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 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.

The past six months have provided a once-in-a-generation experience for the world’s sugar markets, and the US market has been no exception. Since the beginning of the program year on October 1st, the #11 sugar market has rallied from a low of 20.00 to 30.40 and subsequently plummeted to a low of 15.46 on April 1st, buffeted by a unique mix of supply and demand dynamics, speculative fund in- and out-flows, currency fluctuations, occasional rogue exports and, to some extent, by the reluctance of the US to allow additional imports despite a raw sugar price more than 15.00 above world raws and US refined prices $590 (nearly 27.00 cents) over the London whites market.

While the bull market in world sugar undoubtedly impacted US prices, the US market has been remarkable resilient since the #11 futures peaked two months ago. While the #11 market has recoiled by more than 14.50 cents per pound, the July #16 is 8.00 beneath its 39.00 contract high. US refined prices are down 4.00 cents since the world market peaked basis the Midwest list price. World whites are 12.55 cents off their late-January highs. The point is that the US market, love it or hate it, is to a very large extent the product of the USDA’s management of the program. Thus the tea leaves provided by today’s USDA supply and demand report merit close inspection.

The bottom line of today’s report is an 11.6 % stocks/use ratio for 2009-10, up from 10.3 % in the March report and only marginally below the 11.6 % 2008-09 ending stocks/use ratio from the April 2009 WASDE report released one year ago today. Nothing about 11.6 % stocks/use suggests an imminent quota increase. Based on today’s report, we do not see an increase likely before the May WASDE report.

In today’s report, beginning stocks for 2009-10 were increased by 48,000 tons, due to revisions to the 2008-09 analysis, as opposed to additional early-harvest (September) beet production. The estimate of Florida production was reduced by 35,000 tons to 1.630 million tons. Due to the recent 90,329 short ton (81,946 metric tonne) TRQ reallocation and the expectation that a higher percentage of the TRQ will be filled due to the lower #11 value, the TRQ shortfall was reduced from 200,000 tons to 70,000 tons. There were no changes made to the “D” side of the S&D, thus ending stocks were increased by a net 143,000 tons.

About the US food use estimate: The USDA has been open about the fact that there are apparent discrepancies in data regarding refined imports and deliveries for human use by “non-reporters”. In the Sweetener Market Data report published yesterday, the USDA’s Farm Services Agency notes “ FSA is still not satisfied with our procedures to estimate refined imports and domestic deliveries by non-reporters…The current procedure results in negative refined sugar imports and domestic deliveries by non-reporters, which is, of course, not possible.” The department cautions that year-on-year comparisons are likely misleading.

Frank Jenkins, The Jenkins Sugar Group.

The USDA’s data through February 2010 shows FY 2010 deliveries for domestic human consumption at 4.372 million tonnes – 216,775 tons, or 5.3 %, higher than deliveries in the same period last year. Refined imports under the TRQ have totaled 59,185 tonnes through February, and Mexican refined imports have totaled 199,820 tonnes for a total of 259,000 tons. As deliveries through February were up by 216,775 tons, even if 83 % of all refined sugar imports were double-counted, domestic food use would still be flat year-on-year, as opposed to down 3.17 % as per today’s report.

Looking at two extremes, if consumption is flat year-on-year, the use figure in today’s WASDE in underestimated (and ending stocks overestimated) by 333,000 tons. If the 5.3 % increase shown in the USDA Sweetener Market Data through February is accurate and holds up through the year, use would be under estimated by 909,000 tons.

Mexican exports to the US in 2009-10 are estimated at 540,000 short tons. Based on the pace of exports to date, the crop progress and the fact that storage and finance pressures are less of a factor in the second-half of the year, we feel this estimate if too high by 100,000 tons.

What does this mean: The 11.6 % ending stocks/use ratio for 2009-10 in today’s report gives little impetus for the USDA to increase the TRQ today, or this month. The USDA’s threshold for increasing imports is not price-based, but rather based on a physical shortage of sugar. Today’s report should assuage any concerns that there will be a shortage of sugar in the coming months. This is a dangerous illusion.

TRQ arrivals through April 5th totaled 716,350 tonnes, leaving a 393,585 tonne unshipped balance. Adjusting for the 70,000 short ton shortfall in today’s report, the actual balance is 330,081. Argentina recently tendered its quota (49,010 tonnes) for delivery in the July-September quarter, and numerous other shippers are committed to delivering sugar in July-September. Many of the TRQ holders have un-shippable balances following the reallocation (Australia has 7,077 tonnes). A more realistic TRQ availability for April-June is 240,000 tonnes. At the pace of TRQ arrivals from October 1st through March 30th, this supply will be fully depleted in 61 days, or on June 10th. The assumed balance left for the July-September quarter will last only two to three weeks of the 13-week quarter.

From mid-June through September 30, there are roughly 90,000 tons of TRQ available and roughly 200,000 tons of re-export sugar. In simple terms, this is sufficient to the demand from one large cane refinery – Baltimore, C&H or Savannah, when its running up to speed. Thus, assuming that the two Gulf refineries run on Louisiana and Texas sugars, two large refineries, Yonkers and AmCane will have to compete for the residual supply from Hawaii and Florida and any (unlikely) Mexican cargoes. Raw sugar imports must be increased by a minimum of 500,000 tons to accommodate this need – either as high tier, TRQ or form Mexico.

