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Group Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 03-9
Title: Sweetner-ethanol complex in Brazil, the United States, and Mexico : do corn and sugar prices matter?
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Title: Sweetner-ethanol complex in Brazil, the United States, and Mexico : do corn and sugar prices matter?
Series Title: Policy Brief Series - International Agricultural Trade and Policy Center. University of Florida ; no. 03-9
Physical Description: Book
Language: English
Creator: Schmitz, Andrew
Seale, James L., Jr.
Schmitz, Troy G.
Publisher: International Agricultural Trade and Policy Center, Institute of Food and Agricultural Sciences, University of Florida
Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2003
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PBTC 03-9




i ional Agricultural Trade and Policy Center


POLICY BRIEF SERIES


UNIVERSITY OF

SFLORIDA
Institute of Food and Agricultural Sciences


Sweetener-Ethanol Complex in Brazil, the United States, and
Mexico: Do Corn and Sugar Prices Matter?
By

Andrew Schmitz, James L. Seale, Jr., and Troy G. Schmitz
PBTC 03-9 August 2003


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INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


MISSION AND SCOPE: The International Agricultural Trade and Policy Center
(IATPC) was established in 1990 in the Food and Resource Economics Department
(FRED) of the Institute of Food and Agricultural Sciences (IFAS) at the University of
Florida. Its mission is to provide information, education, and research directed to
immediate and long-term enhancement and sustainability of international trade and
natural resource use. Its scope includes not only trade and related policy issues, but also
agricultural, rural, resource, environmental, food, state, national and international
policies, regulations, and issues that influence trade and development.

OBJECTIVES:

The Center's objectives are to:

Serve as a university-wide focal point and resource base for research on
international agricultural trade and trade policy issues
Facilitate dissemination of agricultural trade related research results and
publications
Encourage interaction between researchers, business and industry groups,
state and federal agencies, and policymakers in the examination and
discussion of agricultural trade policy questions
Provide support to initiatives that enable a better understanding of trade and
policy issues that impact the competitiveness of Florida and southeastern
agriculture specialty crops and livestock in the U.S. and international markets










Sweetener-Ethanol Complex in Brazil, the United States, and Mexico:
Do Corn and Sugar Prices Matter?

Andrew Schmitz
University of Florida, Gainesville, Florida

James L. Seale, Jr.
University of Florida, Gainesville, Florida

Troy G. Schmitz
Arizona State University, Tempe, Arizona


Introduction

Sugar is a major commodity, produced and traded around the world, but it is no longer
the only sweetener. For example, in the United States, roughly 50 percent of the sweetener
market is made up of high fructose corn syrup (HFCS), which is also making inroads into
Mexico. This is not the case, however, for the European Union and countries such as Brazil,
which dominates the world sugar market in almost all aspects (Schmitz, 2002). In the United
States, 8 to 10 percent of the U.S. corn crop goes into HFCS production, with roughly the same
percentage of corn being used for the production of ethanol (Schmitz and Polopolous, 1999). In
Brazil, however, sugarcane, rather than corn, is used in the production of ethanol. Because of
relative price differences for corn and sugar, along with government subsidies, countries like
Brazil will remain heavily dependent on sugar for both its sweetener needs and ethanol
production.

The World Sugar Market

Brazil, the European Union, and India, respectively, are the top three world sugar
producers. For example, Brazil produced 19.07 million metric tons (mmt) of sugar in
1998-99.

Brazil is one of the largest sugar-consuming countries in the world. Brazilian sugar
consumption increased from 42 kilograms per capital in 1990-91 to 54 kilograms per capital in
2001-02 (Table 1). Brazil ranks among the top three countries in world sugar consumption at
9.45 mmt in 1998-99, behind India at 16.5 mmt and the European Union at 14.4 mmt.

Brazil is also the largest exporter of sugar in the world, exporting both raw and refined sugar.
Brazil dominated the 1998-99 export market at roughly 8.9 mmt of sugar, followed by the
European Union at 5.2 mmt and Australia at 4.0 mmt. The former Soviet Union was the largest
sugar importer, importing 5.2 mmt of sugar in 1998-99. The remaining top-five sugar importers
are the European Union, Indonesia, the United States, and Japan.

