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.

The USDA released supply and demand figures for the US and Mexican sugar markets on Nov. 9, showing plumped-up ending stocks for the US for 2011-12 of an estimated 1.213 million tonnes, providing for an ending stocks/use ratio of 10.4 %, up from 7.7 % estimated in October. The report contained a dizzying array of adjustments to both fiscal years for both countries. The short version is simple, however: the estimate of Mexican exports to the US in 2011-12 was increased by 426,000 short tons, the estimated 2010-11 TRQ shortfall (the portion that was expected to come in during October) was increased by 102,000 short tons and the estimate of US ending stocks for 2011-12 was increased by 324,000 tons. If the Mexican S&D had been left unchanged, US ending stocks for 2011-12 would have declined by 102,000 tons and the estimated ending stocks/use ratio would have been 6.7 % as opposed to the 10.4 % in today’s report. Thus, the Mexican side of the story merits particular attention.

Mexican beginning stocks for 2011-12 were increased by 81,000 tonnes actual weight, resulting from a 54,000 tonne reduction in 2010-11 estimated imports and a 16,000 tonne increase in exports being more than offset by a 151,000 tonne reduction in the domestic consumption estimate for 2010-11 – an interesting discovery a month after the books were closed on the year, but who are we to argue. The 2011-12 import estimate was increased by 194,000 tonnes based on Mexico’s announced import intentions, and estimated domestic food use was reduced by 75,000 tonnes. All of this additional supply plus a further random 16,000 tonnes accrued to estimated exports, which is an estimated 366,000 tonnes above the October estimate at 1.361 million tonnes actual weight, or 1.590 short tons raw value. Mexican ending stocks for 2011-12 are pegged at 883,000 tonnes, or 10.7 weeks worth of consumption – just enough to bridge to the new crop. The USDA’s estimate of Mexican production for 2011-12 is 5.330 million tonnes, 146,000 tonnes higher than 2010-11 output. Our estimate is for a crop nearer 5.0 million tonnes, though we would not argue too loudly with something nearer 5.100 million tonnes. If we assume that the USDA estimate is 250,000 metric tonnes actual weight too high, this would reduce the US import estimate by 283,000 short tons raw value and would reduce the 2011-12 ending stocks/use ratio to 8.0 %.

Back on the US side of the border, numerous minor adjustments were made to the 2010-11 S&D, most notably a 31,000 ton reduction in the estimate of domestic food use, netting a 69,000 ton increase in 2010-11 ending stocks. The beet crop was reduced by a further 12,000 tons to 4.663 million tons for 2010-11 and by a further 50,000 tons to 4.525 million tons for 2011-12. Since July the estimate of the new beet crop (August’11– July’12) has been reduced by 412,000 tons. The US S&D for 2011-12 looks challenging. A substantially lower beet crop – the smallest since the disastrous 2008-09 crop – will force buyers into the arms of cane refiners who will be reliant in the extreme on the USDA to act decisively and in a timely way to increase imports. Mexican exports to the US averaged 142,000 tons per month during FY’11, 67,250 tons per month in FY’10, 116,800 tons in FY’09 and 57,800 tons in FY’08. Average monthly shipments for the period October 1, 2007 through September 30, 2010 were 80,617 tons. Our estimate for 2011-12 amounts to 108,167 short tons per month, which seems quite reasonable given the lower crop estimate.

The US ending stocks to use ratio was 13.2 % at the end of FY’10 and 12.9 % at the end of FY’11. US raws prices averaged 34.23 in FY’10 and 38.46 in FY’11 while refined prices averaged 50.20 in FY’10 and 55.81 in FY’11. Based on our numbers, which incorporate the assumption that Mexican use between FY’11 and FY’12 is in fact 226,000 tonnes lower than was estimated in October, US ending stocks/use ratio of FY’12 is 8.0 %. For a buyer to have any rational hope that prices will shift meaningfully lower, an ending stocks/use ratio of 13.5 % at a minimum will be needed. It will take imports of 638,000 short tons over and above the imports in our estimate to achieve a 13.5 % stocks/use ratio. If the reduction in estimated Mexican consumption proves to have been mythical, 902,000 tons of additional imports will be needed to achieve a 13.5 % stocks/use ratio. While HFCS could make additional inroads in Mexico at the expense of sugar usage that is not depicted in today’s report – Mexican sugar usage is actually up 2.5 % in the report.

Given the above, we would reiterate our view the US raws prices for January, March and May will move back above 40.00 and that refined prices will remain at the historically high levels seen over the past two years. The S&D as we view it is more challenging than it was a year ago and with the lower US beet crop and reduced export profile for Mexico, it will take aggressive import decisions by the USDA to keep the market on an even keel.

The USDA released overhauled supply and demand data for the US and Mexican sugar markets earlier this month, bringing their numbers more in line with reality as reflected in the market place. According to the USDA, the US raws price averaged 39.41 and the US refined price averaged 57.00 in the third quarter and the 12.2 % ending stocks/use ratio for 2010-11 in today’s report is far more correlated to these prices than the 15.2 % ratio seen in the September report. It is also the lowest ending stocks/use ratio for any year dating back to the early 1980’s when the modern US sugar program was conceived. The S&D for 2011-12 sports a 7.7 % stocks/use ratio, down from the 9.8 % stocks/use ratio in the September report, but still far too high due to an overly optimistic take on the Mexican crop.

The numerous adjustments to the 2010-11 balance sheet appear to put it in proper trim. As expected, the estimate of the beet crop was reduced by 125,000 short tons to 4.675 million tons. The Texas cane crop estimate was increased by 3,000 tons – total US cane production is now pegged at 3.149 million tons and total US sugar production at 7.824 million tons, down 139,000 tons for 2009-10. On the import front, imports under the TRQ were reduced by 149,000 tons due mainly to the extension of the TRQ year through the end of October. Estimated imports under the re-export program were reduced by 19,000 tons to 291,000 tons and imports from Mexico were increased by 63,000 tons to 1.687 million short tons (1.530 million metric tonnes). These import numbers should now be final, though some adjustments cannot be ruled out. The net of these changes amounts to a 227,000 ton reduction in supply. The estimate of domestic food use was increased by 100,000 tons to 11.100 million tons, an increase of 2.12 % over 2009-10. The above serves to reduce the estimate of 2011-12 beginning stocks by 327,000 tonnes to 1.418 million tons. As noted, the resulting 12.2 % ending stocks/use ratio is the lowest in the history of the modern US sugar policy, dating back to the early 1980’s. This underscores the idea that, while the elevated world sugar price has played a role in lifting US prices, the USDA’s approach to management of US imports is the main driver in keeping US sugar prices at historically unprecedented levels While the USDA is right in taking a cautious approach due to the uncertainty surrounding Mexico’s export intent and ability, Mexican exports to the US were a record 1.687 million tons and even so we would up with a record low ending stocks/use ratio. Imagine if Mexico had underperformed…

The estimate of beet production was left unchanged despite slight deterioration seen in recent weeks and the dramatic decline in crop condition in the Red River Valley relative to last year. The combined 2010-11 early harvest estimate and 2011-12 beet crop estimates have been reduced by a total of 350,000 tons in the past two months, which is reasonable. If there is risk, it is that the estimate is still too high. Partially offsetting this is a 252,000 ton increase in the import figure for 2011-12 due in part to late entries under the 2010-11 raw sugar TRQ and the 150,000 ton increase in the refined sugar TRQ announced at the end of September. The estimate of imports of Mexican sugar was reduced by 63,000 tons, thus estimate of total supply for 2011-12 was reduced by 138,000 tons. The domestic food use estimate for 2011-12 was increased by 100,000 tons to 11.225 million tonnes – an increase of only 1.126 % over 2010-11. The ending stocks/use ratio is 7.7 %. It will take additional imports of 680,000 tons to achieve a 13.5 % stocks/use ratio and an increase of 795,000 tons to achieve a 14.5 % stocks/use ratio – assuming that is a policy goal.

