Group Title: Journal reprint - International Agricultural Trade and Policy Center. University of Florida ; JRTC 02-1
Title: Near term prospects for the U.S. sugar industry
CITATION PDF VIEWER THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00089815/00001
 Material Information
Title: Near term prospects for the U.S. sugar industry
Series Title: Journal reprint - International Agricultural Trade and Policy Center. University of Florida ; JRTC 02-1
Physical Description: Book
Language: English
Creator: Evans, Edward
Lampang, Sikavas Na
VanSickle, John J.
Publisher: International Agricultural Trade and Policy Center. University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: December 2002
 Record Information
Bibliographic ID: UF00089815
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.

Downloads

This item has the following downloads:

JRTC_02-01 ( PDF )


Full Text


JRTC 02-1




I ional Agricultural Trade and Policy Center


JOURNAL REPRINT SERIES












UNIVERSITY OF
= FLORIDA
Institute of Food and Agricultural Sciences


NEAR TERM PROSPECTS FOR THE U.S. SUGAR INDUSTRY
By
Edward Evans, Sikavas Na Lampang and John VanSickle


JRTC 02-1 December 2002









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









Abstract: Expanding domestic production, increasing imports and international
commitments under the WTO and NAFTA have severely weakened the U.S. sugar
Program and are wreaking havoc on the industry. The consequences have been: prices in
the domestic market plummeting to 22-year lows; closure of several mills; bankruptcy of
the nation's largest seller of refined sugar; forfeitures of sugar loans commitments;
government purchases of sugar; and extremely high stocks to usage ratio. Moreover, the
longer-term prospects for the industry are not encouraging. New rounds of agricultural
trade negotiations under the umbrella of the WTO set to restart later in 2001, the likely
formation of an FTAA in 2005, the creation of a single sugar market between Mexico and
U.S. by the year 2008, the formation of a free trade area with APEC by 2010, and
impending trade with Cuba create a wave of uncertainty over the future of the U.S. sugar
industry.

This paper discusses some of these major developments but focuses its analysis on the
likely near term impacts, a period covering the next five years, of likely developments
within the industry. Use is made of a modified version of a World Sugar Policy
Simulation Model to facilitate the analysis.

Keywords: U.S. sugar program, sugar model, U.S. sugar and sweetener industry, U.S
and Mexico sugar dispute, NAFTA









NEAR TERM PROSPECTS FOR THE U.S. SUGAR INDUSTRY

Edward Evans, Sikavas Na Lampang and John VanSickle1


The U.S. is the world's largest single-country market for sugar and corn

sweeteners. It is currently the fourth largest sugar producer and by far the largest

producer of corn sweeteners. Its sweetener industry spans 42 states, generates

approximately $26.2 billion in economic activity annually and accounts for as many as

420 thousand direct and indirect full time jobs (VanDriessche).

The U.S. sugar industry has had a long history of government support and

regulation dating back to the Sugar Act of 1934. The current sugar program has its

origins in the Food and Agriculture Act of 1981. This Act followed a seven-year period

in which the market was relatively open to foreign sugar imports, and growers and

processors were exposed to volatile world market prices. Although the Act has undergone

several modifications, in 1985,1990 and 1996, the intent of the provisions has more or

less remained the same. The stated objective of the Program is to ensure the reliable

supply of sugar to American consumers at competitive prices, while providing some

stability for American sugar interests (growers and processors) [Evans and Davis].

Since the reinstatement, the Program is now facing its biggest challenge in

providing stability to the American sugar interests and appears to have lost the ability to

operate at no cost to the government treasury. It is now at a major crossroad with no clear

indication of the direction it will follow. Expanding domestic production, increasing

imports and international commitments under the WTO and NAFTA have severely


1 Edward A. Evans is a visiting assistant professor, Sikavas Na Lampang is a graduate student and John
VanSickle is a professor, all in the Food and Resource Economics Department, University of Florida,
Gainesville, Florida.









weakened the Program and are wreaking havoc on the industry. The consequences have

been: prices in the domestic market plummeting to 22-year lows; closure of several mills;

bankruptcy of the nation's largest seller of refined sugar; forfeitures of sugar loans

commitments; government purchases of sugar; and an extremely high stocks to usage

ratio. Moreover, the longer-term prospects for the industry are not encouraging. New

rounds of agricultural trade negotiations under the umbrella of the WTO, the likely

formation of Free Trade Area of the Americas (FTAA) by 2005, the creation of a single

sugar market between Mexico and U.S. by year 2008, the likely formation of a free trade

area encompassing the Asian Pacific Economic Cooperation countries (APEC) by 2010,

and impending trade with Cuba, all create a wave of uncertainty over the future of the

U.S. sugar industry.

This paper discusses some of the major developments within the U.S. sugar

market, but focuses it analysis on the likely near term prospects for the industry-a

period covering the next five years. Use is made of a modified version of a World Sugar

Policy Simulation Model to facilitate the analysis.

Section I of the paper recalls the main provisions of the U.S. sugar program and

explains how it operates. Section II provides evidence of the growing infectiveness of the

current U.S. sugar program by examining some of the major trends within the U.S. sugar

market and the impact of recent developments on the US sugar industry. In section III we

discuss some of the current issues that are likely to impact the industry. A brief overview

of a World Simulation Model used in the analysis is presented in Section IV and the

policy scenarios considered in the analysis are also outlined. The simulation results are









presented and discussed in section V. The paper is concluded with a few brief remarks in

section VI.

