Milling & Baking News - February 10, 2009 - 16

Corn Wet Milling

Curious disconnect in U.S. sugar
market calls for closer look
BY PETER A. MEYER

The U.S. sugar market has a curious
discontinuity, which is particularly
painful for a segment of the industry - the sugar cane growers. The
growers have seen the price of raw
cane sugar fall well below the forfeiture price despite the fact that
refined sugar prices are well above
$30 per cwt. This spread between
$19 per cwt U.S. raw sugar (#14
contract) and refined sugar is at a
record level.
There are several reasons for this
phenomenon. Among them is the reduction in refining capacity caused

month estimates the supply and demand for sugar in the United States
on a fiscal year basis. As a projection,
it becomes a valuable tool both for
industry participants - buyers and
sellers - and perhaps more importantly in sugar for policy makers.
Historically the stocks-to-use ratio has been a key factor used by the
U.S.D.A. in managing the U.S. sugar
program. It focuses attention on the
likely ratio of ending stocks for the
fiscal year as a percentage of the anticipated sugar use for that year. If
the stocks appear to be too low, the
U.S.D.A. has the option of increasing

Mexico sugar supply and use1/
Supply
Fiscal
years

Beginning
stocks

Production

Use
Imports

Domestic

Exports

Ending
stocks

1,000 metric tons, raw value
Sugar
2007/08 est.
Dec.
Jan.
2008/09 proj.
Dec.
Jan.

1,718
1,718

5,852
5,852

226
226

5,731
5,731

677
677

1,388
1,388

5,850
5,850

150
150

5,780
5,780

575
575

1,033
1,033

1/
U.S. high-fructose corn syrup exports to Mexico (metric tons, dry-weight basis): Oct.-Sept.
2007/08 = 427,705; October 2007 = 25,907; October 2008 = 35,392.

Source: U.S. Census Bureau

by the shutdown of the Savannah,
Ga., refinery. There are two other
factors that are unexpectedly interconnected and where a change in
the World Agricultural Supply and
Demand Estimates (WASDE) from
the U.S. Department of Agriculture
reporting may have an impact.
One factor is Mexican imports,
which reached 250,000 short tons,
raw value (S.T.R.V.), in the first fiscal quarter (October-December).
The U.S.D.A. estimated that 45% of
those imports were further refined
in the United States.
The second factor was the expanded tariff rate quota (T.R.Q.) of
300,000 S.T.R.V. that was initiated
on Aug. 6, 2008. This was supposedly a refined sugar T.R.Q. expansion, but a significant percentage of
the product also was further refined
in the United States.
How are these two factors related? Through the WASDE.
The government report each
16 / February 10, 2009

Milling & Baking News

imports above the T.R.Q. minimum.
If stocks are too high, the U.S.D.A.
only may reduce the overall allotment quantity (O.A.Q.) for the next
year or consider the ethanol conversion option in the new farm bill if
forfeitures are deemed likely - both
slow processes to take effect.
The WASDE in August 2008
showed the projected stocks-to-use
ratio for the 2009 crop year at 7.7%
compared with the 2008 estimate
of 15% and the 2007 crop year end
ratio of a too fulsome 17.3%. It was
in the context of these numbers that
the U.S.D.A. announced the refined
T.R.Q. increase of 300,000 S.T.R.V. on
Aug. 6. Concern was exacerbated by
the September WASDE that showed a
strikingly low 4.6% stocks-to-use ratio. Due to increased production estimates and re-estimated beginning
sugar stocks the ratio has increased
to 9.9%, but some are still seeking an
expanded T.R.Q.
The assumption in the January

WASDE was that Mexico would
supply 630,000 S.T.R.V. to the United States, slightly higher than the
U.S.D.A.'s original estimate but
more in line with fiscal first-quarter
sales. However, since the full implementation of the North American
Free Trade Agreement when Mexican sugar and U.S. sugar received
free access to each other 's market,
in fact in many ways the United
States and Mexico became one market, the old and current version of
the stocks-to-use ratio became questionable as a supply management
tool. If, in the past, a 12% to 14%
ratio of U.S. stocks to U.S. annual
use was comfortable, then when
Mexican supply is estimated and included in U.S. usage some Mexican
stocks also must be included in the
stocks number to make it relevant to
discussion of adequate supply. If it's
included in the denominator and not
included in the numerator, in some
fashion, the supply demand picture
is neither comparable to pre-NAFTA figures nor accurate as to the
balance of supplies available to the
U.S. market.
Questions exist as to how much
of Mexico's stocks should be included and how comparable and
reliable Mexican inventory statistics
are compared to U.S. statistics, but
there is no question that some portion of those stocks need to be included in the WASDE stocks-to-use
ratio for clear decision-making. It is
also possible that Mexico will need
to be more mindful of U.S. stocks as
the access of U.S. sugar to Mexican
markets may provide supplies if a
short crop might leave them in need
of sugar.
The U.S.D.A. already estimates supply and use in Mexico as well as beginning and ending stocks. The additional step of estimating some portion
of those Mexican stocks for supplying
the U.S. market is a straightforward,
but not trivial, step. This effort is essential if the U.S. stocks-to-use is to be
an effective tool in managing the U.S.
program. The reality of Mexican supply to the U.S. market is established.
The WASDE should reflect that
reality. MBN

Peter A. Meyer is president of
PMI Consultants, a Chicagobased consultant to the food
and agribusiness industry.

bakingbusiness.com / world-grain.com

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Milling & Baking News - February 10, 2009

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