SUGAR AND SWEETENERS YEARBOOK June 05, 2001 May 2001, ERS-SSS-231 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- SUGAR AND SWEETENERS YEARBOOK is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. This release contains only the text of the SUGAR AND SWEETENERS report -- tables and graphics are not included. Subscriptions to the printed version of the report are available from the USDA 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 Current Year, FY 2001 Prices Forecast Year, FY 2002 Mexican Sugar Special Article Assessing Economic Impacts of Liberalizing WTO Sugar Tariff Rates and Minimum Access Commitments by the United States Internet Access to Sugar-Related Data Report Coordinator Stephen Haley (202) 694-5247 FAX (202) 694-5884 E-mail: shaley@ers.usda.gov Principal Contributors Stephen Haley Nydia Suarez Database Coordinator/Graphics & Table Design Fannye Lockley-Jolly Editor Martha R. Evans Layout & Text Design Wynnice Napper Approved by the World Agricultural Outlook Board. Summary released May 24, 2001. The next Sugar and Sweetener Situation and Outlook is scheduled for release on September 27, 2001. Summaries and full text of Situation and Outlook reports may be accessed electronically via the ERS web site at www.ers.usda.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 The U.S. Department of Agriculture (USDA) projects sugar production for fiscal year (FY) 2002 at 8.435 short tons, raw value (STRV), a slight decrease of 64,000 STRV from the total estimated for FY 2001. Cane sugar production for FY 2002 is projected at 4.185 million STRV. Area harvested is not expected to change very much from FY 2001. Florida sugar production for FY 2002 is projected at 2.060 million STRV. Based on a projected sugarcane yield of about 37.25 tons per acre and trend growth in productivity, the expected value of the sugar yield is 4.72 tons per acre. Louisiana sugar production for FY 2002 is projected at 1.675 million STRV. Increased adaption of high yielding cane varieties and a return of more favorable growing weather imply an expected value of sugar yield of 3.61 tons per acre. Texas sugar production for FY 2002 is projected at 165,000 STRV, down from a year earlier due to anticipated lower yields. Hawaiian sugar production for FY 2002 is projected at 270,000 STRV, predicated on improved yields in Maui and Kauai. Puerto Rican production is projected to equal 15,000 STRV. Beet sugar production for FY 2002 is projected at 4.25 million STRV. The USDA's Interagency Commodity Sugar Estimates Committee for sugar projects sugarbeet area harvested at 1.36 million acres. USDA will release the forecast for area harvested in June. Because the refined and raw sugar tariff-rate quotas (TRQ) have not yet been announced by the USDA, they are not projected at this time. Sugar imports outside the sugar TRQ for FY 2002 are projected to total 390,000 STRV. This amount includes an expected 265,000 STRV under USDA Re-export Programs and the Polyhydric Alcohol Program. The USDA projects sugar supply extracted from sugar syrups imported under HTS 17029040 at 100,000 STRV and high-tier tariff sugar imports at 25,000 STRV. Sugar exports are projected at 125,000 STRV, the same as the current fiscal year. After netting out deliveries made for the Sugar-Containing Products and Polyhydric Alcohol Programs, along with deliveries for livestock feeding (20,000 STRV), domestic food and beverage deliveries are projected at 10.320 million. Projected growth is only 95,000 STRV or 0.9 percent. The U.S. Embassy's Office of Foreign Agricultural Affairs in Mexico City forecasts Mexican sugar production for 2001/02 at 5.050 million metric tons, raw value (MTRV). Area harvested for sugarcane is projected at 630,000 hectares, and sugarcane production is projected at 44.0 million metric tons. Harvested area is forecast slightly above the 2000/01 level, and good weather conditions should improve yields over the previous year. Sugar consumption for 2001/02 is projected at 4.535 million MTRV, which is 53,000 MTRV higher than the level estimated for 2000/01. Production and consumption of HFCS in 2001/02 are likely to be levels close to those for the previous year. U.S. cane sugar production for FY 2001 is estimated at 4.079 million STRV, only slightly above the estimated total for FY 2000. Production increases in Florida and Texas are offset by declines in Louisiana and Hawaii. Beet sugar production for FY 2001 is estimated at 4.420 million STRV, based on sugar recovery significantly below that achieved last year. TRQ sugar imports for FY 2001 are estimated at 1.245 million STRV. As of May 3, 2001, sugar imports under the TRQ have amounted to 674,815 STRV, or about 51 percent of the amount estimated to enter for FY 2001. Sugar imports outside the sugar TRQ for FY 2001 are estimated to total 453,000 STRV, including 330,000 STRV under the combined Refined Sugar Re-export Program, the Sugar-Containing Products Program, and the Polyhydric Alcohol Program. Based on the pace to date, the USDA estimates sugar supply extracted from sugar syrups imported under HTS 17029040 at 100,000 STRV. High-tier tariff sugar imports for FY 2001 are estimated at 8,000 STRV. Total deliveries for FY 2001 are estimated at 10.345 million STRV. After netting out deliveries made for the Sugar-Containing Products and Polyhydric Alcohol Programs, along with deliveries for livestock feeding (20,000 STRV), domestic food and beverage deliveries are estimated at 10.225 million. Sugar exports occurring under the Refined Sugar Re-export Program are estimated at 125,000 STRV. Ending stocks are estimated at 1.946 million STRV, for an ending stocks-to-use ratio of 18.6 percent. Of the total, the Commodity Credit Corporation owns 793,205 STRV. The ratio of privately held ending stocks-to-use is estimated at 11.8 percent. U.S. Sugar On May 10, 2001, the U.S. Department of Agriculture (USDA) released its latest supply and use estimates for fiscal year (FY) 2001 and projections for FY 2002. Current Year, FY 2001 Cane Sugar Production Cane sugar production for FY 2001 is estimated at 4.079 million STRV, only slightly above the estimated total for FY 2000. Production increases in Florida and Texas were offset by declines in Louisiana and Hawaii. Florida cane sugar production is estimated at 2.054 million STRV. The total would have likely been higher had not the crop suffered from the effects of cold weather in January. These effects were not readily evident until close to the end of the harvest season. Although the USDA had been projecting in January a recovery rate of 13.2 percent, the realized rate is currently estimated at 12.7 percent, based on a sugarcane crop estimated at 16.169 million tons by the National Agricultural Statistics Service (NASS). Louisiana cane sugar production is estimated at 1.570 million STRV. Sugarcane production is estimated at 13.950 million tons, a decrease of 275,000 tons from last year. Crop growing conditions were difficult due to a continuing lack of adequate moisture. Although the sugarcane harvest started at a normal pace in September, muddy conditions beginning in mid-October made progress difficult. Although sugar per acre was down 0.48 tons from the previous year, the ratio at 3.38 tons per acre was the second highest recorded for Louisiana. The high ratio can be attributed to the high percentage of sugarcane constituted by the high-yielding LCP 85-384. Texas cane sugar production is estimated at 200,000 STRV. NASS estimates the sugarcane crop at 1.734 million tons, over 80 percent higher than the crop for the previous year. The harvest season ran well into May. Sugar yield per acre is estimated at 4.35 tons, a record. Hawaii sugar production for FY 2001 is estimated at 240,000 STRV, down 78,000 STRV from