SUGAR AND SWEETENER February 02, 1999 December 1998, SSS-224 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- SUGAR AND SWEETENER is published twice a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. This release contains only the text of the report -- tables and graphics are not included. Subscriptions to the printed version of the report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #SUB-SSS 224, $25/year. ERS-NASS accepts MasterCard and Visa. --------------------------------------------------------------------------- Contents Summary U.S. Sugar Year Ended 1997/98 Forecast 1998/99 Prices Mexican Sugar World Sugar High Fructose Corn Syrup HFCS and Mexico Special Articles Sugar in Mexico: Policy Environment and Production Trends The Rise and Decline of Puerto Rico's Sugar Economy Implications of NAFTA Duty Reductions for the U.S. Sugar Market List of Tables Autofax Access to Sugar-Related Data Internet Access to Sugar-Related Data Report Coordinator Stephen Haley (202) 694-5247 FAX (202) 694-5884 E-mail: SHALEY@ECON.AG.GOV Principal Contributors Stephen Haley Nydia Suarez Database Coordinator/Graphics & Table Design Fannye Lockley-Jolly Layout & Text Design Wynnice Napper Approved by the World Agricultural Outlook Board. Summary released December 2, 1998. The next Sugar and Sweetener Situation and Outlook will be the Yearbook and is scheduled for release on May 18, 1999. Text and summaries may be accessed electronically. For details on electronic access, call ERS Customer Service (202) 694-5050. Summary The National Agricultural Statistics Service pegs the 1998 U.S. sugarbeet crop at 32.4 million tons, which if realized, would represent a record. Acreage harvested is estimated at slightly below 1.46 million acres, 2 percent above the previous year. National yield is estimated at 22.3 tons per acre, slightly below records set in 1981 and 1987. The U.S. Department of Agriculture's (USDA) analysis projects sugar tonnage per harvested acre to be above historical trends at 3.09 tons, and total production at 4.5 million tons. Florida cane for sugar is projected at 15.468 million tons. Sugar per harvested acre is projected at about 4.40 tons and total raw sugar production at 1.89 million short tons, raw value (STRV). Although Louisiana cane yields are forecast at 27.0 tons per acre (down from the record 28.16 tons per acre the previous year), increased acreage offsets much of the yield decrease. The current Louisiana cane sugar production is projected at 1.22 million STRV. The recent precipitation in Texas following a hot and dry summer has raised concerns regarding the sugar content of the State's cane crop. Texas' cane sugar is projected at 90,000 STRV. Hawaii is expected to produce about the same amount of sugar as the year just completed -- 340,000 STRV. Recent hurricane damage will limit Puerto Rico's production to an estimated 7,000 STRV. The 1998/99 U.S. cane sugar produced should be 3.547 million STRV. The tariff-rate quota (TRQ) for fiscal year 1999 for raw, refined, and specialty sugars were announced on September 17,1998. The raw sugar TRQ was initially set by USDA at 1,780,164 STRV and 1,284,133 was made available for allocation by the U.S. Trade Representative. TRQ tranches of 165,347 STRV will be allocated in January, March, and May if the ending fiscal year stocks-to-use ratio projection, as published in the USDA's World Agricultural Supply and Demand Estimates (WASDE) report, in those same months is equal to or below 15.5 percent. The refined sugar TRQ was set at 55,116 STRV. Non-TRQ imports are projected at 445,000 STRV. Total sugar deliveries for consumption are currently projected at 10.025 million STRV. Sugar exports from the Refined Sugar Re-export Program are expected to total 175,000 STRV. Sugar production in Mexico is projected at 5.1 million metric tons (mmt), raw value, for 1998/99 (November/October). Mexico produced a record cane sugar crop of about 5.49 mmt, raw value, during 1997/98. Consumption is projected at 4.13 mmt for 1998/99, down from an estimated 4.2 mmt in 1997/98. Mexican sugar exports are projected at 1.00 mmt for 1998/99, down from an estimated 1.28 mmt for 1997/98. High fructose corn syrup (HFCS) production for calendar year 1998 is forecast at 9.155 million short tons, dry weight. This level represents a 5.5-percent growth over 1997. The production of HFCS-55 is projected to grow 7 percent compared with about 3 percent growth for HFCS-42. HFCS-55 exports through the third quarter of 1998 are up 37 percent from a year earlier. Exports are estimated to constitute 6.2 percent of domestic production, up from 3.7 percent in 1996 and 4.7 percent in 1997. HFCS-42 domestic deliveries are forecast to grow only 2.4 percent in 1998, and exports remain a relatively minor share of production. U.S. Sugar On January 12, the U.S. Department of Agriculture (USDA) released its most recently updated estimate of U.S. sugar supply and demand for fiscal year 1998 and the revised forecast for 1999. Year Ended 1997/98 Beet sugar production is now estimated at 4.389 million short tons, raw value (STRV). Sugarbeet production for 1997 totaled 29.9 million short tons, produced from 1.428 million acres, for a calculated nationwide yield of 20.9 tons per acre. Sugar tonnage per acre was 3.07 tons, which was above the historic trend. Most producing areas reported average- to above-average results, although the Red River Valley had a much warmer-than-normal winter which may have complicated beet pile storage, and excessive rainfall in northern California pushed harvesting back several weeks and pushed sugar content levels down to just over 15 percent. Until November 1998, beet sugar production had been estimated at 4.3 million STRV. Stronger than anticipated beet production in September 1998, reflecting the 1998/99 campaign, were added to the 1997/98 fiscal year to push total production to the higher-than-anticipated total. September sugar production totaled nearly 341,000 STRV, mostly out of the Red River Valley areas of Minnesota and North Dakota. September production for the years 1991/92-1996/97 averaged only 280,000 STRV. Cane sugar production is estimated at 3.632 million STRV. Both Florida and Louisiana had record years. Although excessive rainfall associated with El Nino pushed back harvesting, cane yield was at 36.9 tons per acre in Florida. Florida production was 1.925 million STRV. Louisiana increased acreage from the preceding year from 335,000 to 380,000 acres of cane for sugar. With ideal harvesting conditions during October and the first half of November, raw sugar production reached 1.262 million STRV. Texas suffered from dry conditions, producing 80,000 STRV. Puerto Rico's production, at 16,000 STRV, was adversely affected by El Nino, while Hawaii's production was slightly above expectations at 350,000 STRV. Imports for 1997/98 are estimated at 2.163 million STRV. Of this amount, 1.729 million entered under the tariff-rate quota (TRQ). This total includes the January 1998 tranche cancellation and an estimated 1997/98 shortfall (that is, unfilled quota) of 54,765 STRV. Non-quota imports totaled 434,000 STRV. Raw sugar entering under the Refined Sugar Re-Export Program totaled 185,000 STRV, and 150,000 STRV under the Sugar Containing Products Re-Export Program. High-tariff imports are estimated at 2,000 STRV, and imports for the Polyhydric Alcohol Program are estimated to be 14,000 STRV. Imports of sugar syrups entering under the tariff heading 1702.90.40, when converted to a raw-sugar equivalent, are estimated at 83,000 STRV. Production and imports, along with beginning stocks of 1.488 million STRV, brought 1997/98 U.S. sugar supply to 11.671 million STRV. The December estimate is an upward adjustment of about 91,000 STRV from October. Most of the increase is attributable to early beet sugar production from the 1998/99 campaign entering into the previous year's (1997/98) accounting. Sugar deliveries for 1997/98 totaled 9.815 million STRV. This was 85,000 STRV below the 9.9 million STRV which had been expected in October. August 1998 deliveries to wholesale grocers, jobbers, and dealers fell significantly below the seasonal trend. Until August, actual deliveries had been tracking forecasts closely. Ending stocks for 1997/98 are 1.679 million STRV, for an ending stocks-to-use ratio of 16.8 percent. Forecast 1998/99 Beet Sugar Beet sugar production is currently projected at 4.5 million STRV. The National Agricultural Statistics Service (NASS) pegs the sugarbeet crop at 32.66 million tons, which is 9.3 percent above the 1997 final production estimate, and if realized, would represent a record. Acreage harvested is forecast at 1.452 million acres, a record and 1.6 percent above the previous year. National yield is forecast at 22.5 tons per acre, a record. Late-season warm weather extended the growing season in the Great Plains and contributed to increased yields. NASS increased yield and production forecasts for Colorado, Montana, Nebraska, and Wyoming. Good conditions were also experienced in Idaho and Oregon, causing NASS to increase its production forecasts. The largest increases in expected sugarbeet production were in the Red River Valley of Minnesota and eastern North Dakota where record levels are forecast. According to press reports, the American Crystal Sugar Company expects to be slicing the 1998 crop into early June 1999. (The record is currently May 28 for last year's crop.) Company officials have pegged its raw beet tonnage at over 10.7 million tons, more than 2 million tons above last year's record. They estimate an average yield of 22 tons per acre. Another Red River Valley producer, the Minn-Dak Farmers Cooperative, reports a record 1.772 million tons, mainly due to increased acreage, with yields only forecast at about 18 tons per acre. Low yields were partly attributable to some disease problems (cercospora). Beet producing areas faring less well include Michigan and California. Hot and dry conditions in Michigan during the summer reduced yields. Cool, damp weather in California delayed spring planting and caused a reduction in area planted below original intentions. Industry sources also expect a lower 1999 spring harvest because of stand problems in late-planted fields. USDA currently projects fiscal year 1999 (October-September) sugar from beets at 4.5 million STRV, based on projected tonnage per acre of 3.1 tons. Probably the most significant concern is beet deterioration during a warmer-than-usual winter in the upper Midwest which caused some problems last February in the Red River Valley. Cane Sugar Sugar produced from cane is currently projected at 3.757 million STRV. This is above last year's record. Florida cane production for sugar is currently forecast at 16.602 million tons. Although extremely hot and dry conditions prevailed during most of the summer, most Florida cane is grown in irrigated muck soils. The 20 percent of the crop grown on sandy soils did experience some stress. More seasonal rainfall patterns returned in the late summer, reversing potential damage. Sugar per harvested acre is currently estimated at about 4.84 tons, implying raw sugar production of 2.075 million STRV. Louisiana experienced hot and dry conditions during the summer with isolated rain showers. Much of the normal growth was retarded until precipitation relief came with several tropical storms/hurricanes. There was some concern for lodged cane, but combine equipment for harvest mitigates the effect of lodged cane. Wet conditions delayed planting and pushed back the start of the harvest. Cane yields are currently forecast at 29.0 tons per acre, and forecasted acreage of cane for sugar is 400,000 acres, resulting in a cane for sugar production forecast of 11.6 million tons. The combination of dry summer weather and a rainy fall is contributing to lower sugar content, however. The current cane sugar production projection is 1.25 million STRV. Texas has faced a difficult growing season with extremely hot and dry conditions. Significant acreage withdrawn from production, however, helped raise yields on the remaining acreage by making more irrigation water available that would have otherwise been used on the withdrawn acreage. Like Louisiana, cane areas received some relief from tropical storms/hurricanes in the late summer. Current reports indicate a lush cane crop, but there are significant concerns regarding sugar content. The current projection for cane sugar is 85,000 STRV. Cane sugar production in Hawaii is expected to approximate last year's level. Last year's total cane sugar production was 350,000 STRV, and the current projection for 1999 is 340,000 STRV. Sugar production in Puerto