Trade Disputes in an Unsettled Industry: Mexican Sugar

1. Trade Disputes in an Unsettled Industry:Mexican Sugar

2. Sugar cane production is concentrated in the warmer areas of Central Mexico Source: Rabobank from SAGARPA data

3. Consumption of sugar by major use categories:2000

4. Background to conflict • Private management and government intervention • Early attempts to regulate market • Growth from WWII to the 1960’s • 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

5. 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

6. 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

7. Mexico’s foreign trade in sugar(million dollars)

8. NAFTA from agreement to confustion • Net production surplus – the side letters • English definition “shall includeconsumption of high fructose corn syrup provided for in…” • Spanish “la determinación de´excedente de producción neto´incluirá para efectos de Sección A del Anexo Anexo 703.2, fructosa de maíz, descrita...¨ • NPS • U.S. = Psugar – (Consumptionsug + ConsumptionHFCS) • Mexico = (Psugar+PHFCS) – (Consumptionsug + ConsumptionHFCS) • Letter not ratified by Mexican senate • Mexico’s quota en years 7 – 14 fixed at 250,000 MT or “up to” 250,00 • Similar to corn discussions • Mexico goes to panel

9. 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

10. Mexico’s imports of HFCS Imports of HFCS (55) (‘000 mt) Source: Rabobank with data from the Secretaria de Economia

11. Sugar cane area(‘000 ha.)

12. Sugar cane yields(tons per ha.)

13. Sugar cane production(Million mt)

14. Sugar production(Million mt)

15. Sugar production per hectare(Million mt)

16. Efficiency varies greatly from company to company:Time lost in mills Average

17. 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

18. 2001 Mexican sugar prices

19. Seasonal nature of Mexico’s sugar harvest(mt per week)

20. 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

21. 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

22. Over quota tariffs for imports of Mexican sugar into the U.S.(cents per pound)

23. NAFTA high-tier Mexican sugar exports to the U.S. Source: Rabobank from USDA baseline projections

24. NAFTA high-tier Mexican sugar exports to the U.S. U.S. WTO import commitment Source: Rabobank from USDA baseline projections

25. U.S. sugar prices(cents per pound)

26. The future: 3 scenarios • U.S.opens market to sugar imports • As Mexican imports grows U.S. recognizes that they can’t 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

27. The future: Spoilers • Cuba • Life after Castro • FTAA • Brazil takes over the market (4 cents lbs. break even)

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