Order Code IB95117
Issue Brief for Congress
Received through the CRS Web
Sugar Policy Issues
Updated July 12, 2002
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
Sugar Policy in the 1996-2001 Period
Background
Recourse and Non-Recourse Loans
Loan Forfeiture Penalty
Policy Overview
Price Support
Loan Rates
Effective Price Support Levels
Import Quotas
Program Costs and Receipts
Sugar Industry, Market, and Program Developments
Structural Changes
Low Sugar Prices and USDA’s Responses
Sugar Trade Issues
Mexico’s Tax & Trade Policies on Corn Syrup Imports from the U.S.
Mexico’s Access to the U.S. Sugar Market
Circumvention of Sugar Import Quotas
Sugar Program in the 2002 Farm Bill
Overview
New Sugar Program’s Provisions
Background on New Program
Farm Bill Debate on Sugar Program
LEGISLATION
FOR RELATED INFORMATION, PLEASE SEE THE FOLLOWING CRS PRODUCT:
CRS Electronic Briefing Book on Agriculture Policy and the Farm Bill, Sugar Program
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Sugar Policy Issues
SUMMARY
The sugar program is designed to protect
approaches to reduce the level of price sup-
the incomes of growers of sugarcane and
port, and/or phase out the program by mid-
sugar beets, and those firms that process each
decade. During debate, the House and Senate
crop into sugar. To accomplish this, the U.S.
rejected the amendments offered by oppo-
Department of Agriculture (USDA) supports
nents.
domestic prices by making available loans at
minimum price levels to sugar processors and
The sugar program in the 2002 farm bill
by restricting sugar imports. In practice,
increases the effective price support level by
USDA seeks to administer an import quota in
5-6% compared to that available over the last
a way that (1) allows only as much foreign
6 years, gives USDA tools to operate the
sugar to enter the U.S. market as is needed to
program at no cost, and reactivates a mecha-
meet the balance of domestic demand, and at
nism to limit the amount of domestically
the same time (2) results in a market price
produced sugar that processors can sell in the
above the support level to allow processors to
U.S. market in order to meet import
pay off any price support loans taken out. The
commitments negotiated under two trade
quota is intended to prevent the entry of
agreements.
lower-priced foreign sugar, which if allowed
to enter freely, would undermine the competi-
Congressional attention now turns to a
tive position of the domestic sugar producing
provision in the Senate’s trade bill that would
sector.
establish a process for USDA to follow to
reduce the entry of sugar into the U.S. market
Debate on a new sugar program occurred
in forms intended to circumvent the sugar
against the backdrop of structural changes in
import quota. Sought by sugar producers and
the production sector and an oversupply situa-
cane refiners, this amendment is opposed by
tion that caused historically low prices. Pro-
importers of sugar-containing products. Both
cessors exercised their right to forfeit loans,
sides will seek to influence this amendment as
which led to the first program outlays since
the conference committee resolves differences
the mid-1980s. USDA acted to mitigate the
between the House and Senate trade bills.
effect of low prices and continues to dispose
of its large acquired sugar inventory.
These same groups will also closely
monitor how USDA implements the new
In the debate, growers and processors
program’s authorities (especially the market-
stressed the industry’s importance in provid-
ing allotment provisions), what steps USDA
ing jobs and income in rural areas. Sugar
takes to reduce or eliminate the balance of its
users, some cane refiners, and their allies
sugar inventory, and what sugar import quota
argued U.S. sugar policy costs consumers and
decisions the U.S. Government announces for
results in lost jobs at food firms in urban
FY2003 to meet trade agreement obligations.
areas. The sugar production sector proposal
The U.S. sugar and corn syrup producing
(incorporated in the 2002 farm bill – P.L. 107-
sectors are monitoring and will seek to influ-
171) called for resolving trade disputes, retain-
ence the direction of U.S. Government efforts
ing current loan rate levels, and relying on
to settle contentious sweetener disputes with
domestic marketing controls to control sup-
Mexico. If and how these are resolved will
plies. Program opponents advocated various
affect U.S. sugar supply and price prospects.
Congressional Research Service ˜ The Library of Congress
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MOST RECENT DEVELOPMENTS
Sixty House members have called on House conferees appointed to resolve differences
with the Senate on trade legislation (H.R. 3009) to reject a Senate provision intended to
address the sugar production sector’s and cane refiners’ concerns that sugar is entering the
U.S. market in ways that circumvent the existing structure of sugar import quotas (see
Circumvention of Sugar Import Quotas). Their position was stated in a letter to the
chairman of the Ways and Means Committee, who will serve as the House chair in
conference.
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.
