Order Code RL33541
Sugar Policy Issues
Updated February 26, 2007
Remy Jurenas
Specialist in Agricultural Policy
Resources, Science, and Industry Division

---

Sugar Policy Issues
Summary
The sugar program, authorized by the 2002 farm bill (P.L. 107-171), is designed
to protect the price received by growers of sugarcane and sugar beets, and by firms
that process these crops into sugar. To accomplish this, the U.S. Department of
Agriculture (USDA) makes loans available at mandated price levels to processors,
limits the amount of sugar that processors can sell domestically, and restricts imports.
In support of the program, sugar crop growers and processors stress the industry’s
importance in providing jobs and income in rural areas. Food and beverage firms
that use sugar argue that U.S. sugar policy imposes costs on consumers, and has led
some food manufacturers to decide to move jobs overseas where sugar is cheaper.
In a major policy change, the 2002 farm bill reactivated sugar “marketing
allotments” that limit the amount of domestic-produced sugar that processors can
sell. The level at which USDA sets the national sugar allotment quantity has
implications for sugar prices. Accordingly, sugar crop producers and processors on
one side, and sugar users on the other, seek to influence the decisions that USDA
makes on allotment and import quota levels. The relationship between allotments
and imports drew much attention during congressional debate on the Dominican
Republic-Central American Free Trade Agreement (DR-CAFTA). The U.S. sugar
producing sector argued that DR-CAFTA would let more sugar into the U.S. market
than the program is designed to accommodate, and would require USDA to suspend
marketing allotments. This, in turn, opponents argued, would depress prices enough
to undermine USDA’s ability to operate a “no-cost” program. USDA countered that
this would not occur, but to secure sufficient votes, pledged to take specific steps to
protect the program through FY2008 if imports do exceed this “trigger.”
Attention on sugar trade issues now turns to the potential impact of free trade
in sugar and high-fructose corn syrup (HFCS) — a substitute and cheaper sweetener
— between the United States and Mexico, which takes effect in January 2008. To
govern trade until then, a July 2006 agreement resolved two long-standing sweetener
trade disputes. It provides for Mexican sugar access to the U.S. market equal to the
amount of access that U.S. HFCS exports gain to the Mexican market.
With Congress taking up a new farm bill in 2007, key interest groups have
begun to lay out their views on the future of the sugar program. Sugar
producers/processors want to extend the current program, arguing that this course
would maintain a viable industry. Sugar users want changes to respond to such
external pressures as unrestricted imports from Mexico, and seek to develop new
policies that would work for both the producing and using sectors. Although various
alternatives have been discussed, drawing some attention is the concept of changing
the sugar program into an income and price support program similar to that in place
for other major field crops. USDA in its farm bill package proposes that the current
objectives of operating a no-cost program by managing supplies be continued with
two changes. It seeks the removal of the 1.532 million ton import trigger that
automatically suspends allotments and discretionary authority to administer these
allotments to reduce the program’s future cost exposure (estimated at $1.4 billion
over 10 years). This report will be updated regularly.

---

Contents
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
History of and Background on the Sugar Program . . . . . . . . . . . . . . . . . . . . . . . . 1
Main Features of U.S. Sugar Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Price Support Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Loan Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Effective Support Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Marketing Allotments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Allotments Required When Sugar Imports Are Below
‘Trigger’ Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Allotments Suspended When Imports Exceed Trigger Level . . . . . . . . 5
Exception to Suspending Allotments . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FY2006 and FY2007 Allotment Announcements . . . . . . . . . . . . . . . . . 5
Import Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
FY2006 Import Quota Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FY2007 Import Quota Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Sugar Imports, the Allotment Suspension Trigger Level,
and DR-CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Legislative Activity in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
House Amendment to FY2007 Agriculture Appropriations . . . . . . . . . 9
Senate Oversight Hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Administration’s FY2007 Budget Proposal . . . . . . . . . . . . . . . . . . . . . 10
Sugar Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Sugar in Trade Agreement Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Key Interest Group Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sugar in DR-CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Sugar Deal to Secure Votes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
FTA Negotiations with Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Sugar in the Peru, Colombia, and Panama FTAs . . . . . . . . . . . . . . . . . 14
Sugar in WTO Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Sweetener Disputes with Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2006 Sweetener Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Reactions to Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Potential Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Previewing the 2007 Farm Bill Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Sugar Program Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Factors to Affect Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interest Group Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
USDA’s Farm Bill Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

---

List of Figures
Figure 1. Implementation of Sugar Marketing Allotments, FY2006 . . . . . . . . . . 4
Figure 2. U.S. Sugar Imports Compared to Allotment Suspension Trigger:
Trade Agreement Commitments; FY2003-FY2006 Actual;
FY2007 Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

---

Sugar Policy Issues
Recent Developments
On January 31, 2007, the U.S. Department of Agriculture (USDA) released its
2007 farm bill proposals. For the sugar program, the Secretary of Agriculture
proposed to continue the current no-cost program by managing supplies, but
proposed two changes. He seeks the removal of the 1.532 million ton import trigger
that automatically suspends allotments (i.e., USDA’s ability to manage domestically
produced sugar) and broad discretionary authority to administer these allotments in
such ways as reduce the program’s future cost exposure (estimated at $1.4 billion
over 10 years).
History of and Background on 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 sugar consumption and divide this market
by assigning quotas to U.S. growers and foreign countries. These acts also 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. For the next seven years, the U.S. market was relatively
open to foreign sugar imports, with mandatory price support provided only in 1977
and 1978, and discretionary support in 1979. Congress reinstated mandatory price
support for sugar in the Agriculture and Food Act of 1981 and the Food Security Act
of 1985. Subsequently, the 1990 farm bill, the 1993 budget reconciliation bill, and
the 1996 and 2002 farm bills extended sugar program authority. The last bill extends
it up through the 2007 crop year (i.e., most of FY2008).
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 has grown over the last 25 years,
reflecting the price protection provided by the sugar program. In FY2006, domestic
production filled 73% 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

---

CRS-2
1980s, and domestic sugar production increased later in that decade, foreign suppliers
absorbed the entire adjustment and saw their share of the U.S. market decline
significantly. The import share of U.S. sugar food use in FY2006 was 27%.
Current U.S. sugar policy maintains domestic sugar prices above the world
market price, and is structured to protect the domestic sugar producing sector (sugar
beet and sugarcane producers, and the processors of their crops) and to ensure a
sufficient supply. During 2006, the U.S. raw sugar domestic futures price averaged
22.1¢/lb., compared to the world raw sugar futures price of 15.5¢/lb. Because of the
price differential, U.S. consumers and manufacturers of foods and beverages pay
more for sugar than they would if imports were allowed to enter without any
restriction. Various studies show that over the last 15 years, U.S. sugar users paid
between $400 million and $1.9 billion more for sugar annually. These “cost to user”
estimates vary widely, and largely reflect the extent of the difference between the
higher U.S. price and the lower world price for sugar in the time period examined,
and the differing assumptions and methodology analysts use to develop such
estimates.
The sugar program differs from grains, rice, peanut, and cotton programs in that
USDA makes no direct payments to beet and cane growers and processors.
Structured this way, taxpayers do not directly support the program through federal
government outlays. This fact is highlighted as a positive feature by the sugar
production sector and program supporters. The program’s support level and import
protection, though, keep the U.S. sugar price above the price of sugar traded
internationally, and constitute an indirect subsidy to the production sector by way of
higher costs paid by U.S. sugar users and consumers. Program opponents frequently
refer to this subsidy component to argue for changes to U.S. sugar policy.
Main Features of U.S. Sugar Policy
U.S. sugar policy uses three tools to ensure that domestic growers and sugar
processors receive a minimum price for their sugar. This price is largely determined
by the statutorily-set loan rate. “Marketing allotments” limit the amount of
domestically-produced sugar that can be sold when imports are estimated below a
specified level. Import quotas restrict the amount of foreign sugar allowed to enter
the U.S. market. USDA decisions in administering these tools are intended to
balance available sugar supply (i.e., domestic output plus imports) with U.S. food
demand for sugar so that market prices do not fall below effective support levels.
The 2002 farm bill further requires USDA to operate the sugar program on a “no-
cost” basis (i.e., to result in no federal government outlays).
Price Support Loans
USDA extends “non-recourse” price support loans to processors of sugarcane
and sugar beets rather than directly to the farmers who harvest these crops. Loans are
available only to processors who agree to pay growers for deliveries of sugar beets
and sugarcane at USDA-set minimum payment levels. Their “non-recourse” feature
means a processor can exercise the legal right to hand over sugar it initially offered

