Order Code IB95117
CRS Issue Brief for Congress
Received through the CRS Web
Sugar Policy Issues
Updated September 4, 2001
Remy Jurenas
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Brief History of the Sugar Program
Current Sugar Policy
Background
Policy Overview
Price Support
Import Quota
Program Costs and Receipts
Legislative Proposals and Debate Since 1996
Proposals Offered by Program Opponents
Sugar Production Industry Changes Enacted
Sugar Trade Issues
Mexico’s Access to the U.S. Sugar Market
Stuffed Molasses Imports
Sugar Industry, Market, and Program Developments
Structural Changes
Low Sugar Prices and USDA’s Responses
Policy Tension
U.S. Sugar Sector Outlook
Sugar Program Proposals
House Agriculture Committee’s Proposed Sugar Program
Program Phase-Out Proposal
LEGISLATION
FOR ADDITIONAL READING
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Sugar Policy Issues
SUMMARY
Authorized through FY2003 by the 1996
the sugar oversupply situation reflects
farm bill, the sugar program is designed to
continued fundamental differences between the
protect the incomes of growers of sugarcane
growers and processors on one side, and sugar
and sugar beets, and those firms that process
users (primarily food manufacturers) and some
each crop into sugar. To accomplish this, the
cane refiners on the other side, over what U.S.
U.S. Department of Agriculture (USDA) sup-
sugar policy should be. Though some
ports domestic prices by making available
program changes were made during 1996 farm
loans at minimum price levels to sugar proces-
bill debate, opponents each year since mounted
sors and by restricting sugar imports. In
legislative challenges to modify or eliminate
practice, USDA seeks to administer an import
the program. All failed on recorded votes.
quota in a way that (1) allows only as much
Program supporters reversed two enacted
foreign sugar to enter the U.S. market as is
changes in spending bills.
needed to meet the balance of domestic de-
mand, and at the same time (2) results in a
Lower output in the current marketing
market price above the support level which
season has resulted in some recovery in do-
allows processors to pay off any price support
mestic prices, which are still are low by histori-
loans taken out. The quota is intended to
cal standards. To boost prices, USDA just
prevent the entry of lower-priced foreign
announced another sugar PIK program. Also,
sugar, which if allowed to enter freely, would
the resolution of specific trade issues will
affect the competitive position of the domestic
further affect U.S. sugar supply and price
sugar producing sector.
prospects. Difficult negotiations to resolve
two sweetener disputes with Mexico continue.
Record domestic sugar production, com-
A recent court decision requires sugar syrup
bined with imports of sugar permitted under
imports entering from Canada to enter under
trade agreements or not subject to limitation,
(rather than outside) the sugar import quota.
contributed to a substantial oversupply in
1999/2000. Since the U.S. government could
Affected interest groups will seek to
not further reduce imports to accommodate
shape future sugar policy as Congress consid-
higher domestic sugar output without breaking
ers a new multi-year farm bill. The sugar
its commitment made under World Trade
production sector has called for resolving
Organization rules, USDA intervened to bol-
trade disputes, retaining the current level of
ster market prices that had fallen below effec-
price protection, and relying on marketing
tive price support levels. Government sugar
controls to control supplies and support prices
purchases, and paying growers sugar “in-kind”
as the basis for future policy. Program oppo-
(PIK) to plow under some of their to-be-
nents advocate a loan program that provides
harvested crop in order to reduce output,
no price protection, reduces price support
though, did not raise prices enough to enable
levels, and ends the program after the 2004
processors pay back all of their price support
crops. In upcoming debate, growers and
loans. Some exercised their right to “forfeit”
processors will stress the industry’s impor-
10% of FY2000 sugar output, and USDA
tance in providing jobs and income in rural
recorded significant program outlays.
areas. Sugar users and their allies will argue
U.S. sugar policy costs consumers and results
Disagreement over how USDA handled
in lost jobs at food firms in urban areas.
Congressional Research Service ˜ The Library of Congress
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MOST RECENT DEVELOPMENTS
The U.S. Department of Agriculture (USDA) announced on August 31, 2001, it would
again implement this fall a program to pay sugar “in-kind” to growers who agree to plow
under a portion of their soon-to-be harvested sugar beet and sugar cane crops. The
program’s intent is to reduce the government’s sugar inventory, reduce its storage costs, and
bolster market prices.
An appeals court announced on August 30 that imports of “stuffed molasses” from
Canada can enter only under the sugar import quota. Since 1996, such imports had entered
outside the quota system, to the dismay of the sugar production sector.
The House Agriculture Committee on July 27, 2001, approved an omnibus farm bill
(H.R. 2646) that authorizes a sugar program through 2011, provides the U.S. Department
of Agriculture (USDA) with authority to impose controls on the amount of domestic sugar
allowed to be marketed, reinstates the requirement that USDA operate the program at no
cost to taxpayers, and authorizes a payment-in-kind program permitting the transfer of
Government-owned sugar to growers who agree to reduce production. The American Sugar
Alliance (growers and sugar processors) commended the Committee for reinstating a policy
that “will ensure stable prices for farmers and consumers and operate at no cost to
taxpayers.” Two House Members countered that the Committee chose to “ignore the
failure” of the current program, asserting its proposal “contains no meaningful reform.”
BACKGROUND AND ANALYSIS
Brief History of the Sugar Program
Governments of every sugar producing nation intervene to protect their domestic
industry from fluctuating world market prices. Such intervention is necessary, it is argued,
because both sugar cane and sugar beets must be processed soon after harvest using costly
processing machinery. When farmers significantly reduce production because of low prices,
a cane or beet processing plant typically shuts down, usually never to reopen. This close link
between production and capital intensive processing makes price stability important to
industry survival.