Brazilian sugar exports increased nearly six-fold from 1990-91 to 1997-98 while
Australian sugar exports doubled over the same period. Sugar exports from the European Union
and Thailand experienced moderate growth while Cuban raw-sugar exports decreased by
two-thirds, down from 6.8 mmt in 1990-91 to only 2.3 mmt in 1997-98. In 1990-91, Cuba was
the leading sugar exporter, while Brazil ranked fifth. However, in 1997-98, Cuba was at the
bottom of the top five sugar exporters.












Table 1. Brazil: Domestic sugar consumption, 1990-2003.


Year Total Per Capita
(1000 metric tons) (kilograms)
1990-1991 6,140 42
1991-1992 6,591 45
1992-1993 6,829 46
1993-1994 7,070 47
1994-1995 7,258 47
1995-1996 7,703 49
1996-1997 8,078 51
1997-1998 8,170 51
1998-1999 8,600 53
1999-2000 8,500 52
2000-2001 8,700 52
2001-2002 9,050 54
2002-2003* 9,400 55
Forecast: LMC International and Peter Buzzanell & Associates, Inc.


The European Union is by far the largest exporter of refined sugar, followed by Brazil,
Thailand, and the Ukraine. In 1995, roughly half of the world's sugar was exported in refined
form, dropping to 40 percent in 1996. Exports of refined sugar from Brazil increased from 0.7
mmt in 1991 to 3.6 mmt in 1998. The Brazilian sugar industry is highly flexible because of its
ability to refine and export refined sugar (Pefia Castellanos and Alvarez, 2002).

The Brazilian Sugar Industry and Ethanol Production

There are two important observations concerning the Brazilian sugar industry. First,
Brazilian sugarcane is heavily used for ethanol production and, second, almost all sweeteners
consumed in Brazil are derived from sugar. If either of these were to change, the sugar industry
would be negatively impacted. However, there are unlikely to be any major changes in the
percent of sweeteners derived from sugar or ethanol derived from sugarcane in Brazil.

The Blend Ratio


The largest portion of sugarcane production in Brazil (as high as 64 percent in 1997-98)
goes into ethanol alcohol, both anhydrous and hydrous, with exports between 0.5 billion and 1.0
billion liters per year. The increase in the yield of ethanol from sugarcane has been phenomenal.
In 1999, roughly 5,500 liters were produced per hectare whereas, in 1975, per-hectare yield was
only approximately 2,000 liters (Schmitz, Schmitz, and Seale, 2003).

Over the past ten years, hydrous-alcohol production has declined by more than 50
percent, while anhydrous-alcohol production has increased more than five-fold over that same
period (Schmitz, Schmitz, and Seale, 2003). Anhydrous alcohol is mixed with gasoline according
to the blend ratio mandated by the Brazilian government. Vehicles that solely utilize alcohol are
fueled by hydrous alcohol, and they mainly exist because of Brazil's government subsidies for
rental cars, taxis, and some government vehicles. Ethanol prices were liberalized on February 1,
1999. Subsidies for production of hydrous-alcohol were reduced by more than 50 percent, from










0.98 reals per liter to 0.45 reals per liter, and subsidies for production of anhydrous-alcohol were
eliminated (USDA, 2001). However, the alcohol-to-gasoline blend-ratio range for the percentage
of ethanol used in Brazilian gasoline is set each year by Presidential decree, so the sugar industry
still enjoys the benefits of hidden subsidies (Schmitz, Schmitz, and Seale, 2003). In addition, a
common external tariff of 20 percent on sugar imports was put in place in 2001. Imports of
ethanol are taxed at 30 percent to ensure that sugar and ethanol producers receive a higher price
for their product, without facing competition from other low-cost exporters with respect to the
domestic market. However, there is no tax on the intra-zone trade of ethanol for Brazil's
Southern Cone Common Market (MERCOSUR) partners. There still remains a support
mechanism that compensates for sugarcane-cost differentials across regions that is well under the
de minimis clause of the World Trade Organization's (WTO) agricultural agreement.