last year. Part of the decrease is likely to be permanent due to closure of the two mills on Kauai that were run by AMFAC/JMB, and one of the mills on Maui run by Hawaiian Commercial and Sugar (HCS). There are now only two mills left in Hawaii. Although HCS expects to have the capability of processing the same amount of sugarcane with its remaining mill, the current harvest season has been difficult because of ongoing drought conditions. The firm on Kanai, Gay and Robinson, will be harvesting some of the old AMFAC/JMB acreage but yields are expected to be low because of poor field conditions. Also, the Gay and Robinson harvest was delayed due to a dispute with AMFAC/JMB on the use of port facilities for shipping the island's sugar. Although Puerto Rico's sugar production for FY 2001 continues to be estimated at 15,000 STRV, it is very unlikely that it will reach this level. Earlier expectations that the two sugar mills that exist on the island will be back in production this year disappeared in mid-April when the administrator of Central Agraso announced that they will not operate due to lack of money to make necessary factory repairs. They argued that the incoming Puerto Rico Government did not come through with what they promised during the campaign. On the other hand, Central Roig, which has been closed for the last 2 years, and was expecting to come back this year, is also having financial difficulties. Central Roig announced that it was ceasing operations as of the end of April due to the lack of government assistance. This mill was expecting to produce 12,000 tons of sugar but now this estimate has been reduced to no more than 6,000 tons. Beet Sugar Production Beet sugar production for FY 2001 is currently estimated at 4.420 million STRV. Although NASS estimated 2000 crop year production at 32.521 million tons, this estimate included production from overwintered acreage in California that is counted in the crop year but does not contribute to beet sugar production for the current fiscal year. With the closure of Tracy and Woodland facilities in California, acreage formerly planted to sugarbeets is absent this fiscal year and most likely for all future years. The Interagency Commodity Sugar Estimates Committee of the USDA estimates lost California production for the summer and early fall period at 110,000 STRV, the equivalent of 29,000 acres or 797,000 tons of sugarbeets. Beets sliced from September 2000 through March 2001 total 27,806,707 tons. Based on sugar production net of molasses desugaring, sugar recovery is about 258 pounds per sliced ton. A stable relationship between the 7-month recovery rate and the full-crop year recovery rate suggests a final recovery of 271 pounds per sliced ton, down 23 pounds per sliced-ton from last year. This rate takes into account sugar produced from stored thick juice but not from molasses. When an estimate for sugar produced from molasses is made and a conversion is made from crop to fiscal year, the estimate for beet sugar production for FY 2001 is 4.420 million STRV. Non-TRQ Imports Sugar imports outside the sugar TRQ for FY 2001 are estimated to total 453,000 STRV, including 330,000 STRV under the combined Refined Sugar Re-export Program, the Sugar-Containing Products Program, and the Polyhydric Alcohol Program. This estimate includes 80,000 tons granted to the C&H Sugar Company for FY 2001 as a result of a Settlement Waiver that was meant to facilitate the Company's removal of 100,000 tons of sugar from the U.S. market. The Settlement Waiver permits the company to import up to 100,000 tons of raw sugar during FY 2001 and 2002. However, it must surrender Certificates for Quota Eligibility (CQE) to the USDA for an equivalent amount of sugar. This requirement implies that estimates of sugar entering under the sugar TRQ are to be reduced by the same amount of sugar that C&H Sugar Company is expected to import under the Refined Sugar Re-export Program. Based on pace to date, the USDA estimates sugar supply extracted from sugar syrups imported under HTS 17029040 at 100,000 STRV. High-tier tariff sugar imports for FY 2001 are now estimated at 8,000 STRV. Mexican refined sugar presently held in U.S. Customs bond that had been expected to enter the United States this fiscal year will probably remain in bond until after January 2002 when the high-tier NAFTA tariff for refined sugar is scheduled to drop an additional 1.60 cents to 9.61 cents a pound. Imports under the Re-export Programs through March 2002 have amounted to 120,456 STRV, which is 38 percent of the amount expected to enter this fiscal year. Sugar from sugar syrup imports under HTS 17029040 have amounted to only 33,614 STRV. TRQ Imports On September 15, 2000, the USDA established the FY 2001 tariff- rate quota (TRQ) for imports of sugar at 1,360,983 metric tons, raw value (MTRV), or 1,500,227 STRV. The total includes a quantity for raw sugar of 1,117,195 MTRV, the minimum level to which the United States is committed under the World Trade Organization (WTO); a quantity for refined sugar of 38,000 MTRV; a required quantity of 105,788 MTRV for Mexico under the North American Free Trade Agreement (NAFTA) Side-Letter Agreement that may be shipped as raw or refined sugar; and a reserve of 100,000 MTRV, to be allocated, if needed, contingent on developments in international markets. TRQ sugar imports are currently estimated at 1.245 million STRV. The sum of the raw and refined sugar TRQs, adjusted to eliminate double counting of NAFTA sugar that can be imported as either raw or refined sugar, is estimated at 1.390 million STRV. The shortfall from countries that are unlikely to be able to ship their allocations to the United States is estimated at 65,000 STRV. The C&H Sugar Company is expected to surrender CQE equivalent to 80,000 STRV to the USDA before the end of August 2001. Subtracting these sums from 1.390 million STRV produces the current estimate of 1.245 million STRV. In April 2001, the USDA announced the Mexican shipping pattern. It stated that Mexico could ship up to 70 percent of total allocation or 74,052 MTRV (81,628 STRV) prior to June 30. The remaining 30 percent, plus any residual quantity not shipped prior to June 30, can be shipped in the final quarter (July- September) of FY 2001. It is reported that at least 75,000 mt of the Mexican NAFTA has now been booked for shipment. As of May 3, 2001, sugar imports under the TRQ have amounted to 674,815 STRV, or about 51 percent of the amount estimated to enter for FY 2001. CQE from India, Jamaica, and St. Kitts and Nevis amounting to 30,056 STRV have been surrendered to the USDA in lieu of actual imports. Exports, Deliveries, and Ending Stocks Sugar exports reflect shipments to foreign destinations made under the Refined Sugar Re-export Program. These exports for FY 2001 are estimated at 125,000 STRV, with almost 55,000 STRV having been exported through March (the first half of the fiscal year). Deliveries to domestic food and other products manufacturers under the Sugar-Containing Products Re-export Program are estimated at 85,000 STRV for FY 2001. Actual deliveries through March have totaled 39,200 STRV. Deliveries for the Polyhydric Alcohol Program are estimated at 15,000 STRV for FY 2001. Actual deliveries through March have totaled 6,527 STRV. Total deliveries for FY 2001 are estimated at 10.345 million STRV. After netting out deliveries made for the Sugar-Containing Products and Polyhydric Alcohol Programs, along with deliveries for livestock feeding (20,000 STRV), domestic food and beverage deliveries are estimated at 10.225 million. Deliveries through March have totaled 4.988 million STRV. Beet sugar deliveries at 2.237 million STRV are about 1.5 percent higher than last year through March, and refined