GAO

United States General Accounting Office

Report to Congressional Requesters

June 2000 SUGAR PROGRAM

Supporting Sugar

Prices Has Increased

Users’ Costs While

Benefiting Producers

GAO/RCED-00-126

Page 1 GAO/RCED-00-126 Sugar Program

Contents

Letter 3

Appendixes Appendix I: The U.S. Sugar Program and Recent Price and

Production Trends 12

Appendix II: Estimating Economic Gains and Losses From

the U.S. Sugar Program 20

Appendix III: Structure of the CARD International Sugar Model 46

Appendix IV: Economic Analysis of a Tariff-Rate Quota 50

Appendix V: Estimated Net Losses to the U.S. Economy Accruing

to Foreign Sugar Importers, Fiscal Year 1998 53

Appendix VI: Comments From the U.S. Department of Agriculture 55

Appendix VII: Comments From the American Sugar Alliance 78

Appendix VIII:Comments From the U.S. Cane Sugar Refiners’

Association 102

Appendix IX: GAO Contacts and Staff Acknowledgments 104

Tables Table 1: U.S. and World Prices for Raw and Refined Sugar,

1985-98 14

Table 2: Acres of Sugarcane and Sugar Beets Harvested, by State,

Crop Years 1995-99 16

Table 3: Cane Sugar and Beet Sugar Production and USDA Loans,

by State, Crop Years 1997 and 1999 18

Table 4: U.S. Prices for HFCS, 1985-98 19

Table 5: Estimated Economic Gains and Losses Resulting From

the Sugar Program, 1996 and 1998 21

Table 6: Estimated Distribution Among User Groups of Benefits of

Eliminating the Sugar Program Under Different Pass-Through

Assumptions, 1996 and 1998 23

Table 7: Estimated Effect of Eliminating the Sugar Program on

Prices and Production 25

Table 8: Estimated Longer Term Economic Gains and Losses if

the Sugar Program Were Eliminated 26

Figures Figure 1: U.S. Sugar Production (in thousands of short tons),

Fiscal Years 1990-2000 15

Figure 2: Effects of Removing the TRQ and USDA’s Loan Program

on U.S. Prices and Quantities of Raw Sugar 30
Contents

Page 2 GAO/RCED-00-126 Sugar Program

Figure 3: The TRQ’s Effect on Imports 51

Abbreviations

ASA American Sugar Alliance

CARD Center for Agricultural and Rural Development at Iowa State

University

EV equivalent variation

HFCS high-fructose corn syrup

NAFTA North American Free Trade Agreement

SIC standard industrial classification

TRQ tariff-rate quota

USDA U.S. Department of Agriculture
Page 3 GAO/RCED-00-126 Sugar Program

United States General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-285072 Letr

June 9, 2000

The Honorable Dianne Feinstein

United States Senate

The Honorable George Miller

The Honorable Dan Miller

House of Representatives

The sugar program, administered by the U.S. Department of Agriculture

(USDA), guarantees domestic cane sugar and beet sugar producers

(growers and processors) a minimum price for sugar, which at times during

the past year was about three times the world market price. The sugar

program supports domestic sugar prices by offering loans to sugar

processors at a rate established by law: 18 cents per pound for raw cane

sugar and 22.9 cents per pound for refined beet sugar, with the sugar

serving as collateral for these loans. (See app. I.) The program has allowed

processors to forfeit their sugar to the federal government instead of

repaying their loans—which some processors might do if domestic sugar

prices fall below the level of the loan rate plus certain costs that processors

would no longer incur if they forfeited. To minimize the likelihood of

forfeitures, a direct cost to taxpayers, the sugar program has maintained

artificially high sugar prices by restricting the amount of sugar that can be

imported at a low tariff rate.

Our April 1993 report,1 requested by then Representative Charles E.

Schumer, estimated that the sugar program cost the domestic users of

sugar and other sweeteners about $1.4 billion (in 1991 dollars) annually

from 1989 through 1991 and found that the program primarily benefited

U.S. sugar producers and manufacturers of high-fructose corn syrup

(HFCS), a sweetener primarily used in soft drinks. We recommended that

the Congress gradually lower the loan rate for sugar and direct USDA to

adjust import quotas accordingly to achieve a lower U.S. market price. The

1996 Farm Act did not revise the sugar program along the lines that we had

recommended.

1

Sugar Program: Changing Domestic and International Conditions Require Program

Changes (GAO/RCED-93-84, Apr. 16, 1993).
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To account for changing conditions in U.S. and world sweetener markets in

recent years, you requested that we update the analysis in our 1993 report.

Specifically, you asked us to estimate the U.S. sugar program’s (1) costs to

domestic sweetener users, (2) benefits to domestic sugar and HFCS

producers, and (3) net effects on the U.S. economy—that is, the differences

between the costs to users and the benefits to producers that result from

artificially high sweetener prices.

Because USDA does not have a comprehensive economic model of the U.S.

and world sweetener markets, we developed a model for analyzing the

costs, benefits, and net effects of the U.S. sugar program. Our model used

data on sweetener prices and quantities for the U.S. and world markets and

estimated sugar prices for both markets in the absence of the U.S. sugar

program. (See apps. II and III for descriptions of the model’s U.S. and world

markets.) Specifically, we used our model to compare—for both 1996 and

1998—the domestic and world prices for sugar, HFCS, and other corn

sweeteners with estimated domestic and world prices if there were no

sugar program.2 Our model then used these price comparisons to estimate

the program’s costs, benefits, and net effects. As in any modeling effort,

there is uncertainty associated with the estimates that we developed

because of uncertainty about the model’s structure, data, and assumptions.

These estimates, therefore, should be interpreted as indicative of the order

of magnitude of benefits and costs, rather than as precise estimates.

Despite this uncertainty, we believe that the process for developing our

model has been rigorous and that our model is both comprehensive and

methodologically sound. As agreed with your offices, we did not analyze

how the gradual reduction of U.S. tariffs for Mexican sugar through 2008

under the North American Free Trade Agreement might affect domestic

sugar prices. However, our model could be used for this analysis as well as

for other types of analyses in the future.

This letter summarizes our findings. More detailed information on our

model’s results is presented in appendix II.

2

To estimate the effect of no sugar program, we simulated the elimination of USDA’s loan

program for sugar processors and the tariff-rate quota for both raw sugar and refined sugar

imports. (The tariff-rate quota is the amount of sugar that can be imported during a fiscal

year at a low tariff rate.) The most current year for which sweetener price and quantity data

are available is 1998.
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Sugar Program

Increases Users’ Costs

We estimate that the sugar program cost domestic sweetener users about

$1.5 billion in 1996 and about $1.9 billion in 1998.3 Sweetener users

included (1) sugarcane refiners that bought raw cane sugar, (2) food

manufacturers that bought refined sugar and other sweeteners, and (3)

final consumers who bought sweeteners and sweetener-containing

products. The program’s costs to U.S. sweetener users depend on the world

price of sugar and can vary from year to year—they will be higher, other

things being equal, when the difference between the domestic and the

world price is greater. In 1998, for example, the program’s costs to users

were higher than in 1996 because the world price dropped while the

domestic price remained about the same.

If the sugar program were eliminated and the domestic price of sugar fell, it

would be difficult to predict the extent to which and the speed with which

sugar refiners and manufacturers of sugar-containing foods would pass

their cost reductions through to final consumers. This would depend on,

among other things, the degree of competition in their markets. For

example, the market for table sugar is likely to be more price-competitive

than the markets for sugar-containing foods for several reasons, including

that table sugar varies little from brand to brand while most sugarcontaining foods have greater product differentiation. As a result, sugar

refiners that market table sugar might be more likely than manufacturers of

sugar-containing foods (such as candy makers) to lower their prices, and

this pass-through might occur more quickly. Assuming that, in absence of a

sugar program, competition among sugar refiners had caused them to pass

all of their cost reductions for table sugar through to consumers and the

manufacturers of sugar-containing foods had not passed through any of

their cost reductions, we estimate that final consumers could have

benefited generally by about $800 million using 1998 data and by about

$600 million using 1996 data. If both sugar refiners and the manufacturers

of sugar-containing foods passed through all of their cost reductions, the

maximum annual benefit to final consumers would be about $1.9 billion

using 1998 data and about $1.4 billion using 1996 data. Table 6 in appendix

II provides additional information on the benefits accruing to all sweetener

users (refiners, food manufacturers, and final consumers) under these

alternative assumptions about the degree to which cost reductions are

passed through.

3

All estimates are in 1999 dollars. See app. II for our assumptions about short-run and longer

term supply elasticities.
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Page 6 GAO/RCED-00-126 Sugar Program

Sugar Program

Benefits Producers

The primary beneficiaries of the sugar program’s higher prices are

domestic sugar beet and sugarcane producers who, we estimate, received

benefits of about $800 million in 1996 and about $1 billion in 1998.4 About

70 percent of the benefits went to sugar beet growers and processors.

Sugarcane producers received about 30 percent of the benefits.

HFCS producers received little, if any, benefit from the sugar program in

either 1996 or 1998, according to our current model’s estimates. This result

contrasts with our finding in 1993. At that time, HFCS cost a few cents per

pound less than domestic sugar, and both products cost about twice as

much as sugar on the world market. Thus, if the domestic price of sugar

had fallen in 1993, HFCS producers would have had to reduce their prices

to remain competitive. Since 1993, the price of HFCS has fallen, and today

it is much lower than the wholesale price of sugar in the United States.

Furthermore, the possibilities for substitution between sugar and HFCS are

more limited than in prior years because technological advances have

improved HFCS products and created more specialized sweetener markets.

As a result, even if the sugar program were removed and the price of

domestic sugar fell substantially, the impact on the price of HFCS would be

limited—HFCS producers might no longer need to lower their prices to

remain competitive. Executives from the Corn Refiners’ Association, which

represents HFCS manufacturers, agreed with our model’s results as they

pertained to HFCS, stating that HFCS producers do not benefit from the

sugar program because domestic HFCS prices are no longer linked to sugar

prices.

Net Losses to the U.S.

Economy Were

Sizeable

We estimate that the sugar program resulted in net losses to the U.S.

economy of about $700 million in 1996 and about $900 million in 1998. Our

net loss estimates include economic inefficiencies and transfers to foreign

producers. Economic inefficiencies occurred, for example, when the sugar

program’s artificially high domestic prices encouraged farmers to grow

sugar beets instead of another crop, such as wheat, that, without the sugar

program, might have been relatively more profitable. Inefficiencies also

occurred when artificially high sugar prices discouraged consumers from

4

Producers include both growers and processors. According to USDA’s 1997 census of

agriculture, 973 farms grew sugarcane and 7,097 farms grew sugar beets. USDA’s Farm

Service Agency, using a different definition of a farm, estimated that 11,800 farms grew

sugar beets in 1997.
B-285072

Page 7 GAO/RCED-00-126 Sugar Program

purchasing sugar. The cost of these inefficiencies totaled about $300

million in 1996 and about $500 million in 1998. Transfers from the U.S.

economy to foreign producers occurred because foreign producers

received artificially high prices for the raw sugar they exported to the

United States. (See app. V.) We estimate that these transfers amounted to

about $400 million in both 1996 and 1998. The transfers were about the

same in each year despite the larger difference between domestic and

world prices in 1998 because the United States imported less sugar in 1998.

Agency Comments and

Our Evaluation

We provided the U.S. Department of Agriculture; the American Sugar

Alliance, which represents sugarcane and sugar beet growers; and the U.S.

Cane Sugar Refiners’ Association with a draft of this report for review and

comment.

The U.S. Department of Agriculture stated that our model’s results were

suspect and should not be quoted authoritatively, citing three broad areas

of concerns. First, the Department stated that the report’s methodology

was not adequately developed or justified. We disagree. We took several

actions to help ensure that our model was methodologically sound.

Initially, we contracted with a well-known expert in modeling the

international trade of agricultural commodities and with a prominent

agricultural economist to work with us in developing the model. Then, in

December 1999, we sent our proposed model to four outside academicians

who specialize in agricultural economics and international trade

economics and revised the model in response to their comments. We also

sent the proposed model to the Department at that time, but the

Department did not provide comments. Finally, our process for obtaining

agency comments on draft reports served as a last check of our

methodology. In response to these comments, we adjusted our model to

more fully account for certain transportation costs in our final estimates.

Second, the Department stated that documentation of the economic model

was inadequate. We disagree. We included two appendixes in the draft

report that provided detailed information about the model. While we

believe that our model was adequately documented, the Department

suggested some useful clarifications that we incorporated. Third, the

Department stated that in numerous places the model’s results are

inconsistent with our description of the model or alternative data sources.

For example, the Department disagrees with our model’s finding that HFCS

producers would experience few economic losses if the sugar program

were eliminated. We continue to believe that this finding is accurate.

Recent price data show that while HFCS producers benefited from the
B-285072

Page 8 GAO/RCED-00-126 Sugar Program

sugar program in the 1980s and early 1990s, the domestic HFCS and sugar

markets have since been decoupled because of domestic price, cost, and

market conditions. After thoroughly examining this and each of the

Department’s other concerns about our model’s results and discussing

them with experts outside GAO, we continue to believe that the model’s

results are reasonable. See appendix VI for the Department’s written

comments and our responses.

The American Sugar Alliance also disagreed with the draft report’s analysis.

Its concerns also fell into three general areas. First, the Alliance stated that

our methodology for estimating the sugar program’s cost to users was

flawed because our model used world prices of raw sugar that did not

reflect each country’s cost of production—the Alliance asserted that our

model’s world prices were distorted by, among other things, subsidies

provided by other countries and differences in labor and environmental

standards. We believe that our methodology is appropriate. Our model

estimated the impact of the U.S. sugar program in the world as it exists

today—not in a hypothetical “free market” environment, as the Alliance

suggested. To isolate the sugar program’s effects, we made the analytical

assumption that all factors, other than the U.S. sugar program, would

remain unchanged. Second, the Alliance stated that our model incorrectly

assumed that food manufacturers and retailers would pass through 100

percent of their savings to final consumers if the sugar program were

eliminated. In fact, the draft report noted that the extent to which cost

reductions would be passed through to consumers would depend on the

degree of competition in their markets. We revised the report, however, to

further clarify the different assumptions we used in discussing the extent to

which final consumers could benefit if the sugar program were eliminated.

Third, the Alliance stated that we did not sufficiently assess the benefits

and costs of the sugar program, noting among other things that rural areas

would suffer if the sugar program were eliminated. As stated in our study

objectives, this report focuses on the U.S. sugar program’s (1) costs to

domestic sweetener users, (2) benefits to domestic sugar and HFCS

producers, and (3) net effects on the U.S. economy. The American Sugar

Alliance also provided comments to clarify what it perceived to be

misleading statements and analytical errors in the draft report. We address

each of these comments in appendix VII, which contains the American

Sugar Alliance’s complete written comments and our responses.

The U.S. Cane Sugar Refiners’ Association stated that we had done a

thorough job of illuminating the very significant impact of the sugar

program on different interests. The Association also provided comments to
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improve the report’s technical accuracy, which we incorporated as

appropriate. See appendix VIII for the written comments of the U.S. Cane

Sugar Refiners’ Association.

Scope and

Methodology

Estimating the total cost of the sugar program to users is controversial

because the total cost is not a simple difference between the current U.S.

and world sugar prices. Instead, the cost estimate depends in part on

assumptions about how much the world price would rise if the United

States did not have a sugar program. In developing our model, we:

• Contracted with Professor John C. Beghin, who heads the Trade and

Agricultural Policy Division at Iowa State University’s Center for

Agricultural and Rural Development, to work with our staff economists

to integrate an economic model of the U.S. sweetener market with the

Center’s international trade model for agricultural commodities.

Professor Beghin is a recognized expert in agricultural trade policy and

has extensive experience in developing econometric models of the U.S.

and world markets for agricultural commodities. We also contracted

with Professor Bruce Gardner, of the University of Maryland and a

former USDA Assistant Secretary for Economics, to consult with

Professor Beghin and our economists in developing our model,

assessing the reasonableness of its results, and responding to comments

from outside consultants and organizations.

