Re-export credit values have been one of the bright spots for sugar-containing products for exporters that participate in USDA’s re-export program, especially since the Suspension Agreements with Mexico were put in place.
Over the last ten years, spot re-export credits using a formula of the #16 contract less the #11 world sugar contract less $0.02 per pound for CIF costs would yield an average credit of $0.0827 per pound. The first five years’ average was only $0.0652 per pound as strength in the #11 world raw sugar market reduced the values. The last five years saw the average value balloon up to $0.1002 per pound as world raw sugar prices fell as global inventories reached record highs over the last two years before dropping with lower production forecast in India and with Brazil continuing to maximize ethanol production as a result of lower sugar prices.
The year 2020 promises to bring more volatility as the global deficit forecast at about 9 MMT cuts into those inventory levels.
The 2020/21 production surplus/deficit will be crucial in determining whether we continue to see stronger values, or we see values moving back toward the long-term average. The recent rulings vacating the 2017 Amended Suspension Agreements could also lower support for #16 domestic raw sugar prices as well.
While it is hard to get excited about values currently trading just over the ten-year average at about $0.1025 per pound, it is questionable that the spread will remain as strong as it has the last two years. In particular, we could argue the #16s could face some downward pressure and the #11s could certainly face upward pressure if we see sizeable early global deficits for 2020/21.
#11 vs. #16 sugar futures
Source: DTN, McKeany-Flavell
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