SUGAR AND SWEETENERS February 4, 2000 January 2000, ERS-SSS-227 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- SUGAR AND SWEETENERS is published three times a year (includes yearbook) by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. This release contains only the text of the report -- tables and graphics are not included. Subscriptions to the printed version of the report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock # SUB-SSS-4033, $25/2 issues. ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Contents Summary U.S. Sugar Year Ended, FY 1999 Prices Current Year, FY 2000 High Fructose Corn Syrup Mexican Sugar Special Article Conceptual Overview of the U.S. Sugar Baseline Autofax Access to Sugar-Related Data Internet Access to Sugar-Related Data. Report Coordinator Stephen Haley (202) 694-5247 FAX (202) 694-5884 E-mail: SHALEY@ECON.AG.GOV Principal Contributors Stephen Haley Nydia Suarez Database Coordinator/Graphics & Table Design Fannye Lockley-Jolly Layout & Text Design Wynnice Napper Approved by the World Agricultural Outlook Board. Summary released January 20, 2000. The next Sugar and Sweetener Situation and Outlook is scheduled for release on May 18, 2000. Summaries and full text of Situation and Outlook reports may be accessed electronically via the ERS web site at www.econ.ag.gov. The Sugar and Sweetener Situation and Outlook is published two times a year and supplemented by a yearbook. To order, call 1-800-999-6779 in the United States or Canada. Other areas please call (703) 605-6220. Or write ERS-NASS, 5285 Port Royal Road, Springfield, VA 22161. Summary Beet sugar production for fiscal year (FY) 2000 is projected at a record 4.725 million short tons, raw value (STRV). The National Agricultural Statistics Service (NASS) forecasts the sugarbeet crop at 33.319 million tons. Acreage harvested is forecast at 1.527 million acres, and yield is forecast at 21.8 tons per acre. Both sugarbeet acreage harvested and production, if realized, would represent records. Although yield is projected at less than last year's record, generally good growing and harvesting conditions permitted a clean crop, with beets having higher sugar content than last year. Cane sugar production for FY 2000 is projected at a record 4.025 million STRV. NASS forecasts the U.S. sugarcane for sugar crop at 33.923 million tons. Acreage harvested is forecast at 939,000 acres, and yield is forecast at 36.1 tons per acre. Both sugarcane acreage harvested and production, if realized, would represent records. The raw sugar tariff-rate quota (TRQ) was announced on November 2, 1999, and was set at 1,501,348 STRV. Of this total, 1,251,123 STRV were made available to the office of the U.S. Trade Representative (USTR) for allocation. The remainder is held in reserve, and will be made available to the USTR for allocation at the discretion of the U.S. Department of Agriculture (USDA). The raw sugar TRQ shortfall is expected to be about 65,000 STRV. Along with the refined sugar TRQ that was announced on October 1, 1999, the expected level of the sugar TRQ is projected at 1.225 million STRV. Non-TRQ imports are currently projected at 570,000 STRV. USDA projects raw sugar imports for the Refined Sugar Re-export Program at 250,000 STRV, for the Sugar Containing Products Re-export Program at 175,000 STRV, and for the Polyhydric Alcohol Program at 15,000 STRV. Given the narrowing of the margin between U.S. and world raw sugar prices, USDA projects that only 5,000 STRV of high-tier tariff sugar (HTS) will enter the United States this fiscal year. After the Court of International Trade in New York revoked the U.S. Customs Service's reclassification of sugar syrups and thereby returned them to their low-duty status under HTS 17029040, the USDA raised its projection of sugar extracted from the syrups and entering U.S. marketing channels to 125,000 STRV. Deliveries for FY 2000 are projected at 10.250 million STRV. This total is the summation of the following individual components: 10.053 million STRV for domestic food and beverage use; 175,000 STRV for the Sugar Containing Products Re-export Program; 15,000 STRV for the Polyhydric Alcohol Program; and 7,000 STRV for feed use. Ending stocks for FY 2000 are projected at 1.684 million STRV. The projected ending stocks-to-use ratio is 16.0 percent, about the same level as the ratio for FY 1999. The combined production of high fructose corn syrup (HFCS) for 1999 is forecast at 9.417 million short tons, dry weight, representing growth of only 2.86 percent over the previous year. The distribution of growth among the components of the HFCS complex has been unusual in that HFCS-55 growth has been much lower than HFCS-42. The growth of HFCS-55 in 1999 over the total for 1998 is forecast at 47,000 tons, or 0.8 percent higher. The growth of HFCS-42 production in 1999 over the total for 1998 is forecast at 220,000 tons, or 6.67 percent higher. USDA forecasts Mexican 1999/2000 sugar production at 5.200 million metric tons, raw value (MTRV). An additional 10,000 hectares have been planted, and improved weather conditions are expected to lift cane yields to about 72.2 tons per hectare. The sugarcane crop is forecast at 45.5 million tons, an expected increase of 1.91 million tons over 1998/99. The sugar recovery rate is forecast at 11.4 percent, about the same level as the previous year. USDA forecasts sugar consumption for 1999/2000 at 4.4 million MTRV, the same as estimated for 1998/99, and forecasts sugar exports at 900,000 MTRV. Ending stocks for 1999/2000 are forecast at 744,000 MTRV. Autofax Access to Sugar-Related Data (ERS) From your fax machine, call (202) 694-5700 and listen to voice prompts to have the following documents automatically downloaded to your fax machine. You may request up to three documents in one phone call. Directory Identification Numbers and Titles: Sugar and Sweeteners: 12626 World Agricultural Supply and Demand Estimates for Sugar 12627 3 pages (1) Wholesale refined beet sugar prices, Midwest market, 1960-present, monthly, quarterly, annual, fiscal (2) U.S. raw sugar price, duty-fee paid, New York, 1960-present, monthly, quarterly, annual, fiscal (3) U.S. retail refined sugar prices, 1975-present, monthly, quarterly, annual 12628 5 pages (1) Wholesale list prices for HFCS-42, Midwest market, 1975-1995, monthly, quarterly, annual, fiscal (2) Wholesale list prices for HFCS-55, Midwest market, 