cane deliveries at 2.708 million are at about the same level as last year through March. Total industrial demand for sugar through March is estimated at 2.68 million tons (actual weight), down 1.3 percent compared with last year. Non-industrial demand through March is estimated at 1.94 million tons (actual weight), up 1.9 percent compared with last year. Ending stocks are currently estimated at 1.946 million STRV, for an ending stocks-to-use ratio of 18.6 percent. Of the total, the CCC owns 793,205 STRV. The CCC total is constituted by 483,529 STRV of refined sugar, or about 61 percent of the total CCC inventory. The refined total is beet sugar except for 10,500 STRV (2.2 percent) of refined cane sugar. The remainder of the inventory of 309,676 STRV is raw cane sugar. The ratio of privately-held ending stocks-to-use is estimated at 11.8 percent. Prices U.S. raw sugar prices (nearby futures, C.I.F., duty-paid, Contract no.14, New York) averaged 21.51 cents per pound during April, up 11 points from the March average and almost 200 points higher than a year ago. The domestic no.14 contract nearby position traded within a narrow range of about 35 points for practically the whole month of April, with the exception of April 9, the final trading day for the May contract. This went off the board at 22.50 cents, due to the closing out of positions. As of May 16, July no.14 futures prices averaged 21.32 cents per pound, with a maximum and minimum of 21.42 cents and 21.15 cents, respectively. Lower than expected U.S. sugarbeet planted acreage, substantial quantities of sugar in government inventory, and expectations for stepped-up U.S. import quota shipments have kept pressure on futures prices in recent weeks. Futures prices are likely to weaken in upcoming months due to expectations for a record FY 2001 U.S. cane sugar production, increased hedge selling, ongoing sugar syrup imports from Canada, larger FY 2001 imports from Mexico, uncertainty about U.S. sugar deliveries, continued high U.S. sugar carryover stocks, and abundant U.S. sugar supplies. The no. 11 world raw sugar contract weakened to 9.27 cents during April compared with 9.64 cents in March. Current prices are almost 3 cents a pound above a year ago. The major fundamental factor underlying this surge appears to be a delay in starting the harvest in Brazil's Centre-South, the world's biggest source of export sugar. This area has been affected by drought over the past couple of years, and although the current crop is expected to recover partially, persistent low rainfall has led to downgrading the extent of Brazil's recovery. World futures raw sugar prices are likely to trend lower in the next few months due to speculative fund selling, low sugar imports by the United States, a cut back in Russian sugar imports, an expected rebound in FY 2002 world sugar production while a reduction in world sugar demand, increasing global sugar export availabilities, and large FY 2001 world sugar carryover. Forecast Year, 2001/02 Production Cane sugar production for FY 2002 is projected at 4.185 million STRV. Production is projected to increase in Louisiana and Hawaii, be steady in Florida, and decrease in Texas. Florida sugar production for FY 2002 is projected at 2.060 million STRV. This projection is based on sugarcane acreage close to that harvested this year. The mid-range of sugarbeet yield projections is about 37.25 tons per acre. Although conditions have been fairly dry, it is too early to expect yield to be in a low range. Based on the projected sugarcane yield and trend growth in productivity, the expected value of sugar yield is 4.72 tons per acre. Louisiana sugar production for FY 2002 is projected at 1.675 million STRV. Adaption of the high-yielding sugarcane variety LCP85-384 is expected to increase from 70 percent in FY 2001 to as high as 80 percent in FY 2002. Based on this information, the expected value of sugarcane yield is 30.85 tons per acre. This yield factor, plus trend productivity growth, implies an expected value of sugar yield of 3.61 tons per acre. Although drought-like conditions prevailed into this year, growing conditions have improved since March and auger well for this year's crop. Texas sugar production for FY 2002 is projected at 165,000 STRV, due basically to a shorter growing season. Hawaii sugar production for FY 2002 is projected at 270,000 STRV. The bulk of the harvest season takes place a year away; thus, the projection assumes a return to more normal weather conditions, especially on Maui. NASS forecast sugarbeet acreage planted at 1.4325 million acres at the end of March. Since then, it has been revealed that the Moses Lake facility in Washington State will not be operating this coming season due to high energy prices and low sugar prices. Acreage intentions in other areas, including Idaho, the Great Plains, and California (around the Mendota beet factory) have at times been uncertain as well. Perhaps one or more of the factories operating in Nebraska last year is not expected to be in operation this year. The setting is complicated as well by the financial distress of beet factory owners and the sale of several of the factories to growers' cooperatives. Although NASS does not forecast area harvested until June, the ICEC projects sugarbeet harvested area at 1.36 million acres. Based on a sugarbeet yield projection of 21.7 tons per acre, and assuming trend productivity growth, national sugar yield is projected at 3.122 tons per acre. These assumptions imply beet sugar production for FY 2002 at 4.25 million STRV. Trade and Deliveries Because the refined and raw sugar TRQs have not yet been announced by the USDA, they are not projected at this time. Sugar imports outside the sugar TRQ for FY 2002 are projected to total 390,000 STRV. This amount includes an expected 265,000 STRV under the combined Refined Sugar Re-export Program, the Sugar- Containing Products Program, and the Polyhydric Alcohol Program. This projection includes the remaining balance of C&H Sugar Company Settlement Waiver. As explained above, the Settlement Waiver permits the company to import up to 100,000 tons of raw sugar during FY 2001 and 2002, but it must surrender CQE to the USDA for an equivalent amount of sugar. Because it is estimated that 80,000 STRV of the Waiver amount enters in FY 2001, the remaining balance for FY 2002 is projected at 20,000 STRV. Also, the USDA projects sugar supply extracted from sugar syrups imported under HTS 17029040 at 100,000 STRV, an amount equal to the amount estimated for FY 2001. High-tier tariff sugar imports for FY 2002 are projected at 25,000 STRV. This amount includes Mexican refined sugar presently held in U.S. Customs bond. The USDA is not currently projecting additional Mexican imports at the high-tier NAFTA tariff rate. Sugar exports are projected at 125,000 STRV, the same as the current fiscal year. These exports occur under the Refined Sugar Re-export Program. The USDA projects that deliveries made to domestic food and beverage manufacturers under the Sugar- Containing Products Re-export Program will total 85,000 STRV, the same as this fiscal year. Total deliveries for FY 2002 are projected at 10.440 million STRV. After netting out deliveries made for the Sugar-Containing Products and Polyhydric Alcohol Programs (15,000 STRV), along with deliveries for livestock feeding (20,000 STRV), domestic food and beverage deliveries are projected at 10.320 million. Projected growth is only 95,000 STRV or 0.9 percent. This compares with growth currently estimated for FY 2001 at 232,000 STRV, or 2.3 percent. Mexican Sugar and HFCS Supply and Use Estimates, 2000/01 The U.S. Department of Agriculture (USDA) currently estimates Mexican sugar production for 2000/01 at 4.925 million metric