Monday May 14, 2018

Say what you will about the WASDE reports generally – on a relative basis, the May WASDE report ranks high in terms of information, serving up the first look at the out-year, in this case FY’19. The May report showed a 15.0 % stocks/use ratio for FY’18 and a 12.1 % ratio for FY’19.

The estimate of the FY’18 beet crop was increased by 82,000 tons to 5.221 million tons while the estimate of production in Florida was increased by 25,000 tons and in Texas by 5,000 tons. The estimate of imports under the re-export program was reduced by 50,000 tons to 350,000 tons and exports increased by 20,000 tons to 170,000 tons. Filtering out the effects of the extension of the FY’17 quota year into FY’18, the TRQ shortfall is estimated at 99,208 tons. If USDA were to successfully reallocate this shortfall to quota holders that can ship, it would boost the ending stocks/use ratio to 15.81 %. As year-end stocks of raw sugar are expected to be ample, we will be surprised if the shortfall is reallocated this year, though the temptation is there: one could argue that Mexico will be challenged to ship 1.645 million tons to the US in FY’19 and reallocating the shortfall would effectively reduce the US market’s reliance on Mexican exports in FY’19 without increasing overall stocks This is due to the calculus embedded in the Suspension Agreements, whereby the ending stocks/use ratio is regularly adjusted to 13.5 % through March by increasing or reducing Mexico’s Export Limit.

For FY’19, the report showed a 12.1 % stocks/use ratio, while noting that the estimate of TRQ imports of specialty sugars includes only the WTO minimum, as additional quantities have not yet been announced by the Secretary of Agriculture. Last year, the additional amount of specialty sugars was set at 160,000 tonnes, or 176,368 short tons. Should the same amount be allowed for FY’18, this would bring the ending stocks/use ratio to 13.5 %. Using this assumption, Mexican access in today’s report was estimated provisionally at 1.465 million tons. Domestic production is estimated at 8.981 million tons, down 2.9 % from the 9.252 million tons made in FY’18. The estimate of beet sugar production is 5.036 million tons, down 185,000 tons or 3.5 % from FY’18, based in part on the pace of plantings through early May. It should be noted that extraordinary progress has been made in plantings over the past two weeks: as of yesterday, nationally beet plantings were 84 % complete, trailing last year’s 93 % at the same date but well ahead of the fiveyear average of 78 %. Cane sugar production is estimated at 3.945 million tons – Florida production is estimated up 87,000 tons at 2.085 million tons; Louisiana down 179,000 tons at 1.680 tons; and Texas up 5,000 tons at 180,000 tons.

Imports under the re-export program are estimated at 350,000 tons while exports of sugar under the US re-export program are estimated at 50,000 tons and “other exports” (mainly sugarcontaining products) are estimated at 155,000 tons for a net import of 145,000 tons. From FY’15 through FY’19 (using estimates for FY’18 and FY’19), the WASDE has shown imports exceeding exports under the re-export program every single year, averaging about 140,000 tons per year and totaling about 700,000 tons of cumulative net imports. We continue to believe that this stems from
the way USDA records certain re-export transactions and expect to see an adjustment in both domestic deliveries (lower) and “other exports” (higher) in a futures report.

We have been closely tracking US beet deliveries this cycle, as a reduction in overhanging beet processors’ inventories is a major theme for us as we move towards FY’19. Beet deliveries in March totaled 449,553 tons, brining deliveries for the first half of the year to 2.644 million tons – 1.7 % ahead of FY’17’s record amount and on track to meet our estimate of 5.400 million tons for FY’18. In FY’17, 48.6 % of total deliveries were made on the first-half of the year. On this basis FY’18 deliveries project at 5.442 million tons. First-half deliveries by beet processors in FY’16 totaled 2.179 million tons, or 47.4 % of total deliveries for the year. On this basis, total deliveries for FY’18 would be 5.580 million ton. Given the logistical challenges of moving the much larger volume, we’ll stick with our estimate of 5.400 million tons for FY’18. We estimate that beet processors stocks at the end of FY’18 will be 717,000 tons, or 37.7 % of total ending stocks. This would be the second-lowest percentage in the past decade. Beet processors’ inventories accounted for 60.58 % of total ending stocks in FY’16 and 48.58 % in FY’17 after averaging 39.4 % from FY’10 through FY’15, prior to the GM labeling dislocations seen in FY’16.

Conversely, inventories held by cane refiners and cane processor at the end of FY’18 are estimated 204,000 tons higher than at the end of FY’17. Taking a slightly longer view, beet processors’ inventories at the end of FY’18 are estimated 528,000 tons lower than at the end of FY’16 while cane refiners and processors’ inventories are estimated 374,000 tons higher. For context the reduction in beet processors inventory from FY’16 equated to over 36 days’ worth of beet deliveries at the record pace seen over the past 18 months, while the increase in cane refiners and processors’ inventories equates to roughly five months’ worth of throughput for a large coastal cane refinery.

The ~200,000-ton increase in cane processors and refiners’ carry-in for FY’19 is augmented by the increased flow of sub-99.2-degree sugar to be exported from Mexico. Based on today’s report, Mexico should ship 1.151 million tons in bulk vessels to US refiners in FY’19 – 262,000 tons more than will be required in the current year should Mexico meet its export limit.