1981-1995, monthly, quarterly, annual, fiscal (3) Wholesale list prices for glucose corn syrup, Midwest market, 1975-present, monthly, quarterly, annual, fiscal (4) Wholesale list prices for dextrose, Midwest market, 1975-present, monthly, quarterly, annual, fiscal (5) U.S. producer price index for HFCS and sugar, monthly, annual, 1986-present 12629 2 pages (1) World raw sugar prices, 1960-present, monthly, quarterly, annual, fiscal (2) World refined sugar prices, 1980-present, monthly, quarterly, annual, fiscal 12630 2 pages (1) U.S. and world sugar prices, 1990-present, monthly, quarterly, annual, fiscal 12631 3 pages (1) Net cost of corn starch to U.S. wet-millers, Midwest markets, 1985-present 12632 3 pages (1) U.S. sugar (including Puerto Rico) supply and use, fiscal years, 1980/81-present 12633 10 pages (1) The Beet Sugar Industry of Minnesota and North Dakota: Current Situation and Prospects, by Ron Lord, September 1994 Sugar and Sweetener Situation and Outlook Report 12634 Text Boxes, Graphs, and Tables, September 1997 S&O Report, 10 pages "HFCS Trade Dispute With Mexico," by Jacqueline Salsgiver; "Origin of the U.S. Sugar Import Tariff-Rate Quota Shares," by Nydia Suarez; and "Changing Structure of the U.S. Refined Sugar Market," by Ron Lord and Robert Barry, September 1997 Sugar and Sweetener Situation and Outlook Report For more information on specially crops, contact the following subject matter specialists: Sugar & Sweetener: Fannye Jolly, (202) 694-5249 Vegetables: Gary Lucier (202) 694-5253 Tobacco: Tom Capehart (202) 694-5311 Fruit & Tree Nuts: Susan Pollack (202)694-5251 & Agnes Perez (202)694-5255 Industrial Uses and Alternative Agriculture: Lewrene Glaser (202) 694-5246 Internet Access to Sugar-Related Data Home Pages Main Data Directory: http://usda.mannlib.cornell.edu/cgi-usda/agency.cgi?ers U.S. Department of Agriculture (USDA): http://www.usda.gov Economic Research Service (ERS): http://www.econ.ag.gov Office of the Chief Economist, USDA: http://www.usda.gov/agency/oce/ World Agricultural Outlook Board (WAOB): http://www.usda.gov/agency/oce/waob/waob.htm National Agricultural Statistics Service (NASS): http://www.usda.gov/nass/ Foreign Agricultural Service (FAS): http://www.fas.usda.gov/ Reports ERS Sugar & Sweetener Situation and Outlook Reports (including text of reports): http://usda.mannlib.cornell.edu/reports/erssor/specialty/sss-bb ERS Sugar Yearbook Data (May 1999): http://usda.mannlib.cornell.edu/data-sets/specialty/89019/ Sugar Statistical Compendium (1991): http://usda.mannlib.cornell.edu/data-sets/specialty/91006/ U.S. Corn Sweetener Statistical Compendium (1993): http://usda.mannlib.cornell.edu/data-sets/specialty/94002/ Farm Sector Cost of Production: Sugarbeets: Analysis, 1997-98: http://www.econ.ag.gov/briefing/farmincome/car/beets2.htm Data, 1981-98: http://www.econ.ag.gov/briefing/fbe/farmincome/beets3.htm Sugarcane: Analysis, 1995-96: http://www.econ.ag.gov/briefing/farmincome/car/cane2.htm Data, 1981-96: http://www.econ.ag.gov/briefing/farmincome/car/cane3.htm World Agriculture Supply and Demand Estimates Report (WASDE): http://www.usda.gov/oce/waob/wasde/wasde.htm February 1999 Outlook Forum: http://www.usda.gov/agency/oce/waob/outlook99/99speeches.htm Sugar: U.S. Sugar Re-export Programs, Foreign Agricultural Service (FAS): http://www.fas.usda.gov/htp/sugar/sugarpg.html Foreign Agricultural Service Report from Foreign Countries (includes sugar reports): http://www.fas.usda.gov/scriptsw/AttacheRep/attache_frm.idc Sweetener Market Data, Farm Service Agency (FSA): http://www.fsa.usda.gov/ao/epas/dsa/sugar/coversu.htm U.S. Sugar On January 12, 2000, the U.S. Department of Agriculture (USDA) released its latest supply and use estimates for fiscal year (FY) 1999 and projections for FY 2000. Year Ended, FY 1999 Crop campaigns ended in Louisiana, Florida, and Texas for a combined total of 3.495 million short tons, raw value (STRV) through August. The Louisiana 1999/2000 campaign began in mid-September due to a large projected crop and added an additional 69,000 STRV to the estimate for cane sugar production for FY 1999. The Hawaiian 1999 crop campaign began in February and totaled 301,000 through September. Because the Hawaiian campaign extends through December, the October-December portion of the 1998 campaign, totaling 83,000 STRV, is counted in FY 1999. Together with the 3,000 STRV produced in Puerto Rico, the cane sugar estimate for FY 1999 is 3.951 million STRV. Beet sugar production for FY 1999 finished strongly and is currently estimated at 4.423 million STRV. Beet sugar production continued throughout the year due to recovery of sugar from molasses and from stored thick juice. Also, a large anticipated crop for FY 2000 caused the campaign to start more strongly at an earlier date. September 1999 beet sugar production is estimated at 353,650 STRV, the highest level since 1993 and well above the 292,000 STRV average for 1994-98. Tariff-rate quota (TRQ) imports totaled 1.252 million STRV. The TRQ shortfall is estimated at about 57,500 STRV, implying that about 96 percent of the allocated TRQ was actually filled. Non-TRQ imports are estimated at 567,000 STRV. Non-TRQ components include sugar imported for the Refined Sugar Re-export Program (200,000 STRV), for the Sugar Containing Products Re-export Program (174,000 STRV), and for the Polyhydric Alcohol Program (12,000 STRV). Sugar extracted from imported sugar syrups classified under HTS 17029040 at a low duty contributed 115,000 STRV. High-tier tariff imports, largely from Mexico, totaled 67,000 STRV. They did not rise to higher levels because the difference between U.S. No. 14 Contract raw sugar prices and Mexican export sugar values declined during the summer, making it less profitable for traders to enter the sugar into the U.S. market. Sugar exports under the Refined Sugar Re-export Program are estimated to have been 230,000 STRV. Total deliveries for domestic food and beverage uses, re-exported products, polyhydric alcohol, and feed uses are estimated at 10.066 million STRV, over 2.5 percent higher than the last fiscal year. Compared with the previous year, beet processor deliveries increased 3.1 percent, while cane sugar refiners' deliveries increased 1.8 percent. Ending stocks are estimated at 1.639 million STRV, implying an ending stocks-to-use ratio of 16.0 percent. Prices U.S. raw sugar prices (nearby futures, C.I.F., duty-paid, Contract