tons, raw value (MTRV). Area harvested for sugarcane is estimated at 620,000 hectares, and sugarcane production is estimated at 42.7 million metric tons (mt), for a yield of 68.9 tons per hectare. The current sugar production estimate is down 165,000 MTRV from the projection made last year in May for 2000/01. The harvest was delayed initially by a strike by mill workers and further complicated by heavy rainfall in Mexico's top producing state of Veracruz. Production from mid-February to mid-March was running about 300,000 tons below the previous year's harvest in the same time period. The harvest conditions have improved since March, and production as of May 26 was only 11,000 mt less than the same period for last year. The number of factories operating in late May total 54, compared with 36 last year and 42 the year before. Although this season's harvest has been somewhat disappointing, the recovery of sugar from milled sugarcane has been very high at 11.12 percent, only slightly below last year's record rate. Figure 1 shows the recovery data from the perspective of how much sugarcane is needed to produce one ton of sugar (i.e. the reciprocal of the percentage recovery rate) from 1990 through 2001. In the early 1990s, it took well over 10 tons of milled sugarcane to produce one ton of sugar. Improvements in extraction pushed the needed number of tons below 9.5 tons in 1995 and thereafter. Tonnage estimates for both 2000 and 2001 harvest seasons have been below 9 tons. Sugar consumption for 2000/01 is estimated at 4.482 million MTRV. Despite improved consumer purchasing power, consumption growth has been slow because of the increased usage of alternative sweeteners. Industry sources indicate, however, that high compensatory duties on high fructose corn syrup (HFCS) imported from the United States has aided the demand for sugar in the current marketing year. It has also been reported that the beverage industry has been using more standard (estandar) sugar than refined (refinado) sugar because of its lower price. Sugar exports for 2000/01 are estimated at 428,000 MTRV. Mexico's share of the U.S. tariff-rate quota (TRQ) was set at 116,000 MTRV. It is comprised of the following: (1) 7,258 MTRV under the World Trade Organization (WTO) raw sugar minimum access commitment; (2) 2,954 MTRV of the 38,000 MTRV of U.S. refined sugar TRQ; and (3) 105,788 MTRV, the quantity which the United States is committed to provide to Mexico under the NAFTA, and which can be exported either as raw or refined sugar. Although Mexico was allocated its share of the U.S. sugar TRQ in September 2000, the USDA did not immediately issue Certificates for Quota Eligibility (CQE), pending determination of entry provisions. In April 2001, the USDA announced the Mexican shipping pattern. It stated that Mexico could ship up to 74,052 mt (or up to 70 percent of total allocation) prior to June 30. The remaining 30 percent, plus any residual quantity not shipped prior to June 30, can be shipped in the final quarter (July-September) of FY 2001. Ending stocks are estimated at 550,000 MTRV. This level is 80,000 MTRV lower than estimated beginning stocks, reflecting expected lower sugar production. Supply and Use Projections, 2001/02 The USDA currently forecasts Mexican sugar production for 2001/02 at 5.050 million MTRV. Area harvested for sugarcane is projected at 630,000 hectares, and sugarcane production is projected at 44.0 million metric tons. Harvested area is forecast slightly above the 2000/01 level, and good weather conditions should improve yields over the previous year. Nonetheless, these projections indicate insignificant growth and are premised on the sugar industry's continuing financial crisis (accumulated debt load of an estimated $1.5 billion), low world sugar prices, and limits on exports into the U.S. market. Figure 2 shows actual weight (tel quel) production since 1994. Production growth has been at a plateau since the 1997/98 season. Realization of production potential awaits solution to the industry's financial problems. In the face of these difficulties, the Secretariat of Agriculture, Livestock, Rural Development, Fisheries, and Food (SAGAR) announced on March 31, 2001, management rules on the newly developed Special Support Fund Program for the Investment in Sugarcane. The purpose of this program is to assist growers in the purchase of equipment and machinery in order to lower production costs and improve technical harvesting efficiency. Major legislation intending to regulate and reorganize the sugar industry was introduced in December 2000. Details are provided in USDA's Foreign Agricultural Service GAIN Report #MX1050.1/----- ----- 1/ http://www.fas.usda.gov/scriptsw/attacherep/attache_lout.asp ----- Sugar consumption for 2001/02 is projected at 4.535 million MTRV, which is 53,000 MTRV higher than the level estimated for 2000/01. Sugar purchases by the Mexican soft drink industry are expected to be between 1.0 and 1.2 million mt, although there may be more purchases of the lower priced estandar sugar instead of refinado sugar. The lower priced sugar year has reportedly displaced sales of HFCS in the soft drink industry. Mexican sugar exports are currently projected at 510,000 MTRV, and ending stocks are projected at 555,000 MTRV. Production and consumption of HFCS in 2001/02 are likely to be levels close to those for the previous year. Although the data are not publicly available, production is likely to be between 320,000 and 350,000 mt, and consumption, between 490,000 and 510,000 mt. Consumption growth has been limited by the availability of low-priced sugar, and by high compensatory import duties placed on HFCS imports from the United States. Imported HFCS is used directly by food and beverage manufacturers, and also by the Mexican HFCS industry (especially HFCS-90) in producing domestic HFCS-55. There are still difficulties in estimating how much U.S.-produced HFCS is shipped to Mexico. Figure 3 shows calendar year shipments of HFCS-55 and higher from the United States to Mexico, according to the source of data, for 1998 through 2000. The Mexican import data indicates that imports have averaged 48 percent more than the U.S. Customs Service estimates for exports. For 1999, the Mexican data imply growth of 17.7 percent over 1998, while the U.S. data imply much lower growth of 3.4 percent. Shipments decreased in 2000: U.S. data imply 11.7 percent, while the Mexican data imply 16.1 percent. Prices Figure 4 shows the price of estandar sugar in Mexico relative to U.S. and world raw prices. Until September 1999, the estandar price was consistently below the U.S. raw sugar price (No.14, New York contract). Since then, the U.S. raw sugar price at times dipped to (historically) low levels (e.g., 17.24 cents a pound in February 2000). It has regained some ground starting in October 2000 and is now in the 21-22 cents a pound range. Between 1998 and 2000, the estandar price has been variable in a range between 18 and 24 U.S. cents a pound. Since September 1999, it has been at times greater than the U.S. raw price. In 2001, however, the estandar price has dropped from 21.52 cents a pound (4.634 pesos per kilogram) in January to 17.18 cents a pound (3.534 pesos per kilogram) in April. It is now well below the U.S. raw price by a margin of 4 cents a pound. Both Mexican and U.S. prices have been well above comparable world prices. Figure 5 shows refined sugar prices for Mexico, the United States, and the world. Until October 1999, Mexican refined sugar prices averaged 4 cents a pound lower than comparable U.S. refined prices. Since then, U.S. refined prices have dropped to as low as 19 cents a pound (summer months, 2000), while Mexican refined prices have stayed in the 21.5 to 25.8 cents a