Sugar and Ethanol Prices


Beginning in 1998, the government no longer set the price paid to independent growers of
sugarcane in Brazil. In response to this, the Sao Paulo State Sugarcane, Sugar, and Alcohol
Producers' Council (CONSECANA-SP) regulated a model sugarcane-payment system established by
the Sao Paulo producers, the largest sugarcane producers in Brazil. This system is based on four
criteria, one of which is the quality of each grower's sugarcane expressed in terms of recoverable total
sugar (Schmitz, Schmitz and Seale, 2003). Monthly prices received for refined sugar, anhydrous
alcohol, and hydrous alcohol are provided in Figure 1.





45
40 -
35
30 -
25 -
20
20 1
15
10
5 -
0
1999 2000 2001 2002
0 Refined sugar (U.S. cents/lb) Anhydrous alcohol (U.S. cents/litre)
SHydrous alcohol (U.S. cents/litre)

Figure 1. Prices for refined sugar (world), anhydrous alcohol, and hydrous alcohol
in Brazil, January 1999-March 2002 (Schmitz, Seale and Buzzanell, 2002).


The U.S. Sweetener and Ethanol Markets

U.S. Sweeteners










The United States is a large sugar producer. U.S. sugar prices are kept significantly
above world levels through U.S. government farm policies. In addition, unlike Brazil, over
40 percent of the sweeteners consumed in the United States are made up ofHFCS (Table 2).


Table 2. U.S. Sugar and HFCS Use: 1992 2001

Year Sugar HFCS
(1,000 short tons raw value) (1,000 short tons dry weight)a
1992 8,259 6,627
1993 8,394 7,060
1994 8,575 7,358
1995 8,804 7,629
1996 8,962 7,833
1997 9,100 8,241
1998 9,317 8,491
1999 9,434 8,833
2000 9,383 8,793
2001b n.a.c 9,147
a Excluding exports
b 2001 value for HFCS is for first quarter of that year
c N/A = not available
Sources: USDA, 2001.



U.S. Sugar Program


Like the previous programs, the U.S. sugar program passed in 2002 supports U.S. sugar
producers. The two main elements of the U.S. sugar policy are the price support loan program
(LP) and the tariff-rate quota (TRQ) import system. The LP supports the U.S. price of sugar.
The TRQ ensures that there is an adequate supply of sugar at reasonable prices for both producers
and consumers.

Sugar Loan Program (LP)

A sugar loan program (LP) allows the United States Department of Agriculture (USDA) to
make loans available to processors of domestically grown sugarcane at a rate of 18 cents per pound
and to processors of domestically grown sugar beets at a rate of 22.9 cents per pound for refined
sugar (U.S. currency). Loans, along with interest charges, are taken out for a maximum term of
nine months and must be liquidated by the end of the fiscal year in which the loan was made.
Sugar loans are made to processors and not directly to producers. This is because sugarcane and
sugar beets must be processed into sugar before they can be traded and stored. To qualify for
loans, processors must provide payments to producers proportional to the value of the loan
received by the processor for beets and cane delivered by producers. The loans are nonrecourse,
which means that when the loan matures, the USDA must accept sugar, pledged as collateral, as
payment-in-full in lieu of cash repayment of the loan.











The LP is intended to operate at no cost to the Federal Government. Under the 2002 U.S.
Farm Act, the USDA can accept bids from sugarcane and beet processors to add to the
Commodity Credit Corporation (CCC) inventory in exchange for reduced sugar production.
Also, the USDA is required to establish flexible marketing allotments for sugar.

