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IB95117: Sugar Policy Issues
April 13, 2001
Authorized through FY2003 by the 1996 farm bill (P.L. 104-127), the current sugar program is designed to protect the incomes of growers of sugarcane and sugar beets, and those firms that process each crop into sugar. To accomplish this, the U.S. Department of Agriculture (USDA) supports domestic prices by making available loans at minimum price levels to sugar processors and by restricting sugar imports. In practice, USDA seeks to administer the sugar import quota in a way that (1) allows only as much foreign sugar to enter the U.S. market as is needed to meet the balance of domestic demand, and at the same time (2) results in a market price above the support level which allows processors to pay off any price support loans taken out.
Record domestic sugar production, added to imports of sugar permitted under trade agreements or not subject to limitation, contributed to a substantial oversupply in FY2000. Since the U.S. government cannot further reduce imports to accommodate higher domestic sugar output without breaking its commitment made under World Trade Organization (WTO) rules, USDA last year could not support the domestic sugar price at the levels specified in the farm bill. Oversupply prospects continue in FY2001, though prices have improved somewhat.
Against this backdrop, and in response to requests from the sugar production sector, USDA took two steps during 2000 to boost prices. It bought some sugar from cane and beet processors in May, announcing that these purchases would be stored and not be disposed overseas or sold for processing into ethanol. Sugar users, cane refiners, and a corn producers' association opposed the purchases, arguing they would be adversely affected. USDA in August decided to pay growers to plow under some of their sugar beet crop in order to reduce sugar output. Users and other program opponents responded that this type of approach made clear the need for reforming the program. Since both actions did not raise prices enough to enable processors pay back all of their loans taken out earlier, some exercised their right to "forfeit" to USDA 10% of total 1999/00 sugar output. As a result, USDA recorded significant outlays for the sugar program for the first time since 1986.
Differences over how USDA handled the sugar oversupply situation reflect continued disagreement between the production sector, and users (primarily food manufacturers) and cane refiners, over what U.S. sugar policy should be. Though some program changes were made during 1996 farm bill debate, opponents each year since mounted legislative challenges to modify or eliminate the program. All failed on recorded votes. Program supporters were able to add provisions to spending bills that reversed two previously enacted changes.
Domestic sugar output in 2000/01 is forecast to be 6% below the previous year's record level. Uncertainty about how USDA may dispose of acquired sugar stocks, and over the amount of foreign sugar that enters under current trade agreements, may continue to keep prices down. How specific trade issues are addressed will further affect U.S. sugar supply and price prospects. Negotiations to resolve two sweetener disputes with Mexico continue. The issue of unrestricted sugar syrup imports entering from Canada is still in the courts, and may be addressed legislatively. With work starting on a new farm bill, the sugar production sector is tentatively scheduled to present its policy views to the House Agriculture Committee in late April.
Cane sugar producers and processors joined their beet sugar counterparts on April 12, 2001, to request the Secretary of Agriculture to implement a "product for production sales" program. Their stated objective for proposing such action is to reduce government inventories of sugar and to reduce the prospect that processors again forfeit additional sugar under loan to the U.S. Department of Agriculture later this year. (See Industry Proposal for Product for Production Sales Program below for additional information.)
Governments of every sugar producing nation intervene to protect their domestic industry from fluctuating world market prices. Such intervention is necessary, it is argued, because both sugar cane and sugar beets must be processed soon after harvest using costly processing machinery. When farmers significantly reduce production because of low prices, a cane or beet processing plant typically shuts down, usually never to reopen. This close link between production and capital intensive processing makes price stability important to industry survival.
The United States has a long history of protection and support for its sugar industry. The Sugar Acts of 1934, 1937, and 1948 required the U.S. Department of Agriculture (USDA) to estimate domestic consumption and to divide this market for sugar by assigning quotas to U.S. growers and foreign countries, authorized payments to growers when needed as an incentive to limit production, and levied excise taxes on sugar processed and refined in the United States. This type of sugar program expired in 1974. Following a 7-year period of markets relatively open to foreign sugar imports, mandatory price support only in 1977 and 1978, and discretionary support in 1979, Congress included mandatory price support for sugar in the Agriculture and Food Act of 1981 and the Food Security Act of 1985. Subsequently, 1990 farm program, 1993 budget reconciliation, and 1996 farm program laws extended sugar program authority through the 2002 crop year. Even with price protection available to producers, the United States historically has not produced enough sugar to satisfy domestic demand and thus continues to be a net sugar importer.
Historically, domestic sugar growers and foreign suppliers shared the U.S. sugar market in a roughly 55/45% split. This, though, has not been the case in recent years. In FY2000, domestic production filled 88% of U.S. sugar demand for food and beverage use; imports covered 12%. As high fructose corn syrup (HFCS) displaced sugar in the United States during the early 1980s, and as domestic sugar production increased in the late 1980s, foreign suppliers absorbed the entire adjustment and saw their share of the U.S. market decline.
To support U.S. sugar market prices, the USDA extends short-term loans to processors and limits imports of foreign sugar. The 1996 farm bill provisions, though, change the nature of the "loan" available to processors. The form of price support is now determined largely by the domestic demand/supply situation and USDA's subsequent decision on what the fiscal year level of sugar imports will be. As a result, these parameters together with market developments have injected more-than-usual price uncertainty into the U.S. sugar market.
The sugar program continues to differ from the grains, rice, and cotton programs in that USDA makes no income transfers or payments to beet and cane growers. In contrast, the program is structured to indirectly support the incomes of domestic growers and sugar processors by limiting the amount of foreign sugar allowed to enter into the domestic market using an import quota - a policy mechanism that lies outside the scope of the program's statutory authority. Accordingly, USDA decisions on the size of the import quota affect market prices, and are made carefully to ensure that growers and processors do realize the benefits of price support they expect to receive as laid out in program authority.
