SUGAR AND SWEETENER                                          February 02, 1999
December 1998, SSS-224
               Approved by the World Agricultural Outlook Board
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Contents

Summary
U.S. Sugar
Year Ended 1997/98
Forecast  1998/99
Prices
Mexican Sugar
World Sugar
High Fructose Corn Syrup
HFCS and Mexico
Special Articles
Sugar in Mexico: Policy Environment and Production Trends
The Rise and Decline of Puerto Rico's Sugar Economy
Implications of NAFTA Duty Reductions for the U.S. Sugar Market
List of Tables
Autofax Access to Sugar-Related Data
Internet Access to Sugar-Related Data

Report Coordinator
Stephen Haley
(202) 694-5247    FAX (202) 694-5884
E-mail: SHALEY@ECON.AG.GOV

Principal Contributors
Stephen Haley
Nydia Suarez

Database Coordinator/Graphics & Table Design
Fannye Lockley-Jolly

Layout & Text Design
Wynnice Napper

Approved by the World Agricultural Outlook Board. Summary released 
December 2, 1998. The next Sugar and Sweetener Situation and Outlook 
will be the Yearbook and is scheduled for release on May 18, 1999.
Text and summaries may  be accessed electronically.
For details on electronic access, call ERS Customer Service (202)
694-5050.

Summary

The National Agricultural Statistics Service pegs the 1998 U.S.
sugarbeet crop at 32.4 million tons, which if realized, would
represent a record. Acreage harvested is estimated at slightly
below 1.46 million acres, 2 percent above the previous year.
National yield is estimated at 22.3 tons per acre, slightly below
records set in 1981 and 1987. The U.S. Department of
Agriculture's (USDA) analysis projects sugar tonnage per
harvested acre to be above historical trends at 3.09 tons, and
total production at 4.5 million tons.

Florida cane for sugar is projected at 15.468 million tons. Sugar
per harvested acre is projected at about 4.40 tons and total raw
sugar production at 1.89 million short tons, raw value (STRV).
Although Louisiana cane yields are forecast at 27.0 tons per acre
(down from the record 28.16 tons per acre the previous year),
increased acreage offsets much of the yield decrease. The current
Louisiana cane sugar production is projected at 1.22 million
STRV. The recent precipitation in Texas following a hot and dry
summer has raised concerns regarding the sugar content of the
State's cane crop. Texas' cane sugar is projected at 90,000 STRV.
Hawaii is expected to produce about the same amount of sugar as
the year just completed -- 340,000 STRV. Recent hurricane damage
will limit Puerto Rico's production to an estimated 7,000 STRV.
The 1998/99 U.S. cane sugar produced should be 3.547 million
STRV.

The tariff-rate quota (TRQ) for fiscal year 1999 for raw,
refined, and specialty sugars were announced on September 17,1998.
The raw sugar TRQ was initially set by USDA at 1,780,164
STRV and 1,284,133 was made available for allocation by the U.S.
Trade Representative. TRQ tranches of 165,347 STRV will be
allocated in January, March, and May if the ending fiscal year
stocks-to-use ratio projection, as published in the USDA's World
Agricultural Supply and Demand Estimates (WASDE) report, in those
same months is equal to or below 15.5 percent. The refined sugar
TRQ was set at 55,116 STRV. Non-TRQ imports are projected at
445,000 STRV.

Total sugar deliveries for consumption are currently projected at
10.025 million STRV. Sugar exports from the Refined Sugar
Re-export Program are expected to total 175,000 STRV.

Sugar production in Mexico is projected at 5.1 million metric
tons (mmt), raw value, for 1998/99 (November/October). Mexico
produced a record cane sugar crop of about 5.49 mmt, raw value,
during 1997/98. Consumption is projected at 4.13 mmt for 1998/99,
down from an estimated 4.2 mmt in 1997/98. Mexican sugar exports
are projected at 1.00 mmt for 1998/99, down from an estimated
1.28 mmt for 1997/98.

High fructose corn syrup (HFCS) production for calendar year 1998
is forecast at 9.155 million short tons, dry weight. This level
represents a 5.5-percent growth over 1997. The production of
HFCS-55 is projected to grow 7 percent compared with about 3
percent growth for HFCS-42. HFCS-55 exports through the third
quarter of 1998 are up 37 percent from a year earlier. Exports
are estimated to constitute 6.2 percent of domestic production,
up from 3.7 percent in 1996 and 4.7 percent in 1997. HFCS-42
domestic deliveries are forecast to grow only 2.4 percent in
1998, and exports remain a relatively minor share of production.

U.S. Sugar

On January 12, the U.S. Department of Agriculture (USDA) released
its most recently updated estimate of U.S. sugar supply and
demand for fiscal year 1998 and the revised forecast for 1999. 

Year Ended  1997/98

Beet sugar production is now estimated at 4.389 million short
tons, raw value (STRV). Sugarbeet production for 1997 totaled
29.9 million short tons, produced from 1.428 million acres, for a
calculated nationwide yield of 20.9 tons per acre. Sugar tonnage
per acre was 3.07 tons, which was above the historic trend. Most
producing areas reported average- to above-average results,
although the Red River Valley had a much warmer-than-normal
winter which may have complicated beet pile storage, and
excessive rainfall in northern California pushed harvesting back
several weeks and pushed sugar content levels down to just over
15 percent.

Until November 1998, beet sugar production had been estimated at
4.3 million STRV. Stronger than anticipated beet production in
September 1998, reflecting the 1998/99 campaign, were added to
the 1997/98 fiscal year to push total production to the
higher-than-anticipated total. September sugar production totaled
nearly 341,000 STRV, mostly out of the Red River Valley areas of
Minnesota and North Dakota. September production for the years
1991/92-1996/97 averaged only 280,000 STRV.

Cane sugar production is estimated at 3.632 million STRV. Both
Florida and Louisiana had record years. Although excessive
rainfall associated with El Nino pushed back harvesting, cane
yield was at 36.9 tons per acre in Florida. Florida production
was 1.925 million STRV. Louisiana increased acreage from the
preceding year from 335,000 to 380,000 acres of cane for sugar.
With ideal harvesting conditions during October and the first
half of November, raw sugar production reached 1.262 million
STRV. Texas suffered from dry conditions, producing 80,000 STRV.
Puerto Rico's production, at 16,000 STRV, was adversely affected
by El Nino, while Hawaii's production was slightly above
expectations at 350,000 STRV. 

Imports for 1997/98 are estimated at 2.163 million STRV. Of this
amount, 1.729 million entered under the tariff-rate quota (TRQ).
This total includes the January 1998 tranche cancellation and an
estimated 1997/98 shortfall (that is, unfilled quota) of 54,765
STRV. Non-quota imports totaled 434,000 STRV. Raw sugar entering
under the Refined Sugar Re-Export Program totaled 185,000 STRV,
and 150,000 STRV under the Sugar Containing Products Re-Export
Program. High-tariff imports are estimated at 2,000 STRV, and
imports for the Polyhydric Alcohol Program are estimated to be
14,000 STRV. Imports of sugar syrups entering under the tariff
heading 1702.90.40, when converted to a raw-sugar equivalent, are
estimated at 83,000 STRV. 

Production and imports, along with beginning stocks of 1.488
million STRV, brought 1997/98 U.S. sugar supply to 11.671 million
STRV. The December estimate is an upward adjustment of about
91,000 STRV from October. Most of the increase is attributable to
early beet sugar production from the 1998/99 campaign entering
into the previous year's (1997/98) accounting. 

Sugar deliveries for 1997/98 totaled 9.815 million STRV. This was
85,000 STRV below the 9.9 million STRV which had been expected in
October. August 1998 deliveries to wholesale grocers, jobbers,
and dealers fell significantly below the seasonal trend. Until
August, actual deliveries had been tracking forecasts closely.
Ending stocks for 1997/98 are 1.679 million STRV, for an ending
stocks-to-use ratio of 16.8 percent.

Forecast 1998/99

Beet Sugar

Beet sugar production is currently projected at 4.5 million STRV.
The National Agricultural Statistics Service (NASS) pegs the
sugarbeet crop at 32.66 million tons, which is 9.3 percent above
the 1997 final production estimate, and if realized, would
represent a record. Acreage harvested is forecast at 1.452
million acres, a record and 1.6 percent above the previous year.
National yield is forecast at 22.5 tons per acre, a record.

Late-season warm weather extended the growing season in the Great
Plains and contributed to increased yields. NASS increased yield
and production forecasts for Colorado, Montana, Nebraska, and
Wyoming. Good conditions were also experienced in Idaho and
Oregon, causing NASS to increase its production forecasts. 

The largest increases in expected sugarbeet production were in
the Red River Valley of Minnesota and eastern North Dakota where
record levels are forecast. According to press reports, the
American Crystal Sugar Company expects to be slicing the 1998
crop into early June 1999. (The record is currently May 28 for
last year's crop.) Company officials have pegged its raw beet
tonnage at over 10.7 million tons, more than 2 million tons above
last year's record. They estimate an average yield of 22 tons per
acre. Another Red River Valley producer, the Minn-Dak Farmers
Cooperative, reports a record 1.772 million tons, mainly due to
increased acreage, with yields only forecast at about 18 tons per
acre. Low yields were partly attributable to some disease
problems (cercospora).

Beet producing areas faring less well include Michigan and
California. Hot and dry conditions in Michigan during the summer
reduced yields. Cool, damp weather in California delayed spring
planting and caused a reduction in area planted below original
intentions. Industry sources also expect a lower 1999 spring
harvest because of stand problems in late-planted fields.

USDA currently projects fiscal year 1999 (October-September)
sugar from beets at 4.5 million STRV, based on projected tonnage
per acre of 3.1 tons. Probably the most significant concern is
beet deterioration during a warmer-than-usual winter in the upper
Midwest which caused some problems last February in the Red River
Valley.

Cane Sugar

Sugar produced from cane is currently projected at 3.757 million
STRV. This is above last year's record.

Florida cane production for sugar is currently forecast at 16.602
million tons. Although extremely hot and dry conditions prevailed
during most of the summer, most Florida cane is grown in
irrigated muck soils. The 20 percent of the crop grown on sandy
soils did experience some stress. More seasonal rainfall patterns
returned in the late summer, reversing potential damage. Sugar
per harvested acre is currently estimated at about 4.84 tons,
implying raw sugar production of 2.075 million STRV.

Louisiana experienced hot and dry conditions during the summer
with isolated rain showers. Much of the normal growth was
retarded until precipitation relief came with several tropical
storms/hurricanes. There was some concern for lodged cane, but
combine equipment for harvest mitigates the effect of lodged
cane. Wet conditions delayed planting and pushed back the start
of the harvest. Cane yields are currently forecast at 29.0 tons
per acre, and forecasted acreage of cane for sugar is 400,000
acres, resulting in a cane for sugar production forecast of 11.6
million tons. The combination of dry summer weather and a rainy
fall is contributing to lower sugar content, however. The current
cane sugar production projection is 1.25 million STRV.

Texas has faced a difficult growing season with extremely hot and
dry conditions. Significant acreage withdrawn from production,
however, helped raise yields on the remaining acreage by making
more irrigation water available that would have otherwise been
used on the withdrawn acreage. Like Louisiana, cane areas
received some relief from tropical storms/hurricanes in the late
summer. Current reports indicate a lush cane crop, but there are
significant concerns regarding sugar content. The current
projection for cane sugar is 85,000 STRV. 