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 supplied roughly 55% of the U.S. sugar
market. This share grew over the last 15 years, reflecting price protection provided by a
sugar program. In FY2001, domestic production filled 88% of U.S. sugar demand for food
and beverage use. As high-fructose corn syrup (HFCS) 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. The
import share of the U.S. sugar market last year was 12%.
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U.S. sugar policy maintains domestic sugar prices considerably above the world market
price, and is structured primarily to protect the domestic sugar producing sector (sugar beet
and sugarcane producers, and the processors of their crops) and to ensure a sufficient supply.
As a result of the price differential, U.S. consumers and food product manufacturers pay
more for sugar and manufactured food products where sugar is an ingredient than they would
if imports entered without any restriction. How competing interests view this issue
undergirds much of the public debate on sugar policy.
Sugar Policy in the 1996-2001 Period
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. Changes
made by Section 156 of the Agricultural Market Transition Act of 1996 were intended to
make the sugar production sector more responsive to market forces and were at that time
accepted by sugar producers and processors as the political price for keeping the basic
program intact. These program provisions still apply to sugar processed from the 2001 beet
and cane crops. The new program (see Sugar Program in the 2002 Farm Bill) begins later
this summer for the 2002 crops without the two provisions described immediately below.
Recourse and Non-Recourse Loans. The first change required USDA to make
recourse loans available to processors whenever it announced 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 activated,
recourse loans would provide no price floor to processors, even if market prices fall below
support levels. If USDA announced an import quota of 1.5 million ST or more,
non-recourse loans (the type of loan available under pre-FY1996 and post-FY2000 policy)
automatically would become available to processors. Non-recourse loans provide a price
guarantee to a processor whenever market prices fall below the same support 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 prices worsened during FY2000, the sugar production sector sought
and succeeded in having Congress repeal USDA’s authority to make recourse loans, effective
for FY2001 (Section 836 of P.L. 106-387 – the FY2001 agriculture appropriations).
Loan Forfeiture Penalty. The second change required USDA to impose about a 1
cent per pound penalty on any processor forfeiting sugar to the Commodity Credit
Corporation (CCC). This applied only when sugar had been 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 reduced 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 Effective Price Support Levels
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 they had
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placed under loan earlier in the year. To exercise this right to forfeit on these loans (plus a
small amount of loans that came due in FY2001), processors paid $13.5 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 and
now under the new program, on how it will administer sugar marketing allotments and other
authorities, affects market prices, and will continue to be made with the intent to ensure that
growers and processors realize the benefits of price support the law provides, 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 (a requirement changed slightly by the new program)
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 2002 farm bill freezes loan rates — 18¢ per pound for raw cane
sugar and 22.9¢ per lb. for refined beet sugar — at levels first set in 1995 for another 6 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 rates (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, under the new farm bill, USDA’s aim will be to
support the raw cane sugar price (depending upon the region) at not less than 20.1¢ to 21.2¢
per 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 plus location discounts ). Similarly, USDA will seek to support the refined beet
sugar price at not less than 23.0¢ to 25.9¢ per lb. (i.e., the regional loan rate plus specified
marketing costs plus the interest paid on a price support loan), depending on the region.1
1 These ranges of effective price support levels reflect the new program’s repeal of the loan forfeiture
(continued...)
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USDA aims to meet these “loan forfeiture,” or higher “effective” price support, levels by (1)
limiting the amount of foreign raw sugar imports allowed into the United States for human
consumption, and soon under the new program by (2) limiting the amount of domestically-
produced sugar permitted to be sold under the marketing allotment mechanism, and (3)
offering sugar in its inventory to processors (and growers) who agree to reduce production.
A loan forfeiture (turning over sugar pledged as loan collateral) may occur if a processor
concludes, also weighing other factors, that the domestic market price at the end of the loan
term is lower than the “effective” sugar price support level.
Import Quotas. USDA restricts the quantity of foreign sugar allowed to enter the
United States for refining and sale for domestic food and beverage consumption to ensure
that market prices do not fall below effective price support levels. 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 specialty) sugar. The
Office of the U.S. Trade Representative (USTR) is responsible for allocating these TRQs
among 41 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
U.S. sugar producing sector from the entry of additional foreign sugar. In addition, other
TRQs limit the import of three categories of sugar-containing products (certain products
containing more than 10% sugar, other articles containing more than 65% sugar, and blended
syrups). Quota and tariff provisions differ depending on whether these imports enter from
Mexico, from Canada, or from any other country.
USDA on September 18, 2001, set the FY2002 tariff-rate quotas for sugar imports (raw
and refined) at 1.421 million short tons (ST), raw value. This quantity is expected to account
for some 14% of U.S. food consumption in FY2002. Of this amount, USDA allocated
151,855 ST to Mexico. This quantity 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).
1 (...continued)
penalty.
