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USDA Sugar and Sweeteners Outlook

15 February 2013

USDA Sugar and Sweeteners Outlook - February 2013USDA Sugar and Sweeteners Outlook - February 2013

USDA Sugar and Sweeteners Outlook

For the second month in a row, the US Department of Agriculture (USDA) made no changes for the Mexico supply and use in the February 2013 World Agricultural Supply and Demand Estimates (WASDE). Production is forecast at 5.668 million metric tons (mt), deliveries for human consumption at 4.200 million mt, and exports at 1.198 million mt—all except 10,000 mt expected to go to the United States. Ending stocks are projected at 1.0 million mt, implying an ending stocks-to-consumption ratio of 23.8 percent.

The USDA increased its projection of fiscal year (FY) 2013 US sugar production from last month by 150,000 short tons, raw value (STRV) to 9.220 million STRV. The forecast of beet sugar production was increased by 100,000 based on analysis, and the forecast of Louisiana cane sugar production was increased by 50,000 due to an increase in processors’ predictions for September 2013 production. Based on reliable information conveyed to USDA’s Foreign Agricultural Service (FAS), the USDA increased its projection of the sugar tariff-rate quota (TRQ) shortfall by 85,000 STRV to 350,000 STRV. No other changes were made. Ending stocks are projected at 2.267 million STRV. The implied ending stocks-to-use ratio is 19.3 percent.

Long-term Projection of US and Mexico Sugar Supply and Use through 2022/23

The US Department of Agriculture (USDA) annually prepares and publishes long-run projections for the US farm sector for the next 10 years. The report is released in February, immediately prior to USDA’s annual Outlook Conference. Projections cover agricultural commodities, agricultural trade, and aggregate indicators of the farm sector, such as farm income and food prices. Projection results are used in the preparation of the President’s Annual Budget.

The Sugar and Sweetener Outlook of USDA’s Economic Research Service (ERS) prepares supply and use projections for US sugar. These projections are reviewed and cleared by USDA’s Interagency Commodity Estimates Committee (ICEC) for sugar. Projections are based on the assumption of extension of current policies through the entire projections period. The Sugar and Sweetener Outlook analytic framework works out the implications for supply and use from the expected states of the physical and economic environment in the policy setting. Although the distinction is subtle, supply and use projections are not forecasts but are base points against which to analyze the effect of policy changes or other exogenous influences on the sugar and sweetener sector.

The most important factors affecting US sugar supply and use over the long-term projection period are the US sugar program, the availability of sugar imports from Mexico, and the level of sugar prices in the world market. The following section develops this background, and then the framework for analysis is described and results and implications discussed.

Background Factors Affecting Long-Term US Sugar Supply and Use

The US sugar program relies on supply control mechanisms of domestic marketing allotments, price support instruments, and import restrictions to keep US sugar prices above world levels. The main features are shown in table 1. The 2008 Farm Act made marketing allotments permanent at a level to be not less than 85 percent of estimated sugar deliveries for human consumption. The 2008 Act sets the raw sugar loan rate at 18.75 cents/pound (lb) in fiscal year (FY) 2013. The refined beet sugar loan rate is specified to equal 128.5 percent of the raw cane sugar loan rate. The 2008 Act introduced the Feedstock Flexibility Program, which requires the diversion of sugar from food use to ethanol producers at the beginning of September, if needed, to keep sugar prices above levels at which sugar processors might otherwise forfeit sugar under loan to the Commodity Credit Corporation (CCC).

The 2008 Farm Act states that the raw and refined sugar tariff-rate quotas (TRQs) be established at the beginning of the marketing year at the minimum levels required to comply with international trade agreements approved by the US Congress, with an exception for imported specialty sugar. During the first half of the fiscal year (October 1- March 31), the 2008 Farm Act states that the sugar TRQ must be increased above the minimum levels by the Secretary of Agriculture if a sugar shortage occurs due to an emergency situation such as a natural disaster or war or similar event. The 2008 Farm Act states that after April 1, the sugar TRQ can be increased by the Secretary to provide an adequate supply, but only to a level that does not threaten sugar forfeitures to the CCC.