Tariff-Rate Quota (TRQ)

A tariff-rate quota (TRQ) is a two-tiered tariff in which the tariff-rate charged depends on
the volume of imports. A lower (in-quota) tariff applies to imports within the quota volume and a
higher (over-quota) tariff is charged on imports in excess of the quota allotments. The United
States has separate TRQs for imports of raw cane sugar and for imports of certain other sugars,
syrups, and molasses. Under the Uruguay Round, the United States agreed to import a minimum
quantity of 1.256 million tons of raw and refined sugar each year, which includes at least 24,251
tons of refined sugar. The TRQ for raw cane sugar is allocated to at least 40 countries. Under
this arrangement, these exporters of sugar to the United States receive the higher U.S. price,
which at times is significantly above the world market price. Also, the United States operates two
re-export programs. Under the Refined Sugar Re-Export Program, there is a license against
which the company can import sugar at world prices for both refining sugar and replacing sugar
that has been exported as refined sugar or sugared products. The Program allows U.S.
participants to buy world-priced sugar to use in products to be exported onto the world market.
HFCS often replaces sugar because sugar prices are significantly above HFCS prices (Table 3).
Roughly 10 percent of the U.S. corn crop is used for HFCS production.

Table 3. U.S. Spot Price for HFCS-42 & U.S. Wholesale Refined Beet Sugar Price.

Year HFCS Price, Dry Weight Wholesale Refined Beet Sugar
(cents per pound) Price
(cents per pound)
1994 18.77 25.15
1995 15.63 25.83
1996 14.46 29.20
1997 10.70 27.09
1998 10.58 26.12
1999 11.71 26.71
2000 11.32 20.80
2001a 11.97 22.63
a 2001 value is for the first quarter of that year
Source: Milling & Baking News.

U.S. Ethanol


In the United States, corn is not only used in the production of HFCS, but is also used in
the production of ethanol (roughly 10 percent of U.S. corn production goes into ethanol
production, which is highly subsidized). However, unlike Brazil, the United States uses
essentially no sugar to produce ethanol (Schmitz and Polopolus, 1999). Even with the ethyl
tertiary butyl ether (ETBE) tax credit, sugarcane and sugar beets cannot compete with corn in the
production of ethanol. According to Schmitz and Polopolus (1999),










(1) ETBE tax credit is a minor extension of a long list of other tax incentives and
subsidies; (2) ETBE tax credit, as well as all other related tax incentives and
subsidies, has not had direct stimulus upon the production of ethanol from
domestically produced sugarcane or sugar beets; (3) current U.S. sugar
program inhibits production of ethanol from sugarcane and sugar beets
because it provides both a price support and a price lid at levels too attractive
to divert sugar crops from the production of high value sugar to the
production of relatively low value ethanol; and (4) the ETBE tax credit is not
expected to increase the prices of corn, corn sweeteners and/or sugar (p.
157).

In addition to the ETBE tax credit, the 2002 U.S. Farm Program reinstated target prices for corn
(Table 4), providing relatively cheap cor for both ethanol and HFCS production.

Table 4. U.S. Agricultural Commodity Loan Rates & Target Prices.

1996 2002 2002
Crop Loan Rate Loan Rate Target Price
Corn ($/bushel) 1.89 1.98 2.60
Sorghum ($/bushel) 1.69 1.98 2.54
Wheat ($/bushel) 2.58 2.80 3.86
Upland Cotton ($/pound) 0.519 0.52 0.72
Rice ($/hundredweight) 6.50 6.50 10.50
Barley ($/bushel) 1.71 1.88 2.21
Oats ($/bushel) 1.14 1.35 1.40
Soybeans ($/bushel) 5.26 5.00 5.80
Minor Oilseeds ($/pound) 0.10 0.096 0.10
Source: Bruce A. Babcock, Iowa Ag Review 8 (3, 2002) and Parr Rosson, Texas A&M University.

The Mexican HFCS Market

Mexico, like the United States, maintains high prices for sugar producers, many whom
are very small relative to their U.S. counterparts (Figure 2). This, along with excess capacity in
the U.S. HFCS manufacturing sector, has brought about an increasing use of HFCS in Mexico
through increased exports from the United States. Roughly 20 percent of the total sweetener
consumption in Mexico was made up of HFCS in 2002 (Garcia-Chavez, Spreen, and Greene,
2002; Buzzanell, 2002).