Cane sugar production in Hawaii is expected to approximate last
year's level. Last year's total cane sugar production was 350,000
STRV, and the current projection for 1999 is 340,000 STRV. Sugar
production in Puerto Rico was seriously affected by Hurricane
Georges. In addition to widespread damage to the cane crop, the
Central Roig (one of the only two mills operating) suffered major
damage, forcing the company out of operation for the 1999
harvest. Reduced cane availability at the remaining mill will
likely limit Puerto Rico's sugar production to about 7,000 STRV. 

TRQ Imports

The TRQ for fiscal 1999 for raw, refined, and specialty sugars
was announced on September 17, 1998. The raw sugar TRQ was set
initially by USDA at 1,780,164 STRV and 1,234,133 was made
available for allocation by the U.S. Trade Representative. TRQ
tranches of 165,347 STRV will be allocated in January, March, and
May if the ending fiscal year stocks-to-use ratio projection, as
published in the USDA's World Agricultural Supply and Demand
Estimates (WASDE) report, in those same months is equal to or
below 15.5 percent.

The refined sugar TRQ was set at 55,116 STRV. Refined sugar is
defined as sugar whose sucrose content by weight in the dry state
corresponds to a polarimeter reading of 99.5 degrees or more. The
specialty sugar TRQ is a subset of the refined sugar TRQ and has
been set at 5,132 STRV. Mexico has been allocated 27,558 STRV of
the refined sugar TRQ in accord with the side letter agreement
submitted by the U.S. Government as a part of the North American
Free Trade Agreement (NAFTA). Apart from NAFTA, Mexico has been
allocated an additional 3,256 STRV of the refined sugar TRQ.
Canada was allocated 11,354 STRV of the refined sugar TRQ. The
remainder, including access under the specialty sugar TRQ, is
available on a first-come, first-served basis. 

Shipping patterns were established for the fiscal 1999 raw sugar
TRQ. Brazil, the Dominican Republic, and the Philippines,
individually, are allowed to ship  25 percent of the initial
allocation during each quarter of fiscal 1999. Argentina,
Australia, Colombia, El Salvador, Guatemala, Nicaragua, Panama,
Peru, and South Africa are permitted to ship up to 50 percent of
their initial allocations in the first 6 months of fiscal 1999.
If allocations are not met within the relevant quarter or 6-month
period, they may be shipped in any subsequent period. 

As of December 1998, the total projected TRQ as shown in the
WASDE rounded to 1.733 million STRV. This total accounts for a
shortfall projected at 75,000 STRV.

Other Imports

Sugar is imported under two re-export programs meant to enhance
U.S. competitiveness in third-country markets. Because the supply
of total U.S. sugar is restricted by the sugar TRQ, the domestic
sugar price is higher than the world price. The Refined Sugar
Re-export Program and the Sugar Containing Products Re-export
Program permit the importation of world price sugar with the
stipulation that an equivalent amount of sugar will be exported.
Both re-export programs help U.S. refiners by providing an
opportunity to increase through-put, thereby lowering average
costs, and by allowing them to take advantage of margins between
world raw and refined sugar prices, should they become
attractive.

The Foreign Agricultural Service (FAS) of the USDA administers
the re-export programs and currently projects fiscal year 1999
imports of 175,000 STRV for the Refined Sugar Re-export Program
and 150,000 STRV for the Sugar Containing Products Re-export
Program. 

Raw sugar can also be imported outside the TRQ for the production
of polyhydric alcohol. Imports under this program are projected
at 15,000 STRV. Imports entering outside the TRQs and subject to
the high-tier tariff are projected at 5,000 STRV. 

The sugar content of sugar syrups entering the United States
under the tariff heading 1702.90.40 is projected at 100,000 STRV
for fiscal 1999. This estimate presumes the same pattern of
imports as witnessed for most of 1997/98. The sugar from the
syrups clearly enters the U.S. sugar marketing system and
substitutes for domestically produced and TRQ sugar. Reports
indicate that most use is centered in the Midwest industrial use
markets. An implication is that U.S. sugar companies that sell
predominantly in this area take relatively more of the brunt of
the competition. 

Deliveries and Exports

Total deliveries, including deliveries for human consumption,
sugar included in products for the Sugar Containing Products
Re-export Program, and deliveries for use in the Polyhydric
Alcohol Program,  and for feed use are currently forecast at
10.025 million STRV. Sugar industrial use is expected to grow by
a healthy 2.8 percent to 5.95 million STRV. The share of total
use constituted by industrial users should remain in the 59
percent range. Sugar demand by non-industrial users is expected
to grow by 1.5 percent. This forecast is lower than originally
estimated, due in large part to the August reduction by the
wholesale grocer sector. This reduction strongly suggested a
break in the observed trend which would have implied more robust
growth. Non-industrial sugar consumption, therefore, remains the
more volatile of the two demand sectors, and will require close
attention by interested analysts.

Exports of sugar under the Refined Sugar Re-export Program are
currently forecast at 175,000 STRV. There may be some additional
export opportunities due to damage from Hurricanes Georges and
Mitch to the sugar sectors of nearby export competitors.

Stocks

Ending-period 1998/99 stocks are calculated as a residual of
total supply (projected 12.114 million STRV) less total use
(projected 10.2 million STRV). Ending stocks are, therefore,
projected at 1.914 million STRV. The projected stocks-to-use
ratio would be 18.8 percent, well above the trigger level for the
cancellation of the January TRQ tranche. 

Prices

U.S. nearby futures raw cane sugar prices (C.I.F., duty-paid,
Contract No.14, New York) averaged 21.95 cents a pound in the
first 15 days of November (through November 20). The price
averaged 21.67 cents in October, compared with 22.27 cents in the
same month a year earlier. The downtrend of the No. 14 market
reflected a number of different factors, such as labor unrest in
two Northeast cane sugar refineries in conjunction with heavy
spot market raw sugar vessel arrivals. Wholesale refined beet
sugar prices (f.o.b. plant, Midwest markets) have increased to
26.90 cents a pound in October, compared with 26.50 cents in
September and from 24.90 cents a year earlier. 

Mexican Sugar

Mexico produced a record cane sugar crop of about 5.49 million
metric tons (mmt), raw value, during  1997/98 (November/October).
This exceeded the previous year's production  by over 600,000
metric tons (mt). According to FAS, the sugar industry and cane
growers have set a production ceiling per mill that would keep
production under 5.10 mmt. Sugarcane area for 1998/99 will be
about the same as 1997/98, and drier-than-normal growing
conditions are expected to lower yields from the previous year.

Mexico's sugar consumption has not been keeping pace with
production, making more available for export. Consumption is
estimated at a flat 4.2 mmt for 1997/98, and projected at only
4.13 mmt for 1998/99. Consumer purchasing power has yet to
recover from the peso devaluation 4 years ago and has been set
back by more recent losses in the peso's value. There is, as
well, the increased competition from imported and domestically
produced alternative sweeteners, mainly high fructose corn syrup
(HFCS), in the soft drink industry. Reports indicate that Mexican
HFCS production of 250,000 to 350,000 mt displaces between
200,000 and 300,000 mt of domestic refined sugar in the soft
drink, bakery, food processing, and fruit canning industries.
Sources indicate that refined sugar use in the soft drink
industry is between 1.2 and 1.4 mmt, and HFCS consumption is
between 350,000 and 450,000 mt. The sources predict that the
lower value of the peso (around 10.2 pesos per U.S. dollar in
September 1998) and higher duties on imported HFCS are likely to
limit the soft drink sector's demand for HFCS in 1998/99 through
higher prices. 

Estimates of Mexican sugar exports are at 1.28 mmt for 1997/98,
and projected at 1.00 mmt for 1998/99. The Mexican sugar industry
cooperates to export sugar above factory-set production quota
ceilings to keep domestic prices above world market prices. The
industry and cane growers share in losses from selling in the
export market at international prices. Also, in 1997/98 the
Mexican sugar industry, with government assistance in financing
storage costs, kept 600,000 mt in stocks from entering the
domestic market, further strengthening domestic prices.

Mexican shipments to the U.S. market are set under terms
specified in the side letter agreement, dated 11/03/93, that was
submitted by the United States Government as a part of the North
American Free Trade Agreement (NAFTA). Mexico's NAFTA access for
1998/99 is 25,000 mt.

World Sugar

World ending stocks for 1998/99 are projected down 1 million tons
due to lower total supply and higher consumption. World sugar
production in 1998/99 is projected by USDA to increase 0.9
percent from 1997/98, to 126.5 million metric tons, raw value.
World consumption is projected to increase 0.4 percent to 127.5
million tons, the smallest increase in 5 years. Nevertheless,
world imports are projected to decrease 2 percent, mainly on
slack import demand in the United States, South America, Ukraine,
and India. Russia, the world's largest importer, is projected to
import 3.7 million tons in 1998/99, down from 3.8 million a year
earlier.

The 1.1 million tons of increased world production is projected
from higher output in Brazil, India, Turkey, and South Africa
more than offsetting lower output from Australia, the
Philippines, Indonesia, Europe, and Mexico. Exports are expected
to increase from South Africa (up 21 percent), remain strong from
Brazil (at 7.2 million tons), and decrease from Mexico (down 22
percent) and the European Union (down 13 percent).

Cane sugar producers have increased their market share of world
sugar production to 70 percent projected in 1998/99, from 65
percent in 1992/93. Among the highlights of cane producers'
increasing share of world production, Brazilian, South African,
and Australian cane sugar production has increased from a
combined 14 million tons in the early 1990s, to nearly 25 million
tons projected in 1998/99.

Brazil's production of fuel alcohol from sugarcane, accounting
for over two-thirds of total area harvested, presents a vast
potential for diverting cane to sugar production, when fuel
prices lose attractiveness relative to sugar. Since 1992/93,
Brazilian sugar production has increased from 9.8 million tons,
to a projected 16.6 million tons in 1998/99, while exports have
tripled from 2.4 million tons, to a projected 7.2 million.

South Africa has more than doubled production during the last 6
years, from 1.2 million tons in 1992/93 to 2.7 million projected
for 1998/99. During this period, South African consumption has
remained near 1.3 to 1.4 million tons, while exports have grown
to a projected 1.4 million tons, from neglible amounts 5 years
earlier. Similarly, Australian production has increased about 2
million tons in the 1990s, driving exports to 4.6 million tons in
1997/98. Australian exports are likely to decrease in 1998/99,
after rainy winter and spring weather sharply reduced production.

The decline in beet sugar's position in world production is
mainly centered in the former Soviet Union (FSU). Following the
FSU collapse 10 years ago, Russian and Ukrainian sugar production
from beets fell from about 7 million tons to just 2.2 million
tons projected for 1998/99. FSU consumption has fallen nearly 5
million tons since the end of the 1980s, to 9 million at the end
of the 1990s. Russia remains the world's largest importer of
sugar, with a shrinking supply coming from Cuba and a growing
dependence on Brazil.

The projected decrease in 1998/99 stocks is only slightly bullish
for world sugar markets, given the slack import demand and the
potential for increased cane sugar supplies. However, some
improvement in world prices is expected from the European Union's
(EU) possible cutback in beet sugar acreage and Russia's lowering
of import duties. The European Union beet sugar sector in late
November pointed to historically low world prices for refined
sugar to motivate reduced area in 1999. Cutbacks in EU sugarbeet
area followed sharp drops in world prices for refined sugar in
the middle 1980s and the early 1990s.

Russian import duties were raised to prohibitive levels for
late-summer and fall 1997 and effectively stifled foreign
deliveries while domestic beet sugar was being produced. The
duties--45 percent for refined sugar and 75 percent for raw
sugar--were put in place with an end-of-December 1998 expiration.
Some form of fall-season tariff protection for Russian beet sugar
producers is likely to be adopted in 1999. However, Russian
import needs are projected at 3.7 million tons in 1998/99, and
world prices are likely to strengthen while Russia is in the
market.

