Fundamental Elements of the U.S. Sugar Program

Fundamental Elements of the U.S. Sugar Program

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Updated February 22, 2017
Fundamental Elements of the U.S. Sugar Program
Overview
“loan forfeiture level,” represents all of the costs that
The U.S. sugar program is singular among major farm
processors need to offset to make it economically viable to
commodity programs in that it combines a floor price
repay the loan. These costs equal the loan rate, plus interest
guarantee with a supply management structure that
accrued over the nine-month term of the loan, plus certain
encompasses both domestic production for human use and
marketing costs. The effective support level for the 2016
sugar imports. Historically, the U.S. sugar market has been
crop of raw cane sugar is 20.87¢/lb and from 24.41¢ to
managed to help stabilize supplies and support prices. The
26.09¢/lb for refined beet sugar, depending on the region.
current sugar program provides a price guarantee to the
processors of sugarcane and sugar beets and, by extension,
If market prices are below these loan forfeiture levels when
to the producers of both crops. The 2014 farm bill (P.L.
a price support loan comes due (i.e., usually July to
113-79) reauthorized the sugar program that expired with
September), and a processor hands over sugar pledged as
the 2013 crop year through crop year 2018 with no changes.
collateral rather than repaying the loan, USDA records a
It directs the U.S. Department of Agriculture (USDA) to
budgetary expense (i.e., an outlay). USDA then gains title
administer the program at no budgetary cost to the federal
to the sugar and is responsible for disposing of it. To avoid
government by limiting the amount of sugar supplied for
such loan forfeitures and associated outlays, USDA sets
food use in the U.S. market (see CRS Report R43998, U.S.
annual limits on the quantity of domestically produced
Sugar Program Fundamentals). To achieve the dual
sugar that can be sold for human use. It also restricts the
objectives of providing a price guarantee to producers while
level of imports that may enter the U.S. market through
avoiding program costs, USDA uses four tools to keep
tariff-rate quotas and annual limits on Mexican sugar.
domestic market prices above guaranteed levels. These are:
Figure 1. U.S. Supply and Overall Allotment Quantity
 Price support loans are the basis for the price
guarantee;
 Marketing allotments limit the amount of sugar
each processor can sell for domestic human use;
 Import quotas control the quantity and source of
imported sugar; and
 A sugar-to-ethanol backstop (Feedstock
Flexibility Program) removes sugar from food
channels to help keep market prices above loan
forfeiture levels.
In addition, agreements with Mexico that were finalized in
late 2014 impose important limits on a substantial and
previously unrestricted supply of sugar to the U.S. market.
Key Program Element: Price Support Loans