No. 14, New York) averaged 17.87 cents per pound during December, up 42 points from the November average. The range for the month was 160 points, from a low of 16.65 on December 1 to a high of 18.24 on December 30. May No. 14 futures prices averaged 18.34 cents in the first 8 market days of January, with a maximum and a minimum price of 18.50 cents and of 18.28 cents per pound, respectively. Prospects for larger domestic beet and cane crops, increasing U.S. sugar deliveries, and the outlook for lower 1999/2000 U.S. sugar carryover stocks continue to pressure raw and refined sugar prices. Wholesale refined beet sugar prices (F.O.B. plant, Midwest markets) have come down to 25.00 cents a pound in mid-January, reflecting the pressure of a larger 2000 crop. World raw sugar prices, which have been in steady decline since mid-1998, closed the year as low as 6.00 cents per pound, 2.59 cents a pound below a year ago. The outlook remains negative as bumper crops in major exporting countries continue to be met with weak demand. As of January 12, the world raw sugar prices averaged 5.84 cents a pound, with a maximum of 6.20 cents a pound and a minimum of 5.54 cents. Current Year, FY 2000 Production Beet sugar production for FY 2000 is projected at 4.725 million STRV. The National Agricultural Statistics Service (NASS) estimates the sugarbeet crop at 33.319 million tons. Acreage harvested is forecast at 1.527 million acres, and yield is forecast at 21.8 tons per acre. Both sugarbeet acreage harvested and production, if realized, would represent records. Although yield is projected at less than last year's record, generally good growing and harvesting conditions permitted a clean crop, with beets having higher sugar content than last year. Beets entered storage in good condition. Sugar production over the next few months, however, remains vulnerable to warmer than average winter temperatures that last year posed significant threats to storage conditions and lowered producer returns, especially in the Red River Valley. Beets sliced through November equaled 10,396,000 tons, the highest level since FY 1996. The cumulative extraction of sugar from sliced beets is estimated at 265 pounds per ton. This rate of sugar extraction is about 20 pounds per ton greater than last year's rate through November and about 11 pounds per ton greater than the average through November for FY 1994-1998. Higher sugar content than last year in the beet crop should imply good recovery of sugar from the desugaring of molasses. Cane sugar production for FY 2000 is projected at a record 4.025 million STRV. NASS estimates the U.S. sugarcane for sugar crop at 33.923 million tons. Acreage harvested is estimated at 939,000 acres, and yield is estimated at 36.1 tons per acre. Both sugarcane acreage harvested and production, if realized, would represent records. Cane sugar in Florida is currently projected at 1.965 million STRV. NASS estimates sugarcane for sugar at 15.727 million tons and acreage harvested at 443,000 acres. Although acreage harvested is estimated at 17,000 acres more than last year, yield is estimated significantly lower at 35.5 tons per acre, compared with 40.1 tons per acre last year. Sugar yield is projected at 4.44 tons per acre, which is lower than last year (5.00 tons per acre) and the previous year (4.57 tons per acre). The largest Florida producer, U.S. Sugar Corporation, began its harvest in mid-October and plans to run about a 190-day campaign, taking the harvest into late April. Early-season plans called for a 7.8-million-ton cane crop, producing about 850,000 STRV of raw sugar. U.S. Sugar's refinery enters its second year of operation with a capacity of about 1,800 tons per day, likely producing about 540,000 STRV of refined sugar for the year. The Sugar Cane Growers Cooperative of Florida planned to harvest about 77,600 acres (up 12,200 acres from FY 1999), producing more than 388,000 STRV of sugar (up 60,000 STRV from FY 1999). Raw sugar factories associated with Flo-Sun, Inc. planned to harvest 800,000 acres, up over 5 percent from the previous year. Cane sugar in Louisiana is currently projected at a record 1.600 million STRV. NASS estimates sugarcane for sugar at a record 14.355 million tons and acreage harvested at a record 435,000 acres. If one includes sugarcane for seed acreage, total sugarcane acreage in Louisiana now exceeds Florida sugarcane acreage by 5,000 acres. With more than 60 percent of total acreage being comprised by the variety LCP85-384, sugarcane yields have reached a record 33.0 tons an acre. The Louisiana harvest season began early in mid-September due to the large anticipated crop. Most of the harvest was completed by the end of the year. Harvest conditions were nearly ideal, with relatively dry weather that helped sugar content in the cane, and there were no damaging freezes. Cane sugar in Texas is currently projected at 95,000 STRV. NASS estimates sugarcane for sugar at 976,000 tons and acreage harvested at 28,700 acres. Harvest conditions have been good, with dry weather, cool nights, and the absence of freezes. NASS forecasts a cane yield of 34.0 tons per acre, the highest since FY 1996. Sugar content is also reportedly high. The harvest has progressed quickly and should be completed soon. Acreage for sugarcane for seed has been estimated unusually high at 2,500 acres, about 8 percent of total sugarcane acreage. It is anticipated that sugarcane acreage may, as a result, increase to 40,000 acres next year. Cane sugar in Hawaii is currently projected at 360,000 STRV. Unlike the other cane-producing areas, current NASS estimates cover the calendar year 1999, most of which is relevant for FY 1999 and not FY 2000. Sugar production for October and November, counted in FY 2000, is estimated at 58,650 STRV, about 75.3 percent of last year's amount. The closing of the Pioneer Mill on Maui is expected to reduce sugar production by about 25,000 STRV. However, technical improvements occurring in other mills, especially by the Hawaiian Commercial & Sugar Company on Maui, are expected to contribute an offset to the decline in sugar production due to the Pioneer closing. Cane sugar in Puerto Rico is currently projected at 5,000 STRV. Only one mill is expected to be operating in FY 2000. Unresolved financing problems continue to plague the industry, calling into question the future of continued sugar production in what was once a viable