SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE

HEARING ON U.S. SUGAR POLICY

JULY 26, 2000

THE HONORABLE RICHARD LUGAR (R-IN),

CHAIRMAN

TESTIMONY OF

JACK F. LAY

PRESIDENT

REFINED SUGARS, INC.

1 FEDERAL STREET

YONKERS, NY 10720

Mr. Chairman and Members of the Committee:

I appreciate very much the opportunity to appear before you today to offer a perspective on what I believe to be a needed change in direction for both U.S. and international sugar policies.

I am currently serving as the President of Refined Sugars, Inc. of Yonkers, N.Y., a cane sugar refinery that employs over 300 people in an economically challenged urban area of New York. I recently returned to the sugar industry after seven years of retirement. I was previously in the employ of the Domino Sugar Corporation for 39 years. During my career with Domino, I served in a number of positions. Ultimately I served as President of Domino.

Mr. Chairman, the structure of the sugar industry in every country of the world is cumbersome and complicated. The United States is no exception to this general rule. Sugar requires the dedication of a large number of acres of land as well as substantial capital assets-to grow beets and cane as well as provide the beet processing, cane milling and cane refining facilities to produce raw and refined sugars. Rotation of the crop on a yearly basis to reflect or anticipate swings in general commodity prices does not occur in sugar. Changes in acreage and in production to reflect wholesale or retail price levels of sugar occur more slowly and over a longer period of time. Stability, not volatility in prices, is what all sugar producers hope to achieve, so long as the price they receive is above their cost of production, or in the case of a cane refinery the cost of raw sugar acquisition plus a refining margin sufficient to cover refining costs and provide for a reasonable return on investment.

The uniqueness of sugar is the primary reason that government agricultural policies support sugar to the extent they do. The investments are large, the land use flexibility is minimal, and employment is critical. Governments respond in kind. In many countries this direct support leads to overproduction. Overproduction then leads to dumping of sugar on the world market. And, ultimately the world market price bears no relation to the actual cost of producing sugar.

In the United States, we support sugar producers indirectly. We limit imports in the hope that domestic prices will settle at levels that yield a fair and reasonable return to growers. While many decry the "intervention" of the U.S. in the domestic sugar market through USDA's administration of an import quota, we need some perspective here. The United States imports roughly 15% of our requirements, whereas most of the larger world producers are subsidized exporters.

It has been the position of the U.S. government and the U.S. sugar industry in international trade negotiations that all government supports of sugar, both direct and indirect, be phased out. Unfortunately, the actions of others have not matched the rhetoric. The European Union, a large exporter, has shown little interest in further internal reforms, is not in compliance with its market access commitments for sugar under the Uruguay Round, and has recently concluded several "regional free trade" agreements that specifically exclude sugar. Mexico has reacted to tough times by rolling over large government loans to NAFTA-privatized sugar groups. Even Australia, the supposed free trade paragon in agriculture, has relapsed in the last two years into more traditional patterns of conduct--coming to the financial aid of its sugar industry.

On the domestic front, the U.S. sugar policy that was adopted by the Congress in the 1996 Farm Bill presumed that the global march toward free trade would take a predictable path. The 1996 Farm Bill repealed supply management policies that attempted to limit U.S. sugar production. It also reinforced the premise that the U.S. would continue to import more than our Uruguay Round commitment of 1.2 million tons of sugar from abroad. The 1996 bill also made changes to other program crops that, in the intervening five years, have coalesced to produce an oversupply of sugar in the United States and a corresponding plunge in the price of both raw and refined sugar.

As I indicated earlier, changes in the sugar production and consumption patterns do not occur quickly. The trends that were set in motion in the 1996 Farm Bill are now showing up in a big way. In 1996, producer prices in the U.S. were at stable levels. With marketing controls repealed, sugar growers planted more, confident that the import quota would be ratcheted down to maintain a constant domestic price support. Producers of other crops were likewise freed from production restraints on their crops. They took a look at growing sugar cane and beets. They had government assistance here because the farm policy of the United States gave these producers checks known as AMTA payments that had no strings attached. The financial barriers to entry for new sugar growers in the United States were altered accordingly. Agriculture producers switched from cotton, rice, soybeans and grains into growing sugar cane and beets. Domestic production grew and the import quota was cut until it hit the WTO floor. Then prices collapsed for both raw and refined sugar.

This is not a pretty picture, but it is the culmination of a cycle that had its origin in the 1996 legislation. We took the restraints off of domestic production. It was assumed that our efficient producers would grow for the U.S. market as well as for world markets. The policy assumption was that world markets would rationalize as a result of global elimination of government subsidies. This has not happened. As evidence of this, one only has to look at the world price levels of sugar, which until recently have been substantially below the cost of production of even the lowest cost producer. This reflects increasing levels of government support around the world for sugar industries, not less support.

When stripped to the essentials, we now have too much sugar grown in the United States. We also have international trade obligations that require us to import large amounts of sugar whether we need it or not. The large subsidizers in the world are not going to suddenly eliminate their internal supports and subsidized exports. If the United States wishes to maintain any sort of defensive support for its sugar industry in this environment, a way must be found to limit U.S. production of sugar cane and beets to levels that balance supply with demand in our domestic market.

I would be happy to answer any questions you may have at the appropriate time.