The United States has a long history of protection and support for its sugar industry.
The Sugar Acts of 1934, 1937, and 1948 required the U.S. Department of Agriculture
(USDA) to estimate domestic consumption and to divide this market for sugar by assigning
quotas to U.S. growers and foreign countries, authorized payments to growers when needed
as an incentive to limit production, and levied excise taxes on sugar processed and refined in
the United States. This type of sugar program expired in 1974. Following a 7-year period
of markets relatively open to foreign sugar imports, mandatory price support only in 1977 and
1978, and discretionary support in 1979, Congress included mandatory price support for
sugar in the Agriculture and Food Act of 1981 and the Food Security Act of 1985.
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Subsequently, 1990 farm program, 1993 budget reconciliation, and 1996 farm program laws
extended sugar program authority through the 2002 crop year. Even with price protection
available to producers, the United States historically has not produced enough sugar to satisfy
domestic demand and thus continues to be a net sugar importer.
Prior to the early 1980s, domestic sugar growers and foreign suppliers shared the U.S.
sugar market in a roughly 55 / 45% split, respectively. This, though, has not been the case
in recent years. In FY2000, domestic production filled 88% of U.S. sugar demand for food
and beverage use; imports covered 12%. As high-fructose corn syrup displaced sugar in the
United States during the early 1980s, and domestic sugar production increased in the late
1980s, foreign suppliers absorbed the entire adjustment and saw their share of the U.S.
market decline.
U.S. sugar policy maintains domestic sugar prices above the world market price. As a
result of this price differential, U.S. consumers and food product manufacturers pay more for
sugar than they would if imports entered without any restriction. How all sides view this
issue undergirds much of the public debate on sugar policy.
Current Sugar Policy
Background
The 1996-enacted sugar program kept intact the broad outlines of prior U.S. sugar
policy (with one change), but adopted two new features that were expected to inject some
price uncertainty into the domestic sugar market under surplus supply conditions. These
changes were intended to make the sugar production sector more responsive to market forces
and were at that time accepted by sugar producers as the political price for keeping the basic
program intact. Current program provisions apply through the 2002 crops.
The first required USDA to make recourse loans available to processors whenever it
announces a fiscal year import quota of less than 1.5 million short tons (ST). “Recourse”
means processors are obligated to repay the loan with interest in cash, rather than exercise
their legal right (under “non-recourse” policy) to hand over sugar offered as collateral in full
payment of the loan. If effective, recourse loans provide no price floor to processors, even
if market prices fall below specified levels. If USDA announces an import quota of 1.5
million ST or more, non-recourse loans (the type of loan available under pre-FY1996 policy)
automatically would become available to processors. Non-recourse loans provide a price
guarantee to a processor whenever market prices fall below the same specified levels. As the
amount of imported sugar projected to cover domestic needs declined in recent years to
below the recourse loan trigger level, USDA (facing external pressure and exercising its own
discretion) effectively took measures that allowed it to announce a non-recourse loan policy.
As sugar oversupply and price prospects worsened during FY2000, the sugar production
sector sought and succeeded in having Congress repeal USDA’s authority to make recourse
loans (Section 836 of P.L. 106-387 – FY2001 agriculture appropriations).
The second change required USDA to impose about a 1 cent per pound penalty on any
processor forfeiting sugar to the Commodity Credit Corporation (applicable only when
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pledged as collateral for taking out a “non-recourse” loan). The CCC is the entity that
finances USDA programs using funds borrowed from the U.S. Treasury. This provision
effectively reduces the statutorily-set level of price support protection available to processors
by one cent. With market prices for raw cane and refined beet sugar below loan forfeiture
levels (see below for explanation) toward the end of FY2000 when non-recourse loans came
due, processors forfeited just over 12% of 1999 domestic sugar output to the CCC that was
placed under loan earlier in the year. To exercise this right to forfeit on these loans,
processors paid $18.7 million in forfeiture penalties to the CCC.
Policy Overview
To support U.S. sugar prices, the USDA extends short-term loans to processors and
limits imports of foreign sugar. The sugar program, though, differs from the grains, rice, and
cotton programs in that USDA makes no income transfers or payments to beet and cane
growers. In practice, overall U.S. policy operates to indirectly support the incomes of
domestic growers and sugar processors by limiting the amount of foreign sugar allowed to
enter the domestic market. This is accomplished by using an import quota — a mechanism
that is not an integral part of the sugar program’s statutory authority as laid out in commodity
legislation, but which operates as an integral part to ensure that market prices stay above
effective support levels. Accordingly, USDA’s decisions on the size of the import quota
affect market prices, and are made to ensure that growers and processors realize the benefits
of price support they expect to receive, whether or not loans are taken out.
Price Support. USDA extends price support loans to processors of sugarcane and
sugar beets rather than directly to the farmers who harvest these crops. Growers receive
USDA-set minimum payment levels for deliveries made to processors who actually take out
such loans during the marketing year — a legal requirement. With those processors that do
not take out loans, growers negotiate contracts that detail delivery prices and other terms.
These loans have at times been attractive to sugar processors as a source of short-term credit
at below-prime interest rates.
Loan Rates. The last farm bill froze price support — 18 cents per pound for raw cane
sugar and 22.9 cents/lb. for refined beet sugar — at 1995 levels for 7 years. Loan support
for beet sugar is set higher than for raw sugar, largely reflecting its availability after
processing as a product ready for immediate industrial food and beverage use or for human
consumption (unlike raw cane sugar). By contrast, raw cane sugar must go through a second
stage of processing at a cane refinery to be converted into white refined sugar that is
equivalent to refined beet sugar in end use. Any processor that meets requirements can take
out a non-recourse loan at these levels (adjusted by region and other factors).
