Jenkins January 2012 Sugar Group Market Update

The following is an analysis of the 2012 January WASDE report provided by Frank Jenkins of the Jenkins Sugar Group.

The USDA released updated data for the US and Mexican sugar markets, showing a dramatic reduction in availability of Mexican exports to the US market and a similarly dramatic reduction in US supply and ending stocks. The bottom line of today’s report is a 5.3 % ending stocks/use ratio for 2011-12.

The crux of the report was a 548,000 short ton reduction in the estimate of Mexican exports to the US in 2011-12. Mexican production was reduced from an estimated 5.330 million tonnes tel quel to 5.0 million tonnes tel quel while the estimate of Mexican imports for 2011-12 was reduced from 449,000 tonnes estimated in December to 310,000 tonne based on the performance against the two 150,000 tonne import quotas executed during the fourth quarter of 2011. This 469,000 metric tonne tel quel reduction equate to a 548,000 short ton raw value reduction in Mexican export availability, assuming six percent weight loss from raw value to “as made”. We mentioned in last night’s report that Mexican production will likely come in near 5.0 million tonnes, but based on progress year-to-date, the risk is that the crop is smaller. As the chart to the left illustrates, through the first week in January the crop is 19 % behind last season’s crop. Both agricultural and industrial yields are well behind last season – reminiscent of the 2011-12 Brazilian performance.

Mexico’s inability to import is worrisome, and is likely to remain an issue. Based on today’s report, the US market will need a further 953,000 short tons of additional imports to achieve a 13.5 % stocks/use ratio – a stock level that would have leave the market in similar trim as in 2009-10 when raws prices averaged 34.23 and refined prices 50.28. Thus a valid question is, will producers in Central America export to Mexico to facilitate Mexican exports to the US when they will be able to export directly to the US? Based on last year’s performance, the US and Mexico will likely be competing for world market refined imports late in the third-quarter. It appears that 2011-12 will not be a year for pass-through exports to the US via Mexico. While the peso will provide some export incentive early in the year relative to last year, once Mexico need to import, any benefits related to the currency become moot.

Based on today’s report, 2011-12 will look a great deal like the past two years, with raws pricing returning to 39.00-40.00 and refined pricing to the 55.00 cent area – assuming that the USDA adds sufficient additional supply to return the market to a 12.5 % to 13.5 % stocks/use ratio in a timely fashion. As the chart at right indicates, the USDA has been consciously reducing the US ending stocks/use ratio for the life of the current farm bill, choosing to follow a very cautious approach to guard against a surge in exports from Mexico. Today’s report suggests that threat will be remote at best this summer. The 5.3 % stocks/use ratio in today’s report should give the Department confidence to act promptly and aggressively. We look for a quota increase immediately following the April WASDE release. If that report shows a similar situation to that in today’s report, an increase of 500,000 tonnes is in the realm of possibility, though that would be a bold step given the USDA’s recent approach and philosophy. That will still leave much work to be done prior to the end of the program year if conditions are to remain orderly. There is clearly a lot of anxiety being priced into the #16 market, for whatever reason. While we would let the market run its course, we view weakness in the #16 as a buying opportunity. Timing will be critical.