---

CRS-3
USDA as collateral for the loan to meet its repayment obligation, if the market price
is below the effective support level when the loan comes due. These loans at times
can be 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 through the 2007 crop year,
at 18¢/lb. for raw cane sugar and 22.9¢/lb. for refined beet sugar. These rates have
not changed since 1995. The loan support for beet sugar is set higher than for raw
sugar because it is available immediately after processing in refined form, ready for
industrial food and beverage use and for human consumption. By contrast, raw cane
sugar must go through a second stage of processing at a cane refinery to be converted
into white refined sugar.
Effective Support Levels. The above loan rates do not serve as the
intended price floor for sugar. In practice, USDA’s aim is to support the raw cane
sugar price at not less than 20.72¢ to 20.46¢/lb. (i.e., the state’s price support level
plus an amount that covers a processor’s cost to transport raw cane sugar to a cane
refinery plus the interest paid on any price support loan taken out plus location
discounts). Similarly, USDA seeks to support the refined beet sugar price at not less
than 23.5¢ to 27.13¢/lb. (i.e., the regional loan rate plus specified marketing costs
plus interest paid on a price support loan plus a cash discount). To ensure that
market prices do not fall below these “loan forfeiture,” or “effective” price support,
levels, USDA administers sugar marketing allotments and import quotas. A loan
forfeiture (turning over sugar pledged as loan collateral to USDA) occurs if a
processor concludes that the domestic market price when the loan comes due is
below the “effective” sugar support level for its state or region. It is this level — not
the loan rate — that represents the minimum level of program benefits intended for
sugar crop growers and processors.
Marketing Allotments
The 2002 addition of marketing allotments to support domestic sugar prices
reflected the sugar production sector’s willingness to accept reduced sales in return
for the assurance of price protection. Allotments serve as a tool to ensure that any
growth in U.S. sugar demand is first met by the U.S. sugar sector, and to guarantee
both the beet and cane sectors a specific share of the U.S. market. By regulating the
amount of sugar that processors can sell, USDA is expected to meet the program’s
no-cost objective by keeping market prices above effective support levels, and thus
not acquiring sugar as a result of any loan forfeitures.
Allotments Required When Sugar Imports Are Below ‘Trigger’
Level. USDA is required to announce marketing allotments when it projects annual
sugar imports will be below 1.532 million short tons (ST) — referred to as the
“trigger level.” By limiting the amount of sugar that beet sugar refiners and raw cane
mills can sell, this mechanism ensures that the United States meets its market access
commitments for sugar imports under the World Trade Organization (WTO) and
NAFTA agreements (see “Import Quotas”).
USDA must weigh several factors to calculate the amount of domestic sugar that
can be sold (the “overall allotment quantity” or OAQ) — (1) estimated consumption,

---

CRS-4
(2) “reasonable” ending stocks, (3) beginning stocks, and (4) imports for human
consumption. The formula that USDA uses to determine the OAQ must
accommodate imports under both trade agreements up to the 1.532 million ST level.
USDA can further adjust the OAQ if necessary to avoid loan forfeitures. Second, the
OAQ must be split between the beet and cane sectors using 54.35% and 45.65%
shares, respectively. Separate rules specify how each sector’s allotment is to be
allocated (i.e., distributed) to each processing firm. Once detailed calculations are
made, each firm can sell only as much sugar as stated in its allotment notification
received from USDA. Sugar produced in excess of a firm’s allotment must be held
off the market (referred to as “blocked stocks”). Figure 1 illustrates how USDA has
implemented marketing allotments for FY2006, the second year it activated some of
the less-known features of this authority.
Figure 1. Implementation of Sugar Marketing Allotments, FY2006
Overall Allotment Quantity (OAQ)
October 2005 to September 2006
9,350,000 Short Tons (ST)* a
Beet Sugar Allotment
Cane Sugar Allotment
54.35% of OAQ
45.65% of OAQ
5,081,725 ST
4,268,275 ST
4 States Received a Cane Marketing Allotment:
Florida, Louisiana, Texas, Hawaii
7 Beet Processing Companies Received
Cane Processors In Each State Received
a Beet Marketing Allocation, or
a Marketing Allocation, or
Share of National Beet Sugar Allotment
Share of Each State's Cane Allotment
USDA in August 2005 Determined Cane Sector is
Unable to Fill All of Its OAQ ---
b
USDA Reassigned Company Marketing Allocations
in March 2006 to Increase the Availability of Sugar
Allotment Deficit, or Shortfalls,
to the Marketplace
Reassigned to Imports Five Times
(August, September & December 2005,
and February & July 2006)
USDA in March 2006 Determined Beet Sector is
Unable to Fill Part of Its OAQ ---
USDA Reassigned State Cane Allotments &
Allotment Deficit, or Shortfalls,
b
Cane Processor Allocations in March 2006
Reassigned to Imports Twice (March & July 2006)
to Reflect Lower Sugar Supply Estimates and
to Increase the Availability of Sugar
to the Marketplace
Beet Sugar Allotment Filled with:
Cane Sugar Allotment Filled with:
FY2006 Beet Sugar Production
FY2006 Cane Sugar Production
(4,349,000 ST)
(2,985,000 ST)
& Reassignment of Shortfall to Imports
& Reassignment of Shortfalls to Imports
(365,000 ST)
(1,227,000 ST)
c
c
Unfilled Beet Sugar Allotment Quantity
Unfilled Cane Sugar Allotment Quantity
(367,725 ST)
(56,275 ST)
* One ST equals 2,000 lbs.
Notes: Reflects USDA decisions and U.S. sugar supply and demand status, as of August 11, 2006. Pending a formal USDA notice,
the July 2006 announced shortfall of 246,000 ST is divided equally between the beet and cane sectors.
a OAQ includes two increases (September 2005 & February 2006) from the initial 8,600,000 ST level announced on August 12, 2005.
b Transferred from those companies that did not have enough sugar to sell (i.e., fill their FY2006 allocation), to those companies that
had sugar to sell against their unfilled allocation.
c Equals amount not available to be marketed.
Source: Derived by CRS from USDA press releases and reports.

---

CRS-5
Allotments Suspended When Imports Exceed Trigger Level. If
USDA estimates sugar imports will be above 1.532 million ST, USDA must suspend
marketing allotments (with the one exception noted below). If allotments are
triggered, USDA is still required to make available price support loans to raw cane
sugar processors and beet sugar refiners. Suspending allotments, though, would raise
considerable uncertainty for domestic sugar prices. Depending upon the U.S. sugar
production and food use outlook at that point in time, and estimated imports of sugar
for food consumption, price scenarios could vary considerably. If sugar processors
use the suspension to release blocked stocks of sugar, sugar prices (depending upon
the additional import amount and the amount of stocks released) could decline to
below loan forfeiture levels. This would likely result in USDA acquiring sugar from
processors that decide not to repay their loans. If U.S. demand for sugar is higher
than can be met by the domestic sugar sector (either from projected output and/or
blocked stocks), prices as additional imports enter under a suspension could very well
rise, and likely stay above loan forfeiture levels.
The USDA initial determination of the OAQ by August 1 for the marketing year
that begins October 1, and any subsequent adjustments, are the most significant
decisions made in implementing marketing allotment authority. Accordingly, sugar
processors and food manufacturers (e.g., users of sugar) weigh in to influence
USDA’s decision-making process on this issue. Each group differs in how USDA
should define “reasonable” ending stocks — a key determinant of the level of
domestic sugar prices in the last quarter of the marketing year (July to September)
when price support loans come due. However, USDA must estimate a year in
advance (even though market conditions can change significantly during this period)
an OAQ level intended to result in market prices 12 months later that are above
effective support levels. Sugar processors favor a smaller OAQ, hoping to benefit
from sugar prices well above effective support levels. Food manufacturers advocate
a larger OAQ, hoping that year-end prices end up lower, and close to loan forfeiture
levels.
Exception to Suspending Allotments. A little-noticed exception in the
law allows USDA not to suspend allotments when additional imports exceed the
trigger level, because the beet or cane sector is unable to supply sugar against their
allotment. Since the law does not allow, for example, a cane sugar “deficit” to be
met with any available “surplus” of beet sugar, USDA can “reassign” such an
allotment deficit, or “shortfall,” to imports. This occurred three times late in
FY2005, and five times in FY2006, when USDA reassigned allotment deficits to
imports in order to alleviate a tight supply situation (see “Import Quotas” and Figure
1 for more on the relationship between allotments and imports).
FY2006 and FY2007 Allotment Announcements. On February 2, 2006,
USDA increased the FY2006 OAQ to 9.35 million ST, in order to respond “to a
continuing tight sugar market” caused largely by Hurricanes Katrina, Rita, and
Wilma, which reduced domestic supplies. This decision allowed both the beet and
cane sectors (unlike previous years) to sell all of their FY2006 sugar output against
their allotment share of the OAQ. To meet the balance of U.S. sugar demand that
could not be met from domestic sources, USDA reassigned the large cane sector’s
and small beet sector’s “allotment shortfall” to imports (Figure 1). Earlier, on
September 30, 2005, USDA announced the initial details of FY2006 marketing