pound range. Mexican refined prices have declined only about 1 cent a pound since the beginning of 2001, which is much less than the drop in estandar prices (4.3 cents a pound). As with the estandar/raw prices, both Mexican and U.S. refined prices continue to be well above comparable world prices. Net Producer Surplus Status According to the North American Free Trade Agreement (NAFTA) side-letter agreement, starting in 2001 Mexico's duty-free yearly access to the U.S. market is the smaller of a ceiling of 250,000 MTRV or Mexico's 'net surplus production'. The net surplus production calculation is based initially on the difference between the Mexican Government's projection of sugar production in metric tons, raw value, less the sum of projected consumption of sugar in metric tons, raw value, and projected consumption of HFCS in metric tons. The NAFTA specifies that U.S. and Mexican officials consult by July 1 to determine by what quantity either nation is projected to be a net surplus producer in the next marketing year. According to the original NAFTA agreement (Appendix 703.2.A.13), the projection for the coming marketing year is to be adjusted for a correction factor. The correction factor takes into account the amount by which actual net production surplus is different than projected net production surplus in the most recent marketing year for which net producer surplus status was projected. In calculating the correction factor, neither the projection nor the actual net production surplus is to exceed the ceiling applicable for the year (i.e., 250,000 MTRV for FY 2001 to 2007) or be lower than 7,258 MTRV. In all years prior to FY 2001 for which Mexico has been determined to be a net surplus producer, the correction factor has been zero. According to the NAFTA, U.S. and Mexican officials are to consult before July 1, 2001, to determine each country's net surplus producer status for FY 2002. According to the USDA, Mexican sugar production is projected to exceed consumption by 515,000 MTRV. If projected HFCS consumption for FY 2002 is between 490,000 and 510,000 mt, then net production surplus without the correction factor would be between 5,000 and 25,000 MTRV. Projected net production surplus for FY 2001 was revealed to be 116,000 MTRV. Although individual components of the net surplus production calculation were not made public, it is not unreasonable to expect that production estimated for 2001 will be less than what may have been projected last June, considering that the current USDA estimate for 2001 is 165,000 MTRV less than what it was projecting at the time. In that case, Mexico's net surplus production status for FY 2002, based solely on criteria set out in the NAFTA and the side-letter agreement, is in doubt. Assessing Economic Impacts of Liberalizing WTO Sugar Tariff Rates And Minimum Access Commitments by the United States Stephen L. Haley 1/----- ----- 1/ Agricultural economist, Specialty Crops Branch, Market and Trade Economics Division. ----- Abstract: The U.S. sugar loan program supports prices of domestically produced sugar, and the sugar tariff-rate quota (TRQ) system helps support domestic sugar prices by restricting imports of sugar. U.S. commitments under international trade agreements, including the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA), affect the level and allocation of the TRQs and also imports of high-tier tariff sugar outside the TRQ system. Increased market access resulting from U.S. sugar trade liberalization would imply changes in the U.S. sugar program. If the present loan rate program were to be retained, the loan rate would have to be reduced substantially in order to prevent large forfeitures to the U.S. Department of Agriculture (USDA). Research suggests that a sugar loan rate of 14 cents a pound, 4 cents less than the current loan rate, would be necessary to prevent sugar forfeitures to the USDA if the U.S. WTO minimum access commitment were to increase 50 percent. Keywords: Baseline, economic model, NAFTA, sugar, Uruguay Round Agreement on Agriculture, WTO. Assessing Economic Impacts of Liberalizing WTO Sugar Tariff Rates And Minimum Access Commitments by the United States The Uruguay Round Agreement on Agriculture (URAA), completed in 1994, was a first step in the process of global agricultural policy reform. The URAA included a provision for a resumption of negotiations on agriculture by December 31, 1999. Although the November 1999 World Trade Organization (WTO) Seattle conference did not successfully initiate a new round, agricultural negotiations began in March 2000. These negotiations are being conducted as special sessions of the WTO Committee on Agriculture in Geneva, Switzerland. This article analyzes the effects of possible changes in U.S. sugar policy resulting from upcoming trade liberalization negotiations. Specifically, it examines the loosening of existing commitments made by the United States as part of the URAA. These include a lowering of high-tier tariffs for U.S. sugar imports and an increase in the minimum import access commitments agreed to by the United States. These actions are analyzed as possible outcomes of WTO negotiations. The analysis is based on modifying key U.S. policy assumptions underlying the sugar baseline of the U.S. Department of Agriculture (USDA). The main components of the U.S. sugar program modeled in the baseline are the tariff-rate quota (TRQ) import system, price support loan program, and the sweetener provisions of the North American Free Trade Agreement (NAFTA). The sugar loan rate program and the TRQ system help to support the domestic price of sugar, but their effectiveness has been challenged by provisions in the URAA and the NAFTA. These elements are discussed below, and a theoretical structure for predicting outcomes of possible trade liberalization measures is developed. The sugar baseline model is used to analyze a 50-percent increase in the WTO minimum access at various levels of price support from the sugar loan rate program. It is also argued that reductions in the high-tier sugar tariff are unlikely to have any measurable effect on U.S. sugar imports. U.S. Sugar Imports and the WTO In the URAA, the United States agreed to import a minimum quantity of raw and refined sugar of 1.256 million short tons, raw value (STRV) each marketing year (October/September). Included in this amount is a commitment to import at least 24,251 STRV of refined sugar. The raw cane sugar tariff-rate quota (TRQ) is allocated to 40 quota-holding countries based on a representative period (1975-81) when trade was relatively unrestricted. A duty of 0.625 cent a pound, raw value, is applied to quota imports. 