• Provided our proposed model for review and comment in December

1999 to Professor James Anderson of Boston College, Professor Andrew

Schmitz of the University of Florida, Professor Daniel Sumner of the

University of California at Davis, and Professor Michael Wohlgenant of

North Carolina State University. We incorporated many of their

comments as we revised the proposed model. We also provided our

proposed model to USDA for review and comment in December 1999.

However, USDA did not provide comments.

• Obtained extensive data on sweetener prices and quantities for the U.S.

and world markets in 1996 and 1998. These included data on (1)

production and prices for sugar, HFCS, and other corn sweeteners and

(2) the use of sweeteners by U.S. industries, disaggregated to the fourth

level of the U.S. Bureau of the Census’ Standard Industrial

Classification. We obtained these data from USDA’s Economic Research

Service; the Bureau of the Census and the Bureau of Economic Analysis,

within the Department of Commerce; the Bureau of Labor Statistics,

within the Department of Labor; and private industry organizations. We

selected 1998 because it is the most current year for which price and
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quantity data were available when we developed our model and 1996

because it was a recent year that provided a contrast in the world price

of sugar and the U.S. prices of corn, wheat, and other crops.

• Used the model to estimate the effect of terminating the U.S. sugar

program on (1) the U.S. and world prices of sugar and (2) U.S.

sweetener producers and users. The U.S. sweetener part of the model is

the U.S. component of the CARD world sugar model, extended on the

supply side to include linkages with the corn, HFCS, and wheat markets.

In addition, Professor Beghin, in collaboration with our economists,

extended the demand side of the CARD domestic sweetener model to

include the demand for sweeteners from food processors, as well as the

direct demand for sweeteners by final consumers. We interpreted the

sugar program’s estimated costs in 1996 and 1998 as the opposite of

estimated benefits that would be derived by the program’s elimination.

While our model primarily examined the short-run effects of eliminating

the sugar program, we also assessed longer-term effects by using

alternative elasticities for the supply of sweeteners.5

• Obtained the comments of Professor Gardner and Professor

Wohlgenant on the final design of our model and its preliminary results

before we provided a draft of our report to USDA for comment.

We conducted our work between August 1999 and May 2000 in accordance

with generally accepted government auditing standards. We did not

independently verify the data that we obtained from USDA, Commerce,

Labor, or industry sources and used in our economic model. However,

these are the best data available on U.S. and world prices and production.

The estimates in this report apply only to the 2 years that we analyzed.

Estimates for other years might be larger or smaller than our 1996 and 1998

estimates, depending on the difference between the domestic and world

prices of sugar.

We are sending copies of this report to the Senate Committee on

Agriculture, Nutrition, and Forestry; the House Committee on Agriculture;

and other appropriate congressional committees; the Honorable Dan

Glickman, Secretary of Agriculture; the Honorable Jacob Lew, Director,

Office of Management and Budget; and other interested parties. We will

also make copies available to others upon request.

5

These elasticities measured the extent to which the quantity of sugar supplied would

respond to changes in price.
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Please contact me at (202) 512-5138 if you or your staff have any questions

about this report. Key contributors to this report are listed in appendix IX.

Robert E. Robertson

Associate Director, Food

and Agriculture Issues
Page 12 GAO/RCED-00-126 Sugar Program

Appendix I

The U.S. Sugar Program and Recent Price and Apendxies

Production Trends ApendxiI

The United States was the fifth largest producer and the fourth largest

consumer of sugar in the world in 1998. Historically, the United States and

other countries have protected their domestic growers and processors of

cane sugar and beet sugar1 from lower world prices through quotas and/or

high tariffs that restrict sugar imports.

The U.S. Sugar

Program

The U.S. sugar program guarantees domestic sugar producers (growers and

processors) a minimum price for sugar by (1) offering loans to sugar

processors at a rate established by law and (2) using a tariff-rate quota

(TRQ) to restrict the supply of sugar that can be imported at a low tariff

rate. The Agriculture and Food Act of 1981 allowed sugar processors to

obtain loans from the U.S. Department of Agriculture’s (USDA) Commodity

Credit Corporation by pledging their sugar as collateral.2 The act also gave

processors the option to forfeit the sugar that secures their loans to the

federal government rather than repay their loans in cash, effectively

establishing the loan rate as a floor for domestic sugar prices. Since 1990,

USDA has used a TRQ for raw sugar to restrict low-priced imports and

maintain domestic prices at levels that are high enough to prevent

producers from forfeiting on their sugar loans.3 Under the TRQ, imported

sugar up to the quota is either assessed no tariff or a 0.63-cent-per-pound

tariff, while imports above the quota are assessed a 15.82-cents-per-pound

tariff, making them prohibitively expensive.4 In 1994, the United States

agreed to set the TRQ for imported sugar at 1.26 million tons or more each

year and to administer the TRQ in a manner consistent with its

commitments under the World Trade Organization Agreement on

Agriculture. USDA normally sets the size of the TRQ at the beginning of a

fiscal year. The U.S. Trade Representative then allocates shares of it among

1

Sugar comes from sugarcane and sugar beet plants, both of which are processed to extract

the sugar. Sugarcane typically is milled into raw cane sugar and is then sent to a refinery,

which further processes it into refined sugar for consumption. Beet sugar is transformed

directly into refined sugar by beet processors. Almost all sugar imported into the United

States is raw cane sugar.

2

Sugar processors are required to pay growers a government-specified minimum price,

equivalent to about 60 percent of the loan.

3

USDA also administers a TRQ for imported refined sugar of at least 30,900 tons each year.

The refined sugar TRQ was set at 66,000 tons for fiscal year 2000.

4

Under the North American Free Trade Agreement, the tariff for Mexican sugar imported

outside the TRQ will gradually be reduced from 15.6 cents per pound in 1994 to zero cents

per pound in 2008. The high-tier tariff for Mexican sugar is 12.1 cents per pound in 2000.
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 13 GAO/RCED-00-126 Sugar Program

40 designated countries on the basis of their exports to the United States

from 1975 through 1981.

The Federal Agriculture Improvement and Reform Act of 1996, commonly

known as the 1996 Farm Act, modified the sugar program by (1)

legislatively establishing USDA’s loan rate at 18 cents per pound for raw

cane sugar and 22.9 cents per pound for refined beet sugar, (2) assessing a

1-cent penalty on each pound of raw cane sugar and a 1.07-cent penalty on

each pound of refined beet sugar forfeited to the government, (3)

eliminating a requirement that the sugar program operate at no net cost to

U.S. taxpayers, (4) limiting processors’ opportunities to forfeit their sugar

to the Commodity Credit Corporation by not allowing such forfeitures if

the TRQ is 1.5 million tons or less, (5) eliminating USDA’s authority to

impose marketing allotments for sugar, and (6) increasing the assessment

on processors to 0.2475 cents per pound for of raw cane sugar and 0.2654

cents per pound for beet sugar.5

USDA has established a TRQ greater than 1.5 million tons each year since

the 1996 Farm Act was enacted. As a result, processors that have obtained

Commodity Credit Corporation loans have had the option to forfeit their

pledged sugar instead of repaying their loans. This option becomes

important to processors if domestic sugar prices drop below USDA’s loan

rate plus transportation and interest costs but minus the 1-cent-per-pound

penalty. If sugar is forfeited, USDA can choose to immediately resell the

sugar on the domestic market, sell it for such restricted uses as ethanol

manufacture, store it, or donate it for humanitarian purposes.

Sugar Prices and

Production

Table 1 shows that, since 1985, the sugar program has resulted in U.S. raw

sugar prices that have been more than 8 cents per pound higher than world

raw sugar prices.6 In 1998, the U.S. raw sugar price was more than 10 cents

per pound higher than the world price.

5

The Agriculture Appropriations Act for fiscal year 2000 suspended the sugar marketing

assessment for fiscal years 2000 and 2001.

6

The basis point for world raw sugar prices is a Caribbean port, including Brazil, while the

basis for domestic prices is New York City. To compare these prices, we added 1.5 cents per

pound to the world price to cover transportation costs from the Caribbean.
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 14 GAO/RCED-00-126 Sugar Program

Table 1: U.S. and World Prices for Raw and Refined Sugar, 1985-98

Note: U.S. and world prices are in nominal dollars.

a

U.S. prices are based on futures contract prices for number 14 raw cane sugar on the New York

Coffee, Sugar, and Cocoa Exchange.

b

World prices are based on bulk spot contracts for number 11 raw cane sugar on the New York Coffee,

Sugar, and Cocoa Exchange (free on board stowed Caribbean port, including Brazil). To compare the

world and U.S. prices, 1.5 cents per pound needs to be added to the world price to account for the cost

of transporting raw sugar from the Caribbean to New York.

c

World prices are based on spot contracts for number 5 refined sugar, London Daily Price (free on

board Europe).

Source: Sugar and Sweetener Situation and Outlook, Economic Research Service, USDA (Sept.

1999), and the New York Coffee, Sugar, and Cocoa Exchange.

Figure 1 shows that domestic sugar production has grown by about 25

percent in recent years—from 7.2 million tons in fiscal year 1997 to a

projected 9 million tons in fiscal year 2000.7

Prices in cents per pound

Year

U.S. raw

cane sugara

U.S. wholesale

refined beet

sugar

U.S. retail

refined

sugar

World raw

sugarb

World refined

sugarc

1985 20.34 23.18 35.34 4.04 6.79

1986 20.95 23.38 35.08 6.05 8.47

1987 21.83 23.60 35.28 6.71 8.75

1988 22.12 25.44 36.60 10.17 12.01

1989 22.81 29.06 40.03 12.79 17.16

1990 23.26 29.97 42.78 12.55 17.32

1991 21.57 25.65 42.80 9.04 13.41

1992 21.31 25.44 41.53 9.09 12.39

1993 21.62 25.15 40.54 10.03 12.79

1994 22.04 25.15 39.99 12.13 15.66

1995 22.96 25.83 39.83 13.44 17.99

1996 22.40 29.20 41.79 12.24 16.64

1997 21.96 27.09 43.26 12.06 14.33

1998 22.06 26.12 42.98 9.68 11.59

7

All ton measurements in this report are short tons—a short ton equals 2,000 pounds.
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 15 GAO/RCED-00-126 Sugar Program

Figure 1: U.S. Sugar Production (in thousands of short tons), Fiscal Years 1990-2000

This growth reflects an 8-percent increase in the estimated acres of

sugarcane and sugar beets harvested in 2000 compared with the actual

acres harvested in 1997. (See table 2.) Many farmers have increased the size

of their sugarcane and sugar beet crops because these crops have offered

better returns than cotton, wheat, or other crops that the farmers grew in

the past. In addition, sugarcane and sugar beet farmers have increased their

crop yields per acre, and sugarcane farmers, in particular, have improved

their sugar-per-acre recovery rates.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Cane sugar

Beet sugar

Total
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 16 GAO/RCED-00-126 Sugar Program

Table 2: Acres of Sugarcane and Sugar Beets Harvested, by State, Crop Years 1995-

99

Note: USDA’s World Agricultural Outlook Board estimates that 939,000 acres of sugarcane and

1,527,000 acres of sugar beets will be harvested in crop year 2000.

a

In 1995, the acreage harvested in New Mexico and Washington was included in 14,100 acres listed

as other states.

Source: Sugar and Sweetener Situation and Outlook, Economic Research Service, USDA (Sept.

1999).

State 1995 1996 1997 1998 1999

Sugarcane

Florida 417,000 417,000 421,000 426,000 436,000

Hawaii 48,500 42,900 32,000 30,300 32,600

Louisiana 368,000 335,000 380,000 400,000 441,800

Texas 41,200 34,600 27,300 32,000 30,700

Subtotal 874,700 829,500 860,300 888,300 941,100

Sugar beets

California 114,000 82,000 99,000 100,000 105,000

Colorado 41,100 51,100 66,400 57,300 67,900

Idaho 197,000 184,000 197,000 203,000 210,000

Michigan 188,000 130,000 160,000 173,000 187,000

Minnesota 420,000 438,000 446,000 458,000 469,000

Montana 55,500 57,500 58,300 62,400 61,800

Nebraska 72,300 51,200 60,300 47,400 66,800

New Mexico a 900 1,600 0 0

North Dakota 204,200 225,300 227,500 242,600 253,000

Ohio 15,300 4,600 900 1,100 1,200

Oregon 17,800 16,300 17,400 17,500 19,700

Texas 19,300 12,600 15,000 0 0

Washington a 13,000 18,000 36,000 27,000

Wyoming 61,500 56,800 60,900 53,300 57,000

Subtotal 1,406,000 1,323,300 1,428,300 1,451,600 1,525,400

Total 2,280,700 2,152,800 2,288,600 2,339,900 2,466,500
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 17 GAO/RCED-00-126 Sugar Program

In November 1999, USDA announced that the TRQ for raw sugar imports in

fiscal year 2000 would be slightly higher than 1.5 million tons, giving sugar

processors that obtained USDA loans the option to forfeit their sugar to the

government if domestic prices drop below the loan rate plus certain costs

that processors would no longer incur if they forfeit.8 In February 2000,

U.S. raw sugar prices on the New York Coffee, Sugar, and Cocoa Exchange

dropped to 16.5 cents per pound as a result of the increasing supply of

sugar. As of May 1, 2000, raw sugar prices had recovered to about 19.7 cents

per pound9

—around the minimum price necessary to provide an economic

incentive to U.S. sugar processors to repay their USDA loans rather than

forfeit the sugar that secures their loans to the government.10

In May 2000, USDA announced that it would seek to purchase 150,000 tons

of domestic sugar to reduce the cost of expected sugar program loan

forfeitures later this fiscal year. While data on the total amount of USDA

loans to sugar processors in 2000 were not available, table 3 shows that

sugarcane processors substantially increased their use of USDA loans in

1999, as compared with 1997. U.S. sugar processors have not forfeited

sugar to the government since 1994, when small amounts were forfeited.

8

USDA also announced plans to allow 1.25 million tons of raw sugar to be imported during

fiscal year 2000, sufficient to fulfill its trade agreement obligations.

9

World raw sugar prices similarly recovered to about 6.53 cents per pound as of May 1, 2000,

after dropping below 5 cents per pound in Feb. 2000.

10See Sugar Program: Changing the Method for Setting Import Quotas Could Reduce Cost to

Users (GAO/RCED-99-209, July 26, 1999).
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 18 GAO/RCED-00-126 Sugar Program

Table 3: Cane Sugar and Beet Sugar Production and USDA Loans, by State, Crop Years 1997 and 1999

Note: USDA loans are in nominal dollars.

a

USDA’s 1997 census of agriculture estimate of the farms that grew sugarcane and sugar beets. In

contrast, USDA’s Farm Service Agency estimated that about 11,800 farms grew sugar beets

nationwide in 1997. The census of agriculture uses a more restrictive definition of a farm that, for

example, counts as a single farm land that has been subdivided into several smaller units that, in some

cases, are operated by different family members.

b

USDA loans were with a sugar beet processor that has its corporate headquarters in Utah and

processing facilities mainly in Idaho.

c

Subtotal excludes two farms in Illinois and three farms in Kansas that USDA’s 1997 census of

agriculture identified because sugar beet production data for these states were not available.

Source: USDA’s 1997 census of agriculture, Economic Research Service, and Farm Service Agency.