The Mexican S&D was little changed. The 2010-11 ledger was adjusted to reflect the higher exports to the US. The export estimate and the ending stocks estimate were lower by 58,000 metric tonnes, to 1.54 million tonnes and 720,000 tonnes respectively. As it is the USDA’s philosophy to solve for minimal ending stocks on September 30 in Mexico (apparently 10.7 weeks of use, just enough to bridge to the new crop on dust), the ending stock estimate for 2011-12 was left at 953,000 tonnes. Thus estimate of exports was reduced by 58,000 tonnes to keep the sheet in balance. The USDA left its estimate of Mexican production unchanged at 5.650 million metric tonnes raw value, or 5.330 million tonnes tel quel. Our estimate is for a Mexican crop nearer 5.0 million tonnes tel quel, or 5.300 million tonnes – 350,000 tonnes lower than the USDA average. While Mexico could either import additionally or choose not to rebuild its torn-down stocks, we will use Mexican production of 5.0 million tonnes tel quel (5.30 million tonnes raw value) and exports of 705,000 metric tonnes raw value (777,121 short tons raw value) for our baseline, solving for 953,000 tonnes of ending stocks. Our 2011-12 S&D, displayed below, shows a need for a need for an additional 1.220 million tonnes of imports over and above the minimum TRQ, 150,000 ton refined sugar increase, and 777,121 tons of Mexican exports. Given the fact that Mexico is unlikely to over-perform and make up for much of the US deficit, the market – both raws and refined – is more clearly in the hands of the USDA than at any time in recent memory. Historically low carry-in and a sharply reduced beet crop have left the market precariously undersupplied. While the past few years have seen unprecedented prices for both raws and refined sugar in the US, it is clear to us that the US S&D at present represents new ground. It appears that 2011-12 will be even more challenging for buyers and more rewarding for producers than the past few years.

The USDA released updated supply and demand data for the US and Mexican sugar markets. The report showed an ending stocks/use ratio of 15.2 % for 2010-11, down from 15.5 % in the August report and 9.8 % for 2011-12, down from 11.7 % in the August report. For 2010-11, the estimate of the TRQ shortfall was increased by 40,000 tons, dropping the import figure to 3.786 million tons and total supply to 13.230 million tons. For 2011-12, the beet crop estimate was reduced by 175,000 tons to 4.575 million tons. Since the July report, the 2011-12 beet estimate has been reduced by a total of 225,000 tons. There are issues to keep in mind – the timing of the harvest and the condition of the crop. All August/September 2011 production is counted in the 2010-11 crop figure. Today’s estimate includes 300,000 tons of new crop production in 2010-11. The 2010-11 crop yielded an estimated 425,000 tons of August/September 2010 beet production.

US beet crop: A look at crop progress and condition reporting as of Sunday is enlightening. In Minnesota, only one percent of the crop had been harvested as of Sunday, down from nine percent last year and five percent on the five year average. In North Dakota, the crop was two percent harvested, compared to nine percent last year and six percent on average. In light of this, we are surprised that the 2010-11 crop was not reduced to some extent – the estimate has been fixed at 4.800 million tonnes since November of last year. As noted, the estimate contains 300,000 tons of August/September beet production. United Sugars only began the pre-pile harvest last week and is reportedly harvesting just enough beet to keep those factories which have opened up and running. While yields vary widely on US beets, Minnesota and North Dakota represent over 57.5 % of US planted beet acreage and over 57.1 % of forecast harvested acreage, it seems reasonable to assume that roughly 200,000 tons less sugar has been produced from beet than last year through Sunday. Conditions are good for harvesting, but that is a lot of ground to make up in 19 days. This has more to do with which year the production should register as opposed to the overall size of the new crop.

As we have stated, the condition of the new crop looks satisfactory – until compared with its predecessor. This year’s condition follows, with the prior year in parentheses. In Colorado, the crop was rated one percent very poor (none), three percent poor (two percent), 31 % fair (seven percent), 47 % good (71 %) and 18 % excellent (20 %). In Minnesota the crop was rated five percent very poor (none), 13 % poor (two percent), 33 % fair (five percent), 40 % good (57 %) and nine percent excellent (36 %). In North Dakota, as of Sunday two percent of the crop was rated very poor (two percent), eight percent poor (two percent), 26 % fair (11 %), 57 % good (48 %) and seven percent excellent (37 %). While the 225,000 ton reduction in the new beet crop looks quite reasonable at this point, we think it makes sense to shift 150,000 tons of the 2010-11 beet supply out to the 2011-12 year.

Mexico: Another crop which merits attention is the 2011-12 Mexican crop. Conditions have been challenging, though conditions have improved with regard to rainfall. The USDA estimate for 2011-12 shows a 5.650 million metric tonne Mexican crop – a 155,000 tonne increase over the 2010-11 crop. While much remains to be seen regarding the new crop in Mexico a combination of weather events have stressed, consensus from sources in Mexico is that 5.0 million metric tonnes “as made” is a good working number. This equates to 5.350 million metric tonnes raw value. As our adjusted Mexican S&D indicates, this will only allow for Mexican exports to the US of 848,000 metric tonnes, or 935,000 short tons. Two caveats: The S&D assumes some rebuilding of stocks in Mexico, but the 953,000 tonne ending stock figure is barely sufficient to bridge to the new crop. Secondly, HFCS consumption appeared to have peaked at roughly 1.70 million tonnes sugar equivalent. Should Mexico’s bottling industry actually move beyond 50 % HFCS as has been suggested, the parameters can change quickly.

Consumption: USDA Sweetener Market Data for July shows Total Sugar Use for 2010-11 up 3.8 % year-on-year through 10 months. Deliveries for human consumption are up 2.1 % through 10 months. Total use could moderate somewhat in the next few months, but the main components of the data set – deliveries by beet processor and deliveries by cane processors and cane refiners – are stable, mature data sets. The estimate of imports for direct distribution is less stable and subject to swings and adjustments. Assuming that total food use finishes the year 2.5 % up on 2009-10 at 11.600 million tons, this would remove 115,000 tons of sugar from 2010-11 ending stocks. If 2011-12 follows with a more modest 1.5 % increase in demand (population growth is nearly 1.0 %) total use in 2011-12 would come in at 11.656 million tons.

What this means: By way of disclaimer, this report has been delayed mainly because the net result of the above is a supply and demand tight enough that we spent hours trouble shooting the numbers and trying to justify a more moderate S&D. Feedback from trusted sources served to give us confidence that our S&D is worthy of consideration. One trusted source in the beet industry even suggested that our beet estimate between the two years is overestimated by 150,000 tons. It is very early and every aspect of the balance sheet will evolve over time, but we believe that the figures shown here are a good starting place. The bottom line is a 4.19 % ending stocks/use ratio for 2011-12. In order to accommodate a 14.5 % stocks/use ratio for 2011-12, additional supply of 1.100 million short tons will be needed. Unless the Mexican bottling industry is willing to go well beyond 50 % HFCS in its blend and is able to find supply and work out the logistics of ramping up, Mexico is not likely to solve much of the US deficit. Thus in the 2011-12 program year, the USDA will be called on to provide additional supply equating roughly to the minimum quota in a timely fashion. The cane refining industry will be called upon to replace supply lost to the late, light beet crop, which will likely exacerbate the chronic lack of liquidity in terms of price cover in the #16 futures for all contracts from November’12 through May’13, and likely for the third-quarter positions as well.

