SUGAR AND SWEETENERS OUTLOOK -- SUMMARY September 21, 2006 September 2006, ERS-SSS-247 Approved by the World Agricultural Outlook Board ---------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete report will be available electronically about 1 week following this summary release. ---------------------------------------------------------------------- The United States and Mexico Resolve Sweetener Dispute On July 27, 2006, the United States and Mexico announced an agreement that resolves disputes related to each nation's interpretation of the sweetener provisions in the North American Free Trade Agreement (NAFTA). Under the July 27 agreement, the United States provides for duty-free access to 250,000 metric tons, raw value (MTRV) of Mexican sugar for fiscal year (FY) 2007, and for duty-free access to between 175,000 and 250,000 MTRV of Mexican sugar for the period October 1, 2007 through December 31, 2007. In turn, Mexico provides for duty-free access to equivalent amounts to U.S. high fructose corn syrup (HFCS) corresponding to the same periods. Under the agreement, the United States can ship 7,258 MTRV of sugar duty-free to Mexico for each of the marketing years 2006, 2007, and 2008. Also, the United States and Mexico confirmed that on July 3 they submitted a joint letter to the World Trade Organization (WTO) Dispute Settlement Body in which both countries had accepted in principal the elimination of Mexico's soft drink and distribution taxes. Effective on January 1, 2008 under NAFTA, there will be no duties or quantitative restraints between the two countries on all sugar and HFCS trade. Also on July 27, 2006, the U.S. Department of Agriculture (USDA) announced additions to the FY 2006 sugar tariff-rate quota (TRQ), provisions of the FY 2007 sugar TRQ, and the Overall Allotment Quantity (OAQ) for FY 2007. The FY 2006 refined sugar TRQ was increased by 100,000 short tons, raw value (STRV). The U.S. Trade Representative (USTR) allocated 29,410 STRV of this TRQ to Mexico, and the remainder to the global portion of the refined sugar TRQ. In addition to this TRQ increase, the USDA increased the specialty sugar portion of the refined sugar TRQ by 9,921 STRV. The USDA established the FY 2007 raw sugar TRQ at 1.481 million STRV. This amount is 250,000 STRV above the WTO minimum access level of 1.231 million STRV. The USDA announced that there would be no shipping patterns for these imports and that early entry of FY 2007 raw sugar TRQ imports could start as of August 7, 2006. Early entries were originally expected to total 75,000 STRV, but the estimate was scaled back to 25,000 STRV in the August World Agricultural Supply and Demand Estimates (WASDE) report. On August 3, 2006, the USTR made allocations to the 40 countries that receive quota shares. The USDA established the FY 2007 refined sugar TRQ at 62,832 STRV, which is 38,581 STRV above the WTO minimum access level of 24,251 STRV. The USTR made specific allocations to Canada (11,354 STRV) and to Mexico (3,256 STRV). The specialty sugar TRQ (mostly organic sugar) was established at 40,406 STRV. The USDA established the FY 2007 OAQ at 8.750 million STRV, down from 9.350 million STRV in FY 2006. As set out in the 2002 Farm Act, allocations to the beet processors were set at 4.756 million STRV and to raw cane sugar processors at 3.994 million STRV. Cane sugar production is expected to fall short of its allocation by 375,000 STRV. This amount was, therefore, reassigned to imports. Although imports for consumption are projected at above 1.532 million STRV, allotments are not suspended because the additional imports are needed to meet the OAQ due to the expected low level of domestic cane sugar production. After the TRQ announcement, the nearby raw sugar No. 14 contract fell from 21.70 cents/lb to 20.75 cents/lb. The raw price had been decreasing for a few days prior to the announcement after news from some TRQ exporters regarding shipments had resolved certain doubts about TRQ shortfall for FY 2006. Also prior to the announcement, world raw sugar spot prices had been decreasing (above 17 cents/lb at the beginning of July to under 16 cents/lb at the end), reflecting more plentiful world supplies. These lower world prices helped to bring down the U.S. raw sugar price. Since the announcement, world sugar prices have continued their fall (between 12 and 13 cents/lb in early September), but the linkage between U.S. and world prices seems to have been broken: the gap between U.S. and world sugar prices has reached about 8 cents/lb, an amount above the threshold at which they are linked. FY 2007 sugar production is projected at 4.878 million for beet sugar and 3.567 million STRV for cane sugar. Especially notable is the increase in beet sugar production forecast for the Upper Midwest. Although area harvested is projected to increase about 7.4 percent above FY 2006 area, sugarbeet production is projected to be 26.1 percent higher, with an expected record yield of 23.3 tons per acre. Cane sugar production is expected to recover from last year's disappointing levels in Florida (1.730 million STRV, up 26.5 percent) and in Louisiana (1.370 million STRV, up 14.0 percent). FY 2006 sugar production is estimated at 7.405 million STRV. September 2006 beet sugar production in the Upper Midwest has been strong and has offset almost nonexistent September production in Louisiana. The estimate for FY 2006 deliveries for food and beverage consumption is 10.150 million STRV. Deliveries this year have been difficult to analyze because of high levels of refined sugar imports going to entities that are not required to report to the USDA. It has not been clear whether these imports have been for immediate delivery/ consumption or are being inventoried for later use. The projection for FY 2007 is 10.250 million STRV. Ending stocks for FY 2006 are estimated at 1.627 million STRV, implying an ending stocks-to- use ratio of 15.5 percent. Ending stocks for FY 2007 are projected at 1.756 million STRV, implying an ending stocks-to-use ratio of 16.5 percent.