Effective Price Support Levels. The above loan rates do not serve as the price
floor for each type of sugar. In practice, USDA’s aim is to support the raw cane sugar price
(depending upon the region) at not less than 19.1 to 20.7 cents/lb. (i.e., the price support level
in a region plus an amount that covers a processor’s cost of shipping raw cane sugar to a cane
refinery plus the interest paid on any price support loan taken out less a forfeiture penalty
applicable under certain circumstances). Similarly, USDA seeks to support the refined beet
sugar price at not less than 23.2 to 26.2 cents/lb. (i.e., the regional loan rate plus specified
marketing costs plus the interest paid on a price support loan less the forfeiture penalty),
depending on the region. USDA seeks to meet these “loan forfeiture,” or higher “effective”
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price support, levels by limiting the amount of foreign raw sugar imports allowed into the
United States for refining and sale for domestic food and beverage consumption. A loan
forfeiture (turning over sugar pledged as loan collateral) occurs if a processor concludes that
domestic market prices at the time of a desired sale are lower than the “effective” sugar price
support level implied by the loan rate.
Import Quota. USDA restricts the quantity of foreign sugar allowed to enter the
United States to ensure that market prices do not fall below the above levels of effective price
support. The policy objective is to maintain market prices at not less than these levels to
ensure that USDA does not acquire sugar due to a loan forfeiture.
Tariff-rate quotas (TRQs) are used as the policy instrument to restrict sugar imports to
the extent needed to meet U.S. sugar program objectives. In practice, the U.S. market access
commitment made under World Trade Organization (WTO) rules means that a minimum of
1.256 million ST of foreign sugar must be allowed to enter the domestic market each year.
While the WTO commitment sets a minimum import level, policymakers may allow additional
amounts of sugar to enter if needed to meet domestic demand. In addition, the United States
committed to allow sugar to enter from Mexico under North American Free Trade Agreement
(NAFTA) provisions. The complex terms are detailed in a schedule and a separate side letter,
which lay out rules for calculating how much Mexico can sell to the U.S. market. Under the
WTO and NAFTA agreements, foreign sugar enters under two TRQs — one for raw cane,
another for a small quantity of refined (including beet) sugar. The Office of the U.S. Trade
Representative (USTR) is responsible for allocating these TRQs among eligible countries,
including Mexico and Canada. The amount entering under each quota (the “in-quota”
portion) is subject to a zero or low duty. Sugar that enters in amounts above each quota is
subject to a tariff that declines over time, according to the rate specified in each trade
agreement. A prohibitive tariff on above-quota imports serves to protect the domestic
producing sector from the prospect that additional sugar enters without any limit.
USDA last September set the FY2001 tariff-rate quotas for sugar imports at 1,500,227
ST. All but 100,000 ST was allocated among 40 countries at that time, leaving about 1.4
million ST eligible for entry. Of this balance, USDA allocated 116,611 ST to Mexico. This
amount reflects the U.S. position on the amount that Mexico is entitled to ship to the U.S.
sugar market under NAFTA (see Mexico’s Access to the U.S. Sugar Market). The 1.4
million ST represents about 14% of U.S. food consumption this year.
Program Costs and Receipts. The sugar program recorded $465 million in budget
outlays in FY2000, the first significant direct costs of the program since FY1986. These
reflected USDA’s purchases of sugar and loan forfeitures made by processors, offset by
forfeiture penalties paid by processors. For FY2001, budget analysts project the CCC will
spend about $15 million to store its sugar inventory. During most of the decade, the sugar
production sector paid more than it drew out. For the 1991-99 crops, sugar processors paid
a budget deficit “marketing assessment” to the CCC on their sale of sugar produced from
domestic cane and beet crops. Imports were not subject to this levy. The $254 million in
assessments collected during this period represented the sector’s contribution to budget
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deficit reduction by generating revenues for the CCC.1 In a policy change that it sought,
Section 803(b) in the FY2000 agriculture appropriations measure (P.L. 106-78) effectively
prohibits USDA from collecting this assessment in FY2000 and FY2001. This saved sugar
processors an estimated $83 million over the 2-year period.
Legislative Proposals and Debate Since 1996
The sugar program compromise enacted as part of the 1996 farm bill did not fully satisfy
the three most directly affected and competing interest groups — growers and sugar
processors, cane refiners, and sugar users. The sugar production sector contended that
“recourse” loan policy, when in effect, would result in considerable price uncertainty. It also
expressed concern that the forfeiture penalty would effectively result in a reduced level of
price support, but indicated that most other provisions were acceptable. Sugar users
contended that the proposed program offered little change from previous policy because price
support levels were not lowered. Cane sugar refiners feared that retaining 1995 price
support levels will result in the closure of more refineries, and further shrink U.S. cane
refining capacity.
Since 1996, sugar users and cane refiners unsuccessfully sought to make changes to the
sugar program during congressional consideration of successive agriculture appropriation bills
in order to attain their lower market price objective. During the 106th Congress, the sugar
production sector succeeded in persuading Congress to drop two farm bill provisions —
marketing assessments, and the requirement that USDA make recourse loans to processors
under certain conditions.
Those that proposed changes contended that the 1996 farm bill did not “reform” the
sugar program by providing a transition to the free market as it did for the other commodity
programs. Program opponents maintained that the program continued to benefit a few
wealthy growers, kept the cost of sugar high, and supported sugar cane production in Florida
with adverse environmental consequences for the Everglades. Members that favored lower
sugar price support argued that consumers would pay less for sugar and sugar products, and
reduce environmental damage in vulnerable producing areas.