Rico was seriously affected by Hurricane Georges. In addition to widespread damage to the cane crop, the Central Roig (one of the only two mills operating) suffered major damage, forcing the company out of operation for the 1999 harvest. Reduced cane availability at the remaining mill will likely limit Puerto Rico's sugar production to about 7,000 STRV. TRQ Imports The TRQ for fiscal 1999 for raw, refined, and specialty sugars was announced on September 17, 1998. The raw sugar TRQ was set initially by USDA at 1,780,164 STRV and 1,234,133 was made available for allocation by the U.S. Trade Representative. TRQ tranches of 165,347 STRV will be allocated in January, March, and May if the ending fiscal year stocks-to-use ratio projection, as published in the USDA's World Agricultural Supply and Demand Estimates (WASDE) report, in those same months is equal to or below 15.5 percent. The refined sugar TRQ was set at 55,116 STRV. Refined sugar is defined as sugar whose sucrose content by weight in the dry state corresponds to a polarimeter reading of 99.5 degrees or more. The specialty sugar TRQ is a subset of the refined sugar TRQ and has been set at 5,132 STRV. Mexico has been allocated 27,558 STRV of the refined sugar TRQ in accord with the side letter agreement submitted by the U.S. Government as a part of the North American Free Trade Agreement (NAFTA). Apart from NAFTA, Mexico has been allocated an additional 3,256 STRV of the refined sugar TRQ. Canada was allocated 11,354 STRV of the refined sugar TRQ. The remainder, including access under the specialty sugar TRQ, is available on a first-come, first-served basis. Shipping patterns were established for the fiscal 1999 raw sugar TRQ. Brazil, the Dominican Republic, and the Philippines, individually, are allowed to ship 25 percent of the initial allocation during each quarter of fiscal 1999. Argentina, Australia, Colombia, El Salvador, Guatemala, Nicaragua, Panama, Peru, and South Africa are permitted to ship up to 50 percent of their initial allocations in the first 6 months of fiscal 1999. If allocations are not met within the relevant quarter or 6-month period, they may be shipped in any subsequent period. As of December 1998, the total projected TRQ as shown in the WASDE rounded to 1.733 million STRV. This total accounts for a shortfall projected at 75,000 STRV. Other Imports Sugar is imported under two re-export programs meant to enhance U.S. competitiveness in third-country markets. Because the supply of total U.S. sugar is restricted by the sugar TRQ, the domestic sugar price is higher than the world price. The Refined Sugar Re-export Program and the Sugar Containing Products Re-export Program permit the importation of world price sugar with the stipulation that an equivalent amount of sugar will be exported. Both re-export programs help U.S. refiners by providing an opportunity to increase through-put, thereby lowering average costs, and by allowing them to take advantage of margins between world raw and refined sugar prices, should they become attractive. The Foreign Agricultural Service (FAS) of the USDA administers the re-export programs and currently projects fiscal year 1999 imports of 175,000 STRV for the Refined Sugar Re-export Program and 150,000 STRV for the Sugar Containing Products Re-export Program. Raw sugar can also be imported outside the TRQ for the production of polyhydric alcohol. Imports under this program are projected at 15,000 STRV. Imports entering outside the TRQs and subject to the high-tier tariff are projected at 5,000 STRV. The sugar content of sugar syrups entering the United States under the tariff heading 1702.90.40 is projected at 100,000 STRV for fiscal 1999. This estimate presumes the same pattern of imports as witnessed for most of 1997/98. The sugar from the syrups clearly enters the U.S. sugar marketing system and substitutes for domestically produced and TRQ sugar. Reports indicate that most use is centered in the Midwest industrial use markets. An implication is that U.S. sugar companies that sell predominantly in this area take relatively more of the brunt of the competition. Deliveries and Exports Total deliveries, including deliveries for human consumption, sugar included in products for the Sugar Containing Products Re-export Program, and deliveries for use in the Polyhydric Alcohol Program, and for feed use are currently forecast at 10.025 million STRV. Sugar industrial use is expected to grow by a healthy 2.8 percent to 5.95 million STRV. The share of total use constituted by industrial users should remain in the 59 percent range. Sugar demand by non-industrial users is expected to grow by 1.5 percent. This forecast is lower than originally estimated, due in large part to the August reduction by the wholesale grocer sector. This reduction strongly suggested a break in the observed trend which would have implied more robust growth. Non-industrial sugar consumption, therefore, remains the more volatile of the two demand sectors, and will require close attention by interested analysts. Exports of sugar under the Refined Sugar Re-export Program are currently forecast at 175,000 STRV. There may be some additional export opportunities due to damage from Hurricanes Georges and Mitch to the sugar sectors of nearby export competitors. Stocks Ending-period 1998/99 stocks are calculated as a residual of total supply (projected 12.114 million STRV) less total use (projected 10.2 million STRV). Ending stocks are, therefore, projected at 1.914 million STRV. The projected stocks-to-use ratio would be 18.8 percent, well above the trigger level for the cancellation of the January TRQ tranche. Prices U.S. nearby futures raw cane sugar prices (C.I.F., duty-paid, Contract No.14, New York) averaged 21.95 cents a pound in the first 15 days of November (through November 20). The price averaged 21.67 cents in October, compared with 22.27 cents in the same month a year earlier. The downtrend of the No. 14 market reflected a number of different factors, such as labor unrest in two Northeast cane sugar refineries in conjunction with heavy spot market raw sugar vessel arrivals. Wholesale refined beet sugar prices (f.o.b. plant, Midwest markets) have increased to 26.90 cents a pound in October, compared with 26.50 cents in September and from 24.90 cents a year earlier. Mexican Sugar Mexico produced a record cane sugar crop of about 5.49 million metric tons (mmt), raw value, during 1997/98 (November/October). This exceeded the previous year's production by over 600,000 metric tons (mt). According to FAS, the sugar industry and cane growers have set a production ceiling per mill that would keep production under 5.10 mmt. Sugarcane area for 1998/99 will be about the same as 1997/98, and drier-than-normal growing conditions are expected to lower yields from the previous year. Mexico's sugar consumption has not been keeping pace with production, making more available for export. Consumption is estimated at a flat 4.2 mmt for 1997/98, and projected at only 4.13 mmt for 1998/99. Consumer purchasing power has yet to recover from the peso devaluation 4 years ago and has been set back by more recent losses in the peso's value. There is, as well, the increased competition from imported and domestically produced alternative sweeteners, mainly high fructose corn syrup (HFCS), in the soft drink industry. Reports indicate that Mexican HFCS production of 250,000 to 350,000 mt displaces between 200,000 and 300,000 mt of domestic refined sugar in the soft drink, bakery, food processing, and fruit canning industries. Sources indicate that refined sugar use in the soft drink industry is between 1.2 and 1.4 mmt, and HFCS consumption is between 350,000 and 450,000 mt. The sources predict that the lower value of the peso (around 10.2 pesos per U.S. dollar in September 1998) and higher duties on imported HFCS are likely to limit the soft drink sector's demand for HFCS in 1998/99 through higher prices. Estimates of Mexican sugar exports are at 1.28 mmt for 1997/98, and projected at 1.00 mmt for 1998/99. The Mexican sugar industry cooperates to export sugar above factory-set production quota ceilings to keep domestic prices above world market prices. The industry and cane growers share in losses from selling in the export market at international prices. Also, in 1997/98 the Mexican sugar industry, with government assistance in financing storage costs, kept 600,000 mt in stocks from entering the domestic market, further strengthening domestic prices. Mexican shipments to the U.S. market are set under terms specified in the side letter agreement, dated 11/03/93, that was submitted by the United States Government as a part of the North American Free Trade Agreement (NAFTA). Mexico's NAFTA access for 1998/99 is 25,000 mt. World Sugar World ending stocks for 1998/99 are projected down 1 million tons due to lower total supply and higher consumption. World sugar production in 1998/99 is projected by USDA to increase 0.9 percent from 1997/98, to 126.5 million metric tons, raw value. World consumption is projected to increase 0.4 percent to 127.5 million tons, the smallest increase in 5 years. Nevertheless, world imports are projected to decrease 2 percent, mainly on slack import demand in the United States, South America, Ukraine, and India. Russia, the world's largest importer, is projected to import 3.7 million tons in 1998/99, down from 3.8 million a year earlier. The 1.1 million tons of increased world production is projected from higher output in Brazil, India, Turkey, and South Africa more than offsetting lower output from Australia, the Philippines, Indonesia, Europe, and Mexico. Exports are expected to increase from South Africa (up 21 percent), remain strong from Brazil (at 7.2 million tons), and decrease from Mexico (down 22 percent) and the European Union (down 13 percent). Cane sugar producers have increased their market share of world sugar production to 70 percent projected in 1998/99, from 65 percent in 1992/93. Among the highlights of cane producers' increasing share of world production, Brazilian, South African, and Australian cane sugar production has increased from a combined 14 million tons in the early 1990s, to nearly 25 million tons projected in 1998/99. Brazil's production of fuel alcohol from sugarcane, accounting for over two-thirds of total area harvested, presents a vast potential for diverting cane to sugar production, when fuel prices lose attractiveness relative to sugar. Since 1992/93, Brazilian sugar production has increased from 9.8 million tons, to a projected 16.6 million tons in 1998/99, while exports have tripled from 2.4 million tons, to a projected 7.2 million. South Africa has more than doubled production during the last 6 years, from 1.2 million tons in 1992/93 to 2.7 million projected for 1998/99. During this period, South African consumption has remained near 1.3 to 1.4 million tons, while exports have grown to a projected 1.4 million tons, from neglible amounts 5 years earlier. Similarly, Australian production has increased about 2 million tons in the 1990s, driving exports to 4.6 million tons in 1997/98. Australian exports are likely to decrease in 1998/99, after rainy winter and spring weather sharply reduced production. The decline in beet sugar's position in world production is mainly centered in the former Soviet Union (FSU). Following the FSU collapse 10 years ago, Russian and Ukrainian sugar production from beets fell from about 7 million tons to just 2.2 million tons projected for 1998/99. FSU consumption has fallen nearly 5 million tons since the end of the 1980s, to 9 million at the end of the 1990s. Russia remains the world's largest importer of sugar, with a shrinking supply coming from Cuba and a growing dependence on Brazil. The projected decrease in 1998/99 stocks is only slightly bullish for world sugar markets, given the slack import demand and the potential for increased cane sugar supplies. However, some improvement in world prices is expected from the European Union's (EU) possible cutback in beet sugar acreage and Russia's lowering of import duties. The European Union beet sugar sector in late November pointed to historically low world prices for refined sugar to motivate reduced area in 1999. Cutbacks in EU sugarbeet area followed sharp drops in world prices for refined sugar in the middle 1980s and the early 1990s. Russian import duties were raised to prohibitive levels for late-summer and fall 1997 and effectively stifled foreign deliveries while domestic beet sugar was being produced. The duties--45 percent for refined sugar and 75 percent for raw sugar--were put in place with an end-of-December 1998 expiration. Some