2/----- ----- 2/ In the Harmonized Trade System, chapter 17 specifies the low-tier tariff at 1.46066 cents per kilogram less .0206686 cents per kilogram for each degree of polarization under 100 degrees. ----- Most countries have the low duty waived under the General System of Preferences (GSP) or the Caribbean Basin Initiative (CBI). Between 95 and 98 percent of the raw cane sugar TRQ fills each year, and the refined sugar TRQ is filled almost as soon as it opens. The high-tier sugar tariff applies to sugar imports above the level of the sugar TRQ. The Uruguay Round specified base rates for raw cane sugar of 18.08 cents a pound and for refined sugar of 19.08 cents a pound. Starting in 1995, the rates were to be cut by 0.45 cent a pound each year for raw sugar and 0.48 cent a pound for refined sugar. The yearly reductions were to take place until 2000, when the raw sugar high-tier tariff was to be 15.36 cents a pound and the refined sugar high-tier tariff rate was to be 16.21 cents a pound. Sugar Loan Rate Program and Minimum Prices To Avoid Forfeiture The 1996 Farm Act provides for the USDA to make loans available to processors of domestically grown sugarcane at a rate of 18 cents per pound and to processors of domestically grown sugarbeets at a rate of 22.9 cents per pound for refined beet sugar. Although the 1996 Farm Act required that the sugar TRQ be established higher than 1.5 million STRV as a condition for nonrecourse loans to processors, the FY 2001 Agricultural Appropriations Act eliminated the TRQ trigger for nonrecourse loans and all references to recourse loans. Loans are taken for a maximum term of 9 months and are repaid along with interest charges before September 30. In order to forestall forfeiture, the sugar price must be high enough to cover the interest expenses. Cane processors share interest expenses with their growers, but beet processors do not and must therefore recover the entire interest expense of loan repayment in their share of the sugar's selling price. Cane processors incur transportation and distribution costs in moving sugar to the refiner and also face location discounts required by some refiners. These additional costs must be included in the minimum price to avoid forfeiture calculation. Because beet sugar is refined sugar requiring no further processing, the minimum price does not include transport adjustments. However, because beet sugar is normally sold subject to a 2-percent cash discount, this amount must be added to arrive at the minimum price. Also, the 1996 Farm Act required that processors who forfeit sugar pledged as collateral for a nonrecourse loan face a penalty of 1 cent a pound for raw cane sugar and 1.072 cents a pound for refined beet sugar. Processors would have to consider these penalties when deciding whether to forfeit sugar to the Commodity Credit Corporation (CCC). For the sugar baseline, the minimum raw sugar market price to discourage forfeitures is calculated at 19.86 cents a pound, while the corresponding minimum refined beet sugar price is calculated at 24.78 cents a pound. North American Free Trade Agreement Low-tier Tariff NAFTA Imports The NAFTA went into effect on January 1, 1994. Although the original agreement contained provisions that related to trade in sugar, they were modified by the terms of a side letter in November 1993 that altered the sugar provisions of the original NAFTA text. Although Mexico has since rejected the validity of the side-letter agreement, the United States maintains that the side letter provisions supersede those of the original NAFTA. According to the NAFTA side letter, Mexican sugar low-tier tariff exports to the United States are restricted by Mexico's 'net surplus production' of sugar. The net surplus is defined as Mexico's production of sugar less its consumption of sugar and high fructose corn syrup. From FY 2001 through 2007, Mexico is to have duty-free access to the U.S. market for the amount of its surplus as measured by the formula, up to a maximum of 250,000 metric tons, raw value (MTRV). Beginning in FY 2008, Mexico is to have duty-free access with no quantitative limit. High-tier Tariff NAFTA Imports The NAFTA specifies a declining high-tier tariff schedule for raw and refined sugar over the transition period to duty-free sugar trade in 2008. For 2001, the raw sugar tariff is 10.58 cents a pound, and the refined sugar tariff is 11.21 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 U.S. Sugar Baseline: Theoretical Framework for Analysis Supply and Demand for U.S. Sugar 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 in the 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. 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. Market for High-tier Tariff Imports 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. In figure A-3, excess supply of NAFTA sugar is shown in the middle panel, along with the U.S. excess demand for high-tier tariff sugar. The excess supply is perfectly elastic up to the point where all exportable NAFTA supply is being shipped to the U.S. market. At that point, the curve becomes perfectly inelastic. The elastic portion of the curve corresponds to the pricing threshold where it is more profitable for Mexico to ship sugar to the U.S. market rather than the world market. The threshold is equal to the world price plus the NAFTA tariff, marketing costs, and price premiums. Because the NAFTA tariff rate is declining each year until 2008, the curve is shifting downward. With sufficiently high tariffs and/or high world prices, the excess supply and excess demand curves need not intersect. In this case, there are no high-tier imports. Over time, however, the curve shifts down as the tariff is reduced and the intersection becomes very likely. The market for high-tier tariff world sugar is shown in the third panel of figure A-3. World supply is perfectly elastic at a pricing threshold (Pwt) that is equal to the sum of the world price, WTO tariff, and marketing costs and premiums. (It is assumed that the NAFTA tariff rate is always lower than or equal to the WTO tariff rate, and that marketing costs of shipping Mexican sugar to the U.S. market are low.) The U.S. excess demand for world high-tier tariff sugar is derived from the differencing of NAFTA excess demand and excess supply. In figure A-3, this excess demand is a perfectly elastic line positioned at the NAFTA threshold price. Unless lower world marketing costs compensate for a WTO tariff rate higher than the NAFTA tariff rate (not likely), then there is no intersection of curves in the high-tier world sugar market and hence no high-tier imports are indicated. Figure A-4 shows the case where the availability of NAFTA high- tier tariff imports is constrained. With no high-tier tariff world imports, the U.S. price (Pus) is higher than the NAFTA threshold (Pthr). The differencing of the excess demand and supply curves define an excess demand in the third panel which is downward sloping from Pus to Pthr , where it once again becomes perfectly elastic. With a sufficiently low WTO tariff, it is possible for a perfectly elastic world excess supply curve to intersect excess demand within the downward sloping range, thus indicating imports of high-tier tariff sugar. Figure A-5 shows the case of a U.S. price floor at Plr. U.S. excess demand for NAFTA high-tier tariff sugar is downward sloping until Plr where it becomes perfectly elastic. Unless the NAFTA excess supply curve intersects the excess demand along its downward sloping portion, U.S. excess demand for world high-tier tariff sugar is perfectly elastic at Plr. Analysis of Reduction in WTO Tariff Rates Any cut in the WTO tariff rate would likely be made ineffective by the lower NAFTA tariff rate. For raw sugar in 2001, the NAFTA tariff rate is 4.78 cents a pound lower than the corresponding WTO tariff. The gap grows at the rate by which the NAFTA tariff rate declines, or 1.51 cents a pound per year until 2008 when the NAFTA tariff becomes zero (figure A-6). For refined sugar in 2001, the NAFTA tariff rate is 5.00 cents a pound lower than the corresponding WTO tariff rate. The gap grows each year by 1.6 cents a pound until 2008. Entry of high-tier tariff sugar from third countries would be in addition to amounts that could be supplied from Mexico. This situation would correspond to case B. A lowering of the high-tier tariff could lead to emergent imports or an increase if NAFTA supplies were sufficiently constrained. Any increase in imports would cause the U.S. price to fall to Pwto. In case C, world high- tier tariff imports could emerge if Pwto fell below Plr, but the U.S. price would fall no lower than Plr. Analysis of Increase in WTO Minimum Access In figures A-3, A-4, and A-5, an increase in the WTO minimum access is represented as a rightward shift of the U.S. sugar supply curve in the left