High Fructose Corn Syrup

High fructose corn syrup (HFCS) production for calendar 1998 is
projected at 9.155 million short tons, dry weight (tables 24 and
25). This level represents 5.5 percent growth over 1997. HFCS
production is split between HFCS-42 and HFCS-55, which reveal
differing growth patterns. HFCS-55 growth is fairly buoyant.1/
----------
1/ HFCS-55 is made up of three products: HFCS-55 syrup, HFCS-55
solid, and crystalline fructose.
----------
Production for 1998 is projected at 5.879 million tons, which is
7 percent more than in 1997. HFCS-42, on the other hand, is
projected at 3.275 million tons, which represents only 2.8
percent growth over 1997.

Most demand for HFCS-55 is from the domestic soft drink industry
where demand this year has been sufficient to support about a
6.2-percent rise. HFCS-55 is aided as well by strong and growing
export demand. It is currently forecast at 365,000 tons, which is
up from 257,000 tons in 1997. Exports are predicted to absorb
about 6.2 percent of production in 1998, up from 3.7 percent in
1996 and 4.7 percent in 1997. Export demand for HFCS-42, on the
other hand is tepid, with imports exceeding exports.

The HFCS sector has been characterized by lower-than-average
product prices and overcapacity the last several years. Figure 7
shows the ratio of the HFCS-42 spot price to the beet sugar
price, both of which are published in the Milling and Baking
News. The levels reached in 1995 are closer to the historical
norm. As can be seen, they deteriorated markedly in 1996 and
worsened in 1997. There seemed to be some rebound in the first
quarter of 1998, but prices weakened in the second quarter (10.18
cents a pound) and third quarter (9.9 cents a pound). The October
price in the fourth quarter edged up to 10.38 cents a pound. Spot
prices in 1998 have been much more volatile than in any of the
other years shown in the figure.

HFCS and Mexico

The Mexican Secretariat of Commerce (SECOFI) investigated imports
of HFCS-90 because the Mexican sugar industry asserted that they
were used to avoid anti-dumping duties that had been imposed on
HFCS-55 imports. SECOFI conducted a 7-month investigation and
determined that HFCS-90 was being imported in order to skirt
duties levied on HFCS-55. Therefore, SECOFI imposed compensatory
duties, effective September 8, 1998, on HFCS imports from the
United States: H.S. 1702.50.01, 1702.60.01, 1702.60.02, and
1702.60.99. U.S. HFCS imports from A.E. Staley Manufacturing Co.
are charged $90.26 a metric ton, and corresponding imports from
Archer Daniels Midland Co. are charged $55.37 a metric ton.

Figure 8 shows HFCS-55 exports to Mexico by quarter for 1997 and
1998. Interim duties on HFCS imports had been made permanent in
January 1998. These tariffs ranged between $55.37 and $175.50 a
metric ton for HFCS-55. As can be seen, HFCS-55 exports in the
first quarter were lower than those for the same period a year
before. However, the tariffs were not sufficient to hold back the
exports in the second quarter. Second-quarter exports rose to
over 50,000 tons, compared with 30,500 in 1997. The story changes
in the third quarter. In August, just prior to the  announcement
of the additional duties on HFCS-90, exports began to decrease.
The third quarter exports fell to about two-third's of the level
recorded for 1997.

Sugar in Mexico: Policy Environment and Production Trends 

By: Stephen L. Haley 2/
----------
2/ Agricultural economist with the Market and Trade Economics
Division, Economic Research Service.
----------
Abstract

This paper analyzes sugar production in Mexico from two
perspectives. The first perspective is analytic and focuses on
the current policy conditions. It presents a model of the Mexican
sugar sector as isolated from world sugar prices by restrictive
Mexican Government import policies. It further shows how Mexican
Government policies promoting cooperation among Mexican
sugar-producing firms can restrict domestic competition, leading
to high and uncompetitive domestic pricing above marginal costs.
Analysis in the second part of the paper focuses on the degree to
which technological change has been adopted by the industry.
Factory data from 1987-97 are examined to show how trends in
sugar yield per harvested hectare have contributed to sugar
production growth and how successful firms have been in improving
technical efficiencies. Contrary to the oligopolistic structure
typifying the current environment, empirical results suggest an
industry anticipating a more competitive market environment. An
implication is that current policies are best understood as
transitional as firms prepare to compete in a market that
encompasses the United States.

Keywords: sugar, Mexico, NAFTA.

The Mexican sugar industry is set to become an important
participant in the U.S. sugar market. Under the terms of the side
letter agreement to the North American Free Trade Agreement
(NAFTA), Mexican access to the U.S. market will increase to a
maximum of 250,000 metric tons (mt) or net surplus production in
fiscal year (FY) 2001 and be unbounded in FY 2008 and thereafter.
The Mexican Government interpretation is that the original NAFTA
language is binding, which would place more Mexican-sourced sugar
in the United States market sooner.

This paper has two goals. The first is to develop a theoretical
framework that describes the current sugar market structure in
Mexico. The framework will show an oligopolistic Mexican sugar
sector that is isolated from world sugar prices by restrictive
Mexican Government import policies, much like those in the United
States. It will also show how Mexican Government policies
promoting cooperation among Mexican sugar-producing firms
restrict domestic competition, leading to an explanation of high
and uncompetitive domestic pricing above marginal costs, and to
an explanation of the emergence of Mexico as a significant
exporter of sugar.

The second goal is to analyze the results of investment decisions
made by firms operating in the oligopolistic market environment.
Factory data from 1987-97 are examined to show how trends in
sugar yield per harvested hectare have contributed to sugar
production growth and how successful firms have been in improving
technical efficiencies. The lack of a competitive pricing
environment leads to the expectation that firms have reduced
incentives to innovate and adapt improved technologies that make
them more efficient producers of sugar. This hypothesis will be
shown to be inconsistent with the data analysis. The analysis
supports an alternative hypothesis that the Mexican sugar
industry is adjusting to an anticipated competitive environment
in the future. Current government policies would then be
interpreted to be transitional and supportive of an industry
expecting growth when duty-free access to the U.S. market without
quantitative restrictions becomes a reality.

Mexican Sugar Policies and Domestic Prices

Mexico does not necessarily have a comparative advantage in
producing sugar. Current costs of production are estimated at
least twice the level of current world prices of 8 to 10 cents
per pound (FAS, 1998), and 5 to 5.5 cents a pound above the
world's most efficient producers (LMC International, 1997).

Figure A-1 shows Mexican prices for Estandar sugar in cents per
pound since 1993 compared with the nearby U.S. and world raw
sugar prices (#14 and #11 Coffee, Sugar, and Cocoa Exchange
(CSCE) contracts, respectively). Figure A-2 shows prices for
Mexican refined, U.S. beet sugar (Milling and Baking News), and
world refined sugar (Contract #5, LIFFE). Mexican prices were
above comparable world and U.S. prices until the peso devaluation
in late 1994/early 1995. Since then, Mexican prices have been
considerably above world levels but below U.S. prices. 3/
-----------
3/ The margins between U.S. and Mexican retail sugar prices are 
even wider, prompting some to argue that in a more liberalized
trading environment, Mexicans could ship much more packaged,
refined sugar than implied by differing wholesale prices.
------------
Mexico maintains import policies that support domestic sugar
prices. The current Most Favored Nation (MFN) tariff rate for all
products under the 1701 tariff heading is currently U.S. $0.39586
per kilogram, or 17.96 cents per pound. Under the terms of the
Uruguay Round Agreement (URA), bound rates were to decrease from
U.S. $400 per mt (18.14 cents per pound) in 1995 to only $360
(16.33 cents per pound) in 2004. Although the URA minimum access
level was set at 110,000 mt in 1995, and set to increase to
183,800 mt by 2004, the access requirement included many other
goods besides those under the 1701 tariff  heading. It included a
variety of sugar-containing products and glucose/fructose corn
syrups, thereby permitting Mexico to meet its URA commitment
without importing sugar. Under NAFTA, Mexico is required by the
sixth year (fiscal year 2000) to adapt a tariff-rate quota (TRQ)
system with rates applied to third countries at the same levels
as maintained by the United States. Therefore, Mexico (like the
United States) is able to isolate its sugar industry from world
market prices.

Figure A-3 shows a supply-demand framework before the
consideration of government policies. The sugar industry's
marginal cost schedule is represented as the upward sloping curve
labeled DMC. Because Mexico is assumed to be a small producer
vis-a-vis the rest-of-the-world, it faces a perfectly elastic
excess demand (line PwE) at the world price Pw. The industry
faces two demand schedules. The first is access to the U.S.
market (Dus) at the relatively high prevailing U.S. price Pus.
The maximum amount that can be shipped is set under the terms of
NAFTA. The second schedule Dmx represents the domestic demand.
These two schedules are joined together as Djt or ABCDE. The
horizontal distance between B and C corresponds to shipments to
the United States. The horizontal segment DE indicates that
returns from exporting to the rest-of-the-world at Pw are higher
than selling domestically at prices less than Pw.

If the domestic industry were a monopoly, or if collusive
agreements among industry participants were sustainable, the
industry's demand and marginal curves would not be equivalent.
With domestic market power, the amount supplied to the domestic
market could be restricted to obtain higher sales revenue at a
higher domestic price. Domestic demand would have to be
relatively inelastic, with good substitutes (like HFCS) also
restricted in availability. In figure A-3, the marginal revenue
schedule is MRjt or LMNOE. The marginal revenue schedule becomes
horizontal at Pw because market power by assumption does not
extend beyond the national market.

Figure A-3 shows the situation with no import restrictions. The
market power of the domestic industry would be restricted due to
unrestricted competition from importers willing to supply all
domestic needs at Pw. Domestic production would be 0T determined
by where DMC and PwE intersect. Imports equal TU, implying
consumption equal to TU. As shown, the producer return is a
shipment-weighted average of the world price and the U.S. price.
If the situation depicted in the figure were true,  Mexico would
not be a net excess producer. Its shipments into the U.S. market
would be set at 7,256 mt. 

Figure A-4 extends the framework by incorporating Mexican
Government policies. Imports are restricted under a TRQ system.
Low-tariff imports are shown to equal U'U (although they could
reasonably be expected to equal zero). The effective demand Djt
shifts leftward by U'U and is represented as A'B'C'D'E. If the
sugar industry were competitive subject only to the Mexican
Government's import policy, it would produce at where DMC and Djt
intersect at a price somewhat higher than Pw. In this situation,
there would be no exports except those to the United States.
However, with collusion among industry participants backed by
government complicity (e.g. marketing allotments, production
quotas, restrictions on substitute goods), the industry can
optimize its return by restricting joint domestic  and U.S.
supply to 0T'. The price charged to the domestic market is a high
Pmx. As before, it ships 0S to the U.S. market, but only ST' to
the domestic market. It still produces, however, a quantity equal
to 0T, but T'T is exported. Domestic consumption is reduced by
this same amount. In effect, the TRQ combined with government
policies that facilitate collusion among firms allow price
discrimination against domestic consumers and favor the implicit
subsidization of exports.

Summarizing, the static model has two key components. The first
is import control, and the second is the government promotion of
coordination among Mexican sugar-producing firms. The import
control aspect is similar to the U.S. sugar program, but the
promotion aspect is not similar.