Price Support. USDA historically has extended price support loans to processors of sugarcane and sugar beets rather than directly to the farmers who harvest these crops. Growers receive USDA-set minimum payment levels for deliveries made to processors who actually take out such loans during the marketing year -- a legal requirement. Other growers negotiate contracts that detail delivery prices and other terms with those processors that do not take out loans.
The loan rate for raw cane sugar is statutorily set. The loan rate for refined beet sugar historically was set in relation to raw sugar under a prescribed formula; however, this rate now is fixed for 7 years at the 1995 level. Loan support for beet sugar is set higher than for raw sugar, largely reflecting its availability as a product ready for immediate industrial food and beverage use or for human consumption (unlike raw cane sugar). By contrast, raw cane sugar must go through a second stage of processing at a cane refinery to be converted into white refined sugar that is equivalent to refined beet sugar in end use.
Loan Rates and Forfeiture Levels. The FY2001 loan rates are set at 18 cents/lb. for raw cane sugar, and 22.9 cents/lb. for refined beet sugar. These loan rates, though, do not serve as the price floor for sugar. In practice, USDA's aim is to support the raw cane sugar price (depending upon the region) at not less than 19.1 to 20.7 cents/lb. (i.e., the price support level in a region plus an amount that covers a processor's cost of shipping raw cane sugar to a cane refinery plus the interest paid on any price support loan taken out less a forfeiture penalty applicable under certain circumstances). Similarly, USDA seeks to support the refined beet sugar price at not less than 23.2 to 26.2 cents/lb. (i.e., the regional loan rate plus specified marketing costs plus the interest paid on a price support loan less the forfeiture penalty), depending on the region. These "loan forfeiture," or higher "effective" price support, levels are met by limiting the amount of foreign raw sugar imports allowed into the United States for refining and sale for domestic food and beverage consumption.
Import Quota. USDA restricts the amount of foreign sugar allowed to enter the United States to ensure that market prices do not fall below the "effective" support levels. The intent in maintaining prices at or above these levels is to make sure that USDA does not acquire sugar due to a loan forfeiture. A loan forfeiture (turning over sugar pledged as loan collateral) occurs if a processor concludes that domestic market prices at the time of a desired sale are lower than the "effective" sugar price support level implied by the loan rate.
Tariff-rate quotas (TRQs) are used as the policy instrument to restrict sugar imports to the extent needed to meet U.S. sugar program objectives. In practice, the U.S. market access commitment made under World Trade Organization (WTO) rules means that a minimum of 1.256 million short tons (ST) of foreign sugar must be allowed to enter the domestic market each year. (1) While the commitment sets a minimum import level, no other provision limits U.S. policymakers in allowing additional amounts of sugar to enter if needed to meet domestic demand (e.g., no cap exists on imports). Under these rules, foreign sugar (including amounts imported from Mexico under North American Free Trade Agreement (NAFTA) negotiated provisions) enters under two TRQs - one for raw cane, another for a small quantity of refined (including beet) sugar. The Office of the U.S. Trade Representative (USTR) is responsible for allocating these TRQs among eligible countries, including Mexico and Canada. The amount entering under each quota (the "in-quota" portion) is subject to a zero or low duty. Sugar entering in amounts above each quota is subject to a tariff that declines over time according to the rate specified in the trade agreement. The purpose of a prohibitive tariff on above-quota imports is to protect the domestic producing sector from the prospect that additional sugar enters without any limit.
Starting in the first year of implementing 1996-enacted sugar program authority, USDA adopted an administrative plan to administer the sugar TRQ. The objective of this approach was to make the process of setting the import quota more transparent and less subject to political influence. In practice, USDA each September set the import quota level for FY1997, FY1998, and FY1999 reflecting its assessment at the time of the upcoming year's sugar supply/demand outlook. Further, each year's plan called for USTR to allocate additional amounts of the unused quota in equal increments at 3 specified times during the year if USDA estimated that ending year stocks would be equal to or below 15.5% of projected use. This approach incorporated USDA's analysis which showed a credible correlation existed between this stocks-to-use ratio and the level of market prices observed during the last quarter of a fiscal year that usually were above loan forfeiture levels. USDA dropped the administrative plan mechanism in FY2000 and FY2001, deciding each year to set the sugar TRQ slightly above the 1.5 million ST in order to ensure that sugar processors had access to non-recourse loans.
USDA on September 15, 2000, set the FY2001 tariff-rate quotas for sugar imports at 1,500,227 short tons (ST). All but 100,000 ST was allocated among 41 countries at that time, meaning about 1.4 million ST is currently eligible for entry. Of this balance, USDA allocated 116,611 ST to Mexico, reflecting the U.S. view on the amount of access to the U.S. sugar market that Mexico is entitled to under NAFTA (see Mexico's Access to the U.S. Sugar Market for more discussion).
Marketing Assessments. Though it will not be collected in FY2000 and FY2001 (see below), the budget deficit marketing assessment applies to marketings of sugar produced from domestic cane and beet crops. Imports are not subject to this levy. Assessments collected have represented the sugar production sector's contribution to budget deficit reduction. (2) The assessment rate on raw cane sugar is 1.375% of the 18 cent loan rate (0.2475 cents per pound, or 24.75 cents per 100 pounds (cwt.)). The rate on marketings of refined beet sugar is 1.47425% of the raw cane sugar's 18 cent loan rate (equal to 0.2654 cents/lb, or 26.54 cents per cwt.). In FY1999, this assessment generated to USDA's Commodity Credit Corporation (CCC) an estimated $40 million in receipts from cane and beet processors. In a policy change, a provision in the FY2000 agriculture appropriations measure (Section 803(b) of P.L. 106-78) effectively prohibits USDA from collecting this assessment in FY2000 and FY2001. This will save the domestic producing sector an estimated $83 million over the 2-year period.
