Sugar Program
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 supports the U.S. price of sugar. The purpose of the
tariff-rate quota system is to ensure an adequate supply of sugar
at reasonable prices for both consumers and producers. 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 allow U.S. refiners
to be competitive in global refined and sugar-containing products
markets.
Sugar loan program. The primary policy tools available
to the U.S. Department of Agriculture (USDA) to assist sugarcane
and sugarbeet producers are contained in the Farm Security and
Rural Investment Act of 2002 ("2002 Farm Act"). The
U.S. sugar program provides for USDA to make loans available to
processors of domestically grown sugar cane at a rate of 18 cents
per pound and to processors of domestically grown sugarbeets at
the rate of 22.9 cents per pound for refined sugar. The 2002 Farm
Act allows processors to obtain loans for "in-process"
sugar and syrups at 80 percent of the loan rate.
Loans are taken for a maximum term of 9 months and must be liquidated
along with interest charges by the end of the fiscal year in which
the loan was made. Unlike most other commodity programs, sugar loans
are made to processors and not directly to producers. This is because
sugarcane and sugar beets, 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 loans are nonrecourse. This means that when the loan matures,
the USDA must accept sugar pledged as collateral as payment in full
in lieu of cash repayment of the loan, at the discretion of the
processor. "In-process" sugar and syrups must be converted
into raw cane or refined beet sugar at no cost to the Commodity
Credit Corporation (CCC) before being eligible for forfeiture. The
processor cannot be required to notify the USDA the intention to
forfeit the sugar under loan. By forfeiting the sugar, the processor
effectively withdraws sugar from the market, thereby reducing excess
sugar supply and helping to support the market price of sugar.
The 2002 Farm Act requires the USDA, to the maximum extent possible,
to operate the U.S. sugar loan program at no cost to the Federal
Government. Specially, this provision means that the USDA must operate
the program in order to avoid the forfeiture of sugar to the CCC.
In order to discourage forfeiture of nonrecourse loans, the sugar
price at the time of loan repayment must be high enough to cover
the loan principal plus interest expenses and other costs. The 2002
Farm Act gives the USDA the authority to accept bids from sugarcane
and sugarbeet processors to obtain raw cane sugar or refined beet
sugar in CCC inventory in exchange for the reduction of the production
of raw cane sugar or refined beet sugar. This is one way to control
expected excess (or "price-depressing") supplies of sugar.
The 2002 Farm Act notes specifically that this authority is in addition
to any other authority that the CCC may have under any other law.
(For example, the CCC relied on the Cost Reduction Options of the
1985 Farm Security Act (section 1009) for its authority for the
Payment-in-Kind (PIK) Diversion Programs for the 2000 and 2001 crop
years.)
As another way to guarantee the sugar loan program operates at
no cost to the Federal Government, the USDA is required to establish
flexible marketing allotments for sugar. The overall quantity of
sugar to be allotted for a crop year is determined by subtracting
the sum of 1.532 million short tons, raw value (STRV) and carry-in
stocks of sugar (including CCC inventory) from the USDA's estimate
of sugar consumption and reasonable carryover stocks at the end
of the crop year. The USDA is required to adjust allotment quantities
to avoid the forfeiture of sugar to the CCC.
The overall allotment quantity is divided between refined beet
sugar at 54.35 percent of the overall quantity and raw cane sugar
at 45.65 percent of the overall quantity. For cane sugar, Hawaii
and Puerto Rico are jointly allotted 325,000 STRV. The mainland
cane sugar producing states' (Florida, Louisiana, and Texas) allocations
would be 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 to 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 the USDA estimates that sugar imports levels for human consumption,
not including the Re-export Programs (see below), will exceed 1.532
million STRV such that the overall allotment quantity would have
to be reduced. The marketing allotments would remain suspended until
such time that imports have been restricted, eliminated, or otherwise
reduced to or below the 1.532 million STRV level.
Tariff-rate quotas. A tariff rate quota (TRQ) is a two-tiered
tariff for which the tariff rate charged depends on the volume of
imports. A lower (in-quota) tariff is charged on imports within
the quota volume. A higher (over-quota) tariff is charged on imports
in excess of the quota volume.
The United States establishes separate TRQs for imports of raw
cane sugar and for imports of certain other sugars, syrups and molasses.
Authority to establish the TRQs is under Additional U.S. note 5(a)(I)
to chapter 17 of the Harmonized Tariff Schedule (HTS). Each year,
the Secretary of Agriculture announces the quantity of sugar that
may be imported at a nominal tariff rate. Any additional annual
quantity may be imported at a higher tariff rate.
In the Uruguay Round of the General Agreement on Tariffs and Trade
(GATT), the United States agreed to make available for import a
minimum quantity, 1.256 million STRV, of raw and refined sugar each
marketing year (October to September). Included in this amount is
a commitment to import at least 24,251 STRV of refined sugar.
The raw cane sugar TRQ is allocated to 40 countries based on a
representative period (1975-81) when trade was relatively unrestricted.
