The US government is close to buying surplus sugar to sell to ethanol producers at a loss, in an effort to bolster weak domestic sugar prices and avoid losing hundreds of millions of dollars in defaulted loans. The White House budget office released the sugar-for-ethanol program, formally known as the Feedstock Flexibility Program, to the Agriculture Department on Thursday.
That paves the way for the USDA to begin purchasing sugar ahead of forfeitures to sell to ethanol producers at a loss. Some analysts are sceptical that USDA can implement the program in time to prevent forfeiture on $620 million in outstanding loans where sugar was used as collateral. "We will continue to review all available tools we have at our disposal and we may make additional announcements as events warrant," said a USDA spokesman.
The losses on the sugar could begin at the end of July, when price support loans expire and processors can begin to forfeit sugar, according to USDA data. "I'm confident they will elect to utilise an appropriate volume, and in time to avoid loan forfeitures," said Jack Roney, director of economics and policy analysis at the American Sugar Alliance, describing the move as a "positive step."
The growers' group is in favour of the 2008 farm law's existing government support programs, which have come under attack from US food manufacturers and other trade groups for inflating domestic sugar prices well above global ones. Initiating the program would be one in a series of actions the USDA is considering in its battle against a growing surplus and the ballooning cost of the sugar program this year.
Earlier this month, USDA said it would purchase sugar for the first time in more than a decade as part of a re-export program expected to cost the government $38 million, but less than mass forfeitures would. US sugar processors use sugar as collateral for their government-backed loans. Domestic prices have tumbled more than 30 percent since June 2012, nearing the loan support level of 18.75 cents a lb for cane sugar as Mexican sugar production surges and the North American surplus grows.
With the world facing another year of surplus, there are few alternative markets for the North America's excess sweetener. The September No 16 domestic raw sugar contract on ICE Futures US was about 19 cents per lb, as global prices touched a near three-year low of 16.02 cents a lb on Friday. Whether the USDA would be able to implement the sugar-for-ethanol program in time to prevent forfeiture remains to be seen.
"I doubt they can get it going fast enough to prevent the forfeitures, but it's still a good move," said Jack Scoville, vice president for Price Futures Group in Chicago. The tool was built into the 2008 farm law but never implemented. Not every ethanol producer has the capability to incorporate sugar into their blends, and for those that do, the question will come down to cost.
"If these guys have a feedstock that's dramatically cheaper, and they can grind it, there's no reason they wouldn't use it," said a US ethanol trader. Ethanol producers may be willing to pay 6 or 7 cents a lb for the sugar acquired by USDA for 20.9 cents, according to agency estimates earlier this year. This is the first year the US sugar program would operate at a cost in nearly a decade, and it comes amid heated debate over federal agriculture policy.
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