industry. TRQ Imports The USDA did not announce the FY 2000 raw sugar TRQ until November 2, 1999, about 6 weeks later than customary. As was explained in the September 1999 issue of the Sugar and Sweetener Situation and Outlook, the system that the USDA had used since FY 1997 to administer the raw sugar TRQ was no longer viable. The TRQ level had been set in the September prior to the beginning of the new fiscal year so that the projected ending stocks-to-use ratio would match a target level of about 14.5 percent. FY 2000 supply and use projections make continuation of the administrative approach impossible. With total use projected at 10.425 million STRV, ending stocks would have to equal 1.512 million STRV in order to achieve an ending stocks-to-use ratio of 14.5 percent. Total supply excluding the TRQ was projected at 11.096 million STRV in the September World Agricultural Supply and Demand Estimates (WASDE) report, 671,000 STRV above projected total use. The difference between target ending stocks of 1.512 million STRV and 671,000 STRV would imply a level of the sugar TRQ at only 841,000 STRV, below the combined raw and refined sugar TRQ of 1.256 million STRV required under the U.S. World Trade Organization (WTO) minimum access. Another complication was that the Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Act) required that processor loans made under the U.S. Sugar Program during any fiscal year be recourse if the fiscal year raw sugar TRQ is established at or below 1.5 million STRV. The USDA wanted to establish the raw sugar TRQ above the 1.5 million trigger level and allocate an amount close to the minimum WTO level, holding the remainder in reserve to meet potential shortfalls from domestic production. Given these complications, the raw sugar TRQ was not announced in mid-September, and the announcement was further delayed while discussions within the U.S. Government regarding a new administrative approach were ongoing. The raw sugar TRQ was announced on November 2, 1999, and was set at 1,501,348 STRV. Of this total, 1,251,123 STRV were made available to the office of the U.S. Trade Representative (USTR) for allocation. The remainder is held in reserve and will be made available to the USTR for allocation at the discretion of the U.S. Department of Agriculture. The raw sugar TRQ shortfall is expected to be about 65,000 STRV. Along with the refined sugar TRQ that was announced on October 1, 1999, the expected level of sugar imports under the TRQ is projected at 1.225 million STRV. Non-TRQ Imports and Exports Non-TRQ imports are currently projected at 570,000 STRV. Although in October 1999 the USDA had been projecting high-tier tariff imports, mainly from Mexico, at 125,000 STRV, this projection was reduced to just 5,000 STRV as a result of declining margins between U.S. raw sugar prices and Mexican export prices. Also in October, the USDA had been projecting the sugar extracted from sugar syrups entering at low-duty under HTS 17029040 at 10,000 STRV. This projection had been based on a decision of the U.S. Customs Service in September to reclassify the product and make it subject to a much higher duty. However, the reclassification was overturned by the Court of International Trade in New York in October. Although the U.S. Sugar Beet Association is appealing the ruling, the USDA revised its projection and now projects that sugar equivalent to 125,000 STRV will enter the United States this fiscal year. The USDA also projects that 15,000 STRV will enter the United States under the Polyhydric Alcohol Program. In October, USDA had projected raw sugar imports for the Refined Sugar Re-export Program at 175,000 STRV, and also projected raw sugar imports for the Sugar Containing Products Re-export Program at 175,000 STRV. The USDA had also projected that refined sugar exports and sugar contained in re-export products under the two re-export programs would exactly equal, in raw value, the amount of sugar permitted to be imported under the programs. On October 26, 1999, before the announcement of the raw sugar TRQ, USDA extended a waiver to C&H Sugar Company, Inc. that allowed it to import an additional 50,000 metric tons, raw value (MTRV) over and above its original re-export license of 50,000 MTRV. The waiver also extended the period over which an equivalent quantity of refined sugar had to be re-exported from the standard 90 days to 5 years. Because it had been assumed that C&H would import 25,000 STRV under its original license and then re-export the equivalent sugar in raw value under one of the re-export programs within the fiscal year, the USDA increased, in the December WASDE, projected non-TRQ imports by the additional 75,000 STRV to reflect the effect of the October waiver. The USDA made no corresponding adjustments to export projections for FY 2000, given the 5-year period permitted for re-export. On December 29, 1999, the USDA specified that the re-export period granted in the original waiver be reduced to 180 days. To facilitate the export of the sugar, the USDA allowed the sugar to be exported as either raw or refined sugar or some combination of the two. Because the 180 days fell within the fiscal year, the USDA increased its projection of sugar exports under the Refined Sugar Re-export Program from 175,000 to 250,000 STRV in the January 2000 WASDE. Deliveries and Ending Stocks Deliveries for FY 2000 are projected at 10.250 million STRV. This total is the summation of the following individual components: 10.053 million STRV for domestic food and beverage use; 175,000 STRV for the Sugar Containing Products Re-export Program; 15,000 STRV for the Polyhydric Alcohol Program; and 7,000 STRV for feed use. Total deliveries for 1999/2000 through November total 1.868 million STRV, about 7.7 percent higher than the same period of last fiscal year. Deliveries by beet sugar processors have been especially high: 831,000 STRV through November, about 14.2 percent higher than the same period last year. Deliveries by cane sugar refiners at 977,000 STRV have been running very close to last year's deliveries. Deliveries to all categories of end-users through November except non-food uses show increases over the same period last year. Ending stocks for FY 2000 are projected at 1.684 million STRV. The projected ending stocks-to-use ratio is 16.0 percent, about the same level as the ratio for FY 1999. Mexican Sugar The USDA currently