Sugar program supporters countered that the changes proposed would devastate an
efficient U.S. sugar industry by driving producers out of business, wreak havoc on industrial
users who rely on critically timed shipments of sugar at prices below those found elsewhere
in the developed world, and undermine the agreement on sugar policy made in the 1996 farm
bill. They asserted that proposed reductions in price support would undercut the seven-year
contract that Congress made in the farm bill, exposing producers and processors to
unreasonable risk who assumed sugar policy would remain unchanged through 2002. They
also argued that food companies would not pass on any savings to consumers if sugar price
support levels were lowered.
1 The peanut sector still pays a similar assessment; authority to collect an assessment from the dairy
and tobacco sectors expired in 1996 and 1998, respectively.
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Proposals Offered by Program Opponents
During the 104th Congress, an amendment offered during House appropriations markup
in May 1996 that effectively would have capped the raw cane sugar price at 21.15 cents per
pound (included in the House-passed FY1997 agriculture appropriations bill - H.R. 3603) was
dropped in the subsequent conference agreement with the Senate. Separately, an amendment
offered in the Senate in July 1996 to this same measure effectively would have eliminated for
most sugar processors the price support guarantee provided by non-recourse loans. This was
tabled on a 63-35 vote.
During the 105th Congress, the House in July 1997 rejected on a 175-253 vote a floor
amendment to the FY1998 agriculture spending bill (H.R. 2160) that would have required
USDA to implement the sugar program on a recourse loan basis in FY1998. The House on
June 24, 1998, rejected on a 167-258 vote a floor amendment to the FY1999 agriculture
appropriations bill (H.R. 4101) that effectively would have reduced sugar price support levels
by one cent per pound.
In the 106th Congress, the Senate on August 4, 1999, tabled 66-33 an amendment to S.
1233 (FY2000 agriculture appropriations) that effectively would have not allowed USDA to
administer the sugar program in FY2000. The Senate on July 20, 2000, tabled 65-32 an
identical amendment to S. 2536 (FY2001 agriculture appropriations). The House, earlier on
June 20, tabled on a point of order an amendment to H.R. 4461 to limit USDA spending to
purchase raw or refined sugar in FY 2001 to $54 million, the amount spent on sugar
purchases during FY2000.
Sugar Production Industry Changes Enacted
The Senate, in adding a farm aid package to the FY2000 agriculture spending measure
(H.R. 1906), included a temporary relief provision to effectively prohibit USDA from
collecting the marketing assessment from sugar processors through FY2001, if the Office of
Management and Budget determines that the federal budget is in surplus in FY2000. House
and Senate negotiators retained this language, but dropped the condition that there be a
budget surplus for the prohibition to be effective, in amending the farm aid package in
conference (Section 803(b) of H.Rept. 106-354). Signed into law (P.L. 106-78) on October
22, 1999, processors expected to save (i.e., increase their revenues by) $83 million over the
2-year period.
With the marketing assessment scheduled to kick back into effect on October 1, 2001,
the sugar sector is seeking to repeal this requirement. A provision to accomplish this was
included in FY2001 emergency farm aid package proposals considered by the House and
Senate Agriculture Committees (but not enacted), and is found in the House Committee’s
omnibus farm bill (Section 151(b) of H.R. 2646). An effort to repeal this reportedly is also
expected to be made during conference this fall on the FY2002 agriculture appropriations
measure.
Conferees to the FY2001 agriculture spending measure (H.R. 4461) added language to
conference agreement text (Section 836) striking the recourse loan feature of the 1996-2002
sugar program. Members opposed to adding this provision argued that changes to 1996 farm
bill authority should be made in the context of congressional consideration of the next farm
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bill. Supporters argued that continued low sugar prices and loan forfeitures by processors
signaled that the production sector was in need of relief as much as the producers of other
commodities that have received farm aid in recent years. Signed into law (P.L. 106-387) on
October 28, 2000, this change means USDA has authority only to make non-recourse loans
to sugar processors for the duration of current program authority.
Sugar Trade Issues
The United States must import sugar to cover the balance of its domestic needs that the
U.S. sugar producing sector cannot supply. Therefore, the implementation of provisions
found in trade agreements specific to both imports and exports of sugar, sugar-containing
products, and other sweeteners such as corn syrup affects the economic interests of the U.S.
sugar production sector, cane refiners, manufacturers of corn sweeteners, and sugar users.
These provisions are complex, reflect compromises in U.S. trade negotiating positions and
the results of bilateral talks to resolve disputes, and affect in varying degrees the economic
interests of all parties with a stake in U.S. sugar policy.
Trade provisions covering sweeteners can affect the domestic sugar supply situation, and
in turn, the level of U.S. sugar market prices. Sugar imported under market access
commitments made by the United States in the NAFTA and WTO trade agreements, together
with some sugar products that are not subject to import restrictions, have added, or could
under certain conditions contribute, to a U.S. sugar surplus and pressure prices downward.
