October 2023 (Sugar) WASDE: highlighted supply risks in US & Mexico as beet sugar campaign hits full stride.

23-October-2023 (Midland, Michigan)

The United States Department of Agriculture (USDA) published its most recent WASDE report on October 12th, showcasing potential risks in supply together with a continued demand slowdown for the recently started crop year starting October 1st.

The key stocks-to-use ratio, used by key government officials and the overall trade to determine balanced market conditions at the agreed 13.5% threshold, saw a further reduction in its latest report of 1.2% versus last month, bringing the ratio to 12.3%, and triggering "undersupplied" sugar conditions at least in paper.

USDA officials will continue analyzing a combination of (1) physical sugar supply import options and (2) estimate further demand market slowdowns to rebalance itself during the coming months. However, when looking at the major drivers in the market itself (both on the supply and demand ends), this rebalancing exercise is not as easy as it looks with current supply shortages also affecting some of our country's main sugar partners.

Realities/Concerns on the Supply End

When analyzing the supply drivers of the US sugar balance sheet for October, we focused on four key line items that are worth attention. First, on the beginning stocks figure, USDA reduced the amount of sugar estimated as available at the beginning of the crop cycle by 182,000 STRV (from 2.159 mm to 1.977mm). The lower adjustment takes into account less than estimated sugar production in the months of August and September particularly in Louisiana which is still battling the effect of extreme dry conditions in the US Gulf region going back to earlier this year. The weather realities have been particularly harsh for sugar cane processors both in Louisiana and Texas (much smaller production).

On the contrary, Florida has been fortunately spared from any major pain so far this year.

In Texas specifically, actual sugar production for the 2021/22 cycle was 124,000 STRV and has been on a steady decline over the past decade. The drought conditions have been punishing to Texas' sugar production almost to the point of full collapse, as their current estimated production for the current crop year is just 42,000 STRV, a 66% drop in just two (2) crop cycles.

Continued attention on final sugar production for the Gulf region later this year will be crucial to determining how much the market will depend on offshore supplemental sugar supply to make it safely to September 2024.

A second supply concern has originated from the third largest raw sugar quota importer under the U.S. Tariff Rate Quota (TRQ). The Philippines is not expected to fill any of its raw sugar supply commitment to the United States for the third consecutive year. With lesser than ideal local sugar production (weather stresses as well), the Philippines' Sugar Regulatory Administration has made the decision once again to keep its sugar in-house to avoid potential shortages in the highly politically charged environment at the island-nation.

As of today, the WASDE report does not reflect this quota shortfall, so at 12.3% stocks to use ratio, the USDA will need to further adjust for the Philippines' non-supply (145,245 STRV) from the TRQ line, making the adjusted stocks-to-use ratio actually closer to 10.03%.

The adjustment on the overall TRQ supply is further complicated with the actual destinations/flows for the Philippines raw sugar to begin with (i.e., standalone refineries in the US West Coast who have traditionally received Philippines' sugar) and who will have to once again rearrange supply sources to import raw material from alternative origins, mainly Central America. These Central American sugars are highly coveted by the trade and will continue commanding strong premiums in the short/medium term as buyers from several points around the globe (including neighbor Mexico) aggressively seek whatever global shrinking supplies they can find.

Central American sugars, as acquired, should enter the USA via the USDA refiner re-export program and/or by paying the full second tier WTO duty if the USDA chooses not to increase today's TRQ baseline quota with new reallocations. The market will count of a large portion of this Central American sugar to offset the Philippines shortfall in a continuously adjusting supply exercise.

Thirdly, on the domestic supply end (this time on the beet sugar end) the market is dealing with persistent weather risk as warmer than normal/rainy weather patterns still hover over key producer regions this Fall (e.g., Michigan, Red River Valley and the Rocky Mountains). The current weather patterns are partially preventing some of the country's largest beet sugar cooperatives from transitioning into full-time harvesting mode/piling of beets for the winter months). The higher temps and additional moisture received in the last weeks will help increase agricultural yields per acre, but they will not necessarily assist in building more sugar content in the beets which is the ultimate objective. The next 30 days will be critical in determining to what extent sugar content may have been further compromised due to these weather stressors.

