SUGAR AND SWEETENER                                            June 30, 1998
May 1998, SSS-223 
               Approved by the World Agricultural Outlook Board
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U.S. beet sugar production for 1997/98 is estimated at 4.225 million short tons,
raw value (STRV). Production in the Red River Valley region is expected to
continue through May as beets stored from last fall's harvest are processed.
California's production started in early April. Problems with excessive rainfall
associated with El Nio caused delays in northern California producing regions. 

U.S. cane sugar production for 1997/98 is currently estimated at 3.630 million
STRV. Production is complete for Texas and Louisiana. Production in Florida
continued into the first half of April and is now estimated at 1.925 million
STRV. Hawaii is projected to produce 340,000 STRV. The estimate for Puerto Rico
stands at 20,000 STRV.

Deliveries are now estimated at 9.9 million STRV. Growth in industrial uses,
especially in the baking/cereal and multiple-use categories, are particularly
strong. Exports under the re-export program remain estimated at 185,000 STRV,
implying a total use estimate of 10.085 million. 

Beet area planted for 1998 has risen 2.6 percent over 1997 to 1.497 million
acres. The largest increase (105 percent) is for Washington State, where the new
Moses Lake processing factory is set to open this year. Beet acreage harvested
is forecast at 1.463 million acres, and yield is expected to be 20.3 tons per
acre, implying a beet crop of 29.584 million tons. The recovery rate is
projected at 14.65 percent, which reflects trend growth and additional sugar
recovery from the desugaring of molasses. Therefore, the 1998/99 beet sugar
forecast is 4.350 million STRV. 

Cane acreage for sugar in Florida is expected to be 422,000 acres in 1998. On
the basis of the excellent growing conditions witnessed thus far, the forecast
yield estimate--36.0 tons per acre--is set above trend but is not expected to
exceed last year's high value. Florida's sugar recovery rate is expected to
decrease somewhat from last year's high to 12.24 percent, implying a raw sugar
1998/99 production forecast of 1.860 million STRV.

Cane acreage for sugar in Louisiana is expected to be about the same as last
year--380,000 acres. Recent yield trend is expected to continue; the forecast is
29.25 tons per acre. The expected sugar recovery rate is forecast at 11.47
percent, roughly the average for the last few years. Therefore, 1998/99 raw
sugar production from a cane crop of 11.115 million tons is 1.275 million STRV,
an increase over this year's estimated total by 10,000.

Texas' 1998/99 production is expected to rebound from last year's disappointing,
drought-plagued crop to 90,000 STRV. Hawaii should come up to this year's
estimate of 340,000 STRV, barring major disturbances, natural or otherwise.
Puerto Rico's production appears to have bottomed out in the 20,000 to 22,000
STRV range. It is projected at 20,000 for the upcoming year.

In all, 1998/99 cane sugar production is forecast at 3.585 million STRV, only
slightly below this year's estimate of 3.630 million. Combined with the beet
sugar estimate, U.S. sugar production should equal 7.935 million STRV.
 
Imports for the re-export program in 1998/99 are estimated at 300,000 STRV:
150,000 each for the sugar re-export program and the products re-export program.
Imports for polyhydric alcohol  are estimated at 10,000 STRV, and high-tariff
and miscellaneous imports are set at 5,000 STRV. Until more information is
available, imports of sugar syrup (tariff code item 1702.90.4000) are still
estimated at 125,000 STRV. The tariff-rate quota for 1998/99 will be announced
later this year but must be at least 1.256 million STRV.

Deliveries for 1998/99 are forecast at 10.075 million STRV. The forecast implies
an increase from this year's estimate by 1.76 percent. Delivery growth trends
will continue to be favorable for baking and cereal, confectionery, and multiple
uses.

U.S. raw sugar prices (nearby futures, C.I.F., duty-paid, Contract No. 14, New
York) averaged 22.37 cents a pound in the first 6 market days of May, with a
maximum and minimum price of 22.45 cents and 22.28 cents a pound, respectively.
The price averaged 22.14 cents in April compared with 21.79 cents in the same
month a year earlier.  Increasing U.S. sugar deliveries and the outlook for
lower 1997/98 U.S. sugar carryover stocks have boosted nearby futures prices
recently.  Wholesale refined beet sugar prices (F.O.B. plant, Midwest markets)
have held at 25.50 cents a pound since December 1997 compared with 28.00 cents
in May 1997, reflecting the pressure of a larger 1998 crop.  

The demand for HFCS-42, both in export and domestic markets, does not appear
particularly strong. Unless there are significant changes, demand, and hence
production, will pretty much resemble last year. Despite the trade dispute with
Mexico, HFCS-55 production will likely grow in 1998. The current forecast is 5.1
percent, down from the 8 percent growth levels for 1996 and 1997.

U.S. Sugar

On May 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 its
forecast for 1999. There were several changes for the current year, and the
forecast for next year reflects good growth prospects for both supply and
demand.

Current Year, 1997/98

U.S. beet sugar production for 1997/98 is estimated at 4.225 million short tons
raw value (STRV). 1/

----------------
1/ In this report, U.S. sugar estimates are presented in short tons, equal to
2,000 pounds. All estimates are expressed in raw value, unless otherwise
specified. One ton of refined sugar is equivalent to 1.07 tons of sugar, raw
value.
----------------

Production through March stands at about 3.2 million tons, which is 75.7 percent
of the projection. Historically, the October-March share averaged 76.0 percent.
Production in the Red River Valley region is expected to continue through 
May as beets stored from last fall's harvest are processed.  California 
production started in early April. Problems with excessive rainfall associated
with El Nino caused delays in northern California producing regions. The 
USDA estimate in March was lowered 25,000 tons (from 4.25 million tons) 
largely on the basis of rain-caused reductions of acreage by as much as 
11,000 acres for summer and fall harvests. Production continues in Brawley, 
where it normally lasts 105 days.

U.S. cane sugar production for 1997/98 is currently estimated at 3.630 million
tons. Production through March totaled about 3.270 million tons, 90.8 percent of
the USDA projection. Production had been completed for Texas and Louisiana
(although there may be some production from September 1998 that will be counted
in the current fiscal year). Louisiana production is slightly under 1.265
million tons, a record that reflects above-average yield and recovery rates.
Texas production was somewhat of a disappointment at 80,000 tons. Lack of
rainfall is largely responsible for production that was 10,000 tons below
early-season USDA estimates.

Production in Florida continued into the first half of April because of
unusually wet spring weather. Industry sources now peg Florida production at
1.91 million tons, which has been reflected in the May World Agricultural Supply
and Demand Estimates (WASDE), and represents a record. Like Louisiana, cane
yields and recovery rates were far above trends. The switch to mechanical
harvest technologies seems fully incorporated. 

Hawaii is projected to produce 340,000 tons. Hawaiian production is year-round,
with an inactive period during January and February. Hawaii has produced through
April about 100,000 tons, or about 30 percent of its expected total. Production
in Puerto Rico lasts from March through May. Initial deliveries of only 2,000
tons were recorded for March. The estimate for the season now stands at 20,000
tons, down from 25,000 tons. This change now reflects all recent mill closures.

Imports are still estimated at 2.174 million tons. This includes both "Under-
quota" imports of 1.734 million tons, and "Other" imports of 440,000 tons. The
"Other" category records activity for the sugar and product re-export programs
(175,000 and 125,000 tons, respectively), for polyhydric alcohol (10,000 tons),
and for Canadian and high-tariff imports (5,000 tons). "Other" also includes
sugar syrups that enter under the tariff code classification of 1702.90.4000.
This product enters outside the quota. Technically it can be described as a
product derived from sugarcane or beets that contain soluble non-sugar solids
equal to 6 percent or less, by weight, of the total soluble solids. A contention
is that sugar, mainly from Australia or Brazil, is transformed into sugar
syrups, it then enters the United States via Canada, and is delivered to a
processing facility in Michigan. It is then transformed into liquid sugar and
delivered for baking and cereal uses in the Midwestern markets. Table 28 shows
imports of this product. A U.S. Customs ruling is expected soon on whether this
sugar syrup is to be considered close enough to sugar to make it subject to the
quota. In the meantime, USDA estimates that it adds 125,000 tons to the nation's
supply of sugar.

