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 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 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 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.