estimates Mexican sugar production for 1998/99 at 4.985 million tons, raw value (MTRV). Although sugarcane harvested hectares had increased 4,000 hectares from the previous year to 636,000 hectares, dry weather conditions contributed to poor cane yields, estimated at 68.5 metric tons (mt) per hectare, an 8.5 percent decrease from the previous year. Sugar consumption for 1998/99 is estimated at 4.4 million MTRV, which is an increase of 160,000 MTRV over the forecast made in April 1999. The increase is attributable to increased consumer purchasing power and lower sugar prices. Demand for refined sugar by the soft drink industry is estimated between 1.2 to 1.4 million tons. Although lower sugar prices relative to high fructose corn syrup (HFCS) has helped sugar demand, sales of bottled water and diet soft drinks have increased relative to sweetened soft drinks, thereby limiting growth in demand for sugar by the industry. Although USDA had forecast 1998/99 Mexican sugar exports at 955,000 MTRV in the spring of 1999, the estimate was revised downward to 500,000 MTRV in November due to very low world sugar prices. As a result, the estimate for ending stocks increased to 844,000 MTRV, up 230,000 MTRV from the April 1999 forecast. The sugar production forecast for 1999/2000 is 5.200 MTRV. An additional 10,000 hectares have been planted, and improved weather conditions are expected to lift cane yields to about 72.2 tons per hectare. The sugarcane crop is forecast at 45.5 million tons, an expected increase of 1.91 million tons over 1998/99. The sugar recovery rate is forecast at 11.4 percent, about the same level as the previous year. According to Mexican sources, the 1999/2000 sugarcane harvest began the week of November 13. Slightly over 6.5 million tons of cane had been harvested through January 8, 2000, and nearly 650,000 mt, tel quel, of sugar had been produced. Although the amount of sugar produced to date is only slightly above the comparable level for last year, the implied recovery rate is notably above comparable to-date rates for the last several years (figure 4). The sugar consumption forecast for 1999/2000 is 4.4 million MTRV, the same as estimated for 1998/99. The same economic conditions and sweetener consumption trends are expected to apply. The high compensatory duties on imports of HFCS are expected to limit HFCS sales, thereby supporting the demand for refined sugar by the soft drink industry. Although world sugar prices are likely to remain low, USDA maintains its forecast of 1999/2000 sugar exports at 900,000 MTRV. Although the Mexican Government provides assistance on sugar storage as an alternative to exports, the Government targets 600,000 MTRV as a desired level. The increase in Mexican sugar supply due to greater carryover stocks and greater expected production puts additional pressure on Mexico to export, in spite of the low return in the world market. Ending stocks for 1999/2000 are forecast at 744,000 MTRV. Conceptual Overview of the U.S. Sugar Baseline: Incorporating the Effects of the North American Free Trade Agreement By: Stephen L. Haley ---------1/ --------- 1/ Agricultural economist, Market and Trade Economics Division, Economic Research Service, USDA --------- Abstract: The U.S. Department of Agriculture (USDA) releases its U.S. sugar baseline projections at the Agricultural Outlook Forum in February. This article presents a conceptual overview of a new approach for making U.S. sugar projections. The new approach is necessary because it is now recognized that price-sensitive Mexican imports are and will be very important sources for sugar in the U.S. market. The price-sensitive imports are the high-tier tariff imports through fiscal year 2007 and the unconstrained duty-free imports thereafter. Their importance is heightened because of the minimum access level of the U.S. sugar tariff-rate quota (TRQ) that is part of the trading rules of the World Trade Organization. The minimum access requirement restricts the USDA's ability to offset the effects of the high-tier tariff imports. Additionally, restrictions on the USDA to respond begin in the early stages of the baseline period because of projected record U.S. sugar production levels that drive the sugar TRQ to the minimum access level. Keywords: baseline, economic model, NAFTA, side letter agreement to NAFTA, sugar. Conceptual Overview of the U.S. Sugar Baseline: Incorporating the Effects of the North American Free Trade Agreement The U.S. Department of Agriculture (USDA) releases its U.S. sugar baseline projections at the Agricultural Outlook Forum in February. A central feature of the new baseline is that price-sensitive Mexican imports are very important in determining the course of U.S. sugar baseline projections. Their importance is heightened because the USDA is likely to be very constrained in its ability to limit sugar tariff-rate quota (TRQ) imports because of U.S. World Trade Organization (WTO) minimum access commitments, coupled with projected rising U.S. sugar production. The purpose of this article is to discuss the conceptual underpinnings of the new USDA approach to making sugar baseline projections. Most of the analysis relies on graphical tools to emphasize an intuitive understanding of the theoretical underpinnings. The key to the analysis is the market for price-sensitive Mexican sugar in the United States. Implicit is the ability to project Mexican export potential and emphasize the factors that determine the destination of the exports. How the United States is affected must be addressed to provide policymakers an accurate basis for developing policy options. Factors Affecting the U.S. Sugar Baseline In recent years production and deliveries projections for the baseline have been made independently of each other. USDA would contact individuals familiar with sugar developments in both production and consumption who could add to the Department's established base of technical expertise in making projections. After production and deliveries projections were developed, the level of the sugar tariff-rate quota was specified such that the ending stocks projection was at a level consistent with USDA's target for the ending stocks-to-use ratio. In recent years this target has been 14.5 percent, a level deemed consistent with the Department's charge to make sure adequate sugar supplies are available to the U.S. public. The USDA approach to making