Sugar production in short tons (raw value)

USDA loans made for 1997 USDA loans made for 1999

State Farmsa

Estimated

1997

production

Production

covered

by loans Dollar value

Estimated

1999

production

Production

covered

by loans Dollar value

Cane sugar

Florida 152 1,925,000 56,000 $20,000,000 2,125,000 470,000 $167,798,000

Hawaii 13 363,000 0 0 380,000 0 0

Louisiana 705 1,262,000 126,000 46,171,000 1,615,000 354,000 129,975,000

Texas 103 80,000 18,000 5,851,000 100,000 24,000 8,659,000

Subtotal 973 3,630,000 200,000 $72,022,000 4,220,000 848,000 $306,432,000

Beet sugar

California 449 436,000 0 $0 450,000 0 $0

Colorado 530 192,000 0 0 203,000 0 0

Idahob 921 765,000 422,000 189,506,000 734,000 320,000 142,302,000

Michigan 1,182 446,000 175,000 83,245,000 465,000 146,000 69,237,000

Minnesota 1,622 1,212,000 0 0 1,361,000 180,000 82,008,000

Montana 415 180,000 0 0 201,000 0 0

Nebraska 367 149,000 0 0 183,000 0 0

New Mexico 5 7,000 0 0 0 0 0

North Dakota 873 618,000 0 0 752,000 18,000 8,201,000

Ohio 33 2,000 0 0 3,000 0 0

Oregon 167 73,000 0 0 68,000 0 0

Texas 119 40,000 0 0 0 0 0

Washington 58 87,000 0 0 119,000 28,000 12,499,000

Wyoming 356 182,000 0 0 162,000 0 0

Subtotal 7,097c 4,389,000 597,000 $272,751,000 4,701,000 692,000 $314,247,000

Total 8,070 8,019,000 797,000 $344,773,000 8,921,000 1,540,000 $620,679,000
Appendix I

The U.S. Sugar Program and Recent Price and

Production Trends

Page 19 GAO/RCED-00-126 Sugar Program

HFCS Prices and

Production

High-fructose corn syrup (HFCS) competes with sugar for leadership in the

U.S. sweetener market. Each year from 1985 through 1994, the weighted

average HFCS price was consistently at least 3 cents per pound lower than

the wholesale refined beet sugar price. Since 1992, the weighted average

HFCS price dropped from 22 cents per pound to 12.4 cents per pound in

1998—13.7 cents per pound less than the wholesale refined beet sugar

price. (See table 4; prices are in nominal dollars.) Because of this cost

advantage, the domestic supply of HFCS grew by almost 40 percent, from

6.8 million tons (dry weight) in 1992 to 9.5 million tons (dry weight) in 1999.

HFCS now accounts for more than half of the total U.S. sweetener output,

with approximately 75 percent of the entire HFCS supply going to the

beverage industry. However, HFCS represented only about 6 percent of

total U.S. corn usage in 1998.

Table 4: U.S. Prices for HFCS, 1985-98

Note: U.S. prices for HFCS and wholesale refined beet sugar are in nominal dollars.

a

HFCS-42 is used in canned fruits, condiments, and other processed foods that need mild sweetness.

b

HFCS-55 is used to make soft drinks, ice cream, and frozen desserts.

Source: GAO’s analysis of data from USDA and the sweetener industry.

Prices in cents per pound (dry weight)

Year HFCS-42a HFCS-55b

Weighted average

HFCS price

U.S. wholesale refined

beet sugar price

1985 17.75 19.95 19.18 23.18

1986 18.07 19.96 19.30 23.38

1987 16.50 17.46 17.11 23.60

1988 16.47 18.68 17.80 25.44

1989 19.24 21.41 20.54 29.06

1990 19.69 21.88 20.99 29.97

1991 20.93 23.32 22.34 25.65

1992 20.70 23.00 22.03 25.44

1993 18.83 20.95 20.08 25.15

1994 18.77 22.51 21.01 25.15

1995 15.63 19.00 17.67 25.83

1996 14.46 20.60 18.28 29.20

1997 10.70 13.98 12.78 27.09

1998 10.58 13.43 12.40 26.12
Page 20 GAO/RCED-00-126 Sugar Program

Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program ApendxiI

The sugar program has used farm commodity and trade policy instruments

to maintain domestic sugar prices at levels that exceed world prices

without requiring the government to buy large quantities of domestic sugar.

Our economic model analyzed the effects of eliminating the sugar program

on prices and production by linking a multimarket domestic sweetener

model to a multicountry world sweetener model. We estimated the

economic welfare1 effects of the program—the gains and losses to the most

heavily affected producer and consumer groups—by interpreting the

estimated welfare loss (gain) resulting from the elimination of the sugar

program as an estimate of the gain (loss) accruing to each group from the

presence of the program.2 Our analysis included the markets for sugar beet

and sugarcane production, corn and HFCS production, sugar refining, food

processing, and the final consumption of sugar and food products

containing sweeteners. In addition, we estimated the net loss to the U.S.

economy (economic welfare gains minus losses) resulting from artificially

high sweetener prices. This net loss includes economic inefficiencies

(known as deadweight losses) and economic rent transfers to foreign sugar

exporters.

This appendix provides (1) our model’s estimates of the sugar program’s

costs and benefits; (2) an overview of our modeling process; (3) a

description of the policy simulations used in our analysis; (4) a more

detailed discussion of the theoretical economic framework of our U.S.

sugar model, including the methods used to estimate welfare gains and

losses for participants in the various affected markets; and (5) a

description of the data and data sources used.

Our Model’s Results Our model estimated the costs and benefits of the sugar program by

comparing—for both 1996 and 1998—the actual domestic and world prices

1

Welfare analysis uses quantitative measures to analyze how an intervention in a market

redistributes economic rents among various groups in the economy. In the context of

agricultural markets, income redistribution to all or some farmers and processors could be

measured as their gains in economic rents at the expense of losses to consumers’ or

taxpayers’ incomes.

2

Our primary estimates of the welfare effects of eliminating the program are based on

supply elasticities of sugar that can be interpreted as short-run elasticities. We also

estimated these effects using higher elasticities that can be interpreted as longer-term

elasticities. These effects would show the welfare losses and gains after more time had

passed for the economy to adjust to the lower sugar prices that would result from

eliminating the program.
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 21 GAO/RCED-00-126 Sugar Program

for sugar, HFCS, and other sweeteners with the estimated domestic and

world prices if the sugar program were eliminated. Both the estimated

costs of the sugar program to sweetener users and the estimated benefits to

sugar beet and sugarcane producers were higher in 1998 when the

difference between the domestic and world prices for sugar was greater.

Estimated Costs and

Benefits of the Sugar

Program

As shown in table 5, we estimated that the sugar program cost domestic

sweetener users—sugarcane refiners, food manufacturers, and final

consumers—about $1.5 billion in 1996 and about $1.9 billion in 1998. In our

analysis, the distribution of these welfare losses resulting from the sugar

program among the sweetener user groups depends on assumptions about

the extent to which refiners’ and manufacturers’ cost reductions from

eliminating the sugar program would be passed on to consumers.

Table 5: Estimated Economic Gains and Losses Resulting From the Sugar Program,

1996 and 1998

Note: Numbers in parentheses are economic losses.

We estimated that the total welfare gains by domestic sugar beet and

sugarcane producers were about $800 million in 1996 and about $1 billion

in 1998. About 70 percent of these benefits went to sugar beet growers and

processors, while the remaining 30 percent went to sugarcane producers.

1999 dollars in millions

Category 1996 1998

Welfare gains accruing to producers $788 $1,045

Sugarcane producers 241 307

Sugar beet growers 490 650

Sugar beet processors 58 89

HFCS manufacturers and corn growers (1) (1)

Welfare losses accruing to sweetener users ($1,471) ($1,938)

Net loss to the U.S. economy ($683) ($893)

Economic inefficiencies (273) (532)

Transfers to foreign suppliers (410) (361)
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 22 GAO/RCED-00-126 Sugar Program

We estimated that HFCS producers did not receive welfare gains from the

sugar program in either 1996 or 1998 primarily because (1) HFCS prices

have been much lower than the wholesale price of sugar in the United

States since 1995 and (2) the possibilities for substitution between sugar

and HFCS are more limited than in prior years because technological

advances have improved the HFCS product and created more specialized

sweetener markets.3 Thus, HFCS producers would not need to lower their

price further to remain competitive if the sugar program were eliminated.

In contrast, our 1993 model of the sweetener markets in the late 1980s and

early 1990s—when the price of HFCS was considerably higher—found that

a fall in the domestic price of sugar would have put pressure on HFCS

producers to lower the price of HFCS to remain competitive. As a result,

our 1993 model found that HFCS producers received substantial welfare

gains from the sugar program. Executives from the Corn Refiners’

Association, which represents HFCS manufacturers, agreed with our

results as they pertained to HFCS. They told us that the domestic HFCS

market was “decoupled” from the domestic sugar market—HFCS prices

are no longer linked to sugar prices, and the soft drink industry has relied

on competition among HFCS manufacturers to minimize its sweetener

costs.

We estimated that the sugar program resulted in net losses to the U.S.

economy of about $700 million in 1996 and about $900 billion in 1998

because total welfare losses exceeded gains. These net losses included (1)

production and consumption inefficiencies of $300 million in 1996 and $500

million in 1998 and (2) transfers of $400 million in 1996 and in 1998 to

foreign countries allocated a portion of the TRQ for sugar imports to the

United States.

Estimated Gains to Final

Consumers if the Sugar

Program Were Eliminated

If the sugar program were eliminated, it would be difficult to predict the

extent to which or the speed with which intermediate users of sweeteners

would pass through lower sugar costs to final consumers. Table 6 presents

two estimates of how the benefits of eliminating the sugar program might

be distributed based on two different sets of pass-through assumptions.

3

Edward A. Evans and Carlton G. Davis, “Dynamics of the United States High Fructose Corn

Sweetener Market,” presented at the Conference on Sweetener Markets in the 21stCentury,

Miami, Fla. (Nov. 1999).
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 23 GAO/RCED-00-126 Sugar Program

Table 6: Estimated Distribution Among User Groups of Benefits of Eliminating the Sugar Program Under Different Pass-Through

Assumptions, 1996 and 1998

Note: The partial pass-through results represent a full pass-through of cost reductions by sugar

refiners and no pass-through by food processors to consumers with the elimination of the sugar

program. The full pass-through results assume all cost reductions are passed through to final

consumers. Numbers in parentheses are economic losses.

The first set of estimates is based on the assumption that (1) competition

would lead sugar refiners to pass cost reductions associated with

eliminating the sugar program through to final consumers in the form of

lower prices for table sugar but (2) manufacturers of sugar-containing

foods would retain their cost savings. Under this “partial pass-through”

assumption, final consumers would have gained about $600 million using

1996 data and about $800 million using 1998 data if the sugar program had

been eliminated.4 We chose to present estimates based on this assumption

because refined white sugar is more homogeneous than sweetenercontaining food goods. With a homogeneous product such as sugar, each

brand is almost perfectly substitutable for another. When substitutability

between products is nearly perfect, it is more difficult for sellers to insulate

their products from the price competition of rivals. In contrast, when

products are highly differentiated, as many sweetener-containing food

products are, firms may be less able to attract customers from competitors

by offering lower prices, so there is less incentive to compete by lowering

prices. Instead, firms may use other nonprice forms of competition, such as

greater advertising. In addition, in sugar refining, the cost of raw sugar is a

1999 dollars in millions

1996 1998

Distribution of benefits

Partial passthroughFull passthroughPartial passthroughFull passthrough

Final consumers $587 $1,434 $769 $1,960

Food manufacturers 715 (60) 999 (85)

Sugarcane refiners 95 97 61 63

Total $1,397 $1,471 $1,829 $1,938

4

Our different pass-through assumptions also resulted in slightly different estimates of the

total gains to sweetener users if the sugar program were eliminated, primarily because

consumers would be expected to increase their sweetener consumption somewhat if

manufacturers of sugar-containing foods lowered their prices. We estimated that the total

welfare gains from eliminating the sugar program would have been about $1.4 billion in 1996

and $1.8 billion in 1998 if only sugarcane refiners had passed cost reductions through to

consumers.
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 24 GAO/RCED-00-126 Sugar Program

much larger share of the total cost of production compared with its share in

the production of other food products. Therefore, a change in the cost of

raw sugar would be likely to have a larger effect on the price of table sugar

than on the prices of sugar-containing products.

Our second set of estimates is based on the assumption that competition

among both food manufacturers and sugar refiners is such that all cost

reductions that would result from eliminating the sugar program would be

passed on to final consumers. This “full pass-through” assumption yields an

upper bound to the potential savings to consumers. Under this assumption,

we estimate that the benefits to final consumers of eliminating the sugar

program would have been about $1.5 billion in 1996 and about $1.9 billion

in 1998.

Other Modeling Results Table 7 compares actual sugar prices and production in 1996 and 1998 with

our model’s estimates, which assume the termination of the sugar program.

In particular, our model shows that if the sugar program had been

eliminated, the domestic price of raw sugar would have dropped from

about 22 cents per pound to about 14.9 cents per pound in 1996 and to

about 12.5 cents per pound in 1998, with comparable declines in the

wholesale price of domestic refined sugar. We estimated that raw sugar

imports would have increased by about 1.1 million tons in 1996 and by

about 1.6 million tons in 1998 if the sugar program had been eliminated,

reflecting both the increased domestic demand for sugar and the decreased

domestic production of sugar beets and sugarcane.
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 25 GAO/RCED-00-126 Sugar Program

Table 7: Estimated Effect of Eliminating the Sugar Program on Prices and

Production

Note: Our model’s estimates of prices without the sugar program are expressed in 1999 dollars, while

the acutal prices are expressed in nominal dollars.

a

The world price for raw sugar is based on a Caribbean location. As compared with the U.S. price, the

world price for raw sugar does not include 1.5 cents per pound in cost to transport the sugar to New

York.

b

As compared with the U.S. price, the world price for refined sugar does not include 2 cents per pound

for transportation.

c

Acreage harvested during the previous crop year.

Estimated Longer-Term

Effects

Table 8 presents our estimates of the welfare changes that would have

resulted from eliminating the sugar program in 1998, using larger supply

elasticities than the ones we used to obtain our primary estimates to

simulate shorter-term changes. Our supply elasticity estimates are arc

elasticities evaluated for 1998 between historical and post-reform values. In

particular, our short-run domestic supply elasticities were 0.05 for

sugarcane and 0.10 for sugar beets, and our short-run import supply

elasticity was 7.26. To obtain longer-term welfare estimates, we used a

double Nerlovian domestic supply response with supply elasticities of 0.20

for cane and 0.26 for sugar beets and an import supply elasticity of 10.17.

These larger elasticities can be interpreted as longer-term elasticities.

Therefore, the resulting estimates from our simulation can be interpreted

Price in cents per pound and production and imports in millions of short tons (raw value)

1996 1998

Actual

Without the

sugar program Actual

Without the

sugar program

U.S. raw sugar price 22.40 14.91 22.06 12.46

World raw sugar pricea 12.24 13.41 9.68 10.96

U.S. wholesale refined

sugar price

29.20 21.77 26.12 16.12

World wholesale refined

sugar priceb

16.64 19.77 11.59 14.12

Sugarcane

Acres harvestedc 953,700 941,300 931,500 916,200

Production 29.1 28.7 30.0 29.5

Sugar beets

Acres harvestedc 1,420,100 1,350,300 1,428,300 1,338,600

Production 28.1 26.7 29.9 28.0

Raw sugar imports 2.2 3.3 1.7 3.3
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 26 GAO/RCED-00-126 Sugar Program

as the welfare gains and losses after more time has passed for the economy

to adjust to the lower sugar prices that would result from eliminating the

sugar program.

Table 8: Estimated Longer Term Economic Gains and Losses if the Sugar Program

Were Eliminated

Note: These results assume a double Nerlovian supply response and a full pass-through of program

costs to final consumers. Numbers in parentheses are economic losses.

Overview of the

Economic Welfare

Modeling Process

Estimating the welfare gains and losses from the U.S. sugar program

requires several steps. First, we simulate the elimination of the program to

determine price and production responses in both domestic and

international sugar markets. This simulation involves specifying complete

U.S. and world sweetener models in the presence of the U.S. sugar TRQ and

commodity loan program. To do this, we used Iowa State University’s

Center for Agricultural and Rural Development (CARD) world sweetener

model (see app. III), which contains the U.S. domestic sweetener economy

as one of its component countries. However, we extended and modified the

U.S. domestic sweetener model to include a more detailed, multimarket

approach, including such markets as corn and feed, sugar, and HFCS. In the

U.S. domestic model, we simulated the sugar program’s elimination by

removing the TRQ for raw and refined sugar and allowing more domestic

demand to be satisfied by lower-priced world imports. Simultaneously, as

the U.S. demand for sugar increased, the world sugar prices rose

Dollars in millions

Category Gain or (loss)

Welfare losses accruing to producers ($1,017)

Sugarcane producers (301)

Sugar beet growers (530)

Sugar beet processors (187)

HFCS manufacturers and corn growers 1

Welfare gains accruing to sweetener users $1,947

Final consumer 1,953

Food manufacturers (84)

Sugarcane refiners 78

Net gain to the U.S. economy $930

Economic inefficiencies 572

Transfers to foreign suppliers 358
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 27 GAO/RCED-00-126 Sugar Program

somewhat. We also removed USDA’s loan program for sugar processors and

allowed the domestic market prices of sugar to fall below the loan rate

levels. After these program changes, U.S. domestic raw sugar prices

approximated the world prices.

