BEFORE THE SENATE AGRICUTURE COMMITTEE

STATEMENT OF SWEETENER USERS ASSOCIATION

REGARDING THE SUGAR PROGRAM

Mr. Thomas A. Hammer

President

Sweetener Users Association

3231 Valley Lane

Falls Church, Virginia 22044

(703) 532-2683

July 26, 2000

Statement of the Sweetener Users Association

Regarding the Sugar Program

July 26, 2000

The Sweetener Users Association (SUA), representing U.S. food and beverage manufacturers who are industrial users of sugar and other sweeteners, is pleased to have the opportunity to submit its views on the operation of the sugar program and the urgent need for reform.

I have been President of the Sweetener Users Association since its inception in 1987. During that time, I have appeared before countless legislative hearings on the sugar program. I dare say that my message was not always well received by all members of the agriculture committees - to say the least. Often, I have been politely dismissed - some times not so politely - with the statement that "the sugar program is not broken, so why would you want us to fix it?" This was usually followed by the comment that the sugar program was being operated at no net cost to the taxpayer. Well, Mr. Chairman and members of the Committee, these two statements do not meet today's "reality test."

I would like to compliment Chairman Lugar for holding these important hearings at this critical time. For many years, industrial users have stated that rigid domestic sugar policy was unfair, but more importantly that it could not be sustained in a dynamic global economy. No one likes an I-told-you-so; but the truth can be uncomfortable at times. The sugar program is in urgent need of reform and the Sweetener Users Association would like to play an active role in the process of developing a program that is consistent with other farm programs, our international trade commitments and the cold hard facts of an intensely competitive marketplace.

The following is the SUA's 'litmus test' when considering sugar reform:

n We support legislative and/or administrative remedies that will cause more market-oriented sweetener prices, while assuring an adequate and reliable supply of sweeteners, both domestic and foreign.

n We oppose government intrusion in the marketplace, such as restrictive trade barriers and domestic production/marketing controls.

n We favor the elimination or substantial reduction of domestic and international trade barriers and subsidies affecting sugar and other sweeteners because it is in the best interest of efficient domestic producers, processors, consumers and manufacturers.

n Finally, we look forward to the day when competition in the global sweetener market is governed by efficiency and competition rather than by government regulation, subsidies and interference.

Sugar Program

The main goal of U.S. sugar policy has been to inflate returns to domestic producers by creating artificial shortages. The basic tool for carrying out this policy was a rigid system of import quotas on raw and refined sugar, and certain sugar-containing products. Over the years, U.S. imports of sugar have declined from 5 million short tons to about 1.25 million tons. Due to these highly restrictive quotas, domestic sugar prices have averaged more than 2 to 3 times above world prices.

Until recently, the operative element of the U.S. sugar program has been the tariff rate quota (TRQ). The domestic sugar program was not truly a farm program. Sugar rarely went into the CCC loan program. There was no need for acreage controls or marketing restraints as long as imports of sugar could be reduced to accommodate increases in domestic production and keep internal sugar prices well above forfeiture levels. For many years, the sugar quota proved to be an effective policy tool and trade barrier.

Fortunately, during the Uruguay Round the United States agreed to import at least 1.25 million tons of sugar from our trading partners. With domestic sugar production approaching 9 million tons, the sugar import quota would have fallen below 1 million tons if the WTO minimum had not been established. This meant that the traditional method of 'shorting the market' was no longer available. From this point forward the industrial users and consumers will not solely bear the cost of the program. If sugar prices are to be supported at such high levels, the taxpayer will now be required to underwrite the sugar growers program.

Negative Costs for the Economy

Let us examine some of the costs that the sugar program imposes on the U.S. economy. They fall into five categories:

n Efficiency and welfare losses.

n Unwarranted consumer costs.

n Adverse impacts on manufacturers of sweetened foods and beverages.

n Taxpayer burden and impact on Federal Budget.

n Impediments to U.S. trade liberalization efforts.

