KANSAS CITY — Sugar producers and buyers are preparing for unprecedented tight sugar supplies in 2020 amid seven-year high prices. While the mechanisms of the U.S. sugar program should help with supply going forward, logistics issues and high prices likely will linger until a new beet crop is harvested in the early fall.
Sugar buyers in many cases have yet to feel the “pinch” of tightening supply, and some won’t feel it at all. Domestic sugar production and shipments were near normal in the first quarter of the sugar marketing year that runs from Oct. 1 to Sept. 30. But delivery restrictions began Jan. 1 for two major beet sugar sellers that declared force majeure in November 2019.
United Sugars Corp. said it would not be able to deliver 18% of is supply in 2019-20, and the Western Sugar Cooperative said it would short deliveries by 15%. Last week Western’s cut another 5% of its deliveries due to reduced sugar content in beets that were damaged by frost at harvest. Actual shipment declines will feel larger as the annual cuts are being administered in nine months (January-September) rather than over 12 months. United’s 18% annual cut equates to a 24% nine-month cut and Western’s 20% annual cut equals a 27% reduction over nine months.
A source at one major Midwest bakery indicated the company’s sugar supply was in good shape, and he expected little impact from the tight supply situation. The bakery contracted all its budgeted sugar needs for 2019-20 during the summer of 2019 from a supplier other than United or Western that indicated it would deliver all its contracted supply.
Prices last summer for delivery in 2019-20 mostly ranged from 34c to 35c a lb f.o.b. Midwest for beet sugar and 36c to 37c a lb f.o.b. for refined cane. Currently, cane sugar is being offered by one major refiner at 44c a lb f.o.b., and one processor is offering a limited supply of beet sugar at the same price. Most beet processors and even some cane refiners are out of the market for the rest of 2019-20. Some buyers indicated difficulty getting offers for either bulk beet or refined cane sugar.
Should the afore-mentioned Midwest bakery need to go back into the market at current prices, the procurement officer said he would be looking at around 50c a lb for sugar on a delivered basis.
Most in the trade expect sugar users will be assessing their sugar needs and the supply situation during the January-February quarter. But this year, sugar sellers have urged users to act quickly and focus on supply rather than price.
The U.S. Department of Agriculture, in its Jan. 10 World Agricultural Supply and Demand Estimates, forecast 2019-20 domestic sugar production (beet and cane) at 8,158,000 short tons, raw value, down 841,000 tons, or 9%, from 2018-19. That was before the additional cut from Western. Total sugar supply in the current year was forecast at 13,821,000 tons, down 1.8% from the prior year as a 26% increase in imports offsets most of the shortfall from domestic production. The ending stocks-to-use ratio was projected at 12.7%, below 13.5% that is the minimum indicating an adequate sugar supply and required in trade agreements with Mexico. It will take at least another 100,000 tons of imports to hit the 13.5% stocks-to-use ratio and would take about 350,000 tons more to bring the ratio up to 15.5%, which is the top end of the range used by the U.S.D.A.
One Upper Midwest ingredient manufacturer also indicated his current sugar supply was adequate. He had fully booked last summer from a distributor and was not dependent on supply from United or Western. At the same time, he said he had warehoused a “couple loads” of sugar just in case supplies ran low.
An East coast cocoa processor noted that a couple of his buyers had delayed receipt of cocoa powder because they were short of sugar, but so far that appears to be the exception rather than the rule.
Tight sugar supplies could have an impact across the food manufacturing spectrum and especially on the baking industry. Baking, cereal and related products is the largest user segment, accounting for about 23% of sugar deliveries for human consumption in 2018-19. Deliveries to the sector last year were down from 2017-18 by about 0.4% but in the first two months of 2019-20 (October-November) were up 0.6% from the same two months of 2018-19, according to data from the U.S.D.A. The second largest segment — wholesale grocers, jobbers and dealers — use about 20% of the sugar delivered for food. Shipments in the first two months of the marketing year were up 2.7% from a year earlier compared with up 2.4% for all of 2018-19.
