Statement of

John E. Frydenlund, Director

Center for International Food and Agriculture Policy

Citizens Against Government Waste

Washington, D.C.

Committee on Agriculture, Nutrition and Forestry

United States Senate

July 26, 2000

Mr. Chairman and members of the committee, on behalf of Citizens Against Government Waste (CAGW), thank you for the opportunity to testify on the federal sugar program.

CAGW is a nonprofit, nonpartisan organization with one million members and supporters, which grew out of President Reagan's Private Sector Survey on Cost Control, better known as the Grace Commission. The organization's mission is to work for the elimination of waste, mismanagement, and inefficiency in the federal government, with the goal of creating a government that manages its programs with the same eye to innovation, productivity, and economy that is dictated by the private sector.

The Center for International Food and Agriculture Policy institutionalized CAGW's long-standing goal of dismantling Depression-era agricultural price supports and regulations. In addition to a belief that Congress should build on the accomplishments of the 1996 Freedom to Farm Bill and achieve a truly free market for agriculture, the Center advances the philosophy that the best way to wean America's farmers off the federal dole and assure them a prosperous and secure future is to promote a more open global food economy by dismantling barriers to free trade.

CAGW applauds Chairman Lugar for holding this hearing, particularly at the present time, in advance of congressional consideration of a new farm bill. For years, the sugar lobby has successfully deceived the public into believing that the sugar program has no cost. However, the truth has finally come out. The Clinton Administration's decision to purchase sugar to prop-up domestic sugar prices finally debunks the greatest myth that producers have perpetrated on the U.S. public - that the sugar program does not cost taxpayers anything.

The Clinton Administration's mid-session budget review shows that from 2000 through 2005, the sugar program will cost taxpayers not consumers, taxpayers a cumulative $1 billion.

The White House agreed in May to purchase 132,000 tons of sugar, which will cost taxpayers approximately $54 million. However, this is only the beginning. The Clinton Administration acknowledged that this purchase would not help strengthen sugar prices. In fact, according to a report in the highly respected Pro Farmer, USDA budget analysts expect the government to spend $140 million on sugar this fiscal year. Indeed, the sugar lobby is already pushing for still more assistance that would cost at least as much as the sugar purchase.

If this sugar were converted to ethanol, as has been urged by sugar growers, this would displace sales of corn. The U.S. Department of Agriculture already acknowledged that if this happened they would consider a similar purchase of corn to make up for lost corn sales. Of course, then the government will dump the surplus corn on the market and displace the sales of some other commodity, which the government will then have to purchase, and the cycle will never end.

The U.S. Department of Agriculture made this situation worse by ignoring warnings from the Office of Management and Budget and by mismanaging the tariff-rate quota (TRQ) for sugar. Although USDA is supposed to announce the TRQ allocations prior to the beginning of each new fiscal year, this year the TRQ was announced late over a month after the fiscal year began.

If the TRQ is more than 1.5 million tons, U.S. sugar processors are eligible for "non-recourse" loans, which do not have to be repaid. But if the TRQ is less than 1.5 million tons, the loans become recourse. Since sugar processors would rather not have to repay their loans, they used their clout to pressure USDA to announce a TRQ that would permit them to forfeit sugar to the government if they wished.

USDA came up with the novel approach of announcing an essentially fictional TRQ and simultaneously announcing a real TRQ that would actually be enforced. The fictional TRQ was just over 1.5 million tons just enough to give sugar processors the right not to repay their loans. But at the same time, USDA also announced that only 1.25 million tons of the quota could actually be imported. Theoretically, the rest would be available "if needed."

In other words, USDA perpetrated a sham by putting the "1.5 million" in a press release, which gave the sugar processing industry the right not to repay loans made with taxpayer money. And by ensuring that the real TRQ was significantly less than this 1.25 million tons USDA further restricted imports, which also helps processors. In fact, the only reason USDA did not shrink the 1.25 million ton figure even more is that the United States has an international obligation under the World Trade Organization not to import any less than this amount.

If USDA had followed the intent of the law last fall, taxpayers would not be paying for sugar purchases now. If USDA had announced the TRQ at the true 1.25 million ton level, then price support loans would have been recourse. The big processors could have still gotten the loans, but they would have had to pay them back with real money, not sugar.

USDA's administration of the TRQ has been marked by a short-term political focus and a bias in favor of the large domestic sugar interests that have historically wielded influence at the Department. Even before this year's fiasco, the General Accounting Office (GAO) found that USDA raised sugar costs for users and consumers $400 million higher than would have been necessary to hold sugar prices at the artificially high levels required by law. In other words, USDA has not just imposed the annual cost of the sugar program on users and consumers recently estimated by GAO at $2 billion, a 40 percent increase since its last report in 1993 but added another $400 million to the consumer tax for sugar.

Furthermore, the continuation of the U.S. sugar program is detrimental to the export opportunities of all of American agriculture. Congress' consideration of a new farm bill will coincide with the next round of international trade negotiations, which has been difficult to launch.

Prior to the Uruguay round completed in 1994, there had been seven rounds of multilateral trade negotiations under the auspices of the GATT, beginning in 1947. During those rounds, the United States agreed to tariff concessions for binding and/or reducing tariff rates on imports of virtually all industrial and agricultural products. However, few concessions were made on sugar imports. In each and every negotiating round, sugar has been singled out for protection from international competition.

The Uruguay round was intended to produce substantial reforms of agricultural policies by reducing domestic and export subsidies and expanding market access. However, the U.S. sugar program undermines the leverage of U.S. negotiators to produce such results. Sugar is supported at a level far above the world market price, and the supply of sugar is controlled through the administration of restrictive import quotas. The sugar program escaped reform in the Uruguay round.

Members of this committee should be aware that some of the poorest countries in the world have been hit hardest by the U.S. sugar program. The U.S. sugar quota has lowered per capita incomes and living standards and prevented some of these countries from emerging from debt and poverty.

The many sectors of agriculture that compete in world markets should no longer allow the sugar program to impair their export opportunities. The future of U.S. agriculture lies in exporting commodities where it has a competitive advantage. Maintenance of the restrictive sugar program is contrary to the interests of corn, wheat and other commodity producers who need to take advantage of expanded export markets.

The U.S. cannot afford to let bad trade policy on sugar and other overly protected commodities interfere with the need to reduce barriers and level the playing field in the $600 billion global agriculture market. In order to continue to be a strong player in world markets and to expand its agricultural prosperity, America must push for further reductions in trade impediments. It would be a mistake for Congress and the administration to allow the archaic federal sugar program to undercut the bargaining position for the rest of American agriculture.

Sugar must be on the table in these negotiations and not get singled out for special protection. Insisting that sugar receive special treatment in trade negotiations will certainly cause other countries to insist on receiving such special treatment for their politically sensitive crops. U.S. unwillingness to significantly liberalize trade in sugar will undermine future trade opportunities for the rest of U.S. agriculture, jeopardizing efforts to increase market access for corn, wheat, rice and many other commodities.

In conclusion, for the good of U.S. taxpayers, consumers, and the rest of the agriculture industry, it is long past time to get rid of the U.S. sugar program.