Efficiency and Welfare Losses

Standard welfare analysis examines supply and demand functions in order to quantify the income transfers between consumers and producers caused by a policy. In so doing, it also highlights the efficiency losses that the policy causes due to misallocation of resources and the transfers to foreign producers or consumers. From the national point of view that represents a pure welfare loss. These losses are significant. According to the latest GAO report, the transfer to foreign producers alone added up to about $400 million in both 1996 and 1998.

The USITC in its 1995 and 1999 reviews of import restraints summarized the various studies that have looked at this issue and reported that the negative welfare effects ranged from $540 million to $1.3 billion annually. Their most recent report estimated that there would be a net welfare gain of $986 million if quotas on sugar and sugar-containing products were removed.

Cost to Consumers

The second negative impact on the US economy is the cost to consumers, which is considerable. In a June 2000 report, the General Accounting Office put the cost at $1.5 billion in 1996 and $1.9 billion in 1998. About 40 percent of that is due to higher prices for sugar in the grocery store and 60 percent is for sugar in processed foods and drinks.

An earlier analysis by USDA suggested a similar figure for excess consumer costs. The USDA study used a hypothetical price gap of 5 cents per pound and was therefore quite conservative because it compared the 22-cent US raw sugar price to a landed cost of 17 cents, equivalent to a world market price of about 15 cents. At that world price level, many countries would have a strong incentive to expand production if they knew they had markets in the United States and Europe that would willingly import their lower cost sugar. The world price has averaged less than12 cents a pound in recent years and is currently about 10 cents. Even the conservative USDA estimate that the US price is too high by 5 cents per pound indicated that there is a consumer cost of more than $1 billion due to inflation of the sugar price by $100/ton on the 10.25 million tons used domestically for food.

Adverse Impact on Food and Beverage Manufacturers

The third negative impact is on industrial consumers. Consumers have many choices in deciding how to spend their money. Sugar import restraints and the associated sugar price support program significantly harm companies that make and sell sweetened products. These result in a higher cost structure that puts sweetened products at a distinct disadvantage relative to other food and beverage products. This means that our member companies sell fewer products and hire fewer people. This policy hobbles growth by imposing unreasonable pricing on a highly competitive industry.

As manufacturers achieve lower costs, they pass most of that benefit on to consumers because it is in their interest to do so. They also have no choice because the food business is extremely competitive. To appreciate this one only has to go into any grocery store and witness the battle for shelf space among tens of thousands of individual products from different companies that are competing for the consumer's attention through sales, special promotions, coupons, etc.

Food and beverage manufacturers would benefit in two ways from an easing of sugar import restraints: through higher volume and better margins. If they can sell more sweetened products because of more competitive pricing, they will be more profitable. And prices will be lower than under a continuation of current policy. Every government study of this issue has shown that changes in food ingredient prices, up or down, are passed through to the consumer level after a lag of a few weeks or months. There is no reason why sugar pricing would behave any differently than commodities that are traded competitively in the marketplace - if it were not supported by a government cartel.

Taxpayer Burden and impact on Federal Budget

In addition to the costs to consumers and users, the sugar program is now beginning to cost taxpayers a lot of money. For a number of years, the federal government collected a small assessment on beet and cane sugar production as a means of offsetting the administrative costs of the program. However, the Congress suspended the assessment in 1999. The sugar program has now become a major cost center competing with other commodity program budgets.

In June, USDA spent more that $54 million acquiring 132,000 tons of refined beet sugar. More purchases are being contemplated. In addition, as of July 10 there was still more that $443 million of beet and cane sugar under loan that could be forfeited by September 30. The latest mid-year review for the Department of Agriculture projects sugar program costs over the next five years at $1 billion. That number will probably only get bigger. So much for the notion of "no net cost" to the taxpayer.

