Lord, Ron

English

Research Papers in Economics

Agricultural Outlook Forum                                          For Release:
Tuesday, February 24, 1998
                       U.S. SUGAR OUTLOOK
                            Ron Lord
                  Agricultural Economist, USDA
                                
Ladies and gentlemen, it is a pleasure and a privilege to present an
outlook on the prospects for the U.S. sugar industry.  In the last 10
years, the sugar industry has expanded considerably, both on the
production and consumption sides.  I would like to present a view of
both the near-term outlook, and 9 years into the future.
The Near Term Outlook: U.S. Sugar Production
In spring 1997, there were hopes for a 1997/98 (October 1 1997 -
September 30, 1998) beet sugar crop that might challenge the record
1994/95 output of 4.5 million tons raw value.  Acreage was up about
100,000 acres, and growing conditions for the country proceeded
reasonably well through the summer.  USDA's initial forecast for
1997/98, 4.3 million tons, was raised to 4.4 million tons in November
due to an increase in the projected sugarbeet crop from National
Agricultural Statistics Service (NASS).  In January, the forecast
sugarbeet crop was lowered, in part due to disease and pest problems
in the western plains and also to slightly lower acreage harvested and
yield.  U.S. beet sugar production was lowered in the January WASDE
report to 4.3 million tons, and kept at that level in February.
USDA is forecasting the volume of sugar produced from the
desugaring of molasses in 1997/98 will be 234,000 tons.  The implied
recovery rate of sugar produced directly from beets is 13.6 percent
(4.06 million tons of sugar from 29.9 million tons of beets).  If sugar
from molasses were included, the recovery rate would be 14.4 percent. 
Cane sugar production in 1997/98 is forecast at 3.555 million tons. 
For now USDA is maintaining  production in Hawaii at 340,000 tons,
but future developments would more likely lower that forecast than
raise it.  Louisiana came in with not only a record crop, but beat the
record by more than 200,000 tons or 20 percent.  The seven percent
rise in sugar per acre above the previous record was mostly due to a
higher-yielding new variety of cane, combined with good weather.  
The season in Texas is over, with production a disappointing 80,000
tons due to lack of adequate irrigation, the lowest since the freeze of
1989.  Some fields were abandoned.  Texas has suffered through 5
years of drought, and even El Nino has not brought relief.  However,
prospects are for higher acreage next year, as some farmers are
switching land and/or water out of cotton into cane.  The final Florida production story is not yet written, as the season is
only three-fourths over.  For a while a record-setting season seemed a
good prospect, and USDA's current forecast is for 1.835 million tons,
which would be about equal to the record output of 1991/92.  There
has been a great deal of rain in the last month, which complicates
harvest but does not necessarily impact final output.  Acreage in
Florida has been relatively stable for the last 8 years, after an earlier
period of rapid growth.   Puerto Rico is projected to produce 25,000
tons.
The U.S. cane sugar production forecast, if achieved, would be a
record.  The forecast total U.S. sugar production would be higher than
all years except 1994/95. 
U.S. Sugar Deliveries
USDA is forecasting an increase in sugar deliveries (a proxy for
consumption) of 1.85 percent over the  1996/97 level of 9.769 million
short tons, raw value.  Note that the USDA data on deliveries include
several categories which are not included in the private-sector
deliveries with which some of you may be familiar:
direct-consumption imports, Puerto Rico, deliveries from sugarcane
processors, deliveries under the import program for polyhydric
alcohol, and, more recently, imported sugar syrups.  The rise of
180,000 tons would be slightly above the 12-year trend increase of
160,000 tons.  
Since September we have been including the product entered under
tariff code 1702.90.4000 in the supply and use balance.  We are
working on obtaining better information on this product.
Americans seem to continue to increase their per-capita use of sucrose,
and HFCS use is growing faster than that of sugar.  The "fear of fat",
although often honored in the breach (at least by folks like me), may
still hold sway with a sizeable segment of the population and thus
contribute to higher intake of carbohydrates (sugars).
Imports
The tariff-rate quota tranche cancellation in January dropped the
estimate of imports under the tariff-rat quota (TRQ) to 1.74 million
short tons, raw value.  This compares to TRQ imports of over 2.2
million tons for each of the last two fiscal years.  Other than those two
years, the last time annual fiscal year TRQ imports exceeded 2 million