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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. In FY2001, program outlays totaled $31 million (half
of which was associated with storing its sugar inventory). USDA estimates that it will
recoup more than a third of its cost related to sugar purchases and forfeitures in FY2002.
Earlier, during most of the decade (FY1991-99), the sugar production sector paid more to the
CCC 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.2 Imports were not subject to this levy. The $254 million in assessments collected
during this period represented the sector’s contribution to budget deficit reduction by
generating revenues for the CCC.3
Sugar Industry, Market, and Program Developments
Those with a direct financial stake in the debate on U.S. sugar policy include:
sugarcane and sugar beet farmers, processors (raw sugar mills and beet sugar refineries), cane
sugar refineries, industrial sugar users (including food and beverage product manufacturers),
foreign countries that export sugar to the U.S. market, corn producers and manufacturers of
high-fructose corn syrup (HFCS), and the federal government.
Congressional debate over sugar policy leading up to the 2002 farm bill changes took
place against the backdrop of structural changes in the industry, historically low domestic
sugar prices caused by oversupply, and the inability of policymakers working within the
1996-enacted U.S. sugar program framework to reconcile the two 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 (under the import quota).
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 decline 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 for the farmers who delivered crop to them. Two beet refining
2 In a policy change sought by the sugar production sector, Section 803(b) in the FY2000 agriculture
appropriations measure (P.L. 106-78) effectively prohibited USDA from collecting this assessment
in FY2000 and FY2001. This saved sugar processors an estimated $80 million over the 2-year
period. The 2002 farm bill eliminated the sugar assessment, effective October 1, 2001.
3 The peanut sector will pay a similar assessment only through the 2001 crop; authority to collect an
assessment from the dairy and tobacco sectors expired in 1996 and 1998, respectively.
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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 have actively sought buyers for
unprofitable operations. Imperial Sugar Company (operating both beet and cane refining
operations) came out of bankruptcy protection in August 2001. Part of its recovery plan
included the sale of its four beet factories in Michigan to a farmer cooperative. Tate & Lyle
(a British firm with multiple sugar and corn sweetener operations in North America) recently
completed the sale of its Western Sugar Company operations in Colorado, Montana,
Nebraska, and Wyoming to another farmer cooperative. Late in 2001, it completed the sale
of 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
In marketing year 1999/2000, record domestic sugar production from the 1999 crops,
combined with imports of sugar permitted under trade agreements or entering not subject to
any limitation, contributed to a substantial oversupply. Since the U.S. government could not
further reduce imports to accommodate higher domestic sugar output without breaking its
market access commitment to other countries made under World Trade Organization rules,
USDA intervened to bolster market prices that had fallen below effective price support
levels. Government sugar purchases, and USDA’s decision to pay growers sugar “in-kind”
(PIK) to plow under some of their to-be-harvested crop in order to reduce output, though, did
not raise prices enough to enable processors pay back all of their price support loans when
they came due. Some processors exercised their right to “forfeit” 10% of FY2000 sugar
output (1,090,320 ST), and USDA recorded significant program outlays ($465 million in
FY2000).
During the 2000/01 marketing year, USDA reduced about one-third of its inventory
under the first sugar PIK program. Lower raw cane sugar output helped prices to recover
above loan forfeiture levels. Refined beet prices, though, did not rise above their forfeiture
levels until late in September 2001, largely in response to a reduced production outlook, and
USDA’s policy to continue disposing of its sugar inventory in order to reduce storage costs
and bolster market prices. It announced sales would occur whenever specified market price
levels thresholds were reached, and that it would offer another sugar PIK program.
In the current 2001/02 marketing year, USDA has further reduced its inventory by
completing its second PIK program, concluding several sales of refined beet sugar, and
facilitating the exchange of some of its acquired raw cane sugar for what some foreign
countries would have shipped to the U.S. market under their respective allocations of the
U.S. sugar TRQ. These initiatives, excessive rainfall that may adversely affect the beet crop
in the Red River Valley area, and expectations that marketing allotments will limit some
sugar sales after October 1, 2002, have contributed to a firming in both raw cane and refined
beet sugar prices. With prices currently above loan forfeiture levels, the earlier prospect that
some sugar might be forfeited later this summer is fading.
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Sugar Trade Issues
The United States must import sugar to cover the balance of its domestic needs that the
domestic sugar producing sector cannot supply (currently about 12%). Therefore, 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, domestic cane refiners, U.S. manufacturers of corn sweeteners,
domestic sugar users, and sugar exporting countries. These provisions are complex,
reflecting compromises in U.S. trade negotiations and the results of bilateral talks to resolve
disputes, and the economic interests of all parties with a stake in U.S. sugar policy.