Mexican Government policies facilitating non-competition among
firms would superficially lead one to expect a stagnant
production structure. However, the Mexican industry is looking
forward to becoming a large player in the U.S. market, although
the timing is in dispute. The problem for Mexican firms is that,
as stated, firms presently in the U.S. market are already
competitive. It does not seem clear that Mexican firms have large
cost of production advantages over U.S. firms. Entry into the
U.S. market requires investments be made by the Mexican industry
making it more capable of competing in the expanded market.

The second part of this paper examines more closely how the
Mexican industry has been preparing for the future. If the
widely-presumed Mexican industry dynamism tests out, the current
Mexican Government policy regime should be understood as having
elements not meant to be permanent. The facilitation aspect of
current policies would more clearly be understood as "industrial
policy." It provides domestic sugar firms protection from
competition, foreign and domestic, as preparations are made for
eventual withdrawal of the policy.

Mexico's Sugar Industry and Production Growth

The rebound in Mexican sugar production has proven remarkable
over the last few years. As recently as 1993/94, only 3.8 mmt of
sugar were produced; whereas the year just ended saw a record of
nearly 5.5 mmt. Although production is forecast to decrease in
1998/99, it could still be the second highest on record. Although
area planted to cane has been increasing and good weather has
played a role, most of the growth has been attributed to gains in
production efficiencies in milling and harvesting methods.
Although many sugar companies seem to be experiencing severe
financial problems, they have been able to adapt more modern
methods into their production processes. Their problems may stem
from being too successful in an unfavorable domestic (i.e., too
little demand) and international (i.e., low world prices) sugar
environment.

Fifteen industrial groupings, plus seven smaller independent
companies, currently produce sugar in Mexico. There are 61 mills
located in 14 Mexican states. Table A-1 shows the mills,
organized by company ownership, along with the state in which
they are located, daily production capabilities, and average
production for 1987-93 and 1994-98. By far the largest company is
the Concorcio Industrial Escorpion, or CAZE, with 22 percent of
total capacity. It has built up capacity since 1988 through mill
acquisitions (two mills in 1990 and five mills in 1993), and
through increased mill investments (5 percent greater daily
grinding capacity since 1993). The second largest company,
Concorcio Machado, can mill 32,200 mt per day or just under 10
percent of total national capacity. The third largest, Grupo
Azucarero Mexico, has plans to increase refining capacity by 130
percent by the year 2000. The five largest companies currently
possess over 55 percent of national grinding capacity.

Sugar production is distributed unevenly over 14 states. Veracruz
is the largest producing area, with a daily grinding capacity
equal to 134,144 tons, or over 40 percent of the national total.
Jalisco is the second largest but with 10.9 percent of the
nation's grinding capacity. Other significant producing areas are
San Luis Potosi (7.6 percent), Sinaloa (6.7 percent), Chiapas
(5.4 percent), and Oaxaca (5.1 percent). The remaining eight
states combined total almost 24 percent of the nation's
production capacity.

Cane sugar production growth is a combination of growth in area
planted and harvested of sugarcane, and in recently instituted
technological and producer incentive measures. Harvested area
reached a low in 1992 of under 482,000 hectares, about 18 percent
lower than 1987. By 1997, the sector harvested about the same
number of hectares as in 1987, but sugar production was 22
percent higher. The data show factory recovery rate increases
from 9.08 to 10.77 percent and an increase in the effective
milling season from 130 to 175 days. It is these measures that
many observers point to when they credit a changed institutional
environment for propelling the efficiency of the sector. 

Although it is difficult to assign statistically-based weights to
all factors, some simple analysis of underlying trends can be
revealing. For this analysis, sugar production is decomposed into
two categories: sugarcane area (measured in hectares) and sugar
yield per harvested hectare. Trends are examined through the
analysis of the following growth equations:

  Sugarcane Area = Constant + (Growth Factor No. 1) * Year Index
  Log(Sugarcane Area) = Constant + (Growth Factor No. 2)* Year
    Index
  Sugar Yield Per Hectare = Constant + (Growth Factor No. 3)
    *Year Index + (Cane Yield Factor) * Cane Yield
  Log (Sugar Yield Per Hectare) = Constant + (Growth Factor
    No. 4) * Year Index + (Cane Yield Factor) * Log(Cane Yield)

Growth factors 1 and 3 measure changes in terms of physical
measures, such as tons (No. 1) and sugar per hectare (No. 3).
Growth factors 2 and 4 measure changes in terms of yearly
percentage changes. The sugar yield equations include a term that
accounts for the effect of sugarcane yields per hectare. There is
a high direct correlation between the yield measures, but cane
yields show no growth over time and are, hence, uncorrelated with
the year index. The inclusion of the cane yield in the equations
allows for greater confidence in the estimate of underlying
growth rates of sugar per hectare.

For Mexico as a whole, area harvested has been increasing over
23,000 hectares per year over 1993-97, or by a yearly rate of 4.3
percent. Table A-2 shows estimated trend growth in area harvested
for Mexican sugar companies and for the states. As a group, the
five largest companies have accounted for about 63 percent of
area growth. However, in terms of percentages, some smaller
companies have seen higher rates: Grupo Seoane increased acreage
at over 11 percent for the period; Administracion Multiple growth
at 8.5 percent; Concorcio AGA growth at 6.9 percent; and the
Porres Group growth at 6.7 percent. For four of the companies,
there has not been statistically significant area growth.

The data reveal that the states of Veracruz, Jalisco, and Sinaloa
have contributed about 65 percent of the total area growth.
Interestingly, growth rates in seven of the states have shown no
significant increase.

Tables A-3 and A-4 show sugar yield growth per hectare, taking
into account the influence of yearly changes in sugarcane yields.
Table A-3 reports results for individual factories, and for
factories aggregated by 1998 ownership patterns. Table A-4
reports results for the states and for Mexico as a whole.4/
----------
4/ The factories' data were grouped according to current
ownership and then estimated as part of a system. Technically,
the method of estimation is Seemingly Unrelated Regression (SUR).
Estimations for the states, on the other hand, were estimated by
Ordinary Least Squares. This distinction explains why the single
factories located in Colima (Queseria) and Quintana Roo (San
Rafael de Pucte), both part of the Beta San Miguel Group, do not
have precisely the same growth rates in both regression
equations. Statistically, results are close enough not to be
significantly different. In the case of the San Rafael de Pucte
factory, both methods reveal growth rates indistinguishable from
zero.
----------
The estimation time covers 1987-97 and is not restricted to
1993-97. The implication is that, unlike area growth, sugar yield
growth seems to have been sustained over the longer time period.
5/ 
----------
5/ It generally cannot be rejected that sugar yield growth from
1993 to 1997 has been significantly different than the growth
over 1987 to 1997. This result seems to suggest that productivity
growth since 1993 is merely a continuation of growth started
earlier. One might then want to discount the argument that only
recently-instituted measures have made the Mexican sugar sector
more efficient. Although this interpretation cannot be rejected,
a longer time series for the data are probably needed to make a
more definitive case one way or the other.
----------
Forty-one of Mexico's 61 factories have seen significant
increases in sugar per hectare. The results from table A-4 show
that the gains have been distributed across all but three of the
states. The 22 factories in Veracruz  show an aggregate growth in
sugar per hectare of about 2.2 percent. The rate for all of
Mexico is estimated at about 1.6 percent.

Eight of the 16 sugar industrial groupings have growth rates at
or above the national rate. Only three factory groupings show
growth rates indistinguishable from zero. In all, firms
accounting for 85 percent of sugar-producing capacity have made
statistically significant increases in sugar yield per hectare. 

The rates are high compared with those in the United States. For
instance, the same methodology applied to Florida data from 1970
to 1998 shows a statistically-significant growth rate of only
0.65 percent. The Louisiana rate is higher at 1.16 percent but
still lower than the Mexican rates.

Conclusion

The first part of this paper showed a supply-demand model of
sugar in Mexico. The model incorporates import protection and
industry coordination measures that allows domestic pricing above
marginal costs. The second part of the paper presented some
evidence that the industry has had wide success in adopting
changes that have produced increasing amounts of sugar from
available land areas. It seems likely that the policy-structure
has had a major role in making this sort of improvement possible.

This analysis was restricted by data availability. Each firm,
producing area, and factory has a set of characteristics that
make projections difficult and provisional. The data and policy
structure, however, do point to an industry that hopes to have a
formidable presence in the U.S. market. The key policy question
involves the interpretation of the side letter agreement to NAFTA
and whether a negotiated solution is feasible to allow earlier
entry of Mexican sugar. The Mexican industry also faces
competition from high fructose corn syrup (although Mexican
government policy has been an aid here as well), as well as the
financial stress in which many of the firms find themselves.

References

Foreign Agricultural Service, United States Department of
Agriculture. GAIN Report #MX8033, page 10, March 31, 1998.

LMC International. A World Survey of Sugar and HFCS Field,
Factory, and Freight Cost: 1997 Report. Oxford, England,
September 1997.

The Rise and Decline of Puerto Rico's Sugar Economy 
by
Nydia R. Suarez 6/
----------
6/ The author is an agricultural economist in the Specialty Crops
Branch, Economic Research Service, USDA. The author wish to thank
the officials from the Puerto Rico Department of Agriculture,
Office of Agricultural Statistics, the Economic Development Bank,
and the staff from Central Roig and Central Coloso for their
insights drawn from a recent trip to Puerto Rico to study the
sugar industry. 
----------
Abstract: Puerto Rico's sugar industry has suffered from a
history of major swings in production and trade. At its peak in
1952, Puerto Rico grew 12.5 million tons of sugarcane on more
than 400,000 acres and processed over 1 million tons of raw sugar
at 34 mills and seven refineries. Today, only two mills and one
refinery are in operation. Puerto Rico has shifted from being a
raw sugar supplier to the United States to importing sugar to
meet domestic needs. The drastic decline in production to less
than 20,000 tons in 1998, has probably gone too far to be
reversed. High production costs, outdated equipment, lack of
capital and collateral for investment in new technology, and the
Sugar Corporation's lack of commitment to continue supporting the
industry generates a very bleak outlook. The government completed
privatization of the industry in mid-1998. Many problems remain
unresolved, leaving the future of the industry dependant on how
the government and the "colonos" (the island's sugar farmers) 
work out their differences.

Keywords: Puerto Rico, sugarcane, sugar, colonos, production,
Sugar Corporation. 

Sugar Dominates Puerto Rico's Early Development 
The Puerto Rico sugar industry is one of the oldest in the
Western Hemisphere, having begun  when Spanish colonizers brought
sugarcane from the Dominican Republic and established the first
sugar mill in the mid-1500s. Sugarcane cultivation and sugar
production expanded during the rest of the 16th century but then
lost momentum and stagnated over the next two centuries. Growth
was impeded by high costs of labor and freight, competition from
other countries, and trade restrictions imposed by the Spanish
Crown.

The sugar sector took off again in the 19th century due to
growing external demand, principally from Europe and the United
States. Sugar production dominated the country's economy as
farmers dedicated an increasing amount of land to sugarcane
cultivation. However, toward the end of the 1800s, sugarcane
cultivation entered a period of decline due to competition from
Brazil and Cuba and labor shortages. 

The Puerto Rico sugar industry was revived as a result of the
Spanish-American War of 1898. Through a Presidential proclamation
in 1901, Puerto Rico became part of a U.S. customs territory,
thereby receiving the same tariff benefits that protected U.S.
mainland sugar interests. Helped by this tariff and other
economic policies, U.S. sugar companies invested heavily in the
island's sugar industry. The area devoted to sugarcane tripled
and farm size increased. Puerto Rico raw sugar production climbed
to 661,000 tons by 1925 from an average of 440,000 tons in the
early 1920s. Over 40 percent of production was controlled by
three corporations. Sugar exports increased accordingly, totaling
about 600,000 tons by the end of 1927 when sugar accounted for
almost 60 percent of the island's exports. 
 