Program Costs. The sugar program recorded $465 million in budget outlays in FY2000. These reflected USDA's purchases of sugar and loan forfeitures made by processors (see Sugar Purchases and Sugar Loan Forfeitures below), and represent the first significant direct costs of the program since FY1986.
Each year, USDA incurs some incidental costs in administering the program. USDA estimates that the salaries and expenses of staff (accounted for separately from program costs) involved in sugar loan making activity totaled $34,000 in FY2000. Loan operations are carried out by the county offices of USDA's Farm Services Agency. Additional costs incurred by USDA's Foreign Agricultural Service in administering the sugar TRQs and re-export programs totaled $388,000 in FY2000.
The enacted sugar program incorporates the provisions agreed upon in the 1995 budget reconciliation's conference with one addition. The modified program keeps intact the broad outlines of previous U.S. sugar policy, but adopts for the first time since 1981 new features that could inject some price uncertainty into the domestic sugar market under certain supply and demand conditions. The degree to which the sugar sector actually becomes more subject to market forces and to the prospect of a higher degree of price uncertainty, though, will depend in large part on the amount of sugar allowed to be imported under quota.
Program provisions (revised to reflect two changes made in the 106th Congress):
(1) reauthorize the sugar program for 7 years (through the 2002 crop -- the same as for all other commodity programs).
(2) freeze the support price at 1995 crop levels -- 18 cents per pound for raw cane sugar and 22.9 cents/lb. for refined beet sugar -- for the entire period.
(3) repeal the program's "no-cost" requirement.
(4) repeal marketing restrictions ("allotments") on the amount of domestically produced sugar that raw sugar processors and beet refiners can sell into the U.S. market when USDA projects imports fell below a statutory minimum level. Allotments were triggered two times during the FY1992-FY1996 period.
(5) increase by 25% the budget deficit assessment paid by raw cane processors and beet refiners on domestically-produced sugar (to 1.375% on raw cane sugar and to 1.47425% on refined beet sugar, set relative to the 18 cent loan rate in effect for raw sugar). Change: Section 803(b) of the FY2000 agriculture appropriations measure (P.L. 106-78) means that processors and beet refiners will not pay this assessment in FY2000 and FY2001.
(6) retain the 9-month term for price support loans taken out by processors and beet refiners.
(7) require that recourse loans be made available whenever USDA announces a fiscal year import quota of less than 1.5 million short tons (ST). If USDA announces an import quota of 1.5 million ST or more, non-recourse loans (the type of loan available under pre-FY1996 policy) automatically would become available to processors. "Recourse" means processors are obligated to repay the loan with interest in cash, rather than exercise the legal right (under "non-recourse" policy) to hand over sugar offered as collateral in full payment of the loan. Change: Section 836 of the FY2001 agriculture appropriations measure (P.L. 106-387) repealed this authority to make recourse loans.
(8) require USDA to impose about a 1 cent/lb. penalty on any processor who forfeits sugar (applicable when pledged as collateral for a "non-recourse" loan) to the CCC.
(9) require a reduction in domestic sugar price support if USDA determines that negotiated reductions in sugar export and domestic subsidies made by the European Union and other major sugar growing, producing, and exporting countries in the aggregate exceed WTO commitments.
For additional explanation of the statutory changes made to the marketing assessment and loan type provisions in the last 2 years, see Sugar Production Industry Proposed Changes Enacted below.
The final sugar program compromise struck by House and Senate farm bill conferees in November 1995 did not fully satisfy the three most affected and competing interest groups -- growers and sugar processors, cane refiners, and sugar users. The sugar production sector contended that considerable price uncertainty will exist whenever "recourse" loan policy is in effect and also will result in a reduced level of price support if "loan forfeitures" occur. It did indicate, though, that it could accept most other provisions. Sugar users contended that the proposed program offered little change from previous policy because price support levels were not lowered. Cane sugar refiners feared that retaining 1995 price support levels will close more refineries, further shrinking U.S. cane refining capacity.
Since 1996, sugar users and cane refiners unsuccessfully sought to make changes (during congressional consideration of the last 5 agriculture spending bills) to the enacted sugar program in order to attain their lower market price objective. During the 106th Congress, the sugar production sector succeeded in dropping two sugar program provisions enacted in the 1996 farm bill.
Proposals Offered by Program Opponents. During the 104th Congress, a 1996 provision that effectively would have capped the raw cane sugar price at 21.15 cents per pound (accepted by the House in passing the FY1997 agriculture appropriations bill - H.R. 3603) was dropped in the subsequent conference agreement with the Senate. Separately, an amendment offered in the Senate in July 1996 to H.R. 3603 that effectively would have eliminated for most sugar processors the price support guarantee provided by non-recourse loans was tabled on a 63-35 vote.
During the 105th Congress, the House in July 1997 rejected on a 175-253 vote a floor amendment to the FY1998 agriculture spending bill (H.R. 2061) that would have required USDA to implement the sugar program on a recourse loan basis in FY1998. The House on June 24, 1998, rejected on a 167-258 vote a floor amendment to the FY1999 agriculture appropriations measure (H.R. 4101) that effectively would have reduced sugar price support levels by one cent/lb.
In the 106th Congress, the Senate on August 4, 1999, tabled 66-33 an amendment to S. 1233 (FY2000 agriculture appropriations) that would have had the effect of not allowing USDA to administer the program in FY2000. The Senate on July 20, 2000, tabled 65-32 an identical amendment to S. 2536 (FY2001 agriculture appropriations). The House, earlier on June 20, tabled on a point of order an amendment to H.R. 4461 to limit USDA spending to purchase raw or refined sugar in FY 2001 to $54 million, the amount spent to date this year on sugar purchases (see Sugar Purchases below).
