Jenkins Sugar Group Market Update Friday October 8, 2010

October’10 WASDE release

The USDA released its monthly supply and demand update for the US sugar market today. The official text of today’s announcement follows:

“Projected U.S. sugar supply for fiscal year 2010/11 is increased 63,000 short tons, raw value, from last month, due to higher beginning stocks more than offsetting lower production. Florida cane sugar production is reduced 65,000 tons to match processor production projections, while Hawaii is increased 35,000 tons to be in line with the previous year’s estimate. Sugar use is increased 100,000 tons, in line with the increase for 2009/10. For 2009/10, U.S. supplies are increased 208,000 tons, due to higher production and imports. Production is increased 98,000 tons to account for larger-than-expected September output of U.S. beet sugar and Hawaii cane sugar. Imports are increased 110,000 tons, mainly due to higher imports from Mexico. Total use is increased 115,000 tons to reflect the strong demand for imported sugar and minor changes in sugar exports and deliveries for re-export products. Ending stocks are increased 93,000 tons, to 1.6 million tons or 14.4 percent of total use.

We have a genuine problem with the report in that while the various changes made to the report today seem reasonable, bringing the various components in line with expectations, the bottom line of the report – a 14.4 % stocks/use ratio for the year just ended, makes absolutely no sense in the context of the market’s realities: raw sugar

prices in the upper 30.00 range and refined prices in the mid- to low 50.00 range.

Historically, a 14.4 % stocks/use ratio has been associated with a raw sugar price nearer 22.50 and a refined price of 35.00. The two charts here

US raw sugar price vs. Stocks/use ratio:

Average spot #16 futures month of July 2001/02-2009/10

US refined price vs. Stocks/use ratio:


19 Average Midwest r2e0.f1i4n, e18d.65price, month of July 2001/02-2009/10

show US prices plotted on the vertical axis and the ending stocks/use ratio plotted on the horizontal axis. The cluster of data on the left hand side of each chart represents the relationship between stocks/use and price for the past decade, and the outlier on the right hand side of each chart represent the 2009-10

18 20 17 19 16

22.72, 17.25 21.32, 16.68

22.44, 16.21


23.50, 18.65 18 15 20.86, 15.15

23.76, 15.26 23.02, 14.3


17 25.38, 17.25

33.66, 14.4

16 15 14 13 12 11 10

14 27.63, 16.68

12 11

35.00, 16.21


53.40, 14.4

13 00, 15.15 38.00, 15.26

21.94, 12.63 35.40, 14.3

anomaly. The market has become completely disconnected from its traditional relationships.

26.0100, 12.63 Eith20er th22e da2t4a is 2c6 orru28pt, o30r the32beha34vior36in the market is irrational.

Price, Ratio

Source: USDA 20 25 30 35 40 45 50 55 60

Jenkins Sugar Group, Inc.

Price, Ratio

For the past many months we have consistently questioned the data. Through a series of adjustments (mainly a 535,000 ton increase in the estimate of 2009-10 domestic food use since April – 300,000 tons of the adjustment since July alone) today’s report looks far more reasonable. The import data and the domestic production data are likely accurate, or nearly so, at this point, given that that water is already under the bridge. Thus our conundrum: how to explain the disorienting disconnect between the ratio and current pricing?

The estimate of 2009-10 beet production was increased by 75,000 tons today, and this new crop production was of little use in meeting 2009-10 demand, despite being included in the ending stock position. A late surge in Mexican exports to the US market may have hit the market too late to impact the #16 futures (the July contract expired on June 8th and the September futures expired on August 9th). But all of this inventory was on hand as we crossed the threshold of the new fiscal year, and a 14.4 % stocks/use ratio at the beginning of 2010-11 would indicate a significantly easier market than we have experienced: the November futures averaged 38.17 during the past month – the highest average price for the spot futures for the past six months. The Midwest refined price averaged 59.00.

There is no question that the #11 market has impacted the US raws price, but the two markets are at present in no way correlated. As evidence, the #11 futures have rallied nearly 700 since September 1st, while the #16 futures are up roughly 100 points. Using today’s numbers, the US market will need 561,000 tons of imports above and beyond the 1.409 million tons of TRQ, 300,000 tons of re-export raws and 550,000 tons of Mexican exports to achieve the 14.3 % to 14.4 % stocks/use ratio which prevailed over the past two years. If one were to assume that the USDA will keep its foot on the market’s throat as per last year, forcing imports of high tier sugar to accommodate demand, the March #16 and May #16 futures are roughly 10.00 undervalued. Central American raws have traded in recent days at 85 points over the March #11 for shipment in the first-quarter. Adding 2.25 points of costs and the 15.35 duty to the 26.50 March #11 brings the landed cost of high tier sugars to 45.00. March and May #16 settled at 35.37 and 34.70 respectively. The July and September futures are roughly 8.00 undervalued by the same reckoning. The market is presently not pricing in the need for high tier imports – no correlation there.

If, on the other hand, one were to assume that the USDA will provide a timely increase in the TRQ of 561,000 tons, giving the US refiners and trade houses the right to go out and compete for raws against other destinations, we would need to pay 3.00 to 4.00 cents over the FOB world market to be the most attractive destination for this sugar. This would indicate a #16 price of 29.50 to 30.50 for the first quarter and a price of roughly 26.00 to 27.50 for the third-quarter positions. Under this scenario, the #16 futures are 6.75-7.00 cents overvalued basis the first quarter and roughly 5.50 overvalued in the third-quarter. No correlation there either. Uncertainty over the USDA’s import policy has left the market in limbo, stuck at a level that reflects the middle ground between very different potential outcomes. US refined prices are priced much more in line with high tier import parity – a vote that the USDA will keep the market tight once again.

Looking at the 2010-11 figures, we were surprised to see the Florida crop reduced, as conditions there have appeared nearly ideal. The fact that the beet crop for 2009-10 was increased by 75,000 tons on early harvest with no reduction in the 2010-11 crop is essentially the same as a 75,000 ton increase in the 2010-11 crop. It would have been premature for the USDA to reduce the estimate of Mexican production, but given that the Mexican agricultural development secretary this week lowered the estimate of the crop to 4.700 million tons following the recent flooding, the USDA estimate could easily be several hundred thousand tons overstated. This would likely lead to a reduction in the estimate of Mexican exports to the US, though not necessarily.

The coming weeks and months will be revealing. How the US beet industry manages the marketing of the +/- 500,000 tons of production over and above last year’s crop will play a major role in determining refined prices and the cane refiners place at the table, and thus the disposition of the #16

futures. Given current prices, we would guess that the domestic producers are well hedged compared to a more typical year. As the chart as right indicates, ending stocks in both the US (blue) and Mexico (red) have been sharply reduced in the past several years, significantly increasing the potential for shortages, as witnessed by the occasional disruptions seen in the past quarter. Two things are quite clear to us – the market is certain to be every bit as volatile as it was over the past year, and the USDA is once again in the position to determining winners and losers.


Frank Jenkins Jenkins Sugar Group, Inc.

4500 4000 3500 3000 2500 2000 1500 1000

500 0

Source: USDA

NAFTA ending stocks: STRV 3.176 million

strv av


2.360 million strv

Jenkins Sugar Group, Inc.

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