1. 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

2. 2 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

3. 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. 4 Introduction -OECD support (99-01) region/country Producer support million US$ producer nominal assistance coefficient Support from Border Protection (%) OECD 63512.11 Australia 511.110 Czech Republic 161.2547.6 E.U. 27132.1191.7 Hungary 121.241.5 Japan 4372.1788.7 Mexico 7132.183.9 Poland 1762.2892.9 Slovak Rep. 161.9454.7 Switzerland 864.3673 Turkey 7493.0295.8 U.S.A. 13022.3784.3

5. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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?