Looking at Mexico, the WASDE shows production of 5.970 million tonnes tel quel, exports of 106,000 metric tonnes to non-US destinations in FY’18 and a carry-out of 1.243 million tonnes, up 241,000 tonnes from the FY’17 carry-out. While this additional inventory and potential nonUS exports would appear to be the perfect capital to fund exports to the US during OctoberDecember, allowing Mexico to meet its potentially large FY’19 US Export Limit, the inventory may not be of the appropriate quality to meet the requirements of the Suspension Agreements. A
Mexican crop of less than 6.00 million tonnes tel quel in FY’19 will leave Mexico challenged to meet its higher US Export Limit (1.645 million short tons/1.408 million tonnes tel quel) in FY’19. Mexico’s initial Export Limit will be fixed in July with adjustments made in September, December and March. Mexico does not have to declare whether it can meet its Export Limit until the end of March.

To our eyes, the balance of the current year and FY’19 set up well for sellers of sugar in the US, with the cane sector the big winner due to lower availability of beet sugar. We estimate that the beet sector will only be able to market 5.100 million tons of sugar in FY’19, down from 5.400 million tons this year due to lower stocks and lower production. The cane refining sector will by default add this market share in FY’19. We expect raw sugar prices to gravitate to the 25.50 to 24.75 range basis the nearby contract in FY’19, providing the opportunity to preserve reasonable refining margins.

This, of course, assumes a stable refined sugar price. We have heard or refined beet pricing between 34.00 and 33.00 FOB factory for FY’19, down a couple of cents from the current year. It is our belief that the reduced market share for the beet sector in FY’19 will allow for better pricing discipline overall. The main caveat is related to the scenario presently unfolding in the world sugar market. Massive surpluses estimated for 2017-18 and 2018-19 have pressed prices under 11.00 recently, and we see little relief on the horizon for producers. In several important producing countries, government subsidies and interventions prevent the price signal to stop producing from reaching farmers, and a broad-based backlash against sugar consumption has precluded lower prices from stimulating offtake.

This has opened the window for world market producers to ship refined sugar to the US, paying the high-tier WTO duty of 16.20 cents per pound. In bear markets past, Safeguard Duties, which increase as world market prices decline, had precluded high-tier imports from entering the US commerce. Free trade agreements that include sugar, however, have exempted many US suppliers (Canada, CAFTA countries, Colombia. The Dominican Republic, Panama and Peru among them) from these duties. World refined sugar prices are currently near $320.00 per tonne. A decline to $300.00 per tonne would allow the most efficient exporters to land refined sugar in the US at roughly 33.50, though not necessarily in the conveyance and packaging that would allow a high level of competitiveness. Should the world market drop to 10.00 and the world white sugar premium, currently at $60 for October-December 15 shipment, drop to $55, the break-even on high-tier refined sugar would drop to nearer 32.20. We get that Central American whites are valued higher than the #5 white sugar contract and that 50kg bags do not work in the US market. The point is it will be difficult for US refined prices to appreciate from the current 34.00-33.00 range if world values continue to deteriorate, as we believe they will. Some
high tier refined sugar has been entered into the US - a reduction in US refined pricing would preclude additional high tier sugar from being entered. Two other items of interest are the negotiations around NAFTA renewal and around the new Farm Bill. Regarding NAFTA, U.S. Trade Representative Robert Lighthizer, Mexican Economy Minister Ildefonso Guajardo and Canadian Foreign Affairs Minister Chrystia Freeland aren’t scheduled to meet together in person this week, according to three government officials familiar with talks who spoke with Bloomberg condition of anonymity. The trio met at least bilaterally every day last week. There has been little progress on five major issues over the past several months. Last week House Speaker Paul Ryan stated that May 17th was a critical date for a deal to be struck and brought before him is there is to be a realistic chance of a vote while the current Congress is in office. Mexican election on July 1st will also likely cloud the deal’s prospects. We do not see much potential for a new NAFTA deal to be struck soon. It is anyone’s guess how the Trump administration will proceed with what it has characterized as the worst deal in history.

Looking at the Farm Bill, House Ag Committee Chair Mike Conaway hopes to bring the House version of the Bill to a floor vote this week. The rules panel will meet Tuesday at 5 p.m. to set the terms of the farm bill debate, and again on Wednesday at 3 p.m. to decide which amendments can be considered on the House floor. Amendments include the sugar program reform effort sponsored by Reps. Virginia Foxx (R-N.C.) and Danny K. Davis (D-Ill.). The Senate Ag Committee has only said that it hopes to pass its version out of Committee this month. U.S. Senator Debbie Stabenow (D-Mich.), Ranking Member of the U.S. Senate Committee on Agriculture, Nutrition and Forestry, recently issued the following statement regarding the House Agriculture Committee passage of H.R. 2 - Agriculture & Nutrition Act of 2018: “In 2014, we were successful in passing a landmark Farm Bill because we had a broad, bipartisan coalition including farmers, conservationists, nutrition and local food advocates, rural communities and others working together for passage. Unfortunately, the Republican leadership of the House Agriculture Committee has abandoned this coalition and has chosen a partisan path that makes it impossible to pass a fiveyear farm bill.” Contentious work rules for SNAP recipients, among several hot-button ag issues, make a one-year extension of the current bill seem the most likely outcome to us.


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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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