In 1934 sugar's role was challenged by the enactment of the
Jones-Costigan Act. The act  established production quotas for
the beet and cane producing areas of the United States and its
possessions, as well as import quotas for foreign countries. The
legislation also restricted the amount of refined sugar that
Puerto Rico could ship to the United States. Even though this law
discouraged investment in the island's refining capacity,
production of raw sugar continued to increase. The vitality and
impetus of the island's sugar industry was mainly a result of the
relationship between the United States and Puerto Rico. Sugar
from Puerto Rico enjoyed a guaranteed outlet in the U.S. market
and brought a premium price that was maintained by U.S. import
restrictions. The profitability of the sugar industry, bolstered
by low labor costs, prompted high levels of investment which led
to the creation of infrastructure and the multiplication of sugar
mills. During this period, the sugar sector earned approximately
two-thirds of the island's net income and employed more than
one-third of its labor force.  

Emphasis Shift from Agriculture to Manufacturing 
Initially, the reformist political party of the 1940s thought
that the economic well being of the island depended on
agriculture. One of their first policy initiatives was to
implement a land reform program through the newly created Land
Authority, whose mandate was to enforce a 500-acre limitation on
the size of corporate land holdings. The Land Authority was also
responsible for purchasing, at a fair-market price, holdings in
excess of 500 acres, and with using these lands to benefit
landless peasants and small farmers. Since most corporate sugar
holdings were in excess of 500 acres, they became prime targets.
By 1947, the Land Authority had purchased 36 percent of the
corporate sugar land holdings. By the end of the 1950s, the
government had become the single largest landowner in the sugar
industry.

Luis Munoz Marin, the island's first elected governor in 1948,
introduced a series of policy measures to encourage
industrialization. This economic plan, which came to be known as
"Operation Bootstrap" gave direction to the Puerto Rico economy
henceforth. By the end of the 1950s, the benefits of Munoz's
pro-industrialization policies were evident as the gross domestic
product (GDP) of the island almost doubled. 

These economic policies, particularly those referring to the
promotion of the private investment and the tax-exemption
benefit, were not extended to the agricultural sector.
Traditional agriculture was not a moneymaker and was unable to
take advantage of the exemption even if it had been offered.

The Sugar Industry Declines as Puerto Rico Industrializes
Over the next 30 years, industrialization created jobs in the
cities and an exodus of labor from the farm. The sugar harvested
area declined by more than 50 percent between 1953 and the early
1980s, while the contribution of the agricultural sector to the
GDP fell from 14 percent to 5 percent.

The sugar industry was not immediately crippled by the
industrialization strategy. According to Dr. Curet Cuevas in his
book El Desarrollo Economico De Puerto Rico, agriculture in
Puerto Rico remained profitable until the mid-1960s, 15 years
after Operation Bootstrap was initiated. In 1949, sugarcane was
produced on about 48 percent of all cultivated land, accounting
for 50 percent  of all agricultural employment and income. In
1952, the sugar industry peaked with the production of almost 1.3
million tons, raw value. As industrialization became the core of
the economy, its effect on the sugar industry became more
evident. Although sugar production averaged over 1 million tons
in 1950-56, it began to fall in 1957. Production briefly
recovered, exceeding 1 million tons in 1961, but since then the
sugar industry has been in a period of prolonged decline. 

Several factors underlie the sharp decline of the Puerto Rico
sugar industry. As with agriculture in general, workers abandoned
sugarcane fields to look for higher-paying manufacturing jobs in
urban areas of Puerto Rico. Sugar mills began to experience labor
shortages at harvest time and the area planted to sugarcane was
reduced. Labor unions, which had gained power during this period,
pressed for higher wages which in turn raised production costs.
As mills sought to accelerate mechanization, unions resisted.
Increased competition from Cuba and the Dominican Republic, as
well as mismanagement of the mills, exacerbated this decline.
Business confidence plummeted and capital investment fell
sharply.

The declining profitability of the sugar industry led to the
bankruptcy of some mills, while many of the survivors reduced
production. Under pressure from both labor and management, the
Government of Puerto Rico began to assume ownership of the
industry by buying out failing mills. Between 1968 and 1972, the
government invested $100 million in an unsuccessful effort to
rehabilitate the industry and bring sugar production levels back
to a million tons per year. In 1973, with sugar production below
300,000 tons, the government nationalized the sugar industry by
creating the Sugar Corporation to oversee the operations of the
remaining 13 mills and one refinery. Nonetheless, sugar
production continued to fall due mainly to high production costs
and labor shortages. Between 1981 and 1989, sugar production
ranged only between 90,000 to 151,000 tons per year, and
production has declined every year thereafter.

Location and Structure of Production
Sugarcane cultivation has been confined largely to the coastal
fringes of the island. Historically, some production also
occurred at higher elevations in the interior, but the central
mountain ranges hamper sugar mechanization and increase labor
costs in that region. The sugarcane area of Puerto Rico is
customarily divided into five districts: the Interior, East,
West, North, and South Coasts. 

Climatic conditions in Puerto Rico are generally ideal for
sugarcane production. The Interior, East, and West Coast
districts have a mean annual rainfall of almost 90 inches; the
South Coast receives approximately half that amount; and the
North Coast is intermediate. Average maximum temperatures do not
vary sufficiently between districts to greatly influence
sugarcane growth. Average minimum temperatures just prior to the
grinding season (January-April) have a critical effect on the
quality. In Puerto Rico lower temperatures are better. As mills
have closed and the industry has shrunk, production is now
primarily concentrated in the West Coast.

Cropping Schemes and Harvesting Methods 
Historically, Puerto Rico has had three types of sugarcane
cropping schemes: the primavera, gran cultura, and ratoon. The
"primavera" crop or short growth, is seeded between January and
June and harvested 10 to 12 months later. In recent years it has
accounted for about 15 percent of the annual cane harvest. The
"gran cultura" crop or long growth, is seeded in the second half
of the year and harvested 14 to 18 months later. It represents
about 5 percent of the annual cane harvest. The "ratoon" crop (a
combination of primavera and gran cultura crops) now accounts for
about 80 percent of total production.

Due to labor shortages and sharp increases in wage rates, about
85 to 90 percent of cane cutting and 90 percent of loading
operations are now mechanized. Once the cane is harvested, it is
delivered to one of the mills with which the farmer has a
contract. After mill technicians sample the cane to determine its
sucrose content, it is processed  into raw sugar, and the mills
pay the farmer for his share. About 64 percent of the sugar
obtained from the total cane delivered to the mill belongs to the
farmer and the difference to the Sugar Corporation.

According to the most recent U.S. Census of Agriculture for
Puerto Rico, the total area harvested for sugarcane in 1992 was
38,462 acres, down sharply from 124,595 acres in 1974, and
424,000 in 1945. The seven leading municipalities where sugarcane
was grown--Cabo Rojo, Humacao, Mayaguez, Ponce, San German, San
Sebastian, and Yabucoa--accounted for 52 percent of total area in
1992.

The number of sugarcane farms dropped from 1,932 in the 1974
Census to 435 in 1992. The average size of sugarcane farms was
182 acres in 1992, compared with 119 in 1974. Since the land
reform of 1941 limited sugarcane farms to 500 acres, Puerto
Rico's production has been dominated by small holders. This
contrasts with the neighboring Dominican Republic, where
sugarcane production has been characterized by large sugar
estates.

The number of sugarcane growers has fallen precipitously due to
the low profitability of the sector. There were about 275 growers
in 1996, compared with 5,000 in 1970. The growers who left
sugarcane production were usually the smaller ones. Most sugar
growers who quit the industry in the mid-1960s had only 25 to 50
acres in cane. Some of this land was eventually sold for
residential or commercial development. The rest was left idle.
This change in land use is still continuing.

Sugarcane Production
The sugarcane production available for processing is estimated at
less than 300,000 tons in 1998, down from 6 million tons in 1970.
Sugarcane yields are also declining. In 1998, they were 13 tons
per acre, down from 26 tons and 31 tons in 1988 and 1978,
respectively. In comparison yields in Florida, for example, rose
from 31 tons in 1978 to 36 tons in 1998. This decline in
sugarcane yields suggests that some of the more productive land
has gone out of production in addition to failure to develop more
productive cane varieties, reduced use of yield-enhancing
production inputs, and deficient farming practices.

Puerto Rico's sugar recovery rate per ton of cane milled is
estimated at 6.64 percent in 1998 compared with 11.04 percent in
the early 1950s and well below other U.S. producing areas. Sugar
farmers claim that recovery levels have declined over time mainly
because of delays in receiving financial support from the
government in addition to malicious fires that occurred in
sugarcane fields. Other reasons are the high levels of trash,
inadequate and old equipment, and deterioration of sugarcane
between cutting and milling.

Production Support
Puerto Rico's Sugar Corporation supported sugarcane farmers
primarily through a price support program guaranteeing the price
of the farmer's share of sugar produced at the mills. According
to the contract terms, 64 percent of the sugar and 66 percent of
the molasses belong to the farmer who delivered the cane. The
remaining sugar was owned by the Sugar Corporation, and was
valued at the U.S. No. 14 nearby futures contract price for
accounting purposes. Although Puerto Rico is eligible to
participate in the Federal sugar program, for which the island's
loan rate for raw sugar for fiscal 1999 has been set at 18.14
cents per pound, Puerto Rico has elected to use its own funds.
However, Puerto Rico continues to benefit from the U.S. price
which is considerably above the world price. 

The Sugar Corporation also helped sugarcane farmers in Puerto
Rico obtained loans at below-market interest rates. The amount of
money that a farmer could borrow, with the cane crop as
collateral, depended on the size of the farm and estimated
production costs. The total loan amount was not given to the
farmer immediately, but released in installments based on how
much of the money borrowed has been used for the farm. If the
farmer could not repay the entire loan, the unpaid balance was
carried into the next crop year.

From 1910 until 1991, sugarcane farmers also benefitted from
varietal breeding research at the Agricultural Experimental
Station of the University of Puerto Rico (AES-UPR). The program 
had a long and dedicated history of highly regarded sugarcane
improvement. But in 1991, the government's diminished interest in
Puerto Rico's fast shrinking sugar sector caused it to cease
funding breeding research.

Milling Industry Structure and Performance
Puerto Rico's cane milling industry has shrunk drastically since
the 1950s as sugarcane production fell. Analyzing the state of
the industry in the late 1960's, Dudley Smith, then vice
president of the Association of Sugar Producers of Puerto Rico,
found that of the eight factories that closed between 1962 and
1967, only one had made a profit in the years immediately
proceeding the end of operations. Profits shrank because of high
production costs and an inadequate cane supply resulting in an
inability to maintain operations close to full capacity. These
fundamental problems, which emerged in the 1960s, have not
significantly changed in the last 30 years.

In 1998, total grinding capacity is 10,000 tons per day, down
from almost 53,000 tons in the mid-1970s. However, the average
size of the mills has remained relatively unchanged at 5,000 tons
per day. While some of the island's smaller mills have closed in
recent years, so too have some of the largest. The Aguirre Sugar
Company's mill in Salinas with a capacity of 7,500 tons per day
and Central Plata in San Sebastian with a capacity of 4,000 tons
per day closed in 1990 and 1996, respectively, due to lack of
sugarcane resulting from irrigation problems. In addition to the
lack of sugarcane for processing, the island's largest mill
located in Ensenada, closed in 1981 due to labor problems.

