1. Sugar Policy in the United States: Pressures For Reform, Lessons From Europe German Marshall Fund November 10, 2005 Thomas Earley Executive Vice President

2. German Marshall Fund 1 US &EU: The Sugar Policy Twins The similarities  Arguably the most policy-distorted agricultural sector  High level of support for sugar industry via tariff rate quotas and other provisions  Preferential quotas for foreign suppliers  Production or marketing quotas  Both under intense international pressure to reform The differences  Degree of support – EU more generous  US has both cane and beet, and major refining industry  EU subsidizes exports in a major way

3. German Marshall Fund 2 NAFTA/WTO FTA’S Sugar product imports New Farm Bill Provisions 2008 Cost/price Squeeze US sugar is winning battles … … but losing the war.

4. German Marshall Fund 3 Pressures on the US sugar program Dysfunctional program, repeated market imbalances, limited policy tools Prospect of free trade with Mexico in 2008 Declining real support price Marginal profitability at farm level Adverse effects of hurricane damage Eroding demand structure Doha and FTA pressures Isolation after peanut/tobacco reforms, CAFTA Federal budget concerns

5. German Marshall Fund 4 US needs to import 2.5 million tons Deliveries for food use Production Structural deficit (right axis) 10 -7.5 =2.5

6. German Marshall Fund 5 US prices reflect current problems Refined beet, fob Midwest Raw cane, #14 futures

7. German Marshall Fund 6 Second tier duties on raw sugar

8. German Marshall Fund 7 Inflation is eroding real support level All ag commodity prices are declining in real terms Productivity growth mostly keeping up Commodity ingredients becoming smaller portion of retail price 18 cents in 2000 will be 13.4 cents in 2010 in real terms with 3% inflation rate

9. German Marshall Fund 8 Erosion of net returns above total cost

10. German Marshall Fund 9 Refined sugar Corn sweeteners

11. German Marshall Fund 10 US imports of sugar in products topped 1.3 million short tons last year

12. German Marshall Fund 11 Can US avoid granting more sugar access? Thailand 3 mmt net exports SACU 1 mmt net exports Andean 2 mmt net exports Doha? FTAs

13. German Marshall Fund 12 Real change just 2-3 years away 0404 0608 ----- Doha Agreement? ---- EU implements WTO panel ---- Doha Effects? NAFTA free trade ---- EU sugar review ---- US Farm Bill ---- Everything but Arms ---- 070509 ----- US market disruption

14. German Marshall Fund 13 The European Commission proposal 40% price cut by mid-2007 Beet growers to get decoupled payments covering 60% of price cut Buyout of inefficient sugar processors over 4 years via a $5.4 billion restructuring fund Merging of A, B and C quotas into single quota Doubling of isoglucose quota to 600,000 mt Eventual elimination of most subsidized exports €40 million compensation to ACP countries for 43% cut in their price to €303 or 16.5 cents/lb Sugar regime extended through 2014/15

15. German Marshall Fund 14 Commission proposed 39% support cut €/mt

16. German Marshall Fund 15 2004 sugar prices US cents/lb Source: LMC International

17. German Marshall Fund 16 Expected impacts Production expected to decline from 20 million mt to 12 million by 2012/13 Imports increase from 2.3 million tons to 3.9 million, mostly due to EBA initiative EU goes from being net exporter of 3+ million tons to net importer of 3+ million tons Net expenditures remain at about €1 billion/year Major opportunity for other white sugar exporters But some ACP suppliers reduce production and exports due to lower price

18. German Marshall Fund 17 Who’s competitive in EU, who’s not? Who’s competitive, who’s not?

19. German Marshall Fund 18 Reform impacts will vary by country

20. German Marshall Fund 19 Effect on current ACP suppliers Source: Paul Ryberg

21. German Marshall Fund 20 Latest developments 11 member states rejected proposed reforms  Finland, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Poland, Portugal, Slovenia, and Spain WTO arbitrator rules EU must comply with panel decision by May 22, 2006  Case brought by Brazil, Australia and Thailand  Must cut subsidized exports from 5 mmt to1.3 mmt  Must cut export subsidies 75% to 0.5 billion euros But there is no guarantee any of this will happen on schedule Next decision point: Council meeting this month

22. German Marshall Fund 21 Implications for US Example of major EU change adds pressure The “level playing field” argument changes Buyout of factories and decoupled producer payments serve as examples Role of preferential quotas reduced and more US quota holders will get out of sugar production Increased potential for US refined sugar exports Any further strengthening of the dollar magnifies the implications

23. German Marshall Fund 22 Refined sugar in cents per pound US cents/lb World market US beet, fob EU support level