UPDATE 1-U.S. tries to pare sugar surplus as high subsidies loom

Thu Sep 26, 2013 6:03pm EDT

(New throughout, analyst response, USDA's likely next steps)

By Charles Abbott

WASHINGTON, Sept 26 (Reuters) - The Agriculture Department trimmed the mammoth U.S. sugar surplus marginally on Thursday and said it would make a final effort to avert nearly $250 million in subsidy costs that are set to arise next week.

USDA said it reduced the sugar supply by 39,833 tonnes (43,896 tons) through a swap of surplus sugar for retired credits held by processors that allow importation of sugar for refining and re-export.

On Monday, USDA will announce the results of an offer to buy unwanted sugar from processors so that it can sell it at a loss to biofuels makers. The sugar-for-ethanol initiative would reduce the surplus by diverting sweetener to nonfood uses. If it is large enough, it could bolster market prices and reduce subsidy costs.

Processors could default on some 490,000 tons of sugar used as collateral on $247.6 million of price support loans from USDA. Large crops worldwide have depressed market prices so it would be more profitable for processors to keep the loan money and forfeit the sugar.

USDA faces the highest sugar subsidy costs in a decade because of a huge surplus of 2.2 million tons. It could face high costs again in 2014 unless stocks are brought under control.

In its latest step, USDA swapped 26,003 tonnes of surplus sugar to retire 65,836 tons of re-export credits. The net effect was to reduce sugar available to the market by 39,833 tonnes, or 43,896 tons.

"It's good the sugar is off the books. This will serve to ease the glut and probably raise domestic prices to a degree and it may help some producers. But the global glut remains," said Sterling Smith, a futures specialist with Citigroup in Chicago.

Earlier swaps offered by USDA removed 486,000 tons of foreign sugar from the market.

Processors have offered nearly 377,000 tons of sugar for the "sugar for ethanol" program. Only sugar under USDA loan was eligible.

An initial trial of the so-called Feedstock Flexibility Program resulted in a relatively minor sale, 7,118 tons out of 90,000 tons that were offered.

"There's no reason for it to get better in the second round, particularly with the corn harvest in our face here," said Smith.

Corn is the primary feedstock for the U.S. biofuels industry and a record harvest is forecast this fall.

The sugar-for-ethanol program was created by Congress in 2008 in hopes of broadening the fuel ethanol industry. Sugar is the feedstock of choice in Brazil's ethanol market.

Analysts said USDA was considering use, for the first time in years, of a program that would give surplus sugar to growers who agree to reduce their plantings.

USDA is obliged by law to guarantee a minimum price to growers, an average 20.9 cents per lb, while operating the sugar program at no net cost to taxpayers. To achieve the twin goals, it limits sugar imports and marketings of domestically grown sugar. (Additional reporting by Chris Prentice; Editing by Bob Burgdorfer)