Key Changes
The Secretary of Agriculture is directed to operate the U.S.
nonrecourse sugar loan program, to the maximum extent possible
at no cost to the Federal Government. Specifically, the Secretary
is to avoid forfeiture to the Commodity
Credit Corporation (CCC) and the attendant costs for purchasing
and storage. To facilitate inventory management, the 2002
Farm Act gives USDA the authority to accept bids from sugarcane
and sugarbeet processors to obtain raw cane sugar or refined
beet sugar from CCC inventory in exchange for reduced production.
Additionally, the Secretary is directed to establish flexible marketing
allotments for sugar producers.
The Act terminates marketing
assessments on sugar, as well as penalties for loan program
forfeiture. The Act specifies that all refined sugars derived
from either sugarbeets or sugarcane are substitutable under
the Refined Sugar Re-Export Program and the Sugar-Containing
Products Re-Export Program.
Summary of Provisions
The two main elements of U.S. sugar policy are the price support
loan program and the tariff-rate
quota (TRQ) import system.
The loan program for sugar processors supports the U.S. price
of sugar. Unlike most other commodity programs, sugar loans
are made to processors and not directly to producers. This
is because sugarcane and sugarbeets, being bulky and very
perishable, must be processed into sugar before they can be
traded and stored. To qualify for loans, processors must agree
to provide a part of the loan payment to producers, in proportion
to the amount of the loan value accounted for by the sugarbeets
and sugarcane the producers deliver.
The purpose of the TRQ system is to ensure an adequate supply
of sugar at reasonable prices for both consumers and producers.
On June 1 of each year, the U.S. Trade Representative, along
with USDA, must calculate used and unused portions of the
TRQ for each quota-holding country and may reallocate unused
quota to qualified quota holders. U.S. commitments under international
trade agreements, including the North American Free Trade
Agreement (NAFTA), affect the level and allocation of the
TRQs. The United States also operates the Refined Sugar and
Sugar-Containing Products Re-Export Programs to support U.S.
refiners' competitiveness in global markets.
Among the other key program provisions are the following:
- The 2002 Farm Act continues the rate for loans to processors
of domestically grown sugarcane at 18 cents per pound and
the rate for loans to processors of domestically grown sugarbeets
at 22.9 cents per pound for refined sugar. Processors may
obtain loans for "in-process" sugar and syrups
at 80 percent of the loan rate. The processor cannot be
required to notify USDA of the intention to forfeit the
sugar under loan.
- Flexible marketing
allotments are determined by subtracting the sum of
1.532 million short tons, raw value (STRV) and carry-in
stocks of sugar (including CCC inventory), from USDA's estimate
of sugar consumption and reasonable range of carryover stocks
at the end of the crop year. USDA is required to estimate
factors affecting allotment quantities no later than August
1 before the beginning of each crop year, through 2007.
USDA is required to re-estimate these factors as necessary,
but "no later than the beginning of each of the second
through fourth quarters of the crop year."
- The overall marketing allotment quantity is divided between
refined beet sugar (54.35 percent) and raw cane sugar (45.65
percent). For cane sugar, Hawaii and Puerto Rico are jointly
allotted 325,000 STRV. Allocations for mainland cane sugar
producing States are assigned based on past marketings of
sugar, the ability to market sugar in the current year,
and past processing levels. Beet sugar processors are assigned
allotments based on their sugar production for the 1998-2000
crop years. The 2002 Farm Act provides for a number of contingencies
that could require reassignment of allotments during the
crop year.
- USDA's authority to operate sugar marketing allotments
is suspended if USDA estimates that sugar imports for domestic
human consumption will exceed 1.532 million STRV. This will
have the effect of reducing the overall allotment quantity.
Marketing allotments would remain suspended until imports
have been restricted, eliminated, or otherwise reduced to,
or below, the 1.532-million level.
Economic Implications
Flexible marketing allotments are likely to provide more effective
price support throughout the marketing year. When allotments
are in effect, processors who have expanded marketings in
excess of the rate of growth in domestic sugar demand will
have to postpone sale of some sugar and either store it at
their own expense or sell it for uses other than domestic
food use. Without allotments, price support comes from forfeiting
sugar under CCC loan in the fourth quarter (July-September)
of the fiscal year. The forfeiture withdraws sugar from the
market, thereby reducing excess sugar supply and helping to
support the market price of sugar.
Cost of storing excess production is shifted from
the Government to the industry. (However, the 2002 Farm Act
requires that CCC establish a sugar storage facility loan
program to assist processors who want to construct or upgrade
storage and handling facilities.)
Under the 2002 Farm Act, USDA efforts to reduce sugar production
should prove more effective. USDA has authority to exchange
CCC-owned sugar for reductions in acreage prior to planting.
Previously, USDA relied on "cost-reduction options"
in the 1985 Farm Security Act for authority to implement payment-in-kind
diversion programs that withdrew already-planted area from
harvest.
Because the loan forfeiture penalty was eliminated, the
support price was effectively increased, and this could
increase the likelihood of forfeitures. Elimination of the
loan forfeiture penalty and of marketing assessments could
increase returns to growers and processors.
Much attention will be on potential sugar imports entering
from Mexico at the high-tier
tariff rate under NAFTA. Although the May 2002 USDA projection
of these imports is only 10,000 STRV in fiscal year 2003,
there are strong economic incentives for additional imports
from Mexico. World raw sugar futures prices (No. 11 New York
Contract) for 2003 are in the range of 6 cents per pound,
and the NAFTA high-tier tariff on raw sugar drops to 7.56
cents per pound on January 1, 2003. Assuming other normal
marketing costs, it is likely that Mexican importers would
find the U.S. market attractive when U.S. raw sugar prices
are at or above 17 cents per pound.
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