Deliveries are now estimated at 9.900 million tons, an increase of 50,000 tons
from April. Strong delivery performance has more than erased the dour totals
from November. Growth in industrial uses, especially in the baking/cereal and
multiple-use categories, is particularly strong. Exports under the re-export
program remain estimated at 185,000 tons, implying a total use estimate of
10.085 million tons.

Ending stocks are calculated as a residual. Initial stocks are 1.487 million
tons. Production and imports, as explained above, stand at 7.855  and 2.174
million tons, respectively. Total supply, therefore, equals 11.516 million tons.
The difference between supply and use implies ending stocks at 1.431 million
tons, for a stocks-to-use ratio of 14.19 percent. The period's ending stocks
total is carried over as the next fiscal year's beginning stocks estimate.

Forecast for 1998/99

Beet Sugar

Area planted is the starting point for the forecast. Beet area planted for 1998
has risen 2.6 percent over 1997 to 1.497 million acres (table 11). The largest
increase is for Washington State, where the new Moses Lake processing factory is
set to open this year. The increase is 19,400 acres, up 105 percent over the
previous year.  Other States with expanded acreage include: North Dakota (6
percent - 245,000 acres), Montana (6 percent - 63,200 acres), California (5
percent - 101,000 acres), Minnesota (5 percent - 475,000 acres), Michigan (4
percent - 170,000 acres), and Idaho (2 percent - 202,000 acres). Imperial-Holly's
decision to close the Hereford, Texas processing plant eliminates all
Texas and New Mexico beet acreage of 18,100 acres (1997). (The closing reduces
the overall daily beet processing capacity by 4 percent, but should be more than
offset by the new Moses Lake facility.) 

Other reductions occur in the central Great Plains States, primarily Nebraska
(21 percent reduction to 53,000 acres), and to a much less extent Colorado (1
percent reduction to 67,500 acres). Returns in this region have been lower, and
alternative cropping activity is considered more lucrative. The reduction in
Nebraska puts it back to the 1996 level, which itself was a reduction from
averages set in the 1990's.

Since 1982, the ratio of area harvested to area planted has shown no significant
upward or downward trend. Nationally, the average has been at 97.76 percent.
Applying this percentage to area planted implies area harvested of 1,463,000
acres. 2/

------------
2/ The harvested-to-planted ratio can differ according to region. Yields differ
regionally as well. However, at this early stage in forecasting, too much
attention to regional differences may not yield additional insight. Forecasting
on the basis of the national aggregate measures is consistent with the sugar
recovery rate from beets, which is only available on a national basis.
------------

Yields have shown no trend over any period since 1971. A value of 20.3 tons per
acre is used for the forecast. This rounded figure is equal to both the straight
and olympic 5-year average. Total beets are estimated at 29.584 million tons.

The sugar recovery rate from beets, although variable from year to year, has
been trending upward since 1971. Starting in 1992, the recovery rate has jumped
due to adaption of molasses desugaring technology at an increasing number of
beet factories. Separating out the desugaring factor still shows that the base
recovery rate has had a yearly growth equal to about 0.03 percentage points.
When combined with the USDA estimate for sugar from molasses desugaring, the
recovery rate estimate is 14.65 percent. (More sugar from desugaring will likely
enter the market in 1999 due to a new facility expected in Michigan.) Applying
this rate to the number of estimated beets yields the USDA beet sugar estimate
of 4.35 million tons.

Cane Sugar

Cane acreage for sugar in Florida is expected to be slightly above last year's
total at 422,000 acres (up 1,000 acres). Thus far, conditions have been very
favorable. There were no cold periods during the winter that might have
inhibited crop development. Since 1982, yields have been trending upward by
slightly less than 0.14 ton per acre, per year. Last year's actual yield of 36.5
tons per acre was far above predicted trend. On the basis of the excellent
growing conditions witnessed this far, the estimate for the coming year is set
above the trend but not expected to exceed last year's high value. The expected
yield is 36.0 tons/acre. Like yield, Florida's sugar recovery rate last year was
very high, historically, at 12.53 percent. It is unlikely to be  repeated. The
current estimate for the upcoming year is 12.24 percent, thereby implying a raw
sugar total from Florida of 1.860 million tons. This total exceeds all previous
years save the current one.

Cane acreage for sugar in 1998 in Louisiana is expected to be about the same as
last year--380,000 acres. Since the early 1990's, yields have been growing as
new more resistant cane varieties have been adopted by an increasing number of
producers. This trend is expected to continue. Therefore, the forecast yield is
29.25 tons per acre, higher than last year's yield by 0.55 ton per acre. The
expected sugar recovery rate is likely to be less than last year's 11.60 percent
- it is set at 11.47 percent, roughly the average for recent years. Therefore,
raw sugar production from a cane crop of 11.115 million tons is 1.275 million
tons, an increase over this year's estimated total (1.265 million tons) by
10,000 tons.

Texas' 1998/99 production is expected to rebound from last year's disappointing,
drought-plagued total. Producers seem hopeful of a turnabout. It is now
projected at 90,000 tons. Hawaii should come up to this year's estimate of
340,000 tons, barring major disturbances, natural or otherwise. Puerto Rico's
production appears to have bottomed out in the 20,000-22,000 ton range.
Currently, it is projected at 20,000 tons for the upcoming year.

In all, 1998/99 cane sugar production is forecast at 3.585 million tons, only
slightly below this year's estimate of 3.630 million tons. Combined with the
beet sugar estimate, U.S. sugar production should equal 7.935 million tons. This
total would exceed this year's projected total by 80,000 tons, and represent a
record.

Imports

Imports for the re-export program are estimated at 300,000 tons: 150,000 for the
sugar re-export program, and 150,000 for the products re-export program. Imports
for polyhydric alcohol are estimated at 10,000 tons, and high-tariff and
miscellaneous imports are set at 5,000 tons. Until more information is
available, imports of sugar syrups (tariff code item 1702.90.4000) are still
estimated at 125,000 tons.

Deliveries

Deliveries are forecast at 10.075 million tons. The forecast implies an increase
from this year's estimate by 1.76 percent. With the increase of fiscal 1998 over
fiscal 1997 now forecast  at 1.62 percent, indications are that next year's
growth should resemble this year's. 

Aggregate growth masks underlying trends in demand. Since 1992, industrial use
demand has been growing more strongly than non-industrial demand: 135,000 versus
38,000 tons per year. Industrial uses include deliveries to the following 
industrial sectors: baking and cereal, confectionery, dairy, beverage, 
canning and frozen products, multiple uses, and non-food. There has been 
strong average yearly growth in baking and cereals (80,100 tons), multiple
uses (35,400 tons), and confectionery (19,200 tons). Although there has 
been no statistically significant growth in the other industrial sectors,
neither has there been any significant decline. 

Non-industrial demand exhibits less vitality. One exception within this category
are deliveries to wholesalers, where there has been growth averaging 33,800 tons
a year. Retail deliveries show an insignificant growth trend and deliveries to
an "Other" category show no trend at all. Deliveries to hotels and restaurants,
on the other hand, have shown significant declines of 5,500 tons a year. 

Exports

Exports of sugar under the sugar-containing products re-export program are
included in the deliveries category but are singled out. The current estimate
for these products (like the amount for "other imports") is forecast at 150,000
tons. The forecast for sugar exports under the sugar re-export program is also
150,000 tons.

There seems to be little reason to adjust this estimate too much higher than the
current year estimate. The incentive to purchase at the world raw price and sell
at a high world refined price  is negatively correlated with the ratio of the
raw price  (Contract No.11, Coffee, Sugar, and Cocoa Exchange)  to the refined
price (Contract No. 5 for refined sugar, LIFFE). In fiscal 1996, this ratio was
0.71 and re-exports were 377,000 tons. In fiscal 1997, the ratio increased to
0.81 and re-exports fell to 211,000 tons. For the first two quarters of the
current fiscal year, the ratio has averaged 0.91 (0.95 the first quarter and a
slightly less 0.87 in the second). The estimate for the current year is 185,000
tons, after being lowered 15,000 tons in January. There does seem to be too much
optimism about world prices in the foreseeable future, hence the estimate for
fiscal 1999 is lowered from the current year's.