form of fall-season tariff protection for Russian beet sugar producers is likely to be adopted in 1999. However, Russian import needs are projected at 3.7 million tons in 1998/99, and world prices are likely to strengthen while Russia is in the market. High Fructose Corn Syrup High fructose corn syrup (HFCS) production for calendar 1998 is projected at 9.155 million short tons, dry weight (tables 24 and 25). This level represents 5.5 percent growth over 1997. HFCS production is split between HFCS-42 and HFCS-55, which reveal differing growth patterns. HFCS-55 growth is fairly buoyant.1/ ---------- 1/ HFCS-55 is made up of three products: HFCS-55 syrup, HFCS-55 solid, and crystalline fructose. ---------- Production for 1998 is projected at 5.879 million tons, which is 7 percent more than in 1997. HFCS-42, on the other hand, is projected at 3.275 million tons, which represents only 2.8 percent growth over 1997. Most demand for HFCS-55 is from the domestic soft drink industry where demand this year has been sufficient to support about a 6.2-percent rise. HFCS-55 is aided as well by strong and growing export demand. It is currently forecast at 365,000 tons, which is up from 257,000 tons in 1997. Exports are predicted to absorb about 6.2 percent of production in 1998, up from 3.7 percent in 1996 and 4.7 percent in 1997. Export demand for HFCS-42, on the other hand is tepid, with imports exceeding exports. The HFCS sector has been characterized by lower-than-average product prices and overcapacity the last several years. Figure 7 shows the ratio of the HFCS-42 spot price to the beet sugar price, both of which are published in the Milling and Baking News. The levels reached in 1995 are closer to the historical norm. As can be seen, they deteriorated markedly in 1996 and worsened in 1997. There seemed to be some rebound in the first quarter of 1998, but prices weakened in the second quarter (10.18 cents a pound) and third quarter (9.9 cents a pound). The October price in the fourth quarter edged up to 10.38 cents a pound. Spot prices in 1998 have been much more volatile than in any of the other years shown in the figure. HFCS and Mexico The Mexican Secretariat of Commerce (SECOFI) investigated imports of HFCS-90 because the Mexican sugar industry asserted that they were used to avoid anti-dumping duties that had been imposed on HFCS-55 imports. SECOFI conducted a 7-month investigation and determined that HFCS-90 was being imported in order to skirt duties levied on HFCS-55. Therefore, SECOFI imposed compensatory duties, effective September 8, 1998, on HFCS imports from the United States: H.S. 1702.50.01, 1702.60.01, 1702.60.02, and 1702.60.99. U.S. HFCS imports from A.E. Staley Manufacturing Co. are charged $90.26 a metric ton, and corresponding imports from Archer Daniels Midland Co. are charged $55.37 a metric ton. Figure 8 shows HFCS-55 exports to Mexico by quarter for 1997 and 1998. Interim duties on HFCS imports had been made permanent in January 1998. These tariffs ranged between $55.37 and $175.50 a metric ton for HFCS-55. As can be seen, HFCS-55 exports in the first quarter were lower than those for the same period a year before. However, the tariffs were not sufficient to hold back the exports in the second quarter. Second-quarter exports rose to over 50,000 tons, compared with 30,500 in 1997. The story changes in the third quarter. In August, just prior to the announcement of the additional duties on HFCS-90, exports began to decrease. The third quarter exports fell to about two-third's of the level recorded for 1997. Sugar in Mexico: Policy Environment and Production Trends By: Stephen L. Haley 2/ ---------- 2/ Agricultural economist with the Market and Trade Economics Division, Economic Research Service. ---------- Abstract This paper analyzes sugar production in Mexico from two perspectives. The first perspective is analytic and focuses on the current policy conditions. It presents a model of the Mexican sugar sector as isolated from world sugar prices by restrictive Mexican Government import policies. It further shows how Mexican Government policies promoting cooperation among Mexican sugar-producing firms can restrict domestic competition, leading to high and uncompetitive domestic pricing above marginal costs. Analysis in the second part of the paper focuses on the degree to which technological change has been adopted by the industry. Factory data from 1987-97 are examined to show how trends in sugar yield per harvested hectare have contributed to sugar production growth and how successful firms have been in improving technical efficiencies. Contrary to the oligopolistic structure typifying the current environment, empirical results suggest an industry anticipating a more competitive market environment. An implication is that current policies are best understood as transitional as firms prepare to compete in a market that encompasses the United States. Keywords: sugar, Mexico, NAFTA. The Mexican sugar industry is set to become an important participant in the U.S. sugar market. Under the terms of the side letter agreement to the North American Free Trade Agreement (NAFTA), Mexican access to the U.S. market will increase to a maximum of 250,000 metric tons (mt) or net surplus production in fiscal year (FY) 2001 and be unbounded in FY 2008 and thereafter. The Mexican Government interpretation is that the original NAFTA language is binding, which would place more Mexican-sourced sugar in the United States market sooner. This paper has two goals. The first is to develop a theoretical framework that describes the current sugar market structure in Mexico. The framework will show an oligopolistic Mexican sugar sector that is isolated from world sugar prices by restrictive Mexican Government import policies, much like those in the United States. It will also show how Mexican Government policies promoting cooperation among Mexican sugar-producing firms restrict domestic competition, leading to an explanation of high and uncompetitive domestic pricing above marginal costs, and to an explanation of the emergence of Mexico as a significant exporter of sugar. The second goal is to analyze the results of investment decisions made by firms operating in the oligopolistic market environment. Factory data from 1987-97 are examined to show how trends in sugar yield per harvested hectare have contributed to sugar production growth and how successful firms have been in improving technical efficiencies. The lack of a competitive pricing environment leads to the expectation that firms have reduced incentives to innovate and adapt improved technologies that make them more efficient producers of sugar. This hypothesis will be shown to be inconsistent with the data analysis. The analysis supports an alternative hypothesis that the Mexican sugar industry is adjusting to an anticipated competitive environment in the future. Current government policies would then be interpreted to be transitional and supportive of an industry expecting growth when duty-free access to the U.S. market without quantitative restrictions becomes a reality. Mexican Sugar Policies and Domestic Prices Mexico does not necessarily have a comparative advantage in producing sugar. Current costs of production are estimated at least twice the level of current world prices of 8 to 10 cents per pound (FAS, 1998), and 5 to 5.5 cents a pound above the world's most efficient producers (LMC International, 1997). Figure A-1 shows Mexican prices for Estandar sugar in cents per pound since 1993 compared with the nearby U.S. and world raw sugar prices (#14 and #11 Coffee, Sugar, and Cocoa Exchange (CSCE) contracts, respectively). Figure A-2 shows prices for Mexican refined, U.S. beet sugar (Milling and Baking News), and world refined sugar (Contract #5, LIFFE). Mexican prices were above comparable world and U.S. prices until the peso devaluation in late 1994/early 1995. Since then, Mexican prices have been considerably above world levels but below U.S. prices. 3/ ----------- 3/ The margins between U.S. and Mexican retail sugar prices are even wider, prompting some to argue that in a more liberalized trading environment, Mexicans could ship much more packaged, refined sugar than implied by differing wholesale prices. ------------ Mexico maintains import policies that support domestic sugar prices. The current Most Favored Nation (MFN) tariff rate for all products under the 1701 tariff heading is currently U.S. $0.39586 per kilogram, or 17.96 cents per pound. Under the terms of the Uruguay Round Agreement (URA), bound rates were to decrease from U.S. $400 per mt (18.14 cents per pound) in 1995 to only $360 (16.33 cents per pound) in 2004. Although the URA minimum access level was set at 110,000 mt in 1995, and set to increase to 183,800 mt by 2004, the access requirement included many other goods besides those under the 1701 tariff heading. It included a variety of sugar-containing products and glucose/fructose corn syrups, thereby permitting Mexico to meet its URA commitment without importing sugar. Under NAFTA, Mexico is required by the sixth year (fiscal year 2000) to adapt a tariff-rate quota (TRQ) system with rates applied to third countries at the same levels as maintained by the United States. Therefore, Mexico (like the United States) is able to isolate its sugar industry from world market prices. Figure A-3 shows a supply-demand framework before the consideration of government policies. The sugar industry's marginal cost schedule is represented as the upward sloping curve labeled DMC. Because Mexico is assumed to be a small producer vis-a-vis the rest-of-the-world, it faces a perfectly elastic excess demand (line PwE) at the world price Pw. The industry faces two demand schedules. The first is access to the U.S. market (Dus) at the relatively high prevailing U.S. price Pus. The maximum amount that can be shipped is set under the terms of NAFTA. The second schedule Dmx represents the domestic demand. These two schedules are joined together as Djt or ABCDE. The horizontal distance between B and C corresponds to shipments to the United States. The horizontal segment DE indicates that returns from exporting to the rest-of-the-world at Pw are higher than selling domestically at prices less than Pw. If the domestic industry were a monopoly, or if collusive agreements among industry participants were sustainable, the industry's demand and marginal curves would not be equivalent. With domestic market power, the amount supplied to the domestic market could be restricted to obtain higher sales revenue at a higher domestic price. Domestic demand would have to be relatively inelastic, with good substitutes (like HFCS) also restricted in availability. In figure A-3, the marginal revenue schedule is MRjt or LMNOE. The marginal revenue schedule becomes horizontal at Pw because market power by assumption does not extend beyond the national market. Figure A-3 shows the situation with no import restrictions. The market power of the domestic industry would be restricted due to unrestricted competition from importers willing to supply all domestic needs at Pw. Domestic production would be 0T determined by where DMC and PwE intersect. Imports equal TU, implying consumption equal to TU. As shown, the producer return is a shipment-weighted average of the world price and the U.S. price. If the situation depicted in the figure were true, Mexico would not be a net excess producer. Its shipments into the U.S. market would be set at 7,256 mt. Figure A-4 extends the framework by incorporating Mexican Government policies. Imports are restricted under a TRQ system. Low-tariff imports are shown to equal U'U (although they could reasonably be expected to equal zero). The effective demand Djt shifts leftward by U'U and is represented as A'B'C'D'E. If the sugar industry were competitive subject only to the Mexican Government's import policy, it would produce at where DMC and Djt intersect at a price somewhat higher than Pw. In this situation, there would be no exports except those to the United States. However, with collusion among industry participants backed by government complicity (e.g. marketing allotments, production quotas, restrictions on substitute goods), the industry can optimize its return by restricting joint domestic and U.S. supply to 0T'. The price charged to the domestic market is a high Pmx. As before, it ships 0S to the U.S. market, but only ST' to the domestic market. It still produces, however, a quantity equal to 0T, but T'T is exported. Domestic consumption is reduced by this same amount. In effect, the TRQ combined with government policies that facilitate collusion among firms allow