Assessing the impact of the sugar programme on the US economy

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  • Food Policy 1994 19 (5) 443-457

    Assessing the impact of the sugar programme on the US economy

    Noel I) Uri Commodity Economics Division, Economic Research Service, US Department of Agriculture, Washington, DC, USA

    Roy Boyd Department of Economics, Ohio University, Athens, OH, USA

    This study examines the effect of the sugar tariff-rate import quota program on the United States economy. Based on a computable general equilibrium model, the analysis suggests that a complete elimjnation of the sugar program would reduce output for all producing sectors by about $2.85 billion. For producing sectors besides the agriculture programme crops, crude oil and petroleum refining sectors, output would increase by about $2.98 billion. Additionally, there would be an increase of about $197 million and $121 million in the consumption of goods and services and in welfare respectively. The government sector would realize a reduction in revenue of about $15 million.

    Keywords: agricultural policy, compatible general equilibrium modefling, sugar

    Introduction

    Since 1789 the United States has had some sort of sugar programme (Schmitz, Allen and Leu, 1984). It was originally intended to raise revenue, but later evolved into a strategy mainly to protect domestic sugar cane and sugar beet producers from foreign competition. In recent times, the programme has taken the form of a support price with domestic market quota allocations administered by the US Department of Agriculture (USDA). In addition, country-by-country quotas are imposed which result in the domestic price of sugar being above support levels thereby avoiding any direct cost to the United States government.

    The current US sugar programme has had a number of effects. One is that it has created a complicated picture of the caloric sweetener market in the United States. Besides sucrose (ie sugar), the caloric sweetener market consists of glucose, dextrose and high fructose corn syrup (HFCS). The dominant caloric substitute for

    A small tariff exists for countries outside the Caribbean. These are listed in the Harmonized Trade Schedule of the United States, Chapter 17.

    The views expressed are those of the authors and do not necessarily represent the policies of the organizations with which the authors are affiliated,

    03~~-9192/94/050443-15 0 1994 ~utterworth-Heinemann Ltd 443

  • Impact of the sugar programme on the US economy: N D Uri and R Boyd

    80 ,

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    Figure 1 Real domestic and world price of raw sugar, 196C92. 0: US price; +: price.

    world

    Source: Barry et al. (1990) and Economic Research Service (December 1992). The domestic raw sugar prices are c.i.f. duty/fee paid. The world prices are f.o.b. Caribbean, contract number 11. Both price series are in real terms. The gross domestic product implicit price deflator is used in computing the real series

    sugar is HFCS.* Consumption of HFCS has increased dramatically since its introduction in the late 1960s. It has displaced sugar almost entirely in soft drinks based on price considerations alone (Uri, 1993). HFCS has also displaced sugar in other uses, although this has been more limited to technical considerations. Because HFCS is substitutable for sugar in many uses (Moore and Buzanell, 1991; Morris, 1980; Nordlund, 1977; Page and Friend, 1974), the sugar programme directly affects the HFCS market and the corn markets from which the HFCS feedstock is obtained.

    Another important effect of the sugar programme is that it has created a substantial disparity between the domestic and the world price of sugar (Figure l). With such a divergence, there are winners and losers as a result of the programme. Thus, it is important to determine who gains and who loses with the sugar programme and by how much. This is the subject of what follows. The analytical vehicle will be a computable genera1 equilibrium model. Before addressing this,

    Fructose in fact is itself a sugar. It is an excellent substitute for centrifugal (cane and beet) sugar in many uses (Lichts, 1991; Lin and Novick, 1988). In keeping with common usage, however, HFCS will be referred to as a sugar substitute. 3Actually, HFCS can be made from any starch and is produced in some parts of the world from tapioca, sweet sorghum, and sweet potatoes. Rendelman and Hertel (1993) discuss some of the technical considerations involved. 4A discussion of the factors giving rise to the price anomalies in 1963, 1974 and 1980 are analysed in Bohall et al. (1977) and Vuilleumier (1981). A discussion here would take the analysis too far afield.