I. Elements of Current U.S. Sugar Program

The main component of the U.S. Sugar Program is a loan rate. The 1996 Farm

Act legislated that sugar processors can take out non-recourse loans from the government

using sugar as collateral2. The average loan rate borrowers received for raw cane sugar is

18 cents per pound, and for refined beet sugar the average rate is 22.9 cents per pound.

These loans can be taken out for a period of 9 months and repaid along with interest

charges before September of each year, or the collateral can be forfeited. To avoid

forfeiting of loan commitments, it has been estimated that the U.S. domestic price for raw

and refined (beet) sugar must be at a minimum 19.60 and 24.84 cents a pound,

respectively (Haley). These minimum prices were calculated on the basis of the loan

rates, transportation and other marketing charges. Hence, the loan rate guarantees

producers a minimum price.

In order to be effective and keep to a minimum government administrative cost,

the program requires trade policies to restrict imports. This has been made possible by a

set of bilateral tariff rate quotas (TRQ), managed by the United States Department of

Agriculture (USDA, May), which limits the amount of sugar imported into the country.

The TRQ is allocated to 41 quota-holding countries based on sugar exports from those

countries to the U.S. during the period 1975-1981. A lower tier tariff of 0.625 cent a



2A non-recourse loan implies that the processor may forfeit the collateral in lieu of repaying the loan, and
the government has no recourse but to accept the sugar as full payment. On the other hand, a recourse loan
must be repaid. The 1996 Farm Bill stipulated that the sugar tariff rate quota (TRQ) be established higher
than 1.5 million STRV as a condition for non-recourse loans, however, the FY 2001 Agricultural
Appropriation Act eliminated the TRQ trigger for non-recourse loans and all references to recourse loans
(Haley).









pound raw value is applied to quota imports. However, the duty is waived for most

countries under the General System of Preferences (GSP) or the Caribbean Basin

Initiative (CBI). Although the total quota can vary from year to year, the U.S. in keeping

with its WTO commitments has agreed to import a minimum quantity of raw and refined

sugar of 1.13 million metric tons raw value equivalent (MMTRV) each marketing year

(October/September). Countries wishing to export an amount above their quota must pay

a higher tariff in accordance with a declining tariff schedule (See Attachment 1 for

Schedule).

As can be seen from the Schedule, in the case of Mexico and under NAFTA the

over quota tariff rates are much less and the decline steeper than those for other countries.

For 2002, raw sugar tariff rates are 9.07 cents a pound and 15.36 for Mexico and other

countries, respectively. The refined sugar tariff rates for the same year are 9.61 and

16.21, respectively. Consequently, Mexico has been the only country so far to utilize this

venue to gain market access.

II. Evidence of Ineffectiveness of Current Sugar Program

Figure 1 shows the trends in U.S. domestic production, consumption, total

imports and ending stocks, over the period FY 1991-2001. The Figure shows that over

the period there has been a slight upward trend in the U.S. domestic consumption of

sugar. This upward trend reflected the general buoyancy of the U.S. economy, the decline

in sugar prices and the consequential increase in per capital consumption of sugar and

sugar related products. The U.S. production trend has been slightly upward. Noticeable

however, was the sharp upturn in sugar output that began in 1997 and continued through










2000. Several factors were responsible for the rise in this output. Chief among such

factors was the area harvested. This increase was due to higher expected returns to


Fig. 1. U.S. Production, Imports, Consumption and Ending
Stocks Sugar, FY 1991-2001


12000

10000
10000 Consumption

8000

6000

S4000
Total Imports
2000
Ending Stocks
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001


sugarcane cultivation compared with other crops, which compete with sugar for land use.

Between 1996 and 2000, acreage planted in sugar beet and sugarcane increased from

1,368 thousand and 914 thousand acres, respectively to 1,565 and 954 thousand acres

(USDA, September). The switch in production patterns was facilitated by the increased

planting flexibility under the 1996 Farm Bill coupled with depressed commodity prices of

the alternative crops. In addition to expanded acreage, the growth in sugar output was due

to higher yields from good weather and investments in improved factory and field

technologies. Yields of sugar beet increased from 18.2 MT (metric tons) per acre in 1996

to 21.2 in 2000, and those for sugarcane, from 32.4 to 35.2 MT per acre. Over the same

time period, there was also a slight increase in the sugar recovery ratio (tons of sugar to









tons of sugarcane) in the factory from 12.03 to 12.16 percent (USDA, September). As a

consequence of these trends, the share of domestic consumption of sugar attributed to

domestic production increased from 78.4 percent in 1991 to 90.1 percent in 2000-the

highest level in recent times.

The drop in sugar output in FY 2001 was due to government intervention,

particularly the Sugar Payment-In-Kind (PIK) Program. This Program offers sugar beet

and sugarcane producers the option of diverting from production a portion of their crop in

exchange for government-held sugar. As a consequence of the Program, 102 thousand

acres of sugar beet, the equivalent of approximately 300 thousand MT of beet sugar was

diverted in FY 2001 (USDA Fact Sheet).