price discrimination against domestic consumers and favor the implicit subsidization of exports. Summarizing, the static model has two key components. The first is import control, and the second is the government promotion of coordination among Mexican sugar-producing firms. The import control aspect is similar to the U.S. sugar program, but the promotion aspect is not similar. Mexican Government policies facilitating non-competition among firms would superficially lead one to expect a stagnant production structure. However, the Mexican industry is looking forward to becoming a large player in the U.S. market, although the timing is in dispute. The problem for Mexican firms is that, as stated, firms presently in the U.S. market are already competitive. It does not seem clear that Mexican firms have large cost of production advantages over U.S. firms. Entry into the U.S. market requires investments be made by the Mexican industry making it more capable of competing in the expanded market. The second part of this paper examines more closely how the Mexican industry has been preparing for the future. If the widely-presumed Mexican industry dynamism tests out, the current Mexican Government policy regime should be understood as having elements not meant to be permanent. The facilitation aspect of current policies would more clearly be understood as "industrial policy." It provides domestic sugar firms protection from competition, foreign and domestic, as preparations are made for eventual withdrawal of the policy. Mexico's Sugar Industry and Production Growth The rebound in Mexican sugar production has proven remarkable over the last few years. As recently as 1993/94, only 3.8 mmt of sugar were produced; whereas the year just ended saw a record of nearly 5.5 mmt. Although production is forecast to decrease in 1998/99, it could still be the second highest on record. Although area planted to cane has been increasing and good weather has played a role, most of the growth has been attributed to gains in production efficiencies in milling and harvesting methods. Although many sugar companies seem to be experiencing severe financial problems, they have been able to adapt more modern methods into their production processes. Their problems may stem from being too successful in an unfavorable domestic (i.e., too little demand) and international (i.e., low world prices) sugar environment. Fifteen industrial groupings, plus seven smaller independent companies, currently produce sugar in Mexico. There are 61 mills located in 14 Mexican states. Table A-1 shows the mills, organized by company ownership, along with the state in which they are located, daily production capabilities, and average production for 1987-93 and 1994-98. By far the largest company is the Concorcio Industrial Escorpion, or CAZE, with 22 percent of total capacity. It has built up capacity since 1988 through mill acquisitions (two mills in 1990 and five mills in 1993), and through increased mill investments (5 percent greater daily grinding capacity since 1993). The second largest company, Concorcio Machado, can mill 32,200 mt per day or just under 10 percent of total national capacity. The third largest, Grupo Azucarero Mexico, has plans to increase refining capacity by 130 percent by the year 2000. The five largest companies currently possess over 55 percent of national grinding capacity. Sugar production is distributed unevenly over 14 states. Veracruz is the largest producing area, with a daily grinding capacity equal to 134,144 tons, or over 40 percent of the national total. Jalisco is the second largest but with 10.9 percent of the nation's grinding capacity. Other significant producing areas are San Luis Potosi (7.6 percent), Sinaloa (6.7 percent), Chiapas (5.4 percent), and Oaxaca (5.1 percent). The remaining eight states combined total almost 24 percent of the nation's production capacity. Cane sugar production growth is a combination of growth in area planted and harvested of sugarcane, and in recently instituted technological and producer incentive measures. Harvested area reached a low in 1992 of under 482,000 hectares, about 18 percent lower than 1987. By 1997, the sector harvested about the same number of hectares as in 1987, but sugar production was 22 percent higher. The data show factory recovery rate increases from 9.08 to 10.77 percent and an increase in the effective milling season from 130 to 175 days. It is these measures that many observers point to when they credit a changed institutional environment for propelling the efficiency of the sector. Although it is difficult to assign statistically-based weights to all factors, some simple analysis of underlying trends can be revealing. For this analysis, sugar production is decomposed into two categories: sugarcane area (measured in hectares) and sugar yield per harvested hectare. Trends are examined through the analysis of the following growth equations: Sugarcane Area = Constant + (Growth Factor No. 1) * Year Index Log(Sugarcane Area) = Constant + (Growth Factor No. 2)* Year Index Sugar Yield Per Hectare = Constant + (Growth Factor No. 3) *Year Index + (Cane Yield Factor) * Cane Yield Log (Sugar Yield Per Hectare) = Constant + (Growth Factor No. 4) * Year Index + (Cane Yield Factor) * Log(Cane Yield) Growth factors 1 and 3 measure changes in terms of physical measures, such as tons (No. 1) and sugar per hectare (No. 3). Growth factors 2 and 4 measure changes in terms of yearly percentage changes. The sugar yield equations include a term that accounts for the effect of sugarcane yields per hectare. There is a high direct correlation between the yield measures, but cane yields show no growth over time and are, hence, uncorrelated with the year index. The inclusion of the cane yield in the equations allows for greater confidence in the estimate of underlying growth rates of sugar per hectare. For Mexico as a whole, area harvested has been increasing over 23,000 hectares per year over 1993-97, or by a yearly rate of 4.3 percent. Table A-2 shows estimated trend growth in area harvested for Mexican sugar companies and for the states. As a group, the five largest companies have accounted for about 63 percent of area growth. However, in terms of percentages, some smaller companies have seen higher rates: Grupo Seoane increased acreage at over 11 percent for the period; Administracion Multiple growth at 8.5 percent; Concorcio AGA growth at 6.9 percent; and the Porres Group growth at 6.7 percent. For four of the companies, there has not been statistically significant area growth. The data reveal that the states of Veracruz, Jalisco, and Sinaloa have contributed about 65 percent of the total area growth. Interestingly, growth rates in seven of the states have shown no significant increase. Tables A-3 and A-4 show sugar yield growth per hectare, taking into account the influence of yearly changes in sugarcane yields. Table A-3 reports results for individual factories, and for factories aggregated by 1998 ownership patterns. Table A-4 reports results for the states and for Mexico as a whole.4/ ---------- 4/ The factories' data were grouped according to current ownership and then estimated as part of a system. Technically, the method of estimation is Seemingly Unrelated Regression (SUR). Estimations for the states, on the other hand, were estimated by Ordinary Least Squares. This distinction explains why the single factories located in Colima (Queseria) and Quintana Roo (San Rafael de Pucte), both part of the Beta San Miguel Group, do not have precisely the same growth rates in both regression equations. Statistically, results are close enough not to be significantly different. In the case of the San Rafael de Pucte factory, both methods reveal growth rates indistinguishable from zero. ---------- The estimation time covers 1987-97 and is not restricted to 1993-97. The implication is that, unlike area growth, sugar yield growth seems to have been sustained over the longer time period. 5/ ---------- 5/ It generally cannot be rejected that sugar yield growth from 1993 to 1997 has been significantly different than the growth over 1987 to 1997. This result seems to suggest that productivity growth since 1993 is merely a continuation of growth started earlier. One might then want to discount the argument that only recently-instituted measures have made the Mexican sugar sector more efficient. Although this interpretation cannot be rejected, a longer time series for the data are probably needed to make a more definitive case one way or the other. ---------- Forty-one of Mexico's 61 factories have seen significant increases in sugar per hectare. The results from table A-4 show that the gains have been distributed across all but three of the states. The 22 factories in Veracruz show an aggregate growth in sugar per hectare of about 2.2 percent. The rate for all of Mexico is estimated at about 1.6 percent. Eight of the 16 sugar industrial groupings have growth rates at or above the national rate. Only three factory groupings show growth rates indistinguishable from zero. In all, firms accounting for 85 percent of sugar-producing capacity have made statistically significant increases in sugar yield per hectare. The rates are high compared with those in the United States. For instance, the same methodology applied to Florida data from 1970 to 1998 shows a statistically-significant growth rate of only 0.65 percent. The Louisiana rate is higher at 1.16 percent but still lower than the Mexican rates. Conclusion The first part of this paper showed a supply-demand model of sugar in Mexico. The model incorporates import protection and industry coordination measures that allows domestic pricing above marginal costs. The second part of the paper presented some evidence that the industry has had wide success in adopting changes that have produced increasing amounts of sugar from available land areas. It seems likely that the policy-structure has had a major role in making this sort of improvement possible. This analysis was restricted by data availability. Each firm, producing area, and factory has a set of characteristics that make projections difficult and provisional. The data and policy structure, however, do point to an industry that hopes to have a formidable presence in the U.S. market. The key policy question involves the interpretation of the side letter agreement to NAFTA and whether a negotiated solution is feasible to allow earlier entry of Mexican sugar. The Mexican industry also faces competition from high fructose corn syrup (although Mexican government policy has been an aid here as well), as well as the financial stress in which many of the firms find themselves. References Foreign Agricultural Service, United States Department of Agriculture. GAIN Report #MX8033, page 10, March 31, 1998. LMC International. A World Survey of Sugar and HFCS Field, Factory, and Freight Cost: 1997 Report. Oxford, England, September 1997. The Rise and Decline of Puerto Rico's Sugar Economy by Nydia R. Suarez 6/ ---------- 6/ The author is an agricultural economist in the Specialty Crops Branch, Economic Research Service, USDA. The author wish to thank the officials from the Puerto Rico Department of Agriculture, Office of Agricultural Statistics, the Economic Development Bank, and the staff from Central Roig and Central Coloso for their insights drawn from a recent trip to Puerto Rico to study the sugar industry. ---------- Abstract: Puerto Rico's sugar industry has suffered from a history of major swings in production and trade. At its peak in 1952, Puerto Rico grew 12.5 million tons of sugarcane on more than 400,000 acres and processed over 1 million tons of raw sugar at 34 mills and seven refineries. Today, only two mills and one refinery are in operation. Puerto Rico has shifted from being a raw sugar supplier to the United States to importing sugar to meet domestic needs. The drastic decline in production to less than 20,000 tons in 1998, has probably gone too far to be reversed. High production costs, outdated equipment, lack of capital and collateral for investment in new technology, and the Sugar Corporation's lack of commitment to continue supporting the industry generates a very bleak outlook. The government completed privatization of the industry in mid-1998. Many problems remain unresolved, leaving the future of the industry dependant on how the government and the "colonos" (the island's sugar farmers) work out their differences. Keywords: Puerto Rico, sugarcane, sugar, colonos, production, Sugar Corporation. Sugar Dominates Puerto Rico's Early Development The Puerto Rico sugar industry is one of the oldest in the Western