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JSG April NAFTA Sugar Market Update

Tuesday April 10, 2018

WASDE numbers released today showed a 99,000-ton reduction in domestic production – an estimated 80,000 tons from beets and 19,000 tons from cane production in Florida – partially offset by a 5,000 ton increase in high-tier imports. The resulting 94,000-ton net reduction in ending stocks yields an ending stocks/use ratio of 14.7 %, down from 15.5 % estimated in March and 15.1 % for FY’17. Ending stocks are estimated 17,000 tons down year on year at 1.859 million tons. Estimates for the Mexican S&D were unchanged from the March report. Mexican production for FY’18 is estimated at 6.050 million tonnes tel quel, up from 5.957 million tonnes in FY’17.

While overall stocks are nearly static from FY17 to FY’18, the underlying flows of sugar continue to show signs of a sea change – US ending stocks are increasing held as raw and refined cane sugar as opposed to refined beet sugar. This is a remarkable transformation when one recalls the anxiety over the availability of refined cane sugar as the GM labeling issue moved to center stage a few years ago.

US beet deliveries continue to impress. Beet deliveries were a record 5.348-million-tons in FY’17 and the industry has continued to garner market share in FY’18. During February, deliveries by beet processors were up 3.6 % over last year. Deliveries year-to-date by the sector are up 3.6 % as well. If this pace were to be maintained through the balance of the year, total beet deliveries would be 5.540 million tons for FY’18 – a new record. Looked at slightly differently, beet deliveries in October’16-February’17 totaled 2.119 million tons, or 39.64 % of the total for the year. If this ratio were to hold for FY’18, total beet deliveries would be 5.538 million tons. Given estimated FY’18 beet production of 5.139 million tons in today’s report, this would require a reduction in carriedin beet inventory of 400,000 tons, from 896,183 tons on September 30 2017 to 496,183 tons on September 30, 2018. A reduction to this level would be unprecedented. For context, ending stocks held by beet processors for the six years from FY’10 to FY’15 averaged 698,000 tons, including two years with ending stocks of less than 560,000 tons. We have adjusted our estimate of total FY’18 beet deliveries to 5.435 million tons from 5.500 million tons last month. This would accommodate an ending stock held by beet processors of 600,000 tons, which appears reasonable give the sector’s improved logistical capacity. This would necessitate beet deliveries from March through September to drop back nearer last year’s (record) pace, leaving beet deliveries up just under 1.63 % on the year as a whole.

On September 30, 2017, raw sugar accounted for 34.92 % of US ending stocks. Five months later, at the end of February, raw sugar accounts for 49.55 % of total stocks, the highest level dating back to January 2015 as the GMO labeling issue reached full-blown proportions. A few efficient levers had to be pulled simultaneously to achieve this transformation.

One is the afore-mentioned grab for market share executed by the beet sector; the flip side of this is that deliveries by cane refiners are down 1.8 % year to date through February. A second is the increase in the TRQ (269,724 tons) and in Mexico’s export limit (75,000 tons with pol of less than 99.5 degrees, 23,932 tons with pol of less than 99.2 degrees) announced on July 24th, 2017. Raw sugar imports under the TRQ from October 1st through March 31st have totaled 571,187 tonnes, 152,297 tonnes higher than last year, due in no small part to the TRQ increase spilling over into Q1 of FY’18. The third is the implementation of the amended Suspension Agreements with Mexico. Data from Conadesuca show that Mexico’s exports to the US of sugar with polarization of less than 99.2 degrees through March 31st have totaled 449,686 tonnes raw value, or 73.87 % of total exports. Last year, arrivals in bulk vessels at US refineries totaled 354,335 lots in the October/April window – a conservative proxy for Mexico’s exports through March. Thus, current year arrivals of bulk vessels from Mexico in October-April have run more than 27 % higher than last year. Given this, it is no wonder that the May #16 expired at 24.35 on Monday, 3.35 cents below the level seen at the end of November, after trading to a 100-point discount to the September futures earlier in the session.