Prices

U.S. raw sugar prices (nearby futures, C.I.F., duty-paid, Contract No. 14, New
York) averaged 22.37 cents a pound in the first 6 market days of May with a
maximum and minimum price of 22.45 cents and 22.28 cents per pound,
respectively. The price averaged 22.14 cents in April compared with 21.79 cents
in the same month a year earlier.  Increasing U.S. sugar deliveries and the
outlook for lower 1997/98 U.S. sugar carryover stocks have boosted nearby
futures prices recently.  Whole refined beet sugar prices (F.O.B. plant, Midwest
markets) have held at 25.50 cents a pound since December 1997, compared with
28.00 cents in May 1997 reflecting the pressure of a larger 1998 crop.  

Update: Relationship Between the Stocks-to-Use Ratio and the 
Third Quarter Raw Sugar Price

In the June 1997 issue of the Sugar and Sweetener Situation and Outlook Report,
ERS economist Ron Lord reported on the relationship between the U.S. third
quarter raw sugar price (No. 14 Contract, Coffee, Sugar, & Cocoa Exchange) and
USDA's ending stocks-to-use ratio. Until 1992, there had always been a strong
statistical relationship between the two variables. Estimation techniques
suggested that over 90 percent of the variation in the third quarter price could
be explained by changes in the stocks-to-use ratio. 

Extension of the analysis into the 1990's has produced less robust results.
Estimation over the period 1982 through 1997 shows the explained portion of the
variation in the third quarter price falling to 73 percent. More detailed
analysis suggests, however, that most of the problem can be assigned to
occurrences in 1992 and 1994. If these 2 years' data are accounted for as
"outliers," the relationship between the price and ratio
re-emerges nearly as strong as before, i.e., 88 percent of the price variation
can be explained by stocks-to-use ratio changes. Results indicate that a 1-
percentage point change in the stocks-to-use ratio is statistically associated
with an opposite-sign change in the raw sugar price of about $0.37. 

From mid-March to mid-May the September No. 14 futures price has risen from
21.98 to 22.40 cents a pound. It is now in the lower range of the interval of
22.23 to 23.48 cents a pound predicted by the estimated relationship with the
USDA estimated stocks-to-use ratio of 14.19 percent. It would take an additional
2.3 percent growth in the futures price to match a point estimate of 22.86 cents
a pound.

High Fructose Corn Syrup

The high fructose corn syrup (HFCS) sector has seen some trying times over the
last 2 years. The sector has been plagued with excess capacity. The larger HFCS
companies have added significant production capacity, and new plants were opened
by Pro-Gold in Wahpeton, ND and by the Minnesota Corn Processors in Marshall,
MN. It has been estimated by some that the HFCS capacity may have grown over 3
million tons, dry basis, perhaps closer to 3.5 million tons, between 1994 and
1997.

Although domestic HFCS sales have increased by more than 13 percent during this
period, the increases have not been sufficient to pace increases in capacity.
The result has been a decline in prices as supply outstrips demand. Figure 1
shows the ratio of the spot price of HFCS-42 to the wholesale beet sugar price.
The ratio began to fall below 0.60 in the fourth quarter of 1995. It bottomed
out below 0.40 for the first three quarters of 1997. It rose moderately in the
fourth quarter and averaged 0.45 for the first quarter of 1998.

In 1996, the industry was doubly plagued as corn prices reached very high levels
relative to the HFCS selling price. Net corn costs (after the subtraction of
byproduct credits) rose to 8.89 and 7.92 cents a pound in the second and third
quarters, respectively, of 1996. They have since moderated substantially,
providing the sector some relief on costs. The average net cost for the first
quarter of 1998 has been 3.86 cents a pound.

The sector has had to face some tough adjustments. In April 1997, Golden
Technologies, a relatively small player in the industry,  announced it was
ceasing operations at its single plant in Colorado. Pro-Gold turned over
operations (including marketing) of its Wahpeton facilities to Cargill. ADM
acquired a passive investment in the corn wet milling operations of Minnesota
Corn Processors (MCP) that allowed a restructuring of the MCP capital position.
More lately, Cargill announced that its Dayton, Ohio facility was ceasing HFCS
production.

HFCS and Mexico

A glimmer of hope during this period was provided by increased HFCS-55 exports
to Mexico. The Mexican soft drink industry is estimated to use the equivalent of
1.4 million tons of sugar in 1997, providing a close natural outlet for excess
productive capacity. (Mexico currently has two HFCS processing facilities 
co-owned/operated with U.S. interests, and with the added benefit to the United
States of only using imported U.S. yellow corn.) Figure 2 shows monthly exports
to Mexico since 1996. There was a large spike in October 1996, and shipments
continued strong through 1997.

The surge in Mexican HFCS use prompted charges by Mexican sugar interests that
HFCS was being dumped. The Mexican Government imposed  interim anti-dumping
duties between $63.00 a ton and $176.00 a ton in June. After the result of an
investigation, the duties were made permanent in January 1998 at a level between
$63.75 and $100.60 a ton for HFCS-42, and between $55.37 and $175.50 a ton for
HFCS-55. Although all details are not known, it was reported in September that
Mexico's National Association of Soft Drink Manufacturers entered into an
agreement with the National Cane Growers' Association to limit the use of HFCS
to 350,000 tons a year. The soft drink manufacturers were to receive a 20-percent 
discount on their sugar purchases.

In February 1998 the U.S. Corn Refiners Association (CRA) asked for a dispute
settlement under the North American Free Trade Agreement (NAFTA) to review the
duties. In early April the CRA formally filed a Section 301 petition with the
U.S. Special Trade Representative (USTR) to investigate the Mexican action. A
decision on whether to accept the petition is expected soon. Acceptance could
lead to U.S. sanctions against Mexico. USTR has more lately announced that it
will ask for a dispute settlement proceeding under both the World Trade
Organization (WTO) and NAFTA. The procedure would likely take a year before a
WTO decision would be made.

It is not easy to predict the course of U.S. HFCS shipments to Mexico during
1998. Figure 3 shows HFCS-55 exports for the first 3 months of 1998 compared
with the same period in 1997 and October/December 1997. They are down compared
with both periods. However, the combined value of February's and March's exports
were about the sae as the corresponding 1998 value. If it were assumed that the
share of the first 3 months of 1998 are equal to the corresponding 1997 share,
then total 1998 exports to Mexico would end up at 87 percent of the 1997 total
and still exceed the 1996 total by 22 percent. 

Forecast

In spite of the problems with Mexico, export performance looks good. The current
year's value of total HFCS exports are 34 percent ahead of where they were last
year and 124 percent ahead of 1996. Exports to Canada, Trinidad and Tobago, and
Japan are running ahead of last year. If seasonal patterns hold, the volume of
total HFCS exports (which includes HFCS-42, HFCS-55, HFCS-55 Solid, and
crystalline fructose) could rise by 30 percent. Exports as a share of production
could continue its upward growth from 2.7 percent in 1996 and 3.2 percent in
1997 to 3.8 percent in 1998. 

The demand for HFCS-42 in export and domestic markets does not appear
particularly strong. Unless there are significant changes, demand, and hence
production, will pretty much resemble last year. HFCS-55, on the other hand,
will likely see production growth. Growth over the previous year (1997)  is
currently forecast at 5.1 percent, which is down from the 8 percent levels for
1996 and 1997.  Details, both historical and for the forecast, are shown in
tables 21, 22, and 23 of this report.

Comparison of Industry Associations and USDA Sugar Deliveries Data

By Dan Colacicco and Stephen Haley 1/

-----------
1/ Dan Colacicco is an agricultural economist with the Farm Service Agency (FSA)
of USDA, and Stephen Haley is an agricultural economist with the Market and
Trade Economics Division, Economic Research Service, USDA.
-----------

The refined sugar industry associations (U.S. Cane Refiners Association and the
U.S. Beet Sugar Association) and the U.S. Department of Agriculture (USDA)
separately collect monthly data from sugarbeet processors and cane refiners on
sugar distribution.  USDA's distribution data exceeded the associations' data by
about 100,000 tons in fiscal year (FY) 1995 and FY 1996.  There are three
reasons for the differences in the data.  First, USDA's data represent sugar
deliveries to users, while the association's data represent shipments from
refiners.  A shipment from a cane refiner to another refiner would be recorded
in the associations' data when the first refiner ships it to the second. 
However, USDA would not include the sugar in its estimate until the receiving
refiner ships the sugar to a user.  Second, the USDA surveys more sellers of
refined sugar than the industry associations.  USDA includes (and the
associations exclude) deliveries by importers of refined sugar, Puerto Rican
cane refiners, and sugarcane processors.  Finally, sales of refined sugar for
animal feed and polyhydric alcohol are included in USDA's data but not in the
industry data.