---

CRS-6
allocations for beet processing companies. Cane state allotments and processor
allocations were announced later on March 22, 2006, after the company-specific
impacts from the 2005 season’s hurricanes had become clear.
On July 27, 2006, USDA set the FY2007 OAQ at 8.75 million ST, reflecting
its assessment of the upcoming year’s sugar supply and demand outlook. Projecting
that 2006/2007 U.S. sugar production and carry-in stocks will not be enough to meet
domestic needs and rebuild ending stocks “to reasonable levels,” USDA immediately
announced a supply shortfall of 350,000 ST. This entire deficit was reassigned to
imports (reflected in the related sugar import quota announcement) to help exporters
facilitate shipping arrangements. USDA states that this is intended to ensure that
sufficient sugar is available to the U.S. market earlier than would otherwise occur.
USDA also signaled that “appropriate adjustments” to the OAQ will be made during
FY2007 to ensure the domestic market is adequately supplied, to avoid loan
forfeitures, and to prevent market disruptions.
Import Quotas
USDA restricts the quantity of foreign sugar allowed to enter the United States
for refining and sale for domestic food and beverage use. By controlling the amount
of sugar allowed to enter, USDA seeks to ensure that market prices do not fall below
effective price support levels, and thus not acquire sugar due to loan forfeitures (i.e.,
meet the “no-cost” requirement). Though the sugar import quotas are not directly
addressed by farm bill provisions, USDA and the Office of the U.S. Trade
Representative (USTR) administer them as an integral part of the sugar program.
Tariff-rate quotas (TRQs) are used to restrict sugar imports to the extent needed
to meet U.S. sugar program objectives.1 The U.S. market access commitment made
under WTO rules means that a minimum of 1.256 million ST of foreign sugar must
be allowed to enter the domestic market each year. Although the WTO commitment
sets a minimum import level, policymakers may allow additional amounts of sugar
to enter if needed to meet domestic demand (as occurred in FY2005 and FY2006, and
announced for FY2007). In addition, the United States is committed to allow sugar
to enter from Mexico under NAFTA provisions. The complex terms are detailed in
a schedule and a controversial and disputed side letter, which lay out the rules and
the formula to calculate how much sugar Mexico can sell to the U.S. market.
Through FY2008, the maximum amount that can enter from Mexico is 276,000 ST
(see “Sweetener Disputes with Mexico — Mexico’s Terms of Access to the U.S.
Sugar Market,” below). Under the WTO agreement, foreign sugar enters under two
TRQs — one for raw cane, another for a small quantity of refined sugar. Under the
1 A TRQ combines two policy instruments used to restrict imports: quotas and tariffs. The
quota component works together with a specified tariff level to provide the desired degree
of import protection. Imports entering under the quota portion of a TRQ are usually subject
to a lower, or sometimes a zero, tariff rate. This “in-quota” amount represents the minimum
that a country has committed to allow to enter under multilateral or other trade agreements.
Imports above the quota’s quantitative threshold (referred to as “above-quota”) face a much
higher (usually prohibitive) tariff.

---

CRS-7
NAFTA TRQ, and the DR-CAFTA TRQ taking effect in stages during 2006, sugar
can enter either in raw or refined form.
The USTR allocates the WTO TRQs among 41 eligible countries, including
Mexico and Canada. The amount entering under the “in-quota” portion is subject to
a zero or low duty. Sugar that enters in amounts above the WTO quota is subject to
a prohibitive tariff (78% in 2003, according to the International Trade Commission),
serving to protect the U.S. sugar-producing sector from the entry of additional foreign
sugar. The tariff on above-quota sugar entering from Mexico under NAFTA
(equivalent to about 7% in 2007) will fall to zero on January 1, 2008. In addition,
other TRQs limit the import of three categories of sugar-containing products (SCPs
— products containing more than 10% sugar, other articles containing more than
65% sugar, and blended syrups).
FY2006 Import Quota Decisions. USDA to date has set the FY2006 WTO
raw and refined TRQs for sugar imports at 2.515 million ST, a level double the U.S.
minimum WTO commitment. On September 29, 2005, USDA announced a separate
sugar TRQ of 268,000 ST for Mexico, having determined that it is a net ‘surplus
producer’ under NAFTA’s terms. The increases in both the WTO and NAFTA sugar
TRQs to levels above what would occur in a typical recent year represented USDA
decisions to boost short-term supplies to address a tight supply situation caused by
the delayed sugar beet harvest in North Dakota and Minnesota, hurricane-related
losses to the sugarcane crops in Louisiana and Florida, the hurricane-related closure
of a large sugar cane refinery in New Orleans from late August to December 2005,
and to make available high quality refined sugar for immediate use. On July 27,
2006, USDA further announced that raw sugar under the FY2007 TRQ will be
allowed to enter early (starting August 7) in order to meet refiners’ needs for more
flexibility in acquiring and processing raw sugar.
FY2007 Import Quota Decisions. On July 27, 2006, USDA announced that
the FY2007 raw and refined TRQs for sugar imports will be 1.544 million ST, 23%
higher than the U.S. minimum WTO commitment. On that same day, USDA
announced a NAFTA TRQ of 268,000 ST for Mexico, stating both countries had
jointly determined that Mexico is projected to be a net ‘surplus producer’ of sugar in
FY2007. The first announcement reflects USDA’s assessment that imports above the
WTO minimum commitment is needed to meet domestic needs and rebuild stocks.
The second is also part of a U.S.-Mexican agreement announced to resolve
outstanding bilateral sweetener disputes (see “Sweetener Disputes with Mexico,”
below).
Sugar Imports, the Allotment Suspension Trigger Level, and DR-
CAFTA. One concern raised during the congressional debate on DR-CAFTA was
that the additional amount of sugar that would enter, when added to existing U.S.
sugar access commitments under the WTO and NAFTA agreements, would exceed
1.532 million ST — the trigger for suspending marketing allotments. Some pointed
out that adding the DR-CAFTA’s first year access commitment to those in the two
existing trade commitments would result in a sugar import level of 1.652 million ST
(see Figure 2).

---

CRS-8
Figure 2. U.S. Sugar Imports Compared to Allotment Suspension Trigger:
Trade Agreement Commitments; FY2003-FY2006 Actual; FY2007 Estimate
WTO & NAFTA
WTO, NAFTA &
Commitments
DR-CAFTA
Commitments
3,250
3,000
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
a
b
a
b
a
2003
2004
2005
2006
2007
Fiscal Year
Other Sugars & Over Quota
Mexico - Over Quota / Tier II
DR-CAFTA TRQ
Mexico - Side Letter TRQ
WTO TRQ
Allotments’ Suspension Trigger Level
Source: USDA (selected reports and press releases), and CRS calculations
a Adjusted for USDA’s formal reassignments of beet and cane allotment deficits to imports.
b Reflects TRQ announcements and USDA estimates, as of August 11, 2006.
Sugar imports in the first two years of current sugar program authority (FY2003
and FY2004) were well below the trigger level. With significantly lower domestic
sugar supplies caused by weather-related problems in FY2005 and FY2006,
permitted sugar imports were above this level. However, above average imports did
not result in the suspension of allotments because USDA determined additional
imports were needed to meet U.S. sugar demand (see “Exception to Suspending
Allotments,” above). To explain further, USDA decided late in FY2005 to allow
additional imports to add to domestic supplies tightened by the effects of Hurricane
Katrina. This resulted in FY2005 imports of 1.6 million ST — 68,000 ST above the
trigger level. However, because much of the late-year increase in imports was due
to the inability of the cane sugar sector to fully utilize its increased allotment, these
imports (used to cover the cane allotment “shortfall”) did not count against the trigger
level. For FY2006, USDA projected lower sugar output, and reassigned increases
in the cane and beet allotment deficits to imports to boost the availability of both raw
and refined sugar. Taken together, these decisions (plus imports under DR-CAFTA)
equal projected FY2006 sugar imports of 3.115 million ST — 1.583 million ST
above the trigger level — but did not result in the suspension of allotments.
Similarly, USDA currently projects FY2007 sugar imports at 1.973 million ST —

