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 tons in the year ending Sept. 30, the U.S. Department of Agriculture said last week. Stockpiles are forecast at 2.2 million 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., sugar broker whose clients have included Golden Valley-based General Mills Inc., Kraft Foods Group 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.
Foodmakers 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 foodmakers.
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 futures contract started in 2008. Prices for domestic sugar fell 3.9 percent to 21.66 cents this month.
Back in May, when U.S. sugar fetched more than 30 cents, Frank Jenkins, president of sugar broker Jenkins Sugar Group in Wilton, Conn., 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 tons this year, 23 percent more than in 2009, the USDA said. 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 tons, 22 percent more than in 2011.
Minnesota is the nation's leader in beet-sugar production, and home to Moorhead-based American Crystal Sugar Co., the single largest U.S. beet-sugar maker. With plants in Crookston, East Grand Forks and Moorhead -- and two more in North Dakota -- the farmer-owned cooperative churns out about 13 percent of the nation's refined sugar.
Crystal Sugar expects sugar production from its 2012 crop to rise 34 percent over a year ago, the company said in a recent report to U.S. securities regulators. Despite declining prices due to the sugar glut, Crystal Sugar still anticipates that net proceeds for its 2013 fiscal year -- which is based on its 2012 crop -- will be about 37 percent higher than in the previous fiscal year.
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 2001.
Processors pledged 1.83 million 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.
Staff writer Mike Hughlett contributed to this report.