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HAVANA DAYDREAMING:A PARTIAL-EQUILIBRIUM SIMULATION OF INCREASING

THE U.S. SUGAR QUOTA FOR CUBA AND MEXICO

A Thesis

Submitted to the Graduate Facultyof the Louisiana State University andAgricultural and Mechanical College

in partial fulfillment of therequirements for the degree of

Master of Science

in

The Department of Agricultural Economics and Agribusiness

by

Daniel Ryan PetroliaB.A., Louisiana State University and A&M College, 1999B.S., Louisiana State University and A&M College, 1999

August 2001

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To my parents

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ACKNOWLEDGEMENTS

I would like to thank my advisor, Professor Lynn Kennedy, for his guidance

and support throughout my program, and especially with the writing of this work. I

would also like to express my gratitude to my committee members, Professor Steve

Henning and Professor Rich Kazmierczak, for their assistance in developing my plan

of study and in completing this thesis. Special thanks also to the entire faculty, staff,

and fellow students of the Department of Agricultural Economics & Agribusiness,

without which none of this would be possible. I would like to thank Mr. Bill Messina

of the University of Florida for the wealth of information he provided me on Cuba, as

well as the Middleton Library staff for their help in government document research. I

should also express my appreciation for Mr. Jimmy Buffett, whose song AHavana

Daydreamin@ both inspired this research and provided a catchy title. Lastly, I wish to

thank my parents and family for their continued support in everything I do. You are

the reason for my success.

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iv

TABLE OF CONTENTS

ACKNOWLEDGMENTS ............................................................................................. iii

LIST OF TABLES ....................................................................................................... vii

LIST OF FIGURES ..................................................................................................... viii

ABSTRACT...................................................................................................................ix

INTRODUCTION.......................................................................................................... 1

CHAPTER ONE: SUGAR PRODUCTION AND

THE WORLD SUGAR MARKET SITUATION.............................. 4

World Sugar Production........................................................................................................ 4Cuba............................................................................................................... 4

Mexico......................................................................................................... 10United States................................................................................................ 13

CHAPTER TWO: LITERATURE REVIEW ............................................................. 18

CHAPTER THREE: THEORETICAL ANDEMPIRICAL FRAMEWORKS ................................................................................. 23

Theoretical Framework ............................................................................... 23Empirical Framework.................................................................................. 26

Description of theModPle Internationale Simplifi de Simulation ............. 26Application of Empirical Model.................................................................. 28

CHAPTER FOUR: DATA.......................................................................................... 31Prices and Quantities .......................................................................................... 31

Elasticities.................................................................................................... 31

CHAPTER FIVE: TRADE LIBERALIZATION SCENARIOS ................................ 40Simulation Results: Prices, Supply, and Demand ...................................... 42Simulation Results: Using Short-Run Elasticities ...................................... 43

Simulation Results: Using Long-Run Elasticities ...................................... 47

Comparison of Results ................................................................................ 48

CHAPTER SIX: WELFARE ANALYSIS ANDPOLICY OPTIONS.................................................................................................... 51

Welfare Analysis ......................................................................................... 51Policy Options ............................................................................................. 55

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CONCLUSION ............................................................................................................ 61

BIBLIOGRAPHY ........................................................................................................ 67

VITA............................................................................................................................. 71

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LIST OF TABLES

Table 1.1 High-tier sugar tariffs of most countries compared

to those of Mexico, in U.S. cents per pound ................ 14

Table 1.2 Provisions of Uruguay Round agreement pertaining

to sugar ........................................................................ 14

Table 1.3 Provisions of the NAFTA pertaining to sugar...................................... 15

Table 4.1 Production, supply, and distribution of sugar,

FY 1999, in 1,000 MTRV ............................................ 32

Table 4.2 U.S. sugar trade for FY 1999, in 1,000 MTRV.................................... 32

Table 4.3 U.S., Mexican, and world refined sugar prices, FY 1999 .................... 33

Table 4.4 Monthly U.S. Dollar exchange rates for Mexican Peso,

FY 1999........................................................................ 34

Table 4.5 Base-year quantity data used inMISS, in 1,000 MTRV....................... 34

Table 4.6 U.S. own-price elasticities of sugar supply and demand ...................... 35

Table 4.7 Own-price supply and demand elasticities for Cuba

and Mexico ................................................................... 36

Table 4.8 ROW beet sugar production by country, as percentage

of world total, and weighted own-price supplyelasticities, in 1,000 MTRV, FY 1999 ......................... 36

Table 4.9 ROW cane sugar production, percentage of ROW total, andweighted own-price supply elasticities, by country, in

1,000 MTRV, FY 1999 ................................................ 37

Table 4.10 ROW sugar consumption, percentage of ROW total, and

weighted own-price elasticities of demand, by country,in 1,000 MTRV, FY 1999 ............................................ 38

Table 4.11 Own-price supply and demand elasticities used in MISS..................... 39

Table 5.1 Scenarios simulated inMISS................................................................ 42

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Table 5.2 Refined sugar price changes relative to the base,in 1,000 MTRV ............................................................ 43

Table 5.3 U.S. supply and demand changes relative to the base,in 1,000 MTRV ............................................................ 44

Table 5.4 Cuban supply and demand changes relative to the base,in 1,000 MTRV ............................................................ 45

Table 5.5 ROW supply and demand changes relative to the base,

in 1,000 MTRV ............................................................ 46

Table 5.6 Results of U.S. sugar trade liberalization from Koo (2000),

with percentage change from 1999 actual shown inparentheses ................................................................... 49

Table 6.1 U.S. changes in consumer and producer surplus andnet welfare gains ........................................................... 53

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viii

LIST OF FIGURES

Figure 1.1 Quarterly Caribbean and U.S. raw sugar prices, 1985-2000,in U.S. cents per pound.................................................. 5

Figure 6.1 Effect of import quota on producer and consumer surplusof an importing country................................................ 52

Figure 6.2 Effect of import quota on producer and consumer surplus

of an exporting country................................................ 54

Figure 6.3 Effect of levying a sales tax on producer and

consumer surplus.......................................................... 59

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ABSTRACT

A world sugar model consisting of Cuba, Mexico, the United States, and an

aggregated Rest of the World was developed in order to simulate increases in sugar

imports by the United States from Cuba and Mexico due to the NAFTA and a

reinstatement of Cuba as a sugar supplier. Results indicate that increased imports

would generate up to $505 million in U.S. net welfare gains, benefiting sugar users

while hurting producers. Policy options are then analyzed which could redistribute

gains to compensate producers. The use of a consumer tax, which allows the supply

price to fall to world levels, while retaining higher demand prices would result in more

efficient production and trade based on comparative advantage, no net producer

surplus change, increased consumer surplus, and no increased government

expenditures. Results also indicate that world prices experience a minimal increase

due to increased U.S. imports, indicating that the United States exhibits small-country

effects on the world sugar market. These results contrast with previous studies which

indicate that the United States would exhibit large-country effects on the world

market, resulting in significant increases in the world sugar market price.

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INTRODUCTION

With the signing of the North American Free Trade Agreement and its

implementation on January 1, 1994, Canada, Mexico, and the United States took a

step toward creating a common North American market. The NAFTA is not

without opposition, however, and many see the agreement as the beginnings of a

trade disaster. Another looming issue is the economic embargo on Cuba by the

United States enacted by President Eisenhower in 1960. The embargo was not

completely effective, however, due to the response of the Soviet Union to come to

Castros aid for the duration of the Cold War. Today, with the Cold War over,

the United States has opened trade routes with many former Soviet-bloc nations.

Even those states still under communist regimes, namely China and Vietnam,

have begun to establish trade relations with the United States. However, Cuba,

only ninety miles from Florida, has not even been seriously considered as a

trading partner for the near future. In fact, in 1992, more restrictions on trade

with Cuba were enacted with the Torricelli Bill, which prohibits United States

subsidiaries in third countries from trading with the island. In 1996, the Helms-

Burton Bill was passed to further tighten restrictions.

Both the NAFTA and impending trade with Cuba create an environment of

uncertainty in U.S. markets. Of major concern is the NAFTAs influence on U.S. and

Mexican sugar production, demand, and prices. This concern also holds true for the

case of Cuba, the worlds fifth- largest sugar exporter, and prior to the revolution of

1959, supplier of over one-third of total sugar requirements to the United States

(Alvarez and Castellanos, 1995). Beginning in the year 2000, Mexico will be able to

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export up to 250,000 metric tons to the U.S. market, and by the year 2008, will have

unlimited access. Also, despite the Torricelli and Helms-Burton Bills, more recent

actions by Congress indicate a move toward cooperation with Cuba. Such actions

include the introduction of the Cuban Humanitarian Trade Act of 1999, introduced in

the House, the Cuban Food and Medicine Security Act of 1999, introduced in the

Senate, as well as the United States-Cuba Trade Act of 2000, introduced in both the

House and Senate. Thus, it is evident that future trade relations with Cuba are slowly

moving forward and, undoubtedly, sugar trade will play a substantial role in this

process.

The purpose of this study was to identify the status-quo of the sugar markets of

Cuba, Mexico, and the United States, and attempt to simulate permutations to the

status-quo and their subsequent effect on both domestic and international sugar

markets. Factors identified included production, consumption, and their respective

price elasticities, prices, and trade. Of primary importance, though, was the current

policy situation for sugar in these states, which, ultimately determines much of the

aforementioned factors.