With regard to trade, total sugar imports (TRQ and Non-TRQ)3 have been

trending downward. From a high of 2,536 thousand MT recorded in 1996, the volume

decreased steadily to a low of 1,484 thousand MT (Figure 1). Imports for FY 2001

showed a slight increase of 56 thousand MT over the previous year. Two points regarding

the trend in imports in order: first, the decline in imports of sugar can be traced back to

the late 1970s and the successful development and marketing of High Fructose Corn

Syrup (HFCS), a sugar substitute manufactured from cornstarch. So, in order to support

domestic sugar price and at the same time accommodate the increasingly available

domestic sweeteners, sugar imports had to be curtailed. Second, non-TRQ imports have

increased due primarily to an increase in the import of sugar syrup known as "stuffed

molasses" from which sugar is recovered, and high tier sugar imports from Mexico.

Indeed, imports of sugar obtained from the import of "stuffed molasses" increased from


3 Non-TRQ sugar imports include imports under the combined Refined Sugar Re-export Program, sugar
extracted from sugar syrups under HTS 17029040 and high-tier tariff imports from Mexico.









an estimated 72 thousand MT in FY 95/96 to 112.5 thousand MT in FY 2001

(VanDriessche) and imports from Mexico under the high tier which amounted to 8

thousand MT in FY 2000 is projected to reach 25 thousand MT in FY 2001. However,

because of a recent U.S. Court of Appeals decision to ban the import of "stuffed

molasses" sugar imports from this source are expected to fall substantially (USDA Fact

Sheet). Further, high tier sugar imports from Mexico will depend on the U.S. domestic

price and the world market price for sugar.

The culmination of increased US sugar supply and the modest growth in

consumption have caused the stocks-to-usage ratio to reach its highest level in recent

times. Ending stocks, which have been more or less constant, increased from 1,371

thousand MT in 1991 to 2,013 in FY 2000, before falling slightly to 1,764 thousand MT

in FY 2001. Over the same time frame, the end stocks-to-use ratio increased from 15.7

percent to a record 22.0 percent before falling to 18.7 percent. Hence, stocks-to-use ratios

are well above the USDA trigger level of 15.7 percent.

As a result of a gradual weakening of the Sugar Program, the domestic sugar price

began declining in FY 1997 and culminated with a noticeable drop in FY 2000 to levels

not seen since FY 1979. Figure 2 shows the trends in U.S. and world raw and refined

sugar prices and illustrates the sharp downturn, in both the domestic raw and refined

sugar prices (current dollars), that occurred in FY 2000. For the first time since

implementing the current Sugar Program, the domestic sugar prices for both raw and

refined sugar fell below the loan rates causing some growers to forfeit loans. Sugar beet

and sugarcane processors forfeited about 800.4 thousand MT sugar. Prices would have

fallen further had it not been that the government intervened into the market in FY 2000










and, in addition to its Payment-in-Kind program, purchased 118.8 thousand MT of sugar

to support the domestic price. Hence, in FY 2000, the government acquired in excess of


Fig. 2. U.S and world raw and refined sugar prices, FY
1991-2000


35

30
US Refined
25

S20
-_. US Raw-*'
L 1World Refine USRa
15

10 -World Raw --
5

0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001


900 thousand MT, of sugar that was placed into storage at a cost of approximately $16.1

million annually (USDA Fact Sheet). The end result was that the total cost of

administering the sugar program in FY 2000 was about $141 million or approximately

0.6% of the total Commodity Credit Corporation (CCC) farm budget for that year

(VanDriessche). In addition, government incurred lost revenue of approximately $ 25

million from the suspension of the "marketing assessment cost" on the sale of domestic

produced sugar4. Sugarcane and sugar beet producers also recorded lost income.

Compared with the 1996 sugar prices, between 1997 and 2001, these producers lost an

estimated $ 2,226 million in revenues ($ 545 million and $1,681 million, respectively).



4 U.S. sugar producers began paying a marketing assessment of 1 percent of the cane and beet loan rates in
1991, for the express purpose of helping to reduce the federal budget deficit. The 1996 Farm Bill had
legislated that the fee should be increased to 1.375 percent of the loan rates. It has been estimated that over
the period 1991-1999, $ 279 million was paid to the government (VanDriessche).









Hence, the Sugar Program rather than operating at no or minimum cost to the

government, as was the situation in the past, was costing the government both in terms of

direct expenditures and lost revenue and was not being effective in stabilizing producer

income.

The impact of the downward pressure on U.S. sugar prices have resulted in the

closure of several sugar beet and cane processing mills. Between 1996 and present, 17

beet and cane processing mills have closed or announced their closure. In addition, the

nation's biggest sugar refinery is in bankruptcy while the nation's second biggest sugar

seller is attempting to sell its beet processing and cane refining operation (VanDriessche).

The data for FY 2001 shows that on account of government actions, prices have

rebounded somewhat from their previous year's low. In the case of US raw sugar, the

2001 average domestic price rose to 21.07 cents a pound, a level that is slightly above the

estimated forfeiture level of 19.60. However, the refined sugar price of 22.11 cents

remained below the estimated forfeiture price of 24.84 cents a pound.

For FY 2002, the USDA (September) is projecting a slight decrease in the level of

domestic sugar production over the previous year, from 7.8 MMT to 7.5 MMT. The

reduction is expected to come largely at the expense of sugar beet cultivation as cane

sugar production is forecast to increase by about 3 percent. On the other hand,

consumption is expected to increase only marginally, from 9.23 MMT to 9.28 MMT or

by half of a percent.