An additional allocation is made available to Mexico to satisfy
U.S. obligations under the NAFTA.
The refined sugar tariff rate quota includes several components,
including specific allocations to Canada, Mexico, and a quantity
of refined sugar that is available to all countries on a first-come,
first-served basis. The first-come, first-served section of the
refined sugar TRQ also includes a category for specialty sugars
such as organic sugars.
In addition, the United States administers TRQs on imports of
various sugar-containing products that originally had been subject
to absolute quotas under Section 22 of the Agricultural Adjustment
Act of 1933. There are four TRQs on imports of similar products
from countries other than Mexico.
Re-export programs. Re-export programs. The United States
also operates two re-export programs for help U.S. sugar refiners
and manufacturers of sugar-containing products compete in world
markets. The Refined Sugar Re-Export Program establishes a license
against which a company can import sugar at world prices for refining
and sale to replace in the market sugar that has been exported as
refined sugar or as sugar in sugar-containing products. The Sugar
Containing Products Re-Export Program allows U.S. participants to
buy world-priced sugar for use in products that will be exported
onto the world market. Raw cane sugar imports under the two programs
are not subject to the sugar tariff rate quotas. The 2002 Farm Act
specifies that all refined sugars derived from either sugarbeets
or sugar cane are substitutable under these programs.
North American Free Trade Agreement and U.S.-Mexico sugar relations.
The North American Free Trade Agreement (NAFTA) went into effect
on January 1, 1994. The original agreement contained provisions
that related to trade in sugar. In order to secure U.S. Congressional
support for the NAFTA, the U.S. and Mexican Governments exchanged
side-letters 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
supercede those of the original NAFTA agreement.
The original provisions of the NAFTA subjected Mexico's sugar
exports to the United States to several conditions.
- During the 15-year transition period, Mexican exports were
to be limited to no more than Mexico's net production surplus
of sugar - domestic sugar production less domestic sugar consumption,
but, at a minimum, Mexico was allowed to ship 7,258 metric tons
of raw cane sugar duty-free.
- For the first 6 years of NAFTA, duty-free access was limited
to no more than 25,000 metric tons, raw value. In year 7, the
maximum duty-free access quantity was to become 150,000 metric
tons, and, in each subsequent year, the maximum duty-free quantity
was to increase by 10 percent.
- Importantly, the NAFTA provided that these maximums could
be exceeded if one of two conditions prevailed. The first condition
required that Mexico achieve net production surplus status for
2 consecutive marketing years. The second condition specified
that Mexico be a net surplus producer for the first year and
be projected as a net surplus producer in the second year unless
it was subsequently determined, contrary to the projection,
that Mexico was not a net surplus producer for that year.
The side-letter agreement changed key sugar provisions of the NAFTA.
The agreement stipulates that projected Mexican sugar production
would have to exceed Mexico's consumption of both sugar and HFCS
for Mexico to be considered a net surplus producer. For the first
6 years of the NAFTA, Mexico was entitled to duty-free access for
sugar exports to the United States in the amount of its projected
net surplus production, up to a maximum of 25,000 metric tons. If
Mexico was not a net surplus producer, it still would have duty-free
access for 7,258 metric tons. From FY2001 through 2007, Mexico will
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.
The NAFTA specifies a declining high-tier tariff schedule for
raw and refined sugar over the transition period to duty-free sugar
trade in calendar year 2008. For 2002, the raw sugar tariff is 9.07
cents a pound, and the refined sugar tariff is 9.61 cents a pound.
The raw sugar tariff drops about 1.5 cents each year (7.56 cents
a pound in 2003), and the refined sugar tariff drops about 1.6 cents
a year (8.01 cents a pound in 2003). Both rates reach zero in calendar
year 2008.
The economic incentive for Mexico to export high-tier tariff raw
sugar exists if a price threshold is less than or equal to the U.S.
sugar price. The threshold is equal to the sum of the world price
of sugar (New York Number 11 Contract), the high-tier NAFTA tariff
rate, unit marketing costs (about 1.1 cents a pound for raw sugar),
plus any marketing premiums. The threshold price is compared to
the U.S. price for entry in Gulf ports. This U.S. price runs about
1 cent lower than the New York Number 14 Contract price. If the
threshold is below the U.S. Gulf price, then Mexico would be encouraged
to export sugar to the United States up to that point where the
marginal returns from exporting to the U.S. and the world markets
are equalized. If the return to exporting to the United States is
at all levels higher than shipping to the rest-of-the-world, then
Mexico is encouraged to ship all exportable sugar to the U.S. market.
For example, if world raw sugar prices are in the 7 cent/lb range
in 2003, any U.S. raw sugar price above 18 cents a pound would signal
a greater return to Mexican producers by exporting to the U.S. market
instead of the world market. High-tier tariff imports could cause
total sugar imports to exceed the 1.532 million STRV import ceiling
necessary for the authority of the USDA to set marketing allotments
to comply with the no cost provision of the 2002 Farm Act.
|