Retail grocers and chain stores are the third largest user at 13%, with deliveries so far this year and for all of last year both down 1.4% from prior comparable periods. Confectionery takes about 11% of total deliveries, with shipments fluctuating seasonally and down 8% in the first two months of 2019-20 compared with down 0.4% for all of last year. The dairy sector uses 7% of sugar delivered for food use, with shipments down 0.5% in October-November and down 7.2% in 2018-19.
Sugar supply in the United States, whether domestic or imported, typically is most tight in the summer ahead of new crop beet sugar supply that first becomes available in September, prior to the start of the new sugar marketing year Oct. 1. Supply tightness is expected to occur much earlier this year. Beet sugar slicing and processing usually are completed in late May as piles in northern areas are worked through. This year, the slicing campaigns will be notably shorter because of the smaller beet crop, as least for Western and for the processors for which United Sugars sells.
Under terms of the agreements suspending countervailing and antidumping duties on sugar from Mexico, that country must be given a “right of first refusal” of sorts to supply any shortfall in the domestic market over and above tariff rate quota and certain other trade agreement imports. Amendments to those 2014 agreements similar to 2017 amendments were just signed by the United States and Mexico in the past couple of weeks and appeared in the Federal Register on Jan. 22. Mexican sugar industry representatives have told the U.S. government that it can fully meet what is called the “U.S. Needs,” thus it will supply all the sugar needed to make up for the loss of U.S. domestic production.
U.S. imports from Mexico were set at 1,827,000 short tons, raw value, in the December WASDE, up 83% from 2018-19. The U.S.D.A. lowered domestic production by 122,000 tons in its January WASDE and raised its import forecast by 21,000 tons, thus reducing forecast 2019-20 ending stocks by about 100,000 tons, which would be added to the amount needed from Mexico. But many doubt that Mexico will have adequate supply as its own crop is forecast down 10% from a year ago and is expected to drop more due to drought in key cane areas unless it shorts its domestic market and imports more sugar from other countries, which is referred to as “back filling.”
The United States also may turn to other countries through a T.R.Q. import increase and/or more high-tier imports (mostly refined sugar imports above T.R.Q. levels with higher import duties). The U.S.D.A. in its January WASDE raised its forecast of high-tier imports to 100,000 tons from 70,000 tons forecast in December, and some believe high-tier imports could easily be double the U.S.D.A. forecast.
But global sugar supplies are not flush this year, with analysts forecasting a world deficit ranging from around 6 million to 10 million tonnes, raw value. That means finding excess supply on the world market will be more difficult for both the United States and for Mexico, if it needs to import more sugar. Further, Canada also suffered a 45% sugar beet crop loss in 2019, which will be made up by additional imports of raw cane most likely from Central and South American origins.
A key this year for U.S. sugar buyers will be acting sooner rather than later to cover needs for the remainder of 2019-20, or to make up for shortfalls caused by United’s and Western’s force majeures. Trade sources indicated it could take upwards of a month to make all the necessary arrangements to ship refined sugar from Mexico to the Midwest. Buyers “starting from scratch” must consider time for price and volume negotiations, arranging transportation, export license in Mexico, border crossing and other factors.
Further complicating the U.S. supply situation are questions as to whether U.S. cane refining capacity is adequate to produce all the refined sugar needed, again assuming they can secure raw cane imports. While cane refining capacity appears adequate “on paper,” the capacity may be inadequate when needed most during the summer months if buyers don’t spread their deliveries out over a longer period. Most agree refining capacity will at a minimum be stressed.
As a result, some are hoping the U.S.D.A. will allow for increased imports of refined sugar, which can go directly to end users if polarity (purity) is 99.8 or above, rather than mostly raw sugar, or any sugar below 99.8 polarity, which must be further refined.
Regardless of raw or refined import levels, both sugar sellers and certainly sugar buyers are in uncharted waters concerning sugar supply, with the need to act early in the case of buyers.
“If you’re not booked now, it’s going to be tough to get coverage,” said one West coast distributor who was contemplating “who to stop selling sugar to.”
There may be light at the end of the tunnel assuming weather is more normal in 2020. Beet sugar for 2020-21 was offered by two refiners at 35c a lb. f.o.b. Midwest, and refined cane sugar was offered by one refiner at 37c a lb f.o.b. Southeast. But not all processors or refiners are yet offering sugar for next year amid the uncertainty in the current market.