On the supply side of the domestic market, we used the domestic

component of the CARD sugar model to estimate the welfare changes due

to the change in the price of sugar. The new U.S. raw sugar price filtered

through the domestic U.S. sugarcane, sugar beet, corn, and HFCS markets,

leading to new production quantities. For each of these producing

industries, we measured the changes in realized quasi-profits, or producer

surplus, that would result from a change in the quantity demanded and/or

the price if the sugar program were eliminated.

Within the domestic sweetener model, we estimated welfare changes for a

comprehensive demand sector, including sugar processors and refiners,

sweetener-using industries, and the final consumer. We estimated the

changes in realized quasi-profits resulting from higher sweetener prices for

sweetener-using food industries, at the 4-digit Standard Industrial

Classification (SIC)5 level, using economic methods to derive industry cost

and demand functions for sugar and HFCS. As part of this analysis, we

integrated different assumptions about the market power of these

industries.

5

The SIC system classifies each industrial establishment according to its primary activity.

This system, last revised in 1987, was established to promote more uniform and comparable

data.
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 28 GAO/RCED-00-126 Sugar Program

Furthermore, we developed two estimates of the welfare effects on

consumers by using different assumptions about the extent to which the

benefits of eliminating the sugar program would be passed along to the

final consumers of sugar and sweetener-containing products. Consumers

are directly affected by the sugar program’s elimination through changes in

the prices of both refined sugar and food items containing a significant

amount of sweetener that they purchase. We applied an incomplete

demand system approach called LINQUAD6 and used an exact welfare

measure, equivalent variation (EV),7 to estimate changes in consumers’

expenditures for these items.

Finally, we aggregated all welfare gains and losses from these groups by

treating the welfare loss (gain) experienced from eliminating the sugar

program as an estimate of the gain (loss) accruing to each group from the

presence of the program. The difference between welfare gains and losses

accruing from the program is the net loss to the U.S. economy, which

consists of (1) transfers to foreign producers that resulted from artificially

high prices for the raw sugar they exported to the United States and

(2) economic inefficiencies, known as deadweight losses. These

inefficiencies resulted from the use of higher-cost domestic resources to

produce sweeteners (instead of importing lower-priced sugar) and reduced

total sugar consumption. These losses did not redistribute income from

consumers to producers.

Using this approach, we specified a subset of closely related agricultural

markets—sugar, HFCS, and corn—that are important in estimating the

welfare gains and losses from the sugar program. We also included the

influence of wheat prices on planted sugar beet acreage. One possible

limitation of our model is that a more general equilibrium approach of

modeling the entire agricultural sector may have been able to give us more

long-term effects by, for example, identifying what alternative crops would

be produced in the absence of the program or how many producers would

leave the industry entirely. However, general equilibrium models take a

6

The LINQUAD is a functional form within the incomplete demand system approach that

provides a practical model for estimation that reflects theoretically sound preference

ordering. In particular, the LINQUAD quasi-expenditure function produces demand

functions that are linear in deflated income and linear and quadratic in deflated prices.

7

EV is the amount of money that, when paid to the consumer, allows the consumer to

achieve the same level of utility before the change that the consumer would enjoy with the

economic change. EV represents the minimum amount that a consumer would require to

willingly forgo the change.
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 29 GAO/RCED-00-126 Sugar Program

more broad-brushed approach, often leaving out important market details.

Our approach is designed to represent the most important sweetener

market relationships with the available data, while keeping the model

tractable.

Policy Scenario Used

in This Analysis

The policy scenario for this analysis removes the TRQs for imported raw

and refined sugar and USDA’s loan program for sugar processors that

supports the price of domestic sugar (see app. IV for a discussion of the

economics of the TRQ).8 Figure 2 shows the effects of removing both the

raw sugar TRQ and USDA’s loan program: the first panel (a) represents the

domestic raw sugar market, while the second panel (b) represents the

world raw sugar market.

8

Our presentation follows Moschini: (Agricultural Economics (5), 1991), Meike and Lariviere

(International Trade Research Consortium, Mar. 1999), and Morath and Sheldon (MIMEO,

Feb. 1999.)
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 30 GAO/RCED-00-126 Sugar Program

Figure 2: Effects of Removing the TRQ and USDA’s Loan Program on U.S. Prices and Quantities of Raw Sugar

In panel (b), we show two world excess supply situations, ES1 and ES2,

corresponding to different trade scenarios. As discussed in appendix IV, in

the presence of a TRQ, the United States faces a kinked world excess

supply function, as in the bold line, ES1. The vertical line segment, BC, on

ES1 represents the level of the TRQ, below and beyond which there is a

supply response to price by foreign exporters. Moreover, at import levels

below the quota, QTRQ, the in-quota tariff applies, and beyond that level, the

out-of-quota tariff applies. The other excess supply curve, ES2, corresponds

to the world excess supply in the absence of import restrictions in the

United States.

The effect of the TRQ on U.S. imports and prices depends on the location of

the U.S. excess demand for imports relative to the excess supply. In panel

(b), we display three potential U.S. import demand situations, ED1, ED2,

and ED3. The excess demand curve, ED1, represents an import demand

Price Price

S

D

P1

PLR

P2

PW

Q1 Q2 Q3 Q4 Quantity QTRQ QFM Imports

ED1

B

ED2

ES2

ES1 D

ED3

C

P1

P2

PW

A

(a) Domestic raw sugar market (b) World raw sugar market
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 31 GAO/RCED-00-126 Sugar Program

schedule that intersects the excess supply schedule below the level of the

TRQ, while the excess demand curve, ED3, represents an import demand

schedule that intersects the excess supply schedule above the level of the

TRQ. With excess demand schedule ED2, the TRQ is binding. Price and

quantity reach equilibrium at the intersection of the U.S. excess demand

curve, ED2 and the kinked excess supply curve, ES1, on its vertical segment,

BC. With the removal of the TRQ, increased imports of raw cane sugar

drive down domestic prices. With the same excess demand schedule, this

situation corresponds to a new equilibrium level: the point where ED2

intersects ES2, the excess supply curve without import restrictions in the

United States, with imports rising to demand of QFM.

Because of USDA’s loan program for sugar processors, however, domestic

prices would still not be free to drop to the world price level. Under the

loan program, producers would still be eligible to forfeit their sugar to the

government and receive the loan rate, PLR. The loan rate mechanism

provides a price floor for domestic sugar producers, maintaining domestic

sugar prices at the loan level, PLR, as in panel (a). However, with the

simultaneous elimination of the TRQ and the sugar loan program, the

domestic sugar price is free to fall below the loan rate level. In panel (b) of

figure 2, this situation corresponds to a new price and trade equilibrium

level. In the domestic market in panel (a), this corresponds to imports

increasing from Q2Q3 to Q1Q4. These increased imports lead to a drop in the

domestic price from P1 to P2. However, P2 is higher than the original world

price of PW.

Similarly, we removed the TRQ for imported refined, or “white,” sugar.

World trade in refined sugar has increased because of policies in the

European Community, the entry of toll refiners,9 and a decrease in freight

and refining costs. In general, removing the TRQ for refined sugar would

have the same effect as removing the TRQ for raw sugar–the U.S. price for

refined sugar would decrease with an increase in imports of refined sugar.

A lower U.S. refined sugar price would then cause a decrease in the

quantity of domestic refined sugar supplied and a decline in refiners’

demand for domestic raw sugar.

9

Toll refiners export refined sugar processed from imported raw sugar.
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 32 GAO/RCED-00-126 Sugar Program

Theoretical

Framework for

Estimating Economic

Gains and Losses From

the U.S. Sugar Program

This section describes our framework for modeling the economic gains and

losses to the various groups affected by the removal of the sugar program.

First, we describe the agricultural markets that transform sugar beets and

sugarcane into white sugar and corn into HFCS, an alternative to sugar in

soft drinks and other food products. The removal of import restrictions

under the TRQ would affect the raw cane and refined beet and cane sugar

markets by allowing free imports in these domestic markets. Second, we

estimate the welfare effects to sweetener processors, such as cane refiners,

HFCS refiners, and beet processors. Since a lower price for refined sugar

would increase the demand for it and could decrease the use of HFCS, the

price of HFCS could also decrease. The lower price for refined sugar would

also lead to a decrease in the quantity supplied by refiners, which in turn

would decrease the demand for sugar beets and sugarcane and, thus, the

price received by their producers. Third, lower prices for refined sugar and

HFCS would, other things being equal, lower the cost of production to

sweetener-intensive food goods industries. As a result, final consumers

would gain from lower prices for these foods as well as a lower price for

white table sugar.

Welfare Changes for

Domestic Sugar Beet and

Sugarcane Producers

Using the CARD sweetener model, we estimated the welfare effects to

sugar beet producers by specifying the supply of sugar beets, BS, as a

function of its price, Pb, the price of competing crops, Pg, and the price of

an aggregate input, Pf

. The CARD domestic sugar model simultaneously

solves for sugar beet prices as well as acreage, yield, and production levels.

Assuming a quadratic form for profit in beet production, we can obtain a

linear sugar beet supply by taking the first derivative of profit with respect

to the price of beets:

with λ and μ summarizing the information on parameters bi and prices Pg

and Pf.

10

10We have the following definitions: λ=bs+bg(Pg/Pf

) and μ=bb/Pf. If the price of a competing

crop changes, then λ will change as well.

+4, %6 EV.EE+3E23I,.EJ+3J23I, «.¬3E/
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 33 GAO/RCED-00-126 Sugar Program

Similarly, the supply of cane, CS, is a function of the price of cane, Pc, and

the price of an aggregate input, Pf

. As in the case of beets, the extended

CARD domestic sugar model simultaneously solves for sugarcane prices,

acreage, yield, and production levels. Using these parameter estimates, we

again assume quadratic profits in cane production, and we obtain a linear

supply of cane:

If we assume a constant extraction margin ace and marginal cost pricing in

cane extraction, the cost function of raw cane sugar production is

Crcs=[(1/γc)Pc+ace]RCSS, where RCSS equals raw cane sugar supplyPrices

in raw cane sugar production, Prcs, obey the following arbitrage condition

to express marginal cost pricing in the extraction of raw sugar from cane,

with γ denoting the exogenous extraction rate:

We assume constant returns to scale in sugarcane processing, which

implies that there will be no welfare changes to sugarcane processors from

price changes due to an elimination of the program. Thus, we estimate

changes in economic welfare by the changes in quasi-profit or producer

surplus realized by cane and beet producers,∆∏

and∆∏defined as:

Parameter estimates ofαβ, λ, μγ

and ace are available from the CARD

sugar model.

Welfare Changes for

Domestic Corn Producers

With the lower price of sugar, the demand for corn might decrease if food

processors replace HFCS with sugar in production. We assume that the

+5, &6 FV.FF+3F23I,# ¡.¢3F1

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33

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33

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F@

S4

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33

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33

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4#

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E@

S4

SR1
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 34 GAO/RCED-00-126 Sugar Program

supply of corn, COS, is determined by the maximum of the loan rate for

corn, LRcorn, or the market price of corn, Pcorn:

If the market price were higher than the loan rate, as it was earlier in the

1990s, then corn farmers would respond to this price. If there were a

decrease in the demand for corn caused by reduced HFCS production, corn

farmers would lose through a decrease in corn price and production.

Therefore, corn farmers would lose:

However, when the loan rate is higher than the market price, as it currently

is, the price signal perceived by corn farmers is the fixed loan rate. In this

case, farmers are eligible to receive loan deficiency payments from the

government.

Welfare Changes for Sugar

Beet Processors

Domestic sugar beet processors would also experience changes in

economic welfare from the extraction process. The domestic supply of

white sugar, WSS, comes from two sources that are perfect substitutes in

supply: beet sugar supply, WBS, and refined cane sugar supply. The supply

of white sugar from beets is a totally inelastic derived demand that comes

from the extraction of white sugar from sugar beets. With γb denoting the

exogenous rate of extraction of sugar from beets, prices in beet production

obey the following condition to express marginal cost pricing:

where abe denotes the extraction margin parameter in beet sugar

extraction.

+9, &26 ¤#.#a 0D[+/5FRUQ/#3FRUQ,1

+:, FRUQ 

33

3

4##

&26+3FRUQ,#G3FRUQ1

+;, 3ZEV +42£E,#3E.DEH:%6
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 35 GAO/RCED-00-126 Sugar Program

Finally, the welfare change for beet processors is then estimated as:

Welfare Changes for HFCS

Producers

Because HFCS is an alternative to sugar in many foods, a change in the

price of sugar may affect the demand for HFCS, and in turn the price of

HFCS, translating into a change in economic welfare for HFCS producers.

The supply of HFCS, HFCSS, comes from extracting fructose from corn

production with an increasing marginal cost of extraction, Phfcs=(1/γcorn)

Pcorn+awmHFCSS, leading to the supply:

with awm denoting the marginal margin parameter in HFCS extraction and γ

being the actual extraction rate for HFCS from corn. Since we extended the

CARD sugar model to include linkages to the corn and HFCS markets, we

obtained all parameter estimates for these markets, as well as extraction

rates and margin parameters, from CARD. Rendleman and Hertel11 argue

that because of feedback through by-product prices, HFCS supply is not

very price responsive. Equation 11 estimates the change in the welfare of

HFCS suppliers as captured by the change in the industry’s producer

surplus:

Welfare Changes for Cane

Sugar Refiners

Cane sugar refiners experience changes in economic welfare with the

elimination of the TRQs for raw and refined sugar. Domestic refined cane

sugar comes from refining domestic and imported raw cane sugar. For cane

sugar refining, we assume that the supply of white cane sugar, WCS, is

competitive. Assuming the cost of producing refined cane sugar increases

+<, ZEV 34

ZV :%64

0#33

ZV:%63L0#

3

:%64

0&EH+34

E#/:%6,#G:%6.#

3

:%63

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E/:%6,#G:%61

11C.M. Rendleman and T.W. Hertel. “Do Corn Farmers Have Too Much Faith in the Sugar

Program?” Journal of Agricultural and Resource Economics Vol. 18 (1993), pp. 86-95.

+43, +)&66 >3KIFV0+42£FRUQ,#3FRUQ@2DZP/

+44,  ̈KIFVV 

3FRUQ3

3FRUQ4



3KIFV3

3KIFV4

+)&66+3KIFV/#3FRUQ,##G3KIFVG3FRUQ1
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 36 GAO/RCED-00-126 Sugar Program

in output, this cost consists of the cost of raw cane sugar and the refining

cost characterized by the margin parameter, arm. We also assume a fixed

proportion, γrc, between raw cane sugar and refined sugar. The marginal

cost of refining is equated to the output price to obtain a supply schedule:

There is competitive price arbitrage between domestic sources of white

sugar, which equates the marginal cost of white cane sugar and beet sugar

to the white sugar price. Using this arbitrage condition and equations

(3) and (5), we have:

Therefore, the welfare change for domestic cane sugar refiners is obtained

by looking at the change in their quasi-profit, or producer surplus, ∆∏wcs,

resulting from the change in policy via Prcs (P0

rcs to P1rcs), output price (from

P0

ws to P1ws), and output change (from WCS0 to WCS1

):

Welfare Changes for

Sweetener-Using Food

Processors

We then estimate the economic welfare effects from changes in sweetener

prices for food-processing industries under two scenarios. The first

scenario assumes a constant markup, and thus a full pass-through of

benefits to consumers of lower input prices and thus output prices. The

second scenario holds output prices constant but allows food processors to

absorb the lower sweetener costs from eliminating the program in their

marginal cost function and thus in their profit margin.