Trade in sweeteners affects 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 were not subject to import restrictions until recently, 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 trade issue. The success or failure of ongoing talks will make
this issue an even more important factor in how USDA administers the enacted 2002
program provisions. Economic 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’s terms; (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 frequently discussed at meetings held by both countries’
presidents since the late 1990s. Developments on two closely intertwined sweetener trade
disputes will be closely watched to see if both can be resolved by September 2002, when
each country faces deadlines on deciding upon key features of next year’s sweetener policies.
Separately, an August 2001 court decision on the issue of “stuffed molasses” imports
ruled in favor of the domestic sugar industry. Seeking to head off the prospect that other
products could be used to circumvent the U.S. sugar import quota system has continued to
receive congressional attention. The Senate’s trade adjustment assistance bill (S. 1209),
incorporated in the trade legislation passed by the Senate (Section 1002 of H.R. 3009),
includes a precedent-setting provision to address the sugar industry’s desire to establish a
process to prevent such circumvention. A coalition of food groups that sell imported sugar-
containing products strongly oppose this amendment.
Mexico’s Tax and Trade Policies on Corn Syrup Imports from the
United States
Legislation passed by the Mexican Congress on January 1, 2002, to tax soft drinks
containing corn syrup but not sugar temporarily eliminated the market for U.S. corn and
HFCS (processed from corn) in Mexico and jeopardized the viability of two U.S. companies
that manufacture HFCS there. The U.S. corn and HFCS sectors viewed this as a step back
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in negotiating a resolution to the HFCS dispute, and pressed Administration officials to
persuade Mexican authorities to remove this tax. Observers view the new soft drinks tax,
though, as an effort by the Mexican sugar industry to capture back their home market and
apply pressure on the United States to negotiate a comprehensive solution on all sweetener
disputes sooner rather than later. Though Mexican President Fox in late March suspended
the application of this tax through the end of September, the Mexican Congress on April 2
voted to challenge his decision in the country’s Supreme Court. Reflecting this uncertainty,
U.S. exports to Mexico of corn for processing into sweeteners and also HFCS remain at low
levels. This issue is also tied to earlier WTO and NAFTA panel rulings that found Mexico’s
1998 decision to impose anti-dumping duties on imports of U.S.-produced HFCS to prevent
further damage to its domestic sugar sector was inconsistent with its trade commitments. To
comply with these rulings, Mexico on April 22 established a new tariff rate quota for HFCS
imports from the United States. Imports above the 148,000 metric tons (MT) quota will be
subject to a 210% duty. Observers note that this quota equals the amount of Mexican sugar
the U.S. government will allow to enter this year under NAFTA (see below) and WTO
provisions. In followup action, Mexico completely lifted its high anti-dumping duties on
imports of U.S. HFCS in mid May 2002.
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.
and Mexican negotiators continue to disagree, however, over just how much sugar Mexico
actually can export to the United States. 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 and Mexico’s Secretary of Commerce and Development.
The side letter was included with other NAFTA agreement documents that President Clinton
submitted to Congress together with the implementing legislation. Mexican negotiators
instead base their position on the sugar provisions of the August 1992 NAFTA agreement
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 FY2002, Mexico under the
side letter’s terms can export its “net surplus” but not more than 250,000 MT of sugar duty
free. USDA announced on September 18, 2001, that Mexico under the side letter’s formula
can sell 137,788 MT of sugar to the United States in FY2002. 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, Mexican officials argue that 550,000 MT would be
eligible for entry in the current year. 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 Mexican sugar into an already well-supplied U.S.
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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 substantial over-quota
sugar imports from Mexico projected to occur starting in FY2004 (e.g., likely to be price
competitive in the U.S. market should world sugar prices fall to historically low levels), and
unlimited duty-free imports beginning in FY2008.
Circumvention of Sugar Import Quotas
The sugar production and cane refining sectors are seeking a legislative remedy so that
U.S. firms will not be able to take advantage of tariff “loopholes” to import sugar outside of
the current sugar and sugar-containing product TRQs. Such activity is sometimes referred
to as “circumventing” the quota. This initiative is one of the three “pillars” the production
sector is seeking in order to achieve a sugar policy that accomplishes their objective of
achieving a supply-demand balance that protects their interests. Sugar producers, processors,
and refiners argue, citing the “stuffed molasses” case as a prime example (see below), that
imports of some sugar mixtures and products have undermined the domestic sugar industry
by adding to the sugar surplus. During Senate Finance Committee markup of trade
adjustment assistance legislation (S. 1209) on December 4, 2001, Members approved an
amendment offered by Senator Breaux to authorize USDA to identify imports that are
circumventing the TRQs on sugars, syrups, or sugar-containing products, and to require the
President to include such-identified products in proclaiming revisions to these quota
provisions. This provision is found in the trade legislation package (Section 1002 of H.R.