III. Current Issues

With the closing of the loophole in the tariff structure, which allowed sugar to be

imported under the guise of imported sugar syrups, the main current issues which are









likely to impact the sugar market in the near future are: 1) the 2002 Farm Bill; 2) the

resolution of the controversy over the exact amount of sugar that Mexico is entitled to

export to U.S. under the NAFTA and; 3) high tier sugar imports from Mexico. These

issues are briefly discussed below and are the ones focused on in defining our policy

scenarios below.

The Farm Security Act of 2001-Although the final version of the 2002 Farm Bill, has

not yet been approved by the U.S. Senate, on the basis of the version which has been

approved by the 107th Congress, the major provisions which will impact the U. S. sugar

industry in the near future, include: a) agreeing to increase the minimum from 1.13 MMT

to 1.38 MMT; b) providing the Secretary of Agriculture with the discretion to adjust the

loan rates; c) requiring the Secretary of Agriculture to administer the sugar program at no

net cost to the federal government to the maximum extent possible; and d) reinstating the

marketing allotment for domestically grown sugar (107th Congress H. R. 2646).

With regard to (a) above, the increase in the TRQ is in keeping with the NAFTA

commitment that beginning in FY 2001 up until FY 2007, Mexico is entitled to duty-free

access to the U.S. market for the amount of its surplus sugar, as measured by the formula

(discussed below), up to a maximum of 250 thousand MT. Provision (b) above is a

safeguard mechanism to ensure that the U.S. satisfies both its NAFTA and WTO

commitments to provide market access for a minimum quantity of sugar. And, in the

cases of (c) and (d) above the provisions are aimed at exerting some control over

domestic sugar production. Provision (c) authorizes the CCC to accept bids from

processors for sugar inventory in exchange for reduced production. The government PIK

program therefore appears to be an essential part of the strategy to ensure that domestic









sugar prices remain above the forfeiting levels. Provision (d) deals with the reinstatement

of the marketing allotments for domestically grown sugar. Such a provision existed in

the U.S. sugar program prior to 1996 and gave the U.S. Secretary of Agriculture the

authority to impose controls upon sugarcane and sugar beet processors in cases where it

was determined that the domestic guaranteed price could not be maintained without

foreign imports falling below a guaranteed minimum of 1.14 MMT. The 1996 Farm Bill

eliminated this provision. Interestingly, the call for the reinstatement of some form of

inventory management mechanism has the full support of the U.S. sugar producers,

notwithstanding that such a provision would mean that the U.S. Government would gain

more control over the U.S. sugar market (VanDriessche).

Resolution of the U.S. and Mexico Sugar Dispute-The second major short term issue

has to do with resolving the current dispute arising from different interpretations, by the

U.S. and Mexico, of the sugar trade agreement under NAFTA. Briefly, the differences in

the interpretation lies in the U.S. sticking to a "side letter agreement" which limits the

amount of sugar Mexico can export to the U.S. duty free as determined by a formula.

This formula computes Mexico's sugar surplus as the difference between its sugar

production less its consumption of sugar and HFCS. On the basis of this side letter,

beginning in FY 2001 and continuing to FY 2007, Mexico is entitled to ship its surplus

sugar, up to a maximum of 250 thousand MT, duty free to the U.S.. Commencing

October 31, 2008, all barriers would be removed and there would be a common sugar

market between the U.S. and Mexico.

On the other hand, Mexico is contending that the sugar negotiations produced several

versions of the "side letter" and there was no agreement on which was the final version,









hence the "side letter" is invalid (Kornis). Consequently, Mexico is sticking with the

original provisions of the NAFTA that would have entitled that country, since October 1,

2000, to ship all of its excess sugar (production of sugar less only the consumption of

sugar) duty free to the U.S.-some 500-600 thousand MT compared with the 116

thousand MT allocated by U.S. on the basis of the "side letter". The dispute is currently

being addressed under NAFTA chapter 20 dispute settlement provision.

The above sugar dispute is linked to a dispute of U.S. access to Mexico's market for

sale of HFCS. Briefly, Mexico contends that HFCS from the U.S. was being sold at less

than fair value in the Mexican market and that such imports were threatening the

Mexican sugar industry with material injury (Evans and Davis, Komis). As a

consequence, in 19985, Mexico formally imposed antidumping duties ranging from

$63.75 to $100.60 per MT on commercial product HFCS-42 and $55.37 to $175.50 per

MT, payable to the regular 4-percent ad valorem duty (Kornis). This has severely

restricted the growth in exports of HFCS from the U.S. to Mexico. Between 1994 and

1998 exports of HFCS increased from 92.8 thousand MT to 218.4 thousand MT, but fell

to 202.0 thousand MT in 2001. Although the exact quantity of HFCS consumed by

Mexico is not known, the USDA estimates a consumption level of about 500 thousand

MT (USDA, May).