Hemisphere, having begun when Spanish colonizers brought sugarcane from the Dominican Republic and established the first sugar mill in the mid-1500s. Sugarcane cultivation and sugar production expanded during the rest of the 16th century but then lost momentum and stagnated over the next two centuries. Growth was impeded by high costs of labor and freight, competition from other countries, and trade restrictions imposed by the Spanish Crown. The sugar sector took off again in the 19th century due to growing external demand, principally from Europe and the United States. Sugar production dominated the country's economy as farmers dedicated an increasing amount of land to sugarcane cultivation. However, toward the end of the 1800s, sugarcane cultivation entered a period of decline due to competition from Brazil and Cuba and labor shortages. The Puerto Rico sugar industry was revived as a result of the Spanish-American War of 1898. Through a Presidential proclamation in 1901, Puerto Rico became part of a U.S. customs territory, thereby receiving the same tariff benefits that protected U.S. mainland sugar interests. Helped by this tariff and other economic policies, U.S. sugar companies invested heavily in the island's sugar industry. The area devoted to sugarcane tripled and farm size increased. Puerto Rico raw sugar production climbed to 661,000 tons by 1925 from an average of 440,000 tons in the early 1920s. Over 40 percent of production was controlled by three corporations. Sugar exports increased accordingly, totaling about 600,000 tons by the end of 1927 when sugar accounted for almost 60 percent of the island's exports. In 1934 sugar's role was challenged by the enactment of the Jones-Costigan Act. The act established production quotas for the beet and cane producing areas of the United States and its possessions, as well as import quotas for foreign countries. The legislation also restricted the amount of refined sugar that Puerto Rico could ship to the United States. Even though this law discouraged investment in the island's refining capacity, production of raw sugar continued to increase. The vitality and impetus of the island's sugar industry was mainly a result of the relationship between the United States and Puerto Rico. Sugar from Puerto Rico enjoyed a guaranteed outlet in the U.S. market and brought a premium price that was maintained by U.S. import restrictions. The profitability of the sugar industry, bolstered by low labor costs, prompted high levels of investment which led to the creation of infrastructure and the multiplication of sugar mills. During this period, the sugar sector earned approximately two-thirds of the island's net income and employed more than one-third of its labor force. Emphasis Shift from Agriculture to Manufacturing Initially, the reformist political party of the 1940s thought that the economic well being of the island depended on agriculture. One of their first policy initiatives was to implement a land reform program through the newly created Land Authority, whose mandate was to enforce a 500-acre limitation on the size of corporate land holdings. The Land Authority was also responsible for purchasing, at a fair-market price, holdings in excess of 500 acres, and with using these lands to benefit landless peasants and small farmers. Since most corporate sugar holdings were in excess of 500 acres, they became prime targets. By 1947, the Land Authority had purchased 36 percent of the corporate sugar land holdings. By the end of the 1950s, the government had become the single largest landowner in the sugar industry. Luis Munoz Marin, the island's first elected governor in 1948, introduced a series of policy measures to encourage industrialization. This economic plan, which came to be known as "Operation Bootstrap" gave direction to the Puerto Rico economy henceforth. By the end of the 1950s, the benefits of Munoz's pro-industrialization policies were evident as the gross domestic product (GDP) of the island almost doubled. These economic policies, particularly those referring to the promotion of the private investment and the tax-exemption benefit, were not extended to the agricultural sector. Traditional agriculture was not a moneymaker and was unable to take advantage of the exemption even if it had been offered. The Sugar Industry Declines as Puerto Rico Industrializes Over the next 30 years, industrialization created jobs in the cities and an exodus of labor from the farm. The sugar harvested area declined by more than 50 percent between 1953 and the early 1980s, while the contribution of the agricultural sector to the GDP fell from 14 percent to 5 percent. The sugar industry was not immediately crippled by the industrialization strategy. According to Dr. Curet Cuevas in his book El Desarrollo Economico De Puerto Rico, agriculture in Puerto Rico remained profitable until the mid-1960s, 15 years after Operation Bootstrap was initiated. In 1949, sugarcane was produced on about 48 percent of all cultivated land, accounting for 50 percent of all agricultural employment and income. In 1952, the sugar industry peaked with the production of almost 1.3 million tons, raw value. As industrialization became the core of the economy, its effect on the sugar industry became more evident. Although sugar production averaged over 1 million tons in 1950-56, it began to fall in 1957. Production briefly recovered, exceeding 1 million tons in 1961, but since then the sugar industry has been in a period of prolonged decline. Several factors underlie the sharp decline of the Puerto Rico sugar industry. As with agriculture in general, workers abandoned sugarcane fields to look for higher-paying manufacturing jobs in urban areas of Puerto Rico. Sugar mills began to experience labor shortages at harvest time and the area planted to sugarcane was reduced. Labor unions, which had gained power during this period, pressed for higher wages which in turn raised production costs. As mills sought to accelerate mechanization, unions resisted. Increased competition from Cuba and the Dominican Republic, as well as mismanagement of the mills, exacerbated this decline. Business confidence plummeted and capital investment fell sharply. The declining profitability of the sugar industry led to the bankruptcy of some mills, while many of the survivors reduced production. Under pressure from both labor and management, the Government of Puerto Rico began to assume ownership of the industry by buying out failing mills. Between 1968 and 1972, the government invested $100 million in an unsuccessful effort to rehabilitate the industry and bring sugar production levels back to a million tons per year. In 1973, with sugar production below 300,000 tons, the government nationalized the sugar industry by creating the Sugar Corporation to oversee the operations of the remaining 13 mills and one refinery. Nonetheless, sugar production continued to fall due mainly to high production costs and labor shortages. Between 1981 and 1989, sugar production ranged only between 90,000 to 151,000 tons per year, and production has declined every year thereafter. Location and Structure of Production Sugarcane cultivation has been confined largely to the coastal fringes of the island. Historically, some production also occurred at higher elevations in the interior, but the central mountain ranges hamper sugar mechanization and increase labor costs in that region. The sugarcane area of Puerto Rico is customarily divided into five districts: the Interior, East, West, North, and South Coasts. Climatic conditions in Puerto Rico are generally ideal for sugarcane production. The Interior, East, and West Coast districts have a mean annual rainfall of almost 90 inches; the South Coast receives approximately half that amount; and the North Coast is intermediate. Average maximum temperatures do not vary sufficiently between districts to greatly influence sugarcane growth. Average minimum temperatures just prior to the grinding season (January-April) have a critical effect on the quality. In Puerto Rico lower temperatures are better. As mills have closed and the industry has shrunk, production is now primarily concentrated in the West Coast. Cropping Schemes and Harvesting Methods Historically, Puerto Rico has had three types of sugarcane cropping schemes: the primavera, gran cultura, and ratoon. The "primavera" crop or short growth, is seeded between January and June and harvested 10 to 12 months later. In recent years it has accounted for about 15 percent of the annual cane harvest. The "gran cultura" crop or long growth, is seeded in the second half of the year and harvested 14 to 18 months later. It represents about 5 percent of the annual cane harvest. The "ratoon" crop (a combination of primavera and gran cultura crops) now accounts for about 80 percent of total production. Due to labor shortages and sharp increases in wage rates, about 85 to 90 percent of cane cutting and 90 percent of loading operations are now mechanized. Once the cane is harvested, it is delivered to one of the mills with which the farmer has a contract. After mill technicians sample the cane to determine its sucrose content, it is processed into raw sugar, and the mills pay the farmer for his share. About 64 percent of the sugar obtained from the total cane delivered to the mill belongs to the farmer and the difference to the Sugar Corporation. According to the most recent U.S. Census of Agriculture for Puerto Rico, the total area harvested for sugarcane in 1992 was 38,462 acres, down sharply from 124,595 acres in 1974, and 424,000 in 1945. The seven leading municipalities where sugarcane was grown--Cabo Rojo, Humacao, Mayaguez, Ponce, San German, San Sebastian, and Yabucoa--accounted for 52 percent of total area in 1992. The number of sugarcane farms dropped from 1,932 in the 1974 Census to 435 in 1992. The average size of sugarcane farms was 182 acres in 1992, compared with 119 in 1974. Since the land reform of 1941 limited sugarcane farms to 500 acres, Puerto Rico's production has been dominated by small holders. This contrasts with the neighboring Dominican Republic, where sugarcane production has been characterized by large sugar estates. The number of sugarcane growers has fallen precipitously due to the low profitability of the sector. There were about 275 growers in 1996, compared with 5,000 in 1970. The growers who left sugarcane production were usually the smaller ones. Most sugar growers who quit the industry in the mid-1960s had only 25 to 50 acres in cane. Some of this land was eventually sold for residential or commercial development. The rest was left idle. This change in land use is still continuing. Sugarcane Production The sugarcane production available for processing is estimated at less than 300,000 tons in 1998, down from 6 million tons in 1970. Sugarcane yields are also declining. In 1998, they were 13 tons per acre, down from 26 tons and 31 tons in 1988 and 1978, respectively. In comparison yields in Florida, for example, rose from 31 tons in 1978 to 36 tons in 1998. This decline in sugarcane yields suggests that some of the more productive land has gone out of production in addition to failure to develop more productive cane varieties, reduced use of yield-enhancing production inputs, and deficient farming practices. Puerto Rico's sugar recovery rate per ton of cane milled is estimated at 6.64 percent in 1998 compared with 11.04 percent in the early 1950s and well below other U.S. producing areas. Sugar farmers claim that recovery levels have declined over time mainly because of delays in receiving financial support from the government in addition to malicious fires that occurred in sugarcane fields. Other reasons are the high levels of trash, inadequate and old equipment, and deterioration of sugarcane between cutting and milling. Production Support Puerto Rico's Sugar Corporation supported sugarcane farmers primarily through a price support program guaranteeing the price of the farmer's share of sugar produced at the mills. According to the contract terms, 64 percent of the sugar and 66 percent of the molasses belong to the farmer who delivered the cane. The remaining sugar was owned by the Sugar Corporation, and was valued at the U.S. No. 14 nearby futures contract price for accounting purposes. Although Puerto Rico is eligible to participate in the Federal sugar program, for which the island's loan rate for raw sugar for fiscal 1999 has been set at 18.14 cents per pound, Puerto Rico has elected to use its own funds. However, Puerto Rico continues to benefit from the U.S. price which is considerably above the world price. The Sugar Corporation also helped