By 1998, the Sugar Corporation managed the two remaining mills as
well as the Snow White refinery--the only refinery on the island.
Central Coloso is the biggest mill, with a grinding capacity of
6,000 tons per day, while Central Roig has a capacity of 4,000
tons per day. A lack of agricultural labor, the shift from
sugarcane to other agricultural products, increased demand for
land, and lack of planning for housing and roads has contributed
to inadequate cane supplies.

During the 1998 milling season (January-April), Puerto Rico
produced an estimated 15,000 tons of sugar from about 226,000
tons of cane processed. In the 1980s, the industry produced an
annual average of 103,000 tons of sugar and that in turn was less
than half of the 263,000 ton average over the 1970s. While
overall production has declined, sugar yield per ton of cane
processed remained relatively unchanged, averaging 154 pounds per
ton of cane during the 1990s, 155 pounds during the 1980s, and
156 pounds during the 1970s, reflecting a lack of quality
improvement. In contrast, Florida crushing yields grew 212 pounds
to 239 pounds per ton over the same 25-year-period.

The milling sector's output of molasses also has dropped
precipitously. The contraction in molasses production has had a
major impact on Puerto Rico's well-known rum industry. Puerto
Rico imports most of the molasses from the Dominican Republic.

Cost of Production
As the industry has shrunk, the fixed cost per unit of sugar
produced has risen rapidly. The two remaining mills would need to
produce at least 100,000 tons of sugar to approach efficient
output levels. However in 1997/98,  raw sugar production from the
two mills reached only 15,000 tons. 

High input costs, relatively high labor content in a high-wage
economy, increased transportation costs now that farms are
located farther from mills, and low productivity place Puerto
Rico among the highest cost sugar producers in the world. Field
costs averaged 17.08 cents a pound from 1980-81/1984/85 and 20.95
cents a pound from 1990/91-1994/95. For the most recent period,
labor accounted for 53 percent of total field cost, capital 33
percent, and fuel, fertilizer, and chemical the balance.

Milling labor costs also are high. Total mill costs averaged
12.44 cents a pound from 1980/81-1984/85 and 19.10 cents a pound
from 1990/91-1994/95. Total sugar production costs (field and
factory and administration) averaged 33.87 cents a pound and
47.18 cents a pound, respectively for the two periods. In the
Landell Mills study, Puerto Rico had the second-highest rank out
of 62 cane producing countries surveyed for the 1980/81-1990/95
year period, versus  mainland U.S. cane producers ranking 28th.
Hawaii field and factory costs, the highest of the four 
cane-producing States, averaged 20.64 cents a pound during the
1980/81-1994/95 period, 36 percent below Puerto Rico's.

These extremely high costs show up in the losses--close to $20
million per year since 1995--sustained by the government's Sugar
Corporation. The Sugar Corporation has sustained losses every
year since fiscal 1974, losing an accumulated total of more than
$1 billion. The Sugar Corporation's inefficiency, obsolete
machinery, and high labor costs have been widely publicized.
Until recently more than 2,000 people worked for the Sugar
Corporation, as pressure from unions hampered its ability to
reduce its labor force.

Marketing Sugar and Molasses 
Raw sugar produced in Puerto Rico is processed into refined sugar
at the Snow White refinery located adjacent to the closed
Mercedita cane mill in Ponce. The refinery is owned by the Land
Authority and operated by the Sugar Corporation. The Sugar
Corporation is the local producer and supplier for the Puerto
Rico market for direct consumption or table grade refined sugar.

The wholesale price of refined sugar is determined by the
government through its Department of Consumer Affairs (DACO). The
price is presently set at 43 cents per pound. To complete the
marketing chain, distributors sell their sugar to supermarkets
and other retail outlets at a price which is also set by DACO.
The current retail price is 52 cents per pound.

While the Sugar Corporation fills Puerto Rico's domestic food
needs, most of the demand for industrial uses is met by shipments
from the mainland United States. These shipments are regulated
and subject to licenses issued by the Government of Puerto Rico.
Currently there are about seven license holders.

When Puerto Rico produced sugar well in excess of the needs of
the island, the surplus was exported to the United States. As the
sugar industry declined, exports diminished as well. Puerto Rico
has shifted from a historically significant exporter to an
importer. Exports during the 1980s averaged about 30,000 tons,
over the last 4 years they have dipped well below this mark.
Exports are essentially raw sugar which cannot be processed with
Puerto Rico's limited refining capacity. Most is sold to the
United States, although occasionally some is shipped to Caribbean
neighbors.

Puerto Rico is also a transshipment point for refined sugar from
Florida and Louisiana. This refined sugar is typically reloaded
onto smaller vessels and shipped to Haiti, Barbados, and other
Caribbean destinations.

Over the years, some U.S. import quota sugar from foreign
countries has entered the island. Non-quota sugar imports for
consumption must pay the high duty (16.27 cents in 1998) as
elsewhere in the United States.

Prospects for the Future
The Puerto Rico sugar industry has become a financial drain for
the government and an ordeal for the colonos. The government has
agreed to privatize the industry and transfer Sugar Corporation
assets to sugar farmers and the two existing mills (92 sugar
farmers from Coloso and 26 from Roig). The refinery asset
transfer will occur in 2000.

Problems were aggravated further in September 1998 by Hurricane
Georges, which inflicted over $12 million in damages to the sugar
industry. The Central Roig mill decided not to harvest in 1998/99
and instead is preparing for the 2000 crop. The Central Coloso
mill is expected to harvest no more than 130,000 tons of
sugarcane and 9,000 tons of sugar in 1998/99. At this point, the
government and the colonos have not reached any agreement on
financing loans for the 1998/99 harvest, making it very difficult
for the colonos to accomplish their dream of being able to at
least satisfy the internal demand of the island.

References
Agro Empresarial (1994) "Industria Azucarera de Puerto
Rico--Situacion en 1994" p38-44.

Albanese, Lorelei (1994) "Subsidies, Losses, and Sugar Cane." The
San Juan Star Business Outlook July 25 p. B32-33.

Alexander, Alex G. (1994) "Sugarcane: A Growing Energy Source,"
The San Juan Start Viewpoint May 8 V2.

Bergad, Laird W. (1978) "Agrarian History of Puerto Rico,
1870-1930, "Latin American Research Review 3, no. 3 pp. 45-46.

Bird, Esteban A. (1941) "Report on the Sugar Industry in Relation
to the Social and Economic System of Puerto Rico", Senate
Document No. 1, San Juan, Puerto Rico.

British West Indies Sugar Association (1995) "Sugar in Puerto
Rico and Florida", 107 pages and Notes on Twelfth Congress of the
International Society of Sugarcane Technologist.

Candelas, Jose B. (1959) "Some Effects of the Sugar Programs on
the Sugar Industry of Puerto Rico" Bulletin 151, University of
Puerto Rico Agricultural Experimental Station, Rio Piedras,
Puerto Rico, p. 46.

Carrion, Arturo (1983)  Puerto Rico: "A Political and Cultural
History", (New York: W.W. Norton and Company), p. 209.

Congress of the United States, Office of Technology Assessment
Integrated Renewable Resource Management for U.S. Insular Area,
(Washington, D.C.: U.S. Government Printing Office, June 1987),
p. 152.

Corporacion Azucarera de Puerto Rico (various years) "Informe
Anual," San Juan, Puerto Rico.

Deitz, James L. (1986) "Economic History of Puerto Rico:
Institutional Change and Capitalist Development," Princeton
University Press.

Department of Agriculture, Office of Agricultural Statistics
(various years), "Anuario de Estadisticas Agricolas de Puerto
Rico," Santurce, Puerto Rico.

Department of Agriculture, Office of Information and
Communication (NA) "Breve Historia de La Agricultura en Puerto
Rico," p. 10.

Department of Agriculture (1995) "Situacion de la Molienda, Zafra
1995" San Juan, Puerto Rico.

Gilmore Sugar Manual (various years) "Puerto Rico Chapter,"
Fargo, North Dakota.

Hernandez Agosto, M. (1963) "Conversion de Nuestra Agricultura de
Cana de Azucar Al Maquinismo," Autoridad de Tierras de Puerto
Rico, p. 40.

Jose A. Herrero (1971) "La Mitologia de la Azucar: Un Ensayo en
la Historia Economica de Puerto Rico, 1900-1970," Working Paper
No. 5, CEREP.

Hill, Marianne (1983) "A Preliminary Assessment of the Economic
Situation of Puerto Rico's Agriculture," Puerto Rico Business
Review Special Edition, p. 15.

Hoff, Robert (1989) "The Puerto Rican Sugar Industry: Historical
Evolution, Current Status, and Future Direction" World Sugar
Circular, Foreign Agricultural Service, USDA November, pp. 22-23. 

Informe Economico Al  Gobernador (various years), Junta de
Planificacion, San Juan, Puerto Rico.

Moscoso Teodoro and Jose Vicente Chandler (1988) "El Amargo Sabor
de Nuestra Cana," San Juan, Puerto Rico, 4 December, p. 18.

Perloff, Harvey (1950) "Puerto Rico Economic Future," A Study in
Planned Development, University of Puerto Rico and the University
of Chicago Press, pp. 67-79.

Revista del Agricultultor (1994) "La Cana En Crisis," pp. 18-29.

Rosa, Samuel (1995) "The Puerto Rican Sugar Industry: Situation
and Outlook," World Sugar Circular, Foreign Agricultural Service,
USDA, June pp. 26-28.

Sanchez, Jorge (1971) "El Programa de Rehabilitacion de la
Industria Azucarera de Puerto Rico Segun La Ley #69, 19 de junio
de 1969" Colegio de Ciencias Sociales, Universidad de Puerto
Rico, p. 35.

Smith, Dudley (1967.) "The Job Being Done by Sugar in Puerto
Rico" Association of Sugar Producers of Puerto Rico p. 50.

Smith, Dudley, (1967) "Why Sugar Factories Have Closed in Puerto
Rico" Sugar y Azucar, November, pp. 30-31.

Price Waterhouse (1992) "Projecto de Reestructuracion de La
Corporacion Azucarera de Puerto Rico" Volumenes I y II.

Rivera, Eduardo Medina and Rafael L Ramirez (1994) "Del canaveral
a la fabrica," Library of Congress Catalog Number: 85-8018,
ISBN-78-0. 

Suarez, Nydia R. (1998) interviews with representatives of the
Government of Puerto Rico and the sugar industry during recent
trip to Puerto Rico.

U. S. Department of Commerce (1992) "Characteristics of
Agriculture in Puerto Rico," Bureau of the Census, Washington,
D.C.

U.S. Department of Commerce (1979) "Economic Study of Puerto
Rico," Washington, D.C.

Williams, Byron (1972) "Commonwealth, State, or Nation?" New
York: Parents' Magazine Press, pp. 53-55.

Implications of NAFTA Duty Reductions for the U.S. Sugar Market
By: Patrick D. Henneberry and S.L. Haley 7/
----------
7/ Henneberry is an executive vice-president of the Louis Dreyfus
Sugar Company, and Haley  is an economist with the Economic
Research Service.
----------
Abstract

The U.S. sugar market is protected from offshore imports by a
tariff-rate quota. The second-tier duty that protects the market
is subject to trade pact negotiated reductions. Negotiations
under the North American Free Trade Agreement (NAFTA) allow for
an accelerated reduction in the second-tier duty for Mexico.
These reductions go far enough to raise the possibility of
significant imports from Mexico outside of the tariff-rate quota
over the next several years. This could have the effect of
reducing or limiting prices of raw and refined sugar in the U.S.
market. It could also introduce more price volatility into the
market and cause the loss of quota allocations to quota holding
nations. Possible remedies for this are available under Section 8
of NAFTA, or through anti-dumping suits against individual
importers. It is important that industries on both sides of the
border consider the implications of these duty reductions when
making long range decisions.