The HFCS market access dispute has been referred to both the NAFTA and WTO

Dispute Settlement Bodies. Although, the WTO rulings were unfavorable to the case of

Mexico, citing among other things that the Mexican government did not adequately

consider all economic factors affecting its sugar industry that were pertinent in

5 The U.S.-Mexican dispute over HFCS actually began in January1997 with the Mexican National
Chamber of Sugar and Alcohol Industries alleging that the U.S. was selling its HFCS in the Mexican
market at less than fair value. Countervailing duties were placed on HFCS imports from June of that year.









determining whether there was a threat of material injury to its sugar industry, Mexico

continued to impose duties on HFCS from the U.S. And, on September 20, 2000 the

Mexican government published revisions to the final resolution of the antidumping

investigation based on the conclusions and recommendations of the Special Group of the

Dispute Settlement Panel of the WTO. The matter has since been referred back to the

original WTO panel by the U.S. on the basis that the re-determination of injury and the

continuation of duties remain inconsistent with the WTO Antidumping Agreement

(USDA, May; FAS Report #MX0140; Kornis).

The HFCS dispute is related to the sugar dispute because if resolved in favor of the

U.S., and consumption of HFCS in Mexico rises, then Mexico's surplus status could

easily be eroded on the basis of the "side letter agreement". However, on the basis of the

original NAFTA agreement exports from Mexico would increase considerably as the

imported HFCS displaces some of the sugar currently used in that country's soft drink

industry.

High tier sugar imports-The third major near term issue that will impact the U.S. sugar

industry is the importation of high tier (over-quota) sugar from Mexico. In addition to the

in-quota duty free export of surplus sugar to the U.S., NAFTA provides for an additional

amount of sugar to be exported from Mexico to the U.S. in accordance with a declining

high-tier tariff schedule (See Attachment). In FY 2001, Mexico was able to export

approximately 8 thousand MT of raw sugar to the U.S. under this provision.

For FY 2002, the high tier tariff on raw sugar exports from Mexico drops even

further to 9.07 cents a pound, respectively. If the U.S. domestic sugar prices were kept at

the minimum level to prevent forfeitures of approximately 20 cents a pound for raw









sugars (assuming a loan rate of 18 cents a pound on raw sugar), and if one assumes a one-

cent transportation cost on raw sugar imported into the U.S. from Mexico, then as long as

the world market price for raw sugar remains at or below 9.9 cent a pound the

opportunity would exist for Mexico to ship all of its excess sugar to the U.S. market.

Moreover, when one considers that the three-year (1999-2001) and five-year (1997-2001)

averages of the world market price of raw sugar were 8.1 and 9.3 cents a pound

respectively, the likelihood of this happening in the next couple of years is very

convincing. More importantly, this development would overshadow the current sugar

disputes since Mexico would be able to export all of its surplus sugar to the U.S. and

there are no dispute surrounding the interpretation of this NAFTA provision.

IV. Overview of Model and Policy Scenarios

The Model-To assist us with our analysis we used a modified version of a World Sugar

Policy Simulation Model6. It is a dynamic, partial equilibrium, net trade model and

consists of 18 countries and regions: Algeria, Brazil, Canada, China, Cuba, Egypt, the

European Union, the former Soviet Union, India, Indonesia, Japan, Mexico, South Africa,

South Korea, Thailand, the United States, and the "Rest of the World". Sugar is assumed

to be a homogenous commodity. Refined sugar quantities are expressed in raw sugar

equivalents. The model is designed for evaluating the effects on the world sugar economy

of farm and trade policies by simulating production, consumption, stocks and trade for

sugar. The model makes use of specific assumptions about growth rates of various

macroeconomics policy variables, population growth rates, and sweetener consumption.


6 The World Sugar Policy Simulation Model was developed by Dr. Won Koo of the Department of
Agricultural Economics, North Dakota State University, Fargo, ND. Details of the model can be found in
document by Benirschka, M., W. Koo, and J. Lou, 1996. "World Sugar Policy Simulation Model:
Description









Policy Scenarios-Using the above model we examine the impact of four likely scenarios

(including our baseline scenario) on the U.S. sugar market, over the period 2002-20057.

The four scenarios are described in Table 1 (below) and are based on likely near term

outcomes discussed earlier. The model was calibrated using 1999 as the base year.

Table 1. Near Term Policy Scenarios
Scenarios I Conditions Rationale


* SetTRQto 1.38 MMT
from FY 2001.


* No change in current loan
rate of 18 cents a pound on
raw sugar.

* No PIK program or direct
government sugar
purchases.

* Mexico allowed to export
all of their surplus sugar to
U.S. market commencing
in FY 2002.














* No restrictions on U.S.
domestic production.


So
(BASE-
LINE)


7 The model was updated and calibrated using FY 1999 as the base data. This year was chosen since it
represented the last year before the start of government PIK program and sugar purchases.


* Increased from current 1.13
MMT in order to reflect the
NAFTA side letter agreement
which permits a maximum duty
free export of sugar from
Mexico of 0.25 MMT beginning
in FY 2001 to FY 2007.

* Based on 1996 Farm Bill.








* In accordance with NAFTA's
accelerated high-tier Schedule
for over-quota sugar exports
from Mexico. Assumptions:

o No drastic increase in
world market price of
sugar (i.e. prices remain
within the range of 5-
year average).


o No or minimum leakage
in the Sugar Re-export
program.









Scenarios Conditions Rationale

S1 Same as Scenario 1, except Assumes some kind of market
US domestic sugar allocation to control domestic
production restricted to production.
maximum of 7.5 MMT
SThe level chosen reflects the
1999 U.S. domestic sugar
production.