Comparison of Industry Association and USDA Sugar Deliveries Data

                      FY 1995          FY 1996           FY 1997

                             1,000 short tons, raw value

USDA                   9,337            9,567            9,742   
Industry               9,232            9,476            9,609 
 Difference              105               91              133

Deliveries of refined sugar in Sweetener Market Data but not collected by
industry:

Imported                  59               44               20
Puerto Rico               49               46               45 
Cane Processors           14               13               17
Animal feed and alcohol   16               18               21
 Subtotal                138              121              103 

Adjusted USDA          9,199            9,446            9,639 

Adj. USDA less industry (33)             (30)               30
  
Statistically speaking, there is a very strong relationship between the two
series. Monthly USDA data are regressed on the corresponding industry data and
on variables representing a year's index, monthly indices, and a constant (C).
Results are shown below. They indicate that for the time period analyzed (fiscal
1993 through the first 5 months of fiscal 1998) one can essentially retrieve the
USDA data from the industry data. The high adjusted R-squared indicates that 99
percent of the variation in the USDA data are explained by the same set of
factors that affect the industry data, after adjusting for seasonal factors, and
constant and yearly adjustment factors. These adjustments would be those
explained above.

LS // Dependent Variable is USDA_data
Sample: 1993:01 1998:05
Included observations: 65 after adjusting endpoints
Convergence achieved after 4 iterations

Variable     Coefficient    Std. Error   T-Statistic    Prob.

C             98.07338      34.48708      2.843772     0.0065
Refiner_data   0.879532     0.043490      20.22400     0.0000
Year_index     4.926810     0.628875      7.834323     0.0000
D_OCT         -25.38339     4.398171     -5.771350     0.0000
D_NOV         -19.43320     5.390789     -3.604889     0.0007
D_DEC          19.65259     4.923098      3.991916     0.0002
D_JAN         -16.50967     4.016087     -4.110885     0.0001
D_FEB         -20.39042     4.665939     -4.370057     0.0001
D_MAR         -12.63605     6.943296     -1.819892     0.0749
D_APR         -36.32781     8.260682     -4.397677     0.0001
D_MAY         -24.28046     7.614316     -3.188791     0.0025
D_JUN          2.684618     4.720160      0.568756     0.5721
D_JUL         -32.92234     6.405057     -5.140055     0.0000
D_AUG         -27.10520     4.943549     -5.482943     0.0000
AR(10)        -0.419974     0.115884     -3.624104     0.0007
AR(12)        -0.249366     0.108567     -2.296874     0.0259

R-squared            0.991618   Mean dependent var    780.0583
Adjusted R-squared   0.989053   S.D. dependent var    77.37592
S.E. of regression   8.095794   Akaike info criterion 4.392430
Sum squared resid    3211.552   Schwartz criterion    4.927664
Log likelihood      -218.9850   F-statistic           386.4791
Durbin-Watson stat   2.208704   Prob(F-statistic)     0.000000

Special Article

U.S. and World Sugar and HFCS Production Costs, 1989/90-1994/95

By Stephen L. Haley 1/

--------------------
1/ Agricultural economist with the Market and Trade Economics Division, Economic
Research Service.
--------------------

Abstract: LMC International periodically publishes its estimates of world sugar
and high fructose corn syrup (HFCS) costs of production. The data go back to
1979/80 and presently extends through 1994/95. This article reports on yearly
trends in costs for various categories of  raw cane and beet producers. The
categories include low- and high-cost producers, and major exporters. World HFCS
cost trends are also traced out. Several diagrams directly compare regional U.S.
costs of production with those of other countries, for both beet and cane sugar.
Components of these costs show where certain U.S. advantages may lie vis-a-vis
other countries. The same procedure is applied to HFCS costs.

Keywords: beet sugar, cane sugar, costs of production, high fructose corn syrup.

Introduction

LMC International periodically publishes its estimates of world sugar and high
fructose corn syrup (HFCS) costs of production.  2/

---------------
2/ The study is copyrighted and the results for specific countries or regions
may not be quoted or published without the prior approval of LMC International.
For more detailed information regarding the LMC study, contact: Andrea Kavaler,
LMC International, 1841 Broadway, New York, NY, 10023. Tel: (212) 586-2427.
----------------

The data go back to 1979/80 and presently extend through 1994/95. Field,
factory, and administrative costs are detailed for 36 beet producing countries
and for 61 cane producing countries. HFCS production costs are presented for 15
countries. Articles in previous Sugar and Sweetener Situation and Outlook
Reports have described data through 1986/87. This article updates the earlier
articles and focuses a bit more on comparisons of U.S. costs of production with
those from other countries.

There are many limitations in the use of production cost estimates. For
instance, the LMC data refer to averaged costs within individual countries.
Economists generally argue that marginal costs are more relevant in predicting
supply response changes due to changes in output prices, government support,
input prices, and the like. Knowledge of industry structures and specific
production technologies in use are also necessary for predicting supply response
changes when underlying price and cost variables change. 

Nonetheless, costs of production provide very useful information. They typically
form the basis for comparing competitiveness in production across regions and
countries. They aid in the calculation of government support to sugar/sweetener
industries in many countries. In addition, trends in production costs can be
compared with long-term trends in world prices to evaluate  the viability of
production in markets that may be liberalized. Finally, the LMC data would be
useful in predicting which countries would be successful bidders if the
assignment of tariff-rate quotas (TRQ's) were determined by auction rather than
based on historical trade shares (see below and special article entitled
"Auctioning Tariff Quotas for U.S. Sugar Imports"). 

U.S. cane and beet sugar producers argue that they are cost-efficient even
though their production costs usually exceed the world price of sugar. They say
the world market for sugar is sufficiently distorted by other producing and
consuming countries' policies; that the world price is a biased measure against
which to compare domestic costs. Therefore, the producers claim other producing
countries' costs of production relative to their own provide a more valid
comparison of cost efficiency.

This article reports on yearly trends in costs for various categories of  raw
cane and beet producers. The categories include low- and high-cost producers,
and major exporters. World HFCS cost trends are also traced out. Several
diagrams directly compare regional U.S. costs of production with those of other
countries, for both beet and cane sugar. Components of these costs show where
certain U.S. advantages may lie vis-a-vis other countries. The same procedure is
applied to HFCS costs. The article also briefly describes the LMC approach to
estimating production costs for beet and cane sugar and HFCS (see box). 

Cost of Production Estimates

Raw Cane Sugar

Results of the LMC study are shown in two tables. Table A-1 shows production
cost estimates for various groupings of sugar and HFCS producing countries from
1989/90 to 1994/95. Table A-2 compares ranges for the same groupings plus the
United States and a production-weighted world estimate range. 

The lowest cost cane producers were Brazil (central, south), Colombia,
Guatemala, Malawi, and Zambia. As a group they accounted for about 9 percent of
world sugar production. Their total costs per pound remained steady over the
period, with a low of 8.04 cents and a high of 9.91 cents. A weak negative trend
in unit costs of 0.16 cents per year is statistically insignificant. 

The highest cane producers were Barbados, Congo, Guadeloupe, Japan, Puerto Rico,
Reunion, and Sri Lanka. Collectively they produced less than 1 percent of the
world's sugar. Unit costs ranged between 43 and 52 cents a pound over the
period. A yearly upward trend of 1.61 cents per pound is statistically
significant, indicating a worsening of already weak  competitiveness in sugar
production. 

Major cane sugar exporters were Australia, Brazil, Colombia, Cuba, Guatemala,
Mauritius, South Africa, and Thailand. Together they produced about 23 percent
of the world's sugar. Unit costs  ranged from 11.15 to 15.17 cents a pound.
These costs were low but still 3 to 5 cents higher than the lowest cost
producers. Analysis of the yearly data indicates an upward trend in costs of
about 0.94 cents per pound. 

The LMC data show unit costs for U.S. cane producers ranged from 14 to 22 cents
a pound. This range was about twice as high as that of the lowest cost
producers, and 3 to 7 cents higher than the major exporters. Nonetheless, U.S.
costs were far below those of the highest cost producers. The range of U.S. cane
costs would also appear to compare favorably with the weighted world average
range of 14.53 to 16.52 cents per pound.