+45, :&6 +42DUP,>3ZV#0+42£UF,3UFV@1

+46, 3ZV +42#£UF,#3UFV.DUP :&6 +42#£UF,#>+42£F,3F.#DFH@.#DUP###:&6 +42£E#,3E.DEH:%61

+47,  ̈ZFV 34

ZV:&64

0#33

ZV:&63L0#

3

:&64

0&ZFV+34

UFV#/:&6,#G:&6.#

3

:&63

0&ZFV+33

UFV#/:&6,#G:&61
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 37 GAO/RCED-00-126 Sugar Program

The derived demand for refined sugar comes from food-processing

industries producing sweetener-intensive food goods. For food processing,

we describe the total cost function of each industry i in food processing as:

+48, &IJL ^$#.#F

a##+3 6/#3+)&6,#`#-#4IJL

+48D, F

∼ D#.E-+36αV

-#3+)&6

αKIFV ,
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 38 GAO/RCED-00-126 Sugar Program

where C represents total cost, c~ represents the cost of a composite

sweetener (sugar and HFCS), “a” is an intercept term, b is a scaling term, Ps

is the price of white sugar, PHFCS is the price of high-fructose corn syrup, Qfgi

is output produced by food sector i, and A represents information from the

prices of other inputs. The derivative of the cost function of the composite

sweetener (15), with respect to the price of sugar, is a nonhomothetic

transformation of a Cobb-Douglas functional form12 and represents the

output-constant industrial white sugar demand:

for all i in sweetener-using food goods where “a” is an intercept term and b

is a scaling factor to calibrate the own-price elasticity of demand

between –0.1 and –0.2.13 Similarly, the derivative of (15) with respect to

HFCS in each food-processing industry represents HFCS demand, HFCSD:

for all i in sweetener-using food goods where c is an intercept term and

once again b is a scaling factor to calibrate the own-price elasticity of

demand between –0.1 and –0.2.

12In the nonhomothetic transformation of a Cobb-Douglas functional form, the cost shares

of inputs are not held constant.

13We assumed that the derived demand for sugar, as well as HFCS, is price inelastic and

small. References to the price elasticities of demand for sugar and other agricultural inputs

include Lopez and Sepulveda (Northeastern Journal of Agricultural and Resource

Economics, Oct. 1985); Shui, Beghin, and Wohlgenant (American Journal of Agricultural

Economics, Aug. 1993), Devadoss and Kropf (Agricultural Economics, Jan. 1996), and

Wohlgenaut (FAO, 1999).

+49, '':6L &IJL23V #+D#.E α6L-#+36

αV04 3+)&6αKIFV #,-#4IJL

+4:, +)&6'L &IJL23+)&6 #+F#.#E#-#α+)&6L#+36

αV 3+)&6αKIFV04##,#-#4IJL
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 39 GAO/RCED-00-126 Sugar Program

Using this type of specification implies constant returns to scale in the cost

structure. Starting from each industry’s cost function (15), we derive the

marginal cost underlying supply decisions:

where d is an intercept term that reflects the cost of other inputs.

From profit maximization with market power and conjectural variation,14

food-processing firms set price above marginal cost with markup

coefficient, θ, such that

Therefore, the price schedule of industry i is:

14Conjectural variation is a parameter that measures how firms with market power

recognize their mutual interdependence. Specifically, it is the percentage change in all other

firms’ output that a firm expects in response to a 1 percent change in its own output. This

variable can also be defined in terms of price behavior.

+4;, 0&IJL G##.#^+#36 #-#+VXJDU XVH,,#.#+3+)&6#-#++)&6 XVH,,#`2#4)*,/

####RU/#DIWHU VXEVWLWXWLQJ#+49,#DQG#+4:,/

+4;D, 0&IJL ##G.>D.E#-#αV -+#36

αV04 3+)&6αKIFV,#@#-#36##.#>F.E#-#α+)&6L#+36αV 3+)&6αKIFV04##,@#-#3+)&6

+4<,  ̈L +3IJL00&IJL,23IJL1

+53, 3IJL +42+40# ̈L

,,#0&IJL1
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 40 GAO/RCED-00-126 Sugar Program

Equations (16), (17), (18), (19), and (20) determine the transmission of

lower sweetener prices into lower prices Pfgi to consumers of sweetenercontaining food goods. Several factors have a role in the price

transmission: the cost share of sweeteners in the cost of food processing,

the substitution possibilities within sweeteners (fructose and sugar) and

between sweeteners and other inputs, and finally the markup and its

evolution as prices change (McCorriston15 et al.).16 In equation (18), we

calibrated to replicate a “historical” marginal cost for the industry using

data from the Bureau of Economic Analysis on output price indexes for 4-

digit SIC industries 2023 to 2099. The historical marginal cost is estimated

to be the historical price divided by 1.2, or a constant 20-percent markup of

price over marginal cost. We use a 20-percent markup of price over

marginal cost as this figure is well within the estimates of other analysts for

the food manufacturing sector.17

Trade in food industries is ignored because net trade is a very small share

of total consumption or production in all food industries; these industries

tend to produce differentiated products, which do not face a strict price

discipline from the world market; and trade data are scarce and are only

available up to 1994. Hence, the equilibrium condition in the foodprocessing markets is found by equating the price schedule (20) of each

industry to the corresponding Marshallian demand (24) as:

The welfare effect of the sugar program on each food industry is estimated

by the change in its profit,∆∏fgi, resulting from the price and output

15S. McCorriston, C.W. Morgan, and A.J. Rayner, “Processing Technology, Market Power, and

Price Transmission,” Journal of Agricultural Economics, Vol. 49, No. 2 (Spring 1998),

pp. 185-201.

16The parameter θ can be defined as the firm’s conjectural variation elasticity divided by its

own price elasticity of demand (see Bhuyan and Lopez (American Journal of Agricultural

Economics, Aug. 1997)).

17See Bhuyan and Lopez (American Journal of Agricultural Economics, Aug. 1997) and

Morrison (NBER Working Paper #3355, 1990).

+54, )*6L )*'L+3ZV/#3IJL/#0,/#IRU DOO L1
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 41 GAO/RCED-00-126 Sugar Program

changes induced by the policy reform (from P1 to P0 and from FGS0 to

FGS1

):

Welfare Changes for the

Final Consumer

We estimated the welfare cost to the final sugar and HFCS consumer by

assuming a representative consumer with expenditure function E(P, U). In

this expenditure function, P is a vector of relevant consumer prices and U

denotes utility. We are interested in two types of goods: white sugar, WS,

and a vector of sweetener-containing food goods, FG. In addition, we have

a third aggregate, other goods, OG, for completeness. We use an incomplete

demand system approach–LINQUAD–as specified in LaFrance18 and

Agnew.19 This approach allows us to derive an exact welfare measure from

an incomplete demand system. In addition, we impose restrictions on the

structure of cross-price responses to reduce the number of parameters to

be calibrated. The price vector P is decomposed into P=(Pws, Pfg, Pog), and

income is denoted by M, with subscripts indicating the respective

commodities. The subvector Pog is then dropped from the incomplete

system. The Marshallian demands for the two types of goods of interest,

white sugar and sweetener-containing food goods, denoted WSD and FGD,

are:

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IJ)*64L

0#33

IJ)*63L0#&IJL+34ZV/#34KIFV/#)*64L

,.&IJL+33

ZV/#33KIFV#/#)*63L

,1

18Jeffrey LaFrance, “The LINQUAD Almost Complete Demand Model,” Unpublished

manuscript, Department of Agricultural and Resource Economics, University of California,

Berkeley.

19Gates Kennedy Agnew, LINQUAD: An Incomplete Demand System Approach to Demand

Estimation and Exact Welfare Measures. Master’s Thesis, Agricultural and Resource

Economics, University of Arizona (1998).

+56, :6'+3ZV/#3IJ/#0,# ®ZV.­ZV3ZV#.·ZV >00#®ZV3ZV0#®IJ*3IJ0318­ZV3ZV

5

0318IJ ­IJL*3IJL

5

@ DQG

+57, )*'L

+#3ZV/#3IJ/#0,# ®IJL.­IJL3IJL#.·IJL >00#®ZV3ZV0#®IJ*3IJ0318­ZV3ZV

5

0318IJ ­IJL*3IJL

5

@
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 42 GAO/RCED-00-126 Sugar Program

for all i industries containing sweeteners. We use a system of consensus

estimates of own- and cross-price responses and income responses based

on Devadoss and Kropf,20 Bhuyan and Lopez,21 and Wohlgenant22to derive

parametersξνandχWe solve the following system of equations:

Equations (23) and (24) lead to an equivalent variation, EV, equal to:

Thus, we compute the change in expenditure, that would produce a change

in utility equivalent to the price changes, with superscripts 0 and 1 denoting

initial and final prices.

Total Welfare Gains and

Losses From the Sugar

Program

Finally, we list the welfare gains and losses from the presence of the sugar

program accruing to the various groups represented in the model.

20Stephen Devadoss and Jurgen Kropf. “Impacts of Trade Liberalization Under the Uruguay Round on

the World Sugar Market,” Agricultural Economics, Vol. 15 (1996), pp. 83-96.

21Sanjib Bhuyan and Rigoberto A. Lopez, “Oligopoly Power in the Food and Tobacco

Industries,” American Journal of Agricultural Economics (Aug. 1997), pp. 1035-1043.

22Michael K. Wohlgenant, Effects of Trade Liberalization on the World Sugar Market,

prepared for the Food and Agriculture Organization of the United Nations, Rome (1999).

)*'L23IJL ­IJL#0#·IJL#+®IJL.#­IJL3IJL,/#)*'L20 ·IJL/#:6'23ZV ­ZV0·ZV+®ZV.­ZV3ZV,/ DQG

:6'20 ·ZV1

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0318IJ­IJL+34

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IJL,.

+·ZV33

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5

0318IJ­IJL+33

IJL,

5

@1
Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 43 GAO/RCED-00-126 Sugar Program

Welfare Losses From the

Presence of the Sugar Program

Losses to consumers (all prices higher as a result of the program):

Net losses to sweetener-using food processors (higher sweetener input

prices and higher output price):

Changes in quasi-profits to cane refiners (higher output price but

significantly higher input prices):

Welfare Gains From the Presence

of the Sugar Program

Gains to beet producers (higher output price):

Gains to beet processors (higher white sugar price partly offset by higher

beet input prices):

Gains to cane producers (higher output price):

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5

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IJL,

5

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,`1

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F@

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Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 44 GAO/RCED-00-126 Sugar Program

Net gains to HFCS producers (higher output price, net of slightly higher

corn input price):

Changes in quasi-profits to corn farmers:

Net gains to the foreign suppliers of raw sugar that have been given quota

rights consist of the unit rent times the total amount of the TRQ:

The net welfare loss is the difference between the additional costs of the

sugar program to the users of sweeteners and the gains to domestic

sweetener producers and processors:

This net welfare loss that results from the sugar program consists of

(1) production and consumption inefficiencies and (2) the transfer of rents

to foreign suppliers.

Data and Data Sources

Used in the Model

On the supply side, all data, parameters, and extraction rates used in the

U.S. component of the world sugar model are from CARD. To estimate

welfare effects for the food-processing industry, we identified a subset of

21 sweetener-using industries at the 4-digit SIC level (2023 to 2099). We

took these industries from the major categories of (1) dairy and frozen

desserts, (2) canned and preserved fruits and vegetables, (3) bread and

bakery products, (4) confectionery and chocolate products, (5) beverages,

and (6) miscellaneous food products industries. To calculate the demand

and marginal cost for sweeteners from these industries, we used data on

+44,  ̈KIFVV 

3FRUQ3

3FRUQ4



3KIFV3

3KIFV4

+)&66+3KIFV/#3FRUQ,##G3KIFVG3FRUQ1

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33

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Appendix II

Estimating Economic Gains and Losses From

the U.S. Sugar Program

Page 45 GAO/RCED-00-126 Sugar Program

the value of shipments for each industry, the price of sugar and HFCS, and

the total quantities of sugar and HFCS sold for the years 1996 and 1998. For

1998 HFCS cost data, we scaled each industry proportionately, using 1997

Bureau of the Census data, to reproduce the exact total disappearance of

HFCS in 1998. For 1996 HFCS data, we used cost data on corn sweeteners

from the Bureau of Economic Analysis. We obtained price data for sugar,

HFCS-42, and HFCS-55 from USDA and industry sources.

For the LINQUAD model of final consumer demand, we used producer

price index data from the Bureau of Labor Statistics for each of our 21

4-digit SIC industries. We rebased the index numbers such that 1992=100.

We then divided each index number by the consumer price index number

for that year, also based with 1992=100, to capture how prices for each food

group compared with prices in the overall economy. USDA provided data

on total deliveries of sugar and HFCS. As previously noted, we obtained

data on income elasticities and own- and cross-price elasticities from

several sources in the economics literature.
Page 46 GAO/RCED-00-126 Sugar Program

Appendix III

Structure of the CARD International Sugar

Model ApendxiI

The CARD International Sugar Model is a nonspatial, partial equilibrium

econometric world sugar model consisting of 29 countries/regions,

including a component for the rest of the world, to close the model.1 Major

sugar producing, exporting, and importing countries are included in the

CARD International Sugar Model. The model specifies only raw sugar trade

between countries/regions and does not disaggregate refined sugar trade

from raw sugar trade. Consequently, importers are not categorized as

refiners or toll refiners because the countries that specialize in these roles

are well known and stable over time. The model covers the following

countries/regions:

The general structure of the submodel for each country includes behavioral

equations for the area harvested, yield, sugarcane and sugar beet

production on the supply side, and per-capita consumption and ending

stocks on the demand side. Equilibrium prices, quantities, and net trade are

determined by equating excess supply and excess demand across countries

and regions. The domestic price for each country or region is linked with a

representative world price through exchange rates and other policy

wedges, such as tariffs and transfer-service margins. Because of the overall

scope of the model, it is not feasible to include the complete empirical

model in the text of this report. The general framework for the submodel

for each country consists of the following:

AHt = f (AHt-1, RSPPt-1, RGPt-1, Trend),

Yield = f (Yieldt-1, Trend),

Cane and beet production = f (AH, Yield),

1

Our analysis replaced the U.S. sugar module of the CARD model with the model described

in app. II.

Algeria Colombia Guatemala Mexico South Korea

Argentina Cuba India Morocco Thailand

Australia Eastern Europe Indonesia Pakistan Turkey

Brazil Egypt Iran Peru Venezuela

Canada European Union Japan Philippines Rest of the World

China Former Soviet Union Malaysia South Africa
Appendix III

Structure of the CARD International Sugar

Model

Page 47 GAO/RCED-00-126 Sugar Program

Per-capita sugar consumption = f (RSP, PCRGDP), and

Ending stocks = f (ESt-1, SC, RSP),

with AH denoting acreage, RSPP the cane or beet price, RGP the price of

alternative crops, PCRGDP real income per capita, ES ending stocks, SC

sugar consumption, and RSP the real raw sugar price. In many countries,

beet or cane prices are set by policy and can be treated as predetermined.

Because some countries lack information on the agricultural price, the

model uses the raw cane sugar price, RSP, instead of the agricultural price

in specifying the acreage response. In some countries, yield improvements

are captured by a time trend.

Although the CARD model in general can be used in either a dynamic or

static framework, we used its static version. In this way, the CARD

international sugar model uses contemporaneous price responses in

supply, consumption and inventory demand. Lagged acreage is fixed at the

previous year level in the acreage equations. Short-term supply elasticities

are based on the short-term price responses of the acreage equations,

which reflect the cost of adjustment between desired acreage and actual

acreage. Long-term responses are obtained by using the Nerlovian longterm response, which is the short-term response divided by the partial

adjustment coefficient of the corresponding acreage equation. In addition,

the elasticity values our analysis uses are arc elasticities evaluated for 1998

between the historical and post-reform levels.

