Frank Jenkins on USDA WASDE Report

Expert analysis by Frank Jenkins of Jenkins Sugar Group on the January USDA WASDE report released this week:

The USDA has released its January updated S&D for the US market, showing a 10.8 % ending stocks/use ratio for the 2009-10 year. More interestingly, 2008-09 ending stocks for Mexico were reduced from 640,000 to 488,000 tonnes and 2009-10 ending stocks were reduced from 760,000 tonnes to 518,000 tonnes – just a bit more than one month’s consumption six to eight weeks before the new crop will begin despite estimated imports of 720,000 tonnes.

No changes were made to the 2008-09 ledger, leaving the ending stocks/use ratio at 13.5 %. For the 2009-10 year, the main event was a 150,000 ton increase in the estimate of Louisiana production to 1.450 million tons. While the harvest was muddy and generally challenging, yields had been good. We had been expecting a more modest increase to 1.350 million tons. The estimates of production in Florida and Hawaii were reduced by 20,000 and 6,000 tons respectively, thus domestic production was increased by a net 124,000 tons. The estimate of imports under the re-export program was reduced by 50,000 tons, which seems like a step in the right direction given the high price of world sugar, though once one gets past the sticker shock, the differential of the #11 futures to the #16 is still basically 10 cents – no different than days past when the #11 was 11.00 cents and the US raws were 21.00, for example.

Exports under the re-export program were also reduced by 50,000 tons, and the USDA reduced US exports to Mexico specifically by this amount. No other changes were made to the estimate of use. The estimate of domestic food use is still 10.140 million tons, down 3.20 % from the much-debated, marginally credible 10.479 million ton use estimate for 2008-09. Remember that 2008-09 food use was estimated at 10.735 million tons as recently as October. The 10.140 million short ton estimate is 5.54 % below the October estimate. The renewed marketing of Pepsi’s Throwback products and the release Dr. Pepper Heritage in December are among several indications that the migration from HFCS to “natural” sugar is still in motion. As an aside, a recent trip to Costco turned up several pallets of Mexican Coca-Cola with the required deposit information stickered onto the bottles. While relative cost will no doubt lead to substitution form sugar to HFCS, it is by no means a one way street.

Turning to Mexico, imports for 2008-09 are estimated at 160,000 metric tonnes, down 55,000 tonnes from the December estimate, and this 55,000 tons was pushed out to 2009-10. The estimate of 2008-09 exports was adjusted upwards to 1.367 million metric tonnes. And ending stocks were reduced to 488,000 tonnes. The 55,000 tonnes of imports under quota shifted from 2008-09 to 2009-10 were partially offset by a 45,000 tonne (50,000 short ton) reduction in exports from the US to Mexico. The estimate of 2009-10 production was reduced by 100,000 tonnes based on disappointing new crop yields. Thus ending stocks for 2009-10 are estimated at 518,000 tonnes. According to the Mexican Economy Ministry, total imports under the quotas from September through December totaled 380,000 tonnes. This suggests that Mexico will import about 500,000 tonnes between January 1st and September 30th, 2010 and will export roughly 650,000 tonnes in the same time frame. Given the limited carry-in of 488,000 tonnes, we feel the estimate of 720,000 tonnes of exports in 2009-10 is overstated. Its lazy math, but Mexico’s carry-in for 2008-09 was 1.975 million tonnes – 1.487 more than was carried in to 2009-10. Exports were 1.367 million tonnes in 2008-09 and ending stocks were less than one month’s consumption. In simple terms, Mexico exported its surplus last year and does not have the wherewithal to repeat.

So – if one assumes that Mexico will only export 350,000 metric tonnes (385,000 short tons) to the US in 2009-10 and that US food use will be flat year on year (two assumptions we are comfortable with) total 2009-10 supply would be 11.290 million tons, total use would be 10.864 million tons and ending stocks would be 426,000 tons. The ending 2009-10 stocks/use would be 3.92 %. To get back to the 13.5 % stocks/use ratio we had at the end of 2008-09 (which provided for a very tight market and historically high prices) we will need additional imports of 1.040 million tons. Given that the March #11 futures command a 1.30 cent premium to the May futures, our trade partners have a meaningful disincentive to hold supplies aside for an eventual US quota increase. We noted last night that Guatemalan exports in November-December at 262,368 tonnes were more than three times greater than the same period last year. The Philippines is discussing the need to import 100,000 tonnes. Deliveries under the TRQ through January 11th have totaled 448,476 tonnes – 169,419 tonnes more than was entered in the same period last year. In 2008-09 TRQ entries did not reach 448,000 tonnes until the first week of March.

We continue to believe that if the USDA takes no action to meaningfully increase US supply prior to the expiry of the March #11 futures on February 26th US refiners and end-users will be severely challenged in procuring sugar this summer and the USDA will be similarly challenged in maintaining an orderly market.

Jenkins Sugar Group
(203) 563 6100