Given the fact that the 2012 #16 futures have been above 30.00 for almost a year and between 35.00 and 41.00 for the past six months, it is reasonable to assume that the domestic cane producers are extremely well sold – particularly given that we have not even entered the harvest season. While we will undoubtedly see some soft spots, we see no reason to believe that raw – or refined – pricing in the US will be any softer than it was in 2010-11. And it will take a proactive, aggressive approach by the USDA to preclude prices from moving to high tier replacement levels.

The USDA released updated supply and demand figures for the NAFTA region this morning, showing higher US ending stocks/use ratios for both 2010-11 and for 2011-12. As is often the case in the NAFTA sugar complex, the dynamics emanate more from Mexico than the US. Estimated ending stocks for 2010-11 were increased by 258,000 tons to 1.785 million short tons, yielding an ending stocks/use ratio of 15.5 %. This increase flowed through to the 2011-12 year, where the ending stocks estimate was increased by 68,000 tons and the ending stocks/use ratio jumped to 11.7 %.

Starting off in Mexico, the estimate of 2010-11 production was reduced by 5,000 metric tonnes to 5.495 million tonnes and 80,000 tonnes of 2010-11 imports were shifted out to 2011-12. Despite this reduction in supply, the estimate of Mexican exports was increased by 200,000 tonnes to 1.482 million tonnes (1.624 million short tons), drawing Mexican ending stocks down to an estimated 778,000 tonnes, or less than nine weeks worth of consumption. Mexican exports to the US through July have totaled 1.496 million short tons – the June estimate was adjusted higher by nearly 100,000 tonnes and exports in July are estimated at 117,130 tonnes. Thus Mexican exports in August-September need total only 127,734 tons to meet the estimate in today’s report.

The additional 200,000 tonnes (220,000 short tons) of Mexican exports, along with a 50,000 ton increase in the TRQ import estimate for 2010-11, was marginally offset by a 12,000 ton decrease in 2010-11 carry-in, netting a 258,000 ton increase in 2010-11 supply.

Back in Mexico, the lower carry-in for 2011-12 as per the above and the 80,000 tonne increase in imports taken from 2010-11 necessitated a 205,000 tonne reduction in Mexican 2011-12 exports to facilitate 953,000 tonnes of ending stocks, the USDA’s benchmark and unchanged from the prior month’s estimate.

Looking at the 2011-12 US balance sheet, the beginning stock estimate was increased by 258,000 tons to 1.785 million tons. The beet crop estimate was reduced by 50,000 tons to 4.75 million tons, Louisiana production was reduced by 40,000 tons and the Texas crop was increased by 10,000 tons. Based on feedback during the ASA meeting earlier this month, we expect to see the beet crop reduced additionally and would not be surprised to see the Louisiana loss reversed. The TRQ import estimate was increased by 125,000 tons due to the recent announcement of the refined sugar TRQ at 100,000 tons above the WTO minimum. The 235,000 short ton reduction in Mexican exports to the US resulted in a net 68,000 ton increase in total estimated supply.

The 15.5 % ending stocks/use figure in today’s report will preclude any further action on the TRQ. Assuming the Mexican import figures are accurate, Mexico has once again pulled the proverbial rabbit out of the hat. To the extent that these imports can be easily digested by the US infrastructure, the issue of bridging to the new year seems to have been resolved. In our new world, it appears that 15.5 % now allows for 38.00 raws and refined prices in the low- to mid-50’s.

The available supply for the October-April period, however, has if anything deteriorated. The TRQ announcement came with the allowance for early entry of the 2011-12 TRQ, but not late entry of the 2010-11 TRQ. The lower Mexican availability will likely be felt most acutely in the first five months of the fiscal year as Mexico refills its pipeline. To achieve a 14.0 % stocks/use ratio for 2011-12, we will need additional supply of 271,500 tons. To achieve 15.5 % stocks/use, we will require 444,375 tonnes of additional supply.

With the September #16 having expired on Monday and the vast majority of FY’11 pricing already fixed, the reality of the 2010-11 situation is already baked into the market. We see little reason to believe that the year to come will follow a significantly different trajectory than the year just past, and expect the current pricing to be sustained well into the new year.

Looking at Mexico for 2010-11, the production estimate was reduced to 5.500 million metric tonnes raw value, which syncs up nicely with the official Mexican 5.182 million tonne “as made” figure. The estimate of Mexican consumption was reduced by a further 52,000 mt to 4.600 million mt. The early estimates of Mexican consumption were 5.018 million tonnes – the estimate has dropped by over 8.3 % since October 2010. The export figure for 2010-11 was reduced by 100,000 MT, based on the pace of exports to date. Interestingly, this provided for a 102,000 mt build in 2010-11 ending stocks to 1.063 million tonnes. In earlier reports the USDA held ending stocks constant, and an increase in supply would translate to higher exports. This late in the year, however, the department can work with year-to-date trends, thus the export figure was reduced and the additional supply accrued to ending stocks.

The US balance sheet for 2010-11 showed a net 80,000 ton reduction in estimated ending stocks. Imports from Mexico were reduced by 110,000 tons as per the above, and the TRQ import estimate was increased by 80,000 tons, reflecting the June 21st shortfall reallocation, but not the 18,507 ton adjustment made to the Philippine quota yesterday. This 30,000 ton net reduction to supply added to a 50,000 ton increase in the “other use” category reflecting higher exports in sugar containing products, provided for an 80,000 ton reduction in 2010-11 ending stocks and thus 2011-12 beginning stocks.

Back in Mexico, the USDA estimates 2011-12 production at 5.650 million mt – 150,000 tonnes higher than 2010-11 despite the extreme drought conditions experienced in recent months. Consumption is estimated at 4.632 million tonnes, up 0.7 % over 2010-11 but for some reason, down 128,000 tonnes from the June estimate. In this instance, the USDA solved for a 22 % ending stocks/domestic food use number, and thus increased the export figure 258,000 tonnes to 1.318 million tonnes.

The US 2011-12 S&D, starting with an 80,000-ton lower carry-in, gained a net 218,000 tons due to a 298,000 ton increase in imports from Mexico. Ending stocks are estimated at 1.274 million tons yielding an ending stocks/use ratio of 11.1 %.

Outlook:
The balance of 2010-11 looks extremely challenging, even following the recent actions taken by the USDA to increase supply. Mexican exports to the US dropped by 90 % from May to June to 19,882 mtrv. To meet even the reduced Mexican export figure in today’s report, Mexican exports to the US will have to total 142,942 tons in the third quarter, or 47,647 tons per month. The unshipped re-export balance is 118,249 tons. If we are to meet the 300,000 ton estimate in today’s report, 39,416 tons of re-export will need to come each month – during a period in which there is no Central American sugar available. Re-export arrivals in since March have averaged 17,250 tons per month.

As the chart at right shows, actual imports in July-September last year totaled 1.229 million tonnes. Assuming that all of the unshipped sugar in today’s report is in fact shipped, which we view as improbable, import availability in July-September 2011 totals 883,614 tonnes – 347,000 tonnes less than was actually imported last year. Graphically speaking, how can we repeat the massive spike in imports experienced last Q’3, not only to feed the market this summer but to lay in a base for October- November? Simply put, we cannot without further action by the USDA. Any delay in bringing the new crop beets to market will only serve to exacerbate this situation. In summary, we look for the raws market to remain tight and expect the September and November to move above 40.00. If high tier imports are needed to supply the market in the September-November period, prices will have to move nearer to 49.50, assuming the October #11 futures hold near 30.00.