baseline projections must now change. Three factors are combining to force a new approach. First, U.S. production is increasing to record levels. In the November 1999 World Agricultural Supply and Demand Estimates (WASDE) report, U.S. sugar production for fiscal year (FY) 2000 is projected at 8.905 million short tons, raw value (STRV). This level is 646,000 STRV, or 7.8 percent, higher than the projected level published in the February 1999 baseline for FY 2000 (table 1). The second factor is the combined minimum level of the raw and refined sugar TRQs (1.256 million STRV) that the United States agreed to maintain as a result of the Uruguay Round Agreement (URA), now part of the trading rules administered by the WTO. The November 1999 WASDE shows the allocated portion of the FY 2000 sugar TRQ, less anticipated shortfall, at 1.252 million STRV, a level very close to the WTO minimum. Although the sugar TRQ minimum has been factored into past baseline projection exercises, it is the first time that it has been projected as early as November of the fiscal year that only the minimum amount would likely be allocated. Therefore, rising production coupled with the WTO minimum access make it impossible for the USDA to project an ending stocks-to-use ratio close to 14.5 percent. Ending stocks are 336,000 STRV higher than projected in the February 1999 baseline. Also, in FY 2001, duty-free imports from Mexico permitted under terms of the side letter agreement to the North American Free Trade Agreement (NAFTA) will increase from 25,000 metric tons, raw value (MTRV) to as much as 250,000 MTRV, further adding to total supply.---------2/ ---------2/ Under the terms of the side letter agreement, Mexico will have duty-free access to the U.S. market from FY 2001 to FY 2007 for the amount of its net production surplus, up to a maximum of 250,000 MTRV. The net production surplus is equal to Mexican sugar production less Mexican consumption of sugar and high fructose corn syrup. In FY 2008, Mexico will have duty-free access with no quantitative restrictions. --------- Unless production adjusts downward dramatically, the 14.5 percent target for ending stocks-to-use ratios will be even harder to reach in FY 2001 and the next few fiscal years. Increasing stocks would imply the lowering of sugar prices, suggesting that the baseline must be designed to deal with price-induced supply reductions and the possibility of forfeitures to the USDA for non-recourse loans made under terms of section 156 of the Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Act). The third factor forcing a new approach to making sugar baseline projections is the declining NAFTA high-tier tariff schedule for sugar imports from Mexico. For FY 2000, the raw sugar tariff is 12.09 cents a pound, and the refined sugar tariff is 12.81 cents a pound. The raw sugar tariff drops about 1.5 cents each year, and the refined sugar tariff drops about 1.6 cents a year. Both rates reach zero in FY 2008. The high-tier tariff constitutes an element in the definition of a threshold pricing level important for determining whether it is advantageous for Mexico to ship sugar into the U.S. market. The threshold is equal to the sum of the world price of sugar, the high-tier NAFTA tariff rate, unit marketing costs, plus any marketing premium deemed desirable by the Mexican Government. The economic incentive for Mexico to export high-tier tariff sugar exists if the pricing threshold is less than or equal to a comparable U.S. sugar price. Given the declining tariff schedule, high-tier tariff imports further threaten the USDA's ability to target particular levels of ending stocks-to-use ratios in creation of long term forecasts. U.S. Sugar Supply The components of U.S. sugar supply are: (1) beginning stocks held by cane processors, cane refiners, and beet processors; (2) U.S. cane and beet sugar production; (3) the raw and refined sugar TRQ whose minimum allocation levels have been bound in the WTO; (4) duty-free sugar from Mexico whose maximum levels have been bound by the side letter agreement to the NAFTA through FY 2007; (5) imports of sugar syrups entering under HTS 1702.90.4000 from which the sugar is extracted; (6) high-tier tariff sugar; and (7) sugar imports entering under the Refined Sugar and Sugar-Containing Products Re-export Programs, and under the Polyhydric Alcohol Program. Figure A-1 isolates several supply components important for analysis. The U.S. price of sugar is measured on the vertical axis, and sugar quantity on the horizontal. Production represents the largest source of U.S. sugar supply. It is shown as the right-most curve in the left panel. Except in the low price range, the production curve is drawn as very inelastic, reflecting that most production decisions are made prior to the marketing year on the basis of expected prices rather than actual prices. The upward shape of the production curve the in low price range allows for sugar prices that are sufficiently low such that producers' and/or processors' variable costs cannot be covered, and less sugar is produced through acreage abandonment or reduced factory activity. The sugar TRQ and duty-free sugar from Mexico are shown as relatively inelastic curves defined above the world price. Sugar syrup imports from which the sugar is recovered are shown as a price elastic curve. Because the syrups are profitable to import only because of high domestic prices relative to world levels, the curve is defined only in the region of high domestic prices. Sugar entering under the Re-export and Polyhydric Programs are omitted because they do not consistently affect domestic U.S. prices. Stockholding activity is explained below. The U.S. sugar supply curve is shown in the right panel as the horizontal summation of the individual curves in the left panel. Except at prices close to world levels, the supply curve is very inelastic, i.e., unresponsive in the short run to changes in same-period prices. The supply curve is redrawn in the left panel of figure A-2, simplifying somewhat the contour by emphasizing the price-inelastic nature above the world price. Added to the left panel in figure A-2 is a downward sloping demand curve. This curve represents the aggregation of sugar demand by end users, including food processors, beverage industries, non-food sugar users, and non-industrial users. Stockholding activity is implicit in the diagrams. Differences