tons was 1990/91.
Imports of sugar under the reexport program are forecast at a
relatively-low 275,000 tons, and exports at 185,000 tons for the
refined sugar reexport program and 100,000 tons as transfers to
the sugar-containing product reexport program.  The lack of a good
premium for white sugar on the world market and the lack of a
consistent discount for forward contracts on the world sugar
futures markets have reduced interest in this program.  It remains to be
seen what will transpire later in the year, when a new refinery inFlorida comes on line raises U.S. refining capacity and thus the need
for other refiners to take more advantage the reexport programs to
utilize capacity.
Prices
Refined sugar prices are reported in recent months at 25.5 cents a
pound for beet sugar, fob Midwest factories.  The beet crop appears to
be about 300,000 tons higher than last year, and the correlation of
softer prices with larger beet crops has held again.  The near-by raw
sugar price (Contract No. 14, New York Coffee Sugar & Cocoa
Exchange) has been below 22 cents a pound for weeks, and averaged
21.85 cents in January and 21.93 cents in December.  The late-summer
futures prices have recently been around 22.10 - 22.20 cents.  The
projected ending stocks-to-use ratio is 13.5 percent, and based on
experience of the last 15 years that stock-so-use ration correlates with
a July-September price in the range of 23 cents.  Is there something
happening this year affecting (shifting) that relationship?  What will
structural changes in the industry do to this relationship?  
Spot prices for HFCS-42 were reported at about 10.5 cents a pound,
dry basis, for 1997, compared with about 14.5 cents in 1996, and 15.5
cents in 1995.  Relatively low HFCS prices in 1997 may have caused
some users to switch from sugar to HFCS.   If true, will there be a
continuation of that phenomenon in 1998?  The possibility of
substitution of HFCS for sugar is low, perhaps too low to detect in our
numbers: but yet, HFCS deliveries continue to grow at more than
twice as fast as sugar deliveries.  The recently-announced temporary
reduction in use of some HFCS production facilities may provide a bit
of lift to HFCS prices in the near term.
Longer-Run Projections 
The USDA baseline is not the same thing as a forecast.  Baseline
projections are provided as a conditional long-run scenario about what
would be expected to happen under current agricultural law, and with
specific assumptions about external conditions.  Critical assumptions
are made about U.S. and foreign policies, U.S. and external
macroeconomic conditions, growth rates of agricultural productivity,
and normal (average) weather.  The sugar baseline shows USDA's
view as of November 1997. 
Beet sugar production seems likely to grow in the years ahead.  The
number of beet factories declined in most of the decades this century,
while beet sugar production continued to rise.  For example, using
averages for a decades, in the 1950s there were 64 sugarbeet factories
producing about 1.8 million tons of beet sugar.  Since then, the number
of factories has dropped while average beet sugar production
increased, although beet sugar output in the 1980s averaged about
3.5 million tons, similar to the 1970s.  For the 1990s, beet sugar
production has averaged about 4 million tons for the decade so far.
What will the next decade bring?  I suspect a continuation of recent
trends: fewer, larger factories, and more beet sugar: perhaps 5 fewerfactories, but beet sugar production approaching 5 million tons a year.
Since the yield of sugarbeets per acre has not shown any upward trend,
the key for better sugar per acre has been in the quality of the beets,
and in the ability of the factory to extract more of the sugar in the
beets.  There are no technical reasons of which I am aware for these
trends to slow down.  In fact, the transgenic plant revolution has barely
begun, and continued progress in finding ways to improve sugarbeets
is likely.  At the same time, some of the new technologies
may lower costs: for example, new sugarbeet varieties which are
resistant to broad-spectrum herbicides may be able to cut costs by $50
or more per acre.  Of course, at least in the early years of the patents,
some of the savings may be partially offset by higher seed costs, but in
the longer run significant costs reductions are possible.
While sugarbeet yields per acre do not show a trend, the recovery of
sugar from beets (not including sugar from de-sugaring of molasses)
shows a trend increase since 1970 of about 0.05 percent a year,
although the time trend explains only about 25 percent of the variation. 
The USDA baseline projects beet sugar production to rise above 5
million tons by the year 2007.
Overall U.S. cane sugar production seems also set to increase.  This
past year's remarkable Louisiana crop may become the norm, or even
