Order Code RL34103
Sugar Policy and the 2007 Farm Bill
Updated May 15, 2008
Remy Jurenas
Specialist in Agricultural Policy
Resources, Science, and Industry Division

---

Sugar Policy and the 2007 Farm Bill
Summary
Congress will decide on the future of the U.S. sugar program in an omnibus
farm bill in 2008. Growers of sugar beets and sugarcane, and processors of these
crops, favor continuing the structure of the current sugar price support program but
seek changes to enhance their position in the U.S. marketplace. Food and beverage
manufacturers that use sugar want Congress to address their concerns about the
impact of sugar prices and program features that restrict supplies.
The sugar program is designed to guarantee the price received by sugar crop
growers and processors and to operate at “no cost” to the U.S. Treasury. To
accomplish this, the U.S. Department of Agriculture (USDA) limits the amount of
sugar that processors can sell domestically under “marketing allotments” and restricts
imports. At the same time, USDA seeks to ensure that supplies of sugar are adequate
to meet domestic demand. “No cost” is achieved if USDA applies these tools in a
way that maintains market prices above minimum price support levels. Should prices
fall, processors who take out loans have the right to hand over as payment sugar that
had earlier been pledged as collateral. Such a step results in program costs.
Effective January 1, 2008, sugar imports from Mexico no longer are restricted
under the rules of the North American Free Trade Agreement. Also, additional
imports are allowed entry under other free trade agreements. Both the Congressional
Budget Office (CBO) and USDA project that, if the sugar program continues without
change, additional imports will bring prices down below support levels and make it
attractive for processors to default on price support loans. With loan defaults
representing a cost, USDA would not be able to operate a no-cost program.
To address any U.S. sugar surplus caused by imports, the farm bill conference
agreement on H.R. 2419 would mandate a sugar-for-ethanol program. USDA would
be required to purchase as much U.S.-produced sugar as necessary to maintain
market prices above support levels, to be sold to bioenergy producers for processing
into ethanol. USDA funding would be open-ended for this program. Other
provisions would increase the minimum guaranteed prices for raw sugar and refined
beet sugar by 4%-5%, mandate an 85% market share for the U.S. sugar production
sector, and remove certain discretionary authority that USDA exercises to administer
import quotas. Though CBO scores some savings with the ethanol program, sugar
program provisions would cost about $650 million over five years and just over $1.2
billion over 10 years. Should Congress not approve a farm bill this year, all sugar
program authorities would expire.
The conference agreement’s sugar provisions reflect the proposals presented to
the House and Senate Agriculture Committees by sugar crop producers and
processors. Food and beverage manufacturers that use sugar oppose them, arguing
that costs to consumers would increase and that new requirements would restrict the
flow of sugar for food use in the domestic market. The Bush Administration opposes
these provisions, with the President identifying them as one reason why he will not
sign the farm bill. This report will be updated to reflect key developments.

---

Contents
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview of Sugar Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Issues in Current Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Level of Sugar Price Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Controlling Sugar Supply to Protect Sugar Prices . . . . . . . . . . . . . . . . . . . . . 3
Import Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Marketing Allotments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Sugar for Ethanol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Sugar Program Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Implications of Possible Extension or Expiration of
Current Sugar Program Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Annual U.S. Sugar Import Commitments When the 2002 Farm Bill
Was Enacted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Outlays (-) or Receipts (+) of the Sugar Program under the
2002 Farm Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. CBO’s Projection of Sugar Program’s Cost under
Farm Bill Conference Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
For more information, please see the following CRS product:
CRS Report RL33541, Background on Sugar Policy Issues, by Remy Jurenas.