    444 Food Policy 1994 Volume 19 Number 5

  • Impact of the sugar programme on the US economy: N D Uri and R Boyd

    however, it is useful to understand the nuances of the sugar programme. Subse- quent to this and prior to quantifying the gains and losses associated with the US sugar programme, an overview of the modelling approach will be provided.

    The sugar programme

    The outline of current sugar programme as configured in the Food, Agriculture, Conservation, and Trade Act of 1990 (P.L. 101~624), was set in place in the Food and Agriculture Act of 1981 (P.L. 97-98). Designed to operate at no net cost to the federal government, the sugar programme provides three tools to support domestic sugar prices which are administered by the USDA: {I) a nonrecourse loan, (2) tariff-rate import quota, and (3) standby domestic marketing allotments.

    The loan programme guarantees sugar producers a minimum support price for their sugar. The loan programme, however, must operate without cost to the federal government. Raw cane and refined beet sugar are used as the collateral for loans obtained. The processors use the loan to pay growers for their cane and beets upon delivery to the processing facility. Growers typically receive at least 60 per cent of the loan at delivery. Final payment is made to the grower based on the price at which sugar was sold. When the sugar is sold, the processor repays the loan.

    The loan programme effectively sets the guaranteed price because producers can forfeit, without penalty, their sugar which serves as the collateral for full payment of the loan. Processors may choose to forfeit their sugar rather than repay the loan, if the market price for sugar is not sufficient to recover the additional costs involved in selling the sugar. The programmes provisions of no net cost to the federal government has brought about the use of an import quota to keep sugar price sufficiently high to prevent forfeitures.

    Currently, a tariff-rate import quota is used to restrict the supply of foreign raw cane sugar, and hence, to support the domestic price of sugar. A tariff-rate import quota permits only a limited quantity of sugar to be imported at a low tariff level. Any imports above this level are assessed a relatively high second-tier tariff. Under this system, foreign producers may exceed their quota but any sugar exported to the United States in excess of their quota is assessed a $0.16 per pound tariff. This tariff is high enough to effectively preclude additional sugar exports to the United States.

    The USDA annually estimates the domestic production, quantity demand and the supply needed to keep domestic prices at a level that prevents producers from forfeiting sugar, In consultation with the Sugar Working Group, the USDA then determines the quantity of sugar to import. The Sugar Working Group is composed of representatives of various government agencies with an interest in the sugar programme. The Food, Agriculture, Conservation and Trade Act of 1990 requires that the quota be at least 1.25 million short tons to ensure that sugar cane refiners continue to have access to foreign raw sugar. The quota also enables the federal governmentto meet foreign policy objectives. The US Trade Representative allocates the quota to individual countries that export sugar to the United States.

    If the import quota is met and the price of sugar falls below the forfeiture level, domestic marketing allotments will be used to support prices. These allotments Iimit the quantity of domestically produced sugar and crystallized HFCS that each manufacturer can sell. To administer marketing allotments, marketing rights based

    %omplete descriptions of the sugar tariff-rate import quota program are presented in Barry er al. (1991) and Lord and Barry (1991). This section draws upon these sources.

    Food PO&y 1994 Volume I9 ~urn~~r 5 445

  • Impact of the sugar programme on the US ec~~~rn~: N D Uri and R Boyd

    Table 1. Classitication of producing sectors and consumer goods and services

    Industries Consumer goods

    1. 2. 3. 4. 5. 6. 7. 8. 9.

    10. Il. 12 13. 14.

    Manufacturing Coal mining Other mining Service Chemicals and plastics Food and tobacco products Petroleum refining Financial Forestry Wood products Crude oil and natma gas Agriculture 1 - Program crops Agriculture 2 - Livestock Agriculture 3 -All other agriculture

    1. 2. 3 _ 4. 5.

    3: 8. 9.

    10. 11. 12. 13. 14

    Food Alcohol and tobacco Utilities Furnishings and appliances Housing Clothing and jewellery Transportation Financial services Other services Motor vehicles Gasoline and other fuels Reading and recreation Nondurable household items Savings

    on historical production, ability to market sugar, and production capacity of sugar cane millers and sugar beet processors are used. On June 30 1993, for the first time, the USDA announced market allotments for sugar and crystalline fructose for fiscal year 1993 (Economic

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