Beet Sugar

Low-cost beet sugar producing countries were Belgium, Chile, the Netherlands,
Turkey, the United Kingdom, and the United States. Together they accounted for 8
percent of the period's beet sugar production. Unit costs per pound ranged
between 19.69 and 21.74 cents. There was no significant trend over the period
for the low-cost producing group. 

It is interesting to compare the low beet sugar costs to the lowest cane costs.
To make the numbers comparable, the raw cane sugar costs were converted into
their refined equivalent using a method used by LMC. These numbers appear in
tables 1 and 2 beneath the results for raw cane sugar. As can be seen, the
lowest cost cane producers have a cost advantage over the
like-defined beet producing group. The range averages differ by about 8 cents a
pound.

The high-cost beet producers are Bulgaria, Japan, Kazakstan, Moldova, Romania,
Russia, and the Ukraine. They produced about 6 percent of the world's sugar over
the period. Their unit costs  ranged between 36 and 55 cents. The costs trended
upward over the period at about 3.3 cents a pound per year. Most of these
countries were formerly command economies that faced major changes with the
collapse of the old order. It appears that their sugar producing sectors have
not had an easy adjustment.

Major beet sugar exporters were the European Union, Turkey, and the Ukraine.
They produced about 19 percent of the world's sugar. Their units costs ranged
between 25 and 33 cents per pound, and showed a slight, relatively insignificant
upward trend during the period. These cost estimates are biased upward due to
the inclusion of  Ukraine, which is a high-cost producer but still exports a
large share of its production, typically to Russia and other countries in the
region. 

The United States emerges as a relatively low-cost producer of beet sugar. Its
costs ranged between 15.6 and 20.6 cents a pound during 1989/90 to 1994/95, or
about 40 percent less than the weighted world average. Over the period, U.S.
unit costs trended downward at a significant 0.81 cents per year. Also, within
the United States, unit costs of beet sugar appeared to be less than the
comparable cane sugar unit costs of 21.4 to 22.2 cents a pound. The beet sector
appeared more competitive at the end of the period than at the beginning.

High Fructose Corn Syrup

HFCS (42 percent, dry weight) costs ranged from 12.5 to 13.6 cents a pound
during the period and showed no significant trend. The United States was clearly
a low-cost producer, with unit costs ranging from 9.6 to 10.6 cents per pound.
HFCS costs in the United States were lower than comparable ranges for either
cane sugar, white value equivalent, or beet sugar, regardless of where produced. 

Implications for the United States

While tables A-1 and A-2 show U.S. costs of production were marginally above the
world average for cane sugar but below it for beet sugar and HFCS, figures 1-3
examine the situation more closely. Figure A-1 shows cane sugar costs separated
into field and factory components. The United States is presented as a whole and
in its regional cane producing areas of Florida, Hawaii, and Louisiana/Texas.
The competitiveness of the U.S. cane sector is enhanced by relatively low
factory costs, which were about 80 percent of the non-U.S. average, with
Florida's percentage at about 60 percent. The Louisiana/Texas percentage was
about the same as the non-U.S. average, while Hawaii's share was somewhat
higher. In all U.S. producing areas, factory costs were lower than were
similarly defined field shares. U.S. costs were made higher by relatively high
field costs. Even in relatively efficient Florida, field costs were 25 percent
higher than the non-U.S. average. 

U.S. beet producing regions include the Great Lakes region, Red River Valley,
Great Plains, Northwest, and the Southwest. Unlike cane sugar costs, all U.S.
regions produced at less cost than non-U.S. beet countries (figure A-2) . In
terms of total costs, the Red River Valley was the lowest cost producer, while
costs in the Southwest (mainly California) were the highest. As with cane, the
United States had a relative advantage in factory costs, which appeared
especially low in the Great Plains and Northwest. Nowhere were they above 50
percent of the non-U.S. factory amount. Also as with cane sugar, the U.S. had
high field costs relative to factory costs. The Western growing areas had
markedly higher field costs than the Eastern regions. Still, all field costs
were below comparable non-U.S. levels.

Figure A-3 shows HFCS costs broken out into processing and net corn cost (i.e.
after deducting byproduct credits) and the total. U.S. HFCS costs were far below
similarly defined costs for non-U.S. producers. The U.S. net corn cost was
less than 40 percent of the non-U.S. average. This advantage stemmed from 
abundant corn supplies and efficient production and marketing of non-HFCS 
starch, oil, and feed products. 

U.S. TRQ Exporters

The other special article in this report examines the economics and implications
of converting the assignment of TRQ's to potential sugar exporters into a system
where the quotas would be auctioned.  An important implication of the analysis
is that, all other things constant,  lower cost producers entitled to
participate in such an auction would be expected to bid higher prices to obtain
the right to export to the United States. Other factors besides fundamental
costs of production (including marketing costs, transport facilities, and
returns-to-scale) would be expected to be important as well.

The countries currently entitled to export sugar to the United States are
grouped below according to their relative costs of production (table A-3). The
average costs of each group are shown in figure A-4. The left axis is scaled
about 100, which represents the average cost of all TRQ exporters weighted by
their TRQ shares. 

The average TRQ cost is most closely approximated by Brazil (north, east). There
are 16 countries or regions with costs lower than Brazil and 21 with higher
costs.  

Also shown in figure A-4 are the groupings' cumulative TRQ share. The low-cost
group members have costs that are 40 percent below the mean and contribute about
28 percent of the sugar exports to the United States. The second group's costs
are about 13 percent below the mean and ship around 17 percent of the TRQ
amount. The medium-high cost group averages over 15 percent above the mean and
has an allocation of over 47 percent. The high-cost group has costs 65 percent
higher than the mean, but its allocation share is less than 7 percent. 

Although costs of production can only partly determine optimal trade patterns,
the listing  in figure A-4 provides a valuable glimpse into what future U.S.
import sourcing could be if the TRQ's were allocated differently than now.

References

Hoff, Frederick L., Luigi Angelo, James Fry. "World Raw Cane Sugar, Beet Sugar,
and HFCS Production Costs, 1979/80-1984/85," Sugar and Sweetener Situation and
Outlook Report. Econ. Res. Serv., U.S. Dept. of Agriculture, SSRV12N1, March
1987. 

Lord, Ronald C., Robert D. Barry, and James Fry. "World Sugar and HFCS
Production Costs, 1979/80-1986/87," Sugar and Sweetener Situation and Outlook
Report. Econ. Res. Serv., U.S. Dept. of Agriculture, SSR14N2, June 1989.

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

Table A-1--Costs of producing raw cane sugar, beet sugar, and high fructose corn
syrup, by select categories of world producers, 1989/90-1994/95

Category                   89/90 90/91 91/92  92/93  93/94  94/95
                                       Cents/pound 1/     

Raw cane sugar              
  Low-cost producers 2/       9.91  9.29  8.04  8.71   8.89  8.93 
High-cost producers 3/       43.08 44.22 45.21 43.64  48.98 51.78    
Major exporters 4/           11.31 11.32 11.15 13.98  14.93 15.17 

Cane sugar, white           
 value equivalent
  Low-cost producers 2/     13.73 13.05 11.69 12.41 12.61 12.66
  High-cost producers       49.77 51.01 52.09 50.39 56.19 59.23
  Major exporters           15.24 15.25 15.07 18.14 19.18 19.44
Beet sugar, refined value   
  Low-cost producers 5/     20.15 21.50 21.74 20.24 19.69 20.40
 High-cost producers 6/     35.87 42.63 47.92 50.08 47.66 55.36
 Major exporters 7/         25.65 30.34 31.57 32.34 28.97 32.19

High fructose corn syrup 8/
 Major producers 9/         12.61 11.31 13.49 12.51 13.10 12.67

1/ Measured in current U.S. cents per pound, ex-mill/factory basis. 2/ Average
of five countries (Brazil, Colombia, Guatemala, Malawi, and Zambia). 3/ Average
of seven countries (Barbados, Congo, Guadaloupe, Japan, Puerto Rico, Reunion,
Sri Lanka). 4/ Average of eight countries (Australia, Brazil, [central, south],
Colombia, Cuba, Guatemala, Mauritius, South Africa, and Thailand). 5/ Average of
six countries (Belgium, Chile, the Netherlands, Turkey, United Kingdom, and
United States). 6/ Average of seven countries (Bulgaria, Japan, Kaxakstan,
Moldova, Romania, Russia, and Ukraine). 7/ Average of three exporters (European
Union, Turkey, and Ukraine). 8/ Cents per pound,
HFCS-42, dry weight. 9/ Average of 15 countries (Argentina, Belgium, Canada,
Finland, France, Germany, Hungary, Italy, Japan, Netherlands, South Korea,
Spain, Taiwan, United Kingdom, and United States).
Source: LMC, Internatinal. 

