What’s Happened in the Sugar Market?

ASA Economist Provides Analysis of Past Year for
U.S. & World Markets - And What May Lie Ahead

     Editor’s Note: Jack Roney is having fun these days. After two decades as a sugar industry economist, “I finally get to defend a price recovery,” he radiates. “This is the moment I’ve been waiting for in my career!”

     The past year has been an exciting one in sugar markets, as world prices have risen to a three-decade high and U.S. sugar prices have also risen dramatically. What factors precipitated this price rise — and what is the prognosis for the remainder of the current marketing year and beyond?

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Roney, who is director of economics and policy analysis for the American Sugar Alliance (ASA), addressed those questions and others in a February 1 presentation during the annual meeting of the American Sugarbeet Growers Association (ASGA) in Charleston, S.C. A summary of Roney’s presentation appears on these pages, with more details available on the ASA website: www.sugaralliance.org.
     Additional coverage of the 2010 ASGA annual meeting will appear in The Sugarbeet Grower’s March issue.

   As of late January 2010, world sugar prices — hovering around 28 to 29 cents per pound, raw value — were a their highest level since 1981. In that year, the average world price hit 40 cents a pound — second only to the record 60-plus cents set in the mid- 1970s. (At the other extreme, the world price sagged to a meagerly three cents in 1985.) “We’ve had a lot of ups and downs since then,” Roney notes. “Right now, we are at nearly a 30-year high on the world market.”
    Normally, there is a wide disparity between the average world “dump” price and the U.S. sugar price levels. “But now we’re seeing that the world market is, without question, helping to push up the U.S. price,” Roney says. (See Figure 1.)
     What have been the major factors contributing to the recent movement in U.S. sugar prices? “I’ve heard critics of U.S. sugar policy say, ‘Ah, it’s because of that ‘blasted farm bill!’ ” Roney remarks. “Certainly the farm bill has played a role. But it’s not solely responsible, by any means.” The ASA economist listed these other reasons:
     • The major explosion at Imperial Sugar Company’s cane sugar refinery near Savannah, Ga., in February 2008 — That tragic event resulted in the deaths of several workers and put the facility out of production for more than a year, thus reducing the nation’s cane sugar refining capacity. It had a strange effect on the sugar market, because it reduced the raw price since there was one less refiner bidding for raw sugar — but also increased the refined sugar price since there was one less refined sugar supplier.
     • U.S. sugarbeet planted acreage in 2008 was 19% below that of the prior year — in large part due to the high prices of acreage-competing crops like wheat, corn and soybeans. Had U.S. beet processors not been grower-owned cooperatives, some areas probably would not have had beets at all that year, Roney states.

     • In August 2008, then-USDA under Secretary Mark Keenum instituted an increase in the “refined” sugar tariff rate quota (TRQ). However, most of the additional imported sugar came into the U.S. in raw form, and that hurt the domestic raw sugar price.
    • The Mexican peso was devalued by half in summer/fall 2008 — triggering a surge in sugar exports from Mexico into the U.S., which in turn hurt domestic raw and refined prices.
    • The threat of raw sugar forfeitures prevented USDA from increasing the TRQ, despite a predicted low stocks-to-use ratio. USDA also accepted an industry recommendation to not increase imports during the October- March period when most U.S. sugarbeets and sugarcane are being processed and that sugar is becoming available to the market.
     • Finally, a big drop in exports from India and the European Union during the summer/fall of 2009 fed the surge in world sugar prices. From exporting 5.72 million metric tons, raw value, of sugar in 2005/06, the EU went to importing 2.3 MMT in 2008/09 and is projected to import 3.0 MMT in 2009/10. India exported 5.8 million metric tons, raw value, in 2007/08. Last year that country imported 1.7 MMT; and for 2009/10, India is projected to import 2.5 MMT. India’s transformation from exporter to importer is, according to Roney, the biggest single reason for the rise in the world price.