Impediment to Trade Liberalization Efforts

Finally, policies like the sugar program give other countries the perfect excuse for not responding to US efforts to reduce barriers to US agricultural exports. While the United States has one of the world's more open economies, that does not give us as much leverage in trade negotiations as it should as long as other countries can point to a highly visible target such as the domestic sugar program. Too often, our trading partners claim that they too will be waiting for that apocryphal level playing field to arrive before reducing or eliminating their trade barriers.

Growth in trade is critical to the future of American agriculture. In 1999, the United States exported $49 billion worth of agricultural products, generating a net surplus in agricultural trade of $12 billion, and accounting for approximately a quarter of farm receipts. This net surplus is in sharp contrast to the very large negative trade balance for nonagricultural products of $352 billion in 1999.

Agricultural exports are important not only to the farm sector but also to the national economy as a whole. If American agriculture is to grow and prosper, it is essential that our trade negotiators achieve reductions in foreign barriers to trade affecting U.S. food and agricultural products. For example, the developing economies around the world represent the growth markets of the future, but as long as U.S. policy blocks access for their sugar to our market, it will be impossible to negotiate reductions in the barriers protecting their agricultural sectors.

The track record for sugar reform - be it in the form of bilateral, regional or multilateral agreements - is not good. However, SUA is heartened by the "Proposal for Comprehensive Long Term Agricultural Trade Reform" tabled recently in Geneva. This extremely bold proposal calls for across-the-board reforms in agriculture including all measures that distort agricultural trade.

As the United States prepares for the pending WTO agricultural negotiations, our negotiators will be pressured to back track from this " all inclusive" position, and refuse to negotiate meaningful changes to the sugar tariff-rate quota. It is imperative that U.S. trade officials resist these political pressures and be vigilant in insisting that sugar remain on the negotiating table. To do otherwise will ensure that our trading partners will not be willing to offer important agricultural concessions for U.S. farmers, ranchers and food processors.

The FY99/00 Quota Year

For the record, I would like to chronicle the events of the current market year thus far. The prospects for a coherent sugar policy next marketing year do not look any more promising. I will cover some of those questions after a review of this year's scramble to artificially prop up prices.

n By the beginning of the 1999/00 marketing year the traditional tool used to 'short' the domestic sugar market was no longer available.

n With 'bin-busting' domestic sugar production at approximately 8.9 million short tons, the sugar import quota established for the fiscal year would have fallen below 1 million short tons.

n As stated earlier, during the Uruguay Round the U.S. agreed to import at least 1.25 million tons of sugar from our trading partners. Thus, with the TRQ established at the WTO minimum the stocks-to- use ratio was estimated at around 16.7%.

n A stock/use ratio above 16.5% suggested that domestic raw and refined sugar prices for the marketing year could bounce around 'forfeiture levels.'

n As early as July 1999, it was apparent that USDA was determined to establish a raw sugar TRQ greater than 1.5 million tons in order to avoid the trigger for recourse loans. Under the 1996 FAIR Act, and using the USDA's existing administrative approach, recourse loans were inevitable given current supply and demand forecasts.

n In total disregard for the market, the TRQ was not announced by October 1, the beginning of the marketing year. By late October because FY99/00 sugar imports were not available to refiners, USDA issued a West Coast Waiver of 100,000 tons adding to the growing surplus.

n The Administration's Sugar Working Group was convened for the first time in a long time. After weeks of spirited discussions, the FY99/00 TRQ was finally announced on November 2, 1999 at 1,501,348 short tons.

n In order to ensure that recourse loans did not come into play a 'phantom quota' of 250,225 tons was established. It was deliberate fiction employed to push the total raw sugar quota above 1.5 million tons in order to make sugar processors eligible for non-recourse loans. (Recourse loans cannot be settled by forfeiting the sugar loan collateral; they must be repaid like any other commercial loan and the sugar is then available to the market.)

n USDA's decision to permit non-recourse loans when the usual administrative plan would not support such an outcome was arbitrary, capricious and represented an unacceptable abuse of authority and contempt for the Department's procedures.

