More U.S. sugar defaults seen unless prices rally

(Reuters) – Global sugar prices must climb by some 11 percent to deter exporters from shipping to the United States and leaving the market overwhelmed with huge supplies in the 2013-14 crop year, according to the largest U.S. raw sugar broker.

Frank Jenkins, President of Jenkins Sugar Group in Wilton, Connecticut, said on Thursday that world prices need to rise above 18.50 cents a lb to prevent another year of ballooning inventories and more sugar defaults from U.S. growers and processors.

Last year, sugar processors defaulted on government-backed loans which used sugar as collateral for the first time in a decade. As a result, they relinquished large tonnages of unwanted sweetener to the U.S. Department of Agriculture.

The defaults came as Mexican and U.S. production climbed, supplies ballooned and prices tumbled.

Jenkins on Thursday projected a 21.9 percent sugar stocks-to-use ratio in the 2013-14 crop year that began on Oct. 1. That would be well above a U.S. government forecast of 19.9 percent, last year’s estimated 18.2 percent, and the 14 percent considered healthy for the market.

U.S. government sugar programs are designed to support U.S. growers by buoying domestic prices. One unintended consequence of this policy is that it makes the U.S. sugar market more attractive to foreign suppliers if prices in the coveted U.S. market climb while global prices languish.

The USDA’s re-export credit swap program used in 2012-13 to erode supplies was “counter-productive to the extent it pressures world prices,” said Jenkins.

He said he expects U.S. exports to Mexico and the rest of the world to climb due to the program.

Further, Jenkins pegged Mexican output this year at roughly 6.7 million tonnes, down slightly from last year’s high levels and in line with recent Mexican forecasts.

Even so, that is historically high and above the current USDA projection of 6.5 million tonnes.

Mexico will export some 788,200 tonnes of sugar outside of the NAFTA market, the country’s traditional outlet for sugar, according to Jenkins.

Another year of excess in North America will burden a world market already awash in supplies from Brazil, India, and Thailand.

A fourth annual global surplus and weak Brazilian real could push front-month prices on the ICE Futures U.S. into the low 15 cents per lb area, said Jeffrey Dobrydney, Vice President at Jenkins.

That would be below the three-year low of 15.93 cents hit in July. Front-month March prices settled at 16.69 cents per lb on Thursday, up from 16.68 cents a day earlier.

Meanwhile, spot U.S. domestic raw sugar contract settled at 19.9 cents a lb, down from 20.10 cents a day earlier.

While the U.S. premium has tumbled precipitously since 2012, it could still lure sugar to American shores.