The work begins in Chapter One by discussing the current economic and

political environment within Cuba and Mexico, and follows with a discussion of U.S.

sugar policy, which drives the study. Chapter Two is a review of trade liberalization

literature, segmented into domestic studies, which focus on the U.S. market, and

international studies, which include other countries, and often, an aggregated rest of

the world within the models. The theoretical and empirical frameworks are explained

in Chapter Three, including a description of theMISSand its application. Chapter

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Four covers all data used and their respective sources, while Chapter Five expounds

on the specific scenarios simulated during the study and their respective results,

including a comparison of results to a prior study. Chapter Six includes a discussion

on welfare analysis and outlines some policy options that exist based on the results,

followed by the conclusion.

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CHAPTER ONE:SUGAR PRODUCTION AND

THE WORLD SUGAR MARKET SITUATION

World Sugar Production

Benirschka et. al. (1996) provide an excellent discussion on sugar production

and the world sugar market, which is summarized here. Sugarcane is a tall perennial

grass that is produced in tropical and subtropical climate zones. It matures in twelve

to sixteen months and each plant yields several crops, called ratoons. Once the cane is

harvested, the sucrose begins to break down. In order to minimize transportation costs

and sucrose losses, sugarcane mills are located close to the cane fields. The cane is

then converted into raw sugar which is shipped to a refinery for further processing.

Refineries, which operate throughout the year, remove the film of molasses and

impurities that surround the sugar crystals (Benirschka et. al., 1996).

Sugar beets are an annual crop grown in temperate climate zones. Because of

disease problems, sugar beets are always grown in crop rotations. Like sugarcane,

sugar beets are bulky and costly to transport, and thus, processing facilities tend to be

close to the fields. Unlike sugarcane, beets are directly processed into refined sugar,

and hence, raw sugar is a product of sugarcane only (Benirschka et. al., 1996).

Raw and refined sugar are two distinct goods, and both are traded

internationally. Sugar beet producing countries export only refined sugar, while

sugarcane producers may export either raw, refined, or both (Benirschka et. al., 1996).

In fiscal year 1999, cane sugar comprised 75% of total world sugar production. The

top five sugar producers for that year were Brazil, the European Union, India, China,

and the United States, respectively. The top five exporters were Brazil, the European

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Union, Australia, Thailand, and Cuba, respective ly, while the top importers were

Russia, the United States, the European Union, Japan, and Indonesia (Coalition for

Sugar Reform, 2000). It should be noted that the European Union imports sugar due

to obligations under the Lome Agreement, but is a net exporter (Benirschka et. al.,

1996). In most years, over 70 percent of world sugar production is consumed

domestically, implying that only a small proportion of world production is traded on

the world market. Also, a significant share of this trade is the result of bilateral long-

term agreements or on preferential terms such as the U.S. sugar quota or the E.U.

Lome Agreement.

Since only a small portion of world production is traded freely, small changes

in production or government policies tend to have large effects on world sugar

markets, and sugar prices are among the most unstable in international trade. Figure

1.1 shows quarterly Caribbean and U.S. sugar prices from 1985 to 2000, which

illustrates the volatility in world prices. The Caribbean raw sugar price is usually

Quarterly Caribbean and U.S. Raw Sugar Prices,

1985-2000

0

5

10

15

20

25

85-186-1

87-188-1

89-190-1

91-192-1

93-194-1

95-196-1

97-198-1

99-100-1

Quarter

U.S.

Cents/Pound

US Raw

World Raw

Figure 1.1. Quarterly Caribbean and U.S. raw sugar prices, 1985-

2000, in U.S. cents per pound.

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considered to be the world market price for sugar. One reason for volatile world

prices could be the asymmetric supply response to price changes due to high fixed

costs of production. An increase in sugar production in response to rising prices

requires significant investment in processing facilities, which take time before

becoming available. Once in place, however, they tend to be used at capacity to

spread fixed costs. Therefore, when prices fall, production remains high. In short,

sugar production is relatively price inelastic in the short run, implying that relatively

small changes in demand can have significant price effects. Government policies may

aggravate this instability by insulating domestic producers and consumers from world

price fluctuations. Since price signals are not transmitted to domestic markets,

domestic supply and demand are not responsive to changing world conditions. In

addition to increasing world market instability, sugar policies can alter sugar

production by stimulating production in countries that would produce less or no sugar

in the absence of policy. Thus, production, consumption, and trade flows often reflect

domestic sugar policies rather than comparative advantage (Benirschka et. al., 1996).

Cuba

Trade between the United States and Cuba has been non-existent since

President Eisenhower enacted a complete economic embargo in late 1960, in response

to Cubas nationalization of numerous American properties. It was believed that this

action would strangle the Cuban economy and force Castro from power. However,

this was largely avoided through aid from Moscow. The fall of the Soviet Union in

the late 1980s crippled the Cuban economy, but it appears that a slow recovery has

begun. The island has begun to take on more free-market characteristics, attracting

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foreign investment through joint ventures, profit sharing, profit repatriation, and tax

exemption. As a result, Australian, British, Canadian, Chilean, Mexican, and Spanish

firms have expanded to Cuba. By the mid-1990s, the number of foreign firms

operating in Cuba increased fourfold since 1987 to five hundred. Trade relations have

also opened between Cuba and China, Italy, Jordan, North Korea, and Vietnam. The

governments of Brazil, Chile, and Mexico have extended credit lines to Cuba. The

tourism industry has also expanded as Australian, German, and Spanish firms have

engaged in joint ventures with the Cuban government in this capacity (Leonard, 1999).

Thus, it appears that the United States policy of economic strangulation of Cuba has

been ineffective in unseating Castro, and may result in costing the United States

economy a share of the quickly growing Cuban market.

Prior to the embargo, the United States was a major importer of Cuban sugar,

tobacco, and citrus fruits, while the United States supplied the island with machinery,

spare parts, railroad harbor equipment, communications technology, and consumer

goods. It is very likely that a resumption of trade today would bring about a very

similar trade relationship (Leonard, 1999). However, some American agri-business

leaders see little promise in Cuba. In 1995, Jim Thrift, spokesman for American

Cyanamid, argued that Even if Cuba opened up for American business, wed wait a

long time because of issues related to instability, credit, and collection. The countrys

collapsed. However, Archer-Daniels-Midland CEO Dwayne Andreas, an early

supporter of trade with the former Soviet Union, argued that open commerce is the

most reliable way to bring democracy and prosperity to Cuba. Andreas cited seed,

equipment, and fertilizer firms as major beneficiaries to open trade (Heuer, 1995).

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Of course, most of the Cuban debate within the United States is economic at

all, but rather, political. Positions are divided between two groups. The first group

favors an intensification of the embargo. Alarmed by Cubas success in building trade

and investment relationships with Canadian, European, and Latin-American partners,

this group wants to give the embargo extra-territorial force. The second group,

composed of more moderate opinions, believes that there is no need to intensify the

embargo, and in some cases, favor easing it. Of all U.S. sanctions, the inclusion of

food and medicine is unique to the Cuban embargo. The embargo against Cuba is

even tighter than those against Iraq, Iran, and Serbia. Even some extremists find this

both disproportionate and inhumane (Mead, 1995).

Only a small number of Americans have any first-hand knowledge of Cuban

conditions and views, and the result is a heated policy debate that does not provide

much guidance. The degree of American hostility remains a central preoccupation in

Havana, but Cuba is of marginal concern within the United States. A small but vitally

interested pressure group still largely shapes United States policy towards Cuba.

Before 1959, this pressure group was composed of American investors and expatriates

in Cuba. Since the Cuban revolution, the group has been dominated by Cuban

migrs. However, before and since Castro assumed power, American policy towards

Cuba has been left to special-interest groups whose agendas were not always in the

interests of either nation, and it is likely that they will continue to dominate Cuban-

American relations in the future (Mead, 1995).

Lifting the United States embargo on Cuba will present many economic and

political issues for both sides. Of great importance will be issues concerning the sugar

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sector, given its dominant role in the Cuban economy, and the historical protection

afforded American sugar producers through the United States sugar program. The

main issue, when the embargo is finally lifted, will not be whether Cuban sugar will

again be imported, but rather in what manner and to what degree. As Alvarez (1992)

points out, Since sugar exports are the main source of Cuban foreign exchange, it is

not unlikely that some type of provision may need to be made by the U.S. Congress

for sugar imports from Cuba. The 1965 amendment to the Sugar Act reallocated the

50 percent Cuban share of American sugar requirements on a pro-rata basis to other

quota-holding countries. Cuban sugar exports to the United States were 2.94 million

metric tons in 1959. Also, 1.95 million MT had been exported to the United States

when trade was suspended in July of 1960 (Alvarez, 1992). However, the average

annual amount of sugar exported to the United States from Cuba during 1958 and

1959 represents twice the amount of total United States sugar imported today. This is

due to increased domestic production and the advent of other caloric sweeteners

(Alvarez and Castellanos, 1995). Thus, it is improbable that Cuba could be given its

original quota level. In the case of Nicaragua, Panama, and South Africa, however,

Congress reinstated sugar quotas withheld for political reasons at levels that reflected

current United States import requirements (Alvarez and Castellanos, 1995).

Cuban sugar production in fiscal year 1999 exceeded earlier expectations at an

estimated 3.78 million metric tons, more than the original target of 3.6 million, which

was the previous years production level. Despite the years higher crop, production

remained well below the 7 million tons that Cuba experienced during the Cold War.

The successful 1999 crop represents an important psychological boost for Cubas

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sugar economy, which has been struggling to recover from drastic output declines due

to over-harvesting and shortages of spare parts, fertilizer, and fuel. These problems

are inherent in the present system, and thus, will not easily disappear. However,

further gains are possible due to changes in management strategy, which have resulted

in efforts to increase efficiency in all production aspects. Also, strict directives have

been issued which prohibit the cutting of young cane. In addition, some

improvements may have occurred by utilizing only the more efficient mills and by

reducing costs throughout the industry from field to mill. Even with increased

production, though, revenue from sugar will fall as a result of low world market prices

(F.O. Licht, 1999). Cuban consumption is estimated at 730,000 MTRV for fiscal year

2000, a ten thousand ton increase from the previous years estimates (USDA-ERS,

2000).