be exceeded in the future.  In the prime growing areas of Louisiana,
there are few alternative crops, and none for which returns per acre
can match cane.  The price-cost squeeze continues to press upon many
growers.  On the other hand, efficiencies are gained with new cane
varieties, harvesting machines, and organizational changes which will
lead to fewer and better factories.  
Florida may continue to face various pressures, including from
environmental concerns.  One Florida mill and associated acreage has
been bought by the government, with an agreement to continue to
produce sugar for 5 more years.  However, as some land is taken out
of cane, it is possible that partial offsetting expansion in other areas
could occur.  Florida has some of the largest mills in the world, but the
pressure to grow even bigger to remain on the cutting edge of
efficiency will likely continue.  On balance, Florida sugar production
is projected to not change much over the next 9 years.  Hawaii is
projected to stabilize slightly below current production levels,
assuming that current companies remain in business (standard baseline
assumptions). Texas should recover back to their peak production
levels of a few years ago.
The long-run growth rate of U.S. sugar consumption is projected at 1.2
percent a year, slightly below the last decade, but above population
growth of about 0.8 percent.  Over the 9-year period to 2007, total
consumption would rise by over 1 million tons. 
Projecting sugar consumption has at times been a treacherous
business.  To illustrate,  I show a chart plotting various projections
made over the last decade.  The projection is for U.S. sugar
consumption in the current year, 1997/98.  In the 1988, 1989 and 1990baselines (made in November of each year), total U.S. sugar
consumption for 1997/98 was projected at about 8.8 million tons.  As
it turns out, we will exceed that level by over 1 million tons.
Or, consider that sugar consumption in 1991, just 2 years after the
1989 forecast, already exceeded the projection for 9 years later in the
year 2000.  Some of you who were involved in the 1990 Farm Bill
debate may recall similar numbers, and the influence they may have
had in shaping the marketing allotment and minimum import
provisions of that legislation.
Why was the projection of 9 years ago off by 1 million tons?  Is it
possible that the current projection for 2006/07 will be off by 1 million
tons?  If so, will it be higher, or lower?  Of course, if we knew the
answers then our projection would take them in to account: recklessly,
I offer some observations about sugar consumption anyway.
Sugar at one time had a rather negative public image, if I remember
the 1970s correctly.  Then in the 1980s, public attention became
focused on fat as something to avoid; and about the same
time a rather successful advertising campaign to promote the healthy
and natural aspects of sugar was conducted. The result: gains to
carbohydrates, and sugar in particular.  Such gains, due to the
movement away from fat, may be exhausted.  If true, this contribution
to the growth in sugar consumption may be over.
U.S. income has grown over the last decade, although many debate
whether there was an even distribution of income growth.  The
correlation of sugar consumption to income was complicated
during the era of HFCS substitution, but certainly there is no reason to
assume anything but a positive correlation, even if small.  With
continued growth of income assumed in the baseline, the impact of
income over the next decade should not be very different from the past
decade.
Sugar has never lost much market share to high-intensity sweeteners,
though some have predicted this result.  There is contrary evidence,
that high-intensity sweeteners may have encouraged sugar
consumption.  Mr. Consumer may convince himself that, since he is
consuming a diet soft drink, he can eat another donut.  I think that this
effect was real, but may have run out of steam.  The number of
alternative sweeteners on the shelf will grow.  While a
low-calorie perfect bulking agent may not be here yet, some progress
may be made in this area.  Clever technicians will figure out more
ways to combine sweeteners and bulking agents.  High-intensity
(low-calorie) sweetener prices are only likely to continue to fall,
particularly when new ones appear.  Bottom line: sugar will be faced
with more competition from low-calorie sweetener in the future than it
has in the past.  
Putting it all together, the USDA baseline indicates that U.S. sugar
consumption growth, even at 1.2 percent a year, out paces production
growth, and import needs rise, though not dramatically. 
Notice, however, that it would not take a very large deviation in eitherthe production or consumption line away from its projected path to
make a significant change in import requirements.  

U.S. SUGAR OUTLOOK

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