Table A-2--Costs of producing raw cane sugar, beet sugar, and high fructose corn
syrup, United States and select categories of world producers, 1989/90-1994/95

Category                           Cents/pound 1/

Raw cane sugar
  U.S. producing regions 2/     14.14 - 22.09
  Low-cost producers 3/          8.04 -  9.91
 High-cost producers 4/         43.08 - 51.78 
 Major exporters 5/             11.15 - 15.17
 World                          14.53 - 16.52

Cane sugar, white value
 equivalent
 U.S. producing regions 2/      18.33 - 26.96
 Low-cost producers 3/          11.69 - 13.73
 High-cost producers 4/         49.77 - 59.23
 Major exporters 5/             15.07 - 19.44
 World                          18.74 - 20.91

Beet sugar, refined value
 United States 6/               15.64 - 20.59
 Lost-cost producers 7/         19.69 - 21.74
 High-cost producers 8/         35.87 - 55.36
 Major exporters 9/             25.65 - 32.34
 World                          27.77 - 33.45
High fructose corn syrup 10/
 United States                   9.55 - 10.60
 Major producers 11/            12.51 - 13.61

Note: Weighted averages except for the United States. 1/ Measured in current
U.S. cents/pound, ex-mill/factory basis. 2/ U.S. producing regions comprise
Florida, Hawaii, and Louisiana/Texas. 3/ Average of five countries (Brazil,
Colombia, Guatemala, Malawi, and Zambia). 4/ Average of seven countries
(Barbados, Congo, Guadaloupe, Japan, Puerto Rico, Reunion, and Sri Lanka). 5/
Average of eight countries (Australia, Brazil [central, south], Colombia, Cuba,
Guatemala, Mauritius, South Africa, and Thailand). 6/ Weighted average of U.S.
producing regions of Great Lakes, Red River Valley, Great Plains, Northwest, and
Southwest. 7/ Average of six countries (Belgium, Chile, the Netherlands, Turkey,
United Kingdom, and United States). 8/ Average of seven countries (Bulgaria,
Japan, Kazakhstan, Moldova, Romania, Russia,  and Ukraine). 9/ Average of three
exports (European Union, Turkey, and Ukraine. 10/ Cents per pound, HFCS-42, dry
weight. 11/ Average of 15 countries (Argentina, Belgium, Canada, Finland,
France, Germany, Hungary, Italy, Japan, Netherlands, South Korea, Spain, Taiwan,
United Kingdom, and United States).
Source: LMC, International.  
 
Table A-3-- Countries Entitled to Export Sugar to the United States

Low-cost                  Australia, Brazil (central, south),                    
                         Colombia, Guatemala, Malawi, Swaziland,                 
                         Zimbabwe

Low- to medium-cost      Bolivia, Brazil (north, east), Ecuador,                 
                         El Salvador, Fiji, India, Mauritius,                    
                         Mexico, South Africa, Thailand

Medium- to high-cost     Argentina, Belize, Costa Rica, Dominican                
                         Republic, Guyana, Honduras, Jamaica,                    
                         Nicaragua, Paraguay, Peru, Philippines,                 
                         St. Kitts, Uruguay

High-cost                Barbados, Congo, Ivory Coast,                           
                         Madagascar, Panama, Papua New Guinea,                   
                         Taiwan, Trinidad

Source: LMC, International.

Box - Cost Estimating Procedures

LMC bases its estimates on an engineering cost approach. Its computations
account for the physical inputs of labor, machinery, fuel, chemicals, and
fertilizers used in alternative technologies  employed in field and processing
operations. The data, therefore, represent actual average costs and do not
necessarily reflect minimum attainable costs.

Cane and beet sugar costs are presented at three different stages. The first
comprises field costs. It covers land preparation before planting to the
delivery of beets or cane to the processing mill. Estimates are made for labor,
capital, and all fuel, chemicals, and fertilizers used in the field. The second
stage is the factory stage. For cane, this covers all costs from the initial
arrival to the delivery of raw sugar into bulk storage at the mill. For beets,
these costs account for everything through the delivery of refined white sugar
into storage at the factory. For both cane and beets, all byproduct credits are
applied against factory costs. As with the field costs, estimates are divided
into their labor, capital, and fuel and chemical components. The third stage
represents administrative and overhead costs that cannot be adequately included
solely as a field or factory expense.

HFCS costs are calculated somewhat differently. Unlike for sugar, the purchase
of the raw agricultural product (i.e. corn) is represented as a factory cost.
The close links between growers and processors that typify the sugar industry
are largely absent in relations between grain farmers and corn wet-millers. For
that reason the cost of producing corn is not included in the analysis as is the
cost of growing beets and cane. 

The process by which HFCS is produced provides several additional products,
including ethanol, corn oil, feed products, starches, related sweeteners, and
other chemicals. Because of the joint product nature of the production process,
LMC tracks HFCS production costs at two stages. The first is the processing of
corn into a starch slurry. This process is common to all
starch-based products. The second stage is the conversion of the starch slurry
into HFCS. Byproduct credits are separated out from the costs of processing and
applied against corn costs, thereby reducing the net cost of the raw material.
Administrative costs are implicitly included in the processing costs, and
therefore are not separated out as with sugar.

The data are reported in terms of U.S. dollars using official exchange rates. It
is possible, therefore, for a country to become a low-cost producer by a
depreciation of its currency, and the opposite when its currency appreciates.
(Although not reported here, LMC uses various deflators when reporting country
estimates in order to give a clearer picture of changing costs.) Capital costs
are estimated on the basis of replacement costs. Real interest rates are used in
the valuation of capital, and capital gains are excluded from revenue
calculations. 

Because the benefits of capital goods investment flow over a number of years,
using current exchange rates may bias depreciation charges. LMC instead links
the cost of capital to the U.S. index of capital goods prices, denominated in
U.S. dollars. The ideal case for tracking land costs is to attach value to the
land in its next alternative use, i.e. opportunity cost. This procedure is more
easily followed for beets, where there are almost always returns from the
cultivation of cereals and other crops. Information from land rental systems can
be used to attach a value to land use. Where this procedure may prove difficult,
costs associated with getting land suitable for cane cultivation is treated as a
separate production process.

Special Article

Auctioning Tariff Quotas for U.S. Sugar Imports

by David W. Skully 1/

----------------
1/ Agricultural economist with the Market and Trade Economics Division, Economic
Research Service.
----------------

Abstract: Auctioning the right to import sugar to the United States has been
suggested as an alternative to the current system, which gives imports rights to
exporting countries based on their shares of U.S. imports during 1975-81. This
article explains the origins and operation of the U.S. sugar tariff quota. The
pattern of imports under the U.S. quota exempt, sugar import program provides
evidence of how the supplier shares of U.S. sugar imports would change were an
auction allocation system employed.
 
Keywords: sugar imports, quota, tariff quota, tariff-rate quota, auction.

Introduction
Since 1990, the United States has employed a tariff rate quota to regulate the
volume of sugar imports.  The right to export sugar to the United States is
granted to selected countries, thereby dictating the sourcing of U.S. sugar
imports as well as their total volume.  The distribution of market shares under
the current U.S. sugar import regime differs from the distribution that would
occur if  a tariff were employed to yield the current volume of imports (the
tariff-equivalent of a quota).  Some countries that export sugar to the United
States do so only because of the export rights they have been granted.  Exports
from these countries displace exports by lower cost exporters and result in an
inefficient allocation of resources among sugar exporters.  

Some economists have advocated auctioning export rights as a fairer and more
efficient system than the current allocation, which is based on historical trade
shares.  Some policy advisors have advocated auctioning export rights as a means
of raising revenue to finance the environmental restructuring of the Florida
sugar industry.  This paper examines how supplier market shares would likely
change if the current country-specific system of allocating export rights were
replaced by an auction.  The first section provides some policy history and
explains how tariff rate quotas operate.  The second discusses different methods
of allocating tariff-rate quota rights, and the third shows the supplier market
shares that would likely emerge were tariff-rate quota rights allocated by
auction.

