1. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Trade Disputes in an Unsettled Industry: Mexican Sugar

2. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Sugar cane production is concentrated in the warmer areas of Central Mexico Source: Rabobank from SAGARPA data

3. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Consumption of sugar by major use categories:2000

4. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Background to conflict Private management and government intervention –Early attempts to regulate market –Growth from WWII to the 1960’s –Price controls –Decreto cañero –Contrato Ley Government management of the mills (1970 – 1988) –Profits squeezed –Government rescues mills control goes from19 to 49 out of a total 66 –Productivity falls in mills and campo (4.1 ha.) –Subsidies grow –Mexico shifts from net exporter to net importer

5. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Background to conflict Government sells the mills (1988 - 1992) –Policy moves to more market orientation –Budgetary concerns also forces sales of state assets –Mills sold in highly leveraged operations – up to 80% –Implicit understanding that tight controls over domestic prices –Yet, imports grew depressing mills sending them anew into crisis –Government support to mills to pay cañeros –Interest rates following economic crisis and debt grows

6. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I NAFTA Mexico negotiates structural change U.S. and Canada negotiate trade agreement Mexico negotiations sugar sector U.S. Negotiates sweetner sector Mexico net importer of sugar U.S.net importer of sugar Mexico and U.S. protect domestic markets Low level of HFCS trade

7. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Mexico’s foreign trade in sugar (million dollars)

8. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I NAFTA from agreement to confustion Net production surplus – the side letters –English definition “shall include consumption of high fructose corn syrup provided for in…” –Spanish “la determinación de´excedente de producción neto´incluirá para efectos de Sección A del Anexo Anexo 703.2, fructosa de maíz, descrita...¨ NPS –U.S. = P sugar – (Consumption sug + Consumption HFCS ) –Mexico = (P sugar +P HFCS ) – (Consumption sug + Consumption HFCS ) Letter not ratified by Mexican senate Mexico’s quota en years 7 – 14 fixed at 250,000 MT or “up to” 250,00 –Similar to corn discussions –Mexico goes to panel

9. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I NAFTA from agreement to confrontation: HFCS U.S. surplus corn producer Government supports (aka subsidies) for corn HFCS capacity grows Displaces sugar in carbonated beverages Limited opportunities for HFCS in other food products Lacks sparkle Excess capacity looks for new markets –Did it grow looking to Mexico? Mexico initiates dumping demand –U.S. loses and goes to panel

10. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Mexico’s imports of HFCS Imports of HFCS (55) (‘000 mt) Source: Rabobank with data from the Secretaria de Economia

11. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Sugar cane area (‘000 ha.)

12. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Sugar cane yields (tons per ha.)

13. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Sugar cane production (Million mt)

14. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Sugar production (Million mt)

15. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Sugar production per hectare (Million mt)

16. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Efficiency varies greatly from company to company: Time lost in mills Averag e

17. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Recent events Consolidation of the milling sector of the industry GAM goes into default 2001 found the domestic market in disarray –Low domestic prices –“Dumping of sugar on domestic market” –SAGARPA under state of siege by cane growers and threats by mill workers Mills of four companies expropriated Government sets up agency to run mills and to eventually privatize them

18. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I 2001 Mexican sugar prices

19. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Seasonal nature of Mexico’s sugar harvest (mt per week)

20. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Recent events (cont.) Congress enacts excise tax on HFCS used in soda pop –Congress flexing muscle –Frustrated with slow pace is resolving dispute –Upset with SE decision to negotiate –Cañeros strength in Congress National Sugar Policy (Feb. 2002) –Bring order to the market –Mixed capital export company –Inventory financing –Modernize market Contrato Ley Decreto cañero Temporary suspension of HFCS tax –Steel for HFCS? –Until Sep. 30 –Criticized by industry and Congress

21. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I The future: 2 and tier tariffs Allows for free imports of sugar paying declining tariffs U.S. WTO sugar quota –Trade policy, foreign policy or subsidies for holders of quotas Imports of sugar paying tariffs will displace quota sugar USDA baseline projection document raises question of dumping of Mexican sugar

22. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I Over quota tariffs for imports of Mexican sugar into the U.S. (cents per pound)

23. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I NAFTA high-tier Mexican sugar exports to the U.S. Source: Rabobank from USDA baseline projections

24. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I NAFTA high-tier Mexican sugar exports to the U.S. Source: Rabobank from USDA baseline projections U.S. WTO import commitment

25. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I U.S. sugar prices (cents per pound)

26. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I The future: 3 scenarios U.S.opens market to sugar imports –As Mexican imports grows U.S. recognizes that they can’t compete –Abandons all supports rather than support Mexican industry –3 rd party countries displace Mexican producers Creation of NAFTA sugar market –Mexico sugar displaces quota sugar –U.S. holders, and others, invest in Mexican mills –Minimal domestic pain –HCFS south and sugar north – happy corn growers and share holders U.S. refuses to open border

27. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I The future: Spoilers Cuba –Life after Castro FTAA –Brazil takes over the market (4 cents lbs. break even)

28. Agricultural and Food Policy Information Workshop Food & Agribusiness Research I U.S. and Mexican refined sugar prices (cents per pound)