Sugar, sugar…

U.S. sugar consumption ranks third in the world behind India and the EU. The U.S. has the world’s third largest population of 274 million and the largest and most diverse food processing industry. Despite a trend toward greater self-sufficiency in sugar production, the U. S. remains one of the world’s largest net sugar importers – – only the Russian Federation and Japan are higher.

The North American Sugar Market:  Recent trends and prospects beyong 200 (FAO, 1997)

The single most important source for all that imported sugar? Why, Mexico of course: in January of this year, 110,000 metric tons of the stuff. By contrast, the second largest US foreign supplier, Brazil, exported 28,389 metric tons (USDA figures). With nearly all sugar destined for the food processing industry (although also used for producing alcohol, both for drinking and industrial use, pharamceuticals and some plastic substitutes), a sudden sugar shortage could effect food prices within a very short time.

Which is likely now to happen. Imported Mexican sugar is cheaper in the United States than domestic sugar, which was good for processors and consumers, but bad for US sugar growers. Growers complained that Mexico was subsidizing sugar exports (just as Mexico complains the US subsidizes corn exports) so…

The U.S. Commerce Department ruled in September [2015] that Mexico was subsidizing its sugar imports, allowing exporters to dump product into the U.S. at 40 percent below market prices. In order to avoid U.S. retaliatory tariffs, Mexico signed onto a “suspension agreement” that would limit Mexican shipments.

The agreement worked in the sense that overall Mexican sugar exports dropped, but it failed in another way. Mexico began exporting more sugar that could go straight to the U.S. market or to melt houses, bypassing U.S. refiners and cutting them out of the process and profits. Melt houses are able to take sugar that is not fully refined, liquefy it and then run it through a fairly basic processing to make it suitable for human consumption.

The results have been shrinking margins for U.S. refiners, according to sources who asked not to be named because of the sensitive nature of negotiations now being held between the U.S. and Mexico.

“It’s creating a problem for U.S. cane refiners that don’t get enough raw sugar,” one source said. “The consequences you can see in the market is that raw (sugar) prices have gone up dramatically because cane refiners are competing for relatively scarce raw cane supplies. And the refined price has been dropping sharply since (the U.S. market) has been inundated with Mexican sugar.” In other words, refiners are getting hit twice – first by a lack of available raw sugar to refine and then by lower refined sugar prices.

“The U.S. government regards that as a problem, so they’re looking at ways to make some modifications to the suspension agreement,” another source said.

In other words, despite the “suspension agreement” (meaning Mexico would limit sales in the United States) Mexican sugar was still cheaper than US sugar, and by refining the suger in Mexican before export, it cut into another US business. So, the suspension agreement was again modified.

To protect US sugar and refinery interests,the agreement “suspends” imports from Mexico if they exceed a 820,000 metric tons in a fiscal year. If Mexico goes over the quota, it has to cut exports by 40% and pay a high tariff that gives domestic sugar a market advantage. But given the demand for sugar in the United States, the quota for Fiscal Year 2016/17 has already been filled. So… rather than pay a tariff, Mexico is just holding back shipments. This being the harvest season for sugar in Mexico, and most sugar in the United States being beet sugar (harvested in the fall), the looming sugar shortage will leave the food and beverage industry, as well as other industries that depend on sugar, forced to compete for higher priced imports from non-NAFTA countries, or the small supply of US-grown cane sugar. Meaning higher prices for food and other commodities.

All this could have been worked out, but in a rather neat way, Donald Trump is to blame. While his top cabinet post nominations have been controversial at best, focus on those nominations has meant overlooking the thousands of other presidential appointments that need to be made (or made by cabinet secretaries). Changes in the suspension agreement, or even working out a fine, would involve negotiations between the Mexican Secretería de Economia and the United States Department of Commerce officials. The Mexican officials are in place. Although there is a US Secretary of Commerce, no one is at home in the office the Mexicans need to talk to.

Sweet, huh?