On May 18, and on May 25, 1999, Representative Dan Miller and Senator Schumer, respectively, introduced identical bills (H.R. 1850 and S. 1118) to change the current program. Their measure proposed to: (1) lower sugar price support levels; (2) require USDA to make only recourse loans to sugar processors; (3) terminate processor access to recourse loans after the 2002 crops; and (4) require the President to use all available authorities to enable USDA (starting in FY2000) to supply the domestic market with raw cane sugar at prices not greater than the higher of: the world sugar price (adjusted for delivery to the U.S. market), or the raw cane sugar loan rate in effect, plus interest. Starting in 1999, the recourse loan rate for raw cane sugar would decline 1 cent per pound each crop year (i.e., to equal 17 cents/lb. in 1999, 16 cents/lb. in 2000, 15 cents/lb. in 2001, and 14 cents/lb. in 2002). Loan rates for refined beet sugar would decline in tandem with the reduction in the raw cane sugar loan rate. No CCC-financed loans would be available after the 2002 crops. Under this proposal, starting with the 2003 crops, decisions made by the Executive Branch in exercising its authority to administer the sugar import quota would effectively determine U.S. sugar policy. H.R. 2599 introduced in July 1999 by Representative Wu proposed to repeal outright the current sugar program.
Sugar Production Industry Proposed Changes Enacted. The Senate, in adding a farm aid package to FY2000 agriculture spending measure (H.R. 1906), included a temporary relief provision that effectively prohibits USDA from collecting the marketing assessment from sugar producing companies through FY2001, if the Office of Management and Budget determines that the federal budget is in surplus in FY2000. House and Senate negotiators retained this language, but dropped the condition that there be a budget surplus for the prohibition to be effective, in amending the farm aid package in conference (Section 803(b) of H.Rept. 106-354). Signed into law (P.L. 106-78) on October 22, 1999, raw cane sugar mills and beet sugar processors that pay this assessment will save (i.e., increase their revenues by) an estimated $83 million over the 2 year period.
Conferees to the FY2001 agriculture spending measure (H.R. 4461) added language to conference agreement text (Section 836) striking the recourse loan feature of the sugar program. Members opposed to the provision argued that changes to 1996 farm bill authority should be made in the context of congressional consideration of the next farm bill. Opponents sought to pin down which member placed the text into the measure since this provision was not in the House nor the Senate versions. Supporters argued that continued low sugar prices and recent loan forfeitures by processors signaled that the production sector was in need of relief just as the producers of other commodities that received farm aid in recent years. Signed into law (P.L. 106-387) on October 28, 2000, this provision means that USDA only has authority to make non-recourse loans for the duration of current sugar program authority. Its practical effect will be to permit raw cane sugar mills and beet sugar processors which take out such loans to hand over pledged sugar to USDA at a guaranteed price when market prices are below loan forfeiture levels.
Those proposing changes have contended that the 1996 farm bill did not "reform" the sugar program by providing a transition to the free market as it did for the other commodity programs. Program opponents maintained that the program continued to benefit a few wealthy growers, kept the cost of sugar high, and supported sugar cane production in Florida with adverse environmental consequences for the Everglades. Those that favored lower sugar price support argued that consumers would pay less for sugar and sugar products, and reduce environmental damage in vulnerable producing areas.
Sugar program supporters countered that these proposals would devastate an efficient U.S. sugar industry by driving producers out of business, wreak havoc on industrial users who rely on critically timed shipments of sugar at prices below those found elsewhere in the developed world, and undermine the agreement on sugar policy made in the 1996 farm bill. They asserted that proposed reductions in price support would undercut the seven-year contract that Congress made in the 1996 farm bill, exposing producers and processors to unreasonable risk who assumed sugar policy would remain unchanged through 2002. They further argued that food companies would not pass on any savings to consumers.
USDA intervened twice in the marketplace since mid-2000 in an effort to help sugar prices recover from near 20 year lows. Steps taken were to: (1) purchase sugar from processors, and (2) make payments of sugar to farmers who agreed not to harvest a portion of their sugar beet acreage. With market prices in early 2000 some 15-20% below loan forfeiture levels, and USDA not able to further restrict sugar imports to boost prices without breaking trade agreements, the sugar production sector sought government intervention sufficient enough to raise prices to avert the forfeiture of sugar pledged as collateral for non-recourse loans that processors had taken out. Forfeiture (e.g., handing over sugar to the CCC as repayment for the loan) becomes a financially attractive alternative to a processor if the market price is below the support (e.g., loan forfeiture) level when the loan comes due.
On June 6, 2000, the Farm Service Agency announced it had purchased 132,000 tons of sugar at a cost of $54 million. This action represented USDA's response to a request made in February by sugar crop growers and processors that it buy on the open market up to 370,000 ST of sugar (4% of 1999/00 production) as soon as possible to stabilize prices. They suggested USDA could dispose of the purchased sugar by donating it overseas or selling it for such non-food uses as ethanol production. Without intervention to boost market prices, the industry claimed sugar farmers will experience economic hardship and processors will face closure. Industrial users of sugar, cane refiners, and corn growers, though, expressed opposition to government purchases of sugar, arguing such action would adversely affect their financial interests. In announcing in early May to purchase a smaller amount of sugar than requested, USDA stated its plan is to store the sugar and not sell it in the U.S. market. Secretary of Agriculture Glickman at that time challenged the "sugar industry to rapidly develop conservation and production options that can form the basis of a sustainable sugar policy. Simply relying on continued government purchases over the longer term is neither feasible nor realistic." Though the industry continued through the summer to press for additional sugar purchases, USDA did not make any. Instead, USDA chose to implement an initiative to pay farmers to plow under their crop (see next section).
