SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 8307 words

COMMITTEE: HOUSE AGRICULTURE

HEADLINE: 2002 FARM BILL

TESTIMONY-BY: JACK RONEY, ON BEHALF OF THE

AFFILIATION: U.S. SUGAR INDUSTRY

BODY:
July 18, 2001

Testimony of

Jack Roney on Behalf of the U.S. Sugar Industry on

"The U.S. Sugar Industry's Farm Bill Proposal"

Committee on Agriculture

United States House of Representatives

Mr. Chairman, Mr. Stenholm, Members of the Committee: Thank you for the opportunity to testify before you today on issues critical to the future of the American sugar industry.

I am Jack Roney, director of economics and policy analysis for the American Sugar Alliance. I am proud today to speak on behalf of American growers, processors, and refiners of sugarbeets and sugarcane - 172,000 farmers, workers, and their families, in 27 states, employed directly and indirectly by the U.S. sugar producing industry.

I would like to describe to you the current plight of American sugar producers, the ways in which we are similar to other major U.S. program crops and the ways in which we are not, the domestic and foreign factors behind the financial and policy crises we are facing, and the legislative remedies that will work best for American sugar producers, consumers, and taxpayers. (The source of the data in this testimony is the U.S. Department of Agriculture, unless otherwise noted. Endnotes appear on page 24; Figures begin on page 25, Appendices on page 36.) A. American Sugar Producers in Crisis

American sugar producers face economic, domestic policy and trade policy crises that profoundly threaten their existence.

1. Producer prices for sugar began falling in 1997 and 1998 and plummeted in 1999 and 2000. American sugar producers, both beet and cane, have been facing sugar prices at or near 22-year lows for most of the past two years. Raw cane and refined beet sugar producers' lost income on the 1996 through 2000

2. Unlike other program-crop farmers who have experienced low prices, American sugar producers have received no direct-payment income support from the government to cushion the financial blow of these historically low prices.

3. Since 1996, 17 beet and cane processing mills have closed or announced their closure (Figure 3). Other mills threaten closure. The nation's largest seller of refined sugar is in bankruptcy. Both this company and the nation's second biggest sugar seller are attempting to sell their beet processing or cane refining operations, but are hard pressed to find buyers or complete sales because of the financial uncertainty. Buyers of last resort have tended to be the growers themselves, desperate to find a way to stay in business. Failure to sell these operations could lead to additional mill closures.

4. Last year, for the first time in nearly two decades, sugar producers forfeited a significant quantity of sugar to the government. Cane and beet sugar 1999-crop forfeitures totaled 949,080 tons, raw value. The 793,000 tons of sugar remaining under government ownership have absorbed a large portion of producers' storage capacity and overhang the domestic market with a price-depressing effect. Wholesale refined sugar prices remain well below forfeiture levels, which varies by region, and raw cane prices are barely above the forfeiture range (Figures 4-5).

5. The government is no longer able to limit sugar imports sufficiently to support prices and avoid sugar loan forfeitures. Within-quota guaranteed imports are too large and threaten to become larger. Non-quota imports are rapidly increasing.

- Within quota: International trade commitments - the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) -- require the United States to provide a minimum import- access amount that equates to as much as 15 percent of its consumption, whether the U.S. market needs that sugar or not, under its essentially duty-free tariff-rate quota (TRQ) for sugar.

- The Uruguay Round Agricultural Agreement (URAA) of the WTO commits the United States to importing no less than 1.256 million short tons per year. Actual U.S. needs the past two years have been substantially less than that.

- The NAFTA granted Mexico access to the U.S. market of up to 276,000 tons per year, roughly 35 times Mexico's traditional access to our market. Worse yet, Mexico is now disputing this access amount, and is requesting virtually unlimited access to our market for their subsidized, surplus sugar.

- Outside the quota: In addition, U.S. borders no longer effectively control the entry into the U.S. market of subsidized foreign sugar outside the TRQ, and these amounts will rise if not addressed:

- A sugar syrup, called stuffed molasses, concocted solely to circumvent the TRQ, continues to enter through Canada, despite a U.S. Customs Service ruling to reverse that quota circumvention.

- Above-quota entries from Mexico have occurred. These imports are made possible by NAFTA provisions reducing the so-called second-tier tariff on Mexican sugar, and Mexican sugar only, to zero by 2008, and were made economic by declines in the world dump market price.

- The volume of non-TRQ entries from both countries threatens to explode. Barring resolution of these two import problems, no domestic policy solution for U.S. sugar will work.

B. Background on U.S. and World Sugar Markets, Policies

Before moving on to our policy recommendations, it is important to provide some background on the unique characteristics of the U.S. and world sugar market and policies.

Size and Competitiveness. Sugar is grown and processed in 16 states and 420,000 American jobs, in 42 states, are dependent, directly or indirectly, on the production of sugar and corn sweeteners. The industry generates an estimated $26.2 billion in economic activity annually.1 A little more than half of domestic sugar production is from sugarbeets, the remainder from sugarcane. More than half our caloric sweetener consumption is in the form of corn sweeteners. Sugar plays an important role in the overall U.S. agricultural economy. According to USDA data for the 1997/98-99/00 crop years, the value of U.S. sugar production averaged $3.5 billion per year - about half the value of the wheat crop, or roughly equal to the combined values of the rice, sorghum, barley, and oats crops.

