Sugar Policy in the United States: Pressures For Reform, Lessons From Europe German Marshall Fund November 10, 2005 Thomas Earley Executive Vice President

Sugar Policy in the United States:Pressures For Reform, Lessons From Europe

German Marshall FundNovember 10, 2005

Thomas EarleyExecutive Vice President

2

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFund

US &EU: The Sugar Policy Twins

The similarities Arguably the most policy-distorted agricultural

sector High level of support for sugar industry via tariff

rate quotas and other provisions Preferential quotas for foreign suppliers Production or