3009) passed by the Senate on May 23, 2002. There is no comparable provision in the trade
bill package that the House on June 26 agreed to.
A coalition of food groups oppose Section 1002 as written, arguing that it represents “a
direct attempt to close the borders to lawfully imported sugar containing products.” It points
out that the amendment is so broadly written that food products that contain sugar, such as
gelatin or ice tea mix, could be placed under a TRQ, despite its stated intent to target only
those products that “circumvent” TRQs. The coalition claims the wording fails to define
“circumvention,” gives USDA “no effective guidance” on how to identify products for
reclassification in a TRQ, allows for no review by the President or the courts of USDA
determinations, and undermines the Department of Treasury’s role in administering tariff
laws by creating an exception for sugar-containing products. This coalition further states that
the amendment could violate U.S. trade agreements and invite foreign retaliation. A group
of House members have laid out these same arguments, and asked that House trade bill
conferees reject the Senate amendment in conference.
The sugar industry argues that the Breaux amendment would enhance the function that
TRQs perform in U.S. sugar policy by establishing a process to protect the industry from the
impact of products containing sugar being imported into the United States in forms that have
no commercial use. Inside U.S. Trade reported that one industry source stated the language
“does not cover any finished products or any products with any commercial use in the form
in which it is imported.” The food group coalition, though, has countered that the
amendment requires USDA to identify imports of articles that circumvent the sugar and
related product TRQs found in four chapters of the Harmonized Tariff Schedule, most of
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which are finished products. The sugar industry also claims that the provision would protect
the market access of those countries with a share of the U.S. sugar TRQ by ensuring that
their sales of sugar do not decline as a result of sugar-containing products entering
intentionally to circumvent the TRQ.
Analysts have attempted to determine how much sugar is included in imports of sugar-
containing products (SCPs). Such estimates can be viewed as a crude proxy for the amount
of domestically-produced sugar displaced by the sugar content in such imports (or the
amount by which demand for U.S. sugar might increase, depending on how USDA were to
administer this amendment). Estimates of the quantity of sugar found in SCPs that might be
covered by the amendment range widely – from 50,000 to over 500,000 short tons. If these
quantities were added to the sugar supplied by the domestic sugar sector and by other
countries under the import quota, the sugar content in imported SCPs would have equaled
from half of 1% to 5% of all sugar delivered for human consumption in 2001.
This initiative reflects the production sector’s objective to codify into law a mechanism
to address situations similar to the “stuffed molasses” case, which took the regulatory process
and courts more than three years to resolve. Starting in the mid-1990s, controversy
surrounded the import by a Michigan company (Heartland By-Products, Inc.) of a liquid
sugar syrup (i.e., “stuffed molasses”). This product was created from sugar imported into
Canada at the low world price primarily from Brazil, mixed with molasses and water, and
then shipped duty free to the United States taking advantage of a specific tariff provision.
Using special equipment, this firm extracted sugar from this syrup and reportedly shipped
the remaining molasses back to Canada where the process started over again. Concerned that
this industrial-grade sugar sold to U.S. food companies displaced sales of domestically
produced beet sugar (an estimated 118,000 short tons in 1999/00 – equal to 1.2% of total
domestic food use that year), U.S. beet and cane refiners sought a remedy to block its import.
Refiners argued that stuffed molasses was imported deliberately to circumvent the sugar
TRQ, by entering under a tariff line that did not subject it to quota restrictions and high
tariffs.
Seeking to “close this loophole,” these refiners since early 1998 sought relief from U.S.
Customs and then the courts. This process culminated in a court decision issued August 30,
2001, when the U.S. Circuit Court of Appeals in Washington unanimously ruled in favor of
the U.S. Government and the Beet Refiners’ Association. Its decision upheld 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 U.S. Court of International Trade (in
countering Custom’s ruling in a subsequent decision) 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.”
Sugar Program in the 2002 Farm Bill
Overview
The 2002 farm bill includes a sugar program that slightly increases effective price
support levels for raw cane sugar and refined beet sugar, and reactivates a mechanism (called
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“marketing allotments”) to limit the amount of domestically produced sugar that can be sold
when imports are projected below a specified level. Other provisions require the program
to operate again at no-cost to the federal government, modify some features of the 1996-
enacted program, explicitly authorize a payment-in-kind program for sugar, and prescribe in
great detail how USDA must administer marketing allotments. Some provisions are
designed to meet the sugar production sector’s objective that the program operate at no cost.
During floor debate in each chamber, program opponents failed in efforts to reduce the
level of price support, and/or to phase out the current program. The Bush Administration did
not present any proposals with respect to the sugar program, but earlier questioned the
practice of compensating growers for not harvesting a portion of their crop. Conferees easily
resolved the few differences between the House and Senate sugar program provisions. The
most important was an agreement to repeal the 1996-enacted penalty imposed on a processor
that decides to forfeit any price support loan taken out (i.e., hand over sugar to the
government in payment).
