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Key changes
The Secretary of Agriculture is
directed to operate the U.S. nonrecourse sugar loan program,
to the maximum extent possible at no cost to the Federal
Government. Specifically, the Secretary is to avoid forfeiture
to the Commodity
Credit Corporation (CCC) and the attendant costs for
purchasing and storage. To facilitate inventory management,
the 2002 Farm Act gives USDA the authority to accept bids from
sugarcane and sugarbeet processors to obtain raw cane sugar or
refined beet sugar from CCC inventory in exchange for reduced
production. Additionally, the Secretary is directed to
establish flexible marketing
allotments for sugar producers.
The Act terminates marketing
assessments on sugar, as well as penalties for loan
program forfeiture. The Act specifies that all refined sugars
derived from either sugarbeets or sugarcane are substitutable
under the Refined Sugar Re-Export Program and the
Sugar-Containing Products Re-Export Program.
Summary of provisions
The two main elements of
U.S. sugar policy are the price support loan program and the
tariff-rate
quota (TRQ) import system.
The loan program for
sugar processors supports the U.S. price of sugar. Unlike most
other commodity programs, sugar loans are made to processors
and not directly to producers. This is because sugarcane and
sugarbeets, being bulky and very perishable, must be processed
into sugar before they can be traded and stored. To qualify
for loans, processors must agree to provide a part of the loan
payment to producers, in proportion to the amount of the loan
value accounted for by the sugarbeets and sugarcane the
producers deliver.
The purpose of the TRQ system is to
ensure an adequate supply of sugar at reasonable prices for
both consumers and producers. On June 1 of each year, the U.S.
Trade Representative, along with USDA, must calculate used and
unused portions of the TRQ for each quota-holding country and
may reallocate unused quota to qualified quota holders. U.S.
commitments under international trade agreements, including
the North American Free Trade Agreement (NAFTA), affect the
level and allocation of the TRQs. The United States also
operates the Refined Sugar and Sugar-Containing Products
Re-Export Programs to support U.S. refiners' competitiveness
in global markets.
Among the other key program provisions are the
following:
- The 2002 Farm Act continues the rate for loans to
processors of domestically grown sugarcane at 18 cents per
pound and the rate for loans to processors of domestically
grown sugarbeets at 22.9 cents per pound for refined sugar.
Processors may obtain loans for "in-process" sugar and
syrups at 80 percent of the loan rate. The processor cannot
be required to notify USDA of the intention to forfeit the
sugar under loan.
- Flexible marketing allotments are determined by
subtracting the sum of 1.532 million short tons, raw value
(STRV) and carry-in stocks of sugar (including CCC
inventory), from USDA's estimate of sugar consumption and
reasonable range of carryover stocks at the end of the crop
year. USDA is required to estimate factors affecting
allotment quantities no later than August 1 before the
beginning of each crop year, through 2007. USDA is required
to re-estimate these factors as necessary, but "no later
than the beginning of each of the second through fourth
quarters of the crop year."
- The overall marketing allotment quantity is divided
between refined beet sugar (54.35 percent) and raw cane
sugar (45.65 percent). For cane sugar, Hawaii and Puerto
Rico are jointly allotted 325,000 STRV. Allocations for
mainland cane sugar producing States are assigned based on
past marketings of sugar, the ability to market sugar in the
current year, and past processing levels. Beet sugar
processors are assigned allotments based on their sugar
production for the 1998-2000 crop years. The 2002 Farm Act
provides for a number of contingencies that could require
reassignment of allotments during the crop year.
- USDA's authority to operate sugar marketing allotments
is suspended if USDA estimates that sugar imports for
domestic human consumption will exceed 1.532 million STRV.
This will have the effect of reducing the overall allotment
quantity. Marketing allotments would remain suspended until
imports have been restricted, eliminated, or otherwise
reduced to, or below, the 1.532-million level.
Economic implications
Flexible marketing
allotments are likely to provide more effective price support
throughout the marketing year. When allotments are in effect,
processors who have expanded marketings in excess of the rate
of growth in domestic sugar demand will have to postpone sale
of some sugar and either store it at their own expense or sell
it for uses other than domestic food use. Without allotments,
price support comes from forfeiting sugar under CCC loan in
the fourth quarter (July-September) of the fiscal year. The
forfeiture withdraws sugar from the market, thereby reducing
excess sugar supply and helping to support the market price of
sugar.
Cost of storing excess production is shifted from the
Government to the industry. (However, the 2002 Farm Act
requires that CCC establish a sugar storage facility loan
program to assist processors who want to construct or upgrade
storage and handling facilities.)
Under the 2002 Farm Act, USDA efforts to reduce sugar
production should prove more effective. USDA has authority to
exchange CCC-owned sugar for reductions in acreage prior to
planting. Previously, USDA relied on "cost-reduction options"
in the 1985 Farm Security Act for authority to implement
payment-in-kind diversion programs that withdrew
already-planted area from harvest.
Because the loan forfeiture penalty was eliminated, the
support price was effectively increased, and this could
increase the likelihood of forfeitures. Elimination of the
loan forfeiture penalty and of marketing assessments could
increase returns to growers and processors.
Much attention will be on potential sugar imports entering
from Mexico at the high-tier
tariff rate under NAFTA. Although the May 2002 USDA
projection of these imports is only 10,000 STRV in fiscal year
2003, there are strong economic incentives for additional
imports from Mexico. World raw sugar futures prices (No. 11
New York Contract) for 2003 are in the range of 6 cents per
pound, and the NAFTA high-tier tariff on raw sugar drops to
7.56 cents per pound on January 1, 2003. Assuming other normal
marketing costs, it is likely that Mexican importers would
find the U.S. market attractive when U.S. raw sugar prices are
at or above 17 cents per pound.
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