---

CRS-9
441,000 ST above the trigger level. It is not expected to announce any suspension
of allotments because of the need for additional imports (see also Figure 2).
The issue of the potential impact of sugar imports on the U.S. sugar program
under DR-CAFTA has receded for now, because USDA included these imports when
setting the FY2006 and FY2007 OAQs. Looking ahead, whether sugar imports in
FY2008 — the last year covered by current sugar program authority — activate the
trigger to suspend allotments will depend on the extent to which domestic sugar
production (particularly in the hurricane-affected cane sector) recovers, and the
degree that U.S. commitments under existing trade agreements allow more sugar to
enter than the U.S. sugar market can absorb and still allow USDA to administer the
program at no-cost. The issue of whether allotments might be suspended if imports
result in more sugar than the U.S. market needs (i.e., exceeds the trigger level),
though, likely was made moot by a pledge made by the Secretary of Agriculture
during congressional debate on DR-CAFTA. In a June 29, 2005, letter to the
chairmen of the House and Senate Agriculture Committees, he specified the steps he
will take to ensure the sugar program operates as authorized through FY2008 if he
estimates imports under DR-CAFTA, NAFTA, and other trade agreements exceed
the trigger level (see “Sugar Trade Issues — Sugar in DR-CAFTA — Sugar Deal to
Secure Votes,” below).
Legislative Activity in the 109th Congress
House Amendment to FY2007 Agriculture Appropriations. During
floor debate on the FY2007 agriculture appropriations bill (H.R. 5384) on May 23,
2006, the House rejected (135-281) an amendment offered by Congressman
Blumenauer to effectively reduce the program’s loan rates by about 6%, to not more
than 17¢/lb. for raw cane sugar and 21.6¢/lb. for refined beet sugar. He argued that
the sugar program artificially raises the price paid by consumers and food
manufacturing firms, most of the program benefits go to large producers, and that it
causes environmental damage in the Everglades. Opponents countered that the
program does not cost taxpayers, is supported by two-thirds of those polled in a
recent survey, and that any vote on a proposed program change should occur when
the 2007 farm bill is debated. In June 2005, an identical amendment offered to the
FY2006 agriculture appropriations bill (H.R. 2744) was rejected by the House on a
vote of 146 ayes to 280 noes.
Senate Oversight Hearing. On May 10, 2006, the Senate Agriculture
Committee held a hearing to review the implementation of the sugar provisions of
the 2002 farm bill. The USDA’s Undersecretary stated that the sugar program
operated relatively smoothly through July 2005, but characterized it as “highly
prescriptive, containing many rigid, and sometimes contradictory, rules” that
increased the complexity of program administration. He noted that the opening of
the U.S. and Mexican sugar sectors after NAFTA takes full effect in January 2008
mean “alternative [sugar policy] approaches will need to be explored.” Anticipating
upcoming debate on the next farm bill, sugar crop growers, processors, and most
cane refiners stated that they will seek an extension of the current program, arguing
that existing policy works well and has provided supply stability. Sugar users (food

---

CRS-10
and beverage manufacturers) called for changes that would allow the program to
operate more flexibly, and want to “explore common ground” with the sugar
producing sector. The president of the only independent cane refinery expressed
concern about two issues that in his view current policy does not handle well, which
he would like addressed in the 2007 farm bill. A spokesman for the sugar industry
of Mauritius, one of the 40 countries with a share of the U.S. import quota,
emphasized how important continued access to the U.S. market is for the stable
revenue flow and positive developmental impact provided by the U.S. program’s
price premium (i.e., the difference between the U.S. price and the lower world price).
Administration’s FY2007 Budget Proposal. The Bush Administration’s
FY2007 budget proposal included legislative changes to reduce farm program
spending, which included a 1.2% marketing assessment on domestic sugar processed
by raw cane mills and sugar beet refiners. This would effectively lower loan rates by
more than 0.2¢/lb, and generate receipts of an estimated $34 million in FY2007, and
$364 million over 10 years. Congress did not address this specific proposal when
each chamber passed its FY2007 budget resolution, and no additional legislative
action occurred.
In 2005, the Administration proposed an identical marketing assessment in its
FY2006 budget package. The Senate Agriculture Committee adopted a modified
version, which was dropped by conferees when they completed action on the FY2006
budget reconciliation bill (S. 1932) in December 2005. The Senate-adopted
provision would have assessed a penalty on non-recourse sugar loans forfeited by a
sugar processor, equal to 1.2% of the loan rates for raw cane and refined beet sugar.
This would have represented the sugar sector’s contribution toward budget deficit
reduction targets.
Sugar Trade Issues
The United States imports sugar to cover the balance of its domestic food needs
(16% in FY2005; 27% in FY2006) that are unmet by the U.S. sugar production
sector. Sugar imported under market access commitments made by the United States
in trade agreements (such as NAFTA) or under prospective free trade agreements
(FTAs), together with the growing increase in imports of sugar-containing products
not subject to import restrictions, can increase available sugar supplies and push
prices down. Increases in sugar imports, though, can also serve to dampen any rise
in domestic sugar prices, particularly when domestic sugar output falls noticeably.
The U.S. sugar production sector argues that liberalizing trade in sugar should
be addressed in multilateral World Trade Organization negotiations, rather than in
hemispheric and bilateral free trade agreements (FTAs). Its concern is that additional
market access provided to prospective FTA partners, many of which are major sugar
exporters with weak labor and environmental rules, would undermine the U.S. sugar
program and threaten the sector’s viability. Sugar users advocate including sugar in
all trade negotiations, eyeing the possibility that increased imports might contribute
to program reform and lower sugar prices.

---

CRS-11
The sugar provisions in DR-CAFTA, strongly opposed by the U.S. sugar
producing sector but favored by most other U.S. commodity groups, drew much
attention during congressional debate. The debate drew attention again to NAFTA’s
sugar provisions. Free trade in sweeteners between Mexico and the United States
will take effect in January 2008, after two longstanding trade disputes were resolved
in July 2007. How to handle the prospect of unrestricted sugar imports from Mexico
starting in 2008, added to sugar imports under other trade agreements, will be a major
issue in the debate on the sugar program’s future when Congress considers the 2007
farm bill.
Sugar in Trade Agreement Negotiations
Whether, and on what terms, to liberalize trade in sugar and sugar-containing
products in prospective trade agreements is a difficult issue that U.S. negotiators face.
With the U.S. sugar price higher than the world sugar price, exporting countries want
these agreements to provide increased access for their sugar to benefit from the more
lucrative U.S. price. The U.S. sugar production sector opposes any additional entry
of sugar and products under bilateral and regional trade agreements. It is concerned
increased imports would undermine its market share, threaten the viability of the
domestic sugar program, and result in significant loan forfeitures. U.S.
manufacturers that use sugar in food products and beverages favor opening up the
U.S. market to additional imports, anticipating lower sugar prices over time.
Sugar trade has been more of an issue in negotiating bilateral and regional FTAs
(witness the debate on DR-CAFTA) than in multilateral negotiations under the WTO.
With Brazil, Colombia, Guatemala, and Thailand considered to be major low-cost
sugar producing and exporting countries, FTAs with them could allow for additional
sales of sugar to the U.S. market above levels now permitted under their shares of the
U.S. sugar TRQ. Brazil’s negotiators frequently mentioned that increased market
access for its sugar in the U.S. market was one of their key agricultural priorities in
the currently dormant hemispheric Free Trade Area of the Americas (FTAA). Since
the U.S. objective in negotiating an FTA is to eliminate eventually all border
protection on all imports, the removal of current U.S. quotas and tariffs on imports
of sugar and sugar-containing products would begin to undermine the operation of
the domestic sugar program as now structured (e.g., make it impossible for USDA
to operate it at “no-cost”). By contrast, any multilateral agreement that might
eventually emerge from the WTO negotiations could reduce trade-distorting policies
that countries (including the United States) use to support their sugar and other
commodity sectors (see “Sugar in WTO Negotiations,” below).
Key Interest Group Views. The American Sugar Alliance (ASA)
representing sugar crop farmers and processors has argued that the Bush
Administration’s efforts should be to “reform the world sugar market through
comprehensive, sector-specific WTO negotiations” and not through regional or
bilateral trade agreements. ASA supports the goal of global free trade (including for
sugar) through the WTO, which it views as the best venue for comprehensively
addressing “the complex array of government policies that distort the world sugar
market.” ASA contends that the subsidies used by many countries “encourage the
dumping of sugar at a fraction of what it costs to produce it.” To support its position,
ASA released in 2003 a commissioned report it says documents the non-transparent

