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American sugar supply is likely to be below acceptable levels in 2019/20, thanks to this year’s disastrous beet harvest.
The US Department of Agriculture (USDA) will therefore intervene to ensure there is enough sugar available.
This will mean increased imports into the USA.

The Rules of the Game

The USDA has a mandate to ensure sugar stocks at the end of September each year are 13.5% of annual consumption.
It can use four methods to ensure this occurs, and these are likely to be used in the following order:

Reallocate unfilled Tariff Rate Quota (TRQ) import volumes to countries with sugar available.
Increase Mexican quota access.
Increase the total TRQ Quota amount.
Introduce an emergency refined sugar quota (last used after Hurricane Katrina).

For 2019/20, the USDA believes closing stocks will only be 10.5% of consumption, thanks to a disastrous beet crop.
The supply shortfall currently amounts to around 300k tonnes sugar but could increase as further crop losses are assessed and reported.
We think resources 1, 2, and 3 are likely to occur to meet the sugar shortfall, while solution 4 will be avoided by allowing the full-duty sugar imports to occur as and when required.

TRQ Reallocation: From Each According to Their Ability

Each year, the USA imports at least 1.1m tonnes (raw value) of raw sugar from a range of countries as part of a Tariff Rate Quota (TRQ).
Most countries ship their full quota to America each year because sugar prices in the USA are higher than most other parts of the world.
However, where a country does not ship, the USDA is able to redistribute their TRQ to other quota holders who have already shipped their allocations.
This happened on 25^th June 2019, when 100k tonnes TRQ were redistributed to the following origins:

2019 TRQ Reallocation

Five countries have not shipped TRQ in each of the past five years and so we believe are unlikely to ship in 2019/20.
Other countries such as Malawi and Mauritius very rarely ship and often fall short of the full volume allocated.
This amounts to a potential TRQ shortfall of 100k tonnes.
The timing of any reallocation is important.
2019’s reallocation was too late to allow all beneficiaries to ship; this could be because the volume reallocated was too small to ship in bulk or the origin no longer had sugar to ship.
Clearly, the earlier the reallocation the better.
However, the USDA is expecting a 50k tonne shortfall in TRQ fill, so an early re-allocation would only add 50k tonnes to the supply balance.

Under the United States-Mexico-Canada Agreement, Mexico gets first refusal on any American sugar quota increase.
We believe that Mexico will prioritise US exports over any other sugar trade this season because American prices are so attractive.
However, Mexican supply could also be tight this season.
We expect Mexico to produce 6.1m tonnes of sugar this season, but following dry weather the local cane industry has forecast production at 5.8m tonnes.

Historical Mexican Sugar Production

Any shortfall in the Mexican crop would limit the volume they would be able to send to the USA.
We think Mexico could ship an additional 500k tonnes sugar on top of their current 1m tonnes access.
This would be enough to meet the USDA’s projected supply shortfall.
However, if Mexico only produces 5.8m tonnes of sugar it would not be able to meet the American shortfall by itself.

Once Mexico has declared what volume it can export, the USDA can increase the size of the TRQ.
The size of the increase is at the discretion of the USDA to achieve the desired 13.5% stocks-to-use ratio.
This last occurred in July 2017, when the TRQ was increased by 245k tonnes (raw value); the deadline for TRQ shipment arrival was also extended by a month.
· Occasionally, the USDA also increases the size of the refined sugar TRQ.

Full-duty sugar imports into the USA are usually discouraged by the size of the import tariff (15.36c/lb for raws and 16.21c/lb for refined).
However, if American domestic prices rise far enough, full-duty sugar imports may become workable into some ports.
If tier 2 (full-duty) imports reach 186k tonnes in a given season, the USDA can reassess whether import duty levels are appropriate.
Based on current prices, this gives an effective ceiling on the American refined sugar price of around $780/mt.

Full Duty Paid Midwest Refined Beet Parity Model