The reduction in beet production in today’s report alters the market dynamic slightly. Beet marketings will have to taper from the pace seen during the first five months of the year this summer unless the beet sector is willing to carry out a historically low inventory number – less than 500,000 tons. This should allow cane refiners to begin the process of absorbing built-up inventories of both raw and refined cane sugar. Nonetheless, we look for inventories held by cane refiners to increase by nearly 250,000 tons in the course of FY’18. Compared to February 2017, raw sugar processors stocks at the end of February were 83,257 tons higher and cane refiners’ stocks were 88,772 tons higher. Raw sugar deliveries from Mexico ballooned in March, surely exacerbating this trend.

Raw sugar producers have rebuilt their inventories – warehouses are well committed and vessel line ups are sprawling. This is inevitable as the beet industry reduces stocks significantly (down 296,000 tons by year’s end) while overall stocks are only expected to decline by 17,000 tons. Statistically, the only entities that hold stocks in the US are beet processors and cane processors and refiners. Cane processors and refiners are thus scheduled to increase inventories by 279,000 tons in the course of FY’19. Assuming that a large US refinery might melt 70,000 tons in a month these days – sales book allowing – this represents four months of supply. And remember, that is just the increase in stocks, not the total held by processors and refiners, which should be closer to 1.250 million tons on September 30th – just as the new domestic crop, new quota year and Mexican export limit year get underway. Interestingly, this is almost exactly the inventory that the beet processors held at the end of FY’16 before their two-year de-stocking campaign.

At some point in the next few months, the beet industry should begin scaling back deliveries relative to the pace of increase (3.6 %) displayed thus far in FY’18. The parameters are pretty clear at this point in terms of the total availability of beet supply – the question is, how low will the industry draw down their stocks ahead of the new crop, and when will the onus of meeting spot demand shift towards the cane sector. The beet sector could proceed conservatively, as per our assumptions above, or they could maintain their momentum and draw down stocks to levels that could cause disruptions in the event that the new crop sees delays.

One concept seems clear – we are moving from a period during which the beet sector aggressively pursued market share to one where the beet sector will likely have to cede share back to the cane refiners. It is easy to forget that beet deliveries from FY’13 to FY’16 averaged just 4.725 million tons before jumping to 5.348 million tons in FY’17. As described above, the beet sector will enter FY’19 with limited inventories – perhaps historically low. If beet production in FY’19 is 5.435 million tons (which would be a record by a roughly 200,000 tons), the sector would be able to maintain share. We are using a 5.100 beet production estimate for FY’19 based on recent history and the slightly lower area (down 1.35 % in the corrected March Prospective Plantings Report). If this holds true, beet deliveries in FY’19 could drop back to near 5.100 million tons – a decline of more than six percent from our estimate for FY’18.

In this event, the cane refining sector will be thrilled to have the additional 279,000-tons of carriedout inventory. FY’19 promises to have a much different complexion than the current year. If raw sugar prices for FY’19 ease nearer to 25.00, which seems likely at this point, current refined cane pricing near 35.00 FOB refinery should allow refiners ample room to breathe while rebuilding sales books. Refined Midwest beet pricing, which we are seeing nearer 33.00 for FY’19, may wind up looking cheap if the sector actually does have to trim their sales volumes by five or six percent.

In the interim, we look for the July and September #16 futures to follow the path blazed by May, tracking down nearer 24.50. Should the deliveries baton be passed to the cane refiners from the beet processors sooner rather than later, it could bolster the raw sugar price, but a meaningful build in raw and refined cane inventories looks inevitable.

Regards,

Jenkins Sugar Group, Inc. This email address is being protected from spambots. You need JavaScript enabled to view it.

This report has been compiled for general informational purposes only. While efforts have been made to ensure accuracy, Jenkins Sugar Group, Inc. assumes no responsibility for errors and omissions.

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