---

Sugar Policy and the 2007 Farm Bill
Recent Developments
On May 15, 2008, the Senate approved the conference report for the farm bill
(H.R. 2419; H.Rept. 110-627) on an 81-15 vote. One day earlier, the House voted
318 to 106 to approve this report. The Food, Conservation, and Energy Act of 2008
maintains the sugar program’s current structure but introduces some new elements.
It adds a new sugar-to-ethanol component to handle any sugar surplus caused by
imports, raises in stages the loan rate for raw cane sugar by three-quarters of one cent
(to 18.75¢ per pound in 2011) and similarly the loan rate for refined beet sugar (to
21.1¢ per pound in 2011), and mandates an 85% share of the U.S. sugar market for
U.S. producers and processors of sugar crops.
On May 13, 2008, President Bush signaled his intent to veto the farm bill
conference report once voted on by Congress. He identified the proposed sugar
program as one of the reasons that he “cannot support” this measure. Specifically,
he stated that “[t]he bill creates an egregious new sugar subsidy program that will
keep sugar prices high for domestic consumers, while making taxpayers subsidize a
handful of sugar growers.”1
On May 8, the Sugar Policy Alliance (a coalition of food and beverage
manufacturers that use sugar and public interest, consumer, and taxpayer groups)
expressed disappointment that “lawmakers not only missed an opportunity to reduce
consumer costs in the outdated and unworkable sugar price support program, but
added new costs that will be borne by the taxpayer.”2
On May 8, the American Sugar Alliance (representing sugar crop producers and
processors) endorsed the sugar program approved by the farm bill conference
committee, noting that existing sugar policy is maintained and enhanced with “an
ethanol provision and a small rate increase on loans that sugar producers repay to the
government with interest.”3
1 White House, Office of the Press Secretary, “Statement by the President on the Farm Bill,”
available at [http://www.whitehouse.gov/news/releases/2008/05/20080513-2.html].
2 “Farm Bill Misses Chance to Reform Sugar Program,” available at [http://sweetenerusers.
org/050808.pdf]
3 American Sugar Alliance, “America’s Sugar Producers Endorse New Farm Bill,” available
at [http://www.sugaralliance.org/output_pages/printDefault.aspx?page_id=19&news_id=
1022].

---

CRS-2
Overview of Sugar Program
The current sugar program is designed to guarantee the minimum price received
by growers of sugarcane and sugar beets, and by the firms (raw sugar mills and beet
refiners) that process these crops into sugar. To accomplish this, the USDA limits
the amount of sugar that processors can sell domestically under “marketing
allotments” and restricts imports. USDA is required to operate the sugar program on
a “no-cost” basis. This means USDA must regulate the U.S. sugar supply using
allotments, import quotas, and related authorities so that domestic market prices do
not fall below guaranteed minimum price levels. These are set out in law as specified
loan rates, which serve as the basis from which USDA derives effective support
levels. If the market price is below the support level when a sugar price support loan
comes due, its “non-recourse” feature means a processor can exercise the legal right
to forfeit, or hand over, sugar offered to USDA as collateral for the loan in fulfillment
of its repayment obligation. This report focuses on the issues raised by the sugar
program provisions in major bills and floor amendments. For background
information, see CRS Report RL33541, Background on Sugar Policy Issues.
Issues in Current Debate
Consideration of future U.S. sugar policy in debating the farm bill has revolved
primarily around four issues. These are raising the level of minimum price
guarantees to be made available to processors, how to use two tools to manage U.S.
sugar supply, authorizing any sugar surplus to be used as a feedstock for ethanol, and
accounting for projected program costs. Though industrial users of sugar in food and
beverage products initially explored converting the sugar program to operate similar
to the programs in place for the major grains, oilseeds and cotton, this policy option
did not receive further attention.
Level of Sugar Price Support
USDA is required to extend price support loans to sugar processors that meet
certain conditions on passing program benefits to the farmers that supply them with
sugar beets or sugarcane. These loans are made at statutorily set loan rates,4 and
account for most of the effective support level made available to producers and
processors. USDA is required to use its other tools to protect this price guarantee.5
4 For sugar, the loan rate is the price per pound at which the Commodity Credit Corporation
(CCC) — USDA’s financing arm — extends nonrecourse loans to processors. This short
term financing at below market interest rates enables processors to hold their commodities
for later sale.
5 The loan rates alone do not serve as the intended price guarantee, or floor price, for sugar.
In practice, USDA sets marketing allotments and import quota levels in order to support raw
cane sugar and refined beet sugar at slightly higher price levels. Each price level takes into
account the loan rate, interest paid on a price support loan, transportation costs (for raw
sugar), certain marketing costs (for beet sugar), and discounts. These are frequently referred
to as “loan forfeiture levels” or the level of “effective” price support.

