Wednesday September 12, 2018

The USDA released updated supply and demand data for the US and Mexican sugar industries today. There were a few minor adjustments to the FY’18 S&D, most notably a 27,000-ton reduction in the estimate of imports under the TRQ, increasing the estimated TRQ shortfall to 239,000 tons. This and some minor adjustments to production estimates served to lower the estimate of ending stocks by 31,000 tons to 2.072 million, yielding and ending stocks/use ratio of 16.7 %. FY’18 ending stocks are 395,000 above the level that would give a 13.5 % stocks/use ratio.

For FY’19, the estimate of beet production was increased by 236,000 tons to a record 5.343 million tons. This does not look like hype. USDA weekly crop condition reporting has been signaling a move in this direction. As of Sunday, the following percentages of the crops were rated in Good or Excellent condition: Colorado 67 %; Idaho 86 %; Michigan 76 %; Minnesota 75 %; Montana 76 %; North Dakota 94 %; Oregon 70 %; Washington 90 %; and Wyoming 90 %. A 4,000 ton increase in the Louisiana raw sugar production estimate rounded the increase in the estimate of domestic production to 240,000 tons. Total US production is a record – all the more amazing given that Hawaii dropped from the roster of cane producers altogether in FY’18.

Interestingly for a developed nation with a mature sweetener complex, USDA data on US food use has been highly volatile. US deliveries for domestic human consumption, which were down 2.3 % in May and down 2.8 % in June year on year, were up a staggering 10.7 % in July. This brought the cumulative deliveries for the first 10 months of FY’18 in .3 % lower than FY’17. Today’s report estimates that domestic deliveries for FY’18 will finish the year flat with FY’17 at 12.100 million tons. Domestic deliveries for FY’19 are estimated at 12.250 million tons – a 1.24 % increase over FY’18. If deliveries were to be flat again in FY’19, this would lead to a 150,000ton increase in ending stocks and an ending stocks/use ratio of 14.88 %.

According to the amended Suspension Agreements, the Department of Commerce must determine the Target Quantity of US Needs based on the September WASDE solving for a 13.5 % stocks/use ratio, and must set Mexico’s Export Limit at 70 % of the Target Quantity. Using today’s report, Mexico’s Export Limit would have been 589,400 tons. However, Mexico’s Export Limit was set at 827,500 tons in July (50 % of the 1.655million-ton Target Quantity of US Needs), and the Export Limit cannot be reduced from that level. The Target Quantity of US Needs and the Export Limit will be revisited in December and finally in March, at which point Mexico’s Export Limit will be set at 100 % of the Target Quantity of US Needs or 827,500 tons, whichever is greater.

Looking at Mexico, the picture is not pretty. Today’s report estimates Mexican exports to the world market of 121,000 tonnes in FY’18 and of 288,000 tonnes in FY’19. Today’s report identifies 264,000 tonnes of “unsold” Mexican 2017-18 inventory that is “expected to be converted
into export certificates…and that will be required to be exported in 2018-19 before December 31st.” Despite these exports, stocks are forecast to increase by 266,000 tonnes in FY’18 and by a further 193,000 tonnes in FY’19. For those keeping score, that is a total of 868,000 tonnes tel quel (1.014 million short tons raw value) of surplus sugar (produced by Mexico but not consumed in the US or in Mexico) accumulated between FY’18 and FY’19. Exports outside of the US are a necessary component of Mexico’s business plan if it is to keep its domestic market at attractive levels. Determining who will take the pain and when seems to be the tricky part. Data from Conadesuca as of September 7th showed that less than one percent of the estimated 409,314 of world market exports for the year ending on September 30th had actually left the country. The last time Mexico’s ending stocks were as high as is estimated for FY’19 was at the end of FY’12. Between FY’13 and FY’14 Mexico exported a total of 3.64 million tonnes tel quel (4.25 million short tons raw value) to the US under the NAFTA when trade was truly free, leading to the US dumping case. No such outlet exists under the current Agreements, but the need to export is no less compelling.

US raw sugar pricing for FY’19 has settled in between 25.35 in November, escalating to a bit better than 26.00 in July and September. Soft demand has allowed for some carry to be built into the market. If the new beet crop actually comes in as advertised, we expect to see each #16 contract slip down to the 25.50-25.00 range as it takes the spot position. The caveat here is that Mexican raws (~580,000 tons – less than 10 % of the total estimated raw sugar supply) cannot be brought into the US market paying the mandated minimum price of 23.00 FOB Mill if the #16 market is below ~25.50. Unless traders are taking advantage of current Q2 and Q3 values to hedge Mexican supplies, the market may have to rally later to capture this supply. We see refined beet sugar pricing, currently in the 32.00-33.00 range FOB Midwest, shifting down to the 30.00-32.00 range over time as increased production and higher-than-previously-anticipated carried-out inventories weigh on values.

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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