It is critical to consider the relationship between macroeconomic forces and the balance of global sugar supply and demand when examining sugar markets. Global economic expansion, along with a world population that is growing at approximately 1% per year (U.S. Department of Commerce, 2024), supports strong sugar demand globally, which typically also supports world prices. However, falling energy prices and/or a worldwide recession could push global sugar prices lower.
The world raw sugar price is somewhat reflected in the Sugar No. 11 futures contract (Figure 1). The Sugar No. 11 contract price does not include the transportation costs associated with delivering sugar to destination ports. As stated in the specifications for the Intercontinental Exchange (2024) Sugar No. 11 futures contract, “the contract prices the physical delivery of raw cane sugar, free-on-board the receiver’s vessel to a port within the country of origin of the sugar.”
Major sugar-producing countries like Brazil, India, and Thailand provide subsidies and other support for their sugarcane sector, which can have a strong influence on the Sugar No. 11 futures contract price. This is especially true when production fluctuates due to weather conditions or when governmental policies dictate a diversion of sugar into ethanol production.
Worldwide sugar deficits have occurred in three out of the last four years. In turn, a tightening global stocks-to-use ratio has supported world sugar prices. As world raw sugar prices have moved upward, so too have U.S. raw sugar prices, which are reflected in the Sugar No. 16 futures contract price (Figure 1). The Sugar No. 16 futures contract does include transportation costs associated with delivering sugar to the destination port and, thus, the contract incorporates physical delivery into its price.
Figure 1. Sugar No. 11 and Sugar No. 16 Futures Contract Prices, their relationship, and the Tier 2 Tariff, 2020 to 2024. Source USDA ERS, 2024.
At present, Mexico’s ability to export sugar to the U.S. is hindered by drought, and Mexican production is expected to be significantly reduced again this year. As such, Mexican sugar exports into the U.S. market are expected be at a decade-and-a-half low at only 497,000 tons, according to the May USDA (2024) World Agricultural Supply and Demand Estimates report.
Under the terms of the World Trade Organization (WTO) and several free trade agreements, sugar imports are allowed duty free under a Tariff-rate Quota (TRQ) system. In situations where raw sugar is imported outside of the TRQ, importers must pay a 15.36-cents-per-pound tariff in addition to the world raw sugar price plus transportation costs. This tariff is referred to as a tier-2 sugar import tariff and is shown as the green line in Figure 1.
The red line in Figure 1 demonstrates the world raw sugar price plus transportation costs to the U.S. plus the tier-2 tariff. If the expected U.S. sugar supply falls and pushes domestic prices up to the point that they exceed that level, higher levels of tier-2 raw sugar will be attracted to the U.S. Thus, the red line represents the effective cap on U.S. raw sugar prices. For example, the existence of substantial demand for sugar beyond what Mexico can supply has resulted in large amounts of tier-2 imports [see Deliberto et al. (2024) for more information]. Those imports will enter the U.S. whenever the price for world sugar plus transportation costs plus the tier-2 tariff (red line, Figure 1) falls below the cost of procuring raw sugar supplies from preferential-access imports or domestic supplies (including Mexican production). Again, that relationship effectively caps the wholesale price of domestic raw sugar in the U.S. (red line, Figure 1).
Conversely, if supply was expected to rise relative to demand in the U.S. (e.g., due to higher-than-expected domestic production or imports from Mexico) then the demand for tier-2 sugar would fall, bringing domestic prices further below the tier-2 cap. But, so long as demand for tier-2 sugar exceeds zero, the price in the U.S. for raw sugar will be driven by world prices plus transportation costs plus the tier-2 tariff of 15.36 cents per pound (red line, Figure 1). It should be noted that the figure depicts monthly prices as well as a static assumption of transportation costs of five cents per pound. There have been significant amounts of tier-2 sugar entering the U.S. over the past several years, which likely represents arbitrage opportunities to bring in tier-2 raw sugar due to pricing relationships or transportation cost adjustments that are occurring on a daily basis.
We observe that the same relationship frames the prices for wholesale refined sugar in the U.S., which is capped at the world price, or the Sugar No. 5 futures contract price for refined sugar plus the tier-2 refined tariff (16.21 cents per pound) plus transportation costs of shipping refined sugar to the U.S. With falling world refined prices coupled with the expectation of near-record high sugarbeet production, the U.S. wholesale refined sugar price has recently followed the world Sugar No. 5 price downwards. Midwest refined beet sugar spot prices have ranged between 55 to 58 cents per pound. When pricing the 2024 expected crop, refined sugar prices have held steady in the 53 to 55 cent range, which is considerably lower than prices in the prior 18 months that reached as high as 70 cents per pound.
Overall, raw and refined sugar prices in the U.S. are currently driven by transportation costs associated with shipping bulk raw sugar and containerized refined sugar to the U.S., and factors that are affecting the global sugar market. Those factors include, among others, foreign subsidies [e.g., World Trade Organization (2024)], demand for ethanol as a transportation fuel [e.g., Bloomberg (2024)], and global growing conditions for sugarbeets and sugarcane crops [e.g., USDA FAS (2024)].
References
Bloomberg. 2024. Tereos Brazil to Keep High Sugar Output as Peers Endure Drought. Retrieved from: https://www.bloomberg.com/news/articles/2024-04-01/tereos-brazil-to-keep-high-sugar-output-as-peers-endure-drought
Deliberto, M., K.L. DeLong, and B. Fischer. “Navigating U.S. Sugar Imports From 70 Countries.” Retrieved from: https://southernagtoday.org/2024/04/18/navigating-us-sugar-imports-from-70-countries/
Intercontinental Exchange. 2024. Sugar No. 11 Futures. https://www.ice.com/products/23/Sugar-No-11-Futures Date accessed: May 3, 2024.
USDA. 2024. May WASDE. Retrieved from: https://www.usda.gov/oce/commodity/wasde
USDA ERS. 2024. “Sugar and Sweeteners Yearbook Tables.” Retrieved from: https://www.ers.usda.gov/data-products/sugar-and-sweeteners-yearbook-tables/ Date updated: April 2, 2024. Date accessed: April 18, 2024.
USDA FAS. 2024. Global Agricultural Information Network: Sugar Annual. Retrieved from: https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Sugar%20Annual_Managua_Nicaragua_NU2024-0002.pdf
U.S. Department of Commerce. 2024. “Census Bureau Projects U.S. and World Populations on New Year’s Day.” Retrieved from: https://www.commerce.gov/news/blog/2024/01/census-bureau-projects-us-and-world-populations-new-years-day#:~:text=The%20projected%20world%20population%20on,the%20U.S.%20and%20world%20populations. Date updated: January 3, 2024. Date accessed: April 18, 2024.
World Trade Organization. 2024. India’s Measures to Provide Market Price Support to Sugarcane. Retrieved from: https://web.wtocenter.org.tw/downFiles/12294/398060/00k37djfolGb0l5OnjSaA8xFnrwmAEQAiLp0Y7SoysK00000tZTwiAmB3qaIG9YFD0000073wLiCTUqy9oiKW087r8sHXz4A==
Deliberto, Michael, Karen L. DeLong, and Bart L. Fischer. “Analyzing World and U.S. Sugar Price Dynamics.” Southern Ag Today 4(21.1). May 20, 2024. Permalink