---

CRS-12
and indirect subsidies that major sugar producing and exporting countries use to
assist their sugar sectors. For this reason, ASA opposes including sugar market
access provisions in FTAs, arguing that the most damaging government policies
(citing Brazil’s sugarcane-ethanol subsidies, and the Mexican government’s
ownership of sugar mills) will not be addressed by bilateral or regional negotiations.
It further argues that U.S. consumers would not benefit in the form of lower prices
from increased imports under such agreements. ASA opposed the DR-CAFTA and
has argued against including sugar in all other FTAs in hearings before USTR and
the ITC.
The Sweetener Users Association (SUA — composed of industrial users of
sugar and other caloric sweeteners and the trade associations that represent them)
have supported the Bush Administration’s proposals tabled at the WTO to further
liberalize agricultural trade. SUA expects that under trade liberalization, “world
sweetener markets will operate more efficiently and fairly,” as EU’s export subsidies
are phased out and U.S. sugar import quotas become more market oriented. SUA
argues that liberalizing trade in sugar would benefit the U.S. economy through lower
prices, keep food manufacturing jobs in the United States rather than see them move
overseas, and help maintain a viable cane refining industry with its well-paid union
jobs. It also contends increased imports would encourage product innovation and
stimulate demand, stimulate competition, and thwart excessive industry
concentration. The SUA supported DR-CAFTA and favors the Administration’s
objectives in the other bilateral FTAs, the FTAA, and WTO talks.
Sugar in DR-CAFTA. The sugar provisions in DR-CAFTA were among the
most hotly debated issues during congressional consideration in the summer of 2005.
The U.S. sugar industry strongly opposed DR-CAFTA, arguing that the amount of
increased access offered the six countries “would destroy the U.S. sugar industry.”
Spokesmen emphasized that the increased imports would depress domestic sugar
prices, make it impossible to operate the U.S. sugar program on a no-cost basis,
increase government costs as processors forfeit on their price support loans, and
“drive efficient American producers out of business.” While acknowledging that the
Administration understood the consequences of reducing the over-quota tariff, one
industry spokesperson pointed out that under the current sugar program, additional
imports would act to displace domestic sugar output. The sugar industry also feared
that approving DR-CAFTA would set a precedent for U.S. negotiators to include
sugar in other FTAs being negotiated with several sugar exporting countries (see
“Sugar in Prospective FTAs,” below). It pointed out total sugar export availability
of actual and potential FTA candidates is 27 million metric tonnes (MT), compared
with U.S. sugar output of 8 million MT. The Sweetener Users Association
supported the DR-CAFTA, stating it will enhance competition in the U.S. sugar
market, increase export opportunities for other U.S. food and commodity sectors in
the six countries, and result in increased employment in U.S. confectionery and other
sugar-using industries.
The six countries covered by this agreement (Costa Rica, Dominican Republic,
El Salvador, Guatemala, Honduras, and Nicaragua), prior to its approval, were
already allowed to sell to the United States a combined minimum of 311,700 MT of
sugar annually under allocations, or shares, of the TRQ. This amount represented a
28% share of the minimum U.S. raw sugar TRQ (1.12 million MT) established under

---

CRS-13
its WTO commitment, and entered on a duty-free basis. Under DR-CAFTA, these
six countries together secured access in year 1 to export to the U.S. market an
additional 109,000 MT of sugar, a 35% increase over their current quota. Increasing
on average about 3% per year, by year 15, these countries combined will be eligible
to sell duty-free an additional 153,140 MT of sugar. Thereafter, the quota would
increase by almost 2% (2,640 MT) annually in perpetuity. The over-quota tariff
would stay at the current high level (78% in 2003) indefinitely, and not decline. The
agreement includes a “compensation” mechanism that the United States can exercise
at its sole discretion in order to manage U.S. sugar supplies. If activated, the United
States commits to compensate the six countries for sugar they would not be able to
ship under the above market access provisions.
In justifying DR-CAFTA’s sugar provisions, U.S. Trade Representative officials
pointed out that the additional access granted all six countries will equal about 1.2%
of current U.S. sugar consumption in year 1, increasing to 1.7% in year 15. They also
emphasized that the U.S. sugar sector will be protected by the compensation
mechanism, the prohibitive tariff on above-quota imports, and the stipulation that a
country can only export its net sugar surplus to the U.S. market. USTR’s lead
agricultural negotiator also stated that the import increase would not interfere with
how sugar marketing allotments function.
Sugar Deal to Secure Votes. Under what circumstances, and how the
sugar “compensation” mechanism might operate, drew much questioning when
USTR officials testified before the Senate Finance Committee in April 2005. Several
senators raised concerns about what would happen to sugar marketing allotments if
USDA projects sugar imports, because of additional imports under DR-CAFTA, will
be above the trigger level that would require USDA to suspend allotments. To
address these concerns, Secretary of Agriculture Johanns, on June 28, 2005, reached
an agreement with two Senators that helped sway enough votes the next day in the
Finance Committee for the DR-CAFTA implementing bill. In a letter to the
chairmen of the House and Senate Agriculture Committees, the Secretary laid out the
steps he would take to ensure the sugar program operates as authorized only through
FY2008 if he estimates annual sugar imports under DR-CAFTA, NAFTA, and other
trade agreements exceed the 1.532 million ST trigger level. These will include
donating surplus commodities in USDA inventories or making cash payments as
compensation to sugar exporters in Central America or Mexico to not ship sugar to
the U.S. market under DR-CAFTA’s and NAFTA’s terms. The letter pledged that
USDA would also divert (by purchasing) surplus sugar imports for ethanol and other
non-food uses, and would complete a study to be submitted to Congress by July 1,
2006, on the feasibility of converting sugar into ethanol.2 Reactions by Members to
the letter were mixed, with some skeptical about the assurance and others remaining
opposed to DR-CAFTA, in part because of the costs that USDA would incur in
meeting its pledge (as scored by the Congressional Budget Office (CBO)). The U.S.
2 On July 10, 2006, USDA issued this report examining the economic feasibility of
converting sugarcane, sugar beets, molasses, raw cane sugar, and refined sugar into ethanol.
The study concluded that while such conversion would be profitable with current high
demand for ethanol and record ethanol prices, it would be unprofitable when compared to
ethanol prices projected for mid-2007. This report can be accessed at [http://www.usda.gov/
oce/reports/energy/EthanolSugarFeasibilityReport3.pdf].