S2 Same as in Scenario 1 except U.S. Assumes a loan rate of 18 cents
domestic price is maintained at 20 a pound for raw sugar.
cents a pound from FY 2001 to
avoid loan forfeitures. Minimum raw sugar price to
avoid loan forfeitures is 19.60 a
pound.
S3 Same as in Scenario 1 except U.S. Assumes a loan rate of 16 cents
domestic price is maintained at 18 a pound for raw sugar, implying
cents a pound from FY 2001 to a reduction in the implicit floor
avoid loan forfeitures. price for sugar.

On this basis the minimum
forfeiture price is calculated at
17.40 a pound for raw sugar.


V. Results and Discussion of Analysis

Attachment 2 contains the results of the analysis while Figures 3 to 7 illustrate the

projected trends based on the information contained in the attachment. Figure 3 shows

that in the baseline scenario (SO), which assumes among other things, no government PIK

and sugar purchases programs, the domestic raw sugar price drops considerably from the

initial based value of 21.39 cents a pound to approximately 17 cents a pound. Since this

level is below the minimum forfeiture level (target price) of 19.60, there would be

considerable amount of loan forfeitures and budgetary consequences. The reduction in

price is caused by the increase in exportable sugar coming from Mexico in FY 2002.

When domestic production is restricted and kept constant at the 1999 level of 7,470









thousand MT, scenario 1 shows that the domestic raw sugar price declines initially to a

low of 19.72 cents a pound in FY 2002 and then rises thereafter to reach a projected level

of 22.87 cents a pound in 2006. This represents a difference of 5 cents compared with the

baseline projection in FY 2006. Scenarios 2 and 3 show the assumed conditions of

holding the domestic raw sugar price constant at 20 and 18 cents a pound, respectively.

Figure 4 shows the projected trends in U.S. domestic sugar production (raw sugar

equivalent). In the base scenario, output increased slightly then decreased in FY 2002 in

response to the increased sugar import from Mexico and the downward pressure exerted

on the U.S. domestic sugar price. Scenario 1 shows the assumed condition of keeping

constant the domestic sugar output. In both scenarios 2 and 3 the effect of maintaining the

sugar price above the minimum forfeiture levels of the respective loan rates, results in a

steady increase in output. In the case of the former, output increased from 7,470 thousand

MT to a level of 8,138 thousand MT in FY 2006 while in the case of the latter it

increased to 8,018 thousand MT. Hence, in both cases, the 2006 estimates showed a four

percent increase over the 2006 baseline output. Because of the lowering of the loan rate

in scenario 3 from 18 to 16 cents a pound, the domestic sugar output is slightly below that

of scenario 2.

Figures 5 and 6 show the expected impact on acreage of sugar beets and sugar cane

harvested. With regard to Figure 5, the baseline scenario shows that acreage harvested,

after increasing slightly from 1,486 acres in the base year to 1,513 in FY 2001, remains

more or less the same through FY 2006. Presumably the lowering of the sugar price

increased the competitiveness of some of the alternative commodities. Scenarios 2 and 3

exhibit the same growth pattern. The differences in acres harvested largely reflect the












Fig. 3. U.S. Raw Sugar Price Projections, 2001-06
(U.S. cents/lb)


26

24

22

20--

18

16

14

12

10
1999 2001 2002 2003 2004 2005 2006

S 0-SO ---S1 S2 ---S3


Fig. 4. U.S. Sugar Production Projections, 2001-06
('000 metric tons)


8,600

8,400

8,200

8,000

7,800

7,600

7,400

7,200

7,000

6,800


1999 2001 2002 2003

-.- SO --S1


2004

S2 --S3


2005 2006


ol











Fig. 5. U.S. Sugar Beet Acres Harvested Projections, 2001-06
('000 acres)


1,580

1,560

1,540

1,520

1,500

1,480

1,460

1,440


1999 2001 2002 2003

--SO -- S1


2004

S2 --S3


2005 2006


Fig. 6. U.S. Sugarcane Acres Harvested Projections, 2001-06
('000 acres)


1,020
1,000
980
960
940
920
900
880
860
840


1999 2001 2002 2003

0-SO --S1


2004

S2 ---S3


2005 2006









differences in the target prices. In scenario 2 when the U.S domestic price is kept at 20

cents a pound, acreage harvested increased from 1,487 thousand acres in the base year to

1,555 in FY 2006. However, as shown in scenario 3, when the domestic price support

reduces to 18 cents a pound, the increase in domestic production over the duration of the

period is smaller, increasing from 1,487 in the base year to 1,516 thousand acres in FY

2006. Scenario 1 reflects the assumed condition of keeping domestic sugar production

constant.

Figure 6 shows the projected growth of acres of sugarcane harvested. The noticeable

difference between this Figure and Figure 5, which shows the projected growth of

acreages of sugarbeets harvested, is due to the greater planting flexibility associated with

the cultivation of sugarbeets in comparison with that of sugarcane. In most areas where

sugarcane is produced, there are not many alternative uses for the land. Figure 6 shows

that there were hardly any changes in the area of sugarcane harvested for the three

scenarios (SO, S2, and S3). From a base level of 889 thousand acres in 1999 area

harvested increased steadily to about 961 in FY 2006, an increase of about seven percent.