    In trying to sort out the U.S. sugar market for 2009/10, one of the most vexing questions is, “How much are we going to get from Mexico?” Under the terms of the North American Free Trade Agreement (NAFTA), the United States and Mexico now share what is essentially a common sugar market without quotas. “No one has better access to the U.S. market than Mexico,” Roney affirms.
     For most of 2008/09, USDA was expecting about 500,000 metric tons, raw value, of sugar to be exported from Mexico into the U.S. during that marketing year. Instead, the final volume totaled nearly 1.3 million metric tons.
     The 2009/10 projection currently stands at just under 700,000 metric tons, raw value (Figure 2). “Oddly, whereas last year we thought USDA was too low for most of the year, most people in the trade now think USDA is too high” in its projection,” Roney observes. That’s because of Mexico’s lower sugar production level: 5.26 million metric tons, raw value, in 2008/09, down from 5.85 MMT the prior year. The current USDA projection of 2009/10 Mexican production is about 5.3 MMT, raw value — and some believe it will end up even lower.
     “The fact that sugar production has been declining in Mexico gives us hope for the future that they’re not going to be in a position to continually oversupply our market,” Roney states.
    But there is a very important caveat here the loophole in the NAFTA that allows Mexico, if market conditions are right, to import as much sugar as it wishes from other countries (to meet its own internal needs) — and export the then-not-needed Mexican sugar to the United States. Roney says he’s continually evaluating the incentive for Mexico to buy world sugar, substitute it for Mexican-grown sugar for internal use — and then ship the displaced Mexican sugar into the U.S. market. While the hefty increase in world prices has removed some of that option’s attractiveness, “the incentive still exists,” Roney adds, since a disparity of just six to eight cents a pound between the U.S. and world price can still make it profitable.
     While obviously appreciating the current sugar price recovery, Roney emphasizes that it’s not a completely “blue sky” scenario for the U.S. sugar sector.
     First, “we have contracted most of our [2009/10] sugar at lower prices than what we’re seeing right now,” he
points out.
     Second, percentage-wise, the U.S. price hike is less than half that of the world price increase. The 2009 U.S. prices for raw cane sugar and wholesale refined sugar, respectively, were 17.0 and 17.1% higher than those of 2008. Meanwhile, world price increases during the same period were 35.3 and 38.7%, respectively. “The world price is still a more-volatile market than [that of the U.S.],” Roney notes.
    Third, when adjusted for inflation, today’s “real” prices are only half of the “nominal” price across the 25-year period between 1985 and 2009. During that same period, the U.S. sugar industry lost about half of its processing and refining facilities as the industry was pressured into rationalization.
Fourth, farm input costs have increased tremendously since 1985: machinery and equipment, up by 83%; gas and other fuels, up 109%; ag chemicals and products, up 113%, for example. Meanwhile, there was no change in the sugar support price.
     Fifth, prices of other key commodities (e.g., corn, wheat, soybeans) are up sharply since 2005, while that of sugar has been quite flat. The 2009 average raw sugar price of 24.93 cents was only 8% higher than that of 1996; the 2009 average refined sugar price of 38.10 cents only 30% higher than in 1996.
     Sixth, the recent rise in the wholesale sugar price is far below the rise in price of retail sweetener-containing
products during the same period.
     So how sustainable is the current sugar price recovery? Several key components will help answer that question, according to Roney: First, what will happen with the level of sugar imports from Mexico? How tight is the Mexican domestic market? Will they again substitute sugar — i.e., import sugar off the world market and ship displaced Mexican sugar into the U.S.?
     Second, what will be the strength of domestic sugar demand? Domestic sugar consumption has risen steadily since 1996/97, with a slight decline projected for 2009/10. Will U.S. consumers revert back to more high fructose corn syrup use? Will artificial sweeteners take a bigger bite out of the market?
     Third, will there be an increase in the TRQ, come April — and, if so, how large will it be?
     Fourth, will the governments of the United States and Mexico finally accept the recommendations of the long-working U.S.-Mexico Joint Sugar Industry Task Force? And, will Mexico cease sugar substitution?
     Finally, where will 2010 U.S. sugarbeet and sugarcane planted acreage end up — and what will be the level of
sugar production ?
     On the world front, several developments will impact prices. Will sugar demand remain strong . . . will production rebound in India . . . what is the outlook for Brazilian sugar production and ethanol usage?
     Roney reiterates that most U.S. food manufacturers’ 2010 sugar purchases were booked at the lower price levels of early 2009. Sustaining the current stronger prices will give sugar producers the “opportunity to recover from past losses, and to reinvest to improve efficiency,” he emphasizes. The ASA economist also notes that the U.S. sugar industry has repeatedly told the Obama Administration, “If there is a chance of a sugar shortage, we will be the first to tell you.” To maintain the industry’s current strong credibility with the Administration, it will be critical to keep that promise, he states.

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     Another key challenge will be to maintain domestic sugar consumption levels. The corn industry, including corn refiners, obviously is working to regain consumption — which, according to USDA, is on track to be up by more than 400,000 in 2009/10 over the previous year (Figure 3). Products made with stevia — a natural, no-calorie sweetener — also are strong competitors, Roney says.
     Finally, 2012 may sound somewhat distant — but preparation for the next farm bill is already beginning. The sugar industry must be — and is — at work to ensure that the industry’s needs are adequately addressed in the 2012 farm legislation process, Roney concludes.

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