Mexico

The outlook for the Mexican economy continues to improve after the

uncertainty caused by the economic crises in Russia, Asia, and Brazil during the latter

part of 1998 and early 1999. The recent increase in oil prices combined with

Mexicos conservative fiscal and monetary policies have led to considerable strength

in the Mexican economy. Mexicos exports increased about 24.5 percent in nominal

terms during the first six months of 2000, relative to those of the same period for

1999. Imports rose by about 25 percent during the same period. High oil prices and a

robust U.S. economy are the primary reasons for these improvements. The United

States remains, by far, the most important market for Mexicos exports (87 percent in

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1999), imports (74 percent), and its main source of foreign short- and long-term

capital (FAS, 2000).

Industry sources estimate sugar production for marketing year 2000 as 4.98

million metric tons raw value (MTRV), very close to 1999. This estimate is based on

the relatively good weather experienced during the growing season, but also accounts

for the drier-than-normal weather that reduced some yields. Presently, the sugar

industry faces excess capacity and financial problems. With almost no sources of

credit, cash flow problems, and high sugar inventories, sugarcane workers did not

receive June and July wages for 2000. To help the industry and prevent unrest,

Bancomext, working throughFINASA (the Mexican Sugar Financing Bank) approved

a financial assistance program. According to private sources, however, very few mills

have benefited because the loans had to be paid back by November 30, 2000. In

addition, the Mexican government decided to liquidate FINASA, which means that

there will be no special access to credit for the sugar industry (FAS, 2000). However,

a December 2000 proposal in the Mexican House of Representatives seeks to develop

a national sugar agro-industry, in which the whole chain of productionplanting,

industrialization, and tradingwould be of national interest. This law would also

create a National Sugar Institute responsible for the development of policies, strategic

planning for the sector, domestic reserves, financial strategies, prices, distribution, and

trade (FAS, 2001).

Sugar consumption for marketing year 2000 is estimated to continue at 4.4

million metric tons. The lack of growth is attributed to the increased use of alternative

sweeteners. Private sources indicate that refined sugar consumption by the soft drink

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industry for 2000 was between 1 and 1.2 million metric tons. This industry also

consumes between 200,000 and 250,000 metric tons of high-fructose corn syrup. The

remainder of HFCS is used by the bakery, food processing, fruit and juice canning,

and yogurt industries. As sugar becomes more expensive and HFCS prices fall

(currently, tariffs on HFCS range between US$55 and US$175 per metric ton, in

addition to the normal 4% ad-valorem duty), sweetener use could change dramatically.

Sugar exports for marketing year 2000 are approximately 540,000 metric tons.

Domestic sugar prices, although low, are higher than international prices. Thus,

exports are a double-edged swordthey are necessary to reduce storage costs, but

unprofitable due to low world prices (FAS, 2000). This could change, however, given

the increased access to the U.S. market by the NAFTA.

Mexico and the United States underwent difficult negotiations due to the

ambiguous nature of the original NAFTA document and a side-letter allowing

different quantities of Mexican sugar to enter the United States. As of October 2000,

no agreement had been reached and Mexico had filed for a NAFTA dispute resolution

panel. Mexican sugar producers, however, have requested that the government close

the border to U.S. HFCS. On September 19, 2000, the USDA announced the fiscal

year 2001 tariff-rate quota allocations for sugar, in which Mexico was allocated

105,788 metric tons, to comply with the NAFTA. Mexico believes it should have

complete access for all of its excess sugar, which it estimates at over 500,000 metric

tons.

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United States

The 1996 U.S. sugar program continues to differ from the grains, rice, and

cotton programs in that the USDA makes no income transfers to beet or cane growers.

Instead, the incomes of producers are indirectly supported by limiting the amount of

imported sugar through import quotas (Jurenas, 1999). The sugar programs provision

of no net cost to the federal government also brought about the use of the import quota

to support domestic prices and prevent loan forfeitures (Uri and Boyd, 1994). Quota

allocations are given to quota-holding countries which allow the import of specific

quantities of sugar produced in those nations at a first-tier, or low-tier, duty rate, which

ranges from zero to 0.625 U.S. cents per pound. The USDA sets the TRQ at the

beginning of the fiscal year, and the U.S. Trade Representative makes an initial

amount available for allocation. Three of these TRQ allocations are made in January,

March, and May if the ending fiscal year stocks-to-use ratio projection is below 15.5

percent. Consequently, if the ending fiscal year stocks-to-use ratio projection is above

15.5 percent, one or more of the allocations will be cancelled (Henneberry and Haley,

1998).

Imports above the allocated tariff-rate quota from either the quota-holding

countries or other countries are subject to a second-tier, or high-tier, duty. This high-

tier duty has historically been high enough to discourage the importation of sugar

above the low-tier quota (Henneberry and Haley, 1998). However, the high-tier duty

is subject to reductions under the Uruguay Round of the General Agreement on Tariffs

and Trade. As Table 1.1 shows, the high- tier rate is decreasing fifteen percent over six

years to 15.36 U.S. cents in 2000 (ASA, 1999).

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The U.S. market access commitment made during the Uruguay Round of the

GATT guarantees that a minimum of 1.1394 million metric tons of foreign sugar be

allowed to enter the United States annually (See Table 1.2). No provision limits the

Table 1.1. High-tier sugar tariffs of most countriescompared to those of Mexico, in U.S.

cents per pound.

U.S. High-Tier Tariffs for Raw and Refined Sugar

Most Countries Mexico

Raw

CaneRefined

Raw

CaneRefined

Base 18.08 19.08 16.00 16.951994 NA NA 15.60 16.531995 17.62 18.60 15.20 16.11

1996 17.17 18.12 14.80 15.691997 16.72 17.65 14.40 15.261998 16.27 17.17 14.00 14.84

1999 15.82 16.69 13.60 14.422000 15.36 16.21 12.09 12.81

2001 15.36 16.21 10.58 11.212002 15.36 16.21 9.07 9.612003 15.36 16.21 7.56 8.01

2004 15.36 16.21 6.04 6.412005 15.36 16.21 4.53 4.81

2006 15.36 16.21 3.02 3.20

2007 15.36 16.21 1.51 1.602008 15.36 16.21 0 0

Source: Lord (1994).

ability of U.S. policymakers to allow additional sugar to enter, if necessary, to meet

domestic demand (Jurenas, 1999).

Table 1.2. Provisions of Uruguay Round agreement pertaining to sugar (ASA, 1999).

Uruguay Round: Agreement on Agriculture

Reduction Effect on U.S. Sugar

Tariffs 36% average; High-tier tariff drops 15% over 6 years15% minimum to 15.36 cents in 2000.

Market Import restrictions reduced to TRQ has minimum of 1.1394 million MTAccess ensure at least 3-5% (well in excess of 3-5% minimum).

consumption from imports.

Source : ASA (1999).

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Mexico faces different import rules under the NAFTA, implemented in

January, 1994 (See Table 1.3). During the first six years, the United States reduced its

high-tier tariff rate by fifteen percent (See Table 1.1). At the same time, Mexico was

to align its tariff regime with that of the U.S. During the remaining nine years, U.S.

and Mexican tariffs on bilateral sugar trade will be linearly reduced to zero. Mexicos

duty-free quota from 1994-1999 was the greater of: 7,258 metric tons; the other

Table 1.3. Provisions of the NAFTA pertaining to sugar (ASA, 1999).

NAFTA Sugar Provisions

Mexican Access to U.S. Provisions

Years 1-6 (1994-1999)Mexico notsurplus producer Greater of 7,258 MT or "other country" share

of import quota.

Mexico surplus producer 25,000 MT

Years 7-14 (2000-2007)

Mexico not surplus producer Greater of 7,258 MT or "other country" shareof import quota.

Mexico surplus producer 250,000 MT

Surplus producer definitionSugar production minus sugarandHFCS

consumption.

country share of the import quota under the current sugar program; or the quantity

allowed under the definition of net surplus producer. In any of these years that

Mexico reached net surplus producer status (production exceeding consumption,

including corn sweeteners), duty-free access was provided, up to 25,000 metric tons.

For years 2000-2008, that figure jumps to 250,000 metric tons. After the fifteen year

transition period, there will be free trade in sugar between the two countries (USDA-

FAS, 1998).

U.S. sugar production for fiscal year 2000 is estimated at a record 8.2 million

MTRValmost 635,000 MT more than 1999. One reason for this increase is record

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area harvested, spurred by higher expected returns compared with substitute crops.

Also, sugar yields in Louisiana, which now surpasses Florida in sugarcane acreage,

have risen more than 34 percent since 1995 as more acreage is devoted to high-

yielding varieties (USDA-ERS, 2000). Total U.S. sugar production for fiscal year

2001 is presently projected at 7.75 MTRV, much lower than the previous year

estimates. Beet sugar production for fiscal year 2001 is currently projected at 3.96

million MTRV, while cane sugar production is projected at 3.78 million MTRV.