We obtained data for the area harvested, yield, and sugarcane and sugar

beet production from the Food and Agricultural Organization of the United

Nations and data for sugar production, consumption, and ending stocks

from USDA’s Production, Supply, and Distribution database. Cane and beet

production is tied to sugar production through the extraction rate. We

obtained macroeconomic data, such as the real gross domestic product,

consumer price index, population, and exchange rate from sources

including the WEFA Group; Project Link; and S&P/DRI.

We estimated the model for the period 1980 through 1998. We used simple

linear specifications and ordinary least squares in the estimation of these

equations to save degrees of freedom, given the short time series used. This

estimation approach overlooks the potential endogeneity of each country’s

domestic sugar prices and treats them as exogenous in estimating acreage

response equations. The Caribbean raw sugar price is generally considered

to be the world market price.
Appendix III

Structure of the CARD International Sugar

Model

Page 48 GAO/RCED-00-126 Sugar Program

Most elasticities in the CARD model are comparable to those used by

Devadoss and Kropf (1996), 2 Hafi et al. (1993),3 and Wohlgenant (1999).4

The lagged own-price supply elasticities for sugarcane for Australia (0.02),

Brazil (0.07), Colombia (0.05), Cuba (0.01), Guatemala (0.02), Mexico

(0.002), South Africa (0.005), and Thailand (0.014) are highly inelastic in the

short run. This is consistent with the fact that these countries are large

producers of sugarcane and exporters of sugar and can harvest several

annual crops, called ratoons, from one planting of sugarcane. Therefore,

there is limited acreage adjustment to price fluctuations in the short run.

These low elasticities are largely the result of the historical policy of

acreage allotment. The own-price supply elasticities for sugar beet

production are generally not as inelastic as they are for sugarcane, except

for the former Soviet Union (0.002).

The own-price demand and income elasticities reflect the fact that in many

developing countries, sugar is considered a staple in the diet and

consumers look to sugar to fulfill basic caloric requirements. The

elasticities implied in the CARD model are very comparable to ones

reported in the literature. For several countries, when more recent data

were not available for the econometric estimation, we borrowed

elasticities from Hafi et al. (1993) and from Devadoss and Kropf (1996).

The Added

Raw/Refined Sugar

Link for GAO’s

Analysis

Although the CARD international sugar model does not disaggregate raw

and refined sugar, we complemented the existing model with an additional

equation to endogenize the world price of refined sugar following the

removal of the refined sugar TRQ in the United States. Consistent with Hafi

et al. (1993), we specified a reduced form to approximate the rest-of-theworld supply faced by the United States. However, there is no explicit

aggregation of excess supply in the various countries to derive this

equation, as is the case for the raw sugar market. This equation is of the

form

IWSrow =a(Pwws)

αws (Pwrcs)βcs

2

S. Devadoss and J. Kropf. Cited in app. II.

3

A. Hafi, P. Connell, and R. Sturgiss, "Market Potential for Refined Sugar Exports From

Australia," Australian Bureau of Agricultural and Resource Economics Research, Report

93.17, Canberra, (1993).

4

M.K. Wohlgenant. Cited in app. II.
Appendix III

Structure of the CARD International Sugar

Model

Page 49 GAO/RCED-00-126 Sugar Program

where IWS is imports of white sugar and the elasticities of white sugar and

raw cane sugar are αws = 0.83 and βcs = -0.44, respectively.

These elasticity values come from Hafi et al. (1993) and are medium-run

estimates. Parameter a is chosen to calibrate the IWS to the existing refined

sugar TRQ level in the United States, prior to the TRQ’s removal.

This equation is treated as the rest-of-the-world supply, which underlies the

import supply faced by the United States. The latter is then equated to the

U.S. excess demand for white sugar to close the white sugar market in our

analysis, once the TRQ is removed.
Page 50 GAO/RCED-00-126 Sugar Program

Appendix IV

Economic Analysis of a Tariff-Rate Quota ApendxiIV

The sugar program includes the use of a TRQ to limit imports of raw and

refined sugar that come into the United States. Under a TRQ, a lower, “inquota” tariff applies to a limited quantity of imports, while a higher, often

prohibitive, “over-quota” tariff applies to any imports that exceed the quota.

Our model follows Moschini,1 as well as Meilke and Lariviere,2 in its

representation of the import supply under a TRQ.

Figure 3 illustrates the effects of the TRQ on the excess supply curve and

shows how this type of policy affects the incentive to import. Our model

describes three excess supply conditions–ESf , ES1 , and ES2. ESfrepresents

the excess supply curve facing the United States if it did not have import

restrictions, while ES2 is the excess supply curve under the in-quota tariff.

However, under the current U.S. sugar TRQ, producers from very few

quota-holding countries pay the in-quota tariff and most pay none because

of preferential arrangements. Therefore, without loss of generality, we will

assume that ES2 is actually the free trade excess supply curve facing the

United States in the absence of import restrictions.

1

G. Moschini, "Economic Issues in Tariffication: An Overview," Agricultural Economics, Vol.

5 (1991), pp. 101-120.

2

Karl Meilke and Sylvain Lariviere, “The Problems and Pitfalls in Modeling International

Dairy Trade Liberalization,” Working Paper #99-3, International Agricultural Trade Research

Consortium (Mar. 1999).
Appendix IV

Economic Analysis of a Tariff-Rate Quota

Page 51 GAO/RCED-00-126 Sugar Program

Figure 3: The TRQ’s Effect on Imports

Overall, the TRQ introduces a discontinuity in the excess supply curve

facing an importing country at the level of the quota, as shown in the bold

curve ES1.

3 As figure 3 illustrates, the TRQ can result in three potential

trade and price outcomes, depending on the U.S. excess demand for

foreign sugar. First, if the excess demand schedule intersects the segment

AB on the lower portion of the excess supply curve, such as ED1, then there

is a supply response to shifts in the excess demand schedule and both

quantity and price will change. In this area of the curve—the “in-quota”

portion of excess supply—the domestic price equals the world price

because the importing country is actually not imposing any border

measures. Second, if the excess demand schedule intersects the excess

supply schedule at the level of the TRQ, such as ED2, the domestic price

will equal P1 and the world price PW. Rents are generated for the holders of

3

We employed the “large country” assumption in our analysis of excess supply under a TRQ,

in the sense that changes in U.S. imports would be sufficient to affect international prices.

Thus, the excess supply curve is upward sloping at import volumes in ranges other than

where the TRQ is binding.

Price

QTRQ QFM Imports

ED1

B

ED2

ES2 ESf

ES1

D

ED3

C

P1

P2

PW

A
Appendix IV

Economic Analysis of a Tariff-Rate Quota

Page 52 GAO/RCED-00-126 Sugar Program

the quota rights corresponding to the binding TRQ. In this case, the quota

rent will be equal to the difference between the domestic price and the

world price. This situation corresponds to the current U.S. sugar import

situation. Third, if the excess demand schedule intersects the excess

supply schedule sufficiently beyond the TRQ, such as ED3, both the price

and the quantity of imports supplied will respond to shifts in the excess

demand for the imports and the rest of the world will satisfy this demand.
Page 53 GAO/RCED-00-126 Sugar Program

Appendix V

Estimated Net Losses to the U.S. Economy

Accruing to Foreign Sugar Importers, Fiscal

Year 1998 ApendxiV

Allocation and imports in short tons (raw value

Country TRQ allocationa Actual imports Estimated economic loss

Argentina 72,300 72,200 $14,600,000

Australia 139,500 140,100 28,400,000

Barbados 8,600 0 0

Belize 18,500 18,500 3,800,000

Bolivia 13,400 12,600 2,600,000

Brazil 243,700 242,900 49,300,000

Colombia 40,300 37,200 7,500,000

Congo 8,000 8,000 1,600,000

Costa Rica 25,200 25,200 5,100,000

Cote d’Ivoire 8,000 30 6,000

Dominican Republic 295,800 294,500 59,700,000

Ecuador 18,500 18,500 3,800,000

El Salvador 43,700 44,000 8,900,000

Fiji 15,100 11,900 2,400,000

Gabon 8,000 0 0

Guatemala 80,700 80,400 16,300,000

Guyana 20,200 20,200 4,100,000

Haiti 8,000 0 0

Honduras 16,800 16,900 3,400,000

India 13,400 13,800 2,800,000

Jamaica 18,500 18,300 3,700,000

Madagascar 8,000 8,100 1,600,000

Malawi 16,800 13,200 2,700,000

Mauritius 20,200 20,400 4,100,000

Mexico 27,600 27,600 5,600,000

Mozambique 21,800 22,100 4,500,000

Nicaragua 35,300 35,400 7,200,000

Panama 48,700 48,700 9,900,000

Papua New Guinea 8,000 100 20,000

Paraguay 8,000 5,500 1,100,000

Peru 68,900 69,000 14,000,000

Philippines 226,900 222,800 45,200,000

St. Christopher-Nevis 8,000 8,000 1,600,000

South Africa 38,700 38,800 7,900,000
Appendix V

Estimated Net Losses to the U.S. Economy

Accruing to Foreign Sugar Importers, Fiscal

Year 1998

Page 54 GAO/RCED-00-126 Sugar Program

Note: Each country supplying sugar to the United States under the TRQ is limited to exporting sugar

that solely originated within that country.

a

Allocations are based on countries’ exports to the United States from 1975 through 1981.

Source: Sugar and Sweetener Situation and Outlook, Economic Research Service, USDA (Sept.

1999).

Swaziland 26,900 27,000 5,500,000

Taiwan 20,200 20,200 4,100,000

Thailand 23,500 23,500 4,800,000

Trinidad-Tobago 11,800 12,100 2,400,000

Uruguay 8,000 8,200 1,700,000

Zimbabwe 20,200 20,100 4,100,000

Total 1,763,700 1,706,030 $346,026,000

(Continued From Previous Page)

Allocation and imports in short tons (raw value

Country TRQ allocationa Actual imports Estimated economic loss
Page 55 GAO/RCED-00-126 Sugar Program

Appendix VI

Comments From the U.S. Department of

Agriculture ApendxiVI

See comment 1.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 56 GAO/RCED-00-126 Sugar Program

See comment 2.

See comment 3.

See comment 4.

See comment 5.

Now on p. 25.

See comment 6.

See comment 7.

See comment 8.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 57 GAO/RCED-00-126 Sugar Program

Now equations 23-25.

See comment 9.

See comment 10.

See comment 11.

Now equations 13,1, and

2.

See comment 12.

See comment 13.

Now equations 3 and 18.

See comment 14.

See comment 15.

See comment 16.

See comment 17.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 58 GAO/RCED-00-126 Sugar Program

See comment 18.

See comment 19.

See comment 20.

See comment 21.

See comment 22.

Now on pps. 29 and 48.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 59 GAO/RCED-00-126 Sugar Program

See comment 23.

See comment 24.

See comment 25.

See comment 26.

See comment 27.

Now equations 15 and

15a.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 60 GAO/RCED-00-126 Sugar Program

See comment 28.

See comment 29.

See comment 30.

See comment 31.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 61 GAO/RCED-00-126 Sugar Program

See comment 32.

See comment 33.

See comment 34.

See comment 35.

See comment 36.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 62 GAO/RCED-00-126 Sugar Program

See comment 37.

See comment 38.

See comment 39.

See comment 40.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 63 GAO/RCED-00-126 Sugar Program

See comment 41.

Now on p. 12.

See comment 42.

See comment 43.

Now on p. 13.

See comment 44.

Now on p. 13.

See comment 45.

Now on p. 12.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 64 GAO/RCED-00-126 Sugar Program

Now on p. 13.

See comment 46.

Now on p. 20.

See comment 47.

Now on p. 21.

See comment 48.

See comment 49.

Now on p. 21.

See comment 50.

Now on p. 22.

See comment 51.

Now on p. 25.

See comment 52.

See comment 53.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 65 GAO/RCED-00-126 Sugar Program

Now on p. 30.

See comment 54.

Now on p. 32.

See comment 55.

Now on p. 38.

See comment 56.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 66 GAO/RCED-00-126 Sugar Program
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 67 GAO/RCED-00-126 Sugar Program

GAO Comments The following are GAO’s comments on the U.S. Department of Agriculture’s

written response to our draft report dated May 16, 2000. Based on agency

and industry comments, we adjusted our model to more fully account for

certain transportation costs. As a result, cost and benefit estimates

referenced in USDA’s comments do not reflect those contained in the final

report.

1. After thoroughly examining each of the Department’s concerns and

discussing them with experts outside GAO, we continue to believe that

our analytical approach and model for estimating the costs and benefits

of the sugar program are comprehensive and methodologically sound

and that the estimates yielded by our model are reasonable. In

developing the model, we took a number of actions to ensure that it

was methodologically sound. First, we contracted with a well-known

expert in modeling the international trade of agricultural commodities

and with a prominent agricultural economist to work with us in

developing the model. In December 1999, we sent our proposed model

to four outside academicians specializing in agricultural economics and

international trade economics and revised the model in response to

their comments. We also sent our proposed model to USDA for review

at that time. However, USDA did not provide any comments.

Furthermore, we asked two of the agricultural economists to review

our final model and results before we sent our draft report to USDA for

comment.

2. Our approach is not strictly based on a traditional “gains-to-trade”

argument, and its validity does not depend on world prices being free of

market distortions. We did not distinguish between the effects of

comparative advantage and export subsidies or other forms of market

intervention in determining the price at which U.S. sugar users would

be able to purchase sugar. To estimate the costs and benefits of the

sugar program, our model compared baseline domestic and world

prices for sugar in 1996 and 1998 with the domestic and world prices

that we estimated would occur if the sugar program were eliminated,

other things being equal. These estimated prices were higher than the

baseline world prices because our model accounted for the impact on

world prices of the higher U.S. sugar imports that would have occurred

if the program had been eliminated. Comparing these estimated prices

with the baseline prices was appropriate for estimating the effects of

the sugar program because the estimated world prices reflect what

domestic sugar users would have been expected to pay for sugar in
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 68 GAO/RCED-00-126 Sugar Program

those years if the sugar program had been eliminated. This comparison

remains appropriate regardless of whether the world price is

influenced by subsidies by countries with surplus production.

3. While the world sugar price that would result from multilateral reform

is uncertain, we believe that several elements of the Schmitz and

Vercammen analysis (University of California, Berkeley, 1990) led to a

high price estimate that is unlikely to be observed. In particular, they

assume a relatively high (in absolute value) excess demand elasticity of

−0.5 and a very inelastic excess supply schedule from the rest of the

world. That is, they assume that a small increase in the world price will

lead to a large reduction in the quantity of sugar demanded but only a

small increase in the quantity of sugar that producers in other countries

would want to supply. Both assumptions tend to cause the world price

to rise more following multilateral reform than would happen if

assumptions of less elastic excess demand and more elastic excess

supply were used. Schmitz and Vercammen also overstate the world

price that would follow multilateral reform because they do not

account for the supply responses of all exporting countries.

4. On the basis of our review of the literature, we believe that the effect of

multilateral reform of sweetener markets on world sugar prices is

highly uncertain. Even if world prices were to rise, this increase would

likely be gradual because the reforms would likely be phased in over a

substantial period of time. Therefore, we regard as speculative USDA’s

view that multilateral reform following the elimination of the U.S. sugar

program would erase the welfare gains that we attributed to the

program’s elimination.

5. We disagree with USDA’s assertion that our model is not well

documented and includes incomplete references. However, we added

language to the scope and methodology section of our report to explain

further the relationship between the model we used in our analysis and

the CARD model.

6. We clarified where on the linear supply schedule the supply elasticities

that we use were estimated.

7. We disagree with USDA that the import supply elasticities are

inconsistent with our model. We clarified our report to indicate that

these elasticities are derived explicitly from the CARD model, which

includes the sugar sectors of the countries listed in appendix III.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 69 GAO/RCED-00-126 Sugar Program

8. We disagree with USDA’s assertion that our model presumes

instantaneous and costless adjustments within the United States. In

fact, our short-run elasticities are smaller than our longer-term

elasticities because they take adjustment costs into account. However,

we added clarifying language to appendix III.