On December 7, 2000, the Farm Service Agency announced the CCC had transferred title to 277,349 short tons of refined sugar to beet farmers who had agreed to plow up almost 102,000 acres of planted sugar beets (7% of planted 2000 crop acreage). This action was the last step of another administrative decision designed to reduce domestic sugar supplies and government costs that began on August 1, when USDA announced sugar beet farmers would be offered the choice of plowing under planted beets in exchange for receiving sugar acquired by the CCC. Under this payment-in-kind (PIK) program, implemented under the cost reduction options authorized by the Food Security Act of 1985, a farmer bid for sugar by offering to divert acres from production. PIK payments (made in the form of in-kind certificates) by law are limited to $20,000 per farmer. Many farmers exercised the option to redeem these certificates for cash, and sold them to processors who exchanged them for CCC-owned sugar.
The program's purpose, according to USDA, was "to help sugar beet and sugar cane farmers deal with low prices caused by an excess of domestic sugar." The expectation was that this approach "will help alleviate sugar overproduction, reduce probable crop loan forfeitures, and dispose of government inventory" as farmers harvested less sugar beet acreage. The CCC used its inventory of sugar purchased in mid-May, and forfeited since early August (see next section), to make these in-kind payments to farmers.
The American Sugar Alliance welcomed USDA's announcement, expressing optimism that the step "will get a significant amount of sugar out of production and restore balance to the U.S. market." Program opponents responded that this initiative made clear the need for reforming the sugar program. The Sweetener Users Association described it as a short-term remedy brought on by production that outpaced U.S. sugar demand. The Coalition for Sugar Reform said that "to use public money to pay farmers to destroy food instead of growing it is just plain indefensible."
With market prices at the end of September 2000 (when outstanding non-recourse loans on 1999 sugar came due) still below loan forfeiture levels, raw sugar mills and refined beet sugar processors exercised their right to forfeit, or hand over, 804,000 short tons (ST) of sugar pledged as collateral for such loans to the CCC. (3) This quantity, added to earlier forfeitures and purchases, meant USDA in early October 2000 held 1.1 million ST, or 12.2% of 1999 domestic sugar output, in its inventory. Of this, USDA in December 2000 released almost 300,000 ST to farmers or processors for the sugar payment-in-kind program (see above). Forfeitures reflected record 1999 sugar production - 15% higher than the previous 3-year average, little growth in domestic sugar use, and USDA's inability to curtail imports due to trade agreement obligations. The situation was further compounded by the continued entry of a liquid sugar syrup from Canada that competes with domestically produced sugar but which is not subject to any import constraint (see Sugar Syrup Imports below).
Processor decisions to hand over pledged sugar to the CCC served to isolate the forfeited sugar from the private marketplace, and were followed by a quick and sharp jump in raw sugar market prices to above loan forfeiture levels in early October 2000. Refined beet sugar prices took longer to recover to near forfeiture levels.
The CCC currently has 793,000 ST of sugar in its inventory (almost 9% of 1999/00 domestic production). Though this quantity is effectively isolated from the marketplace, any decision made to release these stocks quickly in the current market environment would likely depress domestic prices, and likely below loan forfeiture levels. This in turn could lead processors at the end of September 2001 (as occurred last year) to forfeit on a portion of the sugar non-recourse loans then falling due. With cane processing and beet refining still underway in some regions, the FY2001 sugar production level may still change. Once final output becomes clear as processing ends shortly, and if it is below the current forecast level, USDA may begin considering how to dispose of these stocks that are costly to store. If this scenario occurs, affected parties are likely to present the same arguments made last year that led up to USDA's decision to purchase sugar. At that time, the sugar production sector argued that USDA should make acquired sugar available for ethanol production or for donation overseas (the American Sugar Alliance in late October 2000 urged USDA to donate CCC-owned sugar to North Korea). Corn producers opposed diverting sugar for ethanol production, arguing such action would undercut an important end use for their commodity. More recently, a small ethanol producer and some groups in the Upper Plains states have expressed interest in acquiring CCC-owned sugar to perform tests on its effectiveness for grinding in corn dry mills to produce ethanol.
Sales of Sugar Stocks? If sugar prices stay above loan forfeiture levels through mid-2001, one option might be for USDA to sell small lots of sugar over some period of time in order to gradually reduce its inventory. This would reduce CCC storage costs and potential losses due to spoilage, and lower the amount of inventory that USDA carries over into the next marketing year. Sugar users may welcome such sales, if it means being able to purchase sugar at prices slightly below current levels. The sugar production sector, though, may be concerned about the impact of CCC sales on their revenues. Cane refiners may be apprehensive if CCC sales of refined beet sugar displace sales of refined cane sugar in their traditional marketing areas and further reduce their margins. USDA has not decided on what it plans to do with its sugar inventory, in large part because political-level officials have not yet been appointed that could address this issue.
Industry Proposal for "Product for Production" Sales Program. The sugar beet sector in late March 2001 called on USDA to implement a "product for production" program for the sector. The plan would have USDA sell CCC sugar currently in inventory to beet processors if they agree to negotiate with beet growers to reduce acreage they plant to sugar beets this spring. Because continued low refined beet sugar prices and high energy costs were causing economic stress for the entire sugar beet industry, spokesman argued such a plan would improve future price prospects and save taxpayers some $1.4 million in monthly storage costs. The sugar cane sector joined this initiative on April 12 in a joint letter to the Secretary of Agriculture that suggested ways such a plan could be fashioned to enable both industry segments help reduce CCC stocks. The plan's objective is similar to last fall's sugar payment-in-kind program (see above), but is designed to take effect before a beet crop is planted. Observers note that under the 1996 farm bill, USDA does not have the legal authority to implement a paid land diversion program (paying producers not to plant) for any commodity. Some aspects of the proposed plan also bump up against other statutory limitations, and thus could limit its effectiveness even if USDA was able to find a legal basis to pursue this option.
The United States must import sugar to cover the balance of its domestic needs unable to be supplied by the U.S. sugar producing sector. Therefore, the implementation of provisions found in trade agreements that are specific to both imports and exports of sugar, sugar-containing products, and other sweeteners such as corn syrup affects the economic interests of the U.S. sugar production sector, cane refiners, and sugar users. These provisions are complex, reflect compromises in U.S. trade negotiating positions and the results of bilateral talks to resolve disputes that have arisen, and affect in varying degrees the economic interests of all parties with a stake in U.S. sugar policy.