New Sugar Program’s Provisions
The new program is designed to maintain a balance between supply and demand in the
U.S. sugar market, ensure that sugar producers and processors receive enhanced price support
and other program benefits that offset some of the revenue lost to reduced marketings under
the new allotment mechanism, and remove most of the federal government’s budgetary
exposure. The program reflects the sugar production sector’s willingness to accept reduced
sales in return for gaining price protection for the quantity of sugar that the marketing
allotment mechanism allows processors to sell. The sector’s objective, expecting little
growth in domestic sugar demand and accepting U.S. trade commitments that allow other
countries access for a minimum quantity of their sugar, is to maintain the status quo for as
long as possible, until U.S. market demand for sugar increases and/or trade negotiations
conclude in a way that favors their interests.
One provision took effect immediately upon enactment on May 13, 2002 – the repeal
of the loan forfeiture penalty. Another change was made retroactive – the marketing
assessment was eliminated effective October 1, 2001. Loan provision authorities will take
effect starting in late August for refined beet sugar processed from the 2002 beet crop (i.e.,
loan provisions) and then later this year for raw cane sugar processed from the 2002
sugarcane crop. The marketing allotment and no cost provisions will apply beginning
October 1, 2002. Other provisions, such as the storage loan program, will take effect when
USDA issues implementing regulations.
Major provisions –
! reauthorize the sugar program for 6 years (i.e., 2002 to 2007 crop years).
! increase the effective price support level by 5-6% (to a range of 20¢-22¢
per pound for raw cane sugar, and 24¢-27¢ per lb. for refined beet sugar).
Though the loan rates continue at the 1996-enacted levels (18¢ per lb. for
raw cane sugar, and 22.9¢ per lb. for refined beet sugar), the repeal of the
loan forfeiture penalty (see below) effectively raises by about one cent the
minimum price levels USDA will use to administer the no-cost objective
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(see below). This change returns effective price support to the higher levels
in effect prior to 1996.
! make non-recourse loans available to processors of sugarcane and sugar
beets at the specified loan rates. The loan program is expanded to allow
loans to be made also for in-process sugars and syrups at 80% of the raw
cane or refined beet loan rate.
! repeal the loan forfeiture penalty effective May 13, 2002 (see page 2 for
explanation).
! repeal the sugar marketing assessment retroactively to October 1, 2001.
This will save the sugar production sector about $40 million annually.
! require USDA to operate the sugar program at no cost to the federal
government using two tools – marketing allotments and sugar payment-in-
kind (see below for explanations). USDA is directed to use both tools to
ensure that no loan forfeitures occur. In other words, administrative
decisions must be made so that domestic sugar prices do not fall below
effective price support levels that would make it more attractive for
processors to hand over to USDA sugar pledged as collateral for a price
support loan.
! require marketing allotments4 when imports are below 1.531 million short
tons (ST). By limiting the amount of domestically-produced sugar that raw
cane mills and beet refiners can sell, this mechanism ensures that the United
States meets its annual market access commitments for sugar imports under
the WTO agreement (1,255,747 ST) and under NAFTA’s sugar side letter
in effect through FY2007 (up to a maximum 275,578 ST). Provisions detail
the formula that USDA must follow to calculate the amount of domestic
sugar that can be sold (i.e., the total allotment), specify the factors to apply
in making this determination, and split the allotment between the beet and
cane sectors at 54.35% and 45.65%, respectively. Additional rules specify
how the raw cane allotment is to be distributed among sugarcane producing
states, and then among the mills in each state. Separate rules stipulate how
the beet sugar allotment is to be allocated among processing companies
(many of which operate across state lines). Once the detailed calculations
are made, each firm will be able to sell only as much sugar as stated in the
allotment notification received from USDA.5 USDA is charged with
4 The 1996 farm bill suspended sugar marketing allotment authority, which is found in “permanent”
agricultural law (Agricultural Adjustment Act of 1938). Under the 1990 farm bill which reactivated
and amended this permanent authority, USDA imposed allotments three times in the 1991-95 period.
5 Responding to concerns that the marketing allotment provisions would apply immediately upon the
farm bill’s enactment to sugar processed from the 2001 crops and still being sold, conferees agreed
to defer their effect until later this summer to give processors and buyers time to adjust to a changed
marketing environment.
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establishing allotments for cane and beet processors by October 1, 2002, for
sugar sold in the 2002/03 marketing year.