9. We disagree. Our draft report defined each of the symbols describing

the variables used in the LINQUAD model.

10. We disagree with USDA’s assertion that the LINQUAD model is

experimental and not well documented. The LINQUAD approach is the

latest development of the incomplete demand system approach

pioneered by Professor Jeffrey LaFrance at the University of California,

Berkeley. The LINQUAD approach is fully documented in several

working papers that are publicly available, and Professor LaFrance’s

work on incomplete demand systems has appeared in many leading

economics journals. Professor LaFrance first published his results in

1990 in an article of the Australian Journal of Agricultural Economics.

The method was first empirically implemented in an application to

dairy in a 1991 article of the American Journal of Agricultural

Economics. The model was also documented in a thesis that received

the American Agricultural Economics Association’s Outstanding Thesis

Award in 1999. The incomplete demand system model was appropriate

for our work in modeling sugar demand because it allowed us to

compute a consistent welfare measure that included direct and indirect

sugar consumption in food.

11. We disagree that our model’s treatment of the sugar-processing sector

was inadequate. Although no equations for sugarcane and sugar beet

acreage are presented in the report, our model solves for acreage as

well as prices and production levels. We clarified this point in appendix

II.

12. We disagree with USDA’s characterization of equation 15 (now equation

13). This equation establishes a condition that must be met for the

model to solve—at the margin, the cost of producing more white cane

sugar and more beet sugar must be equal to each other and to the price

of white sugar. Although we do not explicitly model the decision to exit

the industry, the parameter representing the refining margin takes into

account changes in output.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 70 GAO/RCED-00-126 Sugar Program

13. Our draft report inadvertently reported slopes rather than elasticities.

We revised the report to present the correct elasticities, which are

much lower. The supply response reported in table 7 is consistent with

these lower elasticities.

14. We agree with USDA that the revenues that producers receive are

based on contracts with processors. However, we believe that the

contractual arrangements, and the sugar program itself, lead to stable

price expectations for producers that are captured in equations 3 and 4

(now equations 1 and 2) — producers’ supply functions. In our model,

prices at all stages are determined simultaneously by the satisfaction of

equilibrium conditions in all markets.

15. We do not think that producers’ ownership of processing plants is an

important issue in our analysis. If producers’ ownership were an

important influence on the supply responses of producers to price

changes, the expected direction of that influence would be to make

supply less elastic (that is, producers might reduce supply less in

response to a price decline than if they did not own the processing

plants). We do not believe that incorporating this possibility into our

model would have much effect because the supply elasticities we use

are already low.

16. The requirement for minimum payments from processors to producers

is not a concern for our model because the supply decisions in our

model are calibrated using historical data that include minimum

payments when relevant.

17. We added language to the report to clarify that the model’s assumption

of constant returns to scale in sugarcane processing implies that there

are no welfare changes to sugarcane processors from price changes

due to the elimination of the sugar program. Accordingly, we did not

report any welfare effects.

18. We disagree with USDA that conducting the analysis at the national

level implies any misspecification of our model, although we agree that

more detail about regional production might be interesting. Our model

does not specifically account for regional differences in cost structure

or alternative crops and we agree with USDA that producers in

different regions would be affected differently. Nevertheless, we remain

confident that our model measures the total effects of the U.S. sugar

program appropriately.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 71 GAO/RCED-00-126 Sugar Program

19. We revised our discussion of equation 20 (now equation 18) to say that

the intercept term represents the cost to food manufacturers of inputs

other than sweeteners (rather than a reflection of market power). As

shown in equation 22 (now equation 20), market power results in a

markup of price above marginal cost.

20. We added a definition of “conjectural variation” and explained how this

parameter of market interdependence is related to industry markup.

21. We disagree with USDA’s assertion that our model did not include some

of the factors cited by McCorriston et al. For example, our model

includes the influence of the retail price elasticity of demand on price

pass-through. It also includes the influences of substitution between

sugar and HFCS and the cost share of sweeteners in food products, but

it does not include the role of marketing inputs.

22. We clarified that the ES2 supply curve in figure 2 (and the ESf supply

curve in figure 3) refer to the excess supply curves that would exist in

the absence of import restrictions in the United States. They were not

meant to represent excess supply curves that would result from free

trade in all world sugar markets.

23. USDA’s conjecture that the domestic sugar industry could successfully

pursue an antidumping action that would raise the price of foreign

sugar for U.S. sugar users is speculative. Accordingly, we believe that it

is appropriate to compare baseline prices with estimated world prices

in the absence of the program, other things being equal, as we have

done. See comment 2.

24. See comment 3.

25. We do not question the objective of pursuing international trade reform

and free world markets through trade negotiation. To estimate the

effects of the U.S. sugar program in this report, we needed to make the

analytical assumption that all other factors, including other countries’

sugar programs, would remain unchanged. If we had not done so, we

would not have been able to separate the effects of the U.S. program

from those of other countries’ programs. Accordingly, when we say that

domestic sugar prices are artificially high, we mean in comparison with

the prices that would prevail if the U.S. sugar program were eliminated

and other conditions remained unchanged. See also comment 37.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 72 GAO/RCED-00-126 Sugar Program

26. We disagree with USDA and stand behind our finding that eliminating

the sugar program would have a limited impact on the price of HFCS.

While HFCS producers benefited from the sugar program in the 1980s

and early 1990s, we believe that the domestic HFCS and sugar markets

have since been decoupled because of domestic price, cost, and market

conditions. The president of the U.S. Corn Refiners’ Association has

also expressed that view. As shown in table 4 in appendix I, the

weighted average wholesale price of HFCS dropped from 22 cents per

pound (dry weight) in 1992 to 12.4 cents per pound (dry weight) in

1998, while the U.S. wholesale price of refined beet sugar was above 25

cents per pound throughout this period. The likelihood of substitution

between sugar and HFCS is less than in prior years because

technological advances have improved HFCS products and created

more specialized sweetener markets.

27. We revised appendix II to clarify that the functional form we used does

not imply that the cost shares of sugar and HFCS need to remain

constant as the price of sugar changes.

28. We added references to the literature on the price elasticity of demand

for sugar and HFCS.

29. We added language to the report to indicate that the lack of substitution

between sugar and HFCS is due not just to the relative prices of the

sweeteners but also to the increasingly specialized uses of sweeteners,

which have limited the substitutability between sugar and HFCS.

30. In our model, the relationship between raw and refined sugar prices

depends on the refining margin as well as on technical coefficients

involved in the refining process. Since the refining margin will be

smaller at lower levels of output, our model takes into account the

lower margins for domestic cane refiners that will result from

increased imports of refined cane sugar.

31. We disagree with USDA’s assertion that we have not adequately

analyzed the increased competition that the domestic refining industry

could face as a result of the elimination of the refined sugar TRQ. If

imports of refined sugar increased following the elimination of the

refined sugar TRQ, the refining margin for domestic refiners would

decline, according to our model. See comment 30.
Appendix VI

Comments From the U.S. Department of

Agriculture

Page 73 GAO/RCED-00-126 Sugar Program

32. Our report does not predict the degree to which cost reductions

resulting from the elimination of the sugar program would be passed

through to consumers. We present two estimates of potential benefits

to consumers based on different assumptions about the pass-through of

cost reductions from food manufacturers to consumers; both estimates

are based on a full pass-through of cost reductions for the production

of table sugar. For reasons given in the report, we believe that a full

pass-through is more likely for table sugar than for sugar-containing

products. In estimating potential benefits, we assumed “other things

being equal” (no other changes in input costs) while the data that USDA

presents on changes in wholesale and retail prices do not. Changes in

the prices of marketing inputs could have offset the reduction in

wholesale prices in determining retail prices.

33. It is unclear what effect accounting for marketing inputs would have

had on our results.

34. See comment 32.

35. We disagree with USDA’s assertion that a comparison of our estimate of

the benefits that sugar beet growers receive from the program with

data on growers’ revenues and expenses implies that our estimate is

clearly overstated. The benefits of a program that keeps price

substantially higher than it otherwise would be can be very high in the

short run, when supply elasticities are low. In the long run, the benefits

of maintaining the sugar program are less because in the absence of the

program a wider set of adjustment opportunities would be available to

producers, implying larger supply elasticities.

36. We revised the report to address USDA’s concern.

37. We disagree that our characterization of domestic sugar prices as

artificially high is inflammatory and unprofessional. The sugar program

keeps domestic sugar prices above the level at which they would be if

the program were eliminated (other things being equal), which is what

we mean by artificially high. Furthermore, USDA has some flexibility in

its implementation of the sugar program, and our report entitled Sugar

Program: Changing the Method for Setting Import Quotas Could

Reduce Cost to Users (GAO/RCED-99-209, July 26, 1999) found that,

from 1996 through 1998, domestic sugar prices were over 2 cents per

pound higher than necessary to avoid sugar loan forfeitures.
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38. We agree that the current conditions in sugar markets differ from those

observed in 1996 and 1998. However, 1998 was the most recent year for

which price and quantity data were available for our analysis when we

began our study. As stated in the report, our estimates apply only to

1996 and 1998.

39. We agree that the North American Free Trade Agreement has the

potential to significantly influence the operation of the sugar program

and the domestic sugar market. We note in appendix I that USDA will

spend substantial federal funds this fiscal year because the sugar

program has resulted in significantly increased domestic sugar

production—USDA recently announced that it will seek to purchase

150,000 tons of domestic sugar to reduce the cost of expected sugar

program forfeitures. Because of our need to establish a base case for

our economic model, we examined 1998, the most recent year for

which sweetener price and quantity data were available. Accordingly,

we state on page 4 of our report, “we did not analyze how the gradual

reduction of U.S. tariffs for Mexican sugar through 2008 under the

North American Free Trade Agreement might affect domestic sugar

prices. However, our model could be used for this analysis as well as

other types of analyses in the future.”

40. The comments of former Under Secretary Moos on our 1993 report

contrast with USDA’s official written comments in 1993 (included as an

appendix to the 1993 report), which state, “Overall, this is a reasonable

report with no major data problems. The costs and benefits, derived

using assumptions of hypothetical policy alternatives, are well within

the range of most research.” We continue to believe that our 1993 report

provided a reasonable estimate of the cost of the sugar program to U.S.

sugar users for the period analyzed. More important, we believe that

although the precise level of the price premium is subject to debate, the

program and policy problems we identified in 1993 are still relevant.

41. In preparing this report, we developed a more comprehensive model

than the one we used for our 1993 report. Under our current approach,

the estimated prices that would exist in the absence of the sugar

program were derived by our model rather than assumed from outside

the model, as was done for the 1993 report. Comparing these estimated

prices with the baseline prices was appropriate for estimating the

effects of the sugar program because the estimated world price reflects

what domestic sugar users would have been expected to pay for sugar

in those years if the sugar program had been eliminated. To estimate
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the effects of the U.S. sugar program by itself, we needed to make the

analytical assumption that all other factors, including other countries’

sugar programs, would remain unchanged. Without this assumption, we

would not have been able to isolate the effects of the U.S. program from

the effects of other countries’ programs. In preparing the 1993 report, if

we had chosen to use a price that seemed more consistent with the

elimination of the U.S. program alone, we might have selected a lower

price for the “no program” scenario, which would have led to higher

estimates of the cost of the program to sugar users and the benefits to

producers.

42. We revised the report to address USDA’s concern.

43. We revised the report to indicate that while the minimum requirement

of the refined sugar TRQ is 30,900 tons, USDA has set the TRQ above

this level in recent years.

44. We revised the report to address USDA’s concern. The Agriculture

Appropriations Act for fiscal year 2000 suspended the sugar marketing

assessment for fiscal years 2000 and 2001.

45. We revised the report to address USDA’s concern.

46. We revised table 1 to note that the basis point for the world raw sugar

contract price is the Caribbean. According to a sugar market expert, the

cost to transport raw sugar from the Caribbean to the United States is

about 1.5 cents per pound. We also refined our model to more fully

account for these transportation costs in our welfare analysis.

47. We revised the report to address USDA’s concern.

48. We did not include a line in table 5 for the revenues that the federal

government derives from sugar marketing assessments because those

revenues represent only part of the sugar program’s financial effects on

the federal government. For example, other effects include increases in

the government’s costs of purchasing food and conducting food

assistance programs because the prices for sugar and sugar-containing

foods are higher under the sugar program. Several years ago, we

estimated that the government’s additional cost of purchasing food and

providing the level of food assistance that it delivered in 1994 was

approximately $90 million. At that time, the government collected

about $30 million annually in marketing assessments.
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49. We did not include a line for the benefits of the sugar program to

sugarcane processors because they would see no welfare change from

the elimination of the sugar program. See comment 17. The cost

reported in table 5 for HFCS manufacturers and corn growers is very

small; in general, the sugar program has little effect on these groups

because of the decoupling of the sugar and HFCS markets. See

comment 26.

50. We adjusted our model to more fully account for certain transportation

costs. As a result, the 1996 estimated U.S. wholesale refined sugar price

without the sugar program increased from 20.5 cents per pound in the

draft report to 21.77 cents per pound in the final report. This revised

price is higher than the 1996 average price of HFCS-55 of 20.6 cents per

pound. To further clarify our model’s results, the final report states that

specialization in sweetener use was also important in estimating the

effect of the sugar program on HFCS producers. See comment 29.

51. We continue to believe that transfers to foreign sugar producers that

receive quota allocations are appropriately treated as a component of

estimated net losses to the U.S. economy due to the sugar program. The

additional revenues that they receive from higher prices as a result of

the program represent a transfer outside the United States and,

therefore, are a net loss to the U.S. economy. By suggesting that these

transfers are more of a foreign policy issue than a sugar program issue,

USDA implies that in the absence of the program the United States

would provide the quota-holding countries with other forms of

assistance equal to the benefits their producers currently derive from

the program. We believe such a conclusion is speculative.

52. Although the estimated refining margin for 1996 is high, it is not as high

relative to other years once adjustments are made for price level

differences (see table 1 in app. I). Our estimate of 6.89 cents per pound

for 1996 is in 1999 dollars. Expressed in 1999 dollars, the 14-year high

(achieved in 1990) was 5.73 cents per pound, not 4.77 cents.

Nonetheless, one limitation of our model is that the world refined and

raw sugar markets are not fully linked. If our estimated price for refined

sugar without the program is too high relative to the estimated noprogram price for raw sugar for 1996, the implication is that we have

overestimated the benefits to refiners and underestimated the benefits

to other sugar users (food manufacturers and consumers) from

eliminating the sugar program.
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53. See comment 13.

54. We revised the report to address USDA’s concern.

55. Our model does not conduct a general equilibrium analysis to

determine the effects of eliminating the sugar program on the prices of

other crops because of acreage being transferred from sugar to these

other crops. However, we believe that any transfers out of sugar would

likely have minimal effects on the total production of most other crops

because of the relatively small acreage involved compared with the

acreage already planted in those crops.

56. We added language to the report to show that the 20-percent markup

we use is consistent with what others have used in their analyses.
Page 78 GAO/RCED-00-126 Sugar Program

Appendix VII

Comments From the American Sugar Alliance ApendxiVI

See comment 1.

See comment 2.

See comment 3.

See comment 4.
Appendix VII

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Page 79 GAO/RCED-00-126 Sugar Program

See comment 5.

See comment 6.
Appendix VII

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Page 80 GAO/RCED-00-126 Sugar Program

See comment 7.

See comment 8.
Appendix VII

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Page 81 GAO/RCED-00-126 Sugar Program

See comment 9.

See comment 10.
Appendix VII

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See comment 11.

See comment 12.

See comment 13.

See comment 14.

See comment 15.
Appendix VII

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See comment 16.

See comment 17.

See comment 18.
Appendix VII

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Page 84 GAO/RCED-00-126 Sugar Program

See comment 19.

See comment 20.

See comment 21.

See comment 22.

See comment 23.

See comment 24.
Appendix VII

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Page 85 GAO/RCED-00-126 Sugar Program

See comment 25.

See comment 26.

See comment 27.

Now on p. 6.
Appendix VII

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Page 86 GAO/RCED-00-126 Sugar Program

See comment 28.