Some Policy History

The United States first employed a quota to regulate the domestic sugar supply
in 1934 under the Jones-Costigan Act.  The Department of Agriculture was
responsible for calculating annual domestic needs.  The U.S. total was then
divided among U.S. beet sugar, U.S. cane sugar, and cane sugar from U.S.
dependencies (Hawaii, Puerto Rico, Virgin Islands, Philippines) and Cuba.  Less
than 1 percent of the total was allocated to other sugar suppliers and was
subject to additional duties.  The group shares were based on market shares
during 1925-33.  The operation of the program changed several times between 1934
and 1975.  Notably, Philippine independence, Hawaiian statehood, and the Cuban
Revolution altered the status of the various suppliers  (see Ballinger, 1971).

Because of record high world sugar prices, the United States removed the quota
in 1974 and allowed essentially free trade in raw sugar.  A small specific
tariff remained.  As world sugar prices returned to their long-run trading
range, the United States attempted to regulate imports by increasing its sugar
import fee.  But as world prices continued to fall, the import fee mechanism
proved ineffective.  Finally, in May 1982, the United States re-imposed a quota. 
Since then, a global quota has regulated import volume.  Country-specific quotas
were allocated among sugar exporters in proportion to their average market share
of U.S. raw sugar imports during 1975-81, exclusive of the highest and lowest
years (see Suarez, 1997).

Since 1982 the objective of U.S. sugar import policy has been to adjust the
global quota so that domestic producer prices for beet and cane sugar remain
above the normative minimum prices established in U.S. farm legislation.
Country-specific quota shares have been reassigned in line with diplomatic
considerations.  For example, the Republic of South Africa and Nicaragua have
each lost and then regained quota or tariff quota rights.  The Haitian quota has
been suspended since 1992.  

The use of high fructose corn syrup as a substitute for cane and beet sugar by
U.S. food processors increased dramatically during the 1980s, reducing domestic
demand for refined sugar.  The burden of adjusting to lower domestic demand for
refined sugar was shifted from domestic producers to foreign quota holders by
reducing the global quota.  Country quotas decline in direct proportion with the
global quota, but the absolute size of a country's quota is prohibited from
falling below one shipload of sugar, defined as 7,258 short tons.  Several
countries are at the shipload minimum.  Therefore, small shares of the global
quota increase as the global quota declines, in turn reducing the shares of
larger shareholders.  The reallocation necessitated by the minimum boatload
constraint explains most of the difference between the 1982 and 1997 shares in
table B-1.

Table B-1 U.S. import market shares for raw sugar

                            1982        1997
Largest suppliers         (quota)   (tariff quota)

                               Percent

Dominican Rep.             17.6          17.0
Brazil                     14.5          14.0
Philippines                13.5          13.0
Australia                   8.3           8.0
Guatemala                   4.8           4.6
Argentina                   4.3           4.2
Peru                        4.1           4.0
El Salvador                 2.9           2.5
Colombia                    2.6           2.3
South Africa                2.1           2.2

Sub-total                  74.7          72.5

Source: U.S. Customs Bureau

In May 1989, in response to a formal complaint by Australia, a panel of the
General Agreement on Tariffs and Trade (GATT) found the administration of the
U.S. sugar program to be in violation of Article IX of the GATT.  The United
States was requested to "either terminate these restrictions or bring them into
conformity with the General Agreement."  On October 1, 1990,  the United States
initiated a "tariff-rate quota" (TRQ) or "tariff quota" for sugar.  Tariff
quotas are considered GATT-consistent, and  supplier tariff quotas' -- those
granting rights to foreign suppliers -- are specifically allowed in GATT Article
XIII.  As table B-1 shows, however, the transformation of quotas into tariff
quotas is more cosmetic than substantive.

Tariff-Rate Quotas

A tariff-rate quota is literally what it says: A quota for a volume of imports
at a (favorable) tariff, as opposed to a quota for a volume of imports.  The
tariff-rate quota granted to Taiwan in 1996/97, for example, gave Taiwan the
right to export 24,345 tons of raw sugar to the United States at a tariff rate
of 0.625 cent per lb.  This appears to differ little from the earlier "absolute"
quota.  The distinction is this: Under a quota it is legally impossible to ship
more than, in this case, 24,345 tons.  Under the tariff-rate quota, however,
Taiwan can ship more than 24,345 tons but the tariff rises to 16.72 cents per
lb. on shipments beyond the quota.  This higher tariff is called the  over-quota
tariff.'  

In principle, the tariff-rate quota regime allows potential access to the U.S.
market.  For example,  Surinam is a major sugar exporter to the European Union
(EU) but has never had a U.S. sugar quota. If Surinam wished to export sugar to
the United States it could do so, but it would be subject to the over-quota
tariff on every unit.  As with the traditional quota, countries that benefit
from favorable discrimination under GSP (General System of Preferences) and CBI
(Caribbean Basin Initiative) are exempt from the 0.625 cent per lb. duty for
shipments within quota, but not from the over-quota tariff.  

The Sugar Tariff Quota and the Uruguay Round

Under the Uruguay Round of the GATT the United States obligates itself to import
no less than 1.23 million short tons (2,000 lbs.) of raw cane sugar annually
under tariff-rate quota.  It may expand the tariff-rate quota beyond 1.23
million short tons.  In fiscal 1997, for example, imports of 2.1 million short
tons were allowed.  The Uruguay Round tariff schedule sets the U.S.
over-quota tariff for raw sugar at 17.17 cents per lb. for fiscal 1996 and
gradually reduces it to 15.36 cents per lb. in fiscal 2000.   In addition to the
tariff-rate quota for raw sugar, which is the focus of this analysis, there is
also a tariff-rate quota for refined sugar.  It is set at not less than 24,250
short tons annually.  The present in-quota tariff for refined sugar is 1.66
cents per lb. and the present over-quota tariff is 17.65 cents per lb.

Mechanisms of Tariff Quota Allocation

Supplier Tariff Quotas 

The U.S. sugar tariff-rate quota, because it is granted to specific suppliers
and may only be filled with the supplier's own sugar production, qualifies as a
supplier tariff-rate quota.  
Figure B-1 contrasts two excess supply or export supply curves.  The lower,
smoothly curved supply function represents the global aggregation of the
willingness to export raw sugar.  This is simply the horizonal aggregation of
the marginal cost curves of potential sugar exporting firms.  The arrow
indicates that the curve continues far beyond the right margin.  

The upward stepped function to the left represents the effective supply schedule
induced by (nontransferable) supplier tariff-rate quotas.  Each step represents
a different sugar exporting country.  The simplifying assumption employed here
is that each country granted tariff-rate quota rights has a single marginal cost
for all its sugar exports.  For the amounts allowed under tariff-rate quota,
this is not an unreasonable assumption.  

The tariff-rate quota supply function has a steeper slope than the global supply
curve because lower cost suppliers cannot export all they would be willing to
export.  Moreover, because tariff-rate quota rights have also been granted to
some relatively high-cost sugar producers (those corresponding to the steps
lying above the line marked "world" price), the possession of tariff-rate quota
rights induces these countries (or firms within them) to produce at a marginal
cost greater than the world price.  

Changing how the global quota is allocated among suppliers will not increase the
volume of U.S. sugar imports, and it is therefore unlikely to have any
significant effect on the world price. The shaded area above the world price
line and below the tariff-rate quota supply schedule represents a misallocation
of productive resources.  Recall that the supply function represents the
marginal cost of producing and exporting sugar, so the shaded area below the
curve represents payments to productive factors, such as wages, land rent and
interest.  The shaded area above the world price may be considered wasteful
because the market value of the product (raw sugar) does not cover the cost of
production for these producers.   

The difference between the world price and the domestic price may be regarded as
the amount of rent granted to tariff-rate quota holders, at least for those
suppliers with a cost of production no greater than the world price.  Higher
cost producers receive less rent than competitive producers, consequently a more
general definition of tariff-rate quota rent is: 

  Rent for supplier [ I ]= U.S. domestic price raw sugar price at port of entry

     less tariff (if applicable)
     less transport cost from  I' to U.S. 
     less the greater of 
     marginal cost for [ I ] f.o.b. 
     or world price (f.o.b. at I)

The expression above is the value exporter  I' would be willing to pay for
tariff-rate quota rights were they for sale.  Exporters with costs of production
below the world price would never pay more than the adjusted U.S. domestic price
less world price because they can always dispose of their output at the world
price.  Exporters with costs of production above the world price will only be
willing to pay the adjusted U.S. domestic price less their marginal cost because
larger payment results in a loss.