Production increases in Florida, Texas, and Puerto Rico are expected to more than

offset declines in Louisiana and Hawaii. Although Louisiana sugarcane area

harvested has increased 35,000 acres over last year, sugarcane production is estimated

down 250,000 MT due to a continuing lack of adequate moisture. Hawaii cane sugar

production for fiscal year 2001 is projected at 240,000 metric tons. One of the three

remaining Hawaiian sugar companies ceased operations in November 2000, and

another closed a processing facility. Sugar imports under the raw and refined sugar

tariff- rate quotas (TRQs) are currently projected at 1.157 million MTRV. As of

January 8, 2001, sugar imports under the TRQs have amounted to 288,215 MTRV, or

about 25 percent of the amount projected to enter for the fiscal year. Sugar imports

outside the sugar TRQ for fiscal year 2001 are projected to total 467,200 MTRV

including 331,000 MTRV under the combined Refined Sugar Re-export Program, the

Sugar-Containing Products Program, and the Polyhydric Alcohol Program. Sugar

exports under the Refined Sugar Re-export Program for FY 2001 are projected at

158,750 MTRV. Total deliveries for the fiscal year are projected at 9.421 million

MTRV. After subtracting deliveries made for the Sugar-Containing Products and

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Polyhydric Alcohol Programs and deliveries for livestock feeding, domestic food and

beverage deliveries are projected at 9.276 million MTRV, about 2.3 percent higher

than fiscal year 2000. Ending stocks are currently projected at 1.987 million MTRV,

for an ending stocks-to-use ratio of 18.8 percent. Of the total, the Commodity Credit

Corporation (CCC) owns 39.9 percent. The CCC acquired 720,004 MTRV in October

2000 as a result of loan forfeitures (USDA-ERS, 2001).

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CHAPTER TWO:LITERATURE REVIEW

This literature review summarizes recent studies focusing on trade

liberalization with respect to sugar. It is organized into two categories: domestic

studies, which focus only on the U.S. sweetener sector, and international studies,

which include other countries within the models.

Sigua (1992) analyzed the effects of partial sugar trade reform on regional

production, consumption, trade, and consumer welfare in the United States. Three

less-protective trade policies were compared with the sugar loan rate program of 1989.

These scenarios were simulated using the SWOPSIM model, and simulations were

determined for the short, medium, and long run. Results indicated that the imposition

of less- protective trade policies affected the sugarcane-producing regions more than

that of sugar beets. Among beet regions, the Northwest and Far West experienced the

most severe negative impacts from trade reform. With respect to sugarcane, Texas

and Hawaii had the greatest negative response to raw sugar production. All scenarios

implied positive consumer surplus due to reduced prices. Also, shifts in demand for

raw sugar due to changes in HFCS use were small, suggesting that relaxing sugar

policy did not discourage the substitution of HFCS for raw sugar.

Haley (1998) models regional sugar processing and uses detailed sectoral

analysis of sweeteners demand using an Almost Ideal Demand System approach. He

assumes a total elimination of sugar policy to estimate the cost on the U.S. economy.

He creates two scenarios: the first, a status quo with the domestic price of raw sugar

kept at 18.42 cents per pound with imports adjusted to retain this price, and the

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second, a simulation where the domestic price equals the world price. His results

show a fall in the domestic raw sugar price of 4.3 cents, a decrease in refined price of

3.6 cents, while fructose price falls by 1.2 cents per pound. Also, domestic cane

production falls by 1.5 million tons, with beet production dropping by just over

900,000 tons. Imports increase by 5.1 million tons, where supply of raw sugar

increases by 2.7 million tons. Also, fructose production drops by 660,000 tons.

Finally, demand for sugar increases by over 1.5 million tons.

Tanyeri-Aburet. al. (1993), look at effects of sugar policy changes from a total

agricultural sector perspective using a base-year, comparative-statics approach. They

model HFCS and sugar as substitutes in beverages, confectioneries, baking, and

canning. Also included are import possibilities for raw sugar as well as domestic

demand and export possibilities for refined sugar, gluten feed (produced from corn

along with HFCS), and HFCS. Their results show that removing the sugar quota leads

to sharply reduced sugar prices (about a 29% drop) and more than a 50% decline in

raw sugar production. Raw sugar imports rise by more than five-fold. Additionally,

HFCS price falls by 5% and production decreases by almost two-thirds of the baseline.

Thus, quota elimination enhances raw sugar refining along with refined sugar

consumption and processing, while greatly curtailing domestic sugar production.

Also, HFCS loses its competitive position.

Uri and Boyd (1994) examined the effect of the sugar tariff-rate quota program

on the U.S. economy, using a computable general-equilibrium model. Their analysis

suggests that a complete elimination of the sugar program would reduce output for all

producing sectors by about $2.85 billion. For production sectors other than

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agricultural program crops, crude oil, and petroleum refining sectors, output would

increase by about $2.98 billion. Also, there would be an increase of about $197

million and $121 million in the consumption of goods and services and in welfare,

respectively. Additionally, government revenue would decrease by roughly $15

million.

Devadoss et. al. (1995), used a non-spatial, partial-equilibrium world sugar

trade model to analyze the trade creation and diversion effects of the NAFTA on U.S.

sugar imports from Mexico. Their results show that the agreement will have a mild

negative effect on U.S. sugarcane and sugarbeet production, with an average annual

decrease of 0.02% and 0.7%, respectively. Also, the effect on sugar consumption in

Mexico will be relatively small, although total caloric sweetener consumption will

increase significantly. They attribute this to increased availability of high-fructose

corn syrups (HFCS) from the U.S. market that will be substituted for sugar. They also

predict an average increase in Mexican production of about 11.4%, caused by

Mexicos opportunity to import improved U.S. technology, lower-priced inputs such

as fertilizer, and the increased availability of U.S. capital to modernize Mexican

production facilities. U.S. sugar demand would increase to about eleven million metric

tons by 2007, as a result of price declines and income increases. They also predicted

that in 1996 and 1997, the U.S. would reduce its imports from other countries by

5,690 MT and 4,750 MT, respectively. Actual figures show a much larger decrease in

quota allocations (USDA-ERS, 1999). They also predict that Mexican imports will

increase modestly beginning in 2000, and by 2005, Mexico will export the maximum

amount of 250,000 MT to the United States. Consequently, other quota-holding

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nations will see a more prominent decrease in market access during these latter stages

due to the higher Mexican export quota.

Benirschka and Koo (1997) used a dynamic partial equilibrium model of the

world sugar market to study the effects of United States tariff-rate quota liberalization.

A scenario increasing the import quota annually by 10 percent increases U.S. imports

by 32 percent, while decreasing the U.S. import price by 16.3 percent of baseline

projections. In response to lower prices, American production falls by 2.7 percent:

beet production falls by 4.4 percent while cane declines by 0.6 percent. The

Caribbean raw sugar price rises by 1.4 percent, while quota rent for exporters with

United States quota allocations declines by 12.4 percent.

The General Accounting Office (2000) estimated welfare gains and losses due

to the U.S. sugar using Iowa State Universitys Center for Agricultural and Rural

Development (CARD) world sweetener model. This model includes 29 sugar-

producing nations, and was extended to include a more detailed, multi-market

approach, including corn and feed, sugar, and HFCS. Results showed that the U.S.

wholesale refined price falls 38.3% of the 1998 base, while the world refined price

falls 21.8%. Sugarcane production falls only 1.7%, while sugar beet production falls

6.4%. These production results were undoubtedly a function of the supply elasticities

used during the simulation, which were 0.05 and 0.10 for sugarcane and sugar beets,

respectively. They also estimated that the U.S. sugar program cost domestic

sweetener users $1.9 billion in 1998, while gains to sugarcane and sugar beet

producers were about $1 billion.

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Koo (2000) investigated the implications of a trade liberalization scenario in

which the United States eliminates import restrictions while other countries maintain

their respective sugar programs. Koo developed a global sugar policy simulation

model to analyze major issues facing the U.S. sugar industry and the impacts of

alternative trade liberalization policies in the United States and European Union. This

model used a base and alternative scenarios approach, and disaggregated the world

sugar market into three sectors composed of seventeen countries: beet sugar, cane

sugar, and beet and cane sugar producing countries. Results show an increase in the

Caribbean raw sugar price of about 36 percent, and a 28 percent decrease in the United

States wholesale price for the 2001-2004 period. When the United States includes

Cuba as a trading partner, the Caribbean raw price rises only 32 percent and the

United States wholesale beet price falls 30.6 percent. This is primarily due to the fact

that Cuba can supply large amounts of sugar to the United States at lower shipping

costs.

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CHAPTER THREE:THEORETICAL AND EMPIRICAL FRAMEWORKS

Theoretical Framework

Consider the initial market model utilized by Mah et. al. (1988), Johnson et.

al. (1992), and Kennedy (1994) in which N commodities are produced, consumed, and

traded by K countries. Vectors of supply, demand, and excess demand are used to

describe aggregate levels of production, consumption, and trade in each country. The

supply sector in country k produces some combination of the N commodities in order

to maximize producer rents, given prices, technology, and endowments. Aggregate

production of the N commodities is described by the vector of supply functions:

(3.1) Sk(PSk; Z

Sk) = [S1k(P

Sk; Z

Sk), S2k(P

Sk; Z

Sk), , SNk(P

Sk; Z

Sk)],

where PSk= (PS1k, P

S2k, , P

SNk) is the vector of prices observed by the supply sector

and ZSkis a vector of exogenous variables, such as technology, input prices, and

endowments for the supply sector of country k. The vector of demand functions

describes aggregate consumption of the N commodities:

(3.2) Dk(PD

k; ZD

k) = [D1k(PD

k; ZD

k), D2k(PD

k; ZD

k), , DNk(PD

k; ZD

k)],

where PDk= (PD

1k, PD

2k, , PDNk) is the vector of prices observed by the final demand

sector and ZDkis a vector of exogenous variables for country k. The aggregate level of

trade in the N commodities for country k is described by the excess demand functions:

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(3.3) Mk(PSk, P

Dk; Z

Sk, Z

Dk) = Dk(P

Dk; Z

Dk) - Sk(P

Sk; Z

Sk)

where Mk= (M1k, M2k, , MNk) and Mik> 0 indicates net imports and Mik< 0

indicates net exports of commodity i for i = 1, 2, , N.

