Global Sugar Policy Reform

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Global Sugar Policy Reform
John Beghin and Amani El-Obeid Economics and
CARD Iowa State University
Silverado Symposium on Agricultural Policy
ReformUniversity of California Agricultural
Issues CenterJanuary 19-20 2004
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Outline

1. Introduction
2. Structure of US sweetener industries
3. Impact of global liberalization
4. Political economy of sugar policy
5. US trade domestic policy challenges
6. EU trade domestic policy challenges
7. Possible domestic solutions
8. Conclusions

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Introduction -Background

• High OECD support (5-6 billion) fosters
  protection and support in the rest of world. US,
  EU, Japan, Mexico, Turkey with significant to
  prohibitive protection
• 80 of production 60 of trade at prices higher
  than the world price. Preferential regimes affect
  trade patterns
• Production mostly characterized by large farmers
  (except in Mexico) hence concentrated interest
• Complex political economy of interest across
  agriculture, sweetener production, environmental
  and consumers interests

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Introduction -OECD support (99-01)
region/country Producer support million US Producer support million US producer nominal assistance coefficient Support from Border Protection ()
OECD OECD 6351 2.11
Australia Australia 51 1.11 0
Czech Republic Czech Republic 16 1.25 47.6
E.U. E.U. 2713 2.11 91.7
Hungary Hungary 12 1.2 41.5
Japan Japan 437 2.17 88.7
Mexico Mexico 713 2.1 83.9
Poland Poland 176 2.28 92.9
Slovak Rep. Slovak Rep. 16 1.94 54.7
Switzerland Switzerland 86 4.36 73
Turkey Turkey 749 3.02 95.8
U.S.A. U.S.A. 1302 2.37 84.3
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Structure of US sweetener industries

• Beet sugar production vertically integrated and
  concentrated (3 major processing co-ops). Higher
  cost than cane production
• Sugarcane production and raw sugar production
  extremely concentrated. Could survive with
  free-trade prices
• Cane sugar refiners penalized in the net (higher
  prices for raw and refined sugar)
• Efficient large-scale HFCS production helped by
  corn subsidies and sugar prices, penalized by
  NAFTA. About 50 of US sweetener use. HFCS uses
  7.3 of corn output

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Impact of global liberalization

• Consensus view inelastic markets imply world
  price increases by 40 in unfettered markets
• Domestic and trade interventions entangled and
  contributors to distortion effects
• Removing all distortions would raise welfare by
  4-5 billion

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Impact of global liberalization

• Substantial relocation of production (Japan, most
  of EU US beet production zapped)
• Gainers Brazil, Australia, South Africa,
  Thailand(?), other LAC food-processors,
  consumers taxpayers in protected markets
• Losers Protected OECD producers, preferential
  trade partners in LDCs

8
Political economy of US sugar policy

• Domestic interests cane and beet
  grower-processors corn-HFCS pro status quo
  HFCS and NAFTA, food processors, consumers,
  environmental groups independent refiners pro
  free trade.
• Mexican interests HFCS producers pro status quo
  cane farmers cane processors pro NAFTA but not
  free trade consumers food processors pro free
  trade

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Political economy of US sugar policy

• CAIRNS mercantilist interests want free trade
• CAFTA, FTAA, Australia-US FTA sugar interests
  overlap with CAIRNS (except Mexico)
• Preferential trade partners other than CAIRNS,
  especially non-competitive ones oppose trade
  reform

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US trade domestic policy challenges

• 2005 FTAA involves both trade and domestic policy
  reforms. Could flood the US sugar market (14-16
  mmt export potential)
• 2004 CAFTA. Preferential imports up by 85,000 mt
  2-growth for 15 years.
• NAFTA. Increased out-of-quota imports free
  trade in 2008 (out-of-quota tariff0 and 5 mmt
  production potential). HFCS side-letter
  disputes

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US trade domestic policy challenges

• Australia-US FTA. Only border protection. Could
  flood US market as well (4-5 mmt export
  potential)
• New WTO commitments? Current import
  commitment1.38 mt. Reductions in market price
  supports an out-of-quota tariff?
• Allotments vanish if imports exceed 1.53 mt to
  make the program collapse. Farm bill expires 2007

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EU trade domestic policy challenges

• EBA 48 LDCs get free access in 2009 (2.7 mmt
  potential)
• EPAs for 77 ACP countries (3.5-6 mmt export
  potential to EU by 2007)
• Enlargement 2004 higher output, no change in
  trade commitments
• 2004 review of current CAP (AB quota sugar, C
  sugar exports, export subsidies)

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EU trade domestic policy challenges

• Preferential TAs and re-export subsidies under
  attack (Brazil, Australia, Thailand) (1.6 mmt
  export reduction)
• HFCS imports are also restricted
• WTO commitments export subsidies (volume and
  value), import quotas of 1.39 0.45 mmt
• New WTO commitments? 45 reduction in export
  subsidies (0.5 to 1 mmt reduction)

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Compatible domestic (US) solutions

• Program buyout? It works (peanuts and tobacco in
  the US, wine/grapes in the EU)
• With vertical integration, buyout based on PDV of
  profit loss of integrated asset
• 2002 crop programs extended to beet and cane
  (decoupled payments CCP LDP). Current sugar
  envelope in the amber box (1 billion)
• Fiscal concerns. New paymentsoutlays
• Compensation for preferential trade partners via
  slow phase out of higher prices and accelerated
  access. A larger issue than just sugar policy

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Conclusions

• The writing on the wall
• A EU-US (fat) bone to the CAIRNS group?
• Issue of preferential trade compensation
• Budgetary pressures in EU and US will influence
  the domestic policy reforms
• Would Japan and other OECD countries go along?