See comment 29.

See comment 30.

Now on p. 18.

See comment 31.

Now on p. 31.
Appendix VII

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Page 87 GAO/RCED-00-126 Sugar Program

See comment 32.

Now on p. 6.

Now on p. 18.
Appendix VII

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Appendix VII

Comments From the American Sugar Alliance

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Appendix VII

Comments From the American Sugar Alliance

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Appendix VII

Comments From the American Sugar Alliance

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Appendix VII

Comments From the American Sugar Alliance

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Appendix VII

Comments From the American Sugar Alliance

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Appendix VII

Comments From the American Sugar Alliance

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GAO Comments The following are GAO’s comments on the American Sugar Alliance’s (ASA)

written response to our draft report dated May 5, 2000. Based on USDA and

industry comments, we revised our model’s final estimates to more fully

account for certain transportation costs. As a result, cost and benefit

estimates referenced in ASA’s comments do not reflect those contained in

the final report.

1. We disagree that the methodology used in our 1993 report on the sugar

program was flawed. Nonetheless, we developed a more

comprehensive economic model for our current analysis, and while we

acknowledge that no economic model completely depicts reality, we

are convinced that our current model is methodologically sound and

that the estimates yielded by our model are reasonable. In developing

the model, we took a number of actions to ensure that it was

methodologically sound. First, we contracted with a well-known expert

in modeling the international trade of agricultural commodities and

with a prominent agricultural economist to work with us in developing

the model. In December 1999, we sent our proposed model to four

outside academicians specializing in agricultural economics and

international trade economics and revised the model in response to

their comments. We also sent our proposed model to USDA for review

at that time. However, USDA did not to provide any comments.

Furthermore, we asked two of the agricultural economists to review

our final model and results before we sent our draft report to USDA,

ASA, and the U.S. Cane Sugar Refiners’ Association for comment.

2. We disagree with ASA’s assertion that our findings are based on

comparisons with a meaningless world price. In estimating the costs

and benefits of the sugar program, our model compared baseline

domestic and world sugar prices with an estimate of the domestic and

world prices that would have been observed if the sugar program had

been eliminated, other things being equal. Regarding the extent to

which cost reductions would be passed through to consumers in the

absence of the sugar program, the report presents two estimates

showing how the benefits might be distributed based on two different

sets of pass-through assumptions. We did not predict the extent to

which cost reductions would be passed through to final consumers. See

comments 4 and 5.
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3. We disagree that our report is biased toward the views of the sugar

program’s critics. We used a standard economic welfare analysis

methodology that many economists have applied to evaluate how

different groups within a society are affected by specific economic

policies.1 Our report provides a quantitative analysis of the U.S. sugar

program’s effects, but we do not take a position on what modifications,

if any, need to be made. Those decisions rest with the Congress. See

comment 5 for a discussion of our assumptions about manufacturers’

and retailers’ behavior in passing through cost reductions.

4. As discussed in comment 2, we disagree with ASA’s assertion that our

findings are based on comparisons with a meaningless world price. Our

model estimated domestic and world sugar prices in the absence of the

program. These estimated prices were higher than the baseline world

prices because our model accounted for the impact on world prices of

higher U.S. sugar imports that would have occurred if the program had

been eliminated. Comparing these estimated prices with the baseline

prices was appropriate for estimating the effects of the sugar program

because the estimated world price reflects what domestic sugar users

would have been expected to pay for sugar in those years if the sugar

program had been eliminated. This comparison remains appropriate

regardless of whether the world price is influenced by subsidies by

countries with surplus production or whether sugar is produced in

countries with lower labor and environmental standards.

5. As discussed in comment 2, we disagree with ASA’s assertion that our

findings are based on the assumption that food manufacturers and

retailers would pass all of their cost reductions through to final

consumers. Our report estimated the total cost of the sugar program to

sweetener users—sugarcane refiners, manufacturers of sugarcontaining foods, and final consumers. We did not predict the extent to

which cost reductions would be passed through to final consumers.

Instead, we presented two estimates of the benefits to consumers if the

sugar program were eliminated, using different assumptions about the

pass-through of cost reductions. One estimate assumed that (1) cost

reductions for table sugar were passed through to final consumers

1

For example, see La France (American Journal of Agricultural Economics, 1991), La France

and de Gorter (American Journal of Agricultural Economics, 1985), Thurman (American

Journal of Agricultural Economics, 1991), Rucker and Thurman (Journal of Law and

Economics, 1990).
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(because it is a homogeneous product and likely to be more price

competitive) but (2) cost reductions for sugar-containing food were not

passed through. The other estimate, which shows the maximum benefit

that consumers could receive, is based on the assumption that all cost

reductions were passed through to consumers. We revised our

discussion on page 4of the pass-through of cost reductions if the sugar

program were eliminated to further clarify the effects under alternative

pass-through scenarios.

6. We agree with ASA that other countries intervene in the world sugar

market. However, to estimate the effects of the U.S. sugar program by

itself, we needed to make the analytical assumption that all other

factors, including other countries’ sugar programs, would remain

unchanged. Without this assumption, we could not isolate the effects of

the U.S. program from the effects of other countries’ programs. Our

estimates represent the actual cost of the sugar program to the U.S.

economy under conditions as they were in 1996 and 1998.

7. As discussed in comment 6, we did not attempt to estimate the free

trade price of sugar. In addition, as discussed in comment 4, we believe

that the appropriate price comparison is between baseline domestic

and world sugar prices in 1996 and 1998 and an estimate of the prices

that would have been observed if the sugar program had been

eliminated, other things being equal.

8. As stated in the objectives, this report focuses on the U.S. sugar

program’s (1) costs to domestic sweetener users, (2) benefits to

domestic sugar and HFCS producers, and (3) net effects on the U.S.

economy. Both the resport’s letter and appendix II present the results of

our model, including the estimated benefits to sugarcase, sugar beet

and HFCS producers. However, our model does not attempt to quantify

every indirect cost and benefit associated with the program. See

comments 13 and 17.

9. We disagree with ASA that our estimates of the net costs of the sugar

program are “misleadingly high.” See comments 10 and 11.

10. We disagree that transfers from the U.S. economy to foreign sugar

producers should not be considered as a component of the estimated

net losses associated with the sugar program. From the perspective of

the U.S. economy, higher prices paid by domestic sugar users and

received by domestic producers and processors as a result of the
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program are internal transfers with no net effect. However, foreign

producers selling sugar in the United States also receive higher prices

because of the program. The additional revenues they receive as a

result of the program represent a transfer outside the United States

and, therefore, are a net loss to the U.S. economy. Whether the United

States would incur similar costs if the sugar program did not exist in

the form of either direct aid to countries whose producers are

benefiting from the program or costs resulting from instability, as

suggested by ASA, is speculative.

11. We disagree with ASA’s assertion that our model assumes that U.S.

sugar producers are inefficient. The types of efficiency losses we

discuss occur when efficient producers produce too much of the wrong

crop, or consumers consume too little of certain foods, because

government programs maintain artificially high prices.

12. The report does not state that sugar production is a less efficient use of

resources than any other agricultural enterprise.

13. We agree that we did not estimate the effects on other crops if acreage

were transferred out of sugar, but we disagree that not doing so was

egregious. Our model does not conduct a general equilibrium analysis

to determine the effects on acreage and price of all other commodities.

However, we believe that any transfers out of sugar into other field

crops would likely have minimal effects on total production because of

the relatively small acreage involved compared with the acreage

already planted in those crops. For example, a transfer of 33 percent of

sugar beet acreage into hard red spring wheat acreage, would have

increased the hard red spring wheat acreage by only about 3 percent in

1998. See comment 17.

14. We disagree. Using generally accepted economic principles, total U.S.

consumption of sugar and sweetener-containing products would rise,

other things being equal, as U.S. sugar prices were reduced.

15. In the absence of the sugar program, we believe that it is unlikely that

no cost reductions would be passed through to final consumers,

particularly in the case of table sugar. In our analysis, we assumed

“other things being equal” (no changes in other input costs), while the

data that ASA presents comparing prices at different levels—especially

for sugar-containing foods—do not. Changes in the prices of other food

inputs between 1990 and 1999 could have been more important and
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could have overwhelmed the effect of declining wholesale refined

sugar prices on retail prices. Moreover, wholesale refined sugar prices

did not stay down continuously over the entire decade, but increased

again in 1996, 1997, and 1998. See comment 5.

16. We recognize that the demand for table sugar and many sugar-related

products is relatively inelastic with respect to price (that is, price

increases will lead to only relatively small declines in consumption),

and we included these assumptions in our model. However, we

disagree with ASA’s assertion that there would be no effect on

consumption at higher prices.

17. We recognize that we did not consider indirect effects associated with

the elimination of the sugar program in our analysis. These effects

could include losses to some groups, as suggested by ASA, but could

also include gains by other groups. For example, if sugar users paid

lower prices for sugar, they would be able to spend more on other

items, which could lead to increased economic activity in some other

sectors. Our approach estimated the program’s major costs and

benefits, while still maintaining tractability as well as appropriate

market detail. A general equilibrium analysis would take both these

gains and losses into account. We added to the report a discussion of

the differences between the partial equilibrium approach we used and a

general equilibrium analysis, indicating that using the latter approach

would require sacrificing considerable detail.

18. We did not assess the competitiveness of U.S. sugar producers relative

to producers in other countries. We assessed the costs and benefits of

the sugar program in the context of the world market in 1996 and 1998.

See also comment 6.

19. See comment 11.

20. We disagree that comparing U.S. and foreign retail sugar prices would

have been the most direct way to assess the effect of the U.S. sugar

program on consumers. Retail sugar prices in other countries do not

represent the price at which U.S. sugar users could have obtained sugar

in the absence of the program, which is the appropriate price to

compare with current U.S. prices (see comment 4). As a result, we did

not compare U.S. retail sugar prices with other countries’ retail sugar

prices. However, ASA’s chart C shows that countries whose retail sugar

prices were higher than the U.S. prices are mostly countries from the
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Page 99 GAO/RCED-00-126 Sugar Program

European Union and Japan, where support for sugar producers is also

high. (The Organization for Economic Cooperation and Development

estimates that sugar consumer support in the European Union was

even higher than in the United States in 1998.) Chart C also shows that

retail sugar prices in Australia and Canada, which have relatively free

trade in sugar, were lower than prices in the United States and the other

countries shown.

21. The minutes worked analysis in chart D may be a misleading indicator

of low sugar prices for U.S. consumers in comparison with consumers

in other countries. This analysis appears to be more dependent on a

country’s average wage rate than on the retail price of sugar in

explaining the differences in the minutes of work required to buy a

pound of sugar among countries. See also comment 20.

22. We agree that U.S. sugar processors have not forfeited sugar to the

government since 1994. However, USDA recently announced plans to

purchase 150,000 tons of sugar to reduce the cost of expected sugar

program forfeitures this fiscal year.

23. We revised the report by adding these increased assessments to the list

of the 1996 Farm Act’s modifications. According to a USDA official, the

assessment on processors raised revenues of about $30 million in fiscal

year 1998 but has been suspended for fiscal years 2000 and 2001. We

note, however, that these revenues represent only part of the sugar

program’s financial effects on the federal government. The higher

domestic cost of sugar increases the government’s expenditures for the

military’s food purchases and for funding domestic food assistance

programs. Several years ago, we estimated that the sugar program

increased the government’s expenditures for these purposes by about

$90 million in 1994.

24. As discussed in comment 31, we disagree with ASA’s statement that we

underestimated the number of U.S. sugar producers. As discussed in

comment 28, we also disagree with ASA’s assertion that the corn

sweetener industry continues to benefit from the sugar program.

25. We disagree with ASA that the benefits received by producers are

derived “theoretical” benefits. Gains that result from higher prices paid

by sugar users—rather than from direct government payments to

producers—are nonetheless real gains in income to producers and are

a direct result of the sugar program.
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26. The production and acreage levels we report were the results of our

simulation of the impact of eliminating the sugar program, as estimated

by our model. We agree with ASA that over time, larger production

responses are likely to result than in the short run.

27. We revised page 25 of the draft report (now on page xx) to clarify that

our model analyzed the HFCS market to determine whether lower

refined sugar prices resulting from the program’s elimination would

cause a substitution from HFCS to sugar in certain markets for sugarcontaining products. We found that eliminating the sugar program had a

limited effect on the HFCS market. See comment 28.

28. We disagree with ASA’s assertion that refined sugar from the world

market would replace HFCS if the sugar program were eliminated.

While HFCS producers benefited from the sugar program in the 1980s

and early 1990s, we believe that the domestic HFCS and sugar markets

have since been decoupled because of domestic price, cost, and market

conditions. The president of the U.S. Corn Refiners’ Association has

also expressed this view. As shown in table 4 in appendix I, the

weighted average wholesale price of HFCS in the United States

dropped from 22 cents per pound (dry weight) in 1992 to 12.4 cents per

pound (dry weight) in 1998, while the U.S. wholesale refined beet sugar

price was above 25 cents per pound throughout this period. In

particular, for 1998, the higher-priced HFCS-55 (13.43 cents per pound)

was below our model’s estimated world refined sugar price (14.12 cents

per pound) if the sugar program were eliminated. Furthermore, the

likelihood of substitution between sugar and HFCS is more limited than

in prior years because technological advances have improved the HFCS

product and created more specialized sweetener markets. See also

comments 24 and 27.

29. Although the 1996 Farm Act made some changes to the sugar program,

we disagree that it substantially pared back the U.S. sugar program

because the basic structure of USDA’s loan program and the TRQ

remained unchanged. In addition, we disagree with ASA’s implication

that a fall in the U.S. price for refined sugar should necessarily result in

a lower estimate of the cost of the program. Because the cost of the

program depends on the difference between domestic and world sugar

prices, changes in the world price are also important in determining the

program’s cost.
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30. We disagree with ASA’s argument for using a world cost-of-production

estimate as a benchmark. Because of a scarcity of data, estimating the

international cost of production would require numerous assumptions

about other countries’ costs of production as well as the effects of their

policies to support producers. See also comments 4 and 7.

31. We used the 1997 census of agriculture, conducted by USDA’s National

Agricultural Statistics Service, to identify the number of sugarcane

farms and sugar beet farms for table 3 in appendix 1. USDA’s census of

agriculture provided a consistent and rigorous methodology for

estimating the number of sugarcane and sugar beet farms. However, as

ASA mentioned, table 3 also notes that the census of agriculture’s

estimate of 7,102 beet farms varied substantially from the USDA Farm

Service Agency’s estimate of 11,800 sugar beet farms in 1997. This

difference reflects differences in the definition of what constitutes a

farm. In any case, the draft and final reports include both estimates.

32. We disagree with ASA’s conclusion. See comments 1 and 3 on our

methodology and objectivity.
Page 102 GAO/RCED-00-126 Sugar Program

Appendix VIII

Comments From the U.S. Cane Sugar

Refiners’ Association ApendxiVI

See comment 1.

See comment 2.

See comment 3.
Appendix VIII

Comments From the U.S. Cane Sugar

Refiners’ Association

Page 103 GAO/RCED-00-126 Sugar Program

GAO Comments The following are GAO’s comments on the letter of the U.S. Cane Sugar

Refiners’ Association to our draft report.

1. We revised the report to address the concern of the U.S. Cane Sugar

Refiners’ Association.

2. We revised table 1 to note that the basis point for the world raw sugar

contract price is the Caribbean. According to a sugar market expert, the

cost to transport raw sugar from the Caribbean to the United States is

about 1.5 cents per pound. We also refined our model to more fully

account for certain transportation costs in our welfare analysis.

3. We revised the report to clarify that USDA’s census of agriculture and

the Farm Service Agency used different definitions of a “farm”.
Page 104 GAO/RCED-00-126 Sugar Program

Appendix IX

GAO Contacts and Staff Acknowledgments ApendxiIX

GAO Contacts Robert E. Robertson (202) 512-5138

Richard Cheston (202) 512-5138

Acknowledgments In addition to those named above, Jay Cherlow and Barbara J. El-Osta

made key contributions to this report.

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