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Global Sugar Policy Reform

Global Sugar Policy Reform. John Beghin and Amani El-Obeid Economics and CARD Iowa State University. Silverado Symposium on Agricultural Policy Reform University of California Agricultural Issues Center January 19-20 2004. Outline. Introduction Structure of US sweetener industries

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Global Sugar Policy Reform

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  1. 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

  2. Outline • Introduction • Structure of US sweetener industries • Impact of global liberalization • Political economy of sugar policy • US trade & domestic policy challenges • EU trade & domestic policy challenges • Possible domestic solutions • Conclusions

  3. 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

  4. Introduction -OECD support(99-01)

  5. 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

  6. 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

  7. 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

  9. 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

  10. 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 tariff=0 and 5 mmt production potential). HFCS & side-letter disputes

  11. 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 commitment=1.38 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

  12. 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 (A+B quota sugar, C sugar exports, export subsidies)

  13. 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)

  14. 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 payments=outlays • Compensation for preferential trade partners via slow phase out of higher prices and accelerated access. A larger issue than just sugar policy

  15. 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?

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