Jenkins Sugar Group Market Update, April 2010

Fiscal year 2010 Halftime Report by Frank Jenkins, Jenkins Sugar Group:

The past six months have provided a once-in-a-generation experience for the world’s sugar markets, and the US market has been no exception. Since the beginning of the program year on October 1st, the #11 sugar market has rallied from a low of 20.00 to 30.40 and subsequently plummeted to a low of 15.46 on April 1st, buffeted by a unique mix of supply and demand dynamics, speculative fund in- and out-flows, currency fluctuations, occasional rogue exports and, to some extent, by the reluctance of the US to allow additional imports despite a raw sugar price more than 15.00 above world raws and US refined prices $590 (nearly 27.00 cents) over the London whites market.

While the bull market in world sugar undoubtedly impacted US prices, the US market has been remarkable resilient since the #11 futures peaked two months ago. While the #11 market has recoiled by more than 14.50 cents per pound, the July #16 is 8.00 beneath its 39.00 contract high. US refined prices are down 4.00 cents since the world market peaked basis the Midwest list price. World whites are 12.55 cents off their late-January highs. The point is that the US market, love it or hate it, is to a very large extent the product of the USDA’s management of the program. Thus the tea leaves provided by today’s USDA supply and demand report merit close inspection.

The bottom line of today’s report is an 11.6 % stocks/use ratio for 2009-10, up from 10.3 % in the March report and only marginally below the 11.6 % 2008-09 ending stocks/use ratio from the April 2009 WASDE report released one year ago today. Nothing about 11.6 % stocks/use suggests an imminent quota increase. Based on today’s report, we do not see an increase likely before the May WASDE report.

In today’s report, beginning stocks for 2009-10 were increased by 48,000 tons, due to revisions to the 2008-09 analysis, as opposed to additional early-harvest (September) beet production. The estimate of Florida production was reduced by 35,000 tons to 1.630 million tons. Due to the recent 90,329 short ton (81,946 metric tonne) TRQ reallocation and the expectation that a higher percentage of the TRQ will be filled due to the lower #11 value, the TRQ shortfall was reduced from 200,000 tons to 70,000 tons. There were no changes made to the “D” side of the S&D, thus ending stocks were increased by a net 143,000 tons.

About the US food use estimate: The USDA has been open about the fact that there are apparent discrepancies in data regarding refined imports and deliveries for human use by “non-reporters”. In the Sweetener Market Data report published yesterday, the USDA’s Farm Services Agency notes “ FSA is still not satisfied with our procedures to estimate refined imports and domestic deliveries by non-reporters…The current procedure results in negative refined sugar imports and domestic deliveries by non-reporters, which is, of course, not possible.” The department cautions that year-on-year comparisons are likely misleading.

Frank Jenkins, The Jenkins Sugar Group.

The USDA’s data through February 2010 shows FY 2010 deliveries for domestic human consumption at 4.372 million tonnes – 216,775 tons, or 5.3 %, higher than deliveries in the same period last year. Refined imports under the TRQ have totaled 59,185 tonnes through February, and Mexican refined imports have totaled 199,820 tonnes for a total of 259,000 tons. As deliveries through February were up by 216,775 tons, even if 83 % of all refined sugar imports were double-counted, domestic food use would still be flat year-on-year, as opposed to down 3.17 % as per today’s report.

Looking at two extremes, if consumption is flat year-on-year, the use figure in today’s WASDE in underestimated (and ending stocks overestimated) by 333,000 tons. If the 5.3 % increase shown in the USDA Sweetener Market Data through February is accurate and holds up through the year, use would be under estimated by 909,000 tons.

Mexican exports to the US in 2009-10 are estimated at 540,000 short tons. Based on the pace of exports to date, the crop progress and the fact that storage and finance pressures are less of a factor in the second-half of the year, we feel this estimate if too high by 100,000 tons.

What does this mean: The 11.6 % ending stocks/use ratio for 2009-10 in today’s report gives little impetus for the USDA to increase the TRQ today, or this month. The USDA’s threshold for increasing imports is not price-based, but rather based on a physical shortage of sugar. Today’s report should assuage any concerns that there will be a shortage of sugar in the coming months. This is a dangerous illusion.

TRQ arrivals through April 5th totaled 716,350 tonnes, leaving a 393,585 tonne unshipped balance. Adjusting for the 70,000 short ton shortfall in today’s report, the actual balance is 330,081. Argentina recently tendered its quota (49,010 tonnes) for delivery in the July-September quarter, and numerous other shippers are committed to delivering sugar in July-September. Many of the TRQ holders have un-shippable balances following the reallocation (Australia has 7,077 tonnes). A more realistic TRQ availability for April-June is 240,000 tonnes. At the pace of TRQ arrivals from October 1st through March 30th, this supply will be fully depleted in 61 days, or on June 10th. The assumed balance left for the July-September quarter will last only two to three weeks of the 13-week quarter.

From mid-June through September 30, there are roughly 90,000 tons of TRQ available and roughly 200,000 tons of re-export sugar. In simple terms, this is sufficient to the demand from one large cane refinery – Baltimore, C&H or Savannah, when its running up to speed. Thus, assuming that the two Gulf refineries run on Louisiana and Texas sugars, two large refineries, Yonkers and AmCane will have to compete for the residual supply from Hawaii and Florida and any (unlikely) Mexican cargoes. Raw sugar imports must be increased by a minimum of 500,000 tons to accommodate this need – either as high tier, TRQ or form Mexico.

The below tables depict the USDA numbers from today with our estimate as per the above. Table 1 compares the USDA S&D with our own. Table 2 uses our S&D as per Table 1, and then solves for 10.5 % ending stocks over use and for 13.9 % stocks/use – the same ratio as 2008-09, which set us on the path we are now on. These two scenarios show a need for total additional imports of between 580,000 and 955,000 tons. Once again, these imports will either come in the form of TRQ imports, high tier imports or imports from Mexico. If today’s report allows the USDA to remain on the fence, which appears to be where they are most comfortable, US domestic raws will have to rally to high tier parity, and high tier refined imports will likely flow until domestic refined prices decline sufficiently to close that spigot.

Used by permission – Frank Jenkins, Jenkins Sugar Group.