U.S.-Mexican efforts to reach an accommodation among sweetener industry sectors in both
countries is probably the most important issue intersecting with the debate on the sugar
program’s future. Those interests with the most at stake are the: (1) the U.S. sugar
production sector, concerned about the amount of sugar allowed to enter the domestic market
under Mexico’s access under NAFTA; (2) U.S. manufacturers of high-fructose corn syrup
(HFCS), seeking to take advantage of a market opportunity opened under NAFTA to sell to
the large Mexican market; and (3) the financially ailing Mexican sugar sector, pressing to
expand sales to the U.S. market, in large part because of its concern that domestic sales will
increasingly be displaced by the Mexican soft drink industry’s import of cheaper HFCS from
U.S. corn wet millers. The importance and sensitivity of this matter are reflected in the fact
that sweetener issues have been discussed at meetings held by both countries’ presidents since
the late 1990s, and again during Mexican President Fox’s official visit to Washington on
September 5-7. For this reason, some Members of Congress closely follow developments, and
have sought to influence the direction of these negotiations. Acknowledging the importance
of resolving this longstanding bilateral trade irritant and also seeking to secure congressional
support for new fast-track (“trade promotion”) negotiating authority, U.S. Trade
Representative Robert Zoellick has reportedly stated that sweetener disputes with Mexico will
be the first issue to be addressed by the agriculture trade negotiator once confirmed by the
Senate. Among other sugar trade issues, the issue of “stuffed molasses” imports continues
to receive congressional attention.
Mexico’s Access to the U.S. Sugar Market
Starting October 1, 2000, Mexico under NAFTA became eligible to ship much more
sugar duty free to the U.S. market than the 25,000 MT allowed to enter in earlier years. U.S.
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and Mexican negotiators continue to disagree, however, over just how much sugar Mexico
actually can export in this and coming years. Their disagreement centers on which version
of the NAFTA agreement governs this issue. U.S. negotiators base their position on the
sugar side letter (dated November 3, 1993) to the NAFTA agreement that was struck in last
minute talks between U.S. Trade Representative Mickey Kantor and Mexico’s Secretary of
Commerce and Development Jaime Serra Pucha. The side letter was included with other
NAFTA agreement documents that President Clinton submitted to Congress together with
the implementing legislation. Mexican negotiators instead refer to the sugar provisions of the
final NAFTA agreement as concluded in August 1992 and signed by each country’s president
in December that year.
The side letter effectively places a lower cap on duty-free imports of Mexican sugar into
the U.S. market than the ceiling would have been under the original NAFTA agreement. The
side letter accomplished this by: (1) redefining the original formula for “net production
surplus” – the amount of sugar that one country could ship to the other duty free – to also
add consumption of HFCS, and (2) raising, but keeping level, the maximum amount that
could enter duty free during the FY2001-FY2007 period. Looking at FY2001, Mexico under
the side letter’s terms can export its “net surplus” but not more than 250,000 metric tons
(MT) of sugar duty free. USDA announced on September 15, 2000, that Mexico under the
side letter’s formula can sell almost 106,000 MT of sugar to the United States in FY2001.
Under the original NAFTA agreement, Mexico (if determined to be a net surplus producer
under the original agreement’s formula for two consecutive years) would have been able to
ship its entire projected net sugar surplus. If this formula were used, some 600,000 MT
would have been eligible for entry in FY2001. This issue is expected to be discussed over the
next month leading up to a USTR decision on the allocation of the FY2002 sugar TRQ, and
may be on the Presidents’ summit agenda. Some have even called for renegotiating all of
NAFTA’s sugar provisions as a way to resolve this dispute and address future concerns.
The U.S. sugar production sector is concerned that a decision not to abide by the side
letter would result in a flood of additional sugar into an already surplus U.S. market. U.S.
cane refiners urge that Mexican shipments under any negotiated deal be in the form of raw
rather than refined cane sugar, so as not to undercut U.S. refining capacity. U.S.
manufacturers of HFCS have signaled they want their concern about access to the Mexican
market addressed. Looking ahead, the U.S. sugar industry is most apprehensive about the
impact of other NAFTA provisions as they take effect. These include over-quota sugar
imports (e.g., price competitive in the U.S. market) from Mexico projected to occur in
FY2004, and unlimited duty-free imports beginning in FY2008.
Stuffed Molasses Imports
Controversy has surrounded the import by a Michigan company (Heartland By-
Products, Inc.) since the mid-1990s of a liquid sugar syrup (i.e., “stuffed molasses”). This
product is created from sugar imported at the low world price into Canada primarily from
Brazil, mixed with molasses and water, and then shipped duty free to the United States taking
advantage of a specific U.S. tariff provision. Using special equipment, this firm extracts sugar
from this syrup and reportedly ships the remaining molasses back to Canada where the
process starts over again. Concerned that this industrial-grade sugar sold to U.S. food
companies displaces sales of domestically produced beet sugar (118,000 short tons in
1999/00), U.S. beet and cane refiners have sought a remedy to block its import. This amount
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equaled 1.2% of total domestic food use that year. Refiners have argued that stuffed
molasses is imported deliberately to circumvent the sugar TRQ, by entering under a tariff line
that does not subject it to quota restrictions and high tariffs.
Seeking to “close this loophole,” these refiners in early 1998 petitioned the U.S.
Customs Service to reclassify imports of the product to subject it to the sugar TRQ. After
an investigation, Customs in September 1999 revoked its 1995 classification ruling granted
to Heartland, and determined that: stuffed molasses had been “tariff engineered” to take
advantage of a favorable tariff provision, and the intent of the sugar quota mandated that this
product be part of the sugar TRQ. Heartland filed a complaint against Custom’s ruling to the
U.S. Court of International Trade (CIT). The CIT in October 1999 ruled that Customs could
not change the tariff classification after having initially ruled that the product could enter
under the tariff line covered by its 1995 classification ruling. Subsequently, the CIT denied
the U.S. government’s and beet refiners’ motion for reconsideration. In late March 2000, the
Department of Justice and the U.S. Beet Refiners Association separately appealed the CIT
ruling to the U.S. Circuit Court of Appeals in Washington. This Court held a hearing on this
case on February 9, 2001. If the court affirms the CIT ruling, imports of stuffed molasses
would continue to enter freely. Under such a decision, analysts expect other companies for
competitive reasons to move to set up similar operations to extract sugar from imports of
stuffed molasses. If the court overrules the CIT ruling, Heartland (then subject to paying very
high tariffs) likely may not continue to operate.