---

CRS-3
Loan rates for raw cane sugar have not changed since 1985; for refined beet sugar,
since 1992. These minimum prices have guaranteed producers of sugar crops and the
processors that convert these crops into sugar, a price that since the early 1980s has
ranged from two to four times the price of sugar traded in the world marketplace.
The farm bill conference agreement would increase sugar loan rates by 4% to
5% by 2011. Conferees split the difference between the House- and Senate-proposed
rate increases and adopted the Senate approach that proposed to increase rates in
stages each year. The loan rate for raw cane sugar would rise in quarter-cent
increments from the current 18.0¢ per pound to 18.75¢ / lb., beginning with the 2009
sugarcane crop. The refined beet sugar loan rate would similarly increase in stages,
from the current 22.9¢ per pound to 24.1¢ / lb.6
Growers and processors had initially sought a one cent increase in the raw cane
sugar loan rate (with a corresponding increase in the refined beet sugar rate), and had
acknowledged their satisfaction with receiving half of their request in the House-
passed farm bill. They argued that the increase in the loan rate is needed to cover
increased production costs, particularly energy inputs. Sugar users countered that the
House-proposed higher loan rates will increase costs to taxpayers by an additional
$100 million annually. They also note that while the bill’s ethanol provisions (see
“Sugar for Ethanol” below) “are supposedly designed to deal with surpluses,” the
loan rate increase “can only encourage higher surplus production.”7 The Bush
Administration, in its statement of administration policy on the House and Senate
farm bills, opposed the increase in the loan rates for sugar.
Controlling Sugar Supply to Protect Sugar Prices
The current sugar program uses two tools — import quotas and marketing
allotments — to ensure that producers and processors receive price support benefits.
By regulating the amount of foreign sugar allowed to enter and the quantity of sugar
that processors can sell, USDA can for the most part keep market prices above
effective support levels, meet the no-cost objective, and ensure that domestic sugar
demand is met. If successful, the likelihood that USDA acquires sugar due to loan
forfeitures is remote.
Import Quotas. The United States must import sugar to cover demand that
the U.S. sugar production sector cannot supply. However, USDA restricts the
quantity of foreign sugar allowed to enter for refining and/or sale to manufacturers
for domestic food and beverage use. Quotas are used to ensure that the quantity that
enters does not depress the domestic market price to below support levels. Quota
amounts are laid out in U.S. market access commitments made under World Trade
Organization (WTO) rules and under bilateral free trade agreements (FTAs).
6 The loan rate for refined beet sugar would reflect the requirement that it be set each year
equal to 128.5% of that year’s raw cane sugar’s loan rate, beginning in 2009.
7 Letter to Members of Congress, from food and beverage companies and trade associations,
and public interest groups, July 13, 2007.

