In a step to bolster US sugar prices the government sold three-fourths of its stockpile of surplus sugar to ethanol makers on Friday and immediately offered to sell the rest for biofuels and other nonfood uses. The sales aim to raise prices by selling the sugar for non-food uses and thus reduce the supply of sugar for human consumption.
Futures prices plunged this year due to record output worldwide and the Agriculture Department forecasts another year of record output and burdensome US supplies. Traders expect prices to languish at low levels because of the huge supply. Biofuels makers bought 216,750 tons of USDA-owned sugar that was offered for sale a week ago, USDA said. The sale amounted to 73 percent of USDA's inventory. Aventine Renewable Energy bought 135,250 tons, Pacific Ethanol 51,500 tons and Central Indiana Ethanol 30,000 tons.
They paid an average 2.6 cents per pound, a steep discount from the 20.9 cents/lb guaranteed to growers. Still, the sale will help defray the highest sugar subsidy costs in a decade. "This will remove sugar from the books (but) the glut is an ongoing situation," said Sterling Smith, a futures specialist with Citigroup in Chicago.
The spot US raw cane contract on ICE Futures US ended little-changed at 20.40 cents a lb on Friday. The contract has climbed 11 percent from a historic low of 18.40 cents a lb in mid-July, but gains have tailed off over the last month in tandem with a stalling global price rally as another year of a bumper output and global surplus weighed. Chief executive Ryan Drook of Central Indiana Ethanol, said his company's purchase would allow a cost-effective test of a new feedstock. The 30,000 tons equals 5 percent of the company's annual needs.
"The aspiration for us is to get commercial-scale advanced sources of feedstock over time," Drook said. USDA offered the remaining 79,750 tons "for bioenergy and other nonfood uses." It set the minimum offer at 5,000 tons. Processors forfeited ownership of 296,500 tons of sugar posted as collateral rather than repay USDA loans because of low market prices.
"All of this sugar was already out of the market once it was forfeited. It was a question of disposing of it," said Frank Jenkins, president of Jenkins Sugar Group in Wilton, Connecticut, the largest raw sugar broker in the United States. "In terms of expedience, this (sale) was good. But in terms of cost effectiveness, it was not," Jenkins said.
Many US sugar producers blame Mexico, a rival grower, in particular for the glut because it is allowed duty-free access to the US market. Some 143,143 tons of surplus sugar were sold in two previous offers through the Feedstock Flexibility Program. The sugar-for-ethanol program was created by Congress in 2008, during the early days of the ethanol boom, but was not put into use until this year.
In another effort to reduce the surplus and bolster prices, USDA swapped sugar in exchange for credits that allow processors to bring sugar into the United States for refining and re-export. Analysts estimated the sugar program would cost $280 million for fiscal 2013, which closed on September 30, the highest pricetag since $465 million in 2000, which was another period of surpluses.
Lawmakers plan no change in the sugar program in the new farm bill pending in Congress. By law, US is obliged to operate the program at no net cost and to guarantee a minimum price to growers. To accomplish the twin objectives, it is empowered to limit imports of foreign sugar and marketing of domestic sugar.