The sugar provisions of the North American Free Trade Agreement (NAFTA) removed all duties and quantitative restrictions on sweetener trade between Mexico and the United States as of January 1, 2008. For FY 2008-12, annual sugar imports from Mexico to the United States averaged about 1.136 million short tons, raw value (STRV)— constituting about 10.5 percent of US sugar consumption. For FY 2013, imports from Mexico are projected at 1.388 million STRV, about 12.2 percent of projected US sugar consumption.

Mexico’s sugar surplus for export is directly affected by the amount of high fructose corn syrup (HFCS) that substitutes for sugar in Mexico’s production of beverages and food products. HFCS consumption has grown from 653,000 metric tons (mt), dry weight, in 2008/09 to 1.721 million mt in 2011/12. The growth in consumption is expected to stall in 2012/13 at 1.635 million mt because of lower sugar prices and higher HFCS prices due to higher suppliers’ net corn costs in production. The upward-use trend is expected to restart once corn prices return to their longer term, lower price equilibrium path.

Beginning in FY 2010, US raw sugar prices have been supported by world raw sugar prices higher than legislated loan rate levels (fig. 1). The Organisation for Economic Co-Operation and Development (OECD) and the Food and Agriculture Organization (FAO) jointly project these world prices to continue above US loan rate levels through 2021/22. These projections, however, remain extremely vulnerable to disturbances from weather, high energy prices, protective government policies, and the unsettled macroeconomic environment. A projection of 2012/13 world prices based on future market quotes puts the average near to and potentially below US price support levels.

World Raw Sugar Prices: Estimates Based on Futures Market 1999/00-2012/13, and Projections from OECD/FAO

Source: Intercontinental Exchange (ICE); Organisation for Economic Co-Operation and Development (OECD) and Food and Agriculture Organization (FAO).

Framework for Making Long-Term Projections

Given world sugar price uncertainty, the Sugar and Sweetener Outlook has developed two frameworks for making long-term projections (table 2). The first framework assumes the OECD/FAO world sugar price projections. The margin between US and world prices is a function of the ending sugar stocks-to-use ratio. Because of the short 3- year period of world prices higher than loan rates, the estimated relationship between the price margin and stocks-touse has low statistical confidence. It is further assumed that the margin has a minimum value of 3 cents/lb—interim margins below 3 cents/lb imply fewer sugar imports from TRQ-supplying countries.

The second framework assumes world prices below loan rates, or essentially a return to pre-FY 2010 price patterns. The third-quarter US raw sugar price is a function of the ending stocks-to-use ratio but cannot fall below the minimum price-to-avoid-forfeiture. This specification implies a potential divergence between total and private stockholding that is resolved by the USDA purchase of sugar for resale with subsidy to ethanol producers. Federal budget expenditure, effectively ruled out in the first framework, becomes possible in the second.

Both frameworks share common elements. The domestic refining margin is a function of ending stocks-to-use and exogenously determined cane sugar refiner capacity utilization. The third-quarter beet sugar spot price is equal to the sum of the third-quarter raw price plus the margin. An annual beet sugar price is estimated as a weighted average of current and previous year third- quarter prices. The return to growing sugarbeets is directly proportional to this annual price. The sugarcane price is proportional to an estimated annual raw sugar price from the current and previous year’s third-quarter price. Sugar crop prices relative to alternative crop prices determine changes in sugarbeet plantings and sugarcane harvested area in all growing areas except Florida. (Area for harvest in Florida is exogenously set.)

Sweeteners for consumption are comprised of refined sugar, HFCS, and sugar in net imported products. Per capita sweetener availability over the long term is assumed to be constant at 119 pounds. There is limited substitution between refined sugar and HFCS, dependent on refined sugar prices and cost of producing HFCS. The declining trend in soft drink consumption that has been the primary cause of reduced per capita HFCS consumption since 1999 is assumed to have flattened out.

Table 3 shows assumptions made about sweetener supply and use in Mexico. Area for sugarcane production is estimated as a function of changes in the real price of sugarcane lagged 2 years. (This estimated relationship has better statistical properties than several examined alternatives.) Sugar yield is assumed to increase according to trend. In sweetener consumption, the trend toward increased HFCS use regains its momentum after 2014/15. Domestic HFCS production is set at 480,000 mt and the rest is imported—almost all from the United States.