Keywords: U.S. sugar program, NAFTA, GATT, duties, sugar,
imports, second-tier duty, trade.

Industry and government leaders in both Mexico and the United
States have spent much time thinking about and debating the North
American Free Trade Agreement (NAFTA) on sugar. Most of the
discussion has concentrated on the general terms of the agreement
and whether the side letter to NAFTA is a bidding part of the
agreement. While these are important matters, there is another,
less often discussed, facet of the NAFTA that may also have
profound effects on the U.S. market in the next several 
years--the agreed reductions in the high rate duty for Mexico.

The tariff-rate quota (TRQ) that limits imports into the United
States from offshore sugar producers protects the U.S. sugar
market. Quota allocations are given to a list of quota-holding
countries which allow the import of specific quantities of sugar
produced in those nations at a first-tier duty rate which ranges
from 0 to 0.625 U.S. cents per pound. Imports of sugar above
those allocated quantities from quota holding nations, or from
other nations, are subject to a second-tier duty. This duty has
been, for the most part, high enough to make such imports
prohibitively expensive and thus make the allocated quota a
quantitative limit on imports into the U.S. market. There have
been small amounts of specialty products imported under this duty
structure, but the total quantities have been small enough to be
completely insignificant in the broader market for sugar in the
United States.

The second-tier duty is subject to negotiated reductions under
the General Agreement on Tariffs and Trade (GATT) and NAFTA trade
agreements. NAFTA allows a particularly rapid reduction in the
second-tier duty for Mexican sugar over the next several years.
Table 1 shows the duty rate applicable for imports of raw and
white sugar from Canada, Mexico, and most other nations.8/
----------
8/ A more complete discussion of U.S. sugar import duties written
by Ron Lord can be found on pages 16 and 17 of the December 1995
Sugar & Sweetener Situation and Outlook Yearbook.
----------
The importance of these reductions in the second-tier duty is
that sugar imports into the United States paying these duties
become profitable at higher world price levels. This could
undermine the effectiveness of the allocated sugar quota as a
quantitative limit to imports. To determine the world price at
which imports would become feasible it is necessary to put the
prices in comparable formats and calculate the costs of moving
sugar from Mexico to the United States.

World market prices are quoted Free on Board, Stowed and Trimmed
(FOBST) in the buyer's vessel at the loading port in the country
of origin. U.S. market prices are quoted and delivered (including
the cost of discharging into buyer's warehouse) to the United
States on a Cost, Insurance, Freight, Duty Paid (CIFDP) basis.
Comparing these prices requires the addition of the costs of
moving the raw sugar from the country of origin to the United
States, to the prevailing price at origin. In the case of Mexico,
an estimate of these expenses is 1.50 U.S. cents per pound. This
expense covers freight, stevedoring, weighing and sampling,
insurance, interest expense, and other costs of moving the raw
sugar to the United States. This may vary somewhat from year to
year with the freight market, but should be representative for
our purposes.

Another factor to consider in comparing the prices for raw sugar
is the polarization and quality differentials that prevail in the
market. 9/

----------
9/ Polarization is a measure of sucrose concentration based on
its ability to rotate the plane of polarized light. The degree of
polarization indicates the percentage of sucrose in raw cane
sugar and white refined sugar.
----------
For simplicity, this analysis assumes that there are no quality
premiums or discounts other than polarization. Polarization
premiums are paid at origin on the FOBST price. Polarization
premiums are paid in the United States on the full CIFDP price.
The duty paid when importing Mexican sugar into the United States
is adjusted for the polarization on a sliding scale. The result
is that there is a polarization credit of the difference between
the CIFDP price in the United States and the FOBST price in the
world that will accrue to the importer. This credit, at 7.50 U.S.
cents per pound for world sugar and 22.00 U.S. cents per pound
for U.S. sugar is approximately 0.40 U.S. cents per pound. The
net cost of moving raw sugar from Mexico to the United States is
then approximately 1.10 U.S. cents per pound.

The situation is similar for refined sugar. World prices are
quoted FOBST country of origin in buyer's vessel. U.S. prices are
quoted delivered to the buyer's plant. For the purpose of this
illustration, the delivery point is assumed to be Chicago. The
cost of moving refined sugar from Mexico to the United States is
approximately 3.50 U.S. cents per pound. This includes charges
for freight to the U.S. Gulf, discharging, weighing and sampling,
breaking bags and re-loading into bulk railcars, and
transportation charges to Chicago.

For illustrative purposes, representative prices for U.S. raw
sugar at 22.00 U.S. cents per pound, and $29.50 per hundredweight
for refined sugar will be used. From these prices we must deduct
costs of delivery to the United States and further deduct the
duty applicable in each year. The result is the world price at
which imports will become competitive with U.S. market prices.
Table 2 shows these prices for each of the next 10 years given
the assumptions above.

As can be seen in table 2, world priced raw sugar exports from
Mexico become competitive at higher and higher prices in coming
years. To see what type of exposure this may mean for U.S.
producers, one need only look at the prices of world raw sugar
for the past 12 years. Figure 1 shows monthly futures prices for
the nearby delivery month of Board of Trade of the city of New
York No. 11 sugar futures from 1985 to the present. World raw
sugar prices have ranged between 5.00 and 16.00 U.S. cents per
pound during this period. Most of the price history was spent
between levels of 9.00 and 13.00 cents per pound. Prices in the
current year have dipped below 7.00 cents per pound and are just
above 8.00 cents per pound in late 1998. Given normal volatility
of sugar prices, over quota imports of Mexican raw sugar are not
out of the question for 1999 and seem to be quite likely after
the turn of the century.

The situation is similar for refined sugar. Prices are currently
trading around $235 per metric ton (mt) in world markets, a price
that is competitive in the U.S. market in 1999 at currently
prevailing U.S. prices. The price range for refined sugar on an
historical basis is also such that U.S. producers should expect
competition from Mexican sugars in the coming years.

It is estimated that the cost of production of raw sugar in many
of the major exporting countries is between 8.5 and 9.00 cents
per pound. Costs of producing refined sugar range from about $45
to $75 per metric ton or 2.00 to 3.50 U.S. cents per pound in
various countries. Constantly devaluing currencies are applying
downward pressure on these dollar denominated costs of
production. The prices that will allow competitive access into
the United States after the year 2000 for either raw or white
sugar are thus prices at which efficient sugar producers in many
nations would be encouraged to expand production. Thus, world
prices would not be expected to remain above the ranges shown in
table 2 for extended periods of time.

Refined imports may require significant discounts to U.S. prices
before industrial users are tempted to buy Mexican sugar instead
of domestic sugars from their traditional suppliers. U.S. refined
sugar is of extremely high and uniform quality. There is
considerable concern among U.S. industrial buyers that Mexican
sugar does not consistently meet the same standards as U.S.
sugar. While this may be true at this point in time, Mexican
refiners can make the necessary changes to their processes and
assure a consistent high quality as the market in the United
States expands. There is also a concern about extending the
supply chain to distant Mexican suppliers. The time necessary to
deliver sugar from Mexico is much longer than from domestic
suppliers. While this will always be the case, expanding volumes
will give the economic incentive necessary to devise ways to
shorten the time and establish distribution channels which will
satisfy these buyers' concerns.

The impact of over-quota imports on domestic prices is more
difficult to ascertain. Certainly over quota imports could act as
a cap on U.S. prices in any given year. If U.S. prices rise, the
world price at which Mexican sugar can be competitive will also
rise. If U.S. prices rise enough, Mexican sugar could flow into
the United States and limit the upward price movement. If world
prices are low enough, Mexican imports could push U.S. prices
lower in a given year.

Another effect of Mexican over-quota imports could be to reduce
the quantity of traditional quota allocated to quota-holding
nations. The U.S. Department of Agriculture (USDA) currently
administers the import quota by setting the TRQ at the beginning
of the fiscal year. The USDA makes available an initial amount
for allocation by the U.S. Trade Representative. Three TRQ
tranches are allocated in January, March, and May if the ending
fiscal year stocks-to-use ratio projection, as published in the
USDA's World Agricultural Supply and Demand Estimates report in
those same months, is equal to or below 15.5 percent. If Mexican
over-quota imports enter the market, they will be counted as an
addition to supply in the U.S. market. If the quantity imported
were large enough to cause the stocks-to-use ratio to exceed 15.5
percent, one of the additional tranches of quota would be lost.
The impact of this falls on the offshore quota-holding producer.
Their access to the U.S. market at quota prices would be replaced
by Mexican sugar at world prices. The U.S. Treasury would be the
beneficiary of the quota rent on this quantity through the
payment of the second-tier duty. The constriction of the quota
supply would have the effect of putting upward pressure back on
U.S. prices.

The United States has agreed under GATT that it will allow a
minimum of 1.256 million short tons of sugar to be imported under
its TRQ. If over-quota imports grew to a point that the amount of
quota sugar needed was less than this amount, U.S. prices could
come under significant pressure. This does not seem likely to be
a significant threat in the next several years. 

Pressure could also be brought to bear on U.S. prices if Mexican
sugar entered the market after the last of the increased quota
allocations had been allocated in May. At that point the USDA
would have already allocated enough sugar to meet the needs of
the U.S. market through the quota, and more imports would
increase supplies and reduce prices.

As world prices are considerably more volatile than U.S. prices,
over-quota imports could add to price volatility in the domestic
market. Refiners and industrial buyers will have to follow world
price movements more closely for points of interaction with U.S.
prices. We have already seen ways in which prices could move
lower or be limited by world price movements. Prices could also
go up as a result of world price movements. For example, consider
a case where the world market dipped to levels low enough to
cause over-quota sugar to be sold into the U.S. and news of these
sales caused a quota tranche to be canceled. A subsequent rally
in world market prices could cause the sellers of Mexican sugar
to buy U.S. quota sugar and re-sell the Mexican sugar to other
destinations in the world with a net profit between the two
transactions. The U.S. market could be left under-supplied for a
short period and prices could rise sharply. Participants on all
sides of the U.S. market will have to follow developments in
world prices much more closely in the years to come.

There are remedies, other than price, which could be employed to
limit the amount of over-quota sugar that would enter the market.
Chapter eight of NAFTA provides for emergency relief one time
during the transition period ending in 2008. If Mexican sugar
imports grew large enough to cause damage to the U.S. industry,
the United States could suspend the duty reductions on Mexican
sugar, or increase the duty back to the Most Favored Nation (MFN)
rate in effect at the point of injury or to the MFN rate prior to
the beginning of NAFTA. This is a volume-based safeguard and
would require imports to grow significantly enough to cause
damage to the U.S. industry before the protest could be made.

Anti-dumping duties are another remedy to limit the entry of
over-quota sugar. These duties are based on the idea that an
individual foreign supplier is selling sugar into the United
States at prices which are lower than they sell in their own
market. Anti-dumping remedies require the injured industry to
prove that dumping has occurred and that it has or threatens to
cause an injury to the domestic industry. If a remedy is imposed,
imports from the company that was dumping will be subject to
additional duties that will presumably eliminate the profit
potential from the dumping. This is a price-based remedy and is
against an individual foreign company. It could take a
considerable period of time before this type of action would stop
all Mexican suppliers.

The specifics of both NAFTA emergency actions and anti-dumping
penalties are quite complex and beyond the scope of this article.
The interested reader should consult the NAFTA documents and the
International Trade Commission for more information.