The government of a country may intervene in the domestic market either

through the use of price () or supply/demand shift () instruments. A price

instrument, denoted as ASikfor producers and AS

ikfor consumers of commodity i in

country k, affect the prices observed by the supply and final demand sectors. With the

world price of commodity i represented as PWi , the domestic price functions for

country k are:

(3.4) PSik= PSik(A

Sik, P

Wi) and P

Dik= P

Dik(A

Dik, P

Wi)

for i = 1, 2, , N.

Supply/demand shift instruments, denoted as ASikfor producers and AD

ikfor

consumers of good i in country k, are implicit elements of vectors ZSkand ZD

kwhich

shift supply and demand functions by modifying non-price elements of a producers or

consumers decision-making process. Examples include input subsidies, acreage

reduction schemes, and food stamps. To make these supply and demand shifters

explicit, the vectors ZSkand ZD

kare defined as follows:

(3.5) ZSk= ZSk(A

Sk, Z

*Sk) and Z

Dk= Z

Dk(A

Dk, Z

*Dk).

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The aggregate supply, demand, and excess demand equations, (3.1), (3.2), and (3.3),

respectively, can be expressed as functions of world price, policy instruments, and

exogenous variables by substituting the domestic price functions (3.4) and the function

of explicit variables (3.5) to obtain:

(3.1*) Sk[PSk (A

Sk, P

W), ASk; Z* S

k],

(3.2*) Dk[PD

k(AD

k, PW), ADk; Z

*Dk], and

(3.3*) Mk[PSk(ASk, PW), PDk (ADk, PW), ASk, ADk; Z*Sk, Z*Dk]

where PHk(AHk, P

W) = [PH1 (AH

1, PW), PH2 (A

H2, P

W), , PHN (AH

N, PW)]

for H = S, D.

World markets are competitive by assumption, and world prices adjust to clear

world markets. Therefore:

(3.6) Kk=1 Mk[PSk(A

Sk, P

W), PDk (AD

k, PW), ASk, A

Dk; Z

*Sk, Z

*Dk] = 0

where the right-hand side of (3.6) is an n x 1 null vector. World prices are defined as

functions of the actions of individual countries. Thus, the world price vector is the

function:

(3.7) PW = PW (ASk, AD

k, AS

k, AD

k; Z*S

k, Z*D

k)

for k = 1, 2, , K.

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Empirical Framework

The empirical framework is provided by theModle Internationale Simplifi

de Simulation (MISS), developed by Mah, Tavra, and Trochet (1988). It is a multi-

product, multi-regional, non-spatial, partial-equilibrium, world trade model, which

simulates, in a comparative-static framework, the effects of various policy actions.

Mah et al. (1988) used theMISSfor an analysis of the interaction between European

and United States policies. The model consisted of seven commodities and four

regions: the European Union, the United States, a market-based rest of the world, and

a centrally-planned rest of the world. Lynn Kennedy (1994) utilized theMISSto study

policy decisions made during the Uruguay Round of GATT negotiations. This model

consisted of seven commodities and three sectors: the European Union, the United

States, and the rest of the world. Kennedy and Hughes (1998) again used theMISSto

analyze welfare effects of agricultural trading blocs, by simulating a North American

customs union.

Description of the Modle Internationale Simpli f ide Simulation

The following is a description of the notation used in the empirical model.

Upper case letters represent variables of amount, while lower case letters denote a

percentage change in the respective quantity variable. A variable with a naught

superscript indicates a base-year value.

i : commodity index: i = 1, , N; in this case, N = 1

k : country index: k = 1, , K; in this case, K = 4

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Sik, Dik: production final demand, respectively, for good i incountry k for the base year

PSik, PD

ik: domestic prices for production and final demand,respectively, for good i in country k

E*ik: matrices of supply elasticities with respect to outputprices

Gik: matrices of final demand elasticities with respect to

consumer prices

PWi : world price of good i

PBik: border price of good i

Wk: margin coefficient representing transportation costs, e.g.,freight, insurance, etc., such that PBik= P

Wik Wk

TSik, TD

ik: protection coefficients for production and final demand,

respectively, such that THik= PH

ik PW

ik, for H = S, D

Ck: currency exchange rate, represents number of currency

units in country k which can be exchanged for one USDollar

Ii initial world stock of good i

s ik, dik: quantity shifters for production and final demand,respectively, for good i in country k

TheMISSuses several identities in order to derive the effects of policy changes

on the sectors of production and final demand for the various countries. The model

operates on the principle of Walrasian equilibrium. Any policy change undertaken by

either country causes an adjustment in the world price levels, resulting in changes in

supply and demand, and thus, a rebalancing of world trade.

Initial equilibrium in the model is shown as

(4.1) SkSik= SkDik+ SkIik for all i = 1, , N.

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Change in supply is shown as

(4.2) sik= Sj (E*ik pSjk) + s ik for all i = 1,, N and k = 1,, K.

Change in final demand is shown as

(4.3) qik= Sj Gik pDjk + ik for all i = 1,, N and k = 1,, K.

The domestic/world price linkage is shown by the equation

(4.4) PHjk= PW

j Ck THjk Wk

or, in logarithmic terms, where Wk is fixed

(4.5) PHjk= PW

j + ck+ tHjk for H = S, D.

Final equilibrium for the model, using the previous equations, is shown as

(4.6) EkSik sik= SkDik dik for all i = 1, , N.

Application of Empirical Model

The following discussion describes how the preceding empirical model was

applied to the present problem. The model consists of four regions: Cuba, Mexico, the

United States, and an aggregated Rest of the World (hereafter referred to as ROW).

In order to create a model in which cane sugar and beet sugar are perfect substitutes,

only one commodity is specified within the model: refined sugar. The processes by

which beet and cane become refined sugar are quite dissimilar and obviously more

involved than this model specifies, and the reader is encouraged to consult the section

on sugar production for more detail. However, this model assumes that the beet and

cane sugar which is produced by the farmer eventually becomes refined sugar, and is

sold to the consumer. Thus, by expressing beet and cane production in terms of sugar

produced rather than beet or cane produced, the levels of supply can be directly

compared to the levels of demand. Thus, the model assumes sugar is produced by the

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farmer and sold directly to the consumer. However, to capture supply response

differences between beet and cane production, two distinct production sectors,

sugarbeet producers and sugarcane producers, are specified in each region which

produce the same commodity. Of course, since Cuba and Mexico produce sugar from

sugarcane alone, their respective levels of sugarbeet production are zero (Actually,

Mexico has some sugarbeet production, but none has been reported since 1996). One

demand sector is specified, which represents aggregate consumption of sugar by both

industrial and non-industrial users. Since only one commodity is specified within the

model, only one price is specified as well. This model makes use of the London Daily

Price for refined sugar reported by USDA as the world refined sugar price. To model

domestic price departure from world prices, protection coefficients are specified for

each region. In the case of the United States, this coefficient is based on the U.S.

wholesale refined beet sugar price, Midwest Markets, reported byMilling & Baking

News and listed in the USDA ERS Sugar and Sweetener Situation and Outlook

Reports (hereafter referred to as SSR). Since the United States utilizes an import

quota to support domestic prices, protection coefficients for supply and demand are

equal. This is also true of Mexico, which, beginning in the year 2000, is required

under the NAFTA to implement a similar import control system. Mexicos protection

coefficient is based on refined sugar prices reported in the USDA FAS GAIN Attache

Reports (hereafter referred to as FAS). Cuba is assumed to respond to the world

market price, and thus, has a protection coefficient of one. Exchange rates are

specified within the model, and the U.S. Dollar is used as the base currency. Mexicos

exchange rate is taken from monthly averages reported by the Federal Reserve. Since

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Cubas exchange rate is not reported by the Federal Reserve, other sources were

consulted. Benirschka et. al. (1996) expressed Cuban prices in U.S. Dollar terms

rather than domestic currency. In addition, the online currency converterfxtop.com

reports a Cuban exchange rate for U.S. Dollars of approximately one to one.

Therefore, a one-to-one ratio was used concerning the exchange rate for Cuba. The

rest-of-the-world region is also expressed in U.S. Dollar terms. For simplicity,

transportation costs are assumed to be zero; therefore, each region has a margin

coefficient of one. MISSdoes not specify beginning and ending stocks for each

region. Rather, a general world stocks is specified, which accounts for world excess

supply/demand in order to balance the model.

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CHAPTER FOUR:

DATA

Prices and Quantities

The data discussed above was taken from various sources, and is reported in

the following tables. Table 4.1 contains production, supply, and distribution data for

Cuba, Mexico, the United States, and the ROW, reported in SSR. Table 4.2 itemizes

United States sugar trade, also taken from SSR. For this analysis, U.S. quota-exempt

sugar for re-export is excluded from trade levels within the model since it is eventually

re-imported and consumed domestically. Table 4.3 contains Mexican, United States,

and world average monthly price levels for refined sugar. U.S. and world data were

taken from SSR, while Mexican data were taken from FAS. Monthly levels are

reported in local terms, while fiscal year averages are reported in both local terms and

in US Dollars per metric ton. Table 4.4 contains average monthly exchange rates for

the Mexican Peso reported by the Federal Reserve. Table 4.5 summarizes the quantity

data used in theMISS.