An important assumption is that Mexico does not import sugar for consumption. The only sugar it does import is for use in its products re-export IMMEX program.1 Adoption of this assumption contrasts with the long-term projections made last year and the year before. In those cases, Mexico was assumed to import from the world market to maintain ending stocks at 22 percent of annual sugar consumption after having exported sugar to the United States, in order to allow an annual ending US stocks-to-use ratio of 13.5 percent (2 years ago) and 14.5 percent (last year). Not importing for consumption allows a higher domestic price of sugar in Mexico that favors more sugar from domestic production.

The price of estandar sugar varies inversely with ending sugar stock levels relative to consumption. An export trading equilibrium is set when the estandar export parity price (price in cents per pound = 1.06*US raw sugar price + 2.27) is equal to the domestic estandar price. The adjustment is achieved by changes in exports affecting ending stock levels on a one-to-one basis but in the opposite direction. (Example: 100 mt export increase decreases ending stocks by 100 mt, all else constant.) Fewer stocks increase the estandar price and more stocks decrease it. After exports have adjusted to reach the trading equilibrium, ending stocks are calculated as a residual.

The sugarcane price in Mexico varies directly with the peso-denominated estandar price and is adjusted into real terms. Exchange rate and inflation factors are taken from USDA’s international macroeconomic baseline projection.

Results from Base—Support from World Prices

There are two specifications: the first assumes that US sugar prices are supported by world prices (the base), and the second assumes support from domestic price support policies (the alternative). Table 4 shows US results for both specifications and table 5 presents average values over the projection horizon. Tables 6 and 7 provide corresponding results for Mexico. Discussion in this section focuses on base results; the next section presents a comparison with the alternative.

Projected growth in US beet and cane sugar production over the next decade is modest. Beet sugar production in 2022/23 is projected at 5.319 million short tons, raw value (STRV), about 4.20 percent higher than in 2012/13. Beet sugar production levels in the first 2 years of the forecast are projected low at an annual average of 4.752 million STRV due to lower sugarbeet prices relative to prices for alternative crops. Cane sugar production in 2022/23 is projected at 3.864 million STRV, about 3.87 percent higher than in 2012/13.

Beet sugar production averages 5.8 percent below its average share of the OAQ under the sugar marketing allotment program. In no year does beet sugar production exceed its OAQ share. Cane sugar production averages 18.8 percent below its average OAQ share. Production levels in all cane sugar producing States remain below their OAQ shares.

Sugar deliveries for human use average 11.854 million STRV over the projection period, with annual growth of about 0.7 percent a year. Sugar consumption is strengthened in the early projection period due to higher HFCS prices resulting from higher net corn input prices. These input prices decrease after a few years and sugar deliveries moderate as a result.

Sugar imports from Mexico are projected to average 1.516 million STRV over the next decade, representing about 12.8 percent of US domestic sugar consumption. Two conditions in Mexico underlie this projection. First, beverage and food manufacturers in Mexico continue to expand the substitution of lower cost HFCS (except for the first 2 years of the projection period) for domestic sugar. Second, remunerative prices in Mexico favor modest expansion of sugarcane area and increased sugar production. As discussed earlier, it is not assumed that Mexico will import sugar from third nations to replenish low sugar supplies caused by large exports to the US market.

TRQ sugar imports from US commitments made to the World Trade Organization (WTO) and to several Free Trade Agreements (FTAs) average 1.444 million STRV. As discussed earlier, it is not assumed that TRQ import levels are increased during any year from initially established levels consistent with WTO and FTA minimum access commitments. (This assumption is maintained for the alternative as well.)

The average third-quarter US raw sugar price over the projection period is 27.35 cents per pound, with a high of 33.05 cents in 2015/16. All prices are higher than the 2012/13 projected raw sugar price of 22.12 cents/lb (not shown in the table). The US refining margin is projected to average 9.88 cents per pound, implying a refined beet sugar average price of 37.23 cents per pound.

Projected sugarbeet prices average $61.01 per ton for 2013/14 to 2022/23, 26.7 percent above the average for 2002/03 to 2011/12. Projected sugarcane prices for 2013/14 to 2022/23 average $44.02 per ton, 34.4 percent above the average for 2002/03 to 2011/12.

February 2013

Published by USDA Economic Research Service

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