* Processors default on 382,000 tons of sugar this year
* Highest sugar subsidy cost since $465 mln in 2000
* Congress unlikely to change sugar program, however
* Analysts expect more USDA effort to pare huge surplus
By Charles Abbott
WASHINGTON, Oct 24 (Reuters) - The United States faces itshighest sugar subsidy cost since 2000, an estimated $280million, following a new wave of defaults by processors ongovernment-backed loans.
Nearly 382,000 tons were forfeited in the final two monthsof fiscal 2013, despite repeated Agriculture Department effortsto whittle down a mammoth surplus and bolster futures prices.The surplus was projected to persist for months to come.
The USDA said on Thursday that 296,500 tons were forfeitedat the end of September, broadly in line with tradeexpectations, on top of 85,375 tons forfeited at the end ofAugust.
Due to low prices, processors ceded the sugar, which hadbeen pledged as collateral, to the government rather than repayprice support loans.
The forfeitures amounted to roughly 4 percent of the 9million tons of sugar produced during 2013. The USDA said sugarprices fell more than 30 percent in the past year because ofhuge crops worldwide. U.S. growers also blame large imports fromMexico.
"We had expectations for bad things happening and they werefulfilled. It just indicates that we have a glut and that isstill a problem for the U.S. sugar market," said Sterling Smith,a futures specialist with Citigroup in Chicago. "This puts a lotof sugar in the hands of the USDA."
It was unclear if the USDA announcement of the forfeitureswould bolster U.S. sugar prices, which are up over 16 percentsince the end of June. The front-month No. 16 domestic raw sugarcontract on ICE Futures U.S. closed up 0.2 percent at22.12 cents a pound on Thursday.
Analysts estimated the sugar subsidy program would cost $280million for 2013, the highest price tag since $465 million in2000, during another period of surpluses.
The USDA was likely to move aggressively to dispose of thesurplus sugar, said two analysts who spoke on condition ofanonymity. They said the government could sell sugar to ethanolmakers and barter it for re-export credits as a way to reducethe sugar supply.
Although costs spiked this year at the same time Congresswas writing a new farm bill, lawmakers are not expected tochange the program, which is supposed to run at no cost totaxpayers and usually does.
The sugar program assures a minimum price for sugar to U.S.growers. The USDA limits sugar imports and has authority toregulate domestic marketing of sugar in order to provide theprice guarantee to growers and limit the cost to taxpayers.
In its efforts to reduce the surplus, the USDA for the firsttime used the Feedstock Flexibility Program to sell surplussugar at a loss to ethanol makers. The sugar-for-ethanol programremoved more than 143,000 tons from the market.
The sugar supply was reduced by an additional 608,000 tons,the USDA said, when it traded sugar to retire credits that allowrefiners to bring sugar into the country for processing andre-export.
American Crystal Sugar Co said it defaulted on$46.6 million in sugar loans at the end of September, about halfof the quantity it had under USDA loans.
"The decision to forfeit is never an easy one. It's always areflection of the market at the time, and the market is verypoor. The decision was logical from a business standpoint," saidKevin Price, director of government affairs for American CrystalSugar.
Price said it was "hard to say" whether the forfeitureswould be taken as a bullish sign and boost futures prices.
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