On August 30, 2001, the Appeals Court unanimously ruled in favor of the U.S.
Government and the Beet Refiners’ Association, upholding the Customs’ 1999 ruling that
imports of stuffed molasses should be subject to the sugar import TRQ’s limits. In its
decision, the 3-judge panel stated that the CIT went too far in determining that this product
was not foreign in origin and thus not covered by the TRQ. The American Sugar Alliance
representing growers and processors applauded the decision, stating it “cuts off one avenue
for circumventing the sugar import rules.”
Concerned that other firms might move to take advantage of “loopholes,” the sugar
production sector still plans to seek a legislative remedy, arguing that imports of other sugar
mixtures could undermine the domestic sugar sector and add to the sugar surplus. In the
107th Congress, Senator Breaux introduced S. 753, similar to a proposal he offered last year,
to classify stuffed molasses and related products in the U.S. tariff schedule as products that
fall under a tariff line covered by the sugar TRQ.
Sugar Industry, Market, and Program Developments
Those with a direct financial stake in the outcome of the debate on future U.S. sugar
policy include: sugarcane and sugar beet farmers, processors (raw sugar mills and beet sugar
refineries), cane sugar refineries, industrial sugar users, foreign countries that export sugar
to the U.S. market, corn producers and manufacturers of high-fructose corn syrup, and the
federal government.
Congressional debate over sugar policy takes place against the backdrop of structural
changes in the industry, historically low sugar prices caused by oversupply, and the inability
of policymakers working within the current U.S. sugar policy framework to reconcile the two
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objectives of protecting the price of domestic sugar (under the sugar program) and also
meeting trade agreement obligations that allow foreign sugar to enter the U.S. market.
Structural Changes. Seeking since the mid-1990s to capture the financial benefits
associated with operating more efficiently and increasing their market share, two processing
firms established a joint refined beet and cane sugar marketing alliance, another company
pursued a strategy of expanding horizontally in order to be a major player in both beet and
cane sugar refining, and three raw cane mills in Florida integrated vertically by building or
purchasing cane refineries to handle their output.
The fall in domestic sugar prices that began in fall 1999 contributed to the emergence
of severe financial difficulties for firms operating facilities in the higher-cost sugar producing
regions, and the farmers who delivered crop to them. Two beet refining factories in
California, and two raw cane mills (one in Hawaii, another in Louisiana), closed their doors
over the last year. Others filed for bankruptcy or actively sought buyers for unprofitable
operations. Imperial Sugar Company (operating both beet and cane refining operations) filed
for bankruptcy protection in mid-January 2001. Part of its recovery plan includes the planned
sale of its four beet factories in Michigan to a farmer cooperative by October. Tate & Lyle
(a British firm with multiple sugar and corn sweetener operations in North America) recently
sold its Western Sugar Company operations in Colorado, Montana, Nebraska, and Wyoming
to a newly-formed farmer cooperative, and its Domino Sugar cane refineries in New York
City, Baltimore, and Louisiana to Flo-Sun, a Florida-based privately-held firm that harvests
cane for processing in its 3 raw cane mills and 2 cane refineries.
Low Sugar Prices and USDA’s Responses. Record U.S. sugar production in
1999/2000, when added to imports of sugar permitted to enter under quota or not subject to
any limitation, contributed to a substantial oversupply of sugar in the U.S. market in FY2000,
and to the fall in prices below effective price support levels and to the lowest levels seen since
1979. In FY2000, raw cane sugar prices were 17% below the previous 3-year average;
refined beet sugar prices were 19% below. Since trade agreement obligations effectively
removed USDA’s ability to further limit the flow of imports, the sugar production sector
sought government intervention sufficient enough to raise prices to avert the forfeiture of
sugar pledged as collateral for non-recourse loans processors had taken out. (Forfeiture —
handing over sugar to the CCC as repayment for the loan — becomes a financially attractive
alternative to a processor if the market price is below the effective support (e.g., loan
forfeiture) level when the loan comes due.) USDA responded with decisions to: (1) purchase
sugar from cane and beet processors (May 2000) and (2) make “in-kind” payments of sugar
to beet farmers who agreed to plow under some of their to-be-harvested crop in order to
reduce sugar output (announced in late July 2000). Since both actions did not raise market
prices sufficient enough to allow processors to pay back all their price support loans taken
out earlier, some exercised their right to “forfeit” to USDA about 10% of 1999/00 sugar
output. As a result, USDA recorded significant budgetary outlays in acquiring a substantial
amount of sugar (1,090,320 ST, raw value).
Though raw cane prices have risen above loan forfeiture levels in the current 2000/01
marketing year, refined beet prices recently were hovering below their respective levels. In
order to reduce storage costs, bolster market prices, and alleviate the sugar oversupply
situation, USDA announced in early June and late August 2001 three initiatives to dispose of
its sugar inventory. First, it plans to sell up to 100,000 tons of refined sugar to ethanol
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producers, and to make available for sale another 40,000 tons (split equally between raw cane
and refined beet) whenever specified market price levels are reached. As of mid-August,
USDA has sold some 7,000 tons of sugar for ethanol; prices still are below levels to trigger
sugar sales.
