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U.S. Sugar Glut Is the Biggest in Last 10 Years

New York — Record U.S. sugar output is creating the biggest domestic glut in a decade, reducing costs for Hershey Co. and making it more likely the government will need to stockpile supply to support farmers.

Production will jump 6.9 percent to 9.07 million short tons (8.23 million metric tons) in the year ending Sept. 30, the U.S. Department of Agriculture said Jan. 17. Stockpiles are forecast at 2.2 million short tons, the most since 2000. Domestic prices will drop 7.7 percent by October to 20 cents a pound, extending last year’s 38 percent slump, according to the median of seven analyst estimates compiled by Bloomberg.

“There’s a massive quantity of sugar being produced,” said Craig Ruffolo, a vice president at McKeanny Flavell Co., the Oakland, Calif.-based sugar broker whose clients have included Kraft Foods Group Inc., General Mills Inc. and Bunge Ltd. “Our supply situation is bursting at the seams.”

While Americans are eating the most sugar since the 1970s, that’s still not enough to absorb increasing supply. Sugar-beet harvests expanded almost twice as fast as demand in the past four years, and the cane crop is the biggest since 2004.

Food makers that didn’t import sugar before 2002 now get about 33 percent of supply from overseas after a free-trade agreement spurred a surge from Mexico. That’s reduced the premium paid for domestic sugar to 3.2 cents a pound relative to world prices, from 10.5 cents a year ago. The decline is reducing profits for farmers and widening margins for food makers.

While commodities have been in a bull market since August, domestic-sugar futures began a bear market in April and slumped the past five quarters, the longest losing streak since the contract started in 2008. Domestic-sugar prices fell 3.9 percent to 21.66 cents this month on ICE Futures U.S. in New York as the Standard & Poor’s GSCI Spot Index of 24 raw materials rose 2.3 percent and the MSCI All-Country World Index of equities gained 3.8 percent. A Bank of America Corp. index shows Treasuries lost 0.3 percent.

Back in May, when U.S. sugar fetched more than 30 cents, Frank Jenkins, the president of Wilton, Conn.-based Jenkins Sugar Group, the largest domestic broker, predicted output gains would send futures to the mid-20s. Prices fell below 25 cents by mid-October and have kept dropping.

Beet-sugar output produced mostly in northern states including Minnesota and North Dakota will climb to a record 5.2 million short tons this year, 23 percent more than in 2009, the USDA says. Farmers are using more genetically modified seeds to boost yields and planting 13 percent more acreage than four years ago, after prices exceeded 40 cents in 2010 and 2011. Cane-sugar production in southern states including Florida and Louisiana will reach 3.87 million short tons, 22 percent more than in 2011.

The government still restricts imports to support farmers and offers loans that guarantee a minimum price of 20.9 cents for unrefined sugar. If it drops below that level, processors who get the credits can repay their debt by selling the sugar to the USDA. The most ever acquired by the government through the program was 764,000 tons in the year ended Sept. 30, 2001.

Processors pledged 1.83 million short tons as collateral for $775.3 million of loans, equal to 20 percent of the crop. A drop below the USDA’s target price would put a “large portion” at risk, said Barbara Fecso, a USDA dairy and sweeteners analyst in Washington. She declined to predict how much the government may end up owning. Buying surplus sugar would add to a budget deficit that the Treasury estimated in October reached $1.09 trillion in the year ended September 2012.

Sugar is the only major agricultural commodity grown in the U.S. in which the government actively manages imports. Quotas started in the 1930s and survived a challenge in Congress last year. An Iowa State University study in 2011, when prices averaged 38 cents, said that ending the limits would cut consumer costs by $3.5 billion annually. Retail prices averaged a record 69 cents a pound last year, from 42 cents a decade earlier, Labor Department data show.

The sugar glut means “retail prices will probably come down,” though declines tend to lag behind reductions in wholesale costs, Tom Earley, an economist with Agralytica, a food and agriculture consulting firm in Alexandria, Va., said in a telephone interview.

The diminishing premium for U.S. sugar relative to international prices also may tighten supply by reducing margins for exporters, said McKeanny Flavell’s Ruffolo. ICE Futures U.S.’s No. 11 raw-sugar contract, reflecting international prices, tumbled 26 percent in the past year, compared with 39 percent for domestic futures.

The U.S. government has few options in curbing shipments from Mexico because of the free-trade accord, and the USDA predicts a 30 percent jump in imports to 1.388 million short tons this year, more than any other foreign supplier. The agency anticipates that Mexican production will rise 12 percent to an eight-year high.

Hershey, the maker of chocolate Kisses and Reese’s candies, expects higher gross margins this year because of “stable to down” commodity costs including sugar, Chief Financial Officer Humberto Alfonso told analysts on a conference call in October. Its shares rose 28 percent in the past year and the Hershey, Pa.-based company will report a 16 percent gain in net income to $806.3 million in 2013, the mean of six analyst estimates compiled by Bloomberg show.

“The price U.S. manufacturers pay for sugar is still considerably higher than the world price our competitors overseas pay,” said Mitchell Goetze, the president and chief operating officer of Baltimore-based Goetze’s Candy Co., the maker of Caramel Creams and Cow Tales. “Confectionery manufacturers have enough challenges in our everyday operations without also having to struggle against a government program that arbitrarily restricts the supply of sugar.”

Rising U.S. production is compounding a third consecutive annual global glut. “There’s going to be a surplus over the next few months and we may make some new lows,” said Claudio Oliveira, the head of trading at Castlestone Management in New York, which manages about $130 million of assets. “Farmers will stand to lose money.”