While attention most recently focused on the debate over whether or not USDA should purchase sugar as a way to boost domestic sugar prices, various trade provisions currently affect the domestic sugar supply situation, and in turn, the U.S. sugar price level. Sugar imported under market access commitments made by the United States in the NAFTA and WTO trade agreements, together with some sugar products that are not subject to import restrictions, have added, or could under certain conditions contribute to, a U.S. sugar surplus and serve to pressure prices downward. For background on these agreements' provisions with respect to sugar imports, see the Import Quota section above. Of the major trade issues, imports of "stuffed molasses" (described below) may receive congressional consideration before Congress adjourns this year. Also, U.S.-Mexican efforts to reach an accommodation among sweetener industry sectors in both countries will be an ongoing issue with implications for the future of the U.S. sugar program. Groups with the most at stake are the: (1) the U.S. sugar production sector, concerned about the flow of sugar imports under Mexico's access under NAFTA to the U.S. market; (2) U.S. manufacturers of high-fructose corn syrup (HFCS), seeking to take advantage of an opening under NAFTA to sell to the large Mexican market; and (3) the financially ailing Mexican sugar sector, pressing to expand sales to the U.S. market, in large part because of its concern that domestic sales will increasingly be displaced by the Mexican soft drink industry's import of cheaper HFCS. The importance and sensitivity of this bilateral issue are reflected in the fact that key sweetener issues occasionally have been discussed at meetings between the two countries' presidents. Three of these bilateral issues are described below.
Starting October 1, 2000, Mexico under NAFTA became eligible to ship much more sugar duty free to the U.S. market than the 25,000 MT allowed to enter in earlier years. U.S. and Mexican negotiators continue to disagree, however, over just how much sugar Mexico actually can export in this and coming years. Their disagreement centers on which version of the NAFTA agreement governs this issue. U.S. negotiators base their position on the sugar side letter (dated November 3, 1993) to the NAFTA agreement that was struck in last minute talks between U.S. Trade Representative Mickey Kantor and Mexico's Secretary of Commerce and Development Jaime Serra Pucha. The side letter was included with other NAFTA agreement documents that President Clinton submitted to Congress together with the implementing legislation. (4) Mexican negotiators instead refer to the sugar provisions of the final NAFTA agreement as concluded in August 1992 and signed by each country's president in December that year. (5)
The side letter effectively places a lower cap on U.S. duty free imports of Mexican sugar than the ceiling would have been under the original NAFTA agreement. The side letter accomplished this by: (1) redefining the original formula for "net production surplus" - the amount of sugar that one country could ship to the other duty free - to also add consumption of HFCS, and (2) raising, but keeping level, the maximum amount that could enter duty free during the FY2001-FY2007 period. Looking at FY2001, Mexico under the side letter's terms can export its "net surplus" but not more than 250,000 MT of sugar duty free to the U.S. market. USDA announced on September 15, 2000, that Mexico using the side letter's formula can ship almost 106,000 MT of sugar to the United States in FY2001, adding that an additional 100,000 MT would "be allocated, if needed, contingent on developments in international markets." To date, USTR has not issued the necessary documents to allow for the entry of Mexican sugar under this allocation. This may be intended to pressure Mexico to reach a resolution on this issue, and may possibly be prompted by concern that this amount (if entered now) could depress domestic sugar prices. Some observers assume that the additional amount set-aside is intended for Mexico, in case both sides reach some resolution during the current year. Under the original NAFTA agreement, however, Mexico (if determined to be a net surplus producer under the original agreement's formula for two consecutive years) would have been able to ship its entire projected net sugar surplus. If this formula were used, some 600,000 MT would have been eligible for entry in FY2001.
The NAFTA agreement envisioned Mexico and the United States as one sweetener market by FY2008, with sugar and corn sweeteners free to be sold in the other market without restriction. The market access provisions covering the 1994-2007 period were intended to serve as a transition to this single market. One key assumption was that by the end of this transition, sugar prices in both countries would be about the same and likely not much different from price levels seen in recent years. The Mexican sugar industry's expectation was that it would be able to sell its surplus in the U.S. market at the U.S. domestic price, reaping a significant financial benefit compared to exporting the same sugar to other markets at the lower world price. Uncertain in 1993 was the pace at which Mexico's soft drink industry might shift to use corn sweeteners (including imports from the United States) instead of sugar. Since then, such displacement has started to occur (a development identical to what occurred in the United States during the 1980s when users purchased cheaper HFCS rather than the relatively more expensive sugar), contributed to Mexico's sugar surplus, and led toward industry efforts to seek access for more sugar sales to the U.S. market. Analysts have pointed out that Mexican efforts to export more sugar than agreed upon in the side letter, however, could end up lowering the price that the Mexican sugar industry receives in the U.S. market, as the additional supply further depresses the U.S. domestic price. Because the cost of producing Mexican sugar, and transporting it to the U.S., is higher than projected U.S. sugar prices, some Mexican mills with their large debts would inevitably close. U.S. operations would face similar pressures. For this reason, some observers think that Mexican negotiators may exercise restraint in how much market access they push for, concerned about the longer-term impact of selling into a market with falling prices. Some have suggested that both sides, taking this scenario into account, work instead to develop a compromise on the issue of the sugar access amount that addresses the interests of the sweetener sectors (sugar and corn sweeteners) in both countries.