---

CRS-4
The sugar program authorized by the 2002 farm bill accommodates, or makes
room for, imports of up to 1.532 million tons each year. This import level is one of
the four factors that USDA uses to establish the national sugar allotment (called the
“overall allotment quantity”), and reflects U.S. trade commitments under two trade
agreements in effect when the 2002 program was authorized (Table 1).
Table 1. Annual U.S. Sugar Import Commitments
When the 2002 Farm Bill Was Enacted
short tons
World Trade Organization Quota (minimum)
1,256,000
North American Free Trade Agreement (NAFTA)
276,000
— Mexico Quota (maximum) a
Total
1,532,000
a. Applied only through the end of calendar year 2007.
Since January 1, 2008, however, U.S. sugar imports from Mexico are no longer
restricted. Under NAFTA, Mexico no longer faces any tariff or quantitative limit on
the amount of sugar exported to the U.S. market. With this opening, though, imports
could fluctuate from year to year for various reasons. First, the amount of Mexican
sugar exported to the U.S. market will depend largely upon the extent that U.S.
exports of historically cheaper high-fructose corn syrup (HFCS) displace Mexican
consumption of Mexican-produced sugar. Surplus Mexican sugar, in turn, would
likely move north to the United States.8 Second, Mexico’s sugar output, though
trending upward, does vary from year to year, depending upon weather and growing
conditions. Mexican government policy also is to hold three months worth of sugar
stocks in reserve and to allow sugar imports when needed to meet demand and lower
prices.9 Third, Mexican sugar prices in recent years have for the most part been
higher than U.S. prices. To the extent this occurs, the incentive for a Mexican sugar
mill to export sugar north in search of a better price could disappear. Fourth, U.S.
buyers’ concerns about the quality of Mexican sugar may limit the amount that
actually flows north in the next few years.
Also, the United States has committed under other existing and pending bilateral
FTAs to allow for additional sugar imports.10 Such imports in 2013, potentially the
8 However, the recent increase in U.S. HFCS prices due to the higher cost of corn — its
main input — may reduce its competitiveness against Mexican-priced sugar. To the extent
this price difference narrows, the incentive for Mexican bottlers of soft drinks to shift to
HFCS may disappear.
9 U.S. sugar processors also will be free to export sugar to Mexico to take advantage of the
occasional higher prices there.
10 Most of the sugar access provisions in the Dominican Republic-Central American FTA
(DR-CAFTA) already are in effect. Congress has yet to consider the FTAs with Panama and
(continued...)

---

CRS-5
fifth year that the sugar program authorized by the 2007 farm bill is in effect, could
total from about 420,000 tons to 1.215 million tons above existing WTO and
NAFTA/Mexico trade commitments. The wide range reflects two varying
assumptions made to estimate by how much HFCS use in Mexico might displace
sugar consumption in Mexico and create a surplus available for export to the U.S.
market.
Legislation. The sugar program provisions in the farm bill conference report
do not directly address the issue of additional sugar imports. Instead, a new sugar-
for-ethanol program would be authorized to handle the price-related impact of such
imports (Section 9001 in the energy title; see “Sugar for Ethanol” and “Program
Costs” below). However, other provisions would prescribe how USDA administers
import quotas. To cover shortfalls (because of hurricanes or other disastrous events)
in what domestic sugar processors can sell under allotments, USDA would be
directed to ensure that most imports enter in the form of raw cane sugar rather than
refined sugar. While historically most permitted imports have entered in raw form,
USDA allowed large quantities of refined sugar to enter after the late 2005 hurricanes
significantly affected the ability of cane refineries in Louisiana and Florida to process
raw sugar. This provision is intended to ensure that cane refineries (which process
raw sugar into refined sugar) can more fully use their operating capacity. Unlike five
years ago when the Congress considered the last farm bill, most cane refineries are
now a key part of vertically integrated operations owned by raw sugar processors
and/or sugarcane producers. Also, limiting the entry of refined sugar would enhance
the position of the domestic beet sector to increase their sales of refined sugar.
Conferees, though, did not adopt provisions found only in the House- passed bill
that would have directed USDA to regulate when and how much raw cane sugar
imports are allowed to be shipped to U.S. cane refineries. While USDA announced
shipping patterns in FY2003-FY2005, the impact of the hurricanes led to a decision
not to follow this long-standing practice in FY2006-FY2008. USDA justified
removing these restrictions because of “changes occurring over time in the domestic
marketing of cane sugar.” The House-proposed provisions could be viewed as
intending to increase the transaction costs for countries that export larger amounts of
sugar to the U.S. market and giving a slight competitive edge to domestic processors
with respect to buyers. Food and beverage firms opposed “micro-managing” the
timing of imports, noting that the application of such rules will limit the ability of
cane refiners to efficiently use their processing capacity and could lead to serious
shortfalls at times in the amount of sugar supplied to the market.11 In commenting
on the House bill, the Bush Administration expressed concern over requiring
shipping patterns for quota sugar imports. Also, several countries eligible to ship
sugar to the U.S. market expressed concern that the proposed regulation of the flow
of imports would run counter to U.S. trade commitments. Because of the concern
expressed that prescribing how sugar import shipping patterns should be
10 (...continued)
Colombia, which would grant additional access for their sugar to the U.S. market.
11 Letter to Members of Congress, July 13, 2007.