Auctions as Markets for Rationed Goods

Bidding on tariff-rate quota rights will result in winning bids equal to their
rent value, the difference between the U.S. domestic price and the prevailing
world price less transport and duty.  As explained above, high-cost exporters
(with costs above the prevailing world price) will not rationally bid more than
the difference between the U.S. domestic price and their marginal cost. 
Consequently, an auction induces exporters to separate themselves into two
groups, those with marginal costs less than or equal to the world price (who
will likely place winning bids) and those with marginal costs greater than the
world price (who will not rationally bid as much as lower cost producers). 
Because only efficient producers purchase tariff-rate quota rights, the
allocative inefficiencies among exporters induced by supplier tariff-rate quotas
are removed.  Moreover, the U.S. Government captures the full value of the
tariff-rate quota rights in the form of auction revenue.  This entails a
redistribution of income from former tariff-rate quota holders to the U.S.
Government.  

The revenue raised by a TRQ auction will equal the difference between the
domestic and world price times the amount of tariff-rate quota auctioned: the
rectangle in figure B-1.  If any former tariff-rate quota holders had marginal
costs above the world price, the rent distributed by granting tariff-rate quotas
must be less than auction revenue.  That is, the area of the rectangle is
greater than the rectangle less the shaded, stepped region.  If, after achieving
an efficient allocation of tariff-rate quota rights, the U.S. Government wished
to use the auction revenue to  compensate' those governments formerly granted
tariff-rate quota rights by lump sum payments, it could make these payments and
have money left over (the shaded stepped area).  The fact that the winner can
compensate the losers and have money left over means that this policy reform
would make the United States better off and no exporting counties worse off. 

Who Benefits from a Tariff Quota Auction?

If an auction were to be adopted, the question becomes one of which sugar-exporting 
countries would be most likely to supply raw sugar to the United
States.  The problem is approached by examining the pattern of quota-exempt
imports of raw sugar by U.S. sugar refiners.

The Quota Exempt Import Program

The U.S. Government allows domestic sugar refiners to import raw sugar above of
the tariff-rate quota as long as the refined sugar is a) re-exported in refined
form; b) re-exported in sugar-containing products; or c) used for the production
of polyhydric alcohol [7 C.F.R. 1530]. The program allows domestic refineries to
use processing capacity beyond that allowed under tariff-rate quota.  The
restrictions on refined sugar marketing ensure that quota exempt imports do not
influence the domestic sugar market, although there may be cost savings that
results from greater capacity use.  

The refined re-export program accounts for the majority of quota-exempt imports. 
We focus on its operation, noting only that the sugar-containing products and
polyhydric alcohol programs operate in an analogous fashion.  The program allows
individual refineries to apply to the Secretary of Agriculture for a license to
import up to 50,000 metric tons of raw sugar.  Such sugar must be re-exported or
transferred to a manufacturer (of sugar-containing products for export) within
90 days of import.  The sugar importer must be bonded.  The bond can be drawn
against by the U.S. Government if the importer violates the terms of the
program.  That is, if quota exempt sugar is not
re-exported or transferred within the 90 day period, then:



....payment will be made to the United States of America under the bond of a
monetary amount equal to the difference between the Number 11 contract price and
the Number 14 contract price, per pound of raw sugar, in effect on the last
market day before the date of entry of the sugar or the last market day before
the end of the period during which export was required, whichever difference is
greater, times the quantity of refined sugar, converted to raw value, that
should have been, but was not, exported in timely compliance with the
requirements of this subpart.  In the event no Number 11 contract price or
Number 14 contract price is reported by the New York Coffee, Sugar and Cocoa
Exchange, for the relevant market day, the Licensing Authority may estimate such
price as he or she deems appropriate.   7CFR1530.103 (g)

Note that the Code of Federal Regulations employs the same method to approximate
the monetary value of the quota rents as that suggested in the previous section
of this paper. (The Number 11 contract is for raw sugar f.o.b. at export source;
the Number 14 contract is for raw sugar c.i.f at U.S. ports of entry.)  Refiners
who violate the program guidelines must also absorb the freight differential
between the two contracts.

Because there are no quota rents to be captured, refiners importing under any of
the quota exempt programs have a pure market-based incentive to choose the
least-cost source of supply for raw cane sugar.  Consequently, the pattern of
quota exempt imports approximates that which would occur in the absence of any
import restriction.  The import volume remains the same whether or not an
auction system is used, but the exporting countries and their shares would
certainly be different. 

Table B-1 shows the distribution of quota-exempt sugar imports by country of
origin and by port of entry for 1993-95.  The distribution of trade represents
the solution to a transportation (or allocation) problem, the objective of which
is to minimize the cost of transporting sugar from export sources to import
destinations.  Over 98 percent of the trade enters Atlantic or Gulf ports.  The
countries supplying the quota-exempt trade have two distinguishing
characteristics: 1) they are efficient enough to export at the world price
(around 11 cents per lb. or $240 per metric ton during this period) and 2) they
are relatively close to U.S. ports of entry, giving them a transportation
advantage over more distant, but equally efficient exporters such as Australia,
Swaziland, or Southern Brazil.

Table B-2 shows the average shares of the quota-exempt trade for 1993-95 (column
1).  These shares may be compared with the shares granted under the tariff
quota.  Tariff quota shares are based on the market shares of U.S. sugar imports
during 1975-81 (column 2).  The shares of the tariff quota in fiscal 1997 are
essentially the same (column 3).  

The accompanying pie charts, figure B-2, illustrate the contrasting
distributions of tariff quota and quota-exempt imports.  Guatemala (39 percent),
Colombia (20 percent) and other countries in Central America plus the Dominican
Republic (39 percent) account for over 98.4 percent of the quota- exempt trade
(top pie).  The remaining 1.6 percent share of  other countries' amounts to 70
percent of imports under the TRQ, while Guatemala's and Colombia's shares fall
to 2.3 percent and 4.6 percent respectively.  Of the other major quota-exempt
suppliers, the Dominican Republic, with the largest single share of the
tariff-rate quota (17 percent), accounts for most of the 23.9 percent (middle
pie).  The bottom pie focuses on the major shareholders of the tariff-rate quota
trade which are not major quota-exempt suppliers.  Brazil (14 percent), the
Philippines (13.1 percent), and Australia (8 percent) are the largest
shareholders of this group.   

The distribution of trade of tariff-rate quota imports is significantly
different from the distribution of quota-exempt imports. Our argument is that
the tariff-rate quota distribution corresponds to the distribution that would be
expected were there no restrictions on U.S. sugar imports. A possible counter
argument is whether the quota-exempt exporters would be able to supply the
tariff-rate quota market in addition to the
quota-exempt trade. Table B-3 shows the total exports of the major quota-exempt
suppliers and their tariff-rate quota exports.  In 1997, the total tariff-rate
quota was set at 2.1 million tons.  Quota-exempt imports averaged around 400,000
tons between 1993 and 1996, yielding total imports of 2.5 million.  The 2.5
million also happens to be the total exports of the seven major quota exempt
suppliers.  At least in 1997, these seven suppliers could have supplied all U.S.
raw sugar imports.  For years when the tariff-rate quota is higher, other
suppliers would have to be drawn upon, but the bulk of the trade would still be
supplied by Central America, Colombia, and the Dominican Republic.

Table B-2 Sugar exports by major quota exempt suppliers, 1997

                      Total          U.S. tariff-rate quota

                                   1,000 tons

Guatemala             1,012                     97
Colombia                585                    173
Costa Rica              159                     30
Honduras                 52                     20
Dominican R.            347                    357
El Salvador             177                     53
Nicaragua               183                     43

Total                 2,515                    773

References:

Ballinger, Roy A.  (1971) A History of Sugar Marketing.  USDA, Economic Research
Service, Agricultural Economic Report No. 197.  February, 1971.

Suarez, Nydia.  1997.  "Origin of the U.S. Sugar Import Tariff-Rate Quota
Shares" Sugar and Sweetener Situation and Outlook Report, USDA, Economic
Research Service, SSS-221, September 1997.

END_OF_FILE