In the four states where sugarcane is grown, it tends to be a monoculture, with cane grown on the same land year after year - in Louisiana, for example, for more than two centuries and in Hawaii for more than one century. In some areas, sugarcane has been the only agricultural activity, and sometimes sole business activity, for generations. In the 12 states where sugarbeets are grown, beets play a key role in rotation with other crops. In both cane and beet growing areas, growers must either own processing facilities or contract with processing companies, or their crops have no value.

Sugar is an essential food ingredient and the U.S. sugar producing industry is highly efficient, highly capitalized, and technologically advanced. It provides 281 million Americans most of the sugar they demand, in 45 different product specifications and with "just-in-time" delivery that saves grocers and food manufacturers storage costs.

The United States is the world's fourth largest sugar producer, trailing only Brazil, India, and China. The European Union (EU), taken collectively, rivals Brazil as the world's largest producing region.

The United States is also the world's fourth largest sugar importer. Roughly 15-20% of U.S. sugar demand is fulfilled by essentially duty-free imports from foreign countries. Many of the 41 countries supplying sugar to the United States are developing economies with fragile democracies. These countries depend heavily on sales to the United States, at prevailing U.S. prices, to cover their costs of production and generate foreign exchange revenues. More than half this imported sugar is produced at a higher cost than U.S. beet and cane sugar. Despite some of the world's highest government-imposed costs for labor and environmental protections, U.S. sugar producers are among the world's most efficient. According to a study recently released by LMC International, of England, and covering the 5-year period ending in 1998/99, American sugar producers rank 28th lowest in cost of production among 102 producing countries, most of which are developing countries.2 According to LMC, more than half the world's sugar is produced at a higher cost per pound than in the United States. U.S. beet producers are the second lowest cost beet sugar producers in the world. U.S. cane sugar producers are 26 th lowest cost of 63 cane producing countries, virtually all of which are developing countries with dramatically lower social standards and costs. American corn sweetener producers are the world's lowest cost producers of corn sweetener (Figure 8).

LMC acknowledged that the U.S. ranking is all the more impressive for two reasons. First, most sugar-producing countries are developing-country cane producers, with much lower government- imposed labor and environmental protection costs than the United States'. Second, the strong value of the dollar.

LMC noted that the dollar has soared about two -thirds in the past 20 years against the currencies of most other cane-producing countries.

Because of their efficiency, American sugar farmers would welcome the opportunity to compete against foreign farmers on a level playing field, free of government subsidies and market intervention. Unfortunately, the extreme distortion of the world sugar market makes any such free trade competition impossible today.

World Dump Market. More than 120 countries produce sugar and the governments of all these countries intervene in their sugar markets and industries in some way. Examples abound. Brazil, the world biggest producer and exporter, built its sugar industry on two decades of fuel alcohol subsidies. Sugar markets in India and China, the second and third biggest producing countries, are controlled by state trading enterprises, as is Australia's, the world's third leading sugar exporter.3 (Figures 6 and 7, from LMC studies, highlight some of the trade-distorting practices among major sugar producers.)

Producers in the EU, taken as a whole the second biggest producer and exporter, benefit from massive production and export subsidy programs. The Europeans are higher cost sugar producers than the United States, but they enjoy price supports that are 40% higher than U.S. levels -- high enough to generate huge surpluses that are dumped on the world sugar market, for whatever price they will bring, through an elaborate system of export subsidies. Sugar export subsidies, alone, in the EU in some years run over 20 cents per pound, higher than the entire raw cane sugar support level in the United States.

World trade in sugar has always been riddled with unfair trading practices. These distortions have led to a disconnect between the cost of production and prices on the world sugar market, more aptly called a "dump market." Indeed, for the 16-year period of 1983/84 through 1998/99, the most recent period for which cost of production data are available, the world average cost of producing sugar is 16.3 cents, while the world dump market price averaged little more half that -- just 9.5 cents per pound raw value 1 (Figure 9).

Furthermore, its dump nature makes sugar the world's most volatile commodity market. In the past two decades, world sugar prices have soared above 60 cents per pound and plummeted below 3 cents per pound. Because it is a relatively thinly traded market, small shifts in supply or demand can cause huge changes in price.

As long as foreign subsidies drive prices on the world market well below the global cost of production, the United States must retain some border control. U.S. sugar policy is a necessary response to the foreign predatory pricing practices that threaten the more efficient American sugar farmers.

Elements of U.S. Sugar Policy. U.S. sugar policy is similar to other commodity programs in some ways, and not in others. Its essential elements are a non-recourse loan program, a loan forfeiture penalty, marketing assessments, and a tariff-rate quota (TRQ).