! explicitly authorize a sugar payment-in-kind (PIK) mechanism that allows
sugar processors (acting in concert with producers of cane and beets) to
submit bids to obtain sugar in USDA’s inventory in exchange for reducing
production. This provision supplements 1985 farm bill authority which
USDA tapped to implement the 2000 and 2001 sugar PIK programs.
! authorize a new storage loan facility program to provide financing to
processors for constructing or upgrading facilities to store and handle raw
cane and refined beet sugar. This will give qualifying processors access to
below-commercial rate financing to install additional facilities for holding
sugar that cannot be sold when marketing restrictions mandated by
allotments are in effect.
! reduce the interest rate USDA charges on price support loans extended to
sugar processors by 100 basis points (1%). This provision is unique to the
new sugar program; loans made available to producers of eligible crops will
continue to carry an interest rate equal to what USDA’s Commodity Credit
Corporation pays the U.S. Treasury for its funds plus 100 basis points.
Background on New Program
The 2002 farm bill’s sugar provisions reflect the recommendations offered by the
American Sugar Alliance (ASA) – representing sugar farmers and processors – in testimony
presented to the House and Senate Agriculture Committees in the spring and early summer
of 2001. The ASA has commended committee and floor actions taken that reinstate 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 the farm bill
as “restoring balance to the U.S. sugar market” when there is a surplus. Its spokesmen have
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.” They add 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.”
Farm Bill Debate on Sugar Program
The nearly identical sugar programs reported by the House and Senate Agriculture
Committees were challenged by program opponents during floor debate. In the House,
Representatives Dan Miller and George Miller offered an amendment on October 4, 2001,
to replace the Committee’s proposed sugar program with an approach they argued would
result in a sugar policy more oriented to market forces. They had earlier expressed
disappointment that the Agriculture Committee “decided to ignore the failure of the U.S.
sugar program,” noting that the measure approved contains “no meaningful reform” and
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turns “the clock back on consumers, workers, taxpayers and the environment.” Their
amendment proposed to retain the current program's non-recourse loan feature, reduce the
current level of sugar price support by almost 6%, increase financial penalties on processors
that hand over sugar to the CCC rather than repay any non-recourse loans taken out, and
designate $300 million from the amendment's savings for conservation and stewardship
programs (with a priority for efforts in the Everglades). Price support would be reduced by
1¢ per pound for raw cane sugar, and 1.2¢ per pound for refined beet sugar (to 17¢ / lb. and
21.6¢ / lb., respectively). Penalties that processors would pay to the CCC would double if
they forfeit on their price support loans (increasing to 2¢ / lb. for raw cane sugar, and 2.14¢
for refined beet sugar). The House rejected this amendment on a 177 to 239 vote.
The Coalition for Sugar Reform (an association of food manufacturers, consumer and
taxpayer advocacy groups, environmental organizations, and publicly-traded cane refiners)
favored this amendment offered during House debate. 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 spokesmen have testified “reform” 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.”
Two Senate amendments offered during debate proposed more sweeping changes to the
sugar program. Both mandated recourse (i.e., removing processors’ access to price
protection) rather than non-recourse loans and the program’s phase out by mid decade.
Senator Lugar’s amendment, offered on December 12, 2001, would have completely phased
out the sugar and other commodity programs after the 2005 crops. Until then, USDA could
only make recourse loans to sugar processors. The level of price support would have been
“progressively and uniformly” lowered starting with the 2003 crops in order to reach zero
in 2006. Prices support would have been replaced with vouchers of up to $30,000 made
available annually through 2006 to any sugar producer who signed a “risk management
contract,” and undertook specified risk management activities such as buying whole farm
revenue insurance and/or contributing to a whole farm stabilization account. This voucher
system would have applied to all (and not just sugar crop) producers. His proposal was
defeated on a 70-30 vote. Senator Gregg’s amendment (offered December 12) similarly
proposed a recourse loan program to be phased out by 2006, but differed in requiring that the
budget savings be used to increase benefits for the food stamp program’s shelter expense
deduction. His proposal was tabled 71-29 during floor debate. Similar proposals were
introduced as identical bills (H.R. 2081 and S. 1652) earlier in the session.
LEGISLATION
P.L. 107-76 (H.R. 2330)
Agriculture, Rural Development, Food and Drug Administration, and Related Agencies
Appropriations Act, 2002. During floor debate on October 25, 2001, Senate by unanimous
consent agreed to amendment #1988 offered on behalf of Senator Dorgan to delay the
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remittance of FY2002 assessments to the CCC for marketings of raw cane sugar and beet
sugar until September 2, 2002 (Section 749 in conference report). Section 773 of the House-
Senate conference agreement requires USDA to transfer 10,000 tons of refined sugar in CCC
inventory to a beet sugar refiner in Minnesota to compensate producers for 2000-crop related
losses. House and Senate agreed to conference report (H.Rept. 107-275) on November 13
and 15, respectively. Signed into law November 28, 2001.
