WASHINGTON: The US government said on Monday that it sold a sizeable block of surplus sugar to ethanol makers to avoid large subsidy costs, the first major use of a program created five years ago to convert the unwanted food into motor fuel.
By diverting the sweetener to biofuels, the US Department of Agriculture cut into a mammoth sugar surplus that could result in the highest sugar subsidy costs in a decade. USDA announced the sale on the same day $234 million in price support loans came due.
The "sugar for ethanol" program, formally known as the Feedstock Flexibility Program (FFP), was created in 2008 as both a safety valve to alleviate surpluses and to promote sugar as a raw material for biofuels, like in Brazil where it is the primary feedstock.
"We may see subsequent FFP action," said Jack Roney of the American Sugar Alliance, a trade group for growers. Roney blamed large imports of Mexican sugar for aggravating the US surplus.
USDA said a month ago it did not expect to buy sugar for FFP during fiscal 2014 because it expected a smaller surplus. It now forecasts a larger surplus in the new year than in 2013.
If surpluses remain large, USDA could face large subsidy costs in 2014. The surplus was forecast at huge 2.2 million tons, a burdensome two-and-a-half month supply, for Monday's end of fiscal 2013 and forecast for 2.3 million tons in 2014.
USDA sold 136,026 tons of refined beet sugar to bioenergy producers through FFP, roughly one-third of the nearly 377,000 tons that were offered by processors. Only sugar that was under USDA loan was eligible for the sugar for ethanol initiative.
At an estimated yield of 135 gallons of ethanol per ton, the sugar would form a small part of US biofuel output above 13 billion gallons a year. Ordinarily, the US sugar subsidy rate makes the sweetener too expensive for making biofuels.
Under FFP, USDA bought sugar for $65.9 million and sold it at a steep loss for $12.6 million. Although it lost $53.3 million on the sale, it was a less costly outcome for USDA than having the sugar forfeited with no offset.
Processors held 500,000 tons of sugar under loans that matured on Monday and had the option to surrender ownership of it to USDA and to keep the loan money. Sugar futures prices were below the loan rate of 29.9 cents per lb for months this year, making forfeiture attractive, but recovered somewhat recently.
Their decision, whether to default or redeem the loans, may not be known for days if there is a shutdown of the federal government on Tuesday. USDA usually needs a couple of days after loans expire to compile a nationwide report.
The US sugar surplus was forecast for a huge 2.2 million tons as of Monday, a two-and-a-half month supply.
An initial trial of FFP in August resulted in sale of 7,118 tons, or 8 percent, of 90,000 tons of sugar that were offered. Some analysts were skeptical that sugar could compete, even as a heavily discounted price, in a biofuel industry dominated by corn. A record-large corn crop is forecast this year.
The sugar for ethanol sale was USDA's final effort to rein in sugar subsidies in fiscal 2013, which closed on Monday. Besides FFP, it swapped surplus sugar to retire credits held by processors that allow them to import sugar for refining and re-export. The swaps removed roughly 500,000 tons of re-export credits.
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