sugarcane farmers in Puerto Rico obtained loans at below-market interest rates. The amount of money that a farmer could borrow, with the cane crop as collateral, depended on the size of the farm and estimated production costs. The total loan amount was not given to the farmer immediately, but released in installments based on how much of the money borrowed has been used for the farm. If the farmer could not repay the entire loan, the unpaid balance was carried into the next crop year. From 1910 until 1991, sugarcane farmers also benefitted from varietal breeding research at the Agricultural Experimental Station of the University of Puerto Rico (AES-UPR). The program had a long and dedicated history of highly regarded sugarcane improvement. But in 1991, the government's diminished interest in Puerto Rico's fast shrinking sugar sector caused it to cease funding breeding research. Milling Industry Structure and Performance Puerto Rico's cane milling industry has shrunk drastically since the 1950s as sugarcane production fell. Analyzing the state of the industry in the late 1960's, Dudley Smith, then vice president of the Association of Sugar Producers of Puerto Rico, found that of the eight factories that closed between 1962 and 1967, only one had made a profit in the years immediately proceeding the end of operations. Profits shrank because of high production costs and an inadequate cane supply resulting in an inability to maintain operations close to full capacity. These fundamental problems, which emerged in the 1960s, have not significantly changed in the last 30 years. In 1998, total grinding capacity is 10,000 tons per day, down from almost 53,000 tons in the mid-1970s. However, the average size of the mills has remained relatively unchanged at 5,000 tons per day. While some of the island's smaller mills have closed in recent years, so too have some of the largest. The Aguirre Sugar Company's mill in Salinas with a capacity of 7,500 tons per day and Central Plata in San Sebastian with a capacity of 4,000 tons per day closed in 1990 and 1996, respectively, due to lack of sugarcane resulting from irrigation problems. In addition to the lack of sugarcane for processing, the island's largest mill located in Ensenada, closed in 1981 due to labor problems. By 1998, the Sugar Corporation managed the two remaining mills as well as the Snow White refinery--the only refinery on the island. Central Coloso is the biggest mill, with a grinding capacity of 6,000 tons per day, while Central Roig has a capacity of 4,000 tons per day. A lack of agricultural labor, the shift from sugarcane to other agricultural products, increased demand for land, and lack of planning for housing and roads has contributed to inadequate cane supplies. During the 1998 milling season (January-April), Puerto Rico produced an estimated 15,000 tons of sugar from about 226,000 tons of cane processed. In the 1980s, the industry produced an annual average of 103,000 tons of sugar and that in turn was less than half of the 263,000 ton average over the 1970s. While overall production has declined, sugar yield per ton of cane processed remained relatively unchanged, averaging 154 pounds per ton of cane during the 1990s, 155 pounds during the 1980s, and 156 pounds during the 1970s, reflecting a lack of quality improvement. In contrast, Florida crushing yields grew 212 pounds to 239 pounds per ton over the same 25-year-period. The milling sector's output of molasses also has dropped precipitously. The contraction in molasses production has had a major impact on Puerto Rico's well-known rum industry. Puerto Rico imports most of the molasses from the Dominican Republic. Cost of Production As the industry has shrunk, the fixed cost per unit of sugar produced has risen rapidly. The two remaining mills would need to produce at least 100,000 tons of sugar to approach efficient output levels. However in 1997/98, raw sugar production from the two mills reached only 15,000 tons. High input costs, relatively high labor content in a high-wage economy, increased transportation costs now that farms are located farther from mills, and low productivity place Puerto Rico among the highest cost sugar producers in the world. Field costs averaged 17.08 cents a pound from 1980-81/1984/85 and 20.95 cents a pound from 1990/91-1994/95. For the most recent period, labor accounted for 53 percent of total field cost, capital 33 percent, and fuel, fertilizer, and chemical the balance. Milling labor costs also are high. Total mill costs averaged 12.44 cents a pound from 1980/81-1984/85 and 19.10 cents a pound from 1990/91-1994/95. Total sugar production costs (field and factory and administration) averaged 33.87 cents a pound and 47.18 cents a pound, respectively for the two periods. In the Landell Mills study, Puerto Rico had the second-highest rank out of 62 cane producing countries surveyed for the 1980/81-1990/95 year period, versus mainland U.S. cane producers ranking 28th. Hawaii field and factory costs, the highest of the four cane-producing States, averaged 20.64 cents a pound during the 1980/81-1994/95 period, 36 percent below Puerto Rico's. These extremely high costs show up in the losses--close to $20 million per year since 1995--sustained by the government's Sugar Corporation. The Sugar Corporation has sustained losses every year since fiscal 1974, losing an accumulated total of more than $1 billion. The Sugar Corporation's inefficiency, obsolete machinery, and high labor costs have been widely publicized. Until recently more than 2,000 people worked for the Sugar Corporation, as pressure from unions hampered its ability to reduce its labor force. Marketing Sugar and Molasses Raw sugar produced in Puerto Rico is processed into refined sugar at the Snow White refinery located adjacent to the closed Mercedita cane mill in Ponce. The refinery is owned by the Land Authority and operated by the Sugar Corporation. The Sugar Corporation is the local producer and supplier for the Puerto Rico market for direct consumption or table grade refined sugar. The wholesale price of refined sugar is determined by the government through its Department of Consumer Affairs (DACO). The price is presently set at 43 cents per pound. To complete the marketing chain, distributors sell their sugar to supermarkets and other retail outlets at a price which is also set by DACO. The current retail price is 52 cents per pound. While the Sugar Corporation fills Puerto Rico's domestic food needs, most of the demand for industrial uses is met by shipments from the mainland United States. These shipments are regulated and subject to licenses issued by the Government of Puerto Rico. Currently there are about seven license holders. When Puerto Rico produced sugar well in excess of the needs of the island, the surplus was exported to the United States. As the sugar industry declined, exports diminished as well. Puerto Rico has shifted from a historically significant exporter to an importer. Exports during the 1980s averaged about 30,000 tons, over the last 4 years they have dipped well below this mark. Exports are essentially raw sugar which cannot be processed with Puerto Rico's limited refining capacity. Most is sold to the United States, although occasionally some is shipped to Caribbean neighbors. Puerto Rico is also a transshipment point for refined sugar from Florida and Louisiana. This refined sugar is typically reloaded onto smaller vessels and shipped to Haiti, Barbados, and other Caribbean destinations. Over the years, some U.S. import quota sugar from foreign countries has entered the island. Non-quota sugar imports for consumption must pay the high duty (16.27 cents in 1998) as elsewhere in the United States. Prospects for the Future The Puerto Rico sugar industry has become a financial drain for the government and an ordeal for the colonos. The government has agreed to privatize the industry and transfer Sugar Corporation assets to sugar farmers and the two existing mills (92 sugar farmers from Coloso and 26 from Roig). The refinery asset transfer will occur in 2000. Problems were aggravated further in September 1998 by Hurricane Georges, which inflicted over $12 million in damages to the sugar industry. The Central Roig mill decided not to harvest in 1998/99 and instead is preparing for the 2000 crop. The Central Coloso mill is expected to harvest no more than 130,000 tons of sugarcane and 9,000 tons of sugar in 1998/99. At this point, the government and the colonos have not reached any agreement on financing loans for the 1998/99 harvest, making it very difficult for the colonos to accomplish their dream of being able to at least satisfy the internal demand of the island. References Agro Empresarial (1994) "Industria Azucarera de Puerto Rico--Situacion en 1994" p38-44. Albanese, Lorelei (1994) "Subsidies, Losses, and Sugar Cane." The San Juan Star Business Outlook July 25 p. B32-33. Alexander, Alex G. (1994) "Sugarcane: A Growing Energy Source," The San Juan Start Viewpoint May 8 V2. Bergad, Laird W. (1978) "Agrarian History of Puerto Rico, 1870-1930, "Latin American Research Review 3, no. 3 pp. 45-46. Bird, Esteban A. (1941) "Report on the Sugar Industry in Relation to the Social and Economic System of Puerto Rico", Senate Document No. 1, San Juan, Puerto Rico. British West Indies Sugar Association (1995) "Sugar in Puerto Rico and Florida", 107 pages and Notes on Twelfth Congress of the International Society of Sugarcane Technologist. Candelas, Jose B. (1959) "Some Effects of the Sugar Programs on the Sugar Industry of Puerto Rico" Bulletin 151, University of Puerto Rico Agricultural Experimental Station, Rio Piedras, Puerto Rico, p. 46. Carrion, Arturo (1983) Puerto Rico: "A Political and Cultural History", (New York: W.W. Norton and Company), p. 209. Congress of the United States, Office of Technology Assessment Integrated Renewable Resource Management for U.S. Insular Area, (Washington, D.C.: U.S. Government Printing Office, June 1987), p. 152. Corporacion Azucarera de Puerto Rico (various years) "Informe Anual," San Juan, Puerto Rico. Deitz, James L. (1986) "Economic History of Puerto Rico: Institutional Change and Capitalist Development," Princeton University Press. Department of Agriculture, Office of Agricultural Statistics (various years), "Anuario de Estadisticas Agricolas de Puerto Rico," Santurce, Puerto Rico. Department of Agriculture, Office of Information and Communication (NA) "Breve Historia de La Agricultura en Puerto Rico," p. 10. Department of Agriculture (1995) "Situacion de la Molienda, Zafra 1995" San Juan, Puerto Rico. Gilmore Sugar Manual (various years) "Puerto Rico Chapter," Fargo, North Dakota. Hernandez Agosto, M. (1963) "Conversion de Nuestra Agricultura de Cana de Azucar Al Maquinismo," Autoridad de Tierras de Puerto Rico, p. 40. Jose A. Herrero (1971) "La Mitologia de la Azucar: Un Ensayo en la Historia Economica de Puerto Rico, 1900-1970," Working Paper No. 5, CEREP. Hill, Marianne (1983) "A Preliminary Assessment of the Economic Situation of Puerto Rico's Agriculture," Puerto Rico Business Review Special Edition, p. 15. Hoff, Robert (1989) "The Puerto Rican Sugar Industry: Historical Evolution, Current Status, and Future Direction" World Sugar Circular, Foreign Agricultural Service, USDA November, pp. 22-23. Informe Economico Al Gobernador (various years), Junta de Planificacion, San Juan, Puerto Rico. Moscoso Teodoro and Jose Vicente Chandler (1988) "El Amargo Sabor de Nuestra Cana," San Juan, Puerto Rico, 4 December, p. 18. Perloff, Harvey (1950) "Puerto Rico Economic Future," A Study in Planned Development, University of Puerto Rico and the University of Chicago Press, pp. 67-79. Revista del Agricultultor (1994) "La Cana En Crisis," pp. 18-29. Rosa, Samuel (1995) "The Puerto Rican Sugar Industry: Situation and Outlook," World Sugar Circular, Foreign Agricultural Service, USDA, June pp. 26-28. Sanchez, Jorge (1971) "El Programa de Rehabilitacion de la Industria Azucarera de Puerto Rico Segun La Ley #69, 19 de junio de 1969" Colegio de Ciencias Sociales, Universidad de Puerto Rico, p. 35. Smith, Dudley (1967.) "The Job Being Done by Sugar in Puerto Rico" Association of Sugar Producers of Puerto Rico p. 50. Smith, Dudley, (1967) "Why Sugar Factories Have Closed in Puerto Rico" Sugar y Azucar, November, pp. 30-31. Price Waterhouse (1992) "Projecto de Reestructuracion de La Corporacion Azucarera de Puerto Rico" Volumenes I y II. Rivera, Eduardo Medina and Rafael L Ramirez (1994) "Del canaveral a la fabrica," Library of Congress Catalog Number: 85-8018, ISBN-78-0. Suarez, Nydia R. (1998) interviews with representatives of the Government of Puerto Rico and the sugar industry