---

CRS-14
sugar industry rejected USDA’s commitment, calling it “a repackaged, short-term
offer” that did not address its long term concerns about (1) sugar that could enter in
future trade agreements; (2) a resolution of the dispute on Mexico sugar access to the
U.S. market; and (3) the continuation of the features of the current sugar program
after FY2008.
FTA Negotiations with Australia. U.S. trade negotiators excluded sugar
from the trade agreement concluded with Australia in February 2004. The sugar
industry “applauded the Administration’s decision to exclude market access
commitments on sugar,” pointing out an FTA can be negotiated without including
sugar and that this can “serve as a template for all future FTA negotiations.” The
National Confectioners Association representing candy manufacturers “condemned”
the negotiating results, stating that limiting access to Australian-produced sugar is
“damaging” to U.S. candy firms and jobs. Other major commodity groups reacted
that excluding sugar in negotiating other FTAs would harm their export interests.
Sugar in the Peru, Colombia, and Panama FTAs. In the FTA with Peru
announced in December 2005, U.S. negotiators offered access for an additional
11,000 MT of sugar to the U.S. market. This represents an almost one-fifth increase
in Peru’s minimum share of the U.S. raw cane TRQ (47,674 MT). Peru’s preferential
raw cane sugar quota would rise 2% each year, and the U.S. protective tariff on over-
quota sugar would continue indefinitely. Peru would be permitted to ship sugar only
if it has a net sugar surplus (i.e., sugar left over once its domestic market is supplied,
and taking imports into account). This is expected to occur infrequently, in light of
Peru’s sugar trade flows in recent years. The American Sugar Alliance (ASA)
signaled it would not oppose this agreement, noting the amount is “more reasonable
than the excessive access granted in CAFTA.” In the Colombia FTA concluded in
February 2006, the United States offers access for an additional 50,000 MT of sugar.
This represents a two-fold increase over Colombia’s present minimum share of the
U.S. raw cane TRQ (25,273 MT). The new quota would increase about 1.5%
annually, and the high U.S. tariff on entries above the quota level would remain in
place in perpetuity. ASA has held off taking a position, reportedly waiting to see
what level of additional access to the U.S. market is agreed to when FTA
negotiations with Panama, Ecuador, and Thailand are concluded. Panama, in its FTA
concluded in mid-December 2006, received three small preferential TRQs for sugar
and sugar-containing products allowed to be sold duty-free in the U.S. market. The
largest duty-free TRQ (6,000 MT for raw sugar) will expand 1% annually for 10
years; all sugar product over-quota tariffs will remain at current high levels
indefinitely. These quotas in the aggregate represent most of the sugar surplus that
Panama traditionally has available to export each year. All three FTAs also include
a sugar compensation provision similar to that found in DR-CAFTA.
Sugar in WTO Negotiations. U.S. sugar policy may face change if
negotiators reach a multilateral agreement that commits countries to proceed further
in significantly liberalizing agricultural trade. For this reason, the U.S. sugar
production sector and U.S. food and beverage manufacturers that use sugar are
watching carefully to see whether the outcome of these negotiations protects and/or
advances their respective economic interests.

---

CRS-15
Launched in late 2001, WTO member countries agreed that the negotiating
objectives for agriculture in the Doha Development Round should be: (1) substantial
reductions in trade-distorting domestic support, (2) the phase-out, with a view to total
elimination, of all export subsidies, and (3) substantial improvements in market
access (i.e., reductions in tariffs and expansion of quotas). In August 2004,
negotiators agreed upon a “framework agreement” to be followed to meet these
objectives. In advance of the December 2005 Hong Kong ministerial conference, the
United States, the EU, and two other country groups presented various agriculture
“modalities” proposals (formulas, schedules, end dates) to add specifics to this
framework. Trade ministers, though, were not able to finalize a modalities package,
and subsequently failed to achieve a breakthrough at a crucial meeting of a core
group of countries held in late July 2006. Though negotiations were then
“indefinitely suspended,” WTO’s director in late January 2007 declared that the
process is now back “to full negotiating mode.”3
Interest groups with a stake in U.S. sugar policy had closely monitored the
“market access” component of these negotiations. Of most significance was the issue
of how much (expressed as a percentage of tariff lines) a country should be allowed
to protect its sensitive agricultural commodities, particularly imports from the least
developed countries (LDCs). The American Sugar Alliance had expressed concern
that the U.S. October 2005 proposal “could dump up to 750,000 tons of unneeded
foreign sugar on a chronically oversupplied U.S. market” but did not seek to
discipline indirect sugar subsidies, and would allow developing countries “to escape
reforms.” Others, though, pointed out that “modalities” that are closer to the EU
proposal would leave the U.S. sugar program unchanged. The Sweetener Users
Association as a member of an agribusiness/commodity/farm group coalition had
called on other countries to match the U.S. proposal to reduce trade-distorting
subsidies “with equally ambitious” tariff reductions and export competition
commitments.
The ministerial declaration adopted in Hong Kong called for “duty-free, quota-
free” imports from LDCs for at least 97% of all of a country’s products. For the
United States, this could apply to sugar imported from these countries, unless U.S.
negotiators decide to exempt sugar from this obligation (i.e., to place sugar in the 3%
category). What duties and quotas would apply to imports of sensitive agricultural
products (i.e.., applicable to sugar imports) from all other countries could also affect
U.S. sugar policy.
Sweetener Disputes with Mexico
Longstanding differences over the level of market access for Mexican sugar to
the U.S. market, and over Mexican barriers on imports of U.S. high-fructose corn
syrup (HFCS), were resolved in a bilateral agreement reached by both governments
in late July 2006. The terms of this agreement will apply until January 1, 2008, when
3 For additional information, see CRS Report RL33144, WTO Doha Round: The
Agricultural Negotiations.

---

CRS-16
bilateral free trade in sweeteners takes effect under NAFTA’s original terms.4 Until
this breakthrough, the almost decade-long impasse had largely reflected divergent
views held by the U.S. and Mexican governments of NAFTA’s sugar provisions;
Mexican government actions on behalf of its powerful sugar industry to force a
change in the U.S. position, and to protect the sector’s share of the Mexican
sweetener market in light of increased imports of HFCS from the United States; each
government’s filing of trade dispute cases before NAFTA and WTO panels
challenging the other’s handling of these disputes; and unsuccessful efforts by
government and private industry negotiators on both sides to arrive at some
compromise. Resolution of both disputes appeared to be prompted by the U.S.
government’s recognition that sugar imports will be needed anyway to meet domestic
sugar demand and rebuild stocks, in return for gaining access to Mexico’s market for
U.S. HFCS sales. Though the agreement in the short term settles the parameters of
U.S.-Mexican sweetener trade, some observe that temporarily resolving the
underlying problems has simply postponed dealing with them until 2008 and after.
As a result, the development of the sugar title in the 2007 farm bill will involve
exploring various options to address imports of Mexican sugar.
2006 Sweetener Agreement. In the July 27, 2006, exchange of letters
between U.S. and Mexican agricultural trade negotiators, both governments agreed
on a number of measures “intended to promote an orderly transition to” free trade in
sweeteners on January 1, 2008. In brief, the agreement provides for Mexican sugar
access to the U.S. market equal to the amount of access that U.S. HFCS will have to
Mexico’s market during this period. Specific provisions call for:
! The United States to provide duty-free access for Mexican sugar as
follows: 250,000 MT in FY2007, and from 175,000 to 250,000 MT
in the first quarter of FY2008 (with the exact amount to be jointly
determined by July 1, 2007, based on market conditions at that
time).5
! Mexico to allow duty-free entry for an equivalent amount of U.S.-
produced HFCS in FY2007 (250,000 MT), with the FY2008
4 A precedent for the outline of this agreement was set in the bilateral agreement announced
on September 29, 2005, that applied only for FY2006. Then, the United States announced
a NAFTA duty-free TRQ of 250,000 MT for sugar imports from Mexico. Mexico
reciprocated by establishing a duty-free 250,000 MT TRQ for imports of U.S. HFCS.
5 The 250,000 MT amount reflects U.S. implementation of the NAFTA sugar side letter,
which the Clinton Administration negotiated with Mexico in November 1993 in order to
secure enough votes for House approval of NAFTA. The Mexican government
subsequently contested the validity of this side letter, which effectively placed a lower cap
on duty-free imports of Mexican sugar allowed to enter the U.S. market than would have
been the case under the original NAFTA agreement. Under the side letter’s provisions,
Mexico can ship not more than 250,000 MT of sugar duty-free to the U.S. market each year
through FY2008, but only if Mexico shows a “net production surplus” (defined as Mexican
sugar production, minus Mexican sugar consumption, minus Mexican HFCS consumption).
NAFTA committed both countries to allow sugar to enter free (not subject to a tariff nor any
quota restriction) from the other in 2008.

