Impetus, Options and Consequences for Sugar Policy Reform in the United States

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Virginia Tech

Sugar has a long history of being a contentious commodity important in international trade. Initially, the global framework for sugar trade was based on sugarcane, a grass grown in the tropics with trade being dictated largely by the British. In the Napoleonic wars, commercialization of the beet sugar industry arose on the continent in response to and a direct challenge to British control over the industry. The advent of the temperate sugar beet as an alternative to tropical cane in sugar production opened up a north-south trading dynamic that exists to this day.

The United States, although a late entry into sugar production, is now at the forefront of the debate on trade liberalization for sugar, which can be produced more economically and out of greater necessity in a battery of nations, many with developing economies. Between 2003 and 2007, the United States ranked 5th in production, averaging 5% of the world total, and 2nd in total imports averaging 4%. Sugar as a percentage of the total value of the crop in the US is relatively minor at roughly 2.5% of the total putting it well below crops like corn and cotton, on par with tobacco and rice and greater than peanuts.

Currently, the US sugar program operates on a price support system which regulates imports from other countries and provides a price floor for sugar. However, the US Sugar sector is under pressure for reform both by other nations with a comparative advantage in sugar production and from within due to an impending NAFTA commitment that allows for free trade with Mexico in sugar beginning in 2008. With large amounts of Mexican sugar entering the United States, the market price will likely fall below the price floor established by the USDA and there will be large amounts of forfeitures to the Commodity Credit Corporation. This would be in direct violation of the government mandate to keep the US sugar program operating at no government cost.

In this thesis, we lay out a matrix of possible alternative policy scenarios and potential exogenous shocks which could impact the US sugar sector. Using the USDA ERS Sugar and Sweeteners model, we illustrate the outcome of this matrix of policies and exogenous shocks to the biggest players in the North American sugar sector. Policies used in the model draw inspiration from the recent reforms to the sugar sector in the European Union and recent commodity program reforms in the US for peanuts and tobacco. Finally, the implications of various policy reform options are discussed in light of their ambition and likelihood.

Sugar, Policy Reform, Agricultural Trade, Agricultural Policy