Looking at 2011-12, today’s report seems dangerously optimistic. It appears to conclude that the series of weather events seen in the past six months or so (ranging from freezes in Florida and Louisiana last winter to drought this spring in the US south and in Mexico to the poor weather that forced delays to beet plantings) will have negligible impact. The beet crop estimate for 2010-11 not been adjusted since November and 2011-12 estimate has not been adjusted since it was first published in May, despite the fact that plantings were nearly a month behind last year in some areas. The Florida crop is expected to be nearly 14 % higher than last year’s freeze-battered crop, and nearly on par with the 2009-10 crop despite residual freeze damage and drought stress. There had been talk from Mexico’ cane growers’ union in recent weeks that the 2011-12 crop could be 7.3 % lower than the 2010-11 crop – between 4.8 and 4.9 million tonnes. This would translate to roughly 5.150 million tonnes raw value – more than a half-million tonnes lower than the estimate in today’s report. Rains have recently been significantly above average in many cane growing areas, and we do not consider the grower’s union estimate to be reliable. Our point is that today’s report is consistently optimistic in terms of crop health and crop size.

We feel that beet production between the two years could be overstated by 150,000 tons; that production between Florida and Louisiana for 2011-12 could be overstated by 100,000 tons; and Mexican production could easily overstated by 165,000 short tons – a total of 415,000 tonnes of 2011-12 ending stocks that we consider “at risk”. Outstanding weather during the balance of the growing season could remedy some or much of this, but a 415,000 ton reduction would yield an ending stocks/use ratio for 2011-12 of 7.45 %. It would take additional imports of 810,000 tons to bring the stocks/use up to 14.5 %.

The USDA has recently shown a more accommodating approach regarding imports. There is a narrow window for action prior to the end of the fiscal year, however, and the number’s in today’s report are not likely to set off any alarm bells within the department. Regardless of the USDA’s approach, there can be no quota increase from October 1st until April. Should we exit FY’11 with the status quo in terms of supply, we expect no relief in raw sugar pricing between now and the expiry of the May 2012 futures. The #16 has shown itself to be resilient – even as the #11 futures dipped from 36.00 to 20.00 recently, the #16 futures saw only marginal relief, so hoping that a massive reversal in world values will provide genuine relief to US raws prices looks like folly.

The January and March #16 futures traded to 38.00 today and May settled last night at 37.50. While these levels represent life of contract highs, they may well prove cheap if the crops in Michigan, Minnesota, North Dakota, Florida, Louisiana, and in Mexico do not come in as forecast in today’s report. Refined prices have reportedly crept back above 50.00 nearly. If the raws market moves ahead, refined values are likely to gravitate back towards the 57.00 list price for FY’12.

The USDA released supply and demand numbers for the NAFTA sugar complex today – after some fine-tuning and a 175,000 tonne adjustment to Mexico’s exports to the US related to the import tender announced last month. The bottom line is a 9.2 % stocks/use ratio for 2011-12, up from 7.7 % last month. The 2010-11 ending stocks/use ratio remains at 14.1 %.

While it is our natural inclination to prattle on endlessly about the S&D, there is precious little fodder in today’s report. Luckily, we are just as happy prattling on about Mexico.

As of Sunday, there were only four mills still active in Mexico. Production had totaled 5.159 million metric tonnes “as made”. Assuming that the crop finishes at 5.175 million tonnes “as made”, this would equate to 5.485 million metric tonnes raw value, or 64,500 tonnes less than the estimate of Mexican production in today’s report. This would reduce Mexico’s 2010-11 carryout to a shade under 900,000 tonnes, just to meet consumption through early December, leaving Mexico with a virtually empty pipeline as the new crop begins. Mexican exports to the US through May have totaled 1.068 million metric tonnes raw value, or 1.178 million strv. To meet the WASDE export estimate, Mexico will need to export 84,000 tonnes per month. While June exports may hit the mark, we expect Mexican exports to taper off in the third-quarter in the wake of the extraordinary export push seen since July of 2010.

Looking at the 2011-12 Mexican crop, it is very early to draw conclusions, but the 5.650 million tonne raw value (5.330 million tonnes “as made”) crop seems quite optimistic. Mexico’s president Felipe Calderon stated on Tuesday that 40 % of Mexican territory is experiencing the worst drought in 70 years. Some areas have received 25 % or less of normal precipitation over the past month and other areas extending from Oaxaca into Veracruz (sugar intensive) have only received between 63 % and 86 % of normal precipitation over the past month. Given this stress, we would simply caution that the risk is that we have significantly smaller Mexican production than estimated. As Mexican exports to the US in 2011-12 represent 41.6 % of total imports the weather in Mexico and the progress of the new crop need to be closely monitored.

We expect to see the September futures remain firm for the next two months. There is little new price cover available to the market between now and the end of the fiscal year, and should Mexico disappoint and the trade be forced to short-cover, prices will likely move to high-tier equivalent in a hurry. The other risk we see is from a late start to the beet crop to offset the late finish to the harvest. Should the beet industry be forced to come to the market to cover September sales, the cane refining industry will be hard-pressed to provide relief.

Looking to 2011-12, we see no reason to think that the first half of the year will look much different than 2009-10 or 2010-11. We will enter the year with low stocks, a minimum quota and very likely with Mexico working to re-stock while facing a drought-challenged new crop. Simply put, the risk/reward speaks for being long all positions from September 2011 through May 2012 at tonight’s settlements.

The USDA released an updated S&D for 2010-11, showing an enhanced stocks/use ratio of 14.1 %, and an initial projection for the 2011-12 S&D, with an ending stocks/use ratio of 7.7 %. The 2011-12 numbers are not fully formed – production projections are based on the March 31 prospective plantings report and trend yields – but the projection provides a good baseline from which to work.

Looking at the 2010-11 balance sheet, the main event was the addition of the TRQ increase and shortfall reallocation totaling 381,000 short tons. Surprisingly, the Department increased the estimate of Mexican production by 165,000 tons, to 1.514 million tons. Recent reports from Mexico indicate that production is closer to 5.0 million tonnes “as made” – roughly 235,000 short tons below the USDA estimate of Mexican production in today’s report. Mexican FOB prices are above export parity and there is talk that 50,000 to 100,000 tonnes of sales contracts have been bought back by Mexican mills. After last week’s dollar bounce, the peso has strengthened again and is currently at 11.6033 to the dollar, up four percent since mid-March and up 8.5 % over the past six months, dampening export enthusiasm considerably.

Mexican exports to the US from October through April have totaled 1.004 million strv. In the nine months from August 2010 through April 2011, exports have totaled 1.382 million tons. Mexican exports to the US will have to average 106,000 tons per month from May through September which is easily attainable logistically. The question is residual availability. Based on the Mexican S&D in today’s report, Mexican ending stocks for 2010-11 will be 802,000 tons. If production is in fact 5.000 million tonnes “as made”, or 5.300 million mtrv, Mexican ending stocks will only total 552,000 tonnes, or a shade over six weeks’ worth of consumption roughly 10 weeks before any new crop sugar is likely to be available.

Partially offsetting these increases was a 75,000 ton reduction in the estimate of imports under the Re-export Program. On balance for the year, US imports under the Re-export Program are estimated 135,000 tons lower than exports and transfers to sugar containing products for export. The estimate of exports was increased by 25,000 tons in today’s report – total use thus stands at 11.435 million tons versus total supply of 13.046 million tons. Ending stocks are estimated at 1.611 million tons, or 14.1 % of use.