Elasticities

The elasticities used in the empirical model were taken from outside sources.

Table 4.6 summarizes various own-price elasticities reported for U.S. sugar supply

and demand. They are categorized according to short-run, long-run, or term indefinite

elasticities, as specified by the sources. Table 4.7 contains various own-price supply

and demand elasticities for Cuba and Mexico. Table 4.8 contains ROW beet sugar

production data reported by SSR and FAS, as well as own-price supply elasticites

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Table 4.1. Production, supply, and distribution of sugar, FY 1999, in 1,000MTRV.

Production, Supply, and Distribution of Sugar, FY 1999 (1,000 MTRV)Beginning

StocksProduction Imports Exports

Domestic

Consumption

Ending

Stocks

UnitedStates

1,523 7,597 1,655 209 9,079 1,487

Beet 4,013

Cane 3,584

Mexico 670 4,985 0 590 4,400 665

Cuba 290 3,780 0 3,200 720 150

ROW * 23,309 114,307 34,265 31,921 110,158 28,341

Beet ** 28,310

Cane ** 85,997

Total 25,792 130,669 35,920 35,920 124,357 30,643

All figures rounded to the nearest whole number* Calculated by subtracting US, Mexico, and Cuba from World Totals.Source: USDA Sugar and Sweetener S&O/SSS-228/May 2000

** Taken from various FAS GAIN Reports.

Table 4.2. U.S. sugar trade for FY 1999, in 1,000 MTRV.

U.S. Sugar Trade, Fiscal Year 1999 (1000 MTRV)

Total Imports 1654.7TRQ 1139.4

Canada, high-duty 165.1Quota-exempt for re-export 339.3

Quota-exempt for polyhydricalcohol 10.9Total Exports 209

Quota-exempt for re-export 209Other 0

CCC disposal, for export 0

Source: USDA Sugar and Sweetener S&O/SSS-228/May2000

reported by Tyers and Anderson (1992). Using the production levels, percentage

shares of world production were calculated, and then used as weights for the

respective elasticities to arrive at ROW own-price elasticities of supply. Table 4.9

accomplishes the same with respect to cane sugar production, while Table 4.10 does

likewise with respect to ROW demand. Table 4.11 summarizes the own-price supply

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and demand elasticities chosen for the model. Since sugarbeets and sugarcane do not

compete for land, cross-price elasticities of supply were assumed to be zero. Also,

since sugar is the only commodity within the model, there are no cross-price

elasticities of demand.

Table 4.3. U.S., Mexican, and world refined sugar prices, FY 1999.U.S., Mexican, and World Refined Sugar Prices for Fiscal Year

1999

U.S. Wholesale Mexican Refined World RefinedCents/lb. Pesos/50 Kg. Cents/lb.

Oct-98 26.90 244.41 10.00

Nov-98 27.00 250.01 10.78Dec-98 27.00 245.77 10.97Jan-99 27.20 250.22 10.99

Feb-99 27.13 251.28 10.50Mar-99 27.00 241.93 9.85

Apr-99 27.00 239.00 8.79May-99 27.00 233.35 9.13Jun-99 27.00 242.83 9.93

Jul-99 27.00 251.83 9.47Aug-99 27.00 243.62 9.04

Sep-99 27.00 239.71 8.28

FY 1999 27.02 244.50 9.81

US$/MT $595.52 $504.12 $216.21

Source: U.S. and World data taken from USDA ERS Sugar and

Sweetener/SSS-229/September 2000. Mexican data takenfrom USDA FAS GAIN Report, Mexico Sugar Annual 2000.

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Table 4.4. Monthly U.S. Dollar exchange

rates for Mexican Peso, FY 1999.Monthly US Dollar Exchange Rates for

Mexican Peso, FY 1999

US $1 = X Mexican

Pesos

October 1998 10.16November 1998 9.97December 1998 9.91

January 1999 10.13February 1999 10.01

March 1999 9.73

April 1999 9.43May 1999 9.40

June 1999 9.52July 1999 9.37

August 1999 9.40September 1999 9.34

FY 1999 Mean 9.70

Source : Federal Reserve Statistical

Release, www.federalreserve.gov

Table 4.5. Base-year quantity data used in MISS, in 1,000 MTRV.

Base-Year Quantity Data Used in MISS, 1,000 MTRV

US Mexico Cuba ROW

Beet Supply 4013 0 0 28310

Cane Supply 3584 4985 3780 85997

Sugar Demand 9079 4400 720 110158

World Stocks * 6312* MISS does not consider beginning and ending stocks. Rather, ituses 'world stocks' to balance the model.Source : USDA Sugar and Sweetener S&O/SSS-228/May &

September 2000.

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Table 4.6. U.S. own-price elasticities of sugar supply and demand.

U.S. Own-Price ElasticitiesSugar Supply Demand

Beet Sugar Cane SugarAggregate

SugarSugar

Short-Run Elasticities

Tyers and Anderson (1992) 0.07

Lopez (1990) 0.246 0.103 -0.141

Lopez (1989) 0.479 0.231 -0.1Sudaryanto (1987) * 0.7 0.17

Leong (1985) * 0.16

Long-Run Elasticities

Tyers and Anderson (1992) 0.28

Lopez (1990) 0.354 0.254 -0.412

Lopez (1989) 1.201 0.579 0.89 -0.597

Sudaryanto (1987) * 2.29 0.74

Leong (1985) * 0.32

Term-Indefinite Elasticities

Devadoss et. al. (1995) 0.215 0.054 -0.042

Uri (1993) ** -0.5

Tyers and Anderson (1992) -0.2Sigua (1992) # 0.51 0.297

Gardineret. al. (1989) 0.5 -0.24

Leu and Knutson (1987) *** -0.15

Vroomen (1984) **** 0.28 0.135 -0.114

* Taken from Sigua (1992)** Taken from Uri and Boyd (1994)*** Taken from Tanyeri-Aburet. al. (1993)

**** Taken from Messina and Seale (1993)# Average of reported regional elasticities

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Table 4.7. Own-price supply and demand elasticities for Cuba and

Mexico.Own-Price Supply and Demand Elasticities for Cuba and Mexico

Supply

SR LRTerm-

indefinite

Demand

Cuba

Tyers and Anderson (1992) 0.13 0.68 -1.4

Mexico

Devadoss et.al. (1995) 0.891 -0.019

Tyers and Anderson (1992) (LR) 0.15 0.45 -0.85

Gardiner et. al. (1989) 0.2 -0.6

Table 4.8. ROW beet sugar production by country, as percentage of worldtotal, and weighted own-price supply elasticities, in 1,000

MTRV, FY 1999.

FY 1999 ROW Beet Sugar Production and Weighted Supply

Elasticities , 1,000 MTRVPrice Elasticities of Supply

Country/Region Production% of

World

TotalSR SR

Weighted

LR LR

Weighted

Canada 93 0.33% 0.1 0.0003 0.5 0.0016

EU * 16222 57.30% 0.1 0.0573 0.5 0.2865

Portugal & Spain 1321 4.67% 0.14 0.0065 0.7 0.0327

Other W. Europe 190 0.67% 0.16 0.0011 0.32 0.0021

E. Europe 3897 13.77% 0.05 0.0069 0.08 0.0110

Former Soviet Union 3983 14.07% 0.11 0.0155 0.21 0.0295

Egypt 220 0.78% 0.1 0.0008 0.32 0.0025

Pakistan 11 0.04% 0.1 0.00004 0.13 0.0001

China 1693 5.98% 0.15 0.0090 0.88 0.0526

Japan 680 2.40% 0.1 0.0024 0.5 0.0120

ROW Total 28310 100.00% 0.0998 0.4307

Source: Production data taken from USDA ERS Sugar and Sweetener

S&O/SSS-229/May 2000. Data for countries producing both beetand cane taken from various USDA FAS GAIN Reports.Elasticities taken from Tyers and Anderson (1992).

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Table 4.9. ROW cane sugar production, percentage of ROW total, and

weighted own-price supply elasticities, by country, in1,000 MTRV, FY 1999.

FY 1999 ROW Cane Sugar Production and Weighted Own-Price

Elasticities, 1,000 MTRVSupply Elasticities

Country/Region Production% of

ROW

Total SR

SR

WeightedLR

LR

Weighted

Argentina 1830 2.13% 0.39 0.0083 0.69 0.0147

Brazil 18300 21.28% 0.4 0.0851 0.8 0.1702

Other Latin America 8929 10.38% 0.4 0.0415 0.59 0.0613

Caribbean 794 0.92%

Centr al Ameri ca 3195 3.72%

Other South Ameri ca 4940 5.74%

EU * 263 0.31% 0.1 0.0003 0.5 0.0015

Spain & Portugal 12 0.01% 0.14 0.00002 0.7 0.0001

Egypt 960 1.12% 0.1 0.0011 0.32 0.0036

S. Africa, Republic of 2808 3.27% 0.1 0.0033 0.3 0.0098

Nigeria 16 0.02% 0.17 0.00003 0.51 0.0001

Sub-Saharan Africa 3909 4.55% 0.17 0.0077 0.51 0.0232

N. Africa & Middle East 5087 5.92% 0.1 0.0059 0.2 0.0118

N. Afr ica 1120 1.30%

M iddle East 3967 4.61%

Bangladesh 165 0.19% 0.25 0.0005 0.51 0.0010

China 7276 8.46% 0.15 0.0127 0.88 0.0745Japan 172 0.20% 0.1 0.0002 0.5 0.0010

India 17436 20.28% 0.12 0.0243 0.46 0.0933

Indonesia 1492 1.73% 0.3 0.0052 0.59 0.0102

Pakistan 3780 4.40% 0.1 0.0044 0.13 0.0057

Philippines 1630 1.90% 0.13 0.0025 0.68 0.0129

Taiwan 312 0.36% 0.2 0.0007 0.4 0.0015

Thailand 5386 6.26% 0.35 0.0219 1.5 0.0939

Other Asia 919 1.07% 0.1 0.0011 0.2 0.0021

Australia & Oceania 5315 6.18% 0.1 0.0062 0.5 0.0309

ROW Total 85997 100.00% 0.2330 0.6233

Source: Production data taken from USDA ERS Sugar and Sweetener

S&O/SSS-229/May 2000. Data for countries producing both beetand cane taken from various USDA FAS GAIN Attache Reports.Elasticities taken from Tyers and Anderson (1992).