Like other commodity programs, sugar producers have access to non- recourse loans, which give producers the option of forfeiting their crop to the government to satisfy their loan if market prices fall below loan repayment levels. The U.S. raw sugar loan rate has been unchanged since 1985 at 18 cents per pound; the refined beet sugar loan rate has been frozen at 22.9 cents per pound since 1996.

Unlike other commodity programs, sugar producers:

- Have been saddled since 1996 with a penalty of one-cent per pound on sugar they forfeit, effectively reducing their intended support price by that amount - a range of $50-100 per harvested acre;

- Have been burdened since 1991 with a marketing assessment - a special fee levied on sugar producers, currently at 1.375 percent of the loan rate, initiated to help reduce the federal budget deficit. After raising $279 million from 1991 to 1999, the marketing assessment was suspended in fiscal 2000 and 2001, because the federal budget is now in surplus, but is set to resume October 1, 2001;

- Forfeited no significant quantities of their crop to the government from 1985 to 1999.

Since 1996, the only tool the government has had to manage U.S. supplies and avoid forfeitures is the import quota system. As events in 2000 proved, this tool is inadequate. Obligations under the Uruguay Round Agreement (URAA) of the World Trade Organization and the North American Free Trade Agreement prevent the U.S. government from reducing the TRQ much below 1.5 million tons, regardless of U.S. needs. The obligation in 2000 to import about 50 percent more sugar than the U.S. market required, plus leakage around the quota, led to market oversupply, depressed prices, and loan forfeitures.

Uniqueness of Sugar Market. Aside from the highly residual and volatile nature of the world sugar price, there are a number of factors that set sugar apart from other program commodities. These unique characteristics must be taken into account when considering domestic and trade policy options for sugar.

1. Grower/Processor Interdependence. Grain, oilseed, and most other field-crop farmers harvest a product that can be sold for commercial use or stored. Sugarbeet and sugarcane farmers harvest a product that is highly perishable and of no commercial value until the sugar has been extracted. Farmers cannot, therefore, grow beets or cane unless they either own, or have contracted with, a processing plant. Likewise, processors cannot function economically unless they have an optimal supply of beets or cane. This interdependence leaves the sugar industry far less flexible in responding to changes in the price of sugar or of competing crops.

2. Multi-Year Investment. The multimillion-dollar cost of constructing a beet or cane processing plant (approximately $300 million), the need for planting, cultivating, and harvesting machinery that is unique to sugar, and the practice of extracting several harvests from one planting of sugarcane, make beet or cane planting an expensive, multiyear investment. These huge, long-term investments further reduce the sugar industry's ability to make short-term adjustments to sudden economic changes in the marketplace.

3. High-Value Product. While the gross returns per acre of beets or cane tend to be significantly higher than for other crops, critics often ignore the large investment associated with growing these crops. Compared with growing wheat, for example, USDA statistics reveal the total economic cost of growing cane is nearly seven times higher, and beet is more than five times higher.

With the additional cost for processing the beets and cane, sugar is really more of a high-value product than a field crop.

4. Inability to Hedge. The 1996 Freedom to Farm Bill made American farmers more vulnerable to market swings and far more depe ndent on the marketplace. Growers of grains, oilseeds, cotton, and rice can reduce their vulnerability to market swings by hedging or forward contracting on a variety of futures markets for their commodities. There is no futures market for beets or cane. Farmers do not market their crop and cannot take delivery of beet or cane sugar. The hedging or forward contracting opportunities exist only for the processors -- the sellers of the sugar derived from the beets and cane. These marketing limitations make beet and cane farmers more vulnerable than other farmers to price swings.

5. Lack of Concentration. World grain markets are overwhelmingly dominated by a small number of developed countries, but sugar exports are far more dispersed, and dominated by deve loping countries. This makes the playing field among major grain exporters comparatively level and trade policy reform relatively less complicated than for sugar.

The world wheat and corn markets, for example, are heavily dominated by a handful of developed-country exporters - the United States, the European Union, Australia, and Canada are four of the top five exporters of each. The top five account for 96% of global corn exports and 91% of wheat exports. The top five sugar exporting countries, on the other hand, account for only two-thirds of global exports and three of these are developing countries. Even the top 19 sugar exporters account for only 85% of the market, and 16 of these are developing countries.

6. Developing-Country Dominance. Developing countries account for 73% of world sugar production and 69% of both exports and imports. Developing countries were, however, not required to make any significant reforms in the Uruguay Round, were given an additional four years to make even those modest changes, and are demanding special treatment again in the next trade round.

7. Widespread Unfair Trade Practices. Production, processing, sale, and distribution of sugar is distorted by government action in virtually all these markets, and the vast majority of world sugar exports from these markets over the past decades has been at prices well below the cost of producing sugar. Suggestions by industrial sugar users and some foreign governments that this trade should be opened ignores this pattern of almost universal market distortion. Even the trade laws of the United States were never meant to cope with such widespread unfairness in trade.

C. Lower Producer Prices: No Consumer Benefit

American consumers and food manufacturers have long benefited from a U.S. sugar policy that has assured stable supplies of high quality sugar at low, stable prices.

U.S. retail refined sugar prices are 20 percent below the developed-country average. Sugar here is also about the most affordable in the world. In terms of minutes worked to purchase one pound of sugar, the United States is third lowest in the world, trailing only Switzerland and Singapore, and well below self-proclaimed free-trade paragons such as Australia, Brazil, and Canada 4 (Figures 10-11). Incredibly, U.S. retail sugar prices are virtually identical to what they were in 1990, though general consumer price inflation since that time has exceeded 30 percent.

But U.S. retail sugar prices could be even lower. The wholesale refined sugar price that we producers receive averaged a disastrous nine cents less per pound in 2000 than it did in 1996. The retail refined sugar price that consumers pay, however, did not drop at all. It even crept up a bit, from an average of 41.8 cents per pound in calendar 1996 to 42.4 cents in 2000.

The grocery chains and food manufacturers passed none of the lower producer prices for sugar along to consumers - neither in the prices of bags of sugar nor in the prices of sweetened products. Figures for sugar and sweetened products are shown in Figure 12 for 1996 to 2000. The relationship is just as strong even if one goes back to 1990 (Figure 13).

The volume of the money transfer from the pockets of sugar producers to the profit margins of the grocers and food manufacturers is staggering. Even more so when one considers that these groups argue to Congress each year that sugar producer prices should be reduced - even further - to benefit consumers. Examining total U.S. refined sugar consumption and compared with 1995/96 prices: U.S. beet processors and cane sugar refiners lost over $2.4 billion from 1996/97 to 1999/00, and are on track to lose another $1.3 billion this year. All the producers' lost revenue has flowed directly to the bottom line profits of grocers and food manufacturers. Consumers have received none of the benefit of lower producer prices. (See table below and Figures 14- 16.)

In fact, the retailers have actually continued to raise sugar and sweetened product prices during this period, while calling for lower producer prices to help consumers. Wholesale refined sugar prices during 1997-2001 have averaged nearly 4 cents per pound less than in 1996. Meanwhile, grocers have charged an average of almost 2 cents per pound more for refined sugar during 1997-2000, and the food manufacturers have boosted the prices they charge for highly sweetened products, such as candy, cereal, ice cream and baked goods, by 4-14 percent. A recent study by the United States International Trade Commission noted that producer prices for sugar have been dropping while consumer prices for sugar and sweetened products are rising. The ITC wrote: "As a result, the price margins have been widening each year, creating greater disparity between the price processors receive for the bulk product and the price retailers receive for final, packaged product." 5

With the combination of lower producer prices for the sugar they buy, and higher consumer prices for the sugar and products they sell, the grocers and food manufacturers are reaping additional revenues, relative to 1996 sugar prices, of $5.31 billion during 1997-2001. Consumers "benefits" from the lower producer prices have been negative. Since about 40 percent of U.S. sugar sales are direct to consumers, in boxes or bags, the grocery chains' share of this windfall is $2.12 billion. With the bulk of our sugar consumption in product form, the food manufacturers' share amounts to $3.18 billion.

Clearly, the purpose of the opposition to U.S. sugar policy by these sweetener-user corporations is to increase their profits, not to benefit consumers, as the sweetener user corporations contend. The contrast is stark -- $3.7 billion in lost producer revenues during 1997-2001; $5.3 billion in additional user profits from the lower prices they pay producers for sugar and the higher prices they charge consumers for sugar and sweetened products.

Lack of competition among food retailers apparently is the main reason these companies can succeed in not passing along to consumers the lower prices they pay for sugar and other agricultural products. The proclivity, and the ability, of retailers to absorb savings on agricultural product purchases, rather than pass them along to consumers, were described in a recent paper by Professor Neil Harl of Iowa State University. Harl noted the alarming increase in concentration, and reduced competition, among food retailers. He wrote: "In 1992, the five leading food retail chains controlled 19 percent of grocery sales" but that figure is "42 percent in 2000" and "unless mergers are curbed (will) reach 60 percent within three years."6

D. Shaping Future Sugar Policy:

What Sugar Has in Common with Other Major Commodities

It is important to put the discussion of future U.S. sugar policy in the context of the ways we are similar to other program crops, and the ways we are not. Like other American farmers, we are:

1. Efficient by world standards, with costs of production below the world average.

2. Ready, willing, and able to compete with foreign countries on a genuine level playing field, free of government programs that distort the terms of trade.

3. In favor of free trade. The U.S. sugar industry has endorsed the goal of complete, multilateral free trade in sugar since the initiation of the Uruguay Round of the GATT, in 1986 - with the understanding that movement toward free trade must be made in a reasonable, equitable manner, that does not unfairly disadvantage efficient American producers in the process.

4. Concerned that we not lose our market to subsidized foreign producers while we move toward our common free trade goal.

5. A key part of the U.S. agricultural economy, and absolutely crucial to the rural economy of many areas.

6. Reeling from low prices. While last year's prices were at a 27- year low for soybeans, a 25-year low for cotton, a 14-year low for wheat and for corn, and an 8-year low for rice,7 sugar prices were at a 22-year low.

E. Shaping Future Sugar Policy:

What Sugar Does Not Have in Common with Other Major Commodities

In shaping U.S. sugar policy, there are also a number of critical factors that distinguish us from other program commodities. We are:

1. Net importers. Unlike the surplus crops, the United States has always been a deficit producer of sugar.

2. Fearful of losing our own domestic market to subsidized foreign competition. Surplus crop producers are mainly fearful of losing their export markets to subsidized foreign producers. For American sugar producers, that concern is much closer to home.

3. Obligated to remaining a deficit producer. Though American sugar producers are efficient, and many would like to expand production to reduce unit costs and better cope with low prices, the U.S. government has agreed to international trade rules that force us to import large quantities of sugar. Currently, about 15 percent of our market is committed, under WTO and NAFTA rules, to foreign sugar producers.

4. Threatened by possible further increases in our import obligations - through another WTO round or through new bilateral or regional trade agreements currently being negotiated.

5. Threatened by lack of control of our borders from subsidized foreign sugar, most specifically, by stuffed molasses - world dump market sugar from Brazil, Colombia, and other countries entering through Canada - or potentially similar cane syrup products from other countries, and by second-tier sugar from Mexico.

6. Not eligible to receive any of the income support the government, fittingly, has provided to other program crop farmers. While AMTA, loan deficiency, and other payments totaled a badly needed $74 billion to other farmers during 1996-2000, sugar producers received no income-support payments, and, in fact, paid $178 million in marketing assessments to the Treasury during that period.

7. Far less able than other farmers to take advantage of the planting flexibility that was a hallmark of the Freedom to Farm Bill. Sugarbeets and sugarcane are only worth growing if the farmers have either made the huge investment in a processing facility or contracted with, and committed their acreage to, a processing company. In either case, the farmer has made a multiyear commitment. Switching to another crop as prices change would negate his investment, or defy his contract.

Moreover, sugarcane is not only a monoculture in most areas where it is grown, but is also a multi-year crop. Two to four harvests are generally achieved from one planting.

8. Unable to absorb additional domestic production or imports, without even more profound economic harm to the industry. With nearly 800,000 tons of surplus sugar in CCC inventory, the U.S. sugar market is already badly oversupplied.

F. Shaping Future Sugar Policy:

Short-Term Actions Needed; Long-Term Options Limited

For the reasons outlined above, the U.S. sugar industry recognizes that the need for immediate administrative and legislative actions is urgent, but our longer term policy options are limited.

Before we can look toward the legislative changes that are necessary in the next Farm Bill, we must address the immediate sugar oversupply situation that continues to depress prices and threatens further loan forfeitures this year, and the trade issues that threaten to exacerbate this year's problems and make long-term solutions impossible. These actions can, and should, be taken concurrently.

G. Sugar Policy Recommendations: Short-Term Actions -- 2001

The U.S. sugar industry strongly urges that Congress or the Administration take the following actions to help American sugar producers out of our deepening economic crisis and create the economic and policy environment in which we can confidently fashion a successful longer term sugar policy.

1. Close the "Stuffed Molasses" Import Loophole. Stuffed molasses is a sugar syrup, concocted in Canada, by a British firm, using mostly Brazilian and Colombian sugar, for the sole purpose of circumventing the U.S. sugar import quota. (Appendix A provides more details.)

Approximately 125,000 tons of sugar are leaking into the U.S. market annually in this fashion. The accumulation of these imports was a significant factor in the sugar loan forfeitures of fiscal 2000. This additional sugar diminishes the import share of legitimate U.S. import quotaholding countries in years when the overall import quota is above the WTO minimum, and oversupplies the U.S. market and depresses our price in the years, such as this one and the past two, when imports are at the WTO minimum. The amount of sugar unfairly entering the U.S. market as stuffed molasses, or mimic products, is certain to grow if this loophole is not closed.

The U.S. sugar industry heartily endorses legislation pending in the Senate (S. 753), co-sponsored by 22 Senators and introduced by Senators Breaux of Louisiana and Craig of Idaho, which would address this import quota loophole and restore some degree of certainty to the U.S. market.

While this legislation is not in the Agriculture Committee's jurisdiction, the stuffed molasses loophole has a direct and immediate impact on the Administration's ability to administer sugar policy and maintain a viable domestic industry. We request the Committee's support in resolving this matter.

Unless the stuffed molasses loophole is closed, no long-term sugar policy that we propose here today could possibly be effective.

2. Address the Mexico Access Issues. The NAFTA requires the United States to: import up to 276,000 tons of sugar per year duty-free from Mexico through 2008, whether we need the sugar or not; reduce our second-tier tariff on sugar imports from Mexico to zero by 2008; and have free trade in sugar with Mexico beginning in 2008.

Mexico is disputing the legitimacy of the NAFTA sugar provisions, and is claiming, through a dispute resolution process it initiated, that Mexico should have virtually unlimited duty-free access to the U.S. sugar market, beginning this year. Furthermore, unlimited quantities of second-tier Mexican sugar could swamp the U.S. market at any time. (Appendix B provides a brief chronology of NAFTA sugar developments. Also, Appendix C provides the sugar industry's views on the proposed Free Trade Area of the Americas.) The U.S. is abiding by its NAFTA sugar commitments. However, the U.S. sugar market is oversupplied, financially depressed, and does not need an additional pound of Mexican sugar. Furthermore, the Mexican sugar surplus that it seeks to unload on the U.S. market is the result of Mexican government subsidies so generous that, since the NAFTA began, production has increased far in excess of Mexican needs.

The U.S. sugar industry fully supports efforts by the Administration to renegotiate sugar access provisions of the NAFTA in a manner that will help restore balance to the sugar markets of both countries.

We support a sugar for fuel ethanol program that would simultaneously address Mexico's problems of sugar oversupply, possible job loss in cane growing areas, and air and water pollution.

Unless the Mexico access problems are resolved, no long-term sugar policy that we propose here today could possibly be effective.

3. Eliminate the Marketing Assessment. U.S. sugar producers began paying a marketing assessment of 1 percent of the cane and beet loan rates in 1991, for the express purpose of helping to reduce the federal budget deficit. Payments to other crop producers were reduced in the 1990 Farm Bill for the same purpose, but payments to sugar producers could not be reduced because sugar producers did not, and still do not, receive any. This unwelcome burden on sugar producers thus made U.S. sugar policy not just "no cost," as it had been, by statute, since 1985, but also a revenue raiser.

Marketing assessments have not been required of the roughly 15 percent of U.S. consumption that is foreign sugar. This provides the imported sugar a marketing advantage, compared with domestic production.

The amount of the assessment was raised twice, the second time in the 1996 Farm Bill, to 1.375 percent of the sugar loan rates. Sugar producers paid $279 million in marketing assessment fees from 1991 to 1999. With the federal budget then, as it is now, in surplus, the marketing assessment fee was suspended in fiscal 2000 and 2001, but is scheduled to resume, beginning October 1, for fiscal 2002 and 2003, the remaining years of the 1996 Farm Bill. American sugar producers find it curious, at best, that we should have to continue to pay this deficit-reduction marketing- assessment fee when the federal budget is now in surplus. This unique fee is clearly no longer necessary, and poses an excruciating burden - approximately $40 million per year - on producers struggling with extremely low prices, many on the brink of bankruptcy. It is inconceivable to us that, while Congress prepares to provide over a trillion dollars in tax cuts because of budget surpluses, a struggling industry would continue to be assessed to reduce a deficit that no longer exists. We, therefore, urge that Congress eliminate marketing assessments on sugar producers under the current Farm Bill. Furthermore, we strongly oppose any future assessments that increase our costs and reduce our competitiveness.

4. Eliminate the Sugar Forfeiture Penalty. The 1996 Farm Bill included a provision, unique to the sugar program, that forces sugar producers to pay a one-cent per pound penalty, raw value, to the government for each pound of sugar they forfeit. This provision had the effect of reducing the sugar support price by that amount, or about 6 percent - making sugar the only commodity to incur an effective support price reduction in the 1996 Bill. The effective cost to American sugar producers: $180 million per year. In addition, sugar producers last year, during a period of severely low prices and economic stress, were forced to pay the government $18.7 million on the sugar they forfeited. We strongly urge that the Congress eliminate the forfeiture penalty for the remaining two years of the current Farm Bill (fiscal years 2002 and 2003), and that no such penalty be included in future legislation.

5. Provide Sugar a Share of the Budget Baseline. The U.S. sugar industry would prefer that sugar remained a no-cost policy - as it had been every year from 1985 to 1999. Last year, however, the government's tools to manage a no-cost U.S. sugar policy proved to be inadequate, and sugar sustained a cost. The cost was modest - an estimated $465 million - the value of sugar forfeited by producers and now in government ownership. That cost likely will be reduced, and could be more than offset, by the eventual sale of the government-owned sugar.

The U.S. is no longer able to avoid forfeitures and ensure a no- cost program, because: international trade commitments prevent it from reducing imports below the WTO and NAFTA minimum; it has not been able to control non-quota imports; and it lacks authority to impose domestic production controls.

Unless these supply problems are solved, the U.S. is likely to continue to face some cost for its efforts either to balance the market or to provide income supports.

As a safeguard, in the event that the U.S. remains unable to solve import and domestic supply problems in a no-cost fashion, the U.S. sugar industry believes sugar should be included in government estimates of future commodity program spending.

Sugar's share cannot be based on past spending because there were no sugar expenditures. Sugar's share of CCC outlays for the major commodities during 1991-99 was non-existent, because sugar was a net revenue raiser for the CCC each of these years. Sugar's share of net outlays in fiscal 2000, the only year in the past 16 of any sugar net outlays, was 1.4 percent. The CCC anticipates net revenues again this year, because of the expected sale of some sugar, and in the next two fiscal years because of the resumption of the marketing assessment fee paid by sugar producers.

The most practical alternative approach would be to examine sugar's share of the value of production of the major program crops. According to USDA statistics, sugar's average share of the value of production of the major program crops (wheat, corn, sorghum, barley, oats, rice, cotton, tobacco, soybeans and peanuts) during the three crop years 1997/98-99/00 was 6.1 percent (Figure 17).

The industry recommends that an outlay of this proportion, about 6 percent, be included in planning for future commodity expenditures. We further recommend that, should our import and domestic supply problems be resolved, the unspent portion of the sugar baseline should be devoted to other commodity programs.

H. Sugar Policy Recommendations:

Long-Term Actions - Next Farm Bill - Basic Elements

U.S. sugar policy recommendations for the next Farm Bill are shaped essentially by the following factors, which have limited our policy options, but upon which we have industry unanimity:

- The need to restore balance to the U.S. sugar market, with economic stability, returns from the marketplace that approximate costs of production and the opportunity for efficient American sugar producers to remain in business;

- The industry's desire to continue to derive its returns from the marketplace, and not from the government, and to maintain a no-cost, or low-cost, program, in the face of potential U.S. budgetary and WTO program-expenditure limitations;

- The inability of USDA to administer a no-cost program, providing stable market prices and avoiding loan forfeitures, with the TRQ as its only supply-control mechanism.

The industry studied carefully the policy path of joining with the other program crops in the AMTA and marketing loan income- support programs. After careful, realistic analysis we concluded the direct-payment route would not work for sugar. The policy path we are recommending can be effective only if the United States regains control of its borders, through resolution of the stuffed molasses and Mexican access problems.

The policy that we recommend has four basic elements:

1. Continuation of the non-recourse loan program, with beet and cane sugar loan rates no lower than current levels and rebalanced relative to soybean loan rates, consistent with the rebalancing plan proposed by other farm groups.

2. Retention of the Secretary's authority to limit imports under the tariff rate quota system, consistent with WTO and NAFTA import minimum requirements.

3. Operation of the program at little or, preferably, no cost to the government.

4. An inventory management mechanism, administered by the go vernment, to balance domestic sugar marketings with domestic demand and import requirements and provide stable market prices at a level sufficient to avoid sugar loan forfeitures.

The industry concluded unanimously that inventory management is the only policy path that can restore balance and stability to the U.S. market over the long run, with minimal, if any, budgetary expenditures.

Since the government requires us to reserve such a large share of our market for foreign producers, and because we remain committed to earning our revenues from the marketplace rather from government payments, it is essential that the government resume potential limits on our sugar marketings.

Inventory management measures should be:

- Established to balance the domestic market.

- Implemented only when the quota circumvention problem has been successfully addressed and when the U.S.-Mexico dispute over trade in sweeteners has been resolved to ensure the threat of market imbalance from second-tier imports is eliminated.

- Designed in a manner to retain planting and production flexibility, though sugar marketings may be restrained in some cases. Producers will still have the ability to expand marketings at a rate of growth consistent with U.S. consumption growth (less any foreign access commitments).

- Designed in a manner that does not provide producers an incentive to increase marketings to maximize market shares should the control measures be imposed.

- Designed in a manner that only producers who expand marketings in excess of the rate of growth in domestic demand would be required to curtail marketings when the program is in effect.

We propose a program built upon the permanent law marketing allotment program of the 1990 Farm Bill, with modifications to reflect the above goals and better reflect current market realities.

In the 1990 Farm Bill, allotments were triggered only when forecast imports for domestic consumption were less than 1.25 million short tons. The trigger level in these permanent law provisions needs to be updated to reflect current import obligations under international trade agreements.

There were no constraints on sugarbeet or sugarcane planting or on sugar production. However, when allotments were in place, sugar companies' marketings could not exceed their base. Production in excess of marketings could be stored and marketed later, or sold in non-domestic-food uses. These features should remain in place.

Following our testimony in April before this Committee, we provided you, Mr. Chairman, at your request, legislative language on marketing allotments and the other legislative proposals contained in this testimony. This language reflects unanimous agreement on our policy path among American sugar producers.

I. Sugar Policy Recommendations:

Long-Term Actions - Next Farm Bill - Related Elements

There are a number of related elements that we recommend for future sugar policy legislation:

5. Loan Rate Rebalancing. The U.S. raw sugar loan rate has been the same since 1985. General price inflation over the past 15 years has been 60.0%. Adjusted for inflation, the 18-cent loan rate is now worth only 10.8 cents.

Input costs paid by farmers have risen steadily, with the exception of energy and fertilizer costs, which have skyrocketed this past year. In some areas, farmers' and processors' fuel costs are four to six times higher than just one year ago.

