The U.S. Department of Agriculture in its mandate to run the U.S. sugar program at the lowest cost failed to stave off expensive forfeitures of sugar against loans maturing Aug. 31. The department’s Commodity Credit Corp. (C.C.C.) spent about $53 million in three tenders during July and August in an effort to remove surplus domestic sugar in the hope prices would rise sufficiently to allow borrowers to pay off their loans. But nearby refined sugar prices barely budged and about 85,000 tons of sugar were forfeited to the government last week.

Even more daunting are the nearly 600,000 tons of sugar pledged as collateral for loans that mature on Sept. 30, the end of the 2012-13 marketing year.

The final blow came when the U.S.D.A. was able to garner a paltry 7,118 tons of refined beet sugar in its first use of the 2008 farm bill’s Feedstock Flexibility Program (F.F.P.), which provides for the U.S.D.A. to buy sugar off the market and resell it solely for the purpose of use in biofuels production. Sugar processors offered 99,375 tons of sugar, all of which had to be pledged as collateral against loans maturing Aug. 31, to the U.S.D.A. in the Aug. 21 tender. But the U.S.D.A. was able to sell only 7,118 tons to a single ethanol producer, and thus by law was only able to buy that amount out of the 99,375 tons offered.

Trade sources indicated a considerable part of ethanol producers’ lack of interest was rules from the Environmental Protection Agency that limit emissions to corn or possibly other grains, not sugar.

The sole U.S. ethanol producer to participate in the tender bought the sugar for 6.3c a lb. The U.S.D.A. paid 25.3c a lb to buy it, resulting in a net cost of about $2.7 million. There were indications of offers well below 6c a lb, which the U.S.D.A. was said to have declined.

In the previous two tenders the U.S.D.A. bought a total of 106,742 tonnes (117,662 tons) of domestic refined beet and raw cane sugar at a total cost of about $51 million. That sugar was exchanged for 345,712 tonnes (381,078 tons) refined sugar re-export credits and certificates of quota eligibility, thus pushing potential supply into later time periods rather than removing it permanently from the food supply as does the F.F.P. The department estimates that had all of the sugar in the three tenders been forfeited, it would have cost the U.S.D.A. more than $133 million. Since there was a cash outlay of just over $53 million, the department contends it potentially saved about $80 million.

Now that forfeitures are a reality, costs likely will balloon. The cost to the U.S.D.A. of the Aug. 31 forfeitures was about $35 million, without consideration for potential revenue for resale of the sugar for some purpose other than food. The greater concern will come as the U.S.D.A. must deal with the nearly 600,000 tons of sugar under loans that mature Sept. 30. Should all of that sugar be forfeited, it may cost upwards of another $300 million, bringing the total sugar tab for the year to about $390 million. It is unlikely all of the Sept. 30 sugar will be forfeited as some loans likely will be repaid and the U.S.D.A. is expected to take additional action to remove supply, but the quantity is expected to be substantial.

But many questions remain, and the U.S.D.A. faces a daunting task. Not only must it attempt to remove additional supply from the market to push prices higher, which will draw the ire of sugar users, in an effort to further avoid loan forfeitures, the U.S.D.A. must decide how to dispose of the sugar it now owns or will own as the result of forfeitures. Under prior farm bills, that sugar was resold into the market in later periods when supplies had declined and prices had risen. That route is no longer an option.

Another challenge facing the U.S.D.A. and the U.S. sugar industry is continued strong shipments from Mexico, which flow into the United States duty free under the North American Free Trade Agreement. Mexico also has a huge surplus after record 2012-13 sugar production. Exports to the United States through the first 10 months of the marketing year were up 75% from the same period a year earlier and were on pace to reach or exceed the U.S.D.A.’s forecast record of 2.1 million tons, equal to 15% of the total U.S. sugar supply.

But there is a ray of optimism for the U.S.D.A. with prices for 2013-14 slightly firmer and sugar production forecasts for the United States and Mexico down from 2012-13.