---

CRS-6
administered would open up the United States to challenges by sugar exporting
countries in the WTO, these provisions apparently were dropped in conference.12
Marketing Allotments. In the 2002 farm bill, the domestic production sector
accepted mandatory limits on the amount of sugar that processors can sell — known
as marketing allotments — in return for the assurance of price protection. It viewed
allotments as a way to try to capture any growth in U.S. sugar demand, and assumed
that the then-U.S. sugar import quota commitments would continue without change
(see “Import Quotas” above). The statute, however, stipulated that if (1) USDA
estimates imports will be above 1.532 million short tons, and (2) that such imports
would lead USDA to reduce the amount of domestic sugar that U.S. processors can
sell, then USDA must suspend marketing allotments. Suspending allotments because
of additional imports raises the prospect of downward pressure on market prices if
most U.S. sugar demand is already met. If the additional imports were to cause the
price to fall below support levels, forfeitures would occur and USDA would be
unable to meet the no-cost requirement. Including the allotment suspension
provision was designed to ensure that USDA not lose control over managing U.S.
sugar supplies for fear of the consequences that could be unleashed (i.e.,
demonstrating its inability to implement congressional policy).
Legislation. Implementation of the 2002 farm bill’s marketing allotment
authority has resulted in the U.S. sugar production sector’s share of domestic food
consumption ranging from a low of 73% in FY2006 to a high of 89% in FY2004.
Concerned that their market share would decline as sugar imports increase under
various trade agreements (see “Import Quotas” above), sugar producers and
processors decided to pursue a different approach, which farm bill conferees adopted.
It would guarantee that the domestic production sector always benefits from a
minimum 85% share of the U.S. sugar-for-food market. USDA would be required
to announce an “overall allotment quantity” — the amount of sugar that all
processors combined can sell — that represents at least 85% of estimated sugar
consumption. This is intended to address the sector’s objective that imports not
displace the ability of U.S. sugar processors to sell more of their output in each
successive year, to the extent U.S. demand for sugar grows.
Sugar for Ethanol
Background. Sugar producers and processors have had an ongoing interest
in exploring the potential for using sugar crops and processed sugar as a feedstock
to produce ethanol (a gasoline additive). In the 2002-2003 period, they encouraged
USDA to explore selling forfeited sugar stocks to corn-based ethanol processors. A
few ethanol producers experimented by adding sugar to speed up the ethanol
fermentation process, but the results appear to have been disappointing.
12 The World Trade Organization administers trade dispute settle procedures whereby a
country can file a case against another alleging that the latter operates a program or policy
that runs counter to WTO rules. In this context, the prospect arose that a sugar exporting
country might allege that the proposed shipping patterns provision were discriminatory or
trade distorting.

