The U.S. Department of Agriculture plans to spend about $38 million to buy domestic sugar in a bid to ease a glut that sent prices plunging this month to a four- year low.
The surplus will be reduced by 300,000 short tons (272,155 metric tons) as the government buys sugar and then gives it to U.S. refiners in exchange for credits normally used to import cheaper raw sugar from overseas, the USDA said today in an e- mailed statement. The refined sugar would then be exported, the agency said.
Record production from cane and beet growers, who are supported by government restrictions on imported sugar, and duty-free supplies from Mexico left the biggest inventories in more than a decade and sent domestic prices tumbling 34% in the year ended June 14. The drop in value threatened to force growers to forfeit $110 million to $320 million of sugar to the USDA to avoid defaults on government loans.
“Most traders believe that there would’ve been some defaults in the fourth quarter without pre-emptive action from the USDA,” James Cassidy, head of the sugar trading desk at Newedge Group in New York, said in a telephone interview. “This won’t be enough to remove all excess supply, but it’s a start.”
Domestic-sugar futures for September delivery rose 2.4% to 19.35 cents a pound on June 14 on ICE Futures U.S. in New York. Prices reached 18.85 cents on June 11, the lowest for a most-active contract since March 2009. Raw sugar for October delivery, reflecting world prices, rallied 3.4% to 17.09 cents a pound on June 14. The contract was up 0.5% at 1:36 p.m.
“Today’s notice is estimated to cost approximately two- thirds less than not taking action to prevent forfeitures” on crop loans, Brian K. Mabry, a USDA spokesman, said in an e-mail. “USDA will continue to monitor market responses and determine if additional action is necessary.”
The U.S. limits sugar imports and sets prices for about 5,000 growers, raising consumer costs by $3.5 billion a year, according to an Iowa State University study. Because it helps farmers by setting artificially higher prices rather than with direct payments, government spending is minimal.
While sugar is the only major agricultural commodity grown in the U.S. in which the government actively manages imports, Mexican product can access the country without restrictions under the Nafta free trade agreement. Mexico’s production will be a record in the year ending Sept. 30, the USDA estimates.
Under the U.S. sugar program, processors can take out loans from the government, pledging the sweetener as collateral. Borrowers are guaranteed a minimum of 20.9 cents a pound for unrefined sugar. If it drops below that level, processors who get the credits can repay their debt by selling the sugar to the USDA by the end of the market year, which coincides with the fiscal year ending Sept. 30. Default notices could come as early as Aug. 1.
While “this might provide some relief to the domestic sugar glut, the market has been anticipating something like this for some time,” Sterling Smith, a futures specialist at Citigroup Inc. in Chicago, said in a telephone interview. “It’s already baked in the cake.”
Production in the 12 months that end Sept. 30 will jump 6.2% to a record 9.015 million tons, the USDA said in a June 12 report. Global production will exceed demand for a third year in row in the 12 months started Oct. 1, according to the London- based International Sugar Organization.