Second, USDA announced on August 31 it would implement a sugar payment-in-kind
(PIK) program similar to last year’s. It will let growers divert from production (e.g., plow
under) part of their 2001 beet or cane crop in exchange for sugar still held in its inventory
(currently about 772,000 ST). USDA will make available a total of 200,000 ST to farmers
placing accepted bids under this exchange. Each farmer will be limited to receiving a
maximum $20,000 value in sugar. The beet sector reportedly favored another PIK program,
expecting to benefit from higher refined sugar prices; cane growers (operating much larger
farms) did not. Fourteen congressman had earlier urged the Secretary of Agriculture not to
move forward to implement this proposal, and called upon her “to use the present sugar
industry problems as a call for comprehensive sugar reform in the upcoming Farm Bill
debate.”
Policy Tension. U.S. commitments to allow foreign sugar access to the U.S. market
under trade agreements (particularly under NAFTA’s terms, but presently subject to dispute),
and under those that may be negotiated in the next WTO Round and the Free Trade Area of
the Americas (FTAA), raise a fundamental policy issue. Since the annual increase in U.S.
sugar consumption largely reflects population growth, domestic sugar output and minimum
import obligations are more than needed to cover demand. The dilemma that policymakers
face is who should be allowed to supply the small increase in U.S. demand: domestic
producers and processors or foreign sellers. The outcome of farm bill debate on the sugar
program will to a large degree answer this question.
U.S. Sugar Sector Outlook
Those that favor continued government support of the U.S. sugar production sector, and
those calling for a radical policy change, acknowledge USDA’s projections of future U.S.
sugar supply and demand in formulating their legislative proposals and presenting arguments
for a change, respectively. Basing its projection on continuing current sugar policy without
change, USDA expects sugar production “to be fairly constant” through 2011 (reflecting
trend increases in sugar crop yields, offset by reductions in area planted and harvested due to
declining real prices for both sugar crops). U.S. consumption is projected to rise at a slower
rate than in the past (135,000 ST, raw value each year), more than the annual average
production increase (52,000 ST) in the 2001-2011 period. USDA’s baseline projects that
imports entering from Mexico under NAFTA will surge in FY2004, reflecting the decline in
the tariff on over-quota imports, and then almost triple in FY2009 when Mexico is free to
ship all its surplus sugar to the U.S. market. Amounts expected to enter then will more than
cover domestic needs. As market prices fall below support levels, the forecast assumes U.S.
sugar processors will take advantage of the program’s non-recourse feature that allows them
to forfeit sugar to the CCC. USDA projects forfeitures will rise noticeably, and that stock
levels by the end of the period will increase to record levels that analysts would view as “not
sustainable.” Reflecting this outlook, the Congressional Budget Office estimates a
continuation of current policy would result in CCC outlays of $900 million over the FY2002-
11 period.
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Sugar Program Proposals
Two very different proposals with respect to the future of the sugar program have been
tabled for congressional consideration during debate on the next farm bill. In approving its
measure, the House Agriculture Committee proposes a 10-year sugar program that retains
current price support levels, modifies other features, and gives USDA two additional powers
to exercise to ensure that the program operates at no cost to taxpayers (Sections 151-153 of
H.R. 2646). Program opponents again introduced their proposal (H.R. 2081) to allow only
recourse loans be made to sugar crop processors, lower price support levels by nearly a
quarter by 2004, and prohibit any form of price or income protection for the sugar production
sector after FY2005. Opponents plan to challenge the Agriculture Committee’s program
when the House debates the farm bill in mid-September. For a detailed comparison of these
proposals, see the Sugar Program in the CRS Electronic Agriculture Policy and Farm Bill
Briefing Book.
House Agriculture Committee’s Proposed Sugar Program
The sugar provisions in H.R. 2646 reflect many of the recommendations offered by the
American Sugar Alliance (ASA) – representing sugar farmers and processors– in testimony
presented the Committee on April 26 and July 18, 2001. As approved on July 27, the
Committee: (1) continues the non-recourse loan program for sugar through the 2011 crop
year, (2) reinstates the pre-1996 directive that USDA operate the program at no cost to the
federal government; (3) reactivates and amends 1991-95 authority to require USDA to
administer sugar marketing allotments limiting the amount of raw cane mills and beet refiners
can sell, in order to prevent loan forfeitures; (4) allows USDA to transfer sugar in CCC
inventory to cane and beet processors (in conjunction with producers who agree to reduce
production of these crops); (5) requires USDA to extend loans for “in-process sugars and
syrups” derived from cane and beets that are not now eligible for price support; (6) requires
the CCC to establish a storage loan facility program to provide financing for the construction
or upgrade of facilities to store and handle raw and refined sugar; (7) reduces the interest rate
charged on price support loans by 100 basis points (1%); and (8) repeals the sugar marketing
assessment fee starting in FY2002. The Committee did not accept the sugar production
sector’s requests to slightly increase support levels as part of its overall farm bill strategy, and
to eliminate the loan forfeiture penalty.
The ASA commended the Committee for reinstating a U.S. sugar policy that “will ensure
stable prices for farmers and consumers and operate at no cost to taxpayers.” It views the
“domestic inventory management tool” included in H.R. 2646 as “restoring balance to the
U.S. sugar market” when there is a surplus. Its spokesman acknowledged that the industry
“is reluctant to face the prospect of limited marketings in some years,” but that trade
commitments under the WTO and NAFTA agreements require the United States to import
as much as 1.5 million ST of sugar each year (about 15% of consumption), “whether we need
that sugar or not.” He added that growers and processors under marketing allotments will
have the flexibility to plant as much crops and produce as much sugar, respectively, as they
wish, but noted that processors who increase sugar output faster than the growth in U.S.
demand “may have to postpone the sale of some sugar, and store that sugar at their expense
until the market requires it.”
