UPDATE 2-USDA to buy sugar from domestic processors to cut surplus
* Plan would include first USDA purchase of sugar since 2000
* Program estimated to cost $38 million
* USDA takes direct action to prevent sugar forfeitures
By Chris Prentice
June 17 (Reuters) - The U.S. Department of Agriculture said on Monday that it would buy sugar on the domestic market for the first time in more than a decade and adjust its re-export credit program in its latest bid to prevent processors from widespread loan defaults.
As part of the plan, the government will buy excess sugar from U.S. beet and cane mills and make it available to refiners, which can then purchase it in exchange for credits they hold through a re-export program.
Those credits entitle them to purchase global sugar at a later date.
The measures will cost an estimated $38 million and are expected to remove 300,000 short tons of sugar from the U.S. market, the USDA said. That represents about 13 percent of U.S. stocks forecast to reach 2.2 million tons by the end of September.
"For nearly a decade, the safety net for domestic sugar producers has operated at no cost to the federal government. However, atypical market conditions this crop year, including record yields and increased imports, require action by the department," a USDA spokesman said in an emailed statement.
Pressure on the government to intervene has increased as sugar prices languish near the federal guarantees for government-backed loans to processors.
The swap program would be a cheaper alternative to forfeiture, and ultimately could support domestic prices as refiners purchase sugar to from the U.S. market that they would have otherwise bought from foreign origins.
It is the first time the USDA has used this re-export swap program and the first time it has purchased sugar from the U.S. market since mid-year 2000.
The government-backed loans to processors use sugar as collateral, and if a processor defaults, it would return the sugar to the government. About $689 million, representing 1.6 million tons of sugar, remains outstanding, according to USDA data. That compares with $862 million outstanding about three months ago.
Acquiring the sugar by forfeiture later this year would cost the government $110 million to $320 million, due to current market conditions, the USDA said.
Processors have until June 24 to offer up sweetener.
It represents the USDA's most direct intervention to prevent these impending defaults, after earlier increasing the amount of refined sugar that can be exported through the re-export program and setting the U.S. raw import tariff-rate quota at a minimum level at the start of the crop year.
"Seeing that short-term measures are being taken, that should give the market a boost," said Jack Roney, director of policy and economic analysis, at the American Sugar Alliance, which represents U.S. growers and processors and is in favor of government intervention.
Just how long it will take to determine if the program will be successful remains to be seen, U.S. traders said.
"This will help, but 300,000 tons is not enough sugar to solve the current problem of having a surplus of domestic sugar in the U.S. and a surplus of world sugar at this time," said Jerry Kramer of Kramer Sugar Company, a brokerage in Massachusetts.
Inventory in the upcoming crop year, which starts on Oct. 1, will hit its highest levels in almost a half-century, the USDA said last week.
Tom Earley, a food policy consultant with Agralytica, estimated that the USDA's move may help prevent some forfeitures as the first loans come due this summer, but that the impact on reducing imports would not be felt until the new crop year.
Other tools are still being considered, including a proposed sugar-for-ethanol program, through which the U.S. government would buy sugar to sell to ethanol producers as feedstock.
"I think they have to rely mainly on the Feedstock Flexibility program this year for the loans due in August and September," said Earley, who consults on behalf of the Coalition for Sugar Reform, a group advocating for changes to existing sugar policy and against the sugar-for-ethanol program.
Sugar prices have plunged this year due to record crop yields and a massive global surplus. U.S. prices on ICE Futures U.S. settled at 19.35 cents a pound on Monday. Global prices on the exchange hit an almost three-year low of 16.17 cents a pound last week.
The U.S. government plans to directly purchase almost 94,000 tons of sugar, and processors have until July 1 to set a price for their offers.
The USDA said it will continue to evaluate the need for other measures, including a proposed sugar-for-ethanol program, which would allow the government to buy excess sugar and sell it to biofuel manufacturers.