U.S. sugar market prices have dipped to 22-year lows in the past two years and the industry is in a financial crisis. But sugar producers have received none of the substantial income provided, appropriately, by the government to other crop producers under financial stress. U.S. sugar policy, in fact, continued to run at a profit to the U.S. Treasury until fiscal 2000, when the government incurred some cost from the first significant sugar loan forfeitures in 16 years. American sugar producers support the concept of equity among crops. In order to restore some equity, and better provide American producers the opportunity to regain financial stability, we endorse the loan rebalancing initiative recently outlined to this Committee by the American Farm Bureau Federation and supported by other producer groups. The Farm Bureau initiative would achieve a rebalancing of other crop loan rates relative to soybean loan rates, through the upward adjustments of the non-soybean crop loan rates. Preliminary analysis suggests that, under the formula proposed by the Farm Bureau, the raw cane and refined beet sugar loan rates would increase modestly, by 3.7 percent. This would be the lowest percentage adjustment among the non-soybean program crops, which range from 4.1 to 32.1 percent. A 3.7-percent adjustment would increase the raw cane loan rate from 18.00 cents per pound to 18.67 cents and the refined beet sugar loan rate from 22.90 cents per pound to 23.75 cents. Though these increases would be modest, they could be critical for the survival of sugar producers on the brink of bankruptcy from the brutally low prices of the past two years.

6. Make Loans Available on In-Process Sugars and Syrups. The sugar industry recommends that beet and cane processors should be permitted to put in-process sugars and syrups under loan, as well as crystalline sugar. Syrup is less costly to store than crystalline sugar, and processors' ability to put it under loan would increase their marketing flexibility, better facilitate orderly marketing, increase their use of the loan program, and make the loan program a more effective price support mechanism. (Appendix D supplies more detail behind this proposal.)

7. Clarify Ability to Forfeit Sugar Loans Made in September. The sugar industry recommends that Congress clarify its intention that all CCC nonrecourse loans made to sugar processors are subject to forfeiture. All CCC loans must either be paid or forfeited by the end of the fiscal year, yet the ability to forfeit loans made in the month of September currently is thwarted by a regulatory requirement that processors give a 30- day notice of intent to forfeit. Hence, loans made in September cannot be forfeited that month because it is impossible to comply with this 30-day notice requirement before the end of the fiscal year--September 30.

Elimination of the 30-day notice impediment will increase processors' marketing flexibility, better facilitate orderly marketing, increase their use of the loan program, and make the loan program a more effective price support mechanism.

8. Restore Bankruptcy Protection for Growers. The sugar industry recommends reinstatement of a provision of the 1985 Farm Bill (P.L. 99-198, Section 903) designed to protect growers in the event of a beet or cane processing company bankruptcy. The need for such protection has become more acute with the severe financial stress of the U.S. sugar industry. Under this provision, growers are assured that they will receive at least their minimum share of the forfeiture value of the sugar produced under contract with the processor. If a processing company with any sugar under loan goes bankrupt and is unable to provide growe rs the full payment the growers would otherwise have received should their sugar have been forfeited, the CCC makes up the difference. If a processing company has not put any sugar under loan, the growers are not protected and the CCC is not liable.

The only time this provision was exercised was following a beet processor bankruptcy in 1985, and the cost to the CCC was approximately $20 million.

9. Eliminate 100-Point Surcharge on Sugar-Loan Interest Rates. Commodity loans had traditionally been made available to farmers and processors at an interest rate equal to the CCC's cost of acquiring the money. The 1996 Farm Bill, in an effort to reduce the federal budget deficit, required that the CCC make loans available at an interest rate 100 points, or one percentage point, higher than the CCC's acquisition cost.

The higher interest rate is not only a burden on producers, but has limited use of the loan program where commercial rates may prove to be lower. Lower participation reduces the price-support ability of the loan program for all producers. Non-participants in the loan program have no price safety net. With the budget now in surplus, the higher interest rate charge is no longer necessary as a revenue raiser.

Because of its extreme financial duress, the sugar industry recommends that the 100-point surcharge on sugar-loan interest rates be eliminated.

10. Establish a Sugar Storage Facility Loan Program. The industry recommends the establishment of a sugar storage facility loan program to provide financing for sugarcane and sugar beet processors to build or upgrade storage and handling facilities for raw and refined sugars. Such a program will promote the orderly marketing of sugar supplies, strengthen the sugar processing industry, and enhance the mar keting opportunities available to farmers and processors.

We recommend that such a program be administered by the Commodity Credit Corporation and provide loans for a minimum term of 7 years.

11. Other Concerns. The U.S. sugar industry makes the following related recommendations:

- Sugar Consumption. The Farm Bill should defend the consumption of sugar, and the USDA should not endorse food consumption guidelines that are not based on generally recognized science.

- Research. The government (USDA) should support improvements to the efficiency of the U.S. sugar industry through continued funding of research into improved sugarbeet and sugarcane production techniques.

- Biotech. The government (USDA) should take all reasonable measures to educate the general public regarding the benefits, and lack of risks, associated with advances in biotechnology and genetically enhanced seeds.

J. Summary and Conclusion

To summarize, Mr. Chairman: Recognizing the severity of our economic distress, the uniqueness of sugar markets, and the need for long-term balance and stability, the sugar industry has made the following recommendations, for the benefit of American sugar producers, consumers, and taxpayers.



LOAD-DATE: July 23, 2001