And fourth, as we shift to Mexico (US' largest offshore sugar supplier), the scenario gets even bleaker and needs closer monitoring in the coming weeks. Although USDA did not make any changes to Mexico's export estimate to the USA in October, the reality is that the upcoming Mexican crop forecast may be severely overstated (according to several trade sources and when analyzing data from both the USDA and Mexican Agriculture Depts.).

The latest WASDE production estimate for Mexico for 2023-24 arrives at 5.575mm metric tons, tel quel, and several key players in the trade are in consensus that the estimate may be off target (less) by as much as 400,000 metric tons, or potentially higher.

Dry weather has ravaged once again key cane sugar growing regions in the Veracruz and Tamaulipas states as they get ready to start milling next month.

If Mexico's production were closer to 5.100 million metric tons (closer to some of trade estimates), the country would have to either (1) hold a significant amount of export commitments to the USA this crop year to handle its own market, or alternatively export its sugar to the USA in fulfillment of trade agreements, only to refill its stocks with imports later on in the year.

Still unknown (and being debated by the USA and Mexican governments) is whether Mexico could import its shortage (after exports to USA) from the international sugar market or will they be limited to imports exclusively from USA, as stipulated in the Suspension Agreements subsequently negotiated between the countries in 2017.

The reality of the lack of sugar availability in the overall US/Mexican integrated market is showing in prices and consistent to similar movements in the global international sugar markets. Refined sugar is currently quoted in Mexico in the US 80 cent per-lb. range (US $1.76 per-kilo, FOB mill, for industrial size packaged sugar), significantly higher than the US. Based on this current scenario and as the Mexican crop sets to begin in late November, new crop sugar should remain in Mexico until US export price parity has been achieved - and this lower trend in prices could take months if Mexican sugar production dissapoints.

Mexico's potential shortfall throws a monkey wrench into the whole US/Mexico sugar picture. The overall market assumption since the beginning of the Free Trade Agreements almost 25 years ago was that the United States would always be the deficit producer and Mexico always the surplus partner. That is not the case today. Both countries are short, and in today's reality, Mexico has the bigger problem balancing its sugar balance sheet due to the limitations it had agreed to under the Suspension Agreement language and to which the US is asking that Mexico oblige.

In the short term, Mexico has imported sugar from non-traditional origins to fix its sugar supply problem (paying full WTO import duties on those imports), and much to the chagrin of its northern neighbor, while a firmer solution is found.

Realities on Demand End

Slower US sugar consumption has helped helping to facilitate the non-traditional sugar flows into Mexico. US refined sugar is now coming across together with sugars from other world market destinations as the market fights for rebalance. Major customers are allegedly seeking to urgently transfer/transport unused sugar balances from their United States purchase books into their Mexico operations to utilize better priced sugars in their systems before contractual shipping period expire in the US. Unfortunately, time & supply chain limitations are major obstacles, so the ultimate success of these new flows is limited today at best. But the market, as always, is continuously looking to correct itself; and seeing USA-origin sugar flowing into Mexico for the first time in years, while non-traditional, is a good sign that the market is working as intended.

As we look at consumption (both in Mexico and the US) for the remainder of the crop year, the main questions arising are:

(1) will the current high sugar price scenario in Mexico trigger demand destruction and a new shift to high fructose corn sweeteners imports from the USA (particularly for the soft drink industry) as a rebalance tool?

(2) will the slower macro-economic condition targets by Washington trigger more decline in US sugar consumption hence make more US-origin sugar available to Mexico to rebalance its supply?

(3) will the US Department of Commerce, Mexican Government and US/Mexican sugar trade group associations arrive at a revised solution for Mexico when its sugar crop is short and supply from USA is not a feasible/cost-economic solution?

Market experts and key players will undoubtedly continue following these developments in the coming weeks.

One thing we have certainly witnessed today after implementation of the NAFTA Agreement (now USMCA) in the early 2000s is that all major players on both sides of the sugar border have arrived at a sugar market that is truly integrated for both sugar and corn sweeteners (as was intended when negotiated between the countries). The local market dynamics as far south as Chiapas, Mexico do have a direct ripple effect in far reaching places like Maine, USA. and viceversa.

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