Analysis of USDA July WASDE Report

Analysis of USDA’s July 2010 WASDE report by Frank Jenkins of The Jenkins Sugar Group:

The July 2010 WASDE report from USDA showed an 11.8 % ending stocks/use ratio for 2009-10 and a 9.0 % ending stocks/use ratio form 2010-11. If not for the 270,000 tons of additional imports as per the TRQ increase, the ending stocks/use ratio for 2009-10 would have dropped to 9.3 % from the 10.7 % in the June report.

Looking at 2009-10, the beet crop estimate was reduced by 50,000 tons due to lower than expected output from the old crop in May. The estimate of Florida production was increased by 8,000 tons. On the import front, the USDA added 270,000 tons of TRQ, assuming a 30,000 shortfall on the increase quantity and a 133,000 ton shortfall overall. This was partially offset by an 110,000 ton reduction in the estimate of Mexican imports from 540,000 to 430,000 based on the pace of imports to date (302,277 tons through the end of May). The impressive tail on the Mexican crop and related dip in prices will allow for at least a couple of cargoes of estandar to be shipped, and the new estimate may well prove a bit on the low side when all is said and done. On balance, the total supply was thus increased by 118,000 tons to 12.033 million tons. One or two high tier raws cargoes have already been landed in the US, suggesting that the USDA’s high tier import estimate of 75,000 tons for 2009-10 is too low.

Frank Jenkins of The Jenkins Sugar Group.

Somewhat surprisingly, the demand side of the ledger was left alone. Demand for 2009-10 is thus remains 1.12 % down from 2008-09. The April Sweetener market Data report (displayed below) shows US deliveries for human us and products for re-export up 7.4 %, led by the bottling sector which is up a staggering 29.3 % year-on-year. For 2010-11, the USDA shows US food use declining by a further ½ percent. If each year showed an actual increase of 2.0 % this would amount to nearly 600,000 tons of demand over the 24 months. 2010-11 ending stocks would be 355,000 tons and the ending stocks/use ratio would be 3.2 %.

For 2010-11, the beet crop estimate was increased by 80,000 tons to 4.710 million tons and the Texas cane crop estimate was reduced by 10,000 tons to 140,000 tons. Thus 2010-11 ending stocks are estimated at 952,000 tons, or 9.0 % of use.

The Mexican estimate is beginning to resemble a parlor trick, where no matter which or how many components are changed, the ending stocks figure never changes. In the most recent iteration, production for 2009-10 was increased by 35,000 tons, imports decrease by 135,000 and exports reduced by 100,000 and – voila! – ending stocks are unchanged at 868,000 tons. (Last month production was increased by 185,000 tons, neatly offset by a 15,000 ton reduction in imports and a 170,000 ton increase in domestic consumption, keeping the 868,000 tons ending stock figure intact.) We do not see how Mexico will bridge to the new crop without additional imports. The import number in today’s report assumes a few hundred thousand tonnes of additional imports before the end of September, and the export number is now a bit too low. Thus, it appears that Mexico will have only about six week’s worth of stocks on September 30th, roughly eight to 10 weeks before any meaningful new crop production is available. This will leave Mexico in the unenviable position of trying to import refined sugar ahead of the new crop, alongside Thailand, the Philippines and the Dominican Republic in addition to the usual suspects such as Pakistan, Bangladesh and Iraq.

We believe that the two quota increases seen recently have put the market on a better footing, but it is clear that the market is still extremely tight. Two simple measure of this are that the 2010-11 beginning stocks are estimated to be 231,000 tons lower than the 2009-10 carry-in – a stock situation that provided for all of the angst, gnashing of teeth and historically unprecedented pricing seen in the past six months. Secondly, in our update following the May WASDE report, we posed the question “If an 11.6 % stocks/use ratio in the April WASDE justified a 200,000 ton quota increase, does an 11.6 % stocks/use ratio in May call for another 200,000 tonne increase?” It turned out that the 10.7 % ratio in the June report called for a 300,000 ton increase, so the math is pretty consistent. So – what does the 11.8 % ratio in today’s report indicate? We doubt we will hear from the USDA again this year, aside from perhaps an early 2010-11 TRQ announcement, and feel the market will be perilously tight as a result – even if the dubious use estimate in today’s report proves accurate.

It is easy to get used to looking at the current S&D and be lulled into a false sense of security. Surely 11.8 % is more accommodating than 10.7 %. Should the 11.8 % ending stocks/use ratio prove accurate, it would be unprecedented. The average ending stocks/use ratio for the past decade is 16.89 %. The difference is roughly 550,000 tons of inventory.

Despite the very welcomed and skillfully allocated quota increases, we still see the market as undersupplied through October and believe that additional high tier imports will be needed in August and/or September to make ends meet. The stage is set to ensure that the 2010-11 futures positions will hold to a 27.00 to 30.00 range and that refined prices will hold in the upper 30 cent range, if not the recently announce 43.00 rate.

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