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Table 4.10. ROW sugar consumption, percentage of ROW total, and

weighted own-price elasticities of demand, by country,in 1,000 MTRV, FY 1999.

FY 1999 ROW Sugar Consumption and Weighted Own-PriceElasticities of Demand

Price Elasticities of

DemandCountry/Region Consumption% of ROW

Total Reported Weighted

Canada 1240 1.13% -0.08 -0.0009

Argentina 1520 1.38% -0.6 -0.0083

Brazil 9100 8.26% -0.6 -0.0496

Other Latin America 6530 5.93% -0.6 -0.0356

Caribbean 674 0.61%

Centr al Ameri ca 1404 1.28%

Other South Ameri ca 4452 4.04%

EU * 12648 11.48% -0.12 -0.0138

Spain & Portugal 1709 1.55% -0.24 -0.0037

Other W. Europe 542 0.49% -0.12 -0.0006

E. Europe 4383 3.98% -0.8 -0.0318

Former Soviet Union 9560 8.68% -0.1 -0.0087

Egypt 1950 1.77% -0.8 -0.0142

Nigeria 675 0.61% -0.8 -0.0049

N. Africa & Middle East 10403 9.44% -0.5 -0.0472

N. Afr ica 2955 2.68%

M iddle East 7448 6.76%

S. Africa, Republic of 1375 1.25% -0.6 -0.0075

Sub-Saharan Africa 4048 3.68% -0.8 -0.0294Bangladesh 460 0.42% -1 -0.0042

China 9000 8.17% -1.5 -0.1226

India 16977 15.41% -0.8 -0.1233

Indonesia 2800 2.54% -1.2 -0.0305

Japan 2313 2.10% -0.05 -0.0010

Korea 1118 1.02% -0.8 -0.0081

Pakistan 3210 2.91% -1 -0.0291

Philippines 1900 1.73% -1.4 -0.0241

Taiwan 495 0.45% -0.8 -0.0036

Thailand 1825 1.66% -0.7 -0.0116

Other Asia 3057 2.78% -1 -0.0278

Australia & Oceania 1320 1.20% -0.18 -0.0022

Total 110158 100.00% -0.6442

Source: Consumption data taken from USDA ERS Sugar andSweetener S&O/SSS-228/May 2000 and USDA FAS EU

Attach Report, April 10, 2000. Elasticities taken from Tyersand Anderson (1992).

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Table 4.11. Own-price supply and demand elasticities used inMISS.

Own-Price Supply and Demand Elasticities Used in MISSShort-Run Elasticities Long-Run Elasticities

Supply

US Mexico Cuba ROW US Mexico Cuba ROWBeet 0.34 - - 0.10 0.86 - - 0.43

Cane 0.14 0.18 0.13 0.23 0.40 0.67 0.68 0.62Demand

US Mexico Cuba ROW US Mexico Cuba ROWSugar -0.14 -0.73 -1.40 -0.64 -0.50 -0.73 -1.40 -0.64

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CHAPTER FIVE:TRADE LIBERALIZATION SCENARIOS

Changes in import quotas are carried out in theMISSby specifying a

percentage increase or decrease relative to a countrys base net-export level. Since

current sugar policies utilize specific quantities, a percentage change was determined

that corresponded to specific quantity levels.

Eight trade liberalization scenarios were developed in which the United States

import quota was gradually increased relative to the base year. These scenarios are

carried out to simulate increased imports of sugar to the United States from both

Mexico and Cuba. It should be noted that the levels of sugar imported under the tariff-

rate quota program, excluding Mexico, are held constant throughout all simulations.

Since theMISSis a non-spatial model, the origin of the commodity is unknown.

However, since sugar is a fungible commodity, it can be assumed that the effects on

the U.S. market due to liberalization will be the same, regardless of origin. The world

price is not sensitive to origin, either, due to the fungibility characterisitic. Any

quantity of sugar diverted from the world market, ceteris paribus, would have the

same effect on the world market, regardless of whether that sugar was from Cuba or

any other nation. For example, suppose the United States increases domestic sugar

supply by importing 1 million MT from Cuba. That means that 1 million MT of sugar

is diverted from the world market, and the would-be buyer of the Cuban sugar must

look to other sources, like Australia, for 1 million MT of sugar. Alternatively,

suppose the United States increases domestic supply by importing 1 million MT of

sugar from Australia. Again, 1 million MT of sugar is diverted from the world

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market, and the would-be buyer of Australian sugar must turn to a different source,

like Cuba, for 1 million MT of sugar. Either way, that sugar which is diverted from

the world market is, theoretically, replaced by the would-be exporter. Another

approach is to consider that the United States increases supply by importing 1 million

MT of sugar from Cuba. Thus, 1 million MT is diverted from the world market, and,

ceteris paribus, the world price rises and the U.S. domestic price falls. Alternatively,

if the United States had imported the sugar from Australia, 1 million MT of sugar

would have still been diverted from the world market, resulting in the same world and

domestic price adjustments.

Therefore, regardless of who is assumed to have exported sugar to an

importing country, the supply, demand, and price effects are the same. The only

difference is who gains from access to the higher-priced market, and this can simply

be calculated outside of the model by multiplying the assumed quantity of sugar

exported from a country by the simulated domestic price, to arrive at country-specific

gains/losses.

Table 5.1 summarizes the scenarios used for the study. Scenario 1 simulates

Mexican accession into the U.S. market of 250,000 MTRV of refined sugar. Since the

base year contains Mexicos previously allocated 25,000 MTRV, Scenario 1 imposes a

quota increase of 225,000 MTRV. Scenario 2 simulates Mexicos accession of

250,000 MTRV, plus a quota allocation of 25,000 MTRV to Cuba. Scenarios 3 and 4

gradually increase Cubas allocation to 100,000, and 250,000 MTRV, respectively,

holding constant Mexicos access of 250,000 MTRV. Scenario 5 simulates Mexico,

under an unlimited access status, exporting 500,000 MTRV to the United States, while

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Table 5.1. Scenarios simulated in MISS.

Scenarios Simulated in MISSU.S. Import Quantity Allocated (MT)

ScenarioCuba Mexico Total

Base 0 25,000 25,000

1 0 250,000 250,0002 25,000 250,000 275,0003 100,000 250,000 350,0004 250,000 250,000 500,0005 100,000 500,000 600,0006 250,000 500,000 750,0007 500,000 500,000 1,000,0008 750,000 750,000 1,500,000

Cuba is allocated 100,000 MTRV. In Scenario 6, Cubas allocation is increased to

250,000 MTRV, and in Scenarios 7 and 8, both Cuba and Mexico are allocated

500,000 and 750,000 MTRV each, respectively.

Simulation Results:

Prices, Supply, and Demand

Table 5.2 summarizes U.S. and world refined sugar price changes relative to

the base in cents per pound, dollars per metric ton, and percentage terms, using both

short- and long-run supply elasticities. Table 5.3 summarizes U.S. supply and demand

changes relative to the base, in both metric tons and percentage terms. Further, Table

5.4 summarizes Cuban supply and demand changes relative to the base, in both metric

tons and percentage terms. Since ROW quantities and percentage changes are of

minimal concern, they are not discussed, but are reported in Table 5.5. The following

discussion addresses each scenario, and its effect on prices, production, and

consumption. Again, all percentage changes discussed are relative to the base.

Since no policy changes are simulated for Mexico, and since Mexicos

domestic price is protected from the world market, they experience no production or

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consumption changes throughout all simulations. Mexicos increase in imports to the

United States is a case of trade diversion, rather than trade creation. Counter-

intuitively, this could be viewed as the removalof trade diversion resulting from the

initial U.S. policy.

Table 5.2. Refined sugar price changes relative to the base, in 1,000MTRV.

Refined Sugar Price Changes Relative to the Base (1,000 MTRV)

United States Refined Sugar Price

Using Short-Run Elasticities Using Long-Run Elasticities

ScenarioU.S. Quota

Level Cents/lb. $/MT%

ChangeCents/lb. $/MT % Change

Base 25 26.98 594.58 26.98 594.581 250 25.10 553.19 -6.96% 26.00 572.99 -3.63%

2 275 24.90 548.74 -7.71% 25.89 570.62 -4.03%

3 350 24.31 535.83 -9.88% 25.57 563.60 -5.21%

4 500 23.15 510.27 -14.18% 24.93 549.45 -7.59%

5 600 22.42 494.09 -16.90% 24.51 540.23 -9.14%

6 750 21.35 470.55 -20.86% 23.89 526.50 -11.45%

7 1000 19.67 433.39 -27.11% 22.86 503.84 -15.26%

8 1500 16.66 367.15 -38.25% 20.88 460.14 -22.61%

World Refined Sugar Price

Using Short-Run Elasticities Using Long-Run Elasticities

ScenarioU.S. Quota

Level Cents/lb. $/MT %Change

Cents/lb. $/MT % Change

Base 25 9.81 216.21 9.81 216.21

1 250 9.83 216.73 0.24% 9.83 216.55 0.16%

2 275 9.84 216.79 0.27% 9.83 216.60 0.18%

3 350 9.84 216.95 0.34% 9.83 216.71 0.23%

4 500 9.86 217.29 0.50% 9.84 216.95 0.34%

5 600 9.87 217.53 0.61% 9.85 217.10 0.41%

6 750 9.89 217.87 0.77% 9.86 217.34 0.52%

7 1000 9.91 218.46 1.04% 9.88 217.73 0.70%

8 1500 9.96 219.62 1.58% 9.91 218.51 1.06%

Simulation Results:

Using Short-Run Elasticities

Scenario 1 simulates Mexicos accession into the U.S. sugar market of 250,000

metric tons. The U.S. refined sugar price falls 6.96% relative to the base, to 25.1 cents

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per pound. The world refined price rises slightly, by 0.24%, to 9.83 /lb. U.S. beet

production drops by 2.42%, while cane production falls by 1%. U.S. demand rises by

1.02%, to 9.17 million MT. Cuba experiences mild changes due to the rise in world

price, increasing cane production by 0.03%, while demand falls by 0.34%.