during recent trip to Puerto Rico. U. S. Department of Commerce (1992) "Characteristics of Agriculture in Puerto Rico," Bureau of the Census, Washington, D.C. U.S. Department of Commerce (1979) "Economic Study of Puerto Rico," Washington, D.C. Williams, Byron (1972) "Commonwealth, State, or Nation?" New York: Parents' Magazine Press, pp. 53-55. Implications of NAFTA Duty Reductions for the U.S. Sugar Market By: Patrick D. Henneberry and S.L. Haley 7/ ---------- 7/ Henneberry is an executive vice-president of the Louis Dreyfus Sugar Company, and Haley is an economist with the Economic Research Service. ---------- Abstract The U.S. sugar market is protected from offshore imports by a tariff-rate quota. The second-tier duty that protects the market is subject to trade pact negotiated reductions. Negotiations under the North American Free Trade Agreement (NAFTA) allow for an accelerated reduction in the second-tier duty for Mexico. These reductions go far enough to raise the possibility of significant imports from Mexico outside of the tariff-rate quota over the next several years. This could have the effect of reducing or limiting prices of raw and refined sugar in the U.S. market. It could also introduce more price volatility into the market and cause the loss of quota allocations to quota holding nations. Possible remedies for this are available under Section 8 of NAFTA, or through anti-dumping suits against individual importers. It is important that industries on both sides of the border consider the implications of these duty reductions when making long range decisions. Keywords: U.S. sugar program, NAFTA, GATT, duties, sugar, imports, second-tier duty, trade. Industry and government leaders in both Mexico and the United States have spent much time thinking about and debating the North American Free Trade Agreement (NAFTA) on sugar. Most of the discussion has concentrated on the general terms of the agreement and whether the side letter to NAFTA is a bidding part of the agreement. While these are important matters, there is another, less often discussed, facet of the NAFTA that may also have profound effects on the U.S. market in the next several years--the agreed reductions in the high rate duty for Mexico. The tariff-rate quota (TRQ) that limits imports into the United States from offshore sugar producers protects the U.S. sugar market. Quota allocations are given to a list of quota-holding countries which allow the import of specific quantities of sugar produced in those nations at a first-tier duty rate which ranges from 0 to 0.625 U.S. cents per pound. Imports of sugar above those allocated quantities from quota holding nations, or from other nations, are subject to a second-tier duty. This duty has been, for the most part, high enough to make such imports prohibitively expensive and thus make the allocated quota a quantitative limit on imports into the U.S. market. There have been small amounts of specialty products imported under this duty structure, but the total quantities have been small enough to be completely insignificant in the broader market for sugar in the United States. The second-tier duty is subject to negotiated reductions under the General Agreement on Tariffs and Trade (GATT) and NAFTA trade agreements. NAFTA allows a particularly rapid reduction in the second-tier duty for Mexican sugar over the next several years. Table 1 shows the duty rate applicable for imports of raw and white sugar from Canada, Mexico, and most other nations.8/ ---------- 8/ A more complete discussion of U.S. sugar import duties written by Ron Lord can be found on pages 16 and 17 of the December 1995 Sugar & Sweetener Situation and Outlook Yearbook. ---------- The importance of these reductions in the second-tier duty is that sugar imports into the United States paying these duties become profitable at higher world price levels. This could undermine the effectiveness of the allocated sugar quota as a quantitative limit to imports. To determine the world price at which imports would become feasible it is necessary to put the prices in comparable formats and calculate the costs of moving sugar from Mexico to the United States. World market prices are quoted Free on Board, Stowed and Trimmed (FOBST) in the buyer's vessel at the loading port in the country of origin. U.S. market prices are quoted and delivered (including the cost of discharging into buyer's warehouse) to the United States on a Cost, Insurance, Freight, Duty Paid (CIFDP) basis. Comparing these prices requires the addition of the costs of moving the raw sugar from the country of origin to the United States, to the prevailing price at origin. In the case of Mexico, an estimate of these expenses is 1.50 U.S. cents per pound. This expense covers freight, stevedoring, weighing and sampling, insurance, interest expense, and other costs of moving the raw sugar to the United States. This may vary somewhat from year to year with the freight market, but should be representative for our purposes. Another factor to consider in comparing the prices for raw sugar is the polarization and quality differentials that prevail in the market. 9/ ---------- 9/ Polarization is a measure of sucrose concentration based on its ability to rotate the plane of polarized light. The degree of polarization indicates the percentage of sucrose in raw cane sugar and white refined sugar. ---------- For simplicity, this analysis assumes that there are no quality premiums or discounts other than polarization. Polarization premiums are paid at origin on the FOBST price. Polarization premiums are paid in the United States on the full CIFDP price. The duty paid when importing Mexican sugar into the United States is adjusted for the polarization on a sliding scale. The result is that there is a polarization credit of the difference between the CIFDP price in the United States and the FOBST price in the world that will accrue to the importer. This credit, at 7.50 U.S. cents per pound for world sugar and 22.00 U.S. cents per pound for U.S. sugar is approximately 0.40 U.S. cents per pound. The net cost of moving raw sugar from Mexico to the United States is then approximately 1.10 U.S. cents per pound. The situation is similar for refined sugar. World prices are quoted FOBST country of origin in buyer's vessel. U.S. prices are quoted delivered to the buyer's plant. For the purpose of this illustration, the delivery point is assumed to be Chicago. The cost of moving refined sugar from Mexico to the United States is approximately 3.50 U.S. cents per pound. This includes charges for freight to the U.S. Gulf, discharging, weighing and sampling, breaking bags and re-loading into bulk railcars, and transportation charges to Chicago. For illustrative purposes, representative prices for U.S. raw sugar at 22.00 U.S. cents per pound, and $29.50 per hundredweight for refined sugar will be used. From these prices we must deduct costs of delivery to the United States and further deduct the duty applicable in each year. The result is the world price at which imports will become competitive with U.S. market prices. Table 2 shows these prices for each of the next 10 years given the assumptions above. As can be seen in table 2, world priced raw sugar exports from Mexico become competitive at higher and higher prices in coming years. To see what type of exposure this may mean for U.S. producers, one need only look at the prices of world raw sugar for the past 12 years. Figure 1 shows monthly futures prices for the nearby delivery month of Board of Trade of the city of New York No. 11 sugar futures from 1985 to the present. World raw sugar prices have ranged between 5.00 and 16.00 U.S. cents per pound during this period. Most of the price history was spent between levels of 9.00 and 13.00 cents per pound. Prices in the current year have dipped below 7.00 cents per pound and are just above 8.00 cents per pound in late 1998. Given normal volatility of sugar prices, over quota imports of Mexican raw sugar are not out of the question for 1999 and seem to be quite likely after the turn of the century. The situation is similar for refined sugar. Prices are currently trading around $235 per metric ton (mt) in world markets, a price that is competitive in the U.S. market in 1999 at currently prevailing U.S. prices. The price range for refined sugar on an historical basis is also such that U.S. producers should expect competition from Mexican sugars in the coming years. It is estimated that the cost of production of raw sugar in many of the major exporting countries is between 8.5 and 9.00 cents per pound. Costs of producing refined sugar range from about $45 to $75 per metric ton or 2.00 to 3.50 U.S. cents per pound in various countries. Constantly devaluing currencies are applying downward pressure on these dollar denominated costs of production. The prices that will allow competitive access into the United States after the year 2000 for either raw or white sugar are thus prices at which efficient sugar producers in many nations would be encouraged to expand production. Thus, world prices would not be expected to remain above the ranges shown in table 2 for extended periods of time. Refined imports may require significant discounts to U.S. prices before industrial users are tempted to buy Mexican sugar instead of domestic sugars from their traditional suppliers. U.S. refined sugar is of extremely high and uniform quality. There is considerable concern among U.S. industrial buyers that Mexican sugar does not consistently meet the same standards as U.S. sugar. While this may be true at this point in time, Mexican refiners can make the necessary changes to their processes and assure a consistent high quality as the market in the United States expands. There is also a concern about extending the supply chain to distant Mexican suppliers. The time necessary to deliver sugar from Mexico is much longer than from domestic suppliers. While this will always be the case, expanding volumes will give the economic incentive necessary to devise ways to shorten the time and establish distribution channels which will satisfy these buyers' concerns. The impact of over-quota imports on domestic prices is more difficult to ascertain. Certainly over quota imports could act as a cap on U.S. prices in any given year. If U.S. prices rise, the world price at which Mexican sugar can be competitive will also rise. If U.S. prices rise enough, Mexican sugar could flow into the United States and limit the upward price movement. If world prices are low enough, Mexican imports could push U.S. prices lower in a given year. Another effect of Mexican over-quota imports could be to reduce the quantity of traditional quota allocated to quota-holding nations. The U.S. Department of Agriculture (USDA) currently administers the import quota by setting the TRQ at the beginning of the fiscal year. The USDA makes available an initial amount for allocation by the U.S. Trade Representative. Three TRQ tranches are allocated in January, March, and May if the ending fiscal year stocks-to-use ratio projection, as published in the USDA's World Agricultural Supply and Demand Estimates report in those same months, is equal to or below 15.5 percent. If Mexican over-quota imports enter the market, they will be counted as an addition to supply in the U.S. market. If the quantity imported were large enough to cause the stocks-to-use ratio to exceed 15.5 percent, one of the additional tranches of quota would be lost. The impact of this falls on the offshore quota-holding producer. Their access to the U.S. market at quota prices would be replaced by Mexican sugar at world prices. The U.S. Treasury would be the beneficiary of the quota rent on this quantity through the payment of the second-tier duty. The constriction of the quota supply would have the effect of putting upward pressure back on U.S. prices. The United States has agreed under GATT that it will allow a minimum of 1.256 million short tons of sugar to be imported under its TRQ. If over-quota imports grew to a point that the amount of quota sugar needed was less than this amount, U.S. prices could come under significant pressure. This does not seem likely to be a significant threat in the next several years. Pressure could also be brought to bear on U.S. prices if Mexican sugar entered the market after the last of the increased quota allocations had been allocated in May. At that point the USDA would have already allocated enough sugar to meet the needs of the U.S. market through the quota, and more imports would increase supplies and reduce prices. As world prices are considerably more volatile than U.S. prices, over-quota imports