US Sugar Policy Under Focus

March 15, 2013 05:46 AM

via a special arrangement with Informa Economics, Inc.

Ag Dept. reviewing several options to avoid sugar loan forfeitures

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The Wall Street Journal reported on Tuesday, quoting a USDA sugar career analyst who probably regrets ever giving the interview, that USDA was considering buying 400,000 tons of sugar in order to boost prices to keep processors from defaulting on government loans. The sugar would then be sold to US ethanol producers, likely at a loss of $80 million. But USDA contacts have stressed no final decision has been made and that several other options are under consideration.

The potential for some (and potentially a large number of) sugar loan forfeitures is real, especially with current sugar price levels and the feeling among many in the sugar industry that the free fall is not complete.

Sugar policy opponents have pounced on the possibility of taxpayer money to help support sugar prices and thus stop loan forfeitures. Four US senators sent a letter to Secretary of Agriculture Tom Vilsack on Thursday requesting the agency provide details on loans made to domestic sugar processors. Sens. John McCain (R-Ariz.), Jeanne Shaheen (D-N.H.), Pat Toomey (R-Pa.) and Mark Kirk (R-Ill.) signed the letter.

"We request that you explain and justify the potential $80 million cost to the American taxpayer that's been reported," the letter said. The senators also requested that the agency "identify each corporation or other entity currently receiving operating loans under the sugar program, and of those entities, which have outstanding loan balances, (and) are at risk for defaulting on some or all of their loans as of the date of this letter."

One possibility is for USDA to buy up some Certificates for Quota Eligibility (CQEs) issued to foreign countries that have been allocated a share of the sugar tariff rate quota. This was done in 2003, and sources say if done again would be considerably less expensive than purchasing sugar for an ethanol feedstock program of which the rules have still not yet been finalized. Of the 1.154 million short tons raw value sugar import quota (which includes an estimated 400,000 short tons shortfall), 51 percent has been shipped at the end of February.

Regarding potential purchases of sugar, some sugar industry sources say the quantity could or should be 600,000 tons – if not larger – and the discounted price offered back via any ethanol feedstock bidding program would likely be at more of a discount than a USDA career employee indicated earlier this week, according to a sugar industry source.

From a farm policy standpoint, the sugar loan forfeiture issue comes at a bad time for sugar policy proponents who have argued for years about their "no net cost program." But sugar policy proponents note that any option announced to avoid sugar loan forfeitures would be minuscule compared with the around $4.8 billion paid out this year via direct payments to corn, soybean, wheat, cotton and rice growers.

Says one sugar policy supporter, "First, nobody knows whether sugar policy will cost a dime this year. Lots can happen in the next few months. The USDA person who gave the WSJ the interview, the WSJ's editorial, and ensuing stories are premature. Second, if there is a cost, it would be small because the law tells USDA they have to operate the program at no cost and use tools to prevent or minimize costs. The Bush administration did this 10 years ago and the policy operated at zero cost for the next decade. Third, why are four fiscal hawk senators taking issue with USDA's effort to minimize costs (if there are to be any this year)? Finally, what's a farm policy for if not to be there when prices plummet? Sugar prices have dropped a whopping 50 percent in a year. If a letter is to be sent to anyone, senators might wish to ask if sugar users who were reporting record profits last year (with higher sugar prices) plan to lower the prices of sugar containing products to match the 50 percent drop in the prices they are now paying for sugar? Anybody notice a drop in prices at the grocery?"

Comments: There is a legitimate need to have a sugar program safety net – especially for times when prices plummet. Sugar users have a legitimate reason for wanting a more balanced policy, but many say their arguments would be better directed at what largely causes the US sugar program – other countries' use of subsidies and so-called "dump" prices.

As for any quantity USDA may (by all means not a certainty) have to buy for any ethanol feedstock program, tonnage levels vary significantly and usually higher than the 400,000 tons the USDA career person told the WSJ. Said one industry analyst, "We can adjust the numbers a little, but I think everyone sees the train wreck ahead." One ag lobbyist told me, "Our sugar sources say there is a need to take 800,000 strv out. And a CQE buyback maybe nets 200,000. Bottom line: a CQE buyback maybe gets you a quarter of the way there, certainly no more than a third... and Mexico holds both jokers."

A sugar industry observer noted that, "If you took 700,000 strv out of USDA’s current 2012/13 balance sheet (via the feedstock flexibility program (ethanol) or reduced imports or loan forfeitures), then you get to a stocks-to-use ratio of 14.1 percent. Let’s call that the upper end of a balance situation. That would be tough; a lower target is far more realistic. Looking through the remaining quota allocations through the 11th of this month, USDA could probably get 250k just from the Dominican Republic and The Philippines. You could quickly add another 50-100k from a few other countries, although at some point, you start to get to countries who might not ship anyway. They might be able to get the CQEs particularly cheap as the 11/16 spread has almost disappeared (just over 200 points versus a historical average of probably above 1,000 points); for some, shipping costs this year means it won’t make economic sense to ship sugar to the US (but they wouldn’t want to lose that quota). Mexico starts to become a problem. Supporting prices will encourage more of their exports to the US, and they are going to have a huge exportable surplus this year. Convincing the Mexicans to look elsewhere (to a degree anyway, a lot of it is coming our way regardless) is part of the solution, because their exports could totally offset any USDA actions. The timing of this is not great for the sugar program, but I don’t think the domestic producers like the Mexicans getting so much of our market. So, a collapse in prices, which would affect the higher-cost Mexicans relatively more, would at least have a silver lining for some folks."

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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