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Two Members of Congress opposed to the sugar program expressed disappointment that
the House Agriculture Committee “decided to ignore the failure of the U.S. sugar program,”
noting that the measure approved contains “no meaningful reform” and turns “the clock back
on consumers, workers, taxpayers and the environment.”
If enacted into law, this proposal would guarantee price protection to farmers and sugar
crop processors at currently-set levels (18 cents/lb. for raw cane, 22.9 cents/lb for refined
beet). The Secretary of Agriculture would have discretionary authority to implement
payment-in-kind programs that in time could result in the complete transfer of the sugar
remaining in CCC inventory to processors, and remove its potential to dampen prices. The
requirement to implement marketing controls on sugar may “lock” the domestic sugar
production sector into a declining share of the U.S. market, as some have observed. These
controls have the potential for significantly reducing the amount of sugar that U.S. processors
can market starting as soon as FY2004, particularly if USDA intends to meet the program’s
no cost objective. Such a scenario could be mitigated to some degree if U.S.-Mexican trade
negotiators reach an accommodation that slows down the pace of sugar allowed to enter the
U.S. market.
Program Phase-Out Proposal
The “Sugar Program Reform Act” (H.R. 2081), introduced by Representative Dan
Miller on June 6, 2001, is largely identical to his proposal introduced in the 106th Congress
(H.R. 1850). This bill proposes to: (1) lower sugar price support levels in stages through
2004; (2) require USDA to make only recourse loans to sugar processors; (3) terminate
processor access to recourse loans, and not allow USDA to use any funds to make payments
or purchases to support sugar, after the 2004 crops; and (4) require the President to use all
available authorities to enable USDA (starting in FY2002) to supply the domestic market with
raw cane sugar at prices not greater than the higher of: the world sugar price (adjusted for
delivery to the U.S. market), or the raw cane sugar loan rate in effect, plus interest. The
recourse loan rate for raw cane sugar would decline 1 cent per pound each crop year (i.e., to
equal 17 cents/lb. in the 2001/02 marketing year, 16 cents/lb. in 2002/03, 15 cents/lb. in
2003/04, and 14 cents/lb. in 2004/05). Loan rates for refined beet sugar would decline in
tandem with the reduction in the raw cane sugar loan rate. After the processing of the 2004
sugar crops is completed, decisions made by the Executive Branch in exercising its authority
to administer the sugar import quotas would effectively determine U.S. sugar policy and the
level of domestic sugar prices.
The Coalition for Sugar Reform (an association of food manufacturers, consumer and
taxpayer advocacy groups, environmental organizations, and publicly-traded cane refiners)
has endorsed the Miller bill. The Coalition has long claimed that the current sugar program
“is an economic disaster for producers, consumers, workers in urban centers who are losing
their jobs and the food manufacturing industry” and should be reformed. Its spokesman
stated that H.R. 2081 would do this by: (1) securing adequate supplies for consumers,
industrial users, and cane refiners, (2) accommodating present and future U.S. international
trade obligations by providing market access for imports, (3) removing “the current economic
incentives for overproduction, and (4) allowing sugar to trade at market prices “below
support levels when market forces dictate.”
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If enacted into law, this proposal would reduce the level of price support by 22% from
current levels. Allowing USDA to make only recourse loans removes processors’ access to
price protection, and thus transfers to them the entire risk of taking out loans. This approach
starts shifting responsibility for sugar policy from Congress to the Executive Branch, by
granting the President authority to administer the import quota, who will have complete
flexibility to do so starting in 2005. By mid-decade, sugar crop production and processing
in the higher cost producing areas can be expected to decline, as some analyses indicate. This
in turn would allow that portion of U.S. sugar needs to be met from increased imports.
LEGISLATION
S. 753 (Breaux)
Amend the Harmonized Tariff Schedule of the United States to prevent circumvention
of the sugar tariff-rate quotas. Introduced April 6, 2001; referred to Committee on Finance.
H.R. 2081 (Miller, Dan)
Sugar Program Reform Act. Amends the Agricultural Market Transition Act of 1996
to change the type of price support available for sugarcane and sugar beets from a
nonrecourse loan program to a solely recourse loan program, to gradually reduce the level
of price support available for sugarcane and sugar beets, and to eliminate the program after
the 2004 crops of sugarcane and sugar beets. Introduced June 6, 2001; referred to
Committee on Agriculture.
H.R. 2646 (Combest)
Agricultural Act of 2001. Title I, Subtitle C, Chapter 2 amends the Agricultural Market
Transition Act of 1996 to authorize a non-recourse loan program for sugar crops through
2011 at current loan rate levels, reinstate the requirement that the sugar program be
administered at no-net cost to taxpayers, eliminate the marketing assessment on domestically-
produced sugar, authorize the USDA to transfer sugar in CCC inventory to farmers who
agree to reduce production (i.e., payment-in-kind program), authorize loans for sugar storage
facilities, and reduce the CCC interest rate on sugar price support loans (Sections 151 and
153). Section 152 amends the Agricultural Adjustment Act of 1938 to authorize the
Secretary of Agriculture to establish marketing allotments for domestically-produced sugar
to eliminate loan forfeitures when certain conditions exist. Amended and passed by voice
vote by the Agriculture Committee on July 27, 2001. H.Rept. 107-191, Part 1, filed August
2.
FOR ADDITIONAL READING
Congressional Research Service, Sugar Program entry in the CRS Electronic Agriculture
Policy and Farm Bill Briefing Book.
USDA. Economic Research Service. Sugar and Sweetener Briefing Room. Available on the
Web at [http://www.ers.usda.gov/briefing/sugar/]
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