Where is the Relief?

It wasn’t too long ago that the US economy was humming along in its 10th year of a slow and steady bull-run, driven by strong economic data and fundamentals, and only somewhat tempered by uncertainty among trade policies and tariffs. The freeze of the economy driven by COVID-19 halted activity and trade and was only exacerbated by a plummeting energy complex.

Slight optimism has somewhat permeated throughout the general public as policy holders discuss re-opening parts of the economy (some states already doing so). Although it feels like a lifetime that stay-at-home orders have been in place, we have only recently been able to analyze data and lagging indicators to confirm our predictions about the effects of the global shutdown.

As it relates to sugar, the impact of COVID-19 is relatively modest compared to other parts of our economy. Over the years, sugar has proven to be inelastic to various price fluctuations. There is currently much speculation on how recent demand will be impacted. While the aggregate demand number can be debated, the shift in demand is much more apparent as suppliers shift product from food service to the goods consumers are currently buying in the stores. Most are expecting some sort of drop in demand to be reflected in the upcoming number. However, any decline in demand is still greatly overshadowed by the still present supply shortage in the NAFTA region.

Many of our customers have been asking, ‘Where is the relief in pricing from the Global Refined Quota?”

Since the announcement on April 1st, and publication of how the USTR would administer it on the 8th, we have now had two tranches opened for a First-come, First-served Refined Quota. A total of 205,123 MTRV have applied for the two tranches so far, immediately oversubscribing the 115,000 MTRV opened between the two. However, US domestic prices have not seen any relief as a result.

Why???

1. Not enough. Among the trade, it is accepted that the US is in need of much more than the 200,000 STRV announced. There is now a glut of raw sugar available to refiners, surprising #16 prices, but capacity will limit the amount of additional refined sugar to be produced and marketed.

2. No new sugar. With suppressed world market prices and elevated US domestic prices, tier 2 sugar imports were already increasing. Many sales were put on months ago at levels over and above paying the high tariff duty. As a result, the FCFS quota isn’t introducing new sugar into the market.

3. Not the right product. A portion of the quota will not be fulfilled by white refined sugar. Various quantities of VHP raw sugar (>99.5 POL) and organic sugar will be included in the awarded proration.

Looking Forward…

The harvest in Mexico is coming to an end, with 12 mills already shutting down as of April 25th. At the current pace, Mexico should be able to fulfill their <99.2 raw sugar obligations. However, white refined sugar production continues to lag and at current rates, will fall far short of US expectations. We believe Mexico will end up producing 1.25-1.30mm MTs (Commercial Weight) of white refined sugar. This will just be enough to satisfy Mexican Domestic consumption needs, but will leave the US market short 350,000-400,000 MTs of anticipated supply. So far white refined exports to the US have totaled just shy of 75,000 MTs. With respect to estandar, current suppressed #16 raw sugar prices leave estandar sugar with no economical homes in the US.

Beet plantings started recently, and many buyers have been monitoring the progress reports. While 20% ahead of last year, plantings are 14% behind historical averages. More relevant information will be looked at once sucrose levels are tested in the near future. Until the new crop harvest, beet sugar inventories will be driven down to historic lows.

The SMD data will be released soon where it will be important to monitor the cane refining capacity utilization and just how much the sector has been able to increase throughput to aid in supply.

Rest easy.

Sugaright works closely with the CSC Sugar Trading Desk to assure adequate supply of cane sugar to our refineries. The breadth and depth of our global supply of raw sugar offers relief to our customers by mitigating the supply risk of a key ingredient. In addition, our technical team is constantly innovating to assure the maximum output at each of our refineries.

Perhaps there is some relief after all.