Mexico's sugar industry began challenging the validity of the sugar side letter in 1998 arguing that the Mexican Senate had never ratified it. Mounting debt problems in the country's sugar sector and an oversupply of produced sugar seem to have been the catalysts for the Mexican decision to press the issue of the substance of the U.S. market access commitment for Mexican sugar. Negotiations between U.S. and Mexican officials since then have not reached any resolution, and appear to be stymied over a related trade dispute on the high duties that Mexico currently imposes on HFCS imports from the United States (see Mexican Duties on Imports of U.S. Corn Syrup below). Mexico's Trade Minister on July 20 warned that Mexico would request a chapter 20 dispute arbitration panel under NAFTA if no agreement is reached on sugar access to the U.S. market by July 31. Negotiations continued on and off through mid August, resumed briefly in October, but did not reach any resolution. Though the last Mexican administration did initiate the NAFTA panel process, Mexico's new government has not pressed this issue. Though this issue may have been discussed by the U.S. and Mexican presidents at their February 16, 2001 meeting, there was no intent to reach an agreement. It is more likely this issue will not receive further attention until this summer, when pressure again builds on how much Mexico should be permitted to ship under NAFTA provisions to the U.S. market next year (FY2002).
The U.S. sugar producing sector is concerned that a decision not to abide by the side letter would result in a flood of additional sugar into an already surplus U.S. market. U.S. cane refiners urge that Mexican shipments under any negotiated deal be in the form of raw rather than refined cane sugar, so as not to undercut U.S. refining capacity. U.S. manufacturers of HFCS have signaled they want their concern about access to the Mexican market addressed.
The outcome of this dispute has implications for (1) congressional perceptions of the efficacy of trade agreements, and (2) the longer term outlook for the U.S. sugar sector. Some members of Congress point out that it was the Clinton Administration's last minute negotiations with Mexico on the sugar and frozen-concentrate orange juice side letters that secured enough votes for NAFTA passage in the House in November 1993. They argue that any decision to void the provisions of the sugar side letter - vital in securing congressional approval of NAFTA - could undermine congressional support for future trade agreements, and set a serious precedent.
Controversy continues to surround the import by a Michigan company (Heartland By-Products, Inc.) since the mid-1990s of a liquid sugar syrup (i.e., "stuffed molasses"). This product is created from sugar imported at the low world price into Canada primarily from Brazil, mixed with molasses and water, and then shipped duty free to the United States taking advantage of a specific U.S. tariff provision. Using special equipment, this firm extracts sugar from this syrup and reportedly ships the remaining molasses back to Canada where the process starts over again. Concerned that this industrial-grade sugar sold to U.S. food companies displaces sales of domestically produced beet sugar (118,000 short tons in 1999/00), U.S. beet and cane refiners have sought a remedy to block its import. This amount equaled 1.2% of total domestic food use that year. Refiners have argued that stuffed molasses is imported deliberately to circumvent the sugar TRQ, by entering under a tariff line that does not subject it to quota restrictions and high tariffs. Seeking to "close this loophole," these refiners in early 1998 petitioned U.S. Customs to reclassify imports of the product to subject it to the sugar TRQ. After an investigation, Customs in September 1999 revoked its 1995 classification ruling granted to Heartland, and determined that: stuffed molasses had been "tariff engineered" to take advantage of a favorable tariff provision, and the intent of the sugar quota mandated that this product be part of the sugar TRQ. Heartland filed a complaint against Custom's ruling to the U.S. Court of International Trade (CIT). The CIT in October 1999 ruled that Customs could not change the tariff classification after having initially ruled that the product could enter under the tariff line covered by its 1995 classification ruling. Subsequently, the CIT denied the U.S. government's and beet refiners' motion for reconsideration. In late March 2000, the Department of Justice and the U.S. Beet Refiners Association separately appealed the CIT ruling to the U.S. Circuit Court of Appeals in Washington. This Court held a hearing on this case on February 9, 2001, but has not yet issued a decision. If the court affirms the CIT ruling, imports of stuffed molasses would continue to enter freely. Under such a decision, analysts expect other companies for competitive reasons to move to set up similar operations to extract sugar from imports of stuffed molasses. If the court overrules the CIT ruling, Heartland (subject to paying very high tariffs) likely would not be able to continue operating.
Facing legal uncertainties and the prospect that other firms might move to take advantage of this "loophole," the sugar industry last year sought a legislative remedy, arguing that continued imports of this sugar syrup undermined the domestic sugar sector and added to the sugar surplus. In late April 2000, Senator Breaux sought in conference to add an amendment to the Africa/CBI Parity bill (H.R. 434) to classify stuffed molasses in the U.S. tariff schedule as a product that falls under a tariff line covered by the sugar TRQ. The Clinton White House and some House members reportedly opposed including such a provision. The final conference agreement did not include this provision. In another effort to address this issue, Senator Breaux in mid- September 2000 requested the chairman of the Senate Finance Committee to add similar language to a measure the Senate Finance Committee was working on. Breaux's amendment (subsequently introduced as S. 3116) was not included in a manager's mark of H.R. 4923, subsequently placed on the Senate calendar but never considered. In the 107th Congress, Senator Breaux recently introduced a measure (S. 753) similar to his proposals offered last year.
Concerned that the substance of S. 3116 may be added to a spending measure, Senator Lugar requested agriculture appropriations conferees not to allow that to occur, arguing that "efforts to circumvent decisions by the U.S. Customs Service and the Court of International Trade would be counterproductive to our agricultural and international trade interests." Others opposed to this amendment (American Bakers Association, Chocolate Manufacturers Association, and the National Confectioners Association) argued in letters to Senate leadership that passage of the amendment would lead to increased sweetener costs, prompt an "embarrassing" challenge in the WTO from Canada, and amount to a unilateral imposition of a new tariff-rate quota.