panel. Because the middle panel's excess demand for high-tier tariff sugar is derived by differencing domestic demand and supply, there is less excess demand than formerly. This reduced excess demand is shown as a leftward movement of the excess demand curve. In case A, an increase in the minimum access reduces NAFTA high-tier tariff imports on a one-to-one basis, with no effect on sugar pricing. However, if the minimum access increase were sufficiently large, NAFTA high- tier imports could be totally displaced, with the U.S. price falling below Pthr. At that point, a higher return for NAFTA sugar would be in the world market rather than the U.S. market. Case B has all of the NAFTA sugar surplus entering the U.S. market at a price higher than the threshold level. The increase in minimum access reduces U.S. excess demand for high-tier tariff sugar. The excess demand curves in both the middle and right panels shift down. The initial effect is to lower the purchase price with no effect on the amount of NAFTA imports. If there are high-tier tariff sugar imports from the world market, these imports decrease, potentially to zero. If the increase in minimum access is sufficiently large, the purchase price can decrease to the NAFTA threshold level (Pthr) and NAFTA high-tier tariff imports may decrease. Case C incorporates a price floor. In the figure, an increase in minimum access shifts the middle panel's excess demand leftward. High-tier tariff imports do not change, but the price falls to the floor level. At the price floor, greater minimum access imports do not add to consumption because the price cannot fall in order to stimulate increased consumption. Stocks withheld from the market accumulate, thus causing government higher budget expense through processors' forfeiting sugar and storage payment expense. Table A-1 presents a summary of possible results suggested by this theory. The U.S. Sugar Baseline: Modeling Framework The USDA releases its U.S. sugar baseline projections at the Agricultural Outlook Forum in February. Baseline projections are a conditional scenario based on specific assumptions about macroeconomics, agricultural policy, weather, and international developments. All commodity baselines incorporate provisions of the Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Act) and assume that its provisions remain in effect throughout the projections period. Additionally, the U.S. sugar baseline incorporates the provisions of the URAA and the NAFTA. The USDA sugar baseline model currently projects supply, use, and prices out through 2011. The production sector includes sugarcane producing areas of Florida, Louisiana, Texas, Hawaii, and Puerto Rico. The sugarbeet producing areas include the Great Lakes region (Michigan and Ohio), the Red River Valley (Minnesota and eastern North Dakota), the Upper Great Plains (Montana, northwestern Wyoming, and western North Dakota), the Central Great Plains (Colorado, Nebraska, southeastern Wyoming), the Northwest (Idaho, Washington State, eastern Oregon), and the Far West (California, central Oregon). Acreage allocation decisions are modeled as functions of grower prices relative to alternative crop prices. 2/----- ----- 2/ See 'Calculation of Real Price Indices for U.S. Sugar Crops,' in Sugar and Sweetener Situation and Outlook. SSS-229, Sept. 2000. ----- Crop yield projections are based on observed trends. Regional sugar yield per-acre projections are based on econometric analysis of the relationship between sugar yields and crop yield developments and yearly trend improvements that capture technical improvements in each of the regions. Sugar production differs from other field crops in that it requires extensive processing to be put in a form that is marketable. Unless processing facilities are close to cropping acreage, it is uneconomical to grow sugar crops. In the baseline model, adjustments to processing capacity are a function of the margin between predicted sugar prices and the average sugar price necessary for processors to cover variable costs. Within a producing region, it is assumed that there is a normal distribution of costs about point estimates reported by the USDA. 4/---- ----- 4/ See www.ers.usda.gov/farmincome/ for costs of processing for cane and beet sugar. ----- If the margin drops to zero, the modeling specification indicates the exit of one-half of processing capacity from that region. It is further assumed that capacity reductions are irreversible; that is, there is a very high cost of reopening closed facilities. Sweetener demand is composed of end-use demands by the beverage and food processing industries, by non-food demanders, and by households or non-industrial users. Commodity coverage includes not only sugar but also high fructose corn syrup (HFCS). In recognition of the importance of NAFTA, the USDA sugar baseline model includes a Mexican sweetener component. Particular attention is placed on modeling how much exportable sugar surplus Mexico possesses throughout the projections period. Substitution trade-offs in Mexico between sugar and HFCS are of particular modeling concern because of the potential of HFCS to displace sugar, especially in beverage end-uses. Scenario Analysis Analyzing the effect of increasing sugar import minimum access commitments by the United States involves crafting of scenarios that differ from the published baseline. A thesis explored in the theoretical section of this paper is that sugar policy developments are interrelated. Increased market access would have to be fitted with NAFTA provisions and the sugar loan rate program. Although Mexico and the United States differ in the interpretation of the NAFTA side-letter modification to the original agreement, it is clear that the sugar sectors of both countries are moving toward becoming unified. Also, if policymakers decide to retain the current structure of the U.S. sugar loan rate program, increased minimum access will likely increase the probability of loan forfeitures to the CCC at the current loan rate of 18 cents a pound for raw cane sugar. This suggests an analysis of increased minimum access commitments in the context of alternative loan rates. There are six scenarios selected for analysis (table A-2). The base assumes the current loan rate of 18 cents a pound and minimum access close to the URAA commitment level. The alternative to the current level of minimum access is a 50- percent increase. Two other loan rate levels are considered as alternatives: 16 cents a pound (2-cent reduction), and 14 cents a pound (4-cent reduction). The Base Scenario Table A-3 shows scenario results for selected variables. In the base scenario, the raw sugar price drops to the minimum level to avoid forfeitures in 2004 and remains at that level throughout the remainder of the projections period. In 2004, the raw sugar high-tier NAFTA tariff rate will be 6.04 cents a pound. If the world price is 10 cents a pound, then the price at which Mexico would find it attractive to ship exportable supplies of sugar into the U.S. market (the 'threshold price') would be 19.50 cents a pound. (This assumes a marketing cost of 1.1 cents a pound, a desired price premium of 1.36 cents a pound, and a 1-cent-a-pound discount from the No.14 New York contract for delivery into Louisiana.) Because the threshold is below the minimum price to avoid forfeitures (19.86 cents a pound), all exportable sugar from Mexico (744,000 STRV) would find its way into the U.S. market because forfeitures to the CCC would act to keep raw sugar prices at the minimum level. Government-owned stocks increase by 321,000 STRV in 2004 and continue to accumulate. The ending stocks-to-use ratio increases to 37.9 percent in 2011. Because of downward price protection for U.S. sugar