P.L. 107-171 (H.R. 2646)
Farm Security and Rural Investment Act of 2002. Title I, Subtitle C, Chapter 2 amends
the Agricultural Market Transition Act of 1996 to authorize a sugar program for the 2002-
2007 sugar crops. House Agriculture Committee included slightly different provisions in its
farm bill measure amended and passed by voice vote on July 27, 2001. H.Rept. 107-191,
Part 1, filed August 2; Part II filed August 31. During floor debate on October 4, the House
rejected (177-239) amendment #343 offered by Representative Dan Miller to extend the
sugar program at reduced loan rates. Measure (as amended) passed House 291 - 120 on
October 5, 2001. Senate passed its version of the farm bill with slightly different sugar
provisions on February 13, 2002 (see entry for S. 1731 below). Conference report (H.Rept.
107-424) filed May 1. On May 2, House motion to recommit with instructions to conference
committee failed 172 - 251. House later that day agreed (280 - 141) to conference report.
Senate agreed (64 - 35) to conference report on May 8. Signed into law May 13, 2002.
H.R. 2081 / S. 1652 (Miller, Dan / Santorum)
Sugar Program Reform Act. H.R. 2081 introduced June 6, 2001; referred to Committee
on Agriculture. S. 1652 introduced November 7, 2001; referred to the Committee on
Agriculture, Nutrition, and Forestry.
H.R. 3009 (Crane)
Andean Trade Promotion and Drug Eradication Act (as passed House on November 16,
2001); Trade Act of 2002 (as passed by Senate on May 23, 2002). Section 1002 of Division
A (Trade Adjustment Assistance) as passed by the Senate requires USDA to set up a
procedure to identify and stop violators of the tariff-rate quotas on sugar, syrups, and related
sugar-containing products. This language is identical to the text of the amendment offered
on December 4, 2001 by Senator Breaux and adopted by voice vote by the Senate Finance
Committee during markup of S. 1209 (see entry for S. 1209 below). Section 1002 (Sugar
Policy) was included in S.Amdt. 3401 offered by Senators Baucus and Grassley on May 10,
2002 to H.R. 3009, which the Senate agreed to by voice vote on May 23. The Senate passed
(66-30) its amended version of H.R. 3009 on May 23. House on June 26 adopted H.Res. 450
that effectively combined its earlier-passed measure with other trade bills (as amended) for
the purpose of entering into conference with the Senate. House conferees appointed that
same day.
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.
S. 1209 (Bingaman)
Trade Adjustment Assistance for Workers, Farmers, Communities, and Firms Act of
2001. Introduced July 19, 2001; referred to Committee on Finance. During markup on
December 4, 2001, Committee adopted by voice vote an amendment (inserted as Section
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1002) offered by Senator Breaux to require USDA to set up a procedure to identify and stop
violators of the tariff-rate quotas on sugar, syrups, and related sugar-containing products.
Committee on a voice vote ordered bill to be reported with an amendment in the nature of
a substitute favorably. Reported (S.Rept. 107-134) on February 4, 2002. See entry for H.R.
3009 above for current status.
S. 1571 (Lugar)
Farm and Ranch Equity Act of 2001. Section 122 (e) amends sugar program authority.
Introduced October 18, 2001; referred to Committee on Agriculture, Nutrition, and Forestry.
Offered as an amendment (S.Amdt. 2473) but rejected (70-30) during floor debate on S. 1731
on December 12.
S. 1731 (Harkin)
Agriculture, Conservation, and Rural Enhancement Act of 2001. The Agriculture
Committee during markup on November 15, 2001, approved (12-9) a commodity title that
includes a revamped sugar program. Committee filed S.Rept. 107-117 on December 7.
During floor debate on December 12, Senate tabled (71-29) an amendment (S.Amdt. 2466)
offered by Senator Gregg to phase out the sugar program and use any resulting savings to
improve nutrition assistance. Senate approved in mid-February 2002 by voice vote two
technical amendments (to modify process for allocating allotments to beet refiners (S.Amdt.
2836) offered by Senator Conrad; and to authorize USDA to increase the sugar import quota
to make up for any shortfall in the amount of sugar countries supply to the U.S. market
(S.Amdt. 2829) offered by Senator Feinstein). Senate passed S. 1731, as modified, on
February 13, and incorporated it as an amendment to H.R. 2646 (see entry for bill above for
final action).
S. 2323 (Graham)
Amends the Harmonized Tariff Schedule of the United States to require the tariff-rate
quota covering specialty sugar imports to include a minimum quota for certified organic
sugar. Introduced April 25, 2002; referred to Committee on Finance.
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