---

CRS-7
In 2005, Congress approved the Dominican Republic-Central American Free
Trade Agreement (DR-CAFTA) that gives six countries increased access for their
sugar to the U.S. market. During the debate, producers and processors sought a deal
with the Bush Administration on a sugar-for-ethanol package. Their objective was
to have the option available to divert additional sugar imports under DR-CAFTA
whenever domestic prices fall below support levels.13 With Congress mandating in
2005 that the use of renewable fuels be doubled by 2012,14 some advocated that sugar
be considered as a feedstock along with other agricultural crops and waste.
Separately, Hawaii mandated (effective April 2006) that 85% of the gasoline sold
must contain 10% ethanol. This requirement assumes that over time, the sugarcane
produced on the islands will be used as the prime feedstock for ethanol.
If the cost of feedstock is excluded, producing ethanol from sugar cane can be
less costly than producing it from corn. This is because the starch in corn must first
be broken down into sugar before it can be fermented. This extra step adds to the
cost of processing corn into ethanol, when contrasted to using sugarcane or processed
sugar. Further, sugar cane waste (bagasse) also can be burned to provide energy for
an ethanol plant, reduce associated energy costs, and improve sugar ethanol’s energy
balance relative to corn ethanol.
Brazil’s success at integrating sugar ethanol into its passenger vehicle fuel
supply has stimulated interest in exploring prospects for sugar-based ethanol in the
United States. However, wide differences in sugar production costs and market
prices in the two countries cause the economics of sugar-based ethanol to differ
significantly. In investigating the economics of ethanol from sugar, USDA
concluded that producing sugar cane ethanol in the United States would be more than
twice as costly as U.S. corn ethanol and nearly three times as costly as Brazilian
sugar ethanol.15 Feedstock costs accounted for most of this price differential.16 The
USDA study showed that while sugar ethanol may be a positive energy strategy in
such countries as Brazil, it may not be economical in the United States.17
13 Though the Administration did not agree to such a package, the Secretary of Agriculture
pledged to divert surplus sugar imports — through purchases — for ethanol and other
non-food uses, to ensure that the sugar program operates as authorized only through
FY2008. For additional information, see “Sugar in DR-CAFTA — Sugar Deal to Secure
Votes” in CRS Report RL33541, Background on Sugar Policy Issues, by Remy Jurenas.
14 For more information, see CRS Report RL33564, Alternative Fuels and Advanced
Technology Vehicles: Issues in Congress, by Brent D. Yacobucci.
15 Office of Economics, The Economic Feasibility of Ethanol Production from Sugar in the
United States, July 2006.
16 In Brazil, the cost of producing raw cane sugar reportedly ranges from 6 to 9 cents per
pound (or 9 to 12 cents when converted to refined basis). In the United States, raw cane
sugar production costs range from 12 to 20 cents per pound; U.S. production costs for
refined beet sugar range from 17 to 33 cents per pound. For additional perspective, see
“Costs of Production and Sugar Processing” in USDA, Economic Research Service, Sugar
Backgrounder, July 2007, pp. 17-21.
17 This discussion is adapted from “Sugar Ethanol” in CRS Report RL33928, Ethanol and
Biofuels: Agriculture, Infrastructure, and Market Constraints Related to Expanded
(continued...)

---

CRS-8
Legislation. The farm bill conference agreement incorporates a proposal
presented to the Agriculture Committees by the U.S. sugar production sector. The
“Feedstock Flexibility Program for Bioenergy Producers” would require USDA to
administer a sugar-for-ethanol program using sugar intended for food use but deemed
to be in surplus. USDA would sell both surplus sugar that it purchases if determined
necessary to maintain prices above support levels, and the sugar acquired as a result
of loan forfeitures, to bioenergy producers for processing into fuel grade ethanol and
other biofuel. Competitive bids would be used by USDA to purchase sugar from
processors, at a price not less than sugar program support levels, which it would then
sell to ethanol firms. USDA would implement this program only in those years
where purchases are required to operate the sugar program at no cost. USDA’s CCC
would provide open-ended funding. This new program would take effect prior to the
expiration of current sugar program authority on September 30, 2008.
Because it would cost much more to produce ethanol from U.S.-priced sugar
than from corn, this new program would require a considerable subsidy to operate as
intended. The prime market for such sugar likely would be existing and planned
corn-based ethanol facilities close to sugar beet and sugarcane producing areas (e.g.,
the Upper Midwest and Hawaii). Producers of ethanol from corn in the continental
United States, though, would likely need to adjust their fermentation process and/or
invest in new equipment to handle sugar. As a result, they may not be as interested
in purchasing sugar as a feedstock unless the price is significantly discounted further
(e.g., requiring even more of a subsidy) to reflect the additional costs of processing
sugar instead of corn. However, the availability of this subsidy could facilitate the
development of the ethanol sector in Hawaii and partially reduce the islands’
dependence on importing gasoline for its vehicle transportation needs. CBO
estimates that this feedstock program would increase demand for sugar and slightly
reduce the cost of the sugar program itself (see “Program Costs” and Table 3 below).
As designed, this program would rely on U.S.-produced (rather than foreign)
sugar. The amount that USDA decides to purchase would approximate its estimate
of the extent that imports under trade agreements reduce the U.S. sugar price below
support levels. Producers supported this provision, viewing it as an insurance policy
for receiving the benefits of a guaranteed minimum price for sugar marketed for food
use. Sugar users opposed this program “to ostensibly manage surplus supplies.” In
their July 13, 2007, letter to Members of Congress, they argued that this authority
“will likely be used to short domestic markets, further restricting the availability of
sugar for food use in the U.S. market.” They characterized this approach as
“wasteful of taxpayer resources” because sugar is not price competitive with corn as
a feedstock, and will require large subsidies to ethanol producers “to induce them to
accept the sugar.” The Bush Administration opposed this sugar-for-ethanol
component, commenting that it would not allow USDA to dispose of surplus sugar
to end uses other than ethanol production, even if “those uses would yield a much
higher return for taxpayers.”18
17 (...continued)
Production, by Brent D. Yacobucci and Randy Schnepf.
18 Office of Management and Budget, “Statement of Administration Policy” on the Senate
(continued...)