---

CRS-17
quantity determined in the same way that the sugar TRQ amount is
determined.6
! The United States to allow not less than 21,774 MT of Mexican
refined sugar to enter duty-free by September 30, 2006 (i.e.,
reflecting USDA’s objective to provide an adequate supply of high-
quality refined sugar to users before the 2006 domestic crops are
available for processing).7
! Mexico to meet its NAFTA commitment to allow duty-free entry of
not less than 7,258 MT of sugar or syrup goods from the United
States in each of FY2005, FY2006, and the first quarter of FY2008
(i.e., totaling 21,774 MT).
! The United States to eliminate its over-quota tariffs on imports of
sugar from Mexico, and Mexico to eliminate its over-quota tariffs on
imports of HFCS from the United States, effective January 1, 2008.8
! Only through December 31, 2007, Mexico to apply import licensing
procedures on the permitted in-quota amounts of HFCS imports, and
to develop and apply “bilaterally agreed” import licensing
6 Under NAFTA, Mexico committed to reduce its base tariff on HFCS imports (15%) from
the United States to zero within 10 years (i.e., 2003). As HFCS sales to Mexico’s soft drink
sector began to displace bottlers’ use of Mexican-produced sugar and Mexico’s sugar sector
sought to renegotiate NAFTA’s sugar provisions, the Mexican government responded in
1998 by imposing high anti-dumping (AD) duties on U.S. HFCS imports. With the AD
duties, U.S. HFCS sales leveled off but continued. Subsequent NAFTA and WTO dispute
panels ruled that these duties were not consistent with Mexico’s trade commitments. To
comply with the WTO’s final ruling, Mexico created in May 2002 a new TRQ for U.S.
HFCS equal to the NAFTA sugar TRQ (under the sugar side letter’s provisions) that the
United States had announced for Mexico for FY2002. This policy also subjected over-quota
HFCS imports to a prohibitive 156% or 210% tariff. Concurrently, Mexico’s Congress
imposed a 20% “soda tax” in 2002 — applied to soft drinks sweetened with corn syrup but
not sugar. Both actions eliminated the Mexican soft drink sector’s demand for HFCS, and
resulted in negligible U.S. HFCS exports in the 2002-2005 period. In a subsequent case
filed by the United States arguing that the tax was discriminatory in its application, the
WTO accepted the U.S. position. In its final decision issued in March 2006, the WTO found
the tax inconsistent with WTO trade rules and called upon Mexico to bring its laws into
compliance. Mexico agreed to eliminate this tax, which its Congress did in December 2006,
as part of this sweetener agreement.
7 This represents Mexico’s share of the additional FY2006 refined sugar TRQ of almost
91,000 ST, announced by USDA on July 27, 2006. This allocation to Mexico reflects U.S.
trade commitments under the WTO.
8 The U.S. over-quota tariff on raw sugar from Mexico under NAFTA is 1.56 ¢/lb.
(equivalent to an ad valorem duty of about 7%) in 2007, and will fall to zero in 2008.
Mexico will continue to apply its MFN over-quota tariff on U.S. HFCS products in the
interim — ranging from 156% to 210%, depending upon the sweetness intensity, not
NAFTA’s zero rate as initially set.

---

CRS-18
procedures on the specified amount of in-quota sugar imports, from
the United States.
! Each country not to take any discriminatory action (e.g., imposing
a tax or any other internal measure) to limit imports of the sensitive
sweetener product from the other (for Mexico, HFCS; for the United
States, sugar).
! Both countries to continue to consult and work to resolve other
ongoing disputes involving trade in sweeteners, in order to facilitate
the transition to free trade on January 1, 2008.
! Both countries to establish a joint industry/government task force to
(1) help both governments prepare for the elimination of tariffs on
sweeteners in January 2008 and (2) periodically review product
shipments against this agreement’s TRQs to ensure that they are
promptly and fully utilized.
The letter exchange also confirms a separate bilateral agreement reached earlier and
submitted to the WTO stating that Mexico will eliminate its “soda tax” no later than
January 31, 2007.
Reactions to Agreement. The American Sugar Alliance expressed concern
that this agreement “will not accomplish” the objective of an “orderly transition” to
bilateral free trade in 2008 for U.S. sugar producers “under current market
conditions.” Its letter to Administration officials stated that the amount of Mexican
sugar to be imported, together with sugar that will enter from other countries, “will
oversupply and disrupt the U.S. sugar market.” Particularly noted were the fall in the
raw cane sugar futures price immediately after the July 27 announcement and a
“more likely surge” in over-quota imports from Mexico in 2007 as the NAFTA tariff
is further reduced. ASA also asserted that the agreement “abandons the fundamental
principles that have governed NAFTA sweetener trade.” It pointed out that USDA’s
estimates of deficits in Mexican sugar and HFCS supply and demand in FY2006 and
FY2007 cannot be reconciled with USDA’s determination that Mexico is a “net
surplus producer” and granted access to the U.S. market, under the NAFTA side
letter formula. The Corn Refiners Association welcomed the agreement, viewing its
HFCS provisions as setting into “motion an irreversible path to free trade in January
2008, as the NAFTA intended.” Acknowledging that it does not resolve all
outstanding issues or compensate U.S. corn refiners for 10 years of losses, CRA
stated that the agreement “solidifies the promise for increasing U.S.-owned corn
sweetener presence in Mexico.” The Sweetener Users Association commended
USDA and USTR for a “successful resolution of these issues” and noted that in the
long term, the agreement puts both countries “on a path toward an open North
American sweetener market in 2008.”
Potential Impact. The extent to which increased Mexican consumption of
HFCS — a cheaper sweetener than sugar and primarily imported from the United
States — displaces Mexican-produced sugar in that market will be the major factor
influencing how much Mexican sugar is actually shipped to the U.S. market during
the sweetener agreement period and beyond. Estimates vary on how much HFCS

---

CRS-19
could displace the sugar consumed by Mexico’s soft drink industry, which would be
the primary user of HFCS under free trade. In 2004, the second year that the “soda
tax” was in effect, Mexico’s soft drink sector used a record 1.6 million MT of sugar
— an amount that theoretically could all be displaced by HFCS over time. Analysts,
though, estimate that HFCS could displace a sizeable, but smaller, portion of the
sugar consumed by Mexico’s soft drink sector (from 600,000 MT to 1 million MT).9
The low end of this range reflects the view that a large portion of the soft drink
bottlers that are owned by Mexican sugar processors will continue to use sugar rather
than switch to HFCS. The high end assumes that Mexico’s soft drink sector will
substitute HFCS for sugar to the same extent as occurred in the U.S. soft drink sector.
Other factors will influence the quantity of sugar that Mexican processors could
export to the U.S. market beginning in 2008. Some of these could reduce the level
of actual shipments; a few factors could raise that level. Also, what transpires during
the agreement’s implementation period through year-end 2007 will affect the climate
in which Congress considers the new sugar program. These factors include:
! how much more U.S.-produced HFCS is actually exported to
Mexican soft drink bottlers. Though there currently is excess
capacity in U.S. plants, the extent to which HFCS production is
increased to take advantage of regained access to the Mexican
market will depend to some extent on whether firms find it more
profitable to produce HFCS for export or to produce ethanol to meet
growing U.S. demand.
! how Mexican wholesale sugar prices compare to comparable U.S.
raw sugar prices, and how Mexican sugar mills respond. If they are
higher — the trend seen in much of the period since 2000 —
Mexican mills may be more inclined to sell into their domestic
market rather than export sugar to the U.S. market. Though
historically high U.S. sugar prices in 2005/2006 encouraged
Mexican firms to export sugar to obtain a better price than in their
home market, the U.S. price already is falling back toward its
historical range. As the U.S. market returns to a more balanced
supply and demand situation, this could reduce the incentive for
Mexican sugar mills to export as much to the United States.
However, if U.S. HFCS exports to Mexico increase substantially and
contribute to a fall in Mexican sugar prices, Mexican mills would
find selling sugar to the United States a more lucrative option, if
U.S. sugar policy (and in turn, U.S. wholesale sugar prices) stays the
same.
! the degree to which the Mexican government intervenes, directly or
indirectly, in the marketplace to ensure adequate domestic supplies
and reduce sugar price increases. The level of Mexican sugar
9 Frank Jenkins, “World and US Sugar and Sweetener Market Outlook,” presentation to
ASA’s 23rd International Sweetener Symposium, August 7, 2006, p. 18; The Future of U.S.
Sugar Policy, prepared for ASA by McKeany-Flavell Company, Inc., June 14, 2006, p. 8.