Table 5.3. U.S. supply and demand changes relative to the base, in 1,000MTRV.

United States Supply and Demand Changes Relative to the Base

(1,000 MTRV)Using Short-Run Elasticities

ScenarioQuota

Level

Beet

Supply

%

Change

Cane

Supply

%

ChangeDemand % Change

Base 25 4013.00 3584.00 9079.00

1 250 3915.89 -2.42% 3548.16 -1.00% 9171.61 1.02%2 275 3905.05 -2.69% 3543.86 -1.12% 9181.59 1.13%

3 350 3873.35 -3.48% 3532.03 -1.45% 9212.46 1.47%

4 500 3809.54 -5.07% 3508.02 -2.12% 9275.11 2.16%

5 600 3768.21 -6.10% 3492.25 -2.56% 9317.78 2.63%

6 750 3706.01 -7.65% 3468.60 -3.22% 9381.33 3.33%

7 1000 3604.08 -10.19% 3428.81 -4.33% 9490.28 4.53%

8 1500 3406.23 -15.12% 3349.96 -6.53% 9712.71 6.98%

Using Long-Run Elasticities

ScenarioQuota

Level

Beet

Supply

%

Change

Cane

Supply

%

ChangeDemand % Change

Base 25 4013.00 3584.00 9079.001 250 3887.39 -3.13% 3531.32 -1.47% 9126.21 0.52%

2 275 3873.35 -3.48% 3525.58 -1.63% 9131.66 0.58%

3 350 3832.42 -4.50% 3508.02 -2.12% 9147.09 0.75%

4 500 3749.75 -6.56% 3472.54 -3.11% 9179.78 1.11%

5 600 3695.57 -7.91% 3449.24 -3.76% 9201.57 1.35%

6 750 3614.51 -9.93% 3413.76 -4.75% 9235.16 1.72%

7 1000 3480.47 -13.27% 3354.27 -6.41% 9292.36 2.35%

8 1500 3219.23 -19.78% 3234.92 -9.74% 9410.38 3.65%

Scenarios 2, 3, and 4 hold constant Mexicos quota of 250,000 MT, and

allocate 25,000, 100,000, and 250,000 MT, respectively, to Cuba. Scenario 2 results

in a 7.71% drop in the U.S. price to 24.9 /lb. World price rises only 0.27% to 9.84

/lb. U.S. production falls by 2.69% for beets, and 1.12% for cane, while demand

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rises by 1.13%, to 9.18 million MT. Cuba increases supply by 0.04%, and demand

falls by 0.38%. Scenario 3 results in a 9.88% drop in U.S. price, while the world price

rises slightly to 9.84 /lb. U.S. production falls 3.48% for beets and 1.45% for cane,

while demand rises 1.47%. Cuban production remains at 0.04% higher than the base,

while consumption falls 0.47%. During Scenario 4, the U.S. price falls 14.18%, to

23.15 /lb., while the world price rises to 9.86 /lb. U.S. production falls 5.07% for

beets, and 2.21% for cane, while demand rises 2.16%. Cuban supply rises by 0.06%,

while demand falls by 0.7%.

Table 5.4. Cuban supply and demand changes relative to the base,in 1,000 MTRV.

Cuban Supply and Demand Changes Relative to the Base(1,000 MT)

Using Short-Run Elasticities

ScenarioU.S Quota

For CubaCane Supply % Change Demand % Change

Base 0 3780.00 720

1 0 3781.13 0.03% 717.55 -0.34%

2 25 3781.51 0.04% 717.26 -0.38%

3 100 3781.51 0.04% 716.62 -0.47%

4 250 3782.27 0.06% 714.96 -0.70%

5 100 3783.02 0.08% 713.88 -0.85%

6 250 3783.78 0.10% 712.30 -1.07%

7 500 3784.91 0.13% 709.63 -1.44%

8 750 3787.56 0.20% 704.38 -2.17%

Using Long-Run Elasticities

ScenarioU.S. Quota

For CubaCane Supply % Change Demand % Change

Base 0 3780.00 720.00

1 0 3784.16 0.11% 718.42 -0.22%

2 25 3784.54 0.12% 718.20 -0.25%

3 100 3786.05 0.16% 717.70 -0.32%4 250 3788.69 0.23% 716.62 -0.47%

5 100 3790.58 0.28% 715.90 -0.57%

6 250 3793.23 0.35% 714.82 -0.72%

7 500 3798.14 0.48% 713.02 -0.97%

8 750 3807.22 0.72% 709.42 -1.47%

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Table 5.5. ROW supply and demand changes relative to the base,in 1,000 MTRV.

ROW Supply and Demand Changes Relative to the Base

(1,000 MTRV)Using Short-Run Elasticities

ScenarioU.S.

Quota

Level

Beet

Supply

%

Change

Cane

Supply

%

ChangeDemand

%

Change

Base 25 28310.00 85997.00 110158.00

1 250 28315.00 0.02% 86048.60 0.06% 109992.76 -0.15%

2 275 28318.49 0.03% 86048.60 0.06% 109970.74 -0.17%

3 350 28318.49 0.03% 86065.80 0.08% 109915.66 -0.22%

4 500 28324.15 0.05% 86091.59 0.11% 109805.50 -0.32%

5 600 28326.99 0.06% 86117.40 0.14% 109728.38 -0.39%

6 750 28332.65 0.08% 86151.80 0.18% 109618.22 -0.49%

7 1000 28338.31 0.10% 86203.39 0.24% 109430.96 -0.66%

8 1500 28355.30 0.16% 86306.59 0.36% 109056.42 -1.00%

Using Long-Run Supply Elasticities

Scenario

U.S.

Quota

Level

Beet

Supply

%

Change

Cane

Supply

%

ChangeDemand

%

Change

Base 25 28310.00 85997.00 110158.00

1 250 28329.82 0.07% 86083.00 0.10% 110047.84 -0.10%

2 275 28332.65 0.08% 86091.59 0.11% 110025.82 -0.12%

3 350 28338.31 0.10% 86117.40 0.14% 109992.64 -0.15%

4 500 28352.46 0.15% 86177.59 0.21% 109915.66 -0.22%

5 600 28360.96 0.18% 86211.99 0.25% 109871.58 -0.26%

6 750 28372.28 0.22% 86272.19 0.32% 109794.48 -0.33%

7 1000 28394.93 0.30% 86366.79 0.43% 109662.28 -0.45%

8 1500 28437.39 0.45% 86564.58 0.66% 109419.94 -0.67%

Scenarios 5, 6, and 7 simulate Mexico, under an unlimited access status,

exporting 500,000 MT to the United States. Also, Cuba is given a quota of 100,000

MT, 250,000 MT, and 500,000 MT, respectively. During scenario 5, U.S. price

decreases 16.9%, and world price increases 0.61%. U.S. beet supply falls 6.1%, while

cane supply falls 2.56%. Demand rises 2.63%, to 9.32 million MT. Cuban supply

rises 0.08%, while demand falls 0.85%. During Scenario 6, U.S. price falls 20.86%,

while world price rises 0.77%. U.S. production drops 7.65% for beets, and 3.22% for

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cane, while consumption rises 3.33%. Cuban production rises 0.1%, while demand

falls 1.07%. During Scenario 7, U.S. price decreases 27.11%, and world price

increases 1.04%. U.S. beet supply falls 10.19%, while cane supply falls 4.33%.

Demand rises 4.53%, to 9.49 million MT. Cuban supply rises 0.13%, while demand

falls 1.44%.

Scenario 8 simulates Mexico, under unlimited access status, exporting 750,000

MT to the U.S., while Cuba receives a quota of 750,000 MT. U.S. price falls 38.25%,

to 16.66 /lb., while the world price rises 1.58%, to 9.96 /lb. U.S. production falls

15.12% for beets, and 6.53% for cane, while demand rises 6.98%, to 9.71 million MT.

Cuban production increases 0.2%, while consumption falls 2.17%.

Simulation Results:Using Long-Run Elasticities

The use of long-run elasticities result in similar, but more modest, changes in

prices and demand. Production changes, however, are more dramatic. During

Scenario 1, the U.S. refined sugar price falls 3.63% relative to the base, to 26 /lb.

The world refined price rises slightly, by 0.16%, to 9.83 /lb. U.S. beet production

drops by 3.13%, and cane production falls by 1.47%, while U.S. demand rises by

0.52%. Cuba increases cane production by 0.11%, while demand falls by 0.22%.

During Scenario 2, U.S. price drops 4.03% to