The dispute over Mexico's imposition of anti-dumping duties on imports of U.S. high fructose corn syrup (HFCS) from U.S. corn wet milling companies is closely tied to the ongoing negotiations on market access for Mexican sugar in the U.S. market. In June 1997, following an anti-dumping investigation by the government conducted at the request of Mexico's sugar producers' association, Mexico issued a preliminary ruling that U.S. firms were selling HFCS at less than fair value and imposed provisional duties on their import. In January and September 1998, following two additional investigations, Mexico imposed final anti-dumping duties on imports of three HFCS products from four U.S. companies. The issue arose as a result of structural changes in the Mexican sugar industry, growing demand by Mexican soft-drink manufacturers for lower-priced HFCS rather than higher-priced Mexican sugar, and efforts by the Mexican sugar sector to speed up its access to the U.S. market under its interpretation of NAFTA provisions. In response to the Mexican government's decision to impose duties, the U.S. government initiated NAFTA's dispute settlement process and requested a WTO dispute settlement panel to investigate the issue.
While the NAFTA process never got underway, the WTO panel (in its January 28, 2000 ruling) agreed with the United States that Mexico did not properly establish injury to its entire domestic sweetener industry as a result of the alleged dumping, and took action that is inconsistent with WTO anti-dumping rules. The panel found that Mexico had not properly determined the likelihood that HFCS imports from the United States would increase, which is required to establish the threat of injury when current injury cannot be shown, and recommended that Mexico adopt measures to conform with WTO's anti-dumping agreement. Mexico did not appeal this ruling, and agreed to implement the panel's recommendation. Its duties on HFCS imports from the United States, though, remain in place. In September 2000, Mexico announced its compliance with the WTO ruling by (1) making another determination that continued HFCS imports was a threat of injury to its domestic sugar industry, and (2) keeping in place the anti-dumping duties, but (3) deciding to refund with interest the provisional duties collected from June 1997 through January 1998. The U.S. government disagreed that Mexico's action met the WTO recommendations and ruling, and in October 2000 requested that the original dispute panel be reconvened to examine the matter. Due to delays, the WTO panel is now scheduled to complete its work by late May 2001.
Separately, USTR in May 1998 at the request of U.S. corn refiners, initiated a Section 301 investigation of an alleged effort by the Mexican government to encourage and support an arrangement between Mexican sugar producers and soft drink bottlers to limit HFCS purchases by the soft drink industry. A year later, USTR concluded its formal investigation without issuing any determination as to the Mexican government's role in the alleged agreement, but indicated it will continue to examine and consult on HFCS trade issues.
Debate over future U.S. sugar policy was renewed in July 2000, when the Senate Agriculture Committee held a hearing on this topic. Sugar producers and their processors, cane refiners, industrial sugar companies, academics and environmental groups laid out their concerns over the sugar market situation then and presented their respective views on the direction that U.S. sugar policy program should take.
The Commission on 21st Century Production Agriculture, in a report submitted to Congress in late January 2001, concluded that the combination of current market conditions and existing international commitments "create the need for serious consideration of alternatives to the current sugar program." Without making any recommendation, the Commission identified four program options that "individually or in combination, should be evaluated" to continue U.S. commitments allowing foreign sugar access to the domestic marketplace. These are: (1) a marketing loan program for sugar, (2) domestic marketing controls, (3) domestic production controls, and (4) direct payments to sugar producers.
In late April 2001, a representative for sugar producers and processors is tentatively scheduled to offer the production sector's views on the direction of future policy to the House Agriculture Committee. This will occur as part of a series of commodity-specific hearings that the Committee has held this spring to consider the future of farm programs after current authorities expire in 2002. Earlier this spring, the cane sector reportedly was leaning towards marketing controls - an approach tried in the 1991-95 period - as the basis of future policy. The beet sector reportedly was focusing on more immediate issues, such as what should be done with the inventory of CCC stocks and how best to resolve the stuffed molasses and NAFTA issues in its favor. Both sectors have reportedly reached a "unified" position, and their recommendations will be made public at the Agriculture Committee's hearing.
Congressional review of sugar policy is taking place against the backdrop of structural change in the production sector caused by low prices since late 1999, and the prospect of continued financial difficulties in some higher cost sugar producing regions. Some processors recently closed their doors - two beet refining facilities in California, and another raw cane operation in Hawaii. Others face severe financial difficulty or are actively seeking buyers. Imperial Holly Sugar (a firm with both beet and cane refining operations) filed for bankruptcy protection in mid-January 2001, and intends to sell its four beet factories in Michigan to a farmer cooperative by October. Tate & Lyle (a British firm with various sugar and corn sweetener operations in North America) recently extended the deadline for selling its Western Sugar Company operations located in Colorado, Montana, Nebraska, and Wyoming to a newly formed farmer cooperative. Also, U.S. commitments to allow foreign sugar access to the U.S. market under trade agreements (particularly under the terms negotiated in NAFTA) and under those that may be negotiated in the next WTO Round and the Free Trade Area of the Americas (FTAA) raise questions on how much of the U.S. sugar sector can remain competitive over the long run. As a result, some Members of Congress and policy makers in the executive branch are expected to consider a broader range of program alternatives than in the past.
S. 753 (Breaux)
1. (back)Quantities of sugar traded across national borders are designated using metric measure (metric tons and kilograms). In the domestic U.S. market, quantities are expressed using English measure (short tons and pounds). Throughout this brief (except in the Sugar Trade Issues section), quantities that refer to international trade commitments and import quotas are converted from metric to English measure. For reference, a metric ton equals 1.1023 short tons; conversely, one short ton equals 0.907 metric tons.
4. (back)The text is referenced and printed in North American Free Trade Agreement Supplemental Agreements and Additional Documents, Message from the President of the United States, House Document 103-160, November 4, 1993, pp. 1, 98-101. The sugar side letter is described in the summary of NAFTA's sugar trade provisions in the "Statement of Administrative Action" (pp. 71-72) accompanying the North American Free Trade Agreement Implementation Act, found in North American Free Trade Agreement, Texts of Agreement, Implementing Bill, Statement of Administrative Action, and Required Supporting Statements, Message from the President of the United States, House Document 103-159, Volume 1, November 4, 1993, pp. 520-521.
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