25.00
20.00



10.00

5.00

0.00 ..
1998 1999 2000 2001
Estandar U.S. raw sugar World raw sugar

Figure 2. Domestic support prices for Estandar (Mexico) and raw (U.S.) sugar,
relative to world sugar prices (1998-2002)

Increased HFCS exports by the United States to Mexico triggered antidumping and
countervail duty action lawsuits by Mexico against U.S. HFCS exporters (several panels,
including the NAFTA panel, ruled there were no legal bases for these suits). Like the United
States, Mexico's HFCS price is less than the price of sugar, which has placed increasing pressure
for the adoption of HFCS in Mexico.

Why Prices Matter

Sugar in Brazil is used for ethanol and makes up most of the sweetener market, unlike in
the United States and Mexico, largely because of relative price differences between sugar and
corn. Because of relative prices (that are influenced by government policy), the United States is a
net exporter of corn and an importer of sugar, while Brazil is a net exporter of sugar and an
importer of corn. Relative prices explain why corn is used in the United States to produce ethanol
and sugarcane is used in Brazil.

The sugar-to-cor price ratios in Brazil and the United States are shown in Table 5. The
sugar-to-cor price ratios in the United States are significantly above those in Brazil. In fact, most
of the annual sugar-to-cor price ratios in Brazil are less than 1 while those in the United States
are over 5. At times, the sugar-to-cor price ratio is over 10 times higher in the United States than
in Brazil. From a profit-maximizing perspective, it is clear why Brazil would use sugar instead of
corn to produce ethanol and why almost all of the sweeteners in Brazil are derived from sugar.
Prices do matter since relative prices clearly influence the composition of the sweetener and
ethanol markets in the United States and Brazil. For example, as calculated by Schmitz, Seale,
and Buzzanell (2002), an increase in the anhydrous/gasoline-blend ratio from 20 to 26 percent
would cause the price received by farmers for sugarcane to rise between 4 and 11 percent. This
would cause the world price for refined sugar to increase by between $3.04 and $7.58 (U.S.
dollars) per metric ton. Aggregate sugarcane consumption for all uses combined would increase
by between 9 and 20 percent. The increase in the world sugar price would cause Brazilian sugar
imports to drop by between 8 and 34 percent. Brazilian producers would receive higher prices due
to the expanded demand for sugar, and production would rise by between 5 and 8 percent.










Table 5. Sugar-Corn Price Ratios, Brazil and the U.S., 1985-2001.


Brazil United States

Year Sugar Farm Corn Sugar-to- Wholesale Farm Corn Sugar-to-
Price Import Price Corn Price Beet Sugar Price, Corn Price
(cents/pound)a (cents/pound)b Ratio' Price (cents/pound) Ratio
(cents/pound)
85/86 2.68 4.17 0.77 23.38 2.50 9.35
86/87 2.58 4.90 0.63 23.60 3.23 7.30
87/88 2.78 5.90 0.57 25.44 4.23 6.01
88/89 2.75 5.60 0.59 29.06 3.93 7.39
89/90 3.26 5.47 0.72 29.97 3.80 7.89
90/91 3.47 5.62 0.74 25.65 3.95 6.49
91/92 3.09 5.12 0.72 25.44 3.45 7.37
92/93 3.19 5.83 0.66 25.15 4.17 6.04
93/94 3.57 5.43 0.79 25.15 3.77 6.68
94/95 4.19 5.40 0.93 25.83 3.73 6.92
95/96 4.46 6.18 0.87 29.20 4.52 6.46
96/97 4.95 5.72 1.04 27.09 4.05 6.69
97/98 4.95 4.90 1.21 26.12 3.23 8.08
98/99 3.61 4.70 0.92 26.71 3.03 8.81
99/00 2.20 4.75 0.56 20.80 3.08 6.75
00/01 3.61 4.92 0.88 22.63 3.25 6.85
a A conversion factor of .134 is used to convert sugarcane to raw sugar
b Brazilian corn import price includes dollar/bushel transaction costs added to U.S. prices received by farmers
To calculate corn/sugar price ratio, assume end users pay 20 percent above sugar prices received by farmers
Source: Calculated by Authors



Conclusions

Brazil is a major player in the world sugar market and one of the lowest-cost
sugar-producing countries in the world. More than half of Brazil's sugarcane is used to produce
fuel alcohol and almost all sweeteners in Brazil are derived from sugarcane. This is in sharp
contrast to the highly subsidized U.S. ethanol program, which uses corn instead of sugar beets or
sugarcane. Also, the U.S. sweetener market is made up of almost half HFCS. These differences
can be explained largely by relative price differences in the two countries for sugar and corn.
Government policies in both countries clearly impact sugar and corn prices. Mexico is increasing
both its HFCS production and HFCS imports due to high sugar support prices in Mexico and excess
HFCS production capacity in the United States.

