In my last post, I complained about the high cost of sugar quotas to US consumers, measuring about $1.8 billion a year. But, what does this have to do with a sugar shortage? In the last few months, the world sugar market has changed dramatically. Although historically the world price of sugar has been far below the US price, the gap has closed considerably. Below, I show the same price chart from my prior post:
Currently, the world price is 21.84 cents/pound and the US price is 26.45 cents/pound. The world price is actually above the target market price set by farm legislation and implemented by the USDA. Ironically, the cost of the subsidy paid to sugar producers is dramatically lower in the current year. The high world price indicates that the supply/demand relationship in the world market has shifted such that its is now a sellers market -- there is not enough sugar on the world market to supply consuming countries.
According to data from the USDA, world production of sugar declined from 166.5 million tons (metric) in the 2007/8 fiscal year to 148.7 million tons (metric) in fiscal 2008/9, a decline of roughly 10 percent. This decline has been matched by an increase in world consumption by about 1.5 percent. What was a market that had bountiful supplies in 2007/8 now has a very tight supply/demand situation.
So, where is sugar produced:
The above chart shows sugar production for the 2008/9 fiscal year. Brazil is by far the largest produce of sugar (the above is for sugar alone, exclusive of cane used for ethanol). India is the second largest producer, followed closely by China. It also turns out that India is also the biggest consumer of sugar (in total) ahead of both China and the United States.
Now the above charts shows absolute sugar production in 2008/9. The following shows the year-to-year change between 2007/8 and 2008/9.
It turns out that the bulk in the world decline in sugar production comes from a really bad crop in India. Of the global reduction in sugar production of 17.7 million tons (metric), India accounts for 11.85 million tons (tons). In fact India has switched from being a net exporter (5.8 million tons in 2007/8) to being a net importer of sugar. The ramifications of this reduction are apparent in the world sugar market -- prices have risen dramatically.
How does this affect the United States?
In 2007/08, Total US Sugar Supply (exclusive of existing stocks) was 10.772 million tons. Of this amount 76% was supplied domestically, 13% from Tariff Rate Quota (TRQ) imports, 6% from Mexico and 5% from other sources. Tariff Rate Quota (TRQ) imports are those limited by Farm Legislation and implemented by the USDA. These imports amounted to 1.354 million tons -- basically the amount of the limit.
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In 2008/09, US sugar producers had a bad year and their production declined by 7% -- about 0.581 million tons. So, right from the get go, the supply/demand situation would be tight anyway. Total supply was about the same in 2008/09 -- 10.762 million tons. So what made up the shortfall?
In 2008/09 TRQ imports were basically flat. Mexico basically drastically increased there imports into the US -- growing from 0.694 million tons to 1.450 million tons -- more than double. Mexican sugar is not subject to an import quota and can imported under NAFTA duty free. Methinks that if the red state farmers had had their way in limiting Mexican sugar imports, the pricing situation for sugar would be much worse. The result of the Mexican imports is that the price of sugar in the US has remained fairly flat throughout the year, even though world sugar prices have escalated substantially.
Crunch Time
Right now, the markets are intensely focused on the 2009/10 supply in the US. Domestic production is expected to rise somewhat, basically back to 2007/08 levels. But, overall supply is expected to fall by 0.730 million tons, or about 6.8 percent. How can that be?
The first problem is that TRQ imports are expected to fall by about 0.250 million tons. How can that be. The US limits sugar imports doesn't it? Well the US does limit imports. But it does so on a country-by-country basis. So, if a country like Zimbabwe does not meet its allowable quota of 12,636 metric tons, the quota 'shortfall' just goes into space and is unused. Thus, for example, Brazil has net its quota by the end of June (quotas are set on a fiscal year -- ending September 30th -- basis), it cannot import anymore into the US. The country-by-country limits always mean that there will be an aggregate shortfall. That is, counties that have extra sugar to export can't make up up for those with a short.fall. The result -- depending on the year TRQ imports are always less than what is allowed in aggregate.
So, while the April, 2009 projection of sugar imports for 2009/10 was set at 1.496 million tons, it has been systematically been reduced to 1.182 million tons (a decrease of about 20%) reflecting not a tighter quota limit, but a greater shortfall. Why? Two reasons come to mind. (1) Bad weather & bad harvests or (2) a willingness on producers to sell their goods elsewhere. I suspect it it the latter. Because the world price is basically the same as the US price (as faced by an exporter), why would anyone prefer to sell to the US when they can get the same price from someone else? I mean put yourself in the shoes of some guy in (pick a country) who has been tormented by quotas & paperwork for years. Why would he (or she) voluntarily choose to trade with the US?
Whatever the the rationale, TRQ imports are expected to decrease by 0.250 million tons.
What about Mexico? Mexico is interesting because the country is now producing less sugar than it consumes. So, how did it significantly raise its imports into the US in 2008/09. Answer: It all came out of existing stocks. Mexico has basically sold its entire preexisting (as of the start of 2008/09) stock of sugar to the US. I'm sure they did this because they got a good price. But, the fact of the matter is the cookie jar is empty. Imports from Mexico into the US are expected to fall by 1.285 million tons. Folks, that is a lot of sugar. Mexico will consume what it produces, but there is nothing extra to export.
The USDA also expects that part of the 2009/10 sugar shortfall will be filled by a draw down in US stocks from 1.252 million tons to 0.709 million tons for an extra 0.543 million tons.
These factors all combine to make for a very tight market in the forthcoming fiscal year. This, then, is the focus of the food companies in the letter to the Secretary of Agriculture requesting an increase in the TRQ country limits (see my prior post).
The current US supply/demand balance now reflects the world's supply/demand balance. Currently, the TRQ import quotas are basically non binding and the US must compete for sugar on the world market. If this is in fact the case, it is not immediately obvious that by raising the TRQ quotas (as requested by the food companies), there will be any additional sugar provided into the US market.
A digression on the TRQ program
The TRQ program limits the sugar imports by allocating a quota to 40 countries. The actual quota assigned to a country is based on the total allowable quota and a percentage share assigned to the country. The percentage shares are based on trade data from 1975-81 when the sugar trade was relatively unrestricted.
The chart below shows the 2008/09 TRQ limits for each country compared to their actual imports through July, 2009.
The chart above shows that most of the big producers/importers are nearly maxed out on the quota, with the exception of Argentina which still has a lot of quota room left. There are also a number of smaller producers that have not imported any sugar into the US this year. Overall, after 10 months of the fiscal year, total TRQ imports are running at 71% of quota. By comparison, by the same point in time last fiscal year, imports were running 74% of quota.
Given the above distribution of imports, it appears that for many countries raising the import quotas would have no affect on the sugar supplied to the US market -- many countries won't hit the current quotas. On the other hand, for the big producers like Brazil, The Philippines, Australia, and The Dominican Republic, raising their quotas may indeed yield greater imports because they are likely to max out under their current quotas.