could add to price volatility in the domestic market. Refiners and industrial buyers will have to follow world price movements more closely for points of interaction with U.S. prices. We have already seen ways in which prices could move lower or be limited by world price movements. Prices could also go up as a result of world price movements. For example, consider a case where the world market dipped to levels low enough to cause over-quota sugar to be sold into the U.S. and news of these sales caused a quota tranche to be canceled. A subsequent rally in world market prices could cause the sellers of Mexican sugar to buy U.S. quota sugar and re-sell the Mexican sugar to other destinations in the world with a net profit between the two transactions. The U.S. market could be left under-supplied for a short period and prices could rise sharply. Participants on all sides of the U.S. market will have to follow developments in world prices much more closely in the years to come. There are remedies, other than price, which could be employed to limit the amount of over-quota sugar that would enter the market. Chapter eight of NAFTA provides for emergency relief one time during the transition period ending in 2008. If Mexican sugar imports grew large enough to cause damage to the U.S. industry, the United States could suspend the duty reductions on Mexican sugar, or increase the duty back to the Most Favored Nation (MFN) rate in effect at the point of injury or to the MFN rate prior to the beginning of NAFTA. This is a volume-based safeguard and would require imports to grow significantly enough to cause damage to the U.S. industry before the protest could be made. Anti-dumping duties are another remedy to limit the entry of over-quota sugar. These duties are based on the idea that an individual foreign supplier is selling sugar into the United States at prices which are lower than they sell in their own market. Anti-dumping remedies require the injured industry to prove that dumping has occurred and that it has or threatens to cause an injury to the domestic industry. If a remedy is imposed, imports from the company that was dumping will be subject to additional duties that will presumably eliminate the profit potential from the dumping. This is a price-based remedy and is against an individual foreign company. It could take a considerable period of time before this type of action would stop all Mexican suppliers. The specifics of both NAFTA emergency actions and anti-dumping penalties are quite complex and beyond the scope of this article. The interested reader should consult the NAFTA documents and the International Trade Commission for more information. The erosion of NAFTA duties will likely expose the U.S. market to imports outside of the usual quota mechanism in the coming years. Offshore quota holders are likely to suffer a declining volume of quota allocations. Prices in the U.S. market are likely to be somewhat more volatile as a result of the interaction of U.S. and world prices. Prices for domestic sugars are likely to meet resistance to upward moves as the second-tier duty continues to be reduced. Producers and consumers of sugar alike would be well advised to begin to follow developments in the world market more closely in coming years. List of Tables World Production, Supply, and Distribution 1. World production, supply, and distribution, centrifugal sugar World and U.S. Sugar and Corn Sweetener Prices 2. World refined sugar price, monthly, quarterly, and by calendar and fiscal year 3. World raw sugar price, monthly, quarterly, and by calendar and fiscal year 4. U.S. raw sugar price, duty fee paid, New York, monthly, quarterly, and by calendar and fiscal year 5. U.S. wholesale refined beet sugar price, Midwest markets, monthly, quarterly, and by calendar and fiscal year 6. U.S. retail refined sugar price, monthly, quarterly, and by calendar and fiscal year 7. U.S. spot price for HFCS-42, Midwest markets, monthly, quarterly, and by calendar and fiscal year 8. U.S. wholesale list price for glucose syrup, Midwest markets, monthly, quarterly, and by calendar and fiscal year 9. U.S. wholesale list price for dextrose, Midwest markets, monthly, quarterly, and by calendar and fiscal year 10. U.S. producer price index for HFCS and sugar, monthly 11. U.S. consumer price index for sugar and selected sweetener-containing products U.S. Sugar Supply and Use 12. U.S. sugarbeet crops: Area planted, acres harvested, yield per acre, and production, by State and region 13. U.S. sugarcane: Area, yield, production, output, recovery rate, and sugar yield per acre, crop years 14. U.S. beet and cane sugar production (including Puerto Rico), fiscal year and share of total 15. U.S.sugarbeet area, yield, and production, 1990-1998 16. U.S. production of beet sugar and cane sugar by State, monthly, quarterly, fiscal, calendar, and crop year 17. U.S. cane and beet sugar deliveries, monthly, quarterly, and by fiscal and calendar year 18. U.S. sugar deliveries for human consumption by type of user, quarterly and calendar year 19. U.S. sugar imports under tariff-rate quota (TRQ), by country 20. U.S. sugar stocks held by primary distributors, by quarters 21. U.S. sugar (including Puerto Rico) supply and use, fiscal year Corn Sweetener Supply, Use, and Trade 22. U.S. wet-milled use of field corn, crop year 23. U.S. high fructose corn syrup (HFCS) deliveries, quarterly, fiscal, and calendar year 24. U.S. high fructose corn syrup (HFCS) production, quarterly, fiscal, and calendar year 25. U.S. high fructose corn syrup (HFCS) supply and use, calendar year 26. Net cost of corn starch to U.S. wet-millers, Midwest markets 27. U.S. corn sweetener exports to Mexico and Canada, fiscal years 1992-98 28. U.S. corn sweetener imports from Mexico and Canada, fiscal years 1992-98 29. U.S. HFCS trade with Mexico and Canada, monthly 1989-98 U.S. Imports of Sugar Syrups 30. U.S. total imports of sugar syrup, harmonized tariff code 1702.90.4000, monthly 1994-98 U.S. Costs of Production 31. Sugar beet production cash costs and returns, 1996-97 32. Sugar beet production economic costs and returns, 1996-97 Special Article Tables A1. Current Mill Ownership, Capacities, and Average Raw sugar Production A2. Trend Growth in Area Harvested for Sugar, 1993-97 A3. Growth in Mexican Sugar Yield Per Hectare, by Factory and Current Owner, 1987-97 A4. Growth in Mexcian Sugar Yield Per Hectare, by State, 1987-97 B1. Puerto Rico: Leading commodities for cash receipts B2. Puerto Rico: Sugarcane area harvested by municipalities, 1992 rank B3. Puerto Rico: Sugarcane for sugar, number of farms, by municipalities, 1992 rank B4. Puerto Rico: Sugarcane for sugar, average size of farms, by municipalities, 1992 rank B5. Puerto Rico: Sugarcane acreage, production, and yield B6. Puerto Rico: Sugarcane manufacturing data B7. Puerto Rico: Sugacane mill capacity B8. Puerto Rico: sugarcane milling production and molasses production, by mill B9. Puerto Rico: Sugar Production (field costs) B10. Puerto Rico: Sugar processing (factory costs) B11. Puerto Rico: Sugar production and processing costs C1. Selected Sugar Tariffs of the United States C2. U.S. Price Vulnerabilities to Mexican Imports under Second-Tier Tariffs List of Figures Figure 1. U.S. Raw Sugar Prices Figure 2. World and U.S. Raw Sugar Prices Figure 3. U.S. Beet and Cane Sugar Production Figure 4. U.S. Wholesale Refined Beet Sugar Prices Figure 5. U.S. Sugar Production and Net Imports Figure 6. U.S. Sugar Consumption Figure 7. Ratio of HFCS-42 Spot Price To the Beet Sugar Price Figure 8. U.S. HFCS-55 Exports to Mexico by Quarter Special Article Tables Figure A-1. Raw Monthly Sugar Prices, 1993-1998 Figure A-2. White Sugar Prices, 1993-98 Figure A-3. Mexican Sugar Market with No Import Restrictions Figure A-4. Mexican Sugar Market with Tariff Quota Figure B-1. Puerto Rico: Sugarcane Production Figure B-2. Puerto Rico: Sugarcane Area Harvested for Sugar Figure B-3. Puerto Rico: Weather Normals in Sugarcane Growing Area (Mayaguez) Figure B-4. Puerto Rico: Sugarcane Yields Per Acre Figure B-5. Puerto Rico: Sugar Yield Per Ton of Cane Milled Figure B-6. Puerto Rico: Sugarcane Mill Capacity and Number of Mills in Operation Figure C-1. Monthly No.11 nearby futures prices Autofax Access to Sugar-Related Data (ERS) From your fax machine, call (202) 694-5700 and listen to voice prompts to have the following documents automatically downloaded to your fax machine. You may request up to three documents in one phone call. Directory Identification Numbers and Titles: Sugar and Sweeteners: 12626 World Agricultural Supply and Demand Estimates for Sugar 12627 3 pages (1) Wholesale refined beet sugar prices, Midwest market, 1960-present, monthly, quarterly, annual, fiscal (2) U.S. raw sugar price, duty-fee paid, New York, 1960-present, monthly, quarterly, annual, fiscal (3) U.S. retail refined sugar prices, 1975-present monthly, quarterly, annual 12628 5 pages (1) Wholesale list prices for HFCS-42, Midwest market, 1975-1995. monthly, quarterly, annual,fiscal (2) Wholesale list prices for HFCS-55, Midwest market, 1981-1995, monthly, quarterly, annual, fiscal (3) Wholesale list prices for glucose corn syrup, Midwest market, 1975-present, monthly, quarterly, annual, fiscal (4) Wholesale list prices for dextrose, Midwest market, 1975-present, monthly, quarterly, annual, fiscal (5) U.S. producer price index for HFCS and sugar, monthly, annual, 1986-present 12629 2 pages (1) World raw sugar prices, 1960-present, monthly, quarterly, annual, fiscal (2) World refined sugar prices, 1980-present, monthly, quarterly, annual, fiscal 12630 2 pages (1) U.S. and world sugar prices starting 1990-present, monthly, quarterly, annual, fiscal 12631 3 pages (1) Net cost of corn starch to U.S. wet-millers, Midwest markets, 1985-present 12632 3 pages (1) U.S. Sugar (including Puerto Rico) supply and use, fiscal years, 1980/81-present 12633 10 pages (1) The Beet Sugar Industry of Minnesota and North Dakota: Current Situation and Prospects, by Ron Lord, September 1994 Sugar and Sweetener Situation and Outlook Report 12634 Text Boxes, Graphs, and Tables, September 1997 S&O Report, 10 pages "HFCS Trade Dispute With Mexico", by Jacqueline Salsgiver; "Origin of the U.S. Sugar Import Tariff-Rate Quota Shares", by Nydia Suarez; and "Changing Structure of the U.S. Refined Sugar Market", by Ron Lord and Robert Barry, September 1997 Sugar and Sweetener Situation and Outlook Report For more information on specially crops, contact the following subject matter specialists: Sugar & Sweetener: Fannye Jolly, (202) 694-5249 Vegetables: Gary Lucier (202) 694-5253; Tobacco: Tom Capehart (202) 694-5311 Fruit & Tree Nuts: Susan Pollack (202)694-5251 & Agnes Perez (202)694-5255 Industrial Uses and Alternative Agriculture: Lewrene Glaser (202) 694-5246 Internet Access to Sugar-Related Data Home Pages Main Data Directory: http://usda.mannlib.cornell.edu/cgi-usda/agency.cgi?ers U.S. Department of Agriculture (USDA): http://www.usda.gov Economic Research Service (ERS): http://www.econ.ag.gov Office of the Chief Economist, USDA: http://www.usda.gov/agency/oce/ World Agricultural Outlook Board (WAOB): http://www.usda.gov/agency/oce/waob/waob.htm National Agricultural Statistics Service (NASS): http://www.usda.gov/nass/ Foreign Agricultural Service (FAS): http://www.fas.usda.gov/ Reports ERS Sugar & Sweetener Situation and Outlook Reports (including text of Reports): http://usda.mannlib.cornell.edu/reports/erssor/specialty/sss-bb ERS Sugar Yearbook Data (September 1998): http://usda.mannlib.cornell.edu/data-sets/specialty/89019/ Sugar Statistical Compendium (1991): http://usda.mannlib.cornell.edu/data-sets/specialty/91006/ U.S. Corn Sweetener Statistical Compendium (1993): http://usda.mannlib.cornell.edu/data-sets/specialty/94002/ Farm Sector Cost of Production: Sugarbeets: Analysis, 1996-97: http://www.econ.ag.gov/briefing/fbe/car/beets2.htm Data, 1981-97: http://www.econ.ag.gov/briefing/fbe/car/beets3.htm Sugarcane: Analysis, 1995-96: http://www.econ.ag.gov/briefing/fbe/car/cane2.htm Data, 1981-96: http://www.econ.ag.gov/briefing/fbe/car/cane3.htm World Agricultural Supply and Demand Estimate Report (WASDE): http://www.usda.gov/oce/waob/wasde/wasde.htm February 1998 Outlook Forum: http://www.usda.gov/oce/waob/outlook98/98speeches.htm Sugar: U.S. Sugar Re-export Programs, Foreign Agricultural Service (FAS): http://www.fas.usda.gov/htp/sugar/sugarpg.html Foreign Agricultural Service Report from Foreign Countries (includes sugar reports): http://www.fas.usda.gov/scriptsw/AttacheRep/attache_frm.idc Sweetener Market Data, Farm Service Agency (FSA): http://www.fsa.usda.gov/ao/epas/dsa/sugar/coversu.htm END_OF_FILE