The erosion of NAFTA duties will likely expose the U.S. market to
imports outside of the usual quota mechanism in the coming years.
Offshore quota holders are likely to suffer a declining volume of
quota allocations. Prices in the U.S. market are likely to be
somewhat more volatile as a result of the interaction of U.S. and
world prices. Prices for domestic sugars are likely to meet
resistance to upward moves as the second-tier duty continues to
be reduced. Producers and consumers of sugar alike would be well
advised to begin to follow developments in the world market more
closely in coming years.

List of Tables

World Production, Supply, and Distribution

1. World production, supply, and distribution, centrifugal sugar

World and U.S. Sugar and Corn Sweetener Prices

2. World refined sugar price, monthly, quarterly, and by calendar
and fiscal year
3. World raw sugar price, monthly, quarterly, and by calendar and
fiscal year
4. U.S. raw sugar price, duty fee paid, New York, monthly,
quarterly, and by calendar and fiscal year
5. U.S. wholesale refined beet sugar price, Midwest markets,
monthly, quarterly, and by calendar and fiscal year
6. U.S. retail refined sugar price, monthly, quarterly, and by
calendar and fiscal year
7. U.S. spot price for HFCS-42, Midwest markets, monthly,
quarterly, and by calendar and fiscal year
8. U.S. wholesale list price for glucose syrup, Midwest markets,
monthly, quarterly, and by calendar and fiscal year
9. U.S. wholesale list price for dextrose, Midwest markets,
monthly, quarterly, and  by calendar and  fiscal year
10. U.S. producer price index for HFCS and sugar, monthly 
11. U.S. consumer price index for sugar and selected
sweetener-containing  products

U.S. Sugar Supply and Use

12. U.S. sugarbeet crops: Area planted, acres harvested, yield
per acre, and production,  by State and region
13. U.S. sugarcane: Area, yield, production, output, recovery
rate, and sugar yield per acre, crop years 
14. U.S. beet and cane sugar production (including Puerto Rico),
fiscal year and share of total
15. U.S.sugarbeet area, yield, and production, 1990-1998
16. U.S. production of beet sugar and cane sugar by State,
monthly, quarterly, fiscal, calendar, and crop year
17. U.S. cane and beet sugar deliveries, monthly, quarterly, and
by fiscal and calendar year
18. U.S. sugar deliveries for human consumption by type of user,
quarterly and calendar year
19. U.S. sugar imports under tariff-rate quota (TRQ), by country 
20. U.S. sugar stocks held by primary distributors, by quarters
21. U.S. sugar (including Puerto Rico) supply and use, fiscal
year
Corn Sweetener Supply, Use, and Trade

22. U.S. wet-milled use of field corn, crop year
23. U.S. high fructose corn syrup (HFCS) deliveries, quarterly,
fiscal, and calendar year
24. U.S. high fructose corn syrup (HFCS) production, quarterly,
fiscal, and calendar year
25. U.S. high fructose corn syrup (HFCS) supply and use, calendar
year
26. Net cost of corn starch to U.S. wet-millers, Midwest markets
27. U.S. corn sweetener exports to Mexico and Canada, fiscal
years 1992-98
28. U.S. corn sweetener imports from Mexico and Canada, fiscal
years 1992-98
29. U.S. HFCS trade with Mexico and Canada, monthly 1989-98

U.S. Imports of Sugar Syrups

30. U.S. total imports of sugar syrup, harmonized tariff code
1702.90.4000, monthly 1994-98

U.S. Costs of Production

31. Sugar beet production cash costs and returns, 1996-97
32. Sugar beet production economic costs and returns, 1996-97

Special Article Tables

A1. Current Mill Ownership, Capacities, and Average Raw sugar
Production
A2. Trend Growth in Area Harvested for Sugar, 1993-97
A3. Growth in Mexican Sugar Yield Per Hectare, by Factory and
Current Owner, 1987-97

A4. Growth in Mexcian Sugar Yield Per Hectare, by State, 1987-97
B1. Puerto Rico: Leading commodities for cash receipts
B2. Puerto Rico: Sugarcane area harvested by municipalities, 1992
rank
B3. Puerto Rico: Sugarcane for sugar, number of farms, by
municipalities, 1992 rank
B4. Puerto Rico: Sugarcane for sugar, average size of farms, by
municipalities, 1992 rank
B5. Puerto Rico: Sugarcane acreage, production, and yield
B6. Puerto Rico: Sugarcane manufacturing data
B7. Puerto Rico: Sugacane mill capacity  
B8. Puerto Rico: sugarcane milling production and molasses
production, by mill
B9. Puerto Rico: Sugar Production (field costs)
B10. Puerto Rico: Sugar processing (factory costs)
B11. Puerto Rico: Sugar production and processing costs
C1. Selected Sugar Tariffs of the United States
C2. U.S. Price Vulnerabilities to Mexican Imports under
Second-Tier Tariffs

List of Figures

Figure 1. U.S. Raw Sugar Prices
Figure 2. World and U.S. Raw Sugar Prices
Figure 3. U.S. Beet and Cane Sugar Production
Figure 4. U.S. Wholesale Refined Beet Sugar Prices
Figure 5. U.S. Sugar Production and Net Imports
Figure 6. U.S. Sugar Consumption
Figure 7. Ratio of HFCS-42 Spot Price To the Beet Sugar Price
Figure 8. U.S. HFCS-55 Exports to Mexico by Quarter

Special Article Tables

Figure A-1. Raw Monthly Sugar Prices, 1993-1998
Figure A-2. White Sugar Prices, 1993-98
Figure A-3. Mexican Sugar Market with No Import Restrictions
Figure A-4. Mexican Sugar Market with Tariff Quota
Figure B-1. Puerto Rico: Sugarcane Production
Figure B-2. Puerto Rico: Sugarcane Area Harvested for Sugar
Figure B-3. Puerto Rico: Weather Normals in Sugarcane Growing
Area (Mayaguez)
Figure B-4. Puerto Rico: Sugarcane Yields Per Acre
Figure B-5. Puerto Rico: Sugar Yield Per Ton of Cane Milled
Figure B-6. Puerto Rico: Sugarcane Mill Capacity and Number of
Mills in Operation
Figure C-1. Monthly No.11 nearby futures prices 

Autofax Access to Sugar-Related Data (ERS)

From your fax machine, call (202) 694-5700 and listen to voice
prompts to have the following documents automatically downloaded
to your fax machine. You may request up to three documents in one
phone call.

Directory Identification Numbers and Titles:

Sugar and Sweeteners:

12626  World Agricultural Supply and Demand Estimates for Sugar

12627  3 pages
       (1) Wholesale refined beet sugar prices, Midwest market,
1960-present, monthly, quarterly, annual, fiscal
       (2) U.S. raw sugar price, duty-fee paid, New York,
1960-present, monthly, quarterly, annual, fiscal
       (3) U.S. retail refined sugar prices, 1975-present
monthly, quarterly, annual

12628 5 pages
      (1) Wholesale list prices for HFCS-42, Midwest market,
1975-1995. monthly, quarterly, annual,fiscal
      (2) Wholesale list prices for HFCS-55, Midwest market,
1981-1995, monthly, quarterly, annual, fiscal
      (3) Wholesale list prices for glucose corn syrup, Midwest
market, 1975-present, monthly, quarterly, annual, fiscal
      (4) Wholesale list prices for dextrose, Midwest market,
1975-present, monthly, quarterly, annual, fiscal
      (5) U.S. producer price index for HFCS and sugar,  monthly,
annual, 1986-present

12629  2 pages
      (1) World raw sugar prices, 1960-present, monthly, 
quarterly, annual, fiscal
      (2) World refined sugar prices, 1980-present, monthly,
quarterly, annual, fiscal

12630  2 pages
      (1) U.S. and world sugar prices starting 1990-present,
monthly, quarterly, annual, fiscal

12631 3 pages
      (1) Net cost of corn starch to U.S. wet-millers, Midwest
markets, 1985-present

12632 3 pages
      (1) U.S. Sugar (including Puerto Rico) supply and use,
fiscal years,  1980/81-present

12633 10 pages
       (1) The Beet Sugar Industry of Minnesota and North Dakota:
Current  Situation and Prospects, by Ron Lord, September 1994
Sugar and  Sweetener Situation and Outlook Report

12634  Text Boxes, Graphs, and Tables, September 1997 S&O Report,
10 pages
      "HFCS Trade Dispute With Mexico", by Jacqueline Salsgiver;
"Origin of  the U.S. Sugar Import Tariff-Rate Quota Shares", by
Nydia Suarez; and "Changing Structure of the U.S. Refined Sugar
Market", by Ron Lord and Robert Barry, September 1997 Sugar and
Sweetener Situation and Outlook Report

For more information on specially crops, contact the following
subject matter specialists:

Sugar & Sweetener: Fannye Jolly, (202) 694-5249 

Vegetables: Gary Lucier (202) 694-5253; Tobacco: Tom Capehart
(202) 694-5311
Fruit & Tree Nuts: Susan Pollack (202)694-5251 & Agnes Perez
(202)694-5255
Industrial Uses and Alternative Agriculture: Lewrene Glaser (202)
694-5246

Internet Access to Sugar-Related Data

Home Pages

Main Data Directory:
http://usda.mannlib.cornell.edu/cgi-usda/agency.cgi?ers

U.S. Department of Agriculture (USDA):
http://www.usda.gov

Economic Research Service (ERS):
http://www.econ.ag.gov

Office of the Chief Economist, USDA:
http://www.usda.gov/agency/oce/

World Agricultural Outlook Board (WAOB):
http://www.usda.gov/agency/oce/waob/waob.htm

National Agricultural Statistics Service (NASS):
http://www.usda.gov/nass/

Foreign Agricultural Service (FAS):
http://www.fas.usda.gov/

Reports

ERS Sugar & Sweetener Situation and Outlook Reports (including
text of Reports): 
http://usda.mannlib.cornell.edu/reports/erssor/specialty/sss-bb

ERS Sugar Yearbook Data (September 1998): 
http://usda.mannlib.cornell.edu/data-sets/specialty/89019/

Sugar Statistical Compendium (1991):
http://usda.mannlib.cornell.edu/data-sets/specialty/91006/

U.S. Corn Sweetener Statistical Compendium (1993):
http://usda.mannlib.cornell.edu/data-sets/specialty/94002/

Farm Sector Cost of Production:

  Sugarbeets:
     Analysis, 1996-97:
http://www.econ.ag.gov/briefing/fbe/car/beets2.htm
     Data, 1981-97:
http://www.econ.ag.gov/briefing/fbe/car/beets3.htm

 Sugarcane:
     Analysis, 1995-96:
http://www.econ.ag.gov/briefing/fbe/car/cane2.htm
     Data, 1981-96:
http://www.econ.ag.gov/briefing/fbe/car/cane3.htm

World Agricultural Supply and Demand Estimate Report (WASDE):
http://www.usda.gov/oce/waob/wasde/wasde.htm

February 1998 Outlook Forum: 
http://www.usda.gov/oce/waob/outlook98/98speeches.htm

Sugar: U.S. Sugar Re-export Programs, Foreign Agricultural
Service (FAS):
http://www.fas.usda.gov/htp/sugar/sugarpg.html

Foreign Agricultural Service Report from Foreign Countries
(includes sugar reports):
http://www.fas.usda.gov/scriptsw/AttacheRep/attache_frm.idc

Sweetener Market Data, Farm Service Agency (FSA):
http://www.fsa.usda.gov/ao/epas/dsa/sugar/coversu.htm

END_OF_FILE