The Mexican Wild Card

The U.S. Department of Agriculture is asked every month to provide a detailed assessment of America’s sugar market, having to forecast more than a year into the future. It’s a difficult job, and since Jan. 1, 2008, it’s become exponentially harder.

That’s when a NAFTA provision kicked in that allowed Mexico to send the United States as much duty-free sugar as it wants.

And under NAFTA, there’s nothing to prevent Mexico from turning a handsome profit by sending every pound of sugar it grows to America and then importing cheaper, subsidized sugar from other countries to meet its own domestic needs.

“Unfortunately for analysts at USDA—some of the best in the business—this NAFTA loophole makes their job of looking into the future very difficult,” explained Jack Roney, an economist with the American Sugar Alliance. “And unfortunately for American producers, it means we’ll be staring at mountains of unneeded Mexican sugar.”

This NAFTA loophole has caused impossible-to-predict fluctuations in USDA sugar supply estimates over the past year.

For example, in Sept. 2008, the USDA forecast one of the tightest U.S. sugar markets in memory, with the country’s sugar surplus ratio for this crop year at 4.6 percent. By May, that ratio ballooned to 12 percent because of unexpected Mexican sugar shipments.

When Department officials first warned of a tight sugar market last year, the information they had received indicated that Mexico would only send America 550,000 short tons of sugar. Actual shipments for this crop year are coming in closer to 1.15 million tons.

It’s no wonder then that raw sugar prices have remained low despite USDA’s early predictions of a tightened sugar market on Sept. 30, 2010—15 months from now.

The government’s May World Agricultural Supply and Demand Estimates (WASDE) showed a surplus ratio of 2.7 percent for the 2010 crop year—an estimate that if not for the Mexican wild card would have normally sent market traders into a frenzy taking sugar prices higher.

But prices didn’t jump, and the USDA has already started revising its estimates upward as new information becomes available. The June WASDE increased the surplus estimate to 4.3 percent, a number that most market observers expect to continue climbing drastically as next year’s market realities continue to come into focus.

“The USDA is doing a good job with the information they have at hand, but the difficulty is that no one knows for sure just how much sugar Mexico will send us in the future,” Roney explained. “Based on 2008 and 2009 actions, U.S. sugar producers think Mexico will send us a lot of sugar, even if they have to backfill their own market with imports to do it.”

According to U.S. government estimates, Mexico will import 285,000 metric tons of sugar this year to make up domestic shortages caused by shipments to the U.S.

Mexico’s willingness to short its own market, Roney says, is why USDA import calculations will likely increase between now and next year. Right now, the Department is expecting just 165,000 tons of sugar from Mexico in 2010—an 85 percent drop from this crop year.

Roney and other sugar economists believe that number will rise along with America’s sugar surplus ratio. Regardless, large food manufacturers are aggressively lobbying the USDA to bring in even more sugar from other countries.

These same companies asked for a 1 million ton import increase last Sept. when the government made early predictions of a tight market in 2009.

“Thankfully, the USDA has been very responsible and not given into the food companies’ requests,” Roney concluded. “The sugar users were wrong last year and they’re wrong now. The USDA is right to be cautious, because to bring in more unneeded sugar now would only harm U.S. sugar producers and incur taxpayer cost.”