producers from the non- recourse loan program, the level of production remains steady throughout the projections period.5/----- ----- 5/ It is assumed that CCC-owned sugar inventories do not affect sugar pricing. ----- Loan Rate Reductions Decreasing the loan rate by either 2 or 4 cents a pound with no change in minimum access imports avoids forfeitures to the CCC. Significant high-tier imports from Mexico commence in 2004, and the U.S. price decreases to the 19.50 cents a pound threshold level. Because the minimum price to avoid forfeiture is lower than the threshold (17.86 cents a pound for a 16-cent loan rate, and 15.86 cents a pound for a 14-cent loan rate), not all of Mexico's exportable surplus is attracted into the U.S. market, as was the case in the base. With greater downward price flexibility, U.S. sugar production decreases as more sugar from Mexico enters. In 2005, production is 86,000 STRV less than the base; and in 2006, production is 382,000 STRV less than the base. Cumulative reductions in production avoid pricing outcomes where the new minimum price levels to avoid forfeiture to the CCC are reached. As a result, CCC-owned stocks do not grow as in the base. In 2011, the U.S. raw sugar price is projected at about 20 cents a pound. Increasing Minimum Access Import Commitments The effect of increasing minimum access imports depends on the loan rate level. The primary effect when the loan rate is 18 cents is to increase CCC-owned stocks on a one-to-one basis. The minimum price of 19.86 cents a pound is reached in 2004 even in the base with no increase in minimum access imports. The high price floor prevents offsetting reductions in either NAFTA imports or in domestic production. The ending stocks-to-use ratio reaches 79.8 percent in 2011. The initial effect in 2004 when the loan rate is 16 cents a pound is to decrease the U.S. raw sugar price to 18.95 cents a pound. Because this price is below the NAFTA threshold price of 19.50 cents a pound, there are no high-tier imports from Mexico; thus increased minimum access imports are initially partially offset. In 2005, however, the reduction in the NAFTA high-tier tariff causes the U.S. price to reach the new threshold level of 17.99 cents a pound. Notwithstanding, NAFTA imports are still lower than the base by 638,000 STRV. In 2006, the reduction in the NAFTA high-tier tariff drives the U.S. price to the minimum price to avoid forfeiture at 17.86 cents a pound. Because the NAFTA threshold price is 16.48 cents a pound (i.e., lower than the minimum price by 1.38 cents), all of Mexico's exportable surplus reaches the U.S. market, and CCC-owned inventories start to accumulate. By 2011, CCC-owned inventory is projected at 2.439 million STRV. Although high, it is still 849,000 STRV less than the base level. In 2011, production is 485,000 STRV less than the base. The ending stocks-to-use ratio equals 34.9 percent. Increasing minimum access imports when the loan rate has been lowered to 14 cents a pound produces a pattern similar to the 16 cent loan rate scenario for the first 2 years. The raw sugar price in 2004 is above the NAFTA threshold (hence, no high-tier tariff imports), and in 2005 the price is at the 17.99 cents a pound threshold level (NAFTA high-tier imports equal 146,000 STRV in both loan rate scenarios). In 2006, the price drops by the amount of the NAFTA high-tier tariff reduction to 16.48 cents a pound, whereas in the 16 cent loan rate scenario it could not fall below the 17.86 cent a pound price floor. Imports are 137,000 STRV less, compared with the 16 cent loan rate scenario; and, more markedly, U.S. sugar production in 2007 is 887,000 STRV less. In contrast to higher loan rate scenarios, the lower, unbreached price floor associated with the 14 cent a pound loan rate implies a greater reduction in cane and beet sugar processing capacity. Capacity reductions of 7 percentage points for beet sugar processing and 11 percentage points for cane sugar milling represent a permanent reduction in the ability to produce domestic sugar. Compared with the base in 2007, production is 1.325 million STRV less - split between 486,000 STRV of beet sugar and 840,000 STRV of cane sugar. A chief consequence of lower domestic production is an increase in those prices after the bottoming out in 2006. Increasing prices are a result of a TRQ system still placing an upper constraint on third-country imports and a limited Mexican exportable surplus. Increased sugar prices imply a higher real return for growing sugarcane and sugarbeets. Sugar crop acreage increases and sugar production manages to grow 2.5 percent relative to 2007 (or 189,000 STRV) by 2011. The ending stocks-to- use ratio in 2011 is projected at 14.3 percent, and the raw sugar price is projected at 21.3 cents a pound. Conclusion Increased market access resulting from U.S. sugar trade liberalization would imply changes in the U.S. sugar program. If the present loan rate program were to be retained, the loan rate would have to be reduced substantially in order to prevent large forfeitures to the U.S. Department of Agriculture (USDA). Baseline analysis suggests that a sugar loan rate of 14 cents a pound, 4 cents less than the current loan rate, would be necessary to prevent sugar forfeitures to the CCC if the U.S. minimum access sugar import commitment were to increase 50 percent. The narrowing of the margin between the U.S. and world prices may limit high-tier tariff imports from Mexico and put pressure on high-cost quota suppliers. To make the sugar TRQ viable, the current system of allocating shares based on historical trade patterns would likely have to be modified, eliminating countries for whom the world-U.S. price margins are no longer sufficiently wide to make exports viable. A larger portion of U.S. supplies would be sourced from low cost producers such as Brazil and Australia, as well as Mexico. Internet Access to Sugar-Related Data Home Pages Sugar and Sweetener Briefing Room: http://www.ers.usda.gov/briefing/sugar U.S. Department of Agriculture (USDA): http://www.usda.gov Economic Research Service (ERS): http://www.ers.usda.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 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://www.ers.usda.gov/publications/so/view.asp?f=specialty/sss- bb/ ERS Sugar Yearbook Data (May 2001): http://www.ers.usda.gov/data/sdp/view.asp?f=specialty/89019/ Sugar Statistical Compendium (1991): http://www.ers.usda.gov/data/sdp/view.asp?f=specialty/91006/ U.S. Corn Sweetener Statistical Compendium (1993): http://www.ers.usda.gov/data/sdp/view.asp?f=specialty/94002/ Farm Sector Cost of Production: Sugarbeets: Analysis, 1998-99:http://www.ers.usda.gov/data/CostsandReturns/car/beets2. htm Data, 1981-99:http://www.ers.usda.gov/data/CostsandReturns/car/Beets3. htm Sugarcane: Data, 1981-96:http://www.ers.usda.gov/data/CostsandReturns/car/cane3. htm World Agriculture Supply and Demand Estimates Report (WASDE): http://www.usda.gov/agency/oce/waob/wasde/wasde.htm February 2001 Outlook Forum: http://www.usda.gov/agency/oce/waob/oc2001/speeches/speechpage. htm Agricultural Baseline Projections Tables: http://usda.mannlib.cornell.edu/data-sets/baseline/2001/ Sugar: U.S. Sugar Re-export Programs, Foreign Agricultural Service (FAS): http://www.fas.usda.gov/itp/imports/ussugar.html Foreign Agricultural Service Report from Foreign Countries (includes sugar reports): http://www.fas.usda.gov/scriptsw/attacherep/default.asp Sweetener Market Data, Farm Service Agency (FSA): http://www.fsa.usda.gov/ao/epas/dsa/sugar/coversu.htm Final Report of the Commission on 21st Century Production Agriculture: http://www.usda.gov/oce/21st-century/index.htm Weekly Weather and Crop Bulletin: http://www.usda.gov/agency/oce/waob/jawf/wwcb.html END_OF_FILE