---

CRS-9
Sugar Program Costs
USDA has succeeded in operating the sugar program at no cost for the years
covered by the 2002 farm bill. Though processors forfeited small quantities of sugar
in FY2004, USDA subsequently sold the acquired sugar to offset the earlier outlays.19
The net revenue, or sales proceeds (shown as receipts in some years), were from the
sale of acquired sugar (Table 2). The proceeds shown for FY2003 reflected the sale
of a significant amount of sugar acquired due to loan forfeitures in FY2000 (under
the previous farm bill’s sugar program provisions). In looking at the current farm
bill’s entire six-year time period, sugar program operations generated almost $100
million in receipts.
Table 2. Outlays (-) or Receipts (+)
of the Sugar Program under the
2002 Farm Bill
Fiscal Year
millions of $
2003
+ 84
2004
- 61
2005
+ 86
2006
- 10
2007
- 25
2008 Estimate
+ 28
Total, 2003-2008
+ 96
Note: While no loan forfeitures occurred in FY2006 and
FY2007, outlays shown reflect CCC’s recording of loan
repayments in the year after they were actually made.
Source: USDA, Farm Service Agency, “CCC Net Outlays by
Commodity and Function,” February 2008.
Budget forecasts in early 2007 projected that the sugar program, if continued
without change, would cost almost $700 million (CBO) to about $800 million
(USDA) for the five years covered by the 2007 farm bill (FY2008-2012). For the 10-
year period (FY2008-2017), program outlays were projected at almost $1.3 billion
(CBO) to $1.4 billion (USDA). These estimated outlays reflected the effect of
projected sugar imports from Mexico and other countries that have gained additional
access for their sugar under bilateral FTAs. Each cost projection assumed that
18 (...continued)
bill (Food and Energy Security Act of 2007), November 6, 2007, p. 3.
19 The forfeiture of a price support loan results in a budget outlay, because the credit that had
been extended is not paid back by the processor (resulting in a loss to the U.S. government).
To the extent USDA succeeds in selling forfeited sugar, proceeds flow back to USDA and
reduce the loss.