between beginning and ending stocks represent dynamic adjustments to changes in supply-demand fundamentals and are difficult or confusing to portray in a static equilibrium framework. An accumulation of stocks can be thought of as an increase in the length of time that sugar remains in inventory before being sold and delivered. Because stockholding is an activity whose costs increase over the time of the holding, stock accumulation puts downward pressure on prices that help restore the supply-demand equilibrium. The demand for high-tier tariff imports is shown in the right panel of figure A-2. It is the excess of demand over supply at prices lower than the price associated with the intersection of the supply and demand curves in the left panel. Until recently it has been the case that high-tier tariffs have been set at prohibitively high levels so that any supply curve represented in the right panel would always lie above the U.S. excess demand curve for high-tier imports. Also, the positioning of the excess demand curve was directly manipulatable by the USDA. The size of the sugar TRQ could be adjusted to counteract supply changes emanating from production, duty-free NAFTA imports, sugar syrup imports, or unanticipated stock changes. Setting the sugar TRQ on the basis of attaining an ending stocks-to-use ratio of 14.5 percent was deemed sufficient to provide adequate U.S. sugar supplies. However, as explained above, large sugar production increases, along with the anticipated ten-fold increase in the duty-free NAFTA import allocation, has pushed the sugar TRQ to the WTO minimum, thus depriving the USDA of a crucial policy instrument. The NAFTA specifies a high-tier tariff schedule that declines yearly until FY 2008 when duties on raw and refined sugar reach zero. In order to understand how high-tier tariff imports and unconstrained duty-free imports affect the U.S. sugar situation, it is necessary to develop a conceptual framework for sugar in Mexico. Sugar in Mexico The left panel of figure A-3 shows a representation of demand for Mexican sugar. It combines two elements. First is the domestic demand that Mexican end users have for sugar. The second element is the sugar eligible to enter the United States duty free under the terms of the side letter agreement to NAFTA. It is shown in the figure at 250,000 MTRV, which presumes that Mexico is a net surplus producer as defined in the side letter in excess of 250,000 MTRV. The two curves are jointed in the right panel (Djt) and an upward sloping Mexican sugar supply curve is included. The horizontal difference between the Mexican supply and demand curves defines excess supplies available for export if no trade distorting policies are used. International demand for sugar from Mexico in figure A-4 is shown to come from the United States and the rest-of-the-world (ROW). The downward sloping curve (EDus) represents U.S. excess demand for high-tier tariff sugar that was derived in figure A-2. The alternative destination is the ROW at price Pw, drawn as a horizontal line reflecting that Mexico is a price-taker in the world market. As drawn, EDus does not incorporate the high-tier tariff on Mexican sugar. TO in the diagram represents an initially high tariff level whose vertical downward displacement from EDus is shown as EDusO . (Marketing costs and price premiums are currently ignored for ease of exposition.) On this effective demand schedule, the world price is always higher than the net return to be gained by selling into the U.S. market. As the tariff becomes smaller (T1), the EDus curve shifts upward by (T1 - TO) to EDus1. The point where EDus1 intersects the Pw line is where Mexico is indifferent between selling into the U.S. or ROW markets. To the left of this intersection point, Mexico would ship only into the U.S. market. At points to the right, Mexico would ship into the United States and the ROW. Figure A-5 joins the right panel of figure A-3 with figure A-4. This figure does not show any policy distortions in Mexico - it serves as a reference standard to be compared with a more realistic depiction below. Exports to the United States occur where the Mexican excess supply curve (ES) intersects EDus1. Total exports OC represented in the figure are shipped only into the U.S. market. The effective selling price in the United States (Pus) is the price sold in Mexico's domestic market (Pmx) plus the tariff T1. A more realistic representation must consider sugar policies that distort the internal Mexican supply and demand balance. First, Mexico maintains import policies that support domestic sugar prices. The Most Favored Nation (MFN) tariff rates bound in the WTO for all products under the 1701 tariff heading are decreasing only modestly, from U.S.$400 per mt (18.14 cents per pound) in 1995 to US$360 per mt (16.33 cents per pound) in 2004. Although Mexico has a minimum access commitment bound in the WTO, the category of items covered under the commitment is wider than sugar alone, thus permitting Mexico to have no imports of world-priced sugar. Additionally, under NAFTA, Mexico is required by FY 2000 to have in place a tariff-rate quota system with rates applied to third countries at the same levels as maintained by the United States. Therefore, Mexico, like the United States, is able to isolate its sugar industry from world market prices. A second distortion arises from marketing quotas enforced by the Mexican Government. After a domestic consumption level has been targeted, the Mexican Government and the sugar industry agree on marketing quotas to be assigned to all individual sugar factories in the nation. Production above the amount allowed into the domestic market must be exported or held in stocks. Because the grower price of sugarcane is tied to the level of sugar prices in the domestic market, producers have an interest in seeing that processors adhere to the quota marketing scheme. Figure A-6 shows the effect of domestic marketing quotas. A reduced quantity of sugar (OA' compared to OA in figure A-5) is consumed domestically at an increased price. The difference is shown as adding to exportable supplies by shifting the excess supply curve in the right panel from ES to ES'. Exports are increased from OC to OE, with OD being shipped into the U.S. market, and DE to the ROW. Additional exports to the United States imply a lower price in the U.S. market in order to absorb the