---

CRS-20
production, while trending up, does vary from year to year. Since
Mexican government policy is to have sugar mills hold in reserve
sugar equal to at least three months of domestic consumption,10
lower output in some years could reduce the amount available for
export. For this reason, the government can require mills to obtain
permits before they are allowed to export sugar. The government
also does at times permit sugar imports to dampen price increases.
! how the Mexican government proceeds to handle a number of
seemingly intractable problems in its sugar sector. The sector
employs more than 2 million workers, many producing and cutting
sugarcane on very small plots, and is a powerful political force in the
countryside. In 2005, Mexico’s Supreme Court reversed the
government’s expropriation of about half of the country’s sugar
mills in 2001. The question that arises is what will happen to many
of these operations. Will the government step in to inject financial
support or let them fail, or will their private owners be able to return
them to profitability? Various initiatives to diversify the sugar
industry are being explored, with much attention focused on
developing an ethanol industry that uses sugarcane as a feedstock.
Relatedly, uncertainty remains over the legal status of a 2005 law to
reintroduce government involvement in the Mexican sugar
producing sector — opposed by the government and sugar mills, but
supported by sugarcane associations and their political allies in
Congress. Ultimately, the outcome of the debate over whether to
introduce more market-oriented policies or to maintain the policy
status quo will determine whether Mexico’s sugar sector contracts
to primarily meet domestic demand, or survives to likely generate a
surplus of sugar that will seek an outlet in the U.S. market.
! whether Mexican sugar mills invest in processing equipment to
improve the quality of sugar sold to U.S. sugar users. Reports
indicate that shipments of Mexican “refined” sugar during FY2006
did not meet the standard that U.S. food manufacturers are
accustomed to procuring and/or contained foreign material. This
required U.S. importers to further process the sugar to remove
impurities, or for example, to remove metal shavings. With the
additional costs involved, U.S. sugar users may be less willing in a
less turbulent market environment to purchase Mexican refined
sugar, unless its quality improves.
Previewing the 2007 Farm Bill Debate
Sugar Program Options. In 2007, Congress will consider legislation to
replace the expiring 2002 farm bill provisions for farm commodity price and income
10 USDA, Foreign Agricultural Service, “Mexico Sugar Semi-Annual Report 2005,”
September 23, 2005, p. 6.

---

CRS-21
support programs, including those for sugar. In advance of this, interest groups with
a direct stake in future U.S. sugar policy have begun to lay out their positions. In
addition, others have floated a number of other policy options that might receive
consideration. These include (1) extending the current program (i.e., keep the loan
program with present price support levels, together with marketing allotment
authority); (2) eliminating the current domestic program, but retaining authority to
impose import quotas reflecting U.S. trade agreement commitments; (3) reducing
current sugar price support levels, but retaining the loan features of the current
program and repealing all marketing allotment authorities; (4) replacing the existing
program with a market-oriented approach used for such program crops as grains,
cotton, and oilseeds (e.g., direct payments, counter-cyclical payments, marketing loan
gains — with benefits determined relative to specified loan rates and to-be-
determined target prices); (5) authorizing a buyout of sugar marketing allotments
(possibly similar to the quota buyout packages authorized for peanuts in 2002 and
tobacco in 2004); (6) adopting a revenue insurance approach for all producers that
bases government payments on producer revenue losses rather than on low
commodity prices; and (7) making direct payments to producers based upon
historical acreage levels, among other possible options and variations. Converting
sugar into ethanol is also expected to receive attention as one way to address any
sugar surplus scenario and make the United States less reliant on foreign energy
sources, likely in an expanded energy title in the farm bill.
Factors to Affect Debate. Key factors that will influence the debate are the
likelihood of unrestricted sugar imports from Mexico once NAFTA takes full effect
in 2008, the funding level that the Agriculture Committees secure for farm bill
programs when Congress considers the FY2008 budget resolution in spring 2007, the
issue of limits on payments made to sugar crop producers if payment alternatives are
considered, and whether there is any movement in WTO negotiations on further
agricultural trade liberalization.
Interest Group Positions. The American Sugar Alliance advocates an
extension of the current “no-cost” sugar program, arguing that the status quo is the
best way to preserve a viable U.S. sugar industry. ASA expressly opposes converting
the sugar program into the type now used to support program crops, where USDA
makes payments to producers when prices fall below specified levels. ASA
emphasizes such a change would be “costly” and “unworkable” for the U.S. sugar
producing sector, projecting a cost of $1.3 billion annually.11 ASA further argues that
problems would arise in implementing this type of program because the sugar
industry is structured differently than other commodities, large sugar producers
would quickly hit current payment limits on farm subsidies, bankruptcies and
11 ASA released its assessment in mid-2006 to counter discussion of the policy option to
change the current “no-cost” sugar program to a “standard” payment program. The study
also concluded that this approach would cause “a dramatic drop in [sugar] producer price
and income,” and not benefit consumers with lower sugar prices since “food manufacturers
historically have not passed savings from lower input costs” on to them. This study, cited
in footnote 9, can be viewed at [http://www.sugaralliance.org/library/resourcedocs/
MF-SugarPolicy-Final.pdf]. In response, the Sweetener Users Association issued an analysis
critical of the ASA-commissioned study, available at [http://www.sweetenerusers.org/
Cover%20Letter%20and%20The%20Future%20of%20U.S.%20Sugar%20Policy1.pdf].

---

CRS-22
consolidations in the U.S. sugar sector could occur, and a costly program would be
politically difficult to approve and maintain in light of the current federal budget
outlook. Given a fixed or smaller budget for farm programs, sugar producers state
that other commodity producers would not want to reduce their subsidies to make
room for a subsidy program for the sugar producing sector.
Separately, recognizing that sugar imports from Mexico are inevitable under
NAFTA, ASA wants sweetener trade with Mexico to be managed once free trade
takes effect in 2008 so that the current U.S. sugar program can continue. This would
mean that Mexico would control the quantity of sugar its sugar mills are allowed to
sell (e.g., by operating a program similar to the U.S. sugar marketing allotment
program) or agree to export its excess sugar to other countries besides the United
States. A Mexican sugar company executive responded that marketing allotments
would be “very unpopular” at this time with Mexican sugar processors, who would
view such a move as an effort to limit their access to the U.S. market just as
NAFTA’s sugar provisions take full effect.12
The Sweetener Users Association is calling for changes to the current sugar
program, in order to respond to external pressures (primarily increased sugar imports
from Mexico) and “to achieve a more workable policy for the entire industry.”
Reflecting a shift in position, spokesmen emphasize that sugar users “need a steady,
reliable supply of sugar and a healthy domestic production and processing sector”
that is geographically dispersed enough to handle supply disruptions caused by
hurricanes and quality problems associated with some imports. Food manufacturers
advocate that the sugar program needs to be reformed to meet this objective, and
propose that budget outlays for a different type of sugar program “can be acceptable
and defensible if they help to make policies more market-oriented or help adjust to
our trade commitments.” A SUA spokesman states that the existing program cannot
be sustained anyway on a no-cost basis, pointing to estimates made by CBO which
project that lower U.S. prices due to increased sugar imports from Mexico will result
in loan forfeitures by sugar processors and accompanying USDA outlays. Though
SUA is not advocating any specific proposal at the moment, it has offered three
approaches for consideration: (1) adapting the income- and price-compensation
features currently used to support program crops to the sugar production sector, (2)
offering revenue insurance, and (3) making direct payments to producers. Further,
it would not support producer payment limits that apply in other commodity
programs, because it would likely disqualify the large sugar processing cooperatives
from receiving any payments.13
The Corn Refiners Association views sugar marketing allotments as “a barrier
to sweetener trade with Mexico” because they cap sugar imports from Mexico at
12 Inside U.S. Trade, “U.S., Mexico Sugar Producers At Odds Over Integrating NAFTA
Market,” August 11, 2006.
13 Chicago Tribune, “U.S. sugar growers, users work on a deal,” August 9, 2006;Inside U.S.
Trade, “Sugar Producers, Users Remain At Odds Over Future of Program,” August 18,
2006. For additional perspective on SUA’s views, see “Congress Should Reform the U.S.
Sugar Program,” at [http://www.sweetenerusers.org/Sugar%20Reform%20-%20Farm%20
Bill%20Talking%20Points2.pdf].

---

CRS-23
250,000 MT and, in effect, do not allow U.S. HFCS sales to Mexico to increase
above this level. CRA states it will not support the U.S. sugar program in the 2007
farm bill “if marketing allotments or any aspect of the sugar program jeopardizes full
implementation of free trade in sweeteners under the NAFTA.”14
USDA’s Farm Bill Proposal. On January 31, 2007, the Secretary of
Agriculture released its proposals for congressional consideration in this year’s
debate. For sugar, USDA proposes that the objectives of operating a no-cost program
by managing supplies be continued with two changes. It proposed the removal of the
1.532 million ton import trigger that automatically suspends allotments and
discretionary authority to administer these allotments to reduce the program’s future
cost exposure (estimated at $1.4 billion over 10 years). In response, the ASA stated
that USDA’s proposal is a “positive development” but expressed concerns over the
discretionary authorities the Secretary would exercise. The SUA has not issued any
public statement on USDA’s proposal.
14 CRA 2007 Farm Bill Position, August 2006, available at [http://www.corn.org/
CRAFarmBillTalkingPoints.doc].

---