The Brazilian government is committed to its ethanol program and has repeatedly stated
that it will continue to promote alcohol as a strategic source of energy and as a means to help
fight pollution. It is unlikely that this policy will change radically with subsequent governments
in Brazil. Looking forward, some promoters of fuel alcohol in Brazil foresee the development of
a substantial fuel-alcohol-export market (in 2002, only about 0.5 to 1.0 billion liters were
exported). To help promote the trade globalization of ethanol, Brazil is providing information on
the economics and technological aspects of ethanol production and trade worldwide. The United
States is also promoting ethanol fuel but, unlike Brazil, its fuel is made from corn rather than from
sugarcane. Three factors account for this difference. First, the U.S. sugar policy keeps domestic
sugar prices high. Second, subsidies are available in the United States for converting corn into










ethanol. Third, the 2002 U.S. Farm Program uses both loan rates and target prices, coupled with
deficiency payments. As a result, U.S. corn production is higher and prices are lower than under a
free-market regime.

References

Alvarez, J., and L. Pefia Castellanos. 1995. Preliminary Study of the Sugar Industries in Cuba and
Florida Within the Context of the World Sugar Market. International Working Paper
IW95-6, International Agricultural Trade and Development Center, Department of Food
and Resource Economics, University of Florida, Gainesville, FL (March).

Buzzanell, P. 2002. U.S.-Mexico High Fructose Corn Syrup (HFCS) Trade Dispute. In Sugar and
Related Sweetener Markets in the 21st Century: International Perspectives, edited by A.
Schmitz, T.H. Spreen, B. Messina, and C.B. Moss. Wallingford, UK: CABI Publishers.

Garcia-Chavez, L.R., T.H. Spreen, and G. Green. 2002. Structural Reform and Implications for
Mexico's Sweetener Market. In Sugar and Related Sweetener Markets in the 21st
Century: International Perspectives, edited by A. Schmitz, T.H. Spreen, B. Messina, and
C.B. Moss. Wallingford, UK: CABI Publishers.

Pefia Castellanos, L., and J. Alvarez. 2002. The Competitive Prospects for Cuba's Sugar
Agroindustry. In Sugar and Related Sweetener Markets in the 21st Century: International
Perspectives, edited by A. Schmitz, T.H. Spreen, B. Messina, and C.B. Moss.
Wallingford, UK: CABI Publishers.

Schmitz, A., and L. Polopolous. 1999. Alcohol Fuel Tax Policy: Sugar, Corn and the
Environment. In Flexible Incentivesfor the Adoption ofEnvironmental Technologies in
Agriculture, edited by F. Casey, A. Schmitz, S. Swinton, and D. Zilberman. Norwell,
MA: Kluwer Academic Publishers.

Schmitz, T.G., A. Schmitz, and J.L. Seale, Jr. 2003. Brazil's Ethanol Program: The Case of
Hidden Sugar Subsidies. The International Sugar Journal (forthcoming).

Schmitz, T.G., J.L. Seale, Jr., and P.J. Buzzanell. 2002. Brazil's Domination of the World Sugar
Market. In Sugar and Related Sweetener Markets in the 21st Century: International
Perspectives, edited by A. Schmitz, T.H. Spreen, W.A. Messina, Jr., and C.B Moss.
Wallingford, UK: CABI Publishers.

USDA (United States Department of Agriculture). 2001. Sugar and Sweetener Situation Outlook
Yearbook. Market and Trade Economics Division, Economic Research Service, United
States Department of Agriculture, Washington, D.C.




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