Near Term Prospects for the U.S. Sugar Industry

Edward Evans, Sikavas Na Lampang and John VanSickle

International Agricultural Trade and Policy Center (IATPC)University of Florida

May 2002

Outline

• Trends in U.S. sugar market• Long & short-term issues• Model• Policy scenarios• Results• Conclusions

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1000

2000

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5000

6000

7000

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9000

10000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Consumption Production Imports Ending Stocks

Trends in U.S. Sugar Consumption, Production, Imports and Stocks, FY 1991-

2001(‘000 metric tons)

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

US Refined US Raw World Refined World Raw

Trends in U.S. and World Raw and Refined Sugar Prices, FY 1991-2001

(U.S. cents a pound)

• New rounds of WTO negotiations on agriculture– Alliance for Sugar Trade Reform and

Liberalization• Proposed formation of FTAA in

2005– Brazil

• Single sugar market between U.S. and Mexico in 2008

Long-Term Issues

• Proposed formation of free trade area with APEC in 2010– Australia

• Impending trade with Cuba– Cuban Humanitarian Trade Act of

1999– Cuban Food and Medicine Security

Act of 1999– U.S.-Cuba Trade Act of 2000

Long-Term Issues

• Farm Security & Rural Investment Act • High-tier sugar imports from Mexico

to the U.S.• How the two sweetener trade

disputes with Mexico are resolved.– Validity of the Side Letter Agreement– Access to the Mexican market for U.S. corn syrup

(HFCS) – Recent Mexican proposal to tax soft drinks

containing corn syrup but not sugar

Near-Term Issues

1. Farm Security & Rural Investment Act:– Honors International Sugar Commitments

• Effectively increases minimum TRQ from 1.13 to 1.38 million metric tons (MMT)

– Reduces the Burden on Producers• Terminates marketing assessments• Eliminates the forfeiture penalty• Eliminates the 1-percentage point payment above

the CCC’s cost of borrowing– Reestablishes No-Net-Cost Feature of

Program• Reinstates marketing allotments for domestically

grown sugar• Pre-Plant Payment-in-Kind Program

Near-Term Issues

Raw Cane Sugar Old Farm Bill

(Cents/lb)

New Farm Bill

(Cents/lb)Loan rate 18.08 18.08Less forfeiture penalty 1.00 0.00Effective loan rate 17.08 18.08Plus Cost of Loan Redemption and Marketing - Interest expense - Transportation costs - Location discounts

0.911.410.20

0.901.410.20

Effective (Target) Price 19.60 20.59

Calculation of U.S. Average Effective Loan Rate and Target Price for Raw Sugar

2.High-tier sugar imports from Mexico to the U.S.

Near-Term Issues

Selected Second-Tier of the U.S., 1995-2008

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US ce

nts p

er p

ound

Mexico’s Raw Sugar

Most Countries’ Raw Sugar

Years

Year Target Price

High Tariff

Mkting Costs

Implicit Barrier

Max World Raw Sugar Mtk. Price

2001 21.002002 21.002003 21.002004 21.002005 21.002006 21.002007 21.00

Mexico’s High Tier Tariff Scenarios*, 2001-07

(U.S. cents/lb)

*Assumption: Loan Rate of 18 cents a pound, for raw sugar

Year Target Price

High Tariff

Mkting Costs

Implicit Barrier

Max World Raw Sugar Mtk. Price

2001 21.00 10.582002 21.00 9.072003 21.00 7.562004 21.00 6.042005 21.00 4.532006 21.00 3.022007 21.00 1.51

Year Target Price

High Tariff

Mkting Costs

Implicit Barrier

Max World Raw Sugar Mtk. Price

2001 21.00 10.58 1.002002 21.00 9.07 1.002003 21.00 7.56 1.002004 21.00 6.04 1.002005 21.00 4.53 1.002006 21.00 3.02 1.002007 21.00 1.51 1.00

Year Target

Price(1)

High Tariff

(2)

Mkting

Costs(3)

Implicit

Barrier

(4)

Incentive to Ship to

US(1)- (4)

2001 21.00 10.58 1.00 11.582002 21.00 9.07 1.00 10.072003 21.00 7.56 1.00 8.562004 21.00 6.04 1.00 7.042005 21.00 4.53 1.00 5.532006 21.00 3.02 1.00 4.022007 21.00 1.51 1.00 2.51

Year Target

Price(1)

High Tariff

(2)

Mkting

Costs(3)

Implicit

Barrier

(4)

Incentive to Ship to

US(1)- (4)

2001 21.00 10.58 1.00 11.58 9.422002 21.00 9.07 1.00 10.07 10.932003 21.00 7.56 1.00 8.56 12.442004 21.00 6.04 1.00 7.04 13.962005 21.00 4.53 1.00 5.53 15.472006 21.00 3.02 1.00 4.02 16.982007 21.00 1.51 1.00 2.51 18.49

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2001 2002 2003 2004 2005 2006 2007

Incentive for Mexico to Ship Over-the-Quota Sugar to the U.S. Market, 2001-07

(U.S. cents/lb)

Model

• Modified version of World Sugar Policy Simulation Model– Dr. Won Koo, North Dakota State University– Dynamic partial equilibrium net trade

model– Comprises 18 sugar producing and

consuming countries and regions– Makes specific assumptions about growth

rate of various macroeconomic policy variables

Scenarios

Scenarios ConditionsBaseline

S0 Increased minimum TRQ from 1.13 to

1.38 MMT Mexico allowed to export all of sugar

surplus to U.S. market beginning in FY 2002

No PIK program or direct sugar purchases by government

No restrictions on U.S. sugar productionS1 Same as in baseline (S0) except U.S.

domestic sugar production restricted to 1999 level of 7.5 MMT

S2 Same as in baseline (S0) except U.S. domestic sugar price is maintained at 21 cents/lb for raw sugar (loan rate 18 cents/lb)

U.S. Raw Sugar Price Projections, 2002-06(U.S. cents/lb)

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1999 2002 2003 2004 2005 2006S0 S1 S2

6,800

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400

8,600

1999 2002 2003 2004 2005 2006S0 S1 S2

U.S. Sugar Production Projections, 2001-06

(‘000 metric tons)

1,440

1,460

1,480

1,500

1,520

1,540

1,560

1,580

1999 2002 2003 2004 2005 2006S0 S1 S2

U.S. Sugar Beet Acres Harvested Projections, 2001-06

(‘000 acres)

840

860

880

900

920

940

960

980

1,000

1,020

1999 2002 2003 2004 2005 2006S0 S1 S2

U.S. Sugarcane Acres Harvested Projections, 2001-06

(‘000 acres)

• The near term prospects and indeed the long term prospects for the U.S. sugar industry appear bleak

• It will be virtually impossible to operate the sugar program at no or minimum cost to the federal government

Concluding Remarks