The projected trends in imports are shown in Figure 7. In all scenarios the projected

patterns of growth are similar, that is, increasing initially and then remaining fairly

constant. The biggest increase in imports occurs in the baseline scenario. This increase

was due in part to the relatively low domestic sugar price that caused consumption to

increase and domestic production to fall. The second highest level of imports is reflected

in scenario 1 when domestic production was restricted. This caused U. S. domestic sugar

prices to increase and provided an incentive for Mexico to ship its entire exportable sugar

surplus to the U.S. Imports of sugar under scenarios 2 and 3 are mirror images of those











Fig. 7. U.S. Sugar Imports Projections, 2001-06
('000 metric tons)




3,000

2,500

2,000

1,500

1,000

500
1999 2001 2002 2003 2004 2005 2006
--SO --S- 1 S2 -M-S3



observed for domestic sugar production (Figure 4). The higher maintained U.S. domestic

sugar price under scenario 2 stimulated domestic sugar production and reduced the need

for imports. Hence, the level of import under scenario 2 is lower than under scenario 3.

VI. Concluding Remarks

The near term prospects for the U.S. sugar industry appear bleak. The fact that this is

so is not new to the industry. The industry was in a somewhat similar situation in the mid

eighties when the successful development and promotion of hfcs threatened its survival.

However, back then, the combination of the sugar program and adequate border

protection (import restrictions) provided a cushion and allowed the industry sufficient

breathing room to recover. The situation is much different today. Increased U.S.

international sugar commitments under the WTO and NAFTA have made it virtually

impossible to use trade restrictions as a means of supporting the sagging industry. And,









the sugar program by itself is proving to be ineffective in providing the level of support to

which the growers had become accustomed to, at no or minimum cost to the federal

government.

Our analysis suggests that within the near future Mexico will be able to ship all of its

exportable surplus sugar to U.S. market as over-quota sugar. Since there are no

misunderstandings surrounding this NAFTA provision that authorizes Mexico to do so,

little if anything, can be done to restrict such imports. Consequently, in the absence of

any restrictions on domestic production or government sugar purchases, the U.S.

domestic raw sugar price can be expected to drop to level of around 17 cents a pound.

Restricting domestic production to 1999 output level of approximately 7.5 MT will

enable prices to recover somewhat but will come at a cost to the government. Owing to

the greater flexibility associated with sugar beet cultivation in comparison with

sugarcane, acreage harvested of the former is expected to vary much more than the latter

in the near future. Consequently, the brunt of the burden will be borne by the sugarcane

growers. Finally, reducing the loan rate on raw sugar from 18 to 16 cents a pound while

supporting the domestic price to prevent loan forfeitures will adversely affect the income

of the U.S. sugar producers but will be insufficient to restrict over-quota exports from

Mexico.

In light of the developments within the U.S. sugar market, alluded to earlier, and the

implications of our findings, there is a need for a comprehensive plan-covering both

sugar and corn sweeteners-to ensure the smooth integration of the U.S. and Mexican

sweetener markets post 2008.











Attachment 1


Mexico's High-Tier Sugar Tariffs


Most Countries


Refined Sugar


Raw Sugar


Refined Sugar


----------------------------------------cents per pound--------------------------------


15.20
14.80
14.40
14.00
13.60
12.09
10.58
9.07
7.56
6.04
4.53
3.02
1.51
0.00


16.11
15.69
15.26
14.84
14.42
12.81
11.21
9.61
8.01
6.41
4.81
3.20
1.60
0.00


17.62
17.17
16.72
16.27
15.82
15.36
15.36
15.36
15.36
15.36
15.36
15.36
15.36
15.36


Source: Evans and Davis


Year


Mexico


Raw Sugar


1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008


18.60
18.12
17.65
17.17
16.69
16.21
16.21
16.21
16.21
16.21
16.21
16.21
16.21
16.21












Attachment 2


U.S. Sugar Projections Under Various Scenarios


Scenario 0 (So)



Carry-in Stocks
Production
Net Imports
Consumption
Carry-out Stocks
Wholesale Price
Sugar Beets Area
Sugarcane Area
World Price


Scenario 1 (Si)



Carry-in Stocks
Production
Net Imports
Consumption
Carry-out Stocks
Wholesale Price
Sugar Beets Area
Sugarcane Area
World Price


