Market Report: USDA Increases Tariff Rate

The USDA increased the 2009-10 Tariff Rate by 200,000 short tons on Friday April 23rd, reports sugar industry analyst Frank Jenkins of the Jenkins Sugar Group. As we have been noting, the initial quota allocation would likely have lasted until the end of June, assuming nothing was held back for the July-September quarter. As TRQ arrivals have been averaging about 26,500 tonnes per week from October 1st through this week, today’s increase should last until roughly mid-August.

Frank Jenkins of the Jenkins Sugar Group

However, according to US Customs data, over the past 20 years total US imports have been skewed 45 % in the October-March period and 55 % in April-September, as the domestic crop dominates demand in the first half of the fiscal year. If this trend holds true, the last two full months of the quota year will be import-starved in the absence of a further increase in the TRQ. Looked at another way, using the 704,051 TRQ import in the first half of the year as a basis, the market should be looking for roughly 860,000 tonnes in the second half. Assuming the USDA’s 70,000 tonne shortfall estimate and including today’s increase, total TRQ availability for the second-half of the year is about 524,000 tonnes. In addition, and significant contraction in the differential between the #11 and #16 markets will allow traders who have hedged high tier imports in the #16 to unwind their trades, removing somewhere between 25,000 and 75,000 tonnes of supply, depending on who you listen to.

While we believe today’s increase is a fraction (30 %??) of what is needed to properly supply the raw market between now and October 1st, it is inevitable that buyers will flee the #16 market while trying to buy quota offshore as cheaply as possible. A significant pullback is likely for the #16 in the near term before the August-September situation manifests itself in higher prices and widening differentials against the #11. While July/September should move to a discount, traders would be unwise to bury precious TRQ into the June-July period at discounts beyond the cost of carry while leaving themselves short the August-September period, hoping for more help from the USDA. If today’s increase proved anything, it’s that the folks in the USDA will spoon-feed the market, with prevention of outright shortages the goal as opposed to “reasonable stocks”, though, admittedly, some would argue the two are the same.

Read Frank Jenkins Sugar Reports.