Global and U.S. sugar supply balances have been uncertain for the past year and prices reached 29-year highs in international markets during the winter. In early July USDA increased the FY2010 TRQ for raw sugar by 300,000 short tons raw value (STRV) to 1.731 million STRV to meet expected market demands. Actual raw sugar TRQ imports are projected at 1.604 million STRV due to some holders of TRQs no longer being competitive in the U.S. market. Sugar imports above the TRQ level carry a tariff rate of $0.1536 per pound. According to analysis in the August 2010 Sugar and Sweeteners Outlook from the Economic Research Service of USDA, U.S. raw sugar futures prices exceeded world futures prices by more than the tariff during most of the last three months indicating the need for additional supplies of raw sugar. High-tier tariff imports for FY2010 were estimated at 114,000 STRV through the end of July.
The U.S. supply management program for sugar is supposed to balance out supply and demand to provide a fair price for sugar beet and cane farmers without being overly costly for sugar users. Imports of raw sugar paying the high-tier tariff are an indication of an imbalance. The domestic market is protected with WTO compliant TRQs for raw sugar at a minimum of 1.23 million STRV per year and a small refined sugar TRQ. Under NAFTA, starting with FY2008 Mexico is allowed to export an unlimited amount of sugar into the U.S. market tariff free. Prior to that, total imports ran about 2.1 million STRV and end-of-year stocks were 1.7-1.8 million STRV. The exceptions were FY2005 when a short crops and strong domestic use pushed end-of-year stocks to a recent low of 1.33 million STRV. Hurricane Katrina followed and pushed production lower, which sent imports to a recent peak of 3.44 million STRV and end-of-year supplies at 1.7 million STRV.
The current year (FY2010) problems began in FY2009 with world production down about 22 million STRV and U.S. production about 0.6 million STRV less than a year earlier, but that was more than offset by record imports from Mexico of 1.37 million STRV, pushing total imports to 3.05 million STRV. U.S. production in FY2010 increased 0.3 million STRV to 7.8 million STRV, while Mexico imports declined to an estimated 530,000 STRV. U.S. imports from all sources are projected to again top 3.0 million STRV, but the shortfall in Mexican supplies had to be filled by expanding the TRQ and allowing some shifts in deliveries between fiscal years as announced. End-of-year stocks are projected at 1.49 million STRV, the lowest since FY2005.
USDA projections for FY2011 (beginning October 1, 2010) are not encouraging for U.S. sugar users. U.S. production is projected at 8.34 million STRV, up 530,000 STRV from last year and near the 8.45 million STRV produced in FY2008 and 8.65 million STRV in FY2004. Imports from Mexico are projected almost unchanged at 550,000 STRV and total imports are projected at 2.27 million STRV assuming the minimum TRQ imports. Total use is projected to decline slightly, leaving end-of-year stocks at a recent low of 1.26 million STRV. The TRQ for FY2011 will likely be increased, particularly if some of it is pulled into FY2010.
Larger sugar imports from Mexico in FY2011 are not likely unless more sugar is replaced by high fructose corn syrup (HFCS). Sugar production in Mexico is expected to recover to 6.0 million STRV, but total domestic use is projected at 5.46 million STRV. Mexican imports of sugar are projected to be only 165,000 STRV, down from FY2010, and end-of-year stocks need to be rebuilt after two years of historically low levels. Use of HFCS is projected at a record 1.54 million tons.
The Mexican sugar supply situation reflects the larger world supply/demand conditions for sugar. World raw sugar prices on the Intercontinental Commodity Exchange (ICE) futures market in New York City reached $0.20 per pound in recent days. That is less than the almost $0.30 high last winter, but up over 50 percent from the May lows. The Indian monsoon season has a couple of weeks to run before markets can assess how much the new crop will yield. Two below average crops in a row have reduced Indian carryover supplies and led to large imports which pushed up world prices. The Brazilian harvest season started early, but it is not certain if the harvest will continue with substantial volume increases. Brazil is the largest sugar producer and accounts for half of world exports. It is also the most cost efficient producer and drives market prices when supplies are large. Ethanol production will consume about half of the Brazilian sugar crop.
The world sugar industry may be entering a new phrase. About 7 percent of the U.S. raw sugar TRQs are not used because holders cannot make money at the U.S. price, which is usually above the world price. The EU no longer exports significant amounts of sugar, Brazil uses half of its sugar production for ethanol and demand continues to grow in countries like India. All of these market forces help support the price of sugar. If potential sugar producers in South America and Africa see these changes as permanent, they may expand output.
U.S. sugar users will not be part of any world market realignment process because TRQs limit the amount of sugar than enters the U.S. market each year. Sugar users can only react to market condition after USDA changes the amount of TRQs available for a fiscal year when market conditions have become tight and prices have increased. The TRQ supply reverts back to the WTO minimum the following year and the process starts all over again. Being a reactor to changing market conditions and waiting for government permission to respond is not a good position to be in for the long term.