Trade Disputes in an Unsettled Industry: Mexican Sugar

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Trade Disputes in an Unsettled IndustryMexican
Sugar
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Sugar cane production is concentrated in the
warmer areas of Central Mexico
Source Rabobank from SAGARPA data
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Consumption of sugar by major use categories2000
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Background to conflict

• Private management and government intervention
• Early attempts to regulate market
• Growth from WWII to the 1960s
• Price controls
• Decreto cañero
• Contrato Ley
• Government management of the mills (1970 1988)
• Profits squeezed
• Government rescues mills control goes from19 to
  49 out of a total 66
• Productivity falls in mills and campo (4.1 ha.)
• Subsidies grow
• Mexico shifts from net exporter to net importer

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Background to conflict

• Government sells the mills (1988 - 1992)
• Policy moves to more market orientation
• Budgetary concerns also forces sales of state
  assets
• Mills sold in highly leveraged operations up to
  80
• Implicit understanding that tight controls over
  domestic prices
• Yet, imports grew depressing mills sending them
  anew into crisis
• Government support to mills to pay cañeros
• Interest rates following economic crisis and debt
  grows

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NAFTA

• Mexico negotiates structural change
• U.S. and Canada negotiate trade agreement
• Mexico negotiations sugar sector
• U.S. Negotiates sweetner sector
• Mexico net importer of sugar
• U.S.net importer of sugar
• Mexico and U.S. protect domestic markets
• Low level of HFCS trade

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Mexicos foreign trade in sugar(million dollars)
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NAFTA from agreement to confustion

• Net production surplus the side letters
• English
• definition shall include consumption of high
  fructose corn syrup provided for in
• Spanish
• la determinación deexcedente de producción
  netoincluirá para efectos de Sección A del Anexo
  Anexo 703.2, fructosa de maíz, descrita...
• NPS
• U.S. Psugar (Consumptionsug
  ConsumptionHFCS)
• Mexico (PsugarPHFCS) (Consumptionsug
  ConsumptionHFCS)
• Letter not ratified by Mexican senate
• Mexicos quota en years 7 14 fixed at 250,000
  MT or up to 250,00
• Similar to corn discussions
• Mexico goes to panel

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NAFTA from agreement to confrontation HFCS

• U.S. surplus corn producer
• Government supports (aka subsidies) for corn
• HFCS capacity grows
• Displaces sugar in carbonated beverages
• Limited opportunities for HFCS in other food
  products
• Lacks sparkle
• Excess capacity looks for new markets
• Did it grow looking to Mexico?
• Mexico initiates dumping demand
• U.S. loses and goes to panel

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Mexicos imports of HFCS
Imports of HFCS (55) (000 mt)
Source Rabobank with data from the Secretaria de
Economia
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Sugar cane area(000 ha.)
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Sugar cane yields(tons per ha.)
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Sugar cane production(Million mt)
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Sugar production(Million mt)
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Sugar production per hectare(Million mt)
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Efficiency varies greatly from company to
companyTime lost in mills
Average
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Recent events

• Consolidation of the milling sector of the
  industry
• GAM goes into default
• 2001 found the domestic market in disarray
• Low domestic prices
• Dumping of sugar on domestic market
• SAGARPA under state of siege by cane growers and
  threats by mill workers
• Mills of four companies expropriated
• Government sets up agency to run mills and to
  eventually privatize them

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2001 Mexican sugar prices
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Seasonal nature of Mexicos sugar harvest(mt per
week)
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Recent events (cont.)

• Congress enacts excise tax on HFCS used in soda
  pop
• Congress flexing muscle
• Frustrated with slow pace is resolving dispute
• Upset with SE decision to negotiate
• Cañeros strength in Congress
• National Sugar Policy (Feb. 2002)
• Bring order to the market
• Mixed capital export company
• Inventory financing
• Modernize market
• Contrato Ley
• Decreto cañero
• Temporary suspension of HFCS tax
• Steel for HFCS?
• Until Sep. 30
• Criticized by industry and Congress

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The future 2and tier tariffs

• Allows for free imports of sugar paying declining
  tariffs
• U.S. WTO sugar quota
• Trade policy, foreign policy or subsidies for
  holders of quotas
• Imports of sugar paying tariffs will displace
  quota sugar
• USDA baseline projection document raises question
  of dumping of Mexican sugar

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Over quota tariffs for imports of Mexican sugar
into the U.S.(cents per pound)
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NAFTA high-tier Mexican sugar exports to the U.S.
Source Rabobank from USDA baseline projections
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NAFTA high-tier Mexican sugar exports to the U.S.
U.S. WTO import commitment
Source Rabobank from USDA baseline projections
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U.S. sugar prices (cents per pound)
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The future 3 scenarios

• U.S.opens market to sugar imports
• As Mexican imports grows U.S. recognizes that
  they cant compete
• Abandons all supports rather than support Mexican
  industry
• 3rd party countries displace Mexican producers
• Creation of NAFTA sugar market
• Mexico sugar displaces quota sugar
• U.S. holders, and others, invest in Mexican mills
• Minimal domestic pain
• HCFS south and sugar north happy corn growers
  and share holders
• U.S. refuses to open border

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The future Spoilers

• Cuba
• Life after Castro
• FTAA
• Brazil takes over the market (4 cents lbs. break
  even)

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U.S. and Mexican refined sugar prices(cents per
pound)