. FY2010 production is projected by the Foreign Agricultural Service of USDA at only 5.10 million metric tons (MT), down from 5.26 million MT in FY2009 and 6.15 million MT as recently as FY2005. Beginning stock in Mexico were at an extremely low 0.49 million MT. With domestic consumption estimated at 5.3 million MT, Mexican sugar imports must increase to 0.72 million MT, up from only 0.16 million MT in FY2009, and HFCS needs to increase to 0.90 million MT, up from 0.65 million MT in FY2009.

With projected low end-of-year stocks in the U.S. and Mexico, U.S. market prices have risen to higher levels than world prices. According to an analysis by Jenkins Sugar Group, Inc. presented recently at the USDA Agricultural Outlook Forum, the International Commodity Exchange (ICE) #11 contract, a world market raw sugar price, and the #16 contract, a U.S. raw sugar market price, trade at about the same level in August 2009 at $0.25-0.29 per pound reflecting the tightening world supplies. By mid-February of this year, the #11 contract had increased to $0.30 per pound, while the #16 contract increased to $0.40 per pound. The analysis projects tighter supplies in the U.S. and Mexico unless USDA increases sugar TRQs.

The current market conditions and expectations of tighter supplies have generated political responses. The Sweetener Users Association which represents companies using sugar in their businesses had encouraged USDA to increase imports in FY2009 and has continued in FY2010. The International Sugar Trade Coalition representing sugar industries in developing countries that supply raw sugar to the U.S. market recently wrote to USDA Secretary Vilsack and USTR Kirk asking that additional imports be raw sugar and allocated based on existing TRQ among the countries that have supplies available for shipment to the U.S.

USDA program decision makers are in a difficult situation. They are charged to run the program at no direct cost to the federal budget. A way to do that is to limit imports to WTO minimums. For years Mexican sugar exports to the U.S. were viewed as one of the biggest threats to the U.S. sugar program and that concern increased with the completion of the NAFTA implementation transition on January 1, 2008. Management of imports is made more complex by the prohibition on additional imports before April 1 unless an emergency exists. Since sugar is a relatively small part of the cost of many sugar containing products, most consumers are unaware of sugar cost increases and large companies like candy and cereal producers are viewed as the beneficiaries of increased imports at the expense of domestic sugar producers. With an imbalance in incentives for managers of the sugar program, high U.S. sugar prices are less of a problem that low ones.

U.S. sugar program management challenges point out the difficulties of managing similar programs in other countries. USDA is fortunate to have reasonably accurate data on U.S. sugar production, consumption and imports. The Foreign Agricultural Service of USDA also provides reliable information about the rest of the world. Despite that data, the sugar program is subject to price spikes. Other countries are trying to manage more complex programs with much less data. Market analysts should not be surprised when sudden shifts in imports or exports occur from uncertainties in estimates of supply and/or demand. Private markets are vital for discovering information and integrating that into market decisions by producers, processors and consumers of agricultural products.