---

CRS-10
additional supplies depress the domestic sugar price below support levels, and lead
processors to forfeit on a portion of their loans.
Though the sugar price support, marketing allotment, and sugar storage payment
provisions in the farm bill conference report (Sections 1401 and 1405) are intended
to ensure that USDA operates the program at no cost, CBO has scored them as
increasing program outlays by $69 million over five years, and $231 million over 10
years (Table 3, rows a and d). The increase above baseline appears to assume that
(1) part of the increase in sugar output induced by the higher level of price support
and then placed under loan is subsequently forfeited by processors, and (2) the
increase in the minimum storage payment rate on forfeited sugar, combined with
increased forfeitures, results in higher storage payments.
Table 3. CBO’s Projection of Sugar Program’s Cost
under Farm Bill Conference Agreement
Farm Bill Conference Agreement
CBO’s
Baseline
Estimate of 2007
Total Projected Cost
Projection
Farm Bill Policy
(CBO Baseline &
(Current
Changes
2007 Farm Bill
Law)
Changes)
Program
Outlays, in millions of dollars
Row
Component
5-YEAR ESTIMATE: FY2008 - FY2012
Price
+ 69
751
Support
682
a
Operations
Sugar-to-
— 108
(108)
Ethanol
0
b
Diversion
Total
682
— 39
$643
c
10-YEAR ESTIMATE: FY2008 - FY2017
Price
+ 231
1,518
Support
1,287
d
Operations
Sugar-to-
— 276
(276)
Ethanol
0
e
Diversion
Total
1,287
— 45
$1,242
f
Source: Derived by CRS from CBO’s March 2007 baseline projection; and CBO’s cost estimate of
farm bill conference agreement, May 12, 2008.

---

CRS-11
Separately, CBO projects that the sugar-for-ethanol program (part of Section
9001) would increase sugar demand and in turn reduce the cost of the sugar price
support program by $108 million over five years and $276 million over 10 years
(Table 3, rows b and e). CBO appears to assume that USDA’s operation of this
program as a guaranteed outlet for surplus and forfeited sugar limits the drop in
domestic sugar prices that would otherwise occur.
Combining both policy changes against CBO’s early 2007 budget forecast or
baseline, the net cost of the conference agreement’s sugar-related provisions would
be $643 million over five years and over $1.2 billion over 10 years (Table 3, rows
c and f). These net cost projections largely reflect the estimated losses incurred as
USDA sells surplus sugar for ethanol processing at a price much lower than the value
of the sugar protected by the minimum price guarantee available under the sugar
program.
Implications of Possible Extension or Expiration of
Current Sugar Program Authority
Expiration. Current sugar program authority expires with the 2007 crop.
Hence, if Congress does not extend the commodity program and related farm bill
authorities, the sugar program’s price support and marketing allotment authorities
would expire on September 30, 2008. Unlike the program crops, there is no
permanent statutory authority for USDA to exercise to support the price of sugar
received by growers and processors. The only tool that USDA would have available
to control supply is tariff headnote authority (chapter 17 of the Harmonized Tariff
Schedule). This allows for imports of sugar at a level that reflects U.S. WTO trade
commitments, with the minimum quota set at 1.256 million short tons. Also, sugar
imports would be allowed to enter under U.S. commitments made in other trade
agreements (i.e., unrestricted amounts from Mexico under NAFTA, and specified
amounts under preferential quotas from four Central American countries and the
Dominican Republic under DR-CAFTA). Unless producers cut back on their
production of sugar beets and sugarcane, domestic sugar prices likely would fall
below recent average levels. Some U.S. sugar crop producers and processors could
face serious financial difficulty and the prospect of going out of business if this
scenario lasted for a prolonged time period. U.S. users of sugar for food and
beverage production could benefit from lower prices.
Extension. Should Congress not complete consideration of the farm bill in
this second session of the 110th Congress, one option would be to temporarily extend
current farm program authority. Extending the sugar program for the 2008 and/or
2009 sugar beet and sugarcane crops would require USDA to continue administering
marketing allotments and the sugar import quota to balance supply with demand.
USDA would be required to manage both tools so that domestic prices are equal to
or above loan forfeiture levels (see above). Also, non-recourse loans would continue
to be available.
Assuming slowly expanding use of HFCS by Mexico’s soft drink industry and
that Mexican 2008/09 sugar production is in line with trends, Mexico’s sugar sector

---

CRS-12
likely would have a surplus for export to the U.S. market. With the amount of this
surplus likely to be larger than the amount of sugar imported from Mexico and other
trading partners that the current program is structured to accommodate, USDA might
face the scenario of having to suspend marketing allotments. As domestic prices fall
below effective price support levels due to the additional supply, some processors can
be expected to forfeit some of their price support loans. However, USDA as in past
years could find ways to structure its decisions in ways to avert such a scenario.

---