The below tables depict the USDA numbers from today with our estimate as per the above. Table 1 compares the USDA S&D with our own. Table 2 uses our S&D as per Table 1, and then solves for 10.5 % ending stocks over use and for 13.9 % stocks/use – the same ratio as 2008-09, which set us on the path we are now on. These two scenarios show a need for total additional imports of between 580,000 and 955,000 tons. Once again, these imports will either come in the form of TRQ imports, high tier imports or imports from Mexico. If today’s report allows the USDA to remain on the fence, which appears to be where they are most comfortable, US domestic raws will have to rally to high tier parity, and high tier refined imports will likely flow until domestic refined prices decline sufficiently to close that spigot.

Used by permission – Frank Jenkins, Jenkins Sugar Group.

World sugar futures turned in a mixed session: March posted a higher low and higher high en route to a 47 higher settlement, but the futures failed upon approaching the 40-day moving average (27.42 last night, 27.51 tonight) and shed 20 points after the official settlement. Prices finished the afternoon 27 higher in March and 19 higher from May through October. Volume was 124,165 lots, including 27,377 lots of March-based spreads. On spread, the March/May traded from traded from 85 out to 97 over and then eased back to finish the session at 88 over. The May/July traded from 240 over in to 201 over and last traded at 202 over.

Talk in the trade is that India bought three prompt cargoes and two cargoes of March–July period raws on the recent price decline. The current bull market has caused some interesting clashes of interest. Brazil’s largest sugar and ethanol marketing company, Copersucar, has called the additional export of 500,000 tonnes of out-of-quota sugar authorized by the EU a “flagrant violation” of WTO rules. In the Philippines, according to local research group Ibon Foundation Inc., the export of nearly 115,000 tonnes to the US earlier than is typical has lead to consumers experiencing low supplies and high prices. The country will import 150,000 tonnes as a result. Mexico’s announcement of an import quota right in the guts of the domestic crop has raised more than a few eyebrows. Russia imported 1.25 million tonnes of raw sugar in 2009, 48.2 % less than in 2008, according to the federal customs service. The country has finished the 2009/10 beet sugar refining season, processing 3.22 million tonnes of white sugar, down from 3.55 million in 2008/09. In Thailand, cash premiums for high-pol raw sugar for March-May shipment were bid at 50 points over the March New York contract and offered at 70 points premium. Technically, the March failed upon approaching the 40-day average and will need to move back above the 40-day (27.51), the 50 % retracement of the recent sell off (28.05) and the 10- and 20-day averages (28.18 and 28.39 respectively) to rekindle fear in the shorts and renew greed in the longs.

In the NAFTA region: US futures trading was extremely quiet in the wake of yesterday’s expiry, the announcement of Mexico’s import quota and the release of WASDE numbers this morning. Today’s USDA release did little to shed light on the USDA’s likely course of action (please see our earlier report). Mexico’s announcement served mainly to widen the whites premium to $155 on the March arb and to nearly $150 on the May arb, and perhaps to reassure the USDA that Mexico’s eventual imports will total the 720,000 tonnes projected in the S&D. Mexico’s economy minister stated today that Mexico will open additional import quotas once the current crop finishes in May. Last year the crop stretched into the first weeks of June, and the first imports were announced on September 7th, so we are clearly swimming in uncharted waters.

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The rally in world sugar prices has now linked world and US raw sugar prices, as the chart below clearly indicates.

As the ICE #11 futures contract is a “Free On Board”, or FOB contract, and the ICE #16 futures contract is a CIF DP, or delivered, contract, we have added 3.00 cents of costs to the #11 contract price to put the two contracts on like terms. It can be deduced that any further increases in world sugar prices will result more or less on a penny for penny increase in US raw sugar prices.

While the US market has historically commanded a significant premium to the world price due to the nature of the US sugar policy, a second year of deficits in the world market has allowed the world price to catch up to the US price.

Courtesy The Jenkins Sugar Group

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Projected 2009/10 U.S. sugar supply is increased 350,000 short tons, raw value, from last month. Sugar production is increased 200,000 tons and beginning stocks are increased 150,000 tons while imports are decreased 50,000 tons. The increase in sugar production is based on higher-than-expected forecast production of U.S. sugar beets (200,000 tons) and Florida sugarcane (150,000 tons), which more than offsets lower Louisiana sugarcane (-100,000). The reduction in 2009/10 imports is due to prospects for sharply higher world market prices increasing shortfall in filling the tariff rate quota (now 200,000 tons).

Estimated 2008/09 U.S. sugar supply is increased 250,000 tons, based on larger early harvest of 2009-crop sugar beets (up 100,000 tons to 4.250 million tons) and continued strong imports from Mexico (up 150,000 tons to 1.450 million tons). Sugar use is increased 100,000 tons to reflect the refined portion of the increase in imports from Mexico.

The report is fairly remarkable, reports Jenkins Sugar Group; the 300,000 ton increase in beet production from the new crop represents nearly a 6.5% increase in the crop over last month’s estimate. This, combined with the increase in the Florida production estimate of over 12% (while partially offset by the 100,000 ton reduction in Louisiana) is likely to squelch any lingering potential for an increase in imports for the balance of the current fiscal year.

Despite the assumption that 100,000 tons of additional Mexican imports will be consumed prior to the end of September, the ending stocks/use ratio for 2008-09 increased to 11.2%. Should this number hold, it would still represent the lowest stocks/use ratio at Sept. 30 in the history of the sugar program. Despite the reduction in the import estimate for 2009-10 and the hit to Louisiana production, the 2009-10 ending stocks/use increased from 3.4% to 6.7% – still in need of a million or so tons of top-off imports, but probably sufficient to put any talk of an increase before September 30 to rest.

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