Unit Base Year
1999


'000 MT
'000 MT
'000 MT
'000 MT
'000 MT
U.S. cents/lb
Acres
Acres
U.S. cents/lb


1,522.60
7,470.08
1,540.19
9,019.46
1,513.41
21.39
1,486.60
889.41
9.16


Base Year
1999


'000 MT
'000 MT
'000 MT
'000 MT
'000 MT
U.S. cents/lb
Acres
Acres
U.S. cents/lb


1,522.60
7,470.08
1,540.19
9,019.46
1,513.41
21.39
1,486.60
889.41
9.16


2001


1,529.63
7,690.57
1,720.19
9,397.41
1,542.98
19.93
1,513.84
909.61
9.90


2001


1,521.19
7,470.08
1,720.19
9,187.82
1,523.64
21.78
1,486.60
889.41
9.90


2002


1,542.98
7,542.00
2,285.00
9,791.65
1,577.07
17.35
1,510.47
918.75
10.90


2002


1,523.64
7,470.08
2,083.07
9,527.51
1,549.28
19.72
1,486.60
889.41
10.90


-----Projections---
2003 2004


1,577.07
7,607.73
2,306.00
9,893.49
1,597.06
17.38
1,511.28
928.75
11.33


1,597.06
7,678.18
2,329.00
9,992.59
1,611.08
17.47
1,513.63
939.31
12.10


-----Projections---
2003 2004


1,549.28
7,470.08
2,105.75
9,564.10
1,561.00
20.40
1,486.60
889.41
11.33


1,561.00
7,470.08
2,128.43
9,593.02
1,566.49
21.20
1,486.60
889.41
12.10


2005


1,611.08
7,744.25
2,351.00
10,084.13
1,622.30
17.56
1,514.18
950.22
12.88


2005


1,566.49
7,470.08
2,151.11
9,618.28
1,569.40
22.00
1,486.60
889.41
12.88


2006


1,622.30
7,804.38
2,374.00
10,168.69
1,631.78
17.75
1,512.43
961.38
13.80


2006


1,569.40
7,470.08
2,173.79
9,642.17
1,571.09
22.87
1,486.60
889.41
13.80


----------------------------------


-----------------------------------












Attachment 2 (contd.)


Scenario 2 (S2)



Carry-in Stocks
Production
Net Imports
Consumption
Carry-out Stocks
Wholesale Price
Sugar Beets Area
Sugarcane Area



Scenario 3 (S3)



Carry-in Stocks
Production
Net Imports
Consumption
Carry-out Stocks
Wholesale Price
Sugar Beets Area
Sugarcane Area


Base Year--------- -------------Proiections------------------


1999 2001


'000 MT
'000 MT
'000 MT
'000 MT
'000 MT
U.S. cents/lb
Acres
Acres


1,522.60
7,470.08
1,540.19
9,019.46
1,513.41
21.39
1,486.60
889.41


Base Year
1999


'000 MT
'000 MT
'000 MT
'000 MT
'000 MT
U.S. cents/lb
Acres
Acres


1,522.60
7,470.08
1,540.19
9,019.46
1,513.41
21.39
1,486.60
889.41


1,528.97
7,693.52
1,708.55
9,388.96
1,542.07
20.00
1,514.79
909.68


2002 2003 2004


1,542.07
7,806.18
1,702.63
9,496.58
1,554.30
20.00
1,530.82
920.40


1,554.30
7,908.58
1,710.94
9,607.52
1,566.30
20.00
1,543.47
931.34


1,566.30
8,000.01
1,733.81
9,721.79
1,578.33
20.00
1,552.37
942.39


2005


1,578.33
8,076.46
1,763.37
9,828.23
1,589.94
20.00
1,556.05
953.52


2006


1,589.94
8,138.06
1,811.07
9,937.58
1,601.49
20.00
1,554.61
964.68


---------------------------------------P i tins---------------------------------


2001


1,546.61
7,614.39
2,020.92
9,615.54
1,566.38
18.00
1,489.30
907.64


2002 2003 2004


1,566.38
7,708.21
2,025.22
9,718.91
1,580.91
18.00
1,499.37
917.90


1,580.91
7,799.39
2,038.79
9,825.63
1,593.46
18.00
1,508.56
928.58


1,593.46
7,884.53
2,063.10
9,935.74
1,605.34
18.00
1,515.60
939.51


2005


1,605.34
7,957.90
2,091.38
10,038.07
1,616.54
18.00
1,518.46
950.59


2006


1,616.54
8,018.47
2,135.97
10,143.41
1,627.58
18.00
1,516.86
961.75









References


Evans, E., C. Davis. 2000 "Recent Developments in the U.S. Sugar and Sweeteners
Markets: Implications for CARICOM Tariff Rate Quota Holders." Social and
Economic Studies 49(4):1-36, December, 2000

Congressional Report HR. 2646 2001 The Farm Security Act of 2001 107th Congress 1st
Session http://www.house.gov/agriculture/HR2646rept.htm

Haley, S. 2001. "Assessing Economic Impacts of Liberalizing WTO Sugar Tariff Rates
and Minimum Access Commitments by the United States." Sugar and Sweetener
Situation and Outlook Yearbook, U.S.DA, Economic Research Service, SSS-231.

Kornis, M. 2001. "Mexican Sugar and U.S. Sweeteners." International Economic Review,
United States International Trade Commission Office of Economics, USITC
Publication 3419.

USDA 2001 (May). Sugar and Sweetener Situation and Outlook Yearbook, Economic
Research Service, SSS-231.

USDA 2001 (September). Sugar and Sweetener Situation and Outlook Yearbook,
Economic Research Service, SSS-232.

USDA 2001. "Mexico Sugar Revised Final Resolution of the Antidumping Investigation
on Imported HFCS 2000." Foreign Agriculture Service GAIN Report #MX0140.
http://www.fas.usda.gov/scriptsw/attacherep/attachelout.asp

USDA Farm Service Agency Online. 2001 (September) Fact .\lhet Electronic Edition,
http://www.fsa.usda.gov/pas/publications/facts/html/sugarpik01.htm,.

VanDriessche, R. 2001. "The Future of U.S. Sugar Policy." Testimony on Behalf of the
U. S. Sugar Industry to the Committee on Agriculture, U.S. Representatives
Washington, D.C




University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs