Jesse, Edward V.

English

Research Papers in Economics

U.S.  Sugar  Policies:  Options  and  Impacts
Edward V. Jesse
The  demise of the  U.S. Sugar Act on December
31,  1974 ended a  period of 40 years during which
the  domestic  sugar  industry  was  insulated  from
the  international  sugar market. At almost the  same
time  the Act  expired,  monthly  world sugar  prices
reached  a peak  several  times  the previous  record.
These  simultaneous  events  created unprecedented
interest  in sugar  and,  in  particular,  the  role of the
Government in sugar pricing.
The  purpose  of  this paper  is to briefly  outline
U.S.  sugar  policy  directions.  For  the  status  quo
alternative,  world  price  projections  under  inter-
national  free  trade  are  provided.  Program  costs
are estimated  for policy options involving domestic
price protection.
Policy  Directions
Sugar policy options for the U.S. are summarized
in  figure  1.  The  first  decision  point  concerns
wheather  to  1)  continue  the  present  course  of
free  trade  (nonrestrictive  global  quota  and  mini-
mum  legal  fixed  tariff)  or  2)  provide  price  pro-
tection  for  domestic  producers.  Two  options  are
shown  under  the  free  trade  alternative-partici-
pation or nonparticipation in an International  Sugar
Agreement  (ISA).  Secretary  of State  Kissinger has
committed the U.S.  to ISA negotiations, but active
U.S.  participation  in  an  agreement  with  strong
economic  provisions  is  uncertain  at  this  time.
Historically,  global  sugar  pacts  set price  corridors
(upper  and  lower  bounds)  and  specific  bilateral
trade assurances. By setting these terms unilaterally,
Edward  V.  Jesse  is  the  acting  program  leader,  Fruits,
Vegetables,  Sweeteners,  and  Tobacco  Program  Area,
Commodity  Economics  Divisions,  Economic  Research
Service,  USDA, Washington,  D.C.
The  views  expressed  herein  are  those  of the  author
and should  not be construed  as  reflecting  the position  of
the U.S. Department of Agriculture.
the  Sugar  Act  precluded  U.S.  participation  in
previous agreements.
Several  policy  approaches  are  possible  if  the
U.S.  adopts  a  protectionist  position.  Sugarbeets
and  sugarcane  could  be  granted  price  protection
under  the  existing  Farm  Bill  through  price  sup-
ports  and  Government  purchase  and  storage.  A
support-storage  program  for  sugar  would  be
extremely  difficult  to manage,  and  would have  to
be  tied  to  import  controls  to  be  effective-the
question  mark associated  with this option in figure
1 implies a feasible but unlikely  policy option.
The  "snapback"  tariff  option  is  also  possible
under  existing  legislation.  Snapback  refers  to  an
automatic  jump  in  the  raw  sugar  duty  from  .625
cents  to  1.875  cents  per  pound, raw  basis,  in the
event  the  President  elects  not  to  announce  an
import  quota.  This  option  is  also  designated
unlikely;  it  provides  no  control  over  the  level
of  domestic  price  protection,  and  it  would  place
the  U.S.  at  a competitive  disadvantage  in obtain-
ing  sugar  from  foreign  suppliers  unless  a  price
premium  could be assured.
Without  special  legislation,  the  President
also  has  the  option  of annually  announcing  a res-
trictive  quota  (i.e.,  at  or  near expected  consump-
tion  less  domestic  production)  either  on a global
or  country-by-country  basis.  This  could  provide
domestic  price  enhancement  through  supply
restriction, but would  create  severe  administrative
and monitoring problems.
Protection  through  Congressional  action  could
take  a  number  of  forms;  extremes  with  respect
to  complexity  are  noted  in  figure  1.  A  direct
deficiency  payment  program  with  target  prices
based  on  production  costs  would  be  one  of  the
easiest  legislative  programs  to administer.  Unlike
a  price  support  plan,  sugar  storage  would not be
required.  Passage  of  a  Sugar  Act  comparable  to
the  expired  Act  would  involve  unwieldy  specifi-
233Western J. Agr. Econ.
Fig. 1. Decision  tree  representation  of domestic sugar policy
*INTERNATIONAL  SUGAR  AGREEMENT  WITH  BINDING  ECONOMIC  PROVISIONS
cation  of tariffs  and  quotas  by  Congress  to "fine
tune"  domestic prices.
Free Trade Options
Presently,  the  U.S.  is  an  integral  part  of  the
world  sugar  economy-monthly  domestic  raw
sugar  prices  (New  York  spot)  have  exceeded  the
world  quote  (Caribbean  ports)  by  a  little  more
than  transportation  charges  plus  tariff  since  the
Sugar  Act  expired.  Hence,  whether  some  form  of
sugar  price  protection  is  necessary  to  maintain  a
viable  domestic  industry  depends  heavily  on  the
level  of  world  prices  under  existing  free  trade
arrangements.
A  highly  aggregate  econometric  model  of the
world  sugar  economy  was  used  to project  world
prices  under  free  trade  [Jesse  and  Zepp].  Basi-
cally,  the  model  contains  seven  functional  and
eight  accounting  and  institutional  equations
relating U.S.  and  rest-of-world  (ROW)  production,
consumption,  stocks  and  prices.  The period 1954/
55  to  1974/75  was  used for parameter estimation,
with  all variables  on a world crop year (May  1-Apr.
30)  basis. The model is fully recursive; some simul-
taneous  relationships  are  modified  to  simplify
estimation  and forecasting.  Numerous  assumptions
with  varying  degrees  of  empirical  validity  were
made  concerning  U.S.  grower  supply  response,
U.S.  stock  demand,  population  growth,  high-
fructose  corn  syrup  (HFCS)  production,  bilateral
trade  agreements,  and  U.S.  tariff  policy.  Prices
used  in  estimation  were  undeflated;  in evaluating
forecasts,  a  general  rate  of  price  change  com-
parable  to the estimation  period must be assumed.
Model  forecasts  of world  sugar  prices  to  1980
for four  scenarios  are  shown  in figure  2. The basic
solution  uses  preliminary  1975/76  Foreign  Agri-
cultural  Service  world  production  and  recursively
generated  model point  estimates beyond  1975/76.
The  "poor  weather"  and  "good  weather"  cases
reflect  actual  ROW  sugar  production  consistently
5  percent  below  and  above,  respectively,  model
point  projections  over  the  entire  projection
period.  The  "constrained  consumption"  case
limits  per  capita  sugar  consumption  growth  out-
side  the  U.S.  to  one-half  the  historical  rate.  The
basic  solution  shows  world  prices  dropping
steadily  to  about  12  cents  per pound in  1978/79
with  an  upswing  in  1979/80.  The  three  modifica-
tions  show  prices  substantially  different  from
those  generated  by  the  basic  solution, but there is
a remarkable  similarity in price  trends.
234
June 1977U.S. Sugar Policies
Fig. 2.  Summary  of world  sugar price  projections
under free  trade
Fig. 3.  Projected  world sugar prices with corridor
sugar agreements
WORLD  SUGAR  PRICE.  CENTS  PER  LB..  RAW
20
18
16
14
12
10
20
18
16
CROP  YEAR
NEG. ERS 2438-76  (4) 14
12
The  price  projections  cast  some  doubt  on  the
need  for  a  long-run  support  plan  to  maintain
current  domestic  sugar  production  levels.  A
world  market  price  decline  is shown  in  all  of the
cases  examined,  and  in  some  cases,  this  decline
would  unquestionably  result  in  serious  economic
losses  to  U.S.  producers  as  well  as  those  in other
countries.  However,  projected  price  recovery  is
rapid  in  all  cases,  and  hence,  the  time  frame  of
protection  may  be  short.  On  the  other hand,  the
question  of  price  stability  is  not considered.  The
point  price  projections  generated  by  the  model
camouflage  potential  price  variability  resulting
from  unusual  weather,  speculative  behavior,  and
other  non-systematic  factors.  It  is  possible  that
the  primary  value  of  a  price  protection  policy
may  be  in  its  stabilizing  effect  rather  than  in  its
price enhancement  effect.
Implications  of  an  International  Sugar  Agree-
ment with price  corridors  were examined with the
model  by  simulating  agreements  with  lower  and
upper  price bounds of 10-15 cents  and  15-20 cents
using the  basic  solution  as  a starting  point. An In-
ternational  Sugar  Agreement  with  a  10-15  cent
10
15-20  CENT
CORRIDOR
*
*
*
*
*
10-15 C
10-15  CENT
CORRIDOR
I  I  I  I  I
1975/76  '76/77  '77/78  '78/79  '79/80  CROP  YEAR
NOTE:  ASTERISK  INDICATES  PRICE  IN ABSENCE  OF  CONSTRAINT
USDA NEG. ERS 2439-76  (3)
price  corridor  would likely  result  in an  extremely
low  world  sugar  stock  position  until  late  in  the
decade,  as  the  upper bound  of the corridor would
be  below  prices  suggested  by supply  and  demand
conditins. There would  probably be strong buyer
pressure  to  purchase  above  the  upper  limit  price
due  to  the  short  stock  situation.  A  15-20  cent
corridor  would  be  expected  to  have  little  short-
run  effect,  as  projected  prices fall  within the range
until  1977-78.  In  the  longer  run,  there  would  be
seller  pressure  to  shade  the  minimum  'price,
possibly  jeopardizing  the  agreement.  Hence,  the
setting  of price  limits  is critical  in corridor  agree-
ments  to  insure  their  preservation.  If  an  inter-
national  agreement  is pursued, a system of flexible
limits might  be  considered  to minimize price pres-
sures.  While  this  would reduce  the  security  incen-
235
WORlD  SUIGAR  PRIClF  CFNTS  PER  I P  RAW
22
20
18
16
14
12
10
8
6
USDA
GOO
I  I  I  I
1975/76  '76/77  '77/78  '78/79  '79/80
I
I  l  l  I  I
Jesse
.._ II.1I-  -.  ,  -,  ju  L.  1  Lo.,  mvv  I
I
-.--  ---l - ...
__
_-
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I
ITable  1. Selected  sugar price support mechanisms;  projected  market  indicators at world prices below U.S.
target price of 14 cents per  pound,  raw1
U.S.  Total  3
Raw Sugar Price  Con-  U.S.  Production  Raw Sugar  Program  Costs
Policy Option  World  U.S.  sumption  Sugar  HFCS
2 Total  Cost  Consumers  Treasury  Total
cents/lb.  ----1,000 short tons, raw basis ----  - --- -million dollars -----------
Quota(s)  with  5.0  14.0  12,550  7,000  3,000  10,000  3,514  2,039  (32)
4 2,007
premiums, .625  7.5  14.0  12,550  7,000  3,000  10,000  3,514  1,412  (32)  1,380
cent tariff  10.0  14.0  12,550  7,000  3,000  10,000  3,514  784  (32)  752
12.5  14.0  12,550  7,000  3,000  10,000  3,514  157  (32)  125
Quota(s)  with  100  5.0  14.0  12,550  7,000  3,000  10,000  3,514  2,039  (414)  1,625
percent variable  7.5  14.0  12,550  7,000  3,000  10,000  3,514  1,412  (287)  1,125
levy  10.0  14.0  12,550  7,000  3,000  10,000  3,514  784  (159)  625
12.5  14.0  12,550  7,000  3,000  10,000  3,514  157  (32)  125
Target price-  5.0  6.5  13,050  7,000  200  7,200  1,696  163  977  1,140
Direct  payment  7.5  9.0  12,900  7,000  1,500  8,500  2,322  161  645  806
10.0  11.5  12,700  7,000  2,500  9,500  2,921  159  310  469
12.5  14.0  12,550  7,000  3,000  10,000  3,514  157  (32)  125
1  All  programs  include  minimum  U.S. tariff  of .625 cents/lb.,  raw  basis. Transportation  and  insurance are assumed
to  be  .875 cents/lb.,  resulting  in minimum  U.S.  (New  York spot)-world  (stowed,  Caribbean ports) price difference of
1.5 cents/lb. Consumption  levels are  1980 projections.  All  prices in  1975 dollars.
2 HFCS  =  High-fructose  corn  syrup.  Projected  production  levels  based  on  announced  expansion  plans.  Up  to  the
quantities indicated  (3 million tons,  raw dry  basis).  HFCS  is assumed to substitute pound for pound with sugar.
3 Consumer  costs reflect  price premium  over  completely  free  trade,  and  include tariff costs. At world price of 12.5
cents,  both  consumer  and  treasury  costs  are  comparable  to  existing  program  costs  for  all  methods  of  protection.
Treasury costs are deficiency  payments and benefits are tariff revenues.
4 Parentheses  indicate negative cost (positive treasury contribution).
tive  of  agreements,  it  would  also  serve  to reduce
temptations  to trade outside  of agreement  terms.
Protection Options
The  viable protectionist policy options outlined
in figure  1 basically involve price assurance through
deficiency  payments or supply management.  While
space  does not permit  discussion  of possible  plans
from  the  standpoint  of  advantages  and  disadvan-
tages  to  all  affected  parties,  table  1 summarizes
some  gross impacts  of three  methods of domestic
price  protection;  global  or  country-by-country
quotas  with both  a fixed  and variable  (with world
price)  levy  and  a  deficiency  payment  scheme.
The  assumed  policy  goal  is  to  stabilize  domestic
sugar  production  at about existing levels  (roughly
7,000,000  tons,  raw  basis).  Recent  ERS  studies
and  updated  ASCS  cost  of  production  figures
suggest  U.S.  prices  of  about  14-16  cents  per
pound  (raw  basis,  New  York  spot),  in  1975
dollars,  would  likely  achieve  this  goal  [USDA,
Jesse  and  Zepp; Zepp].  The time frame  for evalua-
tion  of the  policies  is not crucial,  but 1980 is used
to  fix  probable  consumption  and  levels  of high-
fructose  corn syrup production.
Using  a  14  cent  price,  U.S.  sugar  production  is
identical  for  the  three  methods  of support,  but
low world  prices substantially  curtail high-fructose
corn  syrup  production  under  target  price-direct
payments.  This  emphasizes  that,  as  under  the
expired  Sugar  Act,  corn  sweeteners  enjoy  a price
"umbrella"  with  the  quota  systems.  Hence,  the
degree of price production desired for corn fructose
may  be  an  important  consideration  in selecting  a
sugar policy if low world prices are expected.
Total program costs, comprised of the consumer
overcharge  (premium  over  world  price)  and
treasury outlay,  are identical  for the three program
variants  at  a  12.5  cents  world  price.  Above  this
price,  program  costs  are  quite low, consisting  only
of  the  minimum  tariff  times  total  sugar  use  less
U.S.  treasury  returns  from  imports.  Hence,  the
form  of  a  support  program  may  be  irrelevant  if
world  sugar  prices  are  expected  to be  at  or near
the  supported  price.  Moreover,  the  costs  of  any
direct  support  program  in  this  event  would  not
be large.
At  low  world  sugar  prices,  the  quota  with
236
Western J. Agr. Econ. June 1977U.S. Sugar Policies
premium  option  yields  the  highest  total  program
cost.  Benefits  equalling  these  costs  are  distrib-
uted  among  U.S.  sugar  cane  and  beet  producers,
corn  fructose  products,  and  foreign  suppliers
proportional  to  their  contribution  to  total  sugar
supplies.  With  the  quota-variable  levy  option,
consumer  costs  are the  same as the quota-premium
case.  But  consumers  do  not  benefit  directly
because  the U.S.-world  price  premium for imports
is  recovered  by  the  U.S.  Treasury.  Hence,  the
variable  levy  option  appears  attractive  from
the  standpoint  of  lowering  program  costs.  But
this feature must be weighed against possible prob-
lems  in  attracting  foreign  supplies  without  a
price  incentive  and  in  equitably  redistributing
resulting treasury revenues.
The  direct  payment  plan  consistently  yields
the lowest  total  costs  of the support mechanisms
considered.  Consumer  costs  are  attributable solely
to  the  minimum  .625  cent  tariff,  since  the  U.S.
price  is  tied  to  the  world  price.  There  is  an  addi-
tional welfare  gain at low prices, since consumption
is  substantially  higher  than for the quota schemes.
Probably  the most noteworthy feature of the  direct
payment  option  is  the  high  treasury  cost  at  low
world  sugar  prices,  nearly  $1 billion  at  5 cents.
While  yielding lower costs, direct payment support
is  a  highly  visible  support  mechanism.  This  may
bear on its political viability.
References
Jesse,  E.  V.  and Zepp, G. A.,  Sugar Policy Options for the
United States,  Agr.  Econ.  Rept.  No.  351,  Economic
Research  Service,  U.S.  Department  of  Agriculture,
Washington,  D.C. 1976.
U.S.  Department  of  Agriculture,  Returns,  Costs  and
Profits:  Sugarbeet  Production  - 1972  Crop,  Beet
Sugar  Processing-1970,  1971,  and  1972  Crops,
Sugar  Division,  Agricultural  Stabilization  and  Con-
servation Service,  Washington,  D.C., August  1974.
Zepp,  G. A.,  U.S.  Cane  Sugar  Supply  Response,  Agr.
Econ.  Rept.  Economic  Research  Service,  U.S. Depart-
ment  of Agriculture, Washington,  D.C.  [forthcoming  ].
237
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U.S. SUGAR POLICIES: OPTIONS AND IMPACTS

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