Nonrecourse loans taken out by a processor of a sugar crop,
Source: Derived by CRS from USDA sugar program announcements
not producers themselves, provide a source of short-term,
and USDA’s World Agricultural Supply and Demand Estimates.
low-cost financing until a raw cane sugar mill or beet sugar
refiner sells sugar. The “nonrecourse” feature means that
Key Program Element: Marketing Allotments
processors—to meet their loan repayment obligation—can
Sugar marketing allotments limit the amount of
forfeit sugar offered as collateral to USDA to secure the
domestically produced sugar that processors can sell each
loan, if the market price is below the effective support level
year. They do not limit how much beet and cane farmers
when the loan comes due. The “loan rate” is the amount
can produce, nor do they limit how much sugar beets and
processors receive for placing sugar under loan. For 2016
sugarcane that beet refiners and raw sugar cane mills can
crops (FY2017), the national average raw cane sugar loan
process. The farm bill requires USDA each year to set the
rate is 18.75¢/lb; that of refined beet sugar is higher at
overall allotment quantity (OAQ) at not less than 85% of
24.09¢/lb. The loan rate for raw cane sugar is lower because
estimated U.S. human consumption of sugar for food as
raw cane must be further processed to have the same value
illustrated in Figure 1. Sugar production in excess of a
and characteristics as refined beet sugar for food use.
processors’ allotment may only be sold for human use to
allow another processor to meet its allocation or for export.
The minimum market price that a processor requires to
repay the loan instead of forfeiting sugar is higher than the
The national OAQ is split between the beet and cane sectors
loan rate. This “effective support level,” also called the
and then allocated to processing companies based on
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previous sales and production capacity. If either sector is
imports in the fall of 2014, when preliminary findings in the
not able to supply sugar against its allotment, USDA has
investigations concluded that Mexican sugar was being
authority to reassign such a “shortfall” to imports. Figure 1
subsidized by the government and dumped in the U.S.
illustrates the persistent gap between domestic sugar
market and that these actions were injuring the U.S. sugar
production, the higher levels of the OAQ, and U.S.
industry. The SAs suspended the CVD and AD
domestic consumption for human use. As a result,
investigations and removed the duties in exchange for a
substantial quantities of sugar have been imported to cover
number of concessions from Mexico, among which:
shortfall between domestic output and human consumption.
 Mexico relinquished the unlimited, duty-free
access to the U.S. sugar market it gained via the
Key Program Element: Import Quotas
North American Free Trade Agreement;
The United States imports sugar in order to meet total food
 Mexican sugar exports to the United States would
demand. From FY2014 through FY2016, imports accounted
be subject to minimum prices (at Mexican plants)
for 29% of U.S. sugar consumption. The amount of foreign
of 26¢/lb for refined sugar and 22.25¢/lb for all
sugar supplied to the U.S. market reflects U.S. tariff-rate
other sugar—levels well above U.S. loan support.
quota (TRQ) import commitments under various trade
agreements at low, or zero, tariff rates (Table 1), as well as
Imported Mexican sugar represented on average 15% of the
duty-free sugar from Mexico, as discussed below.
sum of U.S. sugar production plus imports during the three
years prior to the SAs and comprised the only unmanaged
Table 1. Major U.S. Tariff-Rate Quota Commitments
source of U.S. supplies. The SAs impose an annual export
(Quantities are in short tons, raw value)
limit on Mexican sugar based on USDA’s assessment of
U.S. needs after taking into account domestic production
Trade Agreement
FY2017 Quantity
and TRQ imports. Additionally, imports of refined sugar
from Mexico may not exceed 53% of the Mexican total.
World Trade Organization
1,410,062
CAFTA-DR
146,628
Suspension Agreements: Increasingly Controversial
The SAs were expected to greatly facilitate USDA’s ability
Columbia
59,249
to operate the sugar program at no cost, while also avoiding
Source: U.S. Customs and Border Protection.
possible retaliatory actions from Mexico that might have
Notes: CAFTA-DR includes Costa Rica, Dominican Republic,
followed if the duties on Mexican sugar remained in place.
El Salvador, Guatemala, Honduras and Nicaragua.
Since coming into force, the agreements have come under
attack from a number of key stakeholders in the U.S. sugar
Additionally, for FY2017, Panama and Peru have TRQs of
economy, although views on what action should be taken
7,562 and 2,205 short tons, raw value, respectively. High
differ. Some stakeholders have called on DOC to withdraw
tariffs discourage imports of over-quota sugar to help fulfill
from the agreements, while others want them altered so that
the farm bill directive to avoid incurring program costs.
raw cane comprises a far larger share of Mexican imports.
Policy Mechanisms to Counter Low Prices
A common complaint from U.S. stakeholders (including
In addition to domestic marketing allotments, import
organizations representing sugar growers and processors,
quotas, limits and tariffs, USDA has several policy tools to
commercial users of sugar, and certain cane refiners) is that
help prevent prices from slipping below effective loan
the SAs are not working as intended. In part, this reflects
forfeiture levels that could result in budget outlays. These
concern that U.S. cane refiners that rely on raw sugar cane
include offering Commodity Credit Corporation-owned
from Mexico have received an inadequate share of imported
sugar to processors in exchange for surrendering rights to
Mexican sugar. These refiners contend this situation has
import tariff-rate quota sugar; purchasing sugar from
placed them in economic jeopardy, and sugar users are
processors in exchange for surrendering tariff-rate quota
concerned that the loss of a major domestic cane refiner
sugar; and purchasing sugar for domestic human use from
could reduce competition among suppliers of refined sugar.
processors for resale to ethanol producers for fuel ethanol
production under the Feedstock Flexibility Program (FFP).
To date, discussions between the DOC and Mexico to alter
terms of the SAs have not been successful. Following an
Agreements Recast Sugar Trade with Mexico
initial review of the SAs in November 2016, DOC indicated
Events subsequent to the reauthorization of the sugar
the SAs may not be meeting the statutory requirements.
program in the 2014 farm bill have materially altered the
Final results from this review are expected in April 2017.
U.S. sugar market. In December 2014, the U.S. government
Parties to the SAs can terminate them any time, an action
signed suspension agreements (SAs) with the Mexican
that would be expected to trigger the imposition of steep
government and with the Mexican sugar industry that have
duties on Mexican sugar imports, potentially pricing
fundamentally changed bilateral trade in Mexican sugar,
Mexican sugar out of the U.S. market. For more, see CRS
with implications for the sugar program and sugar users.
In Focus IF10517, U.S. Stakeholders Critical of U.S.-
Mexico Sugar Agreements.
The SAs stem from parallel countervailing duty (CVD) and
antidumping (AD) investigations initiated in 2014 by the
Mark A. McMinimy,
U.S. government at the behest of U.S. sugar industry
interests. Substantial duties were applied to Mexican sugar
IF10223
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Fundamental Elements of the U.S. Sugar Program

https://crsreports.congress.gov | IF10223 · VERSION 3 · UPDATED

Fundamental Elements of the U.S. Sugar Program

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https://crsreports.congress.gov | IF10223 · VERSION 3 · UPDATED