In a letter sent last week to sugar processors now storing CCC-owned sugar, the CCC told those processors it was giving them the option to take the payment for the storage in kind, allowing the government to reduce the 793,000 short tons of sugar, raw value, it was left holding after many producers defaulted on loans last year amid depressed domestic sugar prices.

"The stocks are still at 793,000 tons. This program obviously will allow the CCC to get rid of some sugar in the forthcoming months," said a USDA source.

In the letter, the CCC told processors they'll have the option to select either the traditional monetary payment via electronic fund transfer or a sugar payment in kind; failure to choose one method over the other will result in monetary payment. Only CCC-owned sugar recorded at the warehouse listed on the invoice will be released under the payment-in-kind option.

The program will begin June 1, according to the letter, a copy of which was sent to Dow Jones Newswires.

Late last year, as domestic sugar prices hovered near 20-year lows and below the government-guaranteed price support system, sugar beet and cane growers defaulted on $357 million in loans, which allowed those debtors to turn in the collateralized sugar.

The storage cost, now running about $1.4 million a month, has added ammunition to detractors of the sugar policy who called it "corporate welfare" that's allowing inefficient farmers to produce sugar and feed an already oversupplied market - all at tax payers' cost.

And now that the U.S. Congress had begun hearings for a new Farm Bill, several industry groups, from consumer advocates to refiners - who have seen profits dwindle from depressed prices for refined sugar - are lobbying aggressively to have the sugar policy revamped so that U.S. domestic prices move toward parity with world prices.

While world sugar is now going for roughly 9.0 cents a pound, domestic sugar prices are trading around 21.30 cents/lb, which puts food and candy manufacturers at a competitive disadvantage against foreign competitors who buy sugar in the world market and ship the final products into the U.S.

"This will certainly make more sugar available in the market...and it's certainly a step in the right direction to put the (sugar) back in the market. The expense for the storage is pretty high," said a trader in New York, who nonetheless said the amount of sugar to be released won't cause much price disruption.