An unexpected increase in sugar production in Mexico for the 2012 crop has put additional supply pressure on U.S. sugar policy. Under NAFTA, an unlimited amount of Mexican sugar can enter the U.S. market tariff free. The extra supply may create an imbalance in the government-managed market that maintains sugar prices near or above the support price loan rate set in the 2008 farm bill of $0.1875 per pound for raw cane sugar and $0.241 per pound for refined beet sugar.
Under the North American Free Trade Agreement (NAFTA) that came into force in 1994, the U.S. sugar market was provided a fifteen year transition period that ended on January 1, 2008. Both countries have public policies that manage the production and supply of sugar available to the market to achieve stable prices for producers and consumers at no cost to the government. Prior to NAFTA, Mexican sugar exports to the U.S. were subject to tariff rate quotas (TRQs) that continue to apply to the rest of the world.
U.S. raw sugar prices were relatively high from the summer of 2009 through this past summer reflecting the general tight world supply conditions. U.S. raw sugar prices averaged $0.21 per pound for the first six months of 2009 and $0.29 per pound for the last six months. Prices averaged $0.36 per pound in 2010, $0.38 per pound in 2011 and $0.32 per pound in the first six months of 2012. Prices averaged $0.27 per pound in July through October and $0.225 in November. There was more focus on sugar users’ demands for additional imports than on too much supply. In April, when raw sugar still average $0.32 per pound, USDA authorized 420,000 short tons of additional raw sugar imports. Under the 2008 farm bill, April is the earliest in the fiscal year (FY), beginning October 1, that USDA can allow imports above the required minimums.
Based on October production estimates by the Mexican government, USDA has estimated that imports from Mexico for FY 2013 will be 1.5 million short tons raw value (STRV). While this is up from 1.07 million STRV last year, it not unprecedented since free trade in sugar began in 2008. In FY 2009 imports from Mexico were 1.40 million STRV and in FY 2011 imports were 1.71 million STRV.
U.S. production also increased this year and an early harvest allowed more of the sugar to be processed in FY 2012 and added to the carryover on September 30. That increased FY 2012 beet sugar production to 4.89 million STRV. Beet sugar production for FY 2013 as of November was 5.11 million STRV, the largest crop in over ten years. Cane sugar production for FY 2013 is estimated at 3.72 million STRV, up from 3.24 million STRV last year and the largest cane sugar crop since 3.71 million STRV in 2000. The combined beet sugar and cane sugar production for FY 2013 is 8.83 million STRV, up 15.9 percent from 7.62 million STRV last year and the largest production total since FY 2000 at 9.05 million STRV.
World sugar prices have been declining along with U.S. prices and that may temper imports a little. According to an analysis in the November Sugar and Sweetener Outlook from the Economic Research Service (ERS) of USDA, the spread between U.S. and world sugar prices may be narrow enough to result in a 265,000 STRV shortfall in filling the tariff rate quotas. The difference between the U.S. price of sugar and the world price may be too low to pay for the extra shipping costs to the U.S. market rather than other markets closer to the supply location.
U.S. deliveries of sugar for human consumption in FY 2013 are estimated by ERS at 11.38 million STRV, up from 11.14 million STRV in FY 2012. Domestic human consumption has been trending upward over the past ten years and the lower prices for the current year will likely continue that trend.
End-of-year stocks will increase and that will continue to put downward pressures on market prices. Stocks at the end of FY 2012 (September 30) were estimated by ERS at 2.0 million STRV with an implied stocks-to-use ratio of 17.5 percent, the highest since 2004. Production plus imports in FY 2013 is expected to exceed use and stocks are likely to increase to 2.2 million STRV, a stocks-to-use ratio of 18.7 percent. A more market neutral stocks-to-use ratio is 15 percent, about 440,000 STRV less than now expected.
The international market is not likely to provide support for U.S. prices. According to estimates by the Foreign Agricultural Service of USDA, steady world production in marketing year 2012/13 at 172 million MT after three years of rising output and ending stock of 38 million MT should keep prices in check. Global trade will decline 3 percent because China has increased domestic production.
U.S. sugar producers have promoted the current sugar price support program as one that has been operated at no cost to the government while providing producers a modest price guarantee. The TRQs and Mexican tariff-free trade allow access to about 25 percent of the U.S. market; the U.S. is the third largest importer after the EU and Indonesia. The potential for loan forfeitures comes at a time when the 2012 farm bill is being written and funds are in short supply.
The 2008 farm bill provides for marketing allotments for domestic production and the production of ethanol from excess sugar to avoid defaulting on price support loans. The ethanol program has not been used over the last four years, and any production would directly compete with corn ethanol for limited demand because of the ceiling on blending with gasoline commonly referred to as the ‘blend wall’.
Government managers of a commodity market often have problems with a market in transition from low prices to high prices or, more often, from high prices to low prices. Users get tired of paying high prices and encourage government managers to increase supplies. That usually happens just about when market forces are starting to remedy the situation with increased supplies and/or reduced demand.
The supply problems will likely be blamed on Mexico or imports in general when the real issue is that production and markets are variable and difficult to manage in a top down manner.
Ross Korves is an Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org ).