For 2011-12, the USDA estimates beet production at 4.800 million tons, unchanged from last year based on acreage and trend yield. As last year’s growing season was spectacular and this year’s has been challenging, the beet estimate will likely be lowered over time. As of Sunday, Idaho, Michigan, Minnesota and North Dakota, which accounted for 84 % of 2010 beet acreage, were 33 % planted versus 99 % last year and 77 % on the five year average. More importantly, Minnesota and North Dakota, which account for roughly half of US beet acreage, were only 17 % and 14 % planted respectively as of Sunday versus 100 % and 99 % complete last year. A 4.650 crop seems more reasonable at this point, though some ground can be made up if the harvest is delayed and the weather cooperates. Should the crop be left in the ground until late September or later, it will most certainly be disruptive to the late summer market.

The estimate of cane production of 3.390 million tons is 240,000 tons higher than 2010-11, owing mainly to a rebound in Florida production to 1.630 million tons following last winter’s freeze-related losses. Conditions have been overly dry and a good rainy season, which starts next week, will be crucial to the crops development following the stress of the several freeze events last winter. The estimate of Louisiana production was increased by 40,000 tons from 2010 to 1.440 million tons.

The TRQ was placed at the WTO minimum less a 140,000 ton expected shortfall, or 1.259 million tons and imports under the re-export program were pegged at 350,000 tonnes, up 50,000 tons over 2010-11. The exports and transfers to sugar containing products for export total 390,000 tons for a net draw of 40,000 tons on ending stocks.

The estimate of Mexican exports to the US for 2011-12 is 980,000 tons which makes sense based on the Mexican S&D which shows ending stocks on September 30th equivalent to less than 11 weeks of consumption – barely sufficient to bridge to the new crop. Total supply is an estimated 12.400 million tons. US domestic food use is expected to increase by 1.136 % to 11.125 million tons and total use is estimated at 11.515 million tons. Ending stocks are estimated at 885,000 tons, or 7.7 % of use. A look at today’s USDA numbers alongside our own estimates follows:

Based on today’s report, the market will need additional supply of 670,000 tons to achieve a 13.5 % stocks/use ratio, which we feel is disruptively tight but seems to be in the USDA’s comfort zone. Based on our S&D for 2011-12, an additional 973,525 tons of supply will be needed to achieve a 13.5 % stocks/use ratio.

The evidence in the market indicates that it is the USDA’s approach to management of the TRQ and not the #11 market that has kept the #16 market and US refined price at current historically stunning levels. Since February 2nd the #11 market has lost over 15.50 cents basis the nearby futures. The #16 futures, which averaged 39.60 during February held largely above 39.50 until the USDA increased the TRQ on April 11th. The day before the increase the July futures traded as high as 39.35, by which time the #11 had dropped nearly 10.50 cents per pound. It was only after the TRQ increase that #16 values declined to the recent lows at 35.00.

The balance of 2010-11 will hinge almost exclusively on whether Mexico’s ability to export over 100,000 tons per month to the US. If the USDA estimate is accurate, there is sufficient sugar to keep the market on an even keel. If exports from Mexico begin to tail off, prices are very likely to rally back to high tier equivalent levels – roughly 40.00 based on today’s values. As the chart at right shows Mexican exports have exceeded 100,000 tonnes per month 12 of the past 43 months, including the past four months. Each of the past 10 months has been above the average monthly export for the 2007- 08/2009-10 period. If the current crop is in fact between 5.1 and 5.0 million tonnes as made, it is highly likely Mexico will see its exports slump dramatically in the June- September period and will need to import ahead of the new crop.

We believe that prices in 2011-12 will follow a similar trajectory as seen in 2010-11. Refined prices and refiners’ margins will be driven largely by the size of the beet crop – a 150,000 ton reduction in the beet crop and a late start to the harvest will likely give cane refiners a better level of relative pricing power. The conversation from January through March will revolve around the need for additional imports and the timing of the USDA’s actions. The only factor likely to break the cycle we have experienced in the past two years would be a more open-handed import policy from the USDA, targeting a 15.0 or higher stocks/use ratio.

Following the shortfall reallocation and TRQ increase announced this week by the USDA, the US raw sugar market is on better footing as we head into the second half of the program year. After adjusting the 325,000 short ton increase and the 112,630 short ton reallocation for “slippage” of 82,500 tons, imports under the TRQ and CAFTA are now estimated at 1.726 million tons raw value. Ending stocks for 2010-11 now stand at an estimated 1.540 million tons, yielding an ending stocks/use ratio of 13.5 %. This compares with an ending stocks/use ratio for 2009-10 of 13.3 %. The table below shows the April WASDE report, a mock-up of how the USDA balance sheet will look after adding the new TRQ, and our balance sheet for 2010-11:

2010-11 S&D                      April WASDE         USDA post-increase           JSG
Beginning stocks                         1510                                1510                1510
Production                                   7950                               7950                 7950
             Beet                                4800                                4800                4800
             Cane                                3150                              3150                 3150
                         Florida                1440                               1440                 1440
                    Louisiana                1400                               1400                1400
                          Hawaii                  170                                170                  170
                            Texas                  140                                140                  140

Imports                                         3135                              3490               3359
               TRQ                                 1371                              1726               1744
          Other program                     375                                375                   375
                          Mexico                  1349                              1349              1200
                             Other                   40                                    40                 40
                 Total supply                 12595                            12950            12819
Exports                                            225                                225                 225
Deliveries                                     11185                             11185             11185
                        Food                      11000                            11000            11000
                        Other                          185                                185                185
Total use                                         11410                             11410           11410
Ending stocks                                  1185                               1540            1409
Stocks/use ratio                           10.40%                           13.5% 1        12.35%

While past performance is no guarantee of future results, last year’s 13.3 % ending stocks/use ratio provided for an average raw sugar price of 35.36 in July-September and 38.83 in October- December. Last year at this time, world sugar prices were 16.50 en route to a low of 13.00 by the first week of May – half of today’s price. Refined prices averaged 57.30 in July-September and 55.97 in October-December. While the increase was larger than we expected at this stage, we do not expect prices to slump very much or for very long. We view the reliance on Mexican exports for such an important slice of the US supply pie as a potential liability.

Mexico has been exporting at a very impressive pace. Exports to the US since October 1st have averaged 126,979 million tons per month, totaling 761,874 short tons or 56.5 % of the total estimate of 1.349 million tonnes for all of FY’11. More impressively, Mexican exports to the US since August have totaled 1.139 million tons, an average of 142,334 tons per month. To meet the WASDE estimate of 1.349 million tons, exports will have to average 97,854 tons per month. Looking at the track record, Mexican exports have averaged 76,093 tons per month over the past three years with a high average of 115,741 tonnes per month in 2008-09 and a low of 44,533 tons in 2007-08. In the past 42 months, Mexican exports to the US have only exceeded 100,000 tonnes two consecutive months twice and three consecutive months twice, including the most recent three month period. The USDA estimate of 1.349 million short tons is certainly in the realm of possibilities – Mexican production is nearly 20 % ahead of last year. Seven mills have already finished grinding, however, and the crop is expected to wrap up in May, over a month earlier than last year. Prices in Mexico are rallying at present and the peso has made Mexican exports significantly less competitive.

