The U.S. sugar market remains in a tight supply demand balance that has existed for over two years. The latest turmoil has been created by an unexpected shortfall in projected sugar imports from Mexico. USDA will likely provide for increased imports to ensure adequate supplies for the remainder of the marketing year until September 30.

USDA manages the domestic sugar market so the total supply of domestic sugar marketed plus imported sugar does not depress prices for raw cane sugar and refined beet sugar below prices established by Congress. Under NAFTA, an unlimited amount of sugar can enter from Mexico duty free. The WTO agreement and various free trade agreements provide for 1.371 million short tons raw value (STRV) of sugar to be imported each year tariff free from specific countries under tariff rate quotas (TRQs). Additional sugar can also enter with an over-quota tariff of $0.1536 per pound. The Secretary of Agriculture may increase sugar imports under the TRQs to meet anticipated demand, but additional imports cannot occur until after April 1 of the marketing year that begins on October 1.

According to an analysis in the December 2011 Sugar and Sweetener Outlook from the Economic Research Service of USDA, from calendar 1989 through 2008, the quarterly world price of sugar averaged $0.10 per pound at the Intercontinental Commodity Exchange (ICE), with a range of quarterly prices of about $0.05 to $0.15 per pound. In the 2009 marketing year world production was 10.0 million metric tons raw value (MMTRV) below consumption and end-of-year stocks were pulled from a record high over 40.0 MMTRV to a much tighter 31.2 MMTRV. Stocks declined further to 29.3 MMTRV by the end of the 2010 year, before recovering slightly to 29.5 MMTRV by the end of 2011 marketing year. World quarterly prices average $0.226 per pound over 2009-2011 with a range of quarterly prices of $0.15 – $0.30 per pound.

World stocks at the end of the 2012 marketing year are projected at 30.0 MMTRV. With consumption continuing to increase, but more slowly than expected earlier, the world sugar market continues to be sensitive to the relatively low level of carryover stocks. Sugar prices on the ICE peaked at $0.30 per pound last summer before declining to $0.23 in the fall and strengthening again earlier this year. Weather uncertainty on the supply side will continue to attract attention.

In mid-January USDA projected Mexican sugar production for the current 2012 marketing year at 5.0 million metric tons (MMT), down 0.33 MMT from the December projection and down 0.2 MMT from last year, but near average production of the previous three years. Sugar imports into Mexico were reduced to 0.310 MMT from an earlier projection of 0.449 MMT, about unchanged from the 0.316 MMT imported in 2011, but far short of the 0.861 MMT imported in 2010. Those two changes in Mexico forced USDA to lower its forecast of Mexico sugar exports to the U.S. by 0.469 MMT to 0.892 MMT to maintain a reasonable balance for sugar use in Mexico with the reduced supply.

The lower exports from Mexico led USDA to reduce projected imports to the U.S. by 0.563 million short tons raw value (MSTRV) to 2.9 MSTRV. The lower imports and a 15,000 STRV reduction in U.S. production led to a 0.578 MSTRV reduction in ending stocks to 0.620 MSTRV, with a stocks-to-use ratio of 5.3 percent. That stocks-to-use ratio is less than half the level at the end of FY2011, 12.74 percent, which was the lowest stocks-to-use level of the last ten years. USDA has no choice but to increase imports from other countries to replace the Mexican shortfall.

Increasing U.S. imports above the current USDA projection of 2.9 MSTRV will not be a surprise for the world market. In the last marketing year, 2011, U.S. imports were 3.7 MSTRV and in 2010 imports were 3.3 MSTRV. According to Economic Research Service estimates, sugar deliveries for domestic use have grown from 10.0 MSTRV in 2002 to a projected 11.4 million STRV for 2012. Production has varied over the ten last years, but was 7.9 MSTRV in both 2002 and 2012. Imports, from Mexico or someplace else, are needed to fill the gap.

The newly approved free trade agreements with Panama and Colombia have not been implemented, but may add small amounts to imports this marketing year. The USTRs office has certified that Guatemala, El Salvador and Nicaragua have net sugar trade surplus status under CAFTA-DR (export more sugar than they import) and could have additional supplies to ship to the U.S. Guatemala has the largest potential at 1.5 MMT, with the other two at about 200,000 metric tons each. Just because the Secretary of Agriculture increases the TRQ for tariff free imports, there is no guarantee exporters will supply the market. The January Sugar and Sweetener Outlook reported that Mexico had two 150,000 metric ton TRQs that were only 52 percent and 13 percent filled as of mid-December. U.S. buyers will need to outbid in the current market those desiring to hold stocks into next year.

When the 15 year transition for the sugar market under NAFTA ended in 2008, analysts assumed that Mexico would add to supplies in the U.S. Mexico has a government supply management program similar to the U.S. and has been buffeted by the same global market conditions. Sugar production in Mexico has averaged 5.5 MMTRV over the last ten years and has not been trending up. Sugar imports into Mexico were trending higher through the 2010 marketing year and have since declined by 60 percent. Domestic consumption has declined over the last five years, while exports have averaged about 1.0 MMTRV, four times higher than the average for the previous five years.

The U.S. and Mexican sugar programs were designed for an economic situation of large world supplies of low priced sugar, with stable domestic markets that needed protection from world market conditions. They are not capable of easily adjusting to market conditions of the past four years where weather has caused uncertain supplies and sugar ethanol production in Brazil removed excess supplies.

Good weather in major producing countries and a slowdown in demand growth for human consumption could result in a buildup of carryover supplies that would again weigh on global prices. If not, government supply management programs will need increased flexibility to meet consumer demand in importing countries.

Ross Korves is an Economic Policy Analyst with Truth About Trade & Technology