Farm Commodity Programs: Sugar 1

Remy Jurenas
Specialist in Agricultural Policy
Environment and Natural Resources Policy Division

April 24, 1998

98-403 ENR

Industry Profile

Sugar beets and sugarcane are grown on 9,841 farms in the United States (excluding Puerto Rico): 8,810 raise beets, 1,031 farms produce cane. The average size of a beet farm is 164 acres; the average-sized cane operation is 857 acres. 2 Farmers' cash receipts in calendar 1996 for beets and cane delivered for processing totaled $1.9 billion, and accounted for 0.9% of total U.S. crop and livestock receipts. Sugar beets are grown in Michigan and Ohio, the Red River Valley between North Dakota and Minnesota, the Great Plains, the Northwest, and California. Beets are processed directly into refined sugar. Sugarcane is cut from fields in Florida, Hawaii, Louisiana, and Texas, and transported to nearby mills to be ground into raw cane sugar. Ten cane refineries (5 located along the East Coast, 3 along the Gulf Coast, and one each in California and Hawaii) purchase this output, plus raw sugar from foreign suppliers, to process into white sugar. USDA estimates FY 1998 domestic sugar production (on a raw value basis) at 7.83 million short tons (ST), with 54% processed from beets and 46% from cane.

Because the United States historically has not produced enough sugar to meet domestic demand, imports have covered the difference. USDA expects that sugar imported during FY 1998 under an import quota will account for 18 percent (1.7 million ST raw value) of total sugar delivered for domestic food use.

Beet and cane refinery deliveries of refined sugar for domestic food use (9.6 million ST in FY 1997) were valued at $5.4 billion (wholesale). Sugar for manufactured food products (baked goods, cereals, confectionery, and ice cream and dairy products) in 1997 accounted for 58% of all domestic deliveries. Sugar shipments to wholesalers and retailers for sale to household consumers represented 39% of the total.

The U.S. Sugar Program

To support U.S. sugar market prices, the USDA extends short-term loans to processors and limits imports of foreign sugar. However, provisions added in 1996: (1) change the nature of the price support 11 loan" that USDA at times will offer processors,

and (2) penalize a processor that hands over any sugar secured by a nonrecourse loan to USDA for disposition. Each year's program parameters wi~ be largely determined by the projected domestic demand/supply outlook and USDA's subsequent decision on the sugar import level. The 1996 farm act repealed: (1) the standby restrictions on the amount of domestically produced sugar and crystalline fructose (a sugar substitute) allowed to be marketed, and (2) the requirement that the program operate on a "no-cost" basis.

The sugar program differs from the grain, rice and cotton programs in that USDA makes no "market transition" payments to beet and cane growers. Instead, the program supports the income of growers and processors in ways designed to ensure they receive the intended level of price support. How USDA implements the modified authorities to regulate the amount of imported sugar allowed to enter will likely be the most critical factor influencing U.S. market prices. Taken all together, the new program provisions, in years that domestic production is much above average, could inject a greater degree of price uncertainty into the U.S. sugar marketplace than seen before. The following provisions apply to the 1996-2002 sugar beet and sugarcane crops.

Legislative Authority. Authority for sugar price support provisions and for levying marketing assessments are found in section 156 (7 U.S.C. 7272) of the Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127), signed into law on April 4, 1996. Under another law, the President exercises tariff-headnote authority (additional U.S. note 5 to Chapter 17 of the Harmonized Tariff Schedule of the United States, as enacted by section 1204 of the Omnibus Trade and Competitiveness Act of 1988 (19 U.S.C. 3004)) to limit sugar imports (see Sugar Import Quotas below).

Administering Agencies. USDA's Farm Service Agency (FSA) administers the sugar price support program, dealing with processors through county offices located in producing regions. Price support loans are made by the Commodity Credit Corporation (CCC)-- the entity that finances USDA farm programs -- using funds borrowed from the U.S. Treasury. FSA estimates that administrative costs (primarily salaries and expenses) associated with sugar loan operations will total $43,000 in FY 1998.

The President delegates the details of administering the U.S. sugar import quota to the USDA and the Office of the U.S. Special Trade Representative (STR). USDA sets the size of the quota each fiscal year (October 1 to September 30 of the following year) at an amount estimated to cover the gap between domestic production and domestic demand, but not so much that would result in domestic prices falling below "effective" support levels. USTR allocates and adjusts shares of the quota among eligible countries.

Price Support Loans. USDA extends price support loans to processors of sugar beets and sugarcane rather than directly to the farmers who harvest these crops. To take out a loan, a processor must: (1) pledge sugar output as collateral, storing it until the loan is repaid, and (2) agree to pay minimum prices (on a per ton basis) to farmers who deliver sugar beets or sugarcane for processing.

By statute, national weighted average loan rates in FY 1997-FY 2003 are 18 cents per pound for raw cane sugar, and 22.9 cents per pound for refined beet sugar - the same support levels that were available for the 1995 crops. Each rate represents the amount a processor can borrow against each pound of sugar placed under loan. To equalize loan benefits across the nation, USDA adjusts national loan rates to account for differences in the cost of transporting sugar from processing locations in each region to their respective normal market destinations.

The type of price support that USDA offers depends now upon the size of the import quota announced each year (see table on next page). In a statutory change, USDA must make recourse loans available to raw sugar processors and beet sugar refiners whenever the fiscal year import quota is set below 1.5 million ST. "Recourse" loan policy essentially transfers all price risk to growers and processors. Because USDA is not obligated to accept sugar as payment for any recourse loan, a processor has no alternative other than to repay the loan with interest in cash when due, regardless of the market price.

However, when imports are equal to or above 1.5 million ST, USDA must make non-recourse loans available. This type of loan gives a processor the right - if unable to sell in the marketplace at a price that is above the effective price support level - to "forfeit," or hand over, to USDA any sugar pledged as loan collateral, and thereby satisfy his loan repayment obligation (see Loan Forfeiture Levels below). Based on the current FY 1998 import quota of 1.791 million ST, non-recourse policy is in effect. USDA's long-term projections indicate that sugar imports will be above the 1.5 million ST level for the foreseeable future. Though projections can change, USDA will likely offer (based on this outlook) non-recourse loans in each year of the currently authorized program.

Sugar price support loans must be repaid in 9 months or by the end of the fiscal year. In certain producing areas where processors take out and repay loans in the last three months of a fiscal year, USDA must make supplementary loans available at the beginning of the next fiscal year.

Loan Forfeiture Levels. In practice, USDA's import quota limits the entry of foreign sugar to the extent necessary to keep market prices for sugar somewhat higher than the statutorily set loan rates of 18 cents per lb. for raw cane and 22.9 cents/lb. for refined beet sugar (see table). That is because processors incur additional costs (like transportation and loan interest) by the time they repay a price support loan. This "loan forfeiture" level, rather than the loan rate, represents the lowest price that a processor seeks to receive from a sale before weighing other marketing options. To the extent that supply and demand developments differ from initial USDA projections (i.e., domestic sugar production turns out to be higher, sugar consumption is lower, and/or the import quota is set higher than needed), then market prices might fall down toward forfeiture levels. Should market prices decline below this "effective" support level, a processor might decide that it would be more profitable simply to forfeit sugar pledged as collateral rather than repay any loan taken out.

To discourage processors from handing over sugar in payment of any non-recourse loan taken out, the 1996 act requires USDA to impose a penalty of 1.0 cent per pound on raw cane sugar, or 1.072 cents per pound on refined beet sugar, if a forfeiture occurs. If triggered, this provision would reduce the effective level of price support received by a processor by the penalty amount. Should market prices fall below loan forfeiture levels, a processor would face one of three marketing alternatives: (1) accept the market price, (2) forfeit any pledged sugar (paying the penalty) rather than accept the lower market price, or (3) hold the sugar in inventory for a while, selling when market prices improve.

Marketing Assessments. For each pound of sugar sold in FY1997-FY2003, processors of domestically produced sugar beets and sugarcane must pay a nonrefundable marketing assessment to the CCC as their contribution toward budget deficit reduction. Imports of sugar are not subject to this levy. The 1996 farm act increased the assessment rate by 25% to 1.375% on raw cane sugar and to 1.47425% on refined beet sugar, set relative to the 18 cent per pound loan rate for raw cane sugar. Converted into dollars, raw sugar processors now pay 24.75 cents for each 100 pounds (cwt.) produced. Beet sugar refiners' assessment is 26.54 cents per cwt. In FY 1997, this assessment generated $33.7 million in receipts from cane and beet processors.

Sugar Import Quotas

Import controls historically have been used to limit total U.S. sugar supplies in order to keep market prices not less than set minimum levels. Currently, tariff-headnote authority provides for a two-part tariff-rate quota (TRQ) that restricts the amount of sugar that enters the U.S. market on preferential terms. The raw cane sugar quota portion of the TRQ is allocated among 40 sugar-exporting countries, with shares based on the amount each exported to the United States during 1975-81 when competitive and unrestricted access existed. The small refined sugar quota part of the TRQ is allocated between Canada, Mexico, and all other countries (on a first-come, first-served basis). Most of the sugar that enters under the TRQ each fiscal year is subject to a zero tariff Sugar imported from any country in excess of each quota faces a prohibitively high tariff.

To cover the gap between domestic production and projected demand, the FY 1998 TRQ currently is set at 1.791 million ST (1.625 million metric tons (MT)). This is considerably higher than the minimum amount of foreign sugar (1.256 million ST, or 1.139 million MT) that the United States agreed under multilaterally negotiated trade rules to allow to enter the domestic market each year in the 1995-2000 period.

Program and Consumer Costs

From FY 1986 through FY 1996, USDA met the then-in-effect "no-cost" directive in implementing the sugar program. With USDA's use of various statutory authorities to keep market prices most of the time above forfeiture levels, processors were able to sell most of their sugar in the marketplace and repay their loans with interest rather than forfeit sugar to the CCC. As a result, USDA budget documents show there were no direct program costs. Also, marketing assessments generated revenue, as processors have paid to the CCC an average $28.8 million each year in the FY1992-FY1997 period.

U.S. sugar policy maintains domestic sugar prices above the world market price. In FY1997, the U.S. price for raw cane sugar averaged 22.0 cents/lb., while the world price adjusted for transportation to the U.S. market averaged 13.2 cents/lb. As a result of this price differential, U.S. consumers and manufacturers of food products and beverages historically have paid more for sugar than they would if imports were allowed to enter without any restriction. Various studies show that over the last decade, U.S. sugar users paid from $400 million to $3.2 billion more for sugar annually. These "cost to user" estimates vary significantly, largely reflecting the extent of the difference between the higher U.S. price and the lower world price for sugar in any time period examined, and the differing assumptions and methodology used by analysts to develop each estimate.

References

1 This description draws in part from reports issued by USDA's Economic Research Service (Farm Business Economics - online database, Sugar and Sweetener Situation and Outlook), Farm Service Agency (Sweetener Market Data selected budget documents), and World Agricultural Outlook Board (USDA Agricultural Baseline Projections to 2007; World Agricultural Supply and Demand Estimates).

2 U.S. Department of Commerce. Bureau of the Census. 1992 Census of Agriculture: United States Summary and State Data. Vol.1, Part 51. P.384.