The peso, 11.80 to the dollar today, was trading at 12.40 to the dollar at the end of 2010 and averaged 12.60 for CY 2010. Holding the price of estandar constant at 530 pesos per bag, exports to the US on a FOB basis presently return about 2.50 cents per pound less than they did last summer with the peso at 12.60. FOB estandar prices are well above export parity today. Any further easing in US raws prices will only exacerbate this situation. Luis Soto of SIA in Mexico City reported today that bad weather and an increase in refined sugar exports to the US could mean a 200,000 tonne shortfall of refined sugar in Mexico prior to the new crop. As we have noted, the 952,000 tonne Mexican ending stock estimate for 2010-11 is not sufficient to cover consumption from October 1st until new crop sugar is actually available to the internal market. We view Mexico’s performance as critical to the health of the US raws complex for the second half of the year. While one might assume that Mexico exports would taper off once the crop is finished, last year nearly 47 % of total Mexican exports arrived in the US in August/September. We have hitched our wagon to a genuinely unpredictable caballo.

Looking at the JSG S&D above, total supply for 2010-11 is virtually the same as we had in 2009-10 at 12.819 million tons, 131,000 tons less than the USDA mock-up based on lower Mexican exports for the reasons noted above. As seen in the US sugar flow graphic at left, total imports in the first-half of this year were 268,127 tonnes – 295,556 short tons – ahead of last year’s pace. Looked at the other way around, the available supply for the second half of the year is about 300,000 short tons lower than last year’s. The massive coincident spike in both TRQ and Mexican deliveries seen in August and September 2010, which provided liquidity as we transitioned to the 2010-11 year, will not be possible this summer as the supply simply is not available based on the current S&D.

We would view any retracement in raw sugar prices as a buying opportunity. The additional TRQ offerings will hopefully provide some liquidity in the weeks to come. Looking at the refined market, it seems unlikely that refined prices will see much relief as long as the raws market hold up. The industry appears to be quite well sold for the balance of the year. Beet plantings are several weeks behind last year in the west and in Michigan and the Red River Valley is still drying out – the river crested this past weekend in Fargo there have been significant rains in the area in the last several days. This is not cause for concern right now but it any further delays will only encourage sell-side discipline. Current pricing may well extend into a third year.

We feel that the USDA’s action is all that could be expected at this time – there is still a huge amount of uncertainty in the market. However, the supply and demand – either the USDA version or the JSG version – gives little reason to believe prices will ease from current levels and we view the risk in the market as being skewed sharply to the upside should Mexico disappoint or the TRQ prove more challenging to source than expected.

The USDA today released updated supply and demand data for the NAFTA sugar complex. The data appears increasingly reasonable to our eyes. With a more complete accounting of the freeze damage in Florida and a lower import number from Mexico, today’s balance sheet is strikingly similar to the Jenkins Sugar Group S&D presented at the SUA Colloquium last month.

The USDA report shows a 7,000 ton increase in 2010-11 beginning stocks (an 8,000 ton increase in 2009-10 Florida production less a 1,000 ton increase in 2009-10 domestic food use). The estimate of Florida production was reduced by a further 60,000 tons – the total losses from the November estimate are now 280,000 tons. We would not preclude a further slight reduction in the April report as harvesting will continue through March 21st in some areas, but today’s report likely captures reality for all intents and purposes. The other important change in today’s report is an 110,000 short ton reduction in the estimate of Mexican exports to the U.S., based on lower output in Mexico due to the frigid weather experienced this past (hopefully) winter. Total imports are thus estimated at 3.135 million tons and total supply at 12.595 million tons.

Our own estimate of total supply is 79,000 tons lower. We estimate Mexican exports to the U.S. at 1.250 million tons, 139,000 tons lower than the USDA estimate, based on the pace of exports to date, logistical realities and the size of the crop. Also, as we view the WASDE as the USDA’s primary tool in determining the need for a TRQ increase, we feel it is illogical to include high tier imports of any magnitude in the S&D. The USDA includes 40,000 tons of high tier imports in its report. For the U.S. to estimate high tier imports beyond 5,000 to 10,000 tons suggests that the USDA will either use high tier imports as their indicator that the market is at risk of supply shortage, or that the importation of high tier sugars has been incorporated into the mechanics of the program management as a normal means of topping-off supply. Neither of these notions is palatable. If the #11 remains near 30.00 and high tier imports are indeed required, U.S. raws prices will have to appreciate a good 7.00 from present levels to accommodate the duty load.

Looking at Mexico, the reduction in the production estimate is more or less in line with reductions made by the Mexican industry and/or government. Mexican ending stocks are still estimated at a skinny 952,000 metric tonnes – two and a half months worth of consumption roughly two and a half months prior to the onset of the new crop, so it makes sense that any reduction in output will mean a reduction in imports. The peso has retested yesterday’s best level of 11.91 to the dollar. The peso was above 12.20 to the dollar in late February and was between 13.00 and 13.30 to the dollar last summer prior to the massive surge in exports in August and September. From October 2010 through February 2011, Mexican exports have averaged 98,535 metric tonnes. To hit the 1.232 million tonne export target as per today’s report, exports will have to average 105,617 tonnes. Exports over the past three years have averaged only a shade over 69,000 tons. The USDA export estimate is certainly doable, but the stars will have to align.

Based on today’s USDA report, the U.S. will need to import 333,000 tons of sugar over and above that reflected in the report (either TRQ, high tier or more Mexican) to match the 13.3 % stocks/use ratio we “enjoyed” on September 30, 2010 – a level that provided for 40.00 – 42.00 raws and refined prices in the mid-60’s. To achieve the 14.3 % stocks/use ratio as per the end of 2008-09, we will need a further 446,000 tons of imports. Using the JSG estimate above, we will need 412,000 tons of additional imports to achieve a 13.3 % stocks/use ratio and 525,000 tons of additional import to achieve a more comfortable 14.3 % ratio.

As was the case last year, the timing of any potential increase will come very late in the world market proceedings – particularly in light of the large delivery seen against the March #11, which included 181,000 tons of raws from the northeast of Brazil, 189,950 tons of sugar from Central American origins and 112,000 tons of Thai raws. All of this would be important supply for a potential quota increase if not already shipped by the time the USDA makes a move. While we fully expect to see the shortfall reallocated in the near future, an actual increase in the TRQ seems unlikely prior to the May WASDE release, though the TRQ was increased by 200,000 short tons on April 23rd last year, following a shortfall reallocation on March 22nd of 90,329 tons and a second increase on July 6th of 300,000 short tons.

Interestingly, the stocks/use ratio in the March 2010 WASDE 10.3 % and the April’10 WASDE, post-reallocation, showed an 11.6 % stocks/use ratio. The nearby US raws had peaked at 42.50 in February 2010 and stood at 36.22 one year ago today, so the case can be made the market as more ripe for an increase today than it was a year ago. As May shipment center-south Brazilian raws are valued at 30 over May #11, it is unlikely that much of the March-delivery will be left unshipped by mid-to late April. The TRQ cannot be increased prior to April 1st by law, and it is highly unlikely that the TRQ will be increased prior to the April 8th WASDE release.

The main impact of today’s report is to shift responsibility for the market away from Mexico and more squarely onto the USDA’s shoulders. Their approach to supply management will determine whether July and September #16 futures trade to high-tier equivalent – well above 45.00 – and the US refined prices realize the 61.00 cent FOB level announced by Domino Foods yesterday, or prices maintain their present disposition (raws in the upper 30’s to low 40’s and refined prices in the upper 40’s to low 50’s). In any case, we see little potential that conditions will ease in any meaningful way from those prevailing for the past 18 months. Two critical factors – the inclinations of new USDA undersecretary Souse and whether we have conventional or GM beet crop – should be better known in the next 30 days.

