Frank Jenkins: USDA’s June WASDE Report

Sugar industry analyst Frank Jenkins of the Jenkins Sugar Group comments on the USDA June WASDE report:

Frank Jenkins of the Jenkins Sugar Group

The USDA has released its June updated supply and demand (S&D) estimate for the US and Mexican sugar markets, fine-tuning several components of the S&D that served to reduce ending stocks for both 2009-10 and 2010-11 by 80,000 short tons. This resulted in a reduction in the 2009-10 ending stocks/use ratio from 11.6 % to 10.7 % and a reduction in the 2010-11 ending stocks/use ratio from 7.9 % to 7.2 %.

Supply for 2009-10 was increase by 50,000 tons on higher imports under the re-export program. Imports under the program are now estimated at 400,000 tons. Total supply is estimated at 11.915 million tons. Total demand was increased by 130,000 tons: the estimate of exports was increased by 50,000 tons, transfers to sugar containing product license holders for export were increased by 25,000 tons and the estimate of domestic food use was increased by 55,000 tons.

The domestic food use estimate has now been increased by 215,000 tons in the past two months, but still reflects a 1.14 % decline from 2008-09. The estimate of 2010-11 food use of 10.300 million tons reflects a further 0.5 % decline from 20009-10. These year-on-year declines in off take are difficult to square with the empirical evidence (switching from HFCS to sugar, population growth of 0.9 %), or with the USDA‟s own Sweetener Market Data set (SMD), which shows total sugar deliveries for human use and products re-export from October through April up 7.4 % over FY’09 at 5.456 million tons. Sugar use for the beverage sector alone is up 29.3 % over FY’09 according to the SMD.

The estimate of 2009-10 imports of high-tier sugars was left unchanged at 75,000 tons. This number is likely too low by at least half. Vessel fixtures indicate that high-tier raw sugar imports will begin hitting US shores in June and will be commonplace during July. This is the clearest symptom of the USDA’s starving the market for supply and the best evidence that the TRQ is insufficient to meet raw sugar demand. As of last night’s settlement, the tariff was greater than the FOB cost of world sugar. The 75,000 tons of high tier sugars estimated in today’s report, which we believe represent refined imports, will generate $24,315,000 of revenue to the US Treasury.

Aside from the 80,000 ton reduction to the 2010-11 carry-in, no other changes were made to the 2010-11 estimate. The carry-out is estimated at 764,000 tons, or 7.2 % of use. This equates to less than four week’s consumption.

Looking at Mexico, the USDA sensibly increased Mexican 2009-10 production by 185,000 metric tonnes to 5.085 million tonnes raw value, or 4.752 million tonnes “as made,” though this figure will prove to be a tad light. The import estimate for Mexico was reduced by 15,000 tonnes and the consumption estimate increased by 170,000 tonnes and – voila – the ending stocks figure is unchanged at 868,000 tonnes. The USDA still has Mexico importing a massive 955,000 tonnes in 2009-10. While there is some slippage in our data, we believe Mexico has imported roughly 350,000 tonnes this fiscal year. Thus, based on today’s report, Mexico will have to import a further 600,000 tonnes between now and September 30th to achieve the 868,000 tonne carry-out estimated in today’s report – roughly two months worth of consumption 10 weeks before the new crop.

The prospects for 2010-11 are extremely interesting. Assuming the US eventually imports 200,000 tons of high-tier sugar, the carry-in for 2010-11 would be 1.275 million tons – 224,000 tons less that the carry-in for 2009-10 and 385,000 tons less than the 2008-09 carry-in. While the domestic cane crop is expected to be 188,000 tons larger in 2010-11 than in the current year, we see no reason to believe that Mexico will be a better exporter in the October ’10 – March ‘11 than in the current year.

If there is no additional increase to the 2009-10 TRQ between now and September, we can expect the first half of 2010-11 to be every bit as challenging from a buyer’s perspective as was 2009-10. To bring the 2009-10 sending stocks/use ratio up to the 2008-09 level would require 200,000 tons of high tier imports and a further TRQ increase of 221,000 tons. Assuming that this is accomplished (and we doubt the USDA will give the increase – particularly if high-tier imports are flowing) 2010-11 imports will have to be increased by 389,000 tons to achieve the same ending stocks/use ratio seen at the end of 2008-09. Thus to return the market to a more “normal” disposition, between now and September 2011 we will need 735,000 tons of imports (high-tier, Mexican and/or TRQ, in order of likelihood) in addition to the imports estimated in today’s report.

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