additional sugar as compared with the level illustrated in figure A-5. Implicit in the diagram are two policy parameters that could be used to maximize returns to the Mexican sugar industry. First, the level at which marketing quotas are set becomes a variable to obtain higher than competitive returns in the domestic market. Second, the Mexican Government can regulate the level of exports to the United States by finding a mechanism such as selectively issuing "certificates of origin" that are required for entry of sugar into the United States. Restricting exports can cause U.S. prices to be higher than otherwise and could conceivably become an instrument for extracting rents from U.S. consumers. Mexican Sugar in the United States Apart from the sugar TRQ, U.S. imports of sugar sourced outside of Mexico are likely to be small or confined to specialty types. Whereas figures A-4 through A-6 have shown the international market from the perspective of Mexico, figure A-7 focuses on the U.S. perspective of the high-tier tariff sugar market. In the figure, Mexico's excess supply appears as perfectly elastic up to the point where its exportable supply is exhausted. At that point, the excess supply curve is perfectly inelastic. The elastic portion of the curve corresponds to the threshold price that is the sum of the world price, marketing costs, the NAFTA high-tier tariff, and the price premium desired by the Mexican Government. Over time the excess supply curve exhibits downward movement as the NAFTA high-tier tariff decreases. The top curve ESo shows the tariff as sufficiently high to preclude high-tier tariff imports. The U.S. price Puso lies below Pthro and is determined in the U.S. market where the demand and supply curves intersect. The ES1 curve reflects a lower high-tier tariff and intersects the U.S. excess demand curve along its perfectly elastic range. This implies that Mexico ships to both the U.S. and ROW markets. The U.S. price Pus1 is equal to the threshold price Pthr1, which is lower than Puso. In this situation, the U.S. sugar price is directly linked to the world sugar price. The ES2 curve shows the high-tier tariff at zero and for simplicity, assumes that marketing costs and the price premium are zero, implying that Pthr2 = Pw2. As shown, the U.S. price Pus2 is higher than the world level because the U.S. excess demand curve intersects ES2 along its vertical or inelastic range. Mexico ships all exportable sugar into the U.S. market and does not have enough sugar to meet U.S. sugar demand at a U.S. price equal to Pthr2. Because Mexico does not ship to the ROW, the world price linkage to both the Mexican and U.S. sugar markets is severed. Sugar pricing in the United States becomes a direct function of Mexican export potential. The larger is the potential, the lower is the U.S. price, with a lower constraint being the world price. Mexican Sugar Export Potential The primary conclusion of this article is that in order to project a U.S. sugar baseline, one has to project a Mexican sugar baseline as well. Due to NAFTA and the terms of the side letter agreement, the sugar and sweetener sectors of both countries are bounded together and the bond becomes stronger over time. Table A-2 shows a hypothetical Mexican sugar baseline projection through 2011. It is calibrated on the USDA projection for Mexican sugar supply and disappearance in 2000 that was published in November 1999. It assumes a 1-percent yearly growth in acreage and assumes yearly productivity increases measured in terms of sugar per harvested hectare consistent with recent trends. Sweetener consumption varies proportionally with population and real per capita income growth. It is assumed that consumption of high fructose corn syrup (HFCS) is constrained over the entire projection period to no more than 25 percent of sweetener demand by the Mexican soft drink industry and to no more than 20 percent of sweetener demand of the Mexican food processing industry. Figure A-8 shows Mexican export potential from table A-2 and compares it with a case where Mexican HFCS consumption is assumed to be higher. Specifically, the alternative scenario assumes that the Mexican soft drink and food processing industries begin switching in 2001 a significant portion of their sweetener demand from sugar to HFCS. The transition period lasts 3 years, and by 2003 HFCS constitutes 75 percent of sweeteners used in soft drinks and 30 percent used in food processing. The reduction in demand increases Mexican export potential on a one-to-one basis. Export potential rapidly increases to over 2 million MTRV a year and is more than twice the level of the other scenario where HFCS consumption is less. Implications for U.S. sugar would be greater downward pricing pressure. Other scenarios are possible. It may be the case that the Mexican sugar industry may not perform as well as assumed in table A-2. Garcia and others (1999) have argued that longer term prospects of the Mexican sugar industry are not as robust as those shown in table A-2. They assert that 14 sugar mills accounting for about 20 percent of Mexican production have a multiplicity of problems (low production capacities, low sugarcane yields, low recovery rates, etc.) that make them high-cost producers. Also, because much of the Mexican sugar industry is heavily indebted, many necessary capital improvements are unlikely to be made. Acreage associated with failed mills are unlikely to be able to be used to produce for other mills. Exportable supplies may only be between 124,000 and 904,000 MTRV. Certainly more research on the Mexican sweetener sector is in order. Conclusion The work is ongoing, implying conceptual frameworks should be flexible to account for new and possibly unforeseen problems. ------3/ ------ 3/ The U.S. sugar baseline will be released as part of USDA Agricultural Baseline Projections to 2009 on February 24, 2000. ------ Future articles in the Sugar and Sweetener Situation and Outlook series will provide updates to this process. References Garcia, Luis R., Thomas H. Spreen, Gretchen Greene. "Structural Reform and Implications for Mexico's Sweetener Market," presentation made at the conference entitled Sweetener Markets in the 21st Century, organized by the Food and Resource Dept. (FRED) and Institute of Food and Agricultural Sciences (IFAS), both of the University of Florida, Gainesville, November 14-16, 1999, Miami, Fl. END_OF_FILE