n By establishing non-recourse loans, USDA violated the intent of Congress and put the federal budget and the American taxpayer at risk. After the FAIR Act passed, sugar growers boasted that the sugar program was more market-oriented than most crops. Politicians talked boldly about the risk their growers were willing to assume with recourse loans.

n By March 10, sugar production estimates surpassed the 9 million-ton mark and on March 31, prospective beet plantings were up 1%. A sage sugar analyst dubbed this the "crop that won't stop."

n Although sugar growers had lobbied fiercely for non-recourse loans, it appeared that they were just kidding. They instead informed Congress that they wanted USDA to buy their way out of the 'oversupplied' sugar market.

n A purchase program was announced on May 11, 1999. On June 6, the Department purchased 132,000 tons of sugar at 20.5 cents per pound. The market expectation was that USDA might buy as much as 300-350,000 tons.

n The sugar program is now officially costing the taxpayer money not withstanding the bogus statements that this action was accomplished under the "cost reduction" authority of the farm bill.

n However, it appears that there is resistance to USDA purchasing additional sugar from the open market program, perhaps because the initial purchase did not reduce the amount of sugar under loan or because refined sugar prices have fallen below the 20.5 cent per pound tender offer.

n The policy option "du jour" is now a P.I.K. program (payment-in-kind). However, there is much disagreement within the industry on the point. While USDA currently owns only 132,000 tons of sugar, given the large quantities of loans coming due between now and September, the Department may get the opportunity to acquire great quantities of sugar.

n It is doubtful that a P.I.K. program will solve the current problem. A one-year payment-in-kind program will take some acreage out of production. However, any sugar acquired by USDA by means of open market purchases or loan defaults will simply be recycled into the market. This action may not bolster market prices.

n A multi-year P.I.K. will cause sugar farmers to 'farm the program.' Without acreage reduction restrictions in place, it is likely that sugar growers will merely plant additional land to make up for any acres that may be plowed under.

n None of these 'knee jerk" policy actions can mask the fact that there is a lot of sugar in the market. Moreover, there is still about 600,000 tons of quota sugar to come in before the end of the marketing year and the prospects for another bumper sugar crop next season are very high at this time.

FY00/01 Sugar TRQ

We are only two months away from the beginning of the new marketing year for sugar. Based on the most recent acreage report, USDA projects total sugar output next season at 9,083 million tons, slightly above this year's crop. This implies about a 250-300,000 ton increase in stocks in 2000/01 given expectations for trade and consumption.

Moreover, some analysts expect that next month's crop report will show better than expected yield factors, thus increasing the prospects for an even larger sugar crop. This means that the pressure will remain on Congress and the Administration to search for new ways to 'short' the market and artificially raise prices.

Industrial users have many serious questions as we approach FY2000/01.

n Will market forces be allowed to operate or will the mistakes of FY99/00 be repeated?

n Will the Administration again circumvent the clear congressional intent of the law and display utter contempt for the USDA's own procedures by announcing another "phantom quota" to avoid recourse loans?

n Will the FY00/01 quota be announced by the beginning of the marketing year? On the other hand, will delay and deceit again be the hallmark of the sugar TRQ process?

n Will USDA announce another purchase program?

n Will there be a permanent program to pay sugar farmers to plow under their crop?

n How much money will taxpayers be required to pay to sustain this outdated program?

n Will the U.S. renege on its commitment to import additional sugar from Mexico? Alternatively, will increased Mexican sugar imports be put under the WTO minimum and force traditional quota holders out of the U.S. market?

Given the threat of mounting budget expenses and the prospect for WTO and NAFTA sugar trade disputes, it is time to consider developing a rational and workable sugar policy that can take efficient growers, processors and industrial users into the future. We thank you for holding these important hearings and for considering our views. We look forward to working with this Committee on ways to reform this failed sugar program.