Source: Frank Jenkins, Jenkins Sugar Group

Last week’s ruling from the U.S. District Court for Northern District of California, a link to which can be found below, seems to have raised as many questions as it answered. Hopefully the following will serve to clarify some points. Unfortunately, the real questions – whether genetically modified sugar beet will ultimately be grown in 2011 or even 2012 – were not addressed, much less answered, by this most recent ruling.

To quote Judge Sidney R. Thomas, who rendered the opinion, “Without expressing any views on the merits of the ultimate issues in this case or other pending related litigation, we vacate the preliminary injunction, reverse, and remand for further proceedings consistent with this opinion.”

The ruling hinged on the plaintiffs’ failure to demonstrate irreparable harm. The reasoning is enlightening: “The undisputed evidence indicates that the stecklings pose a negligible risk of genetic contamination, as the juvenile plants are biologically incapable of flowering or cross-pollinating before February 28, 2011, when the permits expire”, according to the opinion.

The November 10th decision by the district court (Judge White) was based on the threat posed by the “entire cycle” of Roundup Ready sugar beet planting and production. Friday’s ruling noted, “However, the steckling permits alone do not authorize Intervenors to continue growing the juvenile plants beyond February 28, 2011, much less see them flower, produce seed, or otherwise visit irreparable harm upon Plaintiffs. Indeed, the permits require the stecklings to be destroyed, absent new permit applications by Intervenors and further regulatory decisions by APHIS.”

It is our understanding that the now-infamous stecklings have been dug up for wintering-over and the intent is that they will be replanted in the spring for the production of seed for the 2012 crop. This will require a further round of permitting by APHIS and will allow another opportunity for the Plaintiffs to file another suit – a point noted by Jude Thomas in his opinion.

Thus this most recent ruling only addressed the immediate fate of the stecklings, and in a very narrow way. Judge Thomas waxed poetic on the matter: “As we have noted, this appeal presents a thin slice of a larger litigation. Perhaps, in the end, the entire controversy will be resolved, and we can say that the ‘fair discourse hath been a sugar, [m]aking the hard way sweet and delectable.’ William Shakespeare, Richard II, act 2, sc. 3. Needless to say, given the course of the litigation, that is unlikely.”

From our perspective, today’s ruling was decided on a “technicality” to the extent that the determining factor (the February 28th expiration date on the permits) is not relevant to the permits for planting GM seed this spring, or to the industry’s ability to replant the stecklings in the spring. Whether his most recent action will embolden the industry to damn the legal torpedoes and plant GM seed this spring is not clear to us, but we see little in the ruling to change rational hearts and minds on the matter. The good news is that conjecture will soon give way to knowledge as planting will get underway in the next 30 to 60 days, starting in the west and in Michigan and later in the Red River Valley, depending on weather.

The text of the ruling can be found via the following link: www.ca9.uscourts.gov/datastore/opinions/2011/02/25/1017719.pdf

The USDA released its supply and demand estimate for February, showing an ending stocks/use ratio of 11.8 % for 2010-11, down from 12.6 % estimated in January, 13.3 % at the end of 2009-10 and 14.3 % at the end of 2008-09. The updated balance sheet highlights a trend seen over the past several months: a growing reliance on Mexican exports to keep the US market in balance. Given that, it makes sense to begin with the Mexican balance sheet and work from there.

For 2010-11, today’s report shows Mexican production at an estimated 5.650 million metric tonnes raws value, up 535,000 tonnes from 2008-09, and unchanged from the January estimate. The estimate of Mexican imports was increased by 65,000 tonnes to 290,000 tonnes and the estimate of domestic consumption was reduced by 106,000 tonnes to 4.629 million tonnes. Since 2005-06, Mexican sugar consumption has dropped by 1.020 million tonnes, or 18 %. Since 2008-09 alone, consumption is down an estimated 775,000 tonnes, or 14.34 % as the pendulum has swung in favor of HFCS, particularly in Mexico’s bottling industry. The 65,000 tonnes of additional imports and the 106,000 tonnes freed up by the migration to HFCS are expected to be exported to the US, along with a further 23,000 tonnes draw from stocks, for a total estimated increase in exports of 194,000 metric tonnes, or 214,000 short tons. Total exports are now estimated at 1.332 million metric tonnes, or 1.459 million short tons. The resultant 952,000 tonnes of ending stocks equates to a bit less than 2.5 months of consumption, even at the reduced level in today’s report, which would draw Mexico’s stocks down to essentially nil just as the new crop gets underway in mid-December. We could argue about the Mexican consumption number, or about the size of the crop, but the fact that today’s balance sheet assumes only 290,000 tonnes of imports compared to the 861,000 tonnes imported last year suggests that there is the scope for Mexico to export the 1.332 million tonnes estimated in today’s report, but the economics would be driven by the cost of world market imports by Mexico. More on that later.

Looking at the U.S. market, a further 100,000 short tons of freeze damage in Florida was recognized. Surprisingly, the estimate of production in Texas was not altered despite reports of significant damage to the crop there. As the crop is only 140,000 tons, the impact on the S&D cannot be too dramatic. Looking at imports, the TRQ shortfall was increased by 50,000 tons to 110,000 tons, which seems as good a number as any, and the estimate of imports under the re-export program was increased by 75,000 tons to 375,000 tons. This was offset by a 75,000 ton increase in the export figure. As noted above, the Mexican export figure was increased by 214,000 tons to 1.459 million tons. The estimate of domestic food use was increased to 11.0 million tons, an increase of 125,000 tons over the January estimate and a 1.2 % increase over last year – again, very reasonable. The ending stocks estimate is 1.348 million tons, 11.8 % of estimated use. Ending stocks levels in the U.S. have been steadily declining since 2006-07, and really since the turn of the millennium, as the above chart illustrates.

What this means: Today’s S&D is generally reasonable, though there are an awful lot of “huevos” in the Mexican basket. There are three aspects to consider: supply availability, logistics and economics. US exports of HFCS to Mexico in October-November totaled 160,843 tonnes, dry basis, up 17.8 % over the same period last year. It is important to note that in 2008-09, when Mexico exported 1.367 million tonnes as the currency moved from under 11.00 to over 15.50 to the dollar, Mexico drew down its stocks from 1.975 million tonnes to 624,000 tonnes. Mexican beginning stocks in 2010-11 are 973,000 tonnes – over 1.0 million tonnes lower than 2008-09. It will be interesting to see if the supply chain in Mexico can tolerate 1.332 million tonnes of exports staring with only 973,000 tonnes of carry-in stock. Logistically, Mexican sugar exports to the U.S. in October-December totaled 197,274 metric tonnes, a pace which projects out to 789,000 tonnes for the year. Mexico will have to average 127,000 tonnes per month for the balance of the year to achieve the 1.332 million tonne total as per today’s report. As the chart at right indicates, in the past 39 months, Mexico has only shipped more than 120,000 tonnes in five months, and never for more than three consecutive months. On the other hand, the outlier – May 2009 – saw over 200,000 tonnes shipped as the full impact of the peso crisis was felt. Looking at economics, in the spring of 2008-09, the May #11 futures were beneath 16.00 and, while the #16 futures were roughly 21.50, U.S. refined prices were above 34.00. At the moment, the #11 is 31.25, the #16 is 40.00 and U.S. refined is 57.00 basis list price.

Thus, the differentials are on the whole not terribly different – more favorable for raws and slightly less favorable for refined. But the peso, which was 15.25 at its worst in mid-2009, has moved from 13.25 to the dollar at the end of August to nearer 12.00 to the dollar today. Basis Mexican sugar at 500 pesos per 50kg bag, Mexican exports have become roughly 3.5 cents per pound less competitive since August, assuming all else remained constant (all else never remains constant, but you get the idea). Since mid-2009, Mexican exporters have lost about 8.00 of competitiveness due to the peso. So, we view the availability, logistics and economics all as challenging. Given the above, we feel it is reasonable (not necessarily conservative) to estimate Mexican exports to the U.S. at 1.134 million metric tonnes, or 1.25 million short tons. As Mexico represents more supply than all 40 TRQ holders combined and the harvest is only about one third complete, it seems prudent to proceed with caution. Exports for the Oct-Dec period are lagging 2008-09’s pace badly.

Taking the balance of the S&D at face value, this adjustment would leave us with 1.139 million tons of ending stocks and a 9.9 % stocks/use ratio. To achieve the 13.3 % stocks/use ratio seen at the end of 2009-10, a further 378,530 tons of supply needs to be added. Remember (as if any reminder is needed) that 13.3 % stocks/use ratio yielded 40.00 raws and 67.00 refined last summer. To achieve a more “liberal” 14.3 % stocks/use as per 2008-09, a further 492,630 tonnes of imports will be required. As the chart at left indicates, combined U.S. and Mexican stocks at the end of 2010-11 as estimated in today’s report are 800,000 tons lower than the average level that prevailed from 1999-2000 to 2009-10. The USDA already assumes that we will import 40,000 tonnes of high-duty sugar in 2010-11. Should the USDA not be forthcoming with additional quota, it seems logical that the #16 futures will have to move to high-duty equivalent – somewhere between 46 and 47.00 for raws, assuming the #11 sits still. As most world market S&D estimates show little potential for stock replenishment in 2010-11, we feel there is very real potential for the #11 to move back above 36.00 as the year progresses, which would set the stage for 50.00 raws in the US. Should the GM beet seed case dictate that a conventional beet crop be planted this spring, we can only imagine where refined prices will settle in if the USDA remains tight-fisted on the import front.

The USDA updated its US supply and demand estimate last week, showing an 88,000 short ton reduction in the 2010-11 ending stocks estimate, and an ending stocks/use ratio of 12.6 %, down from 13.4 % last year and 13.3 % at the end of 2009-10. The only changes from the December estimate were a 100,000 ton reduction in the estimate of production in Florida following the series of freezes in December and a 12,000 ton increase in the import estimate, owing to the Dominican Republic’s finally getting its CAFTA export quota of 12,000 tons.

The table at left juxtaposes today’s USDA estimate with our own. As we have previously reported, we believe that the losses in Florida from the series of freeze events in Florida had a very significant impact on production. The severity and duration of the freezes were extremely unusual, and the events took place very early in the harvest cycle. Temperatures added insult to injury by warming quickly. Yields in Louisiana at the end of the crop were reportedly surprisingly high.

The early progress on the Mexican crop has been fantastic – sugar production is 36 % ahead of last season, when the crop got off to a late start. The pace of exports tapered off in October and November, but was nonetheless astounding during Q3. We have estimated total Mexican exports to the US at 1.10 million tons. Is a higher number possible? Absolutely, if all goes well and Mexico resists the temptation to export to the world market should differentials prove attractive (they likely will occasionally). Given that it is early in the crop and given Mexico’s proclivity to confound prognosticators, we feel our estimate is responsible. As the chart at right indicates, Mexico is much better at providing surges and spikes in opportunistic exports than at providing a steady, predictable stream of supply.

Looking at domestic food use, remember that the USDA projected a 1.8 % increase in food use for 2010-11 as recently as October. In November when the 2009-10 food use estimate was boosted by 197,000 tons the estimate for 2010-11 was left unchanged. While use grew by a breath-taking 4.1 % in 2009-10, today’s WASDE assumes that growth halted completely at the turn of the year. We have employed the 1.8 % increase in use that was used by the USDA in the October WASDE. The trend in both domestic food use and the trend in the USDA’s estimates of consumption over the past several years both indicate that the use estimate in today’s WASDE report is too low. Last year, the USDA pegged US food use at 10.400 million tonnes in the January WASDE, and held to that figure through the April report. The estimate was increased in six of the next seven reports, finally settling in at 10.869 million tons, 469,000 tons above the April estimate.

Based on our estimate, the market will require additional imports of 563,000 tons to achieve the 13.3 % stocks/use ratio enjoyed at the end of 2009-11 – a stocks position that allowed for 40.00 raws and refined prices in the mid-60.00 range. To get back to the 2008-09 ending stocks/use ratio of 14.3 %, additional imports of 677,000 tons would be required.

We are now nearly one-third of the way into FY’11, and the lay of the land is becoming clearer. While Mexico has stepped up the pace of exports, we have little doubt that Mexico private and government mills will over export now (by design) and will drive internal prices high enough to 1) slow the pace of exports and 2) produce calls for imports in the summer. The USDA’s approach to program management appears unchanged from last year. The world market remains at least as great a challenge as it was last year. The early projections showing a several million tonne surplus in 2010-11 have crossed the threshold and we are now looking at a third year of deficits, further screwing down world sugar stock. India, the most likely source of relief during the present moment, has ditched its import duty this week while pushing off any decision on exports. Peru is the most recent US quota holder to make clear that its domestic market must be looked after before export opportunities are explored. Brazil, the second largest and most reliable, efficient quota shipper, has already essentially filled its TRQ allocation for the year. The USDA TRQ shortfall estimate of 60,000 tons may well prove optimistic.

The price outlook is thus fairly clear. We view the current Mexican-sponsored holiday as a good opportunity to make one’s bed for the balance of the year. As we have noted, the Mexican market seems to have temporarily replaced the #16 futures as the primary vehicle for price liquidity for the US raws market. Thus, while the bid-side of the #16 futures has retraced back to 37.00 to 37.50 for May through September, it seems unlikely that much cover can be found beneath 39.00 in the futures. Should we revert to high-tier economics this summer, we will likely be looking at prices between 45.00 and 48.00, assuming the #11 market maintains its current altitude (and the May and July futures do not gravitate to the low-30 cent range as per the March).

The refined market remains impressively disciplined given the magnificent beet crop and the pace of refined imports. While there has clearly been a good deal of traffic at meaningful discounts to list prices, outright prices and refined premiums have been maintained at levels undreamt of before last year. In the next few months it will become clear what whether we will have a conventional beet crop or a genetically engineered one. As a GE crop represents the status quo, it stands to reason that a conventional beet crop would serve to boost the refined market to newly undreamt of levels – even if the reduction is “only” 500,000 tons and not the “end of days” 1.6 million ton loss contemplated by the USDA. We see little reason to think US refined prices will ease meaningfully between now and year’s end, though Mexico may allow for some bargains for those who are fleet of foot.

Frank Jenkins, Jenkins Sugar Group

December’s USDA supply and demand estimate for the US and Mexican sugar markets showed a 232,000 increase in ending stocks for 2010-11, providing for an ending stocks/use ratio of 13.4%. The main dynamic of the report was a 200,000 metric tonne increase in Mexican production for 2010-11, all of which is projected to be exported to the U.S. Thus, when 2,000 short tons of additional beginning stocks, a 20,000 ton reduction in Florida production and a 30,000 ton increase in high-tier imports for 2010-11 are factored in, total US supply jumps from 12.475 million tons estimated in November to 12,707 tons today. Total use, on the other hand, was left unchanged in today’s report. As domestic food use is virtually unchanged from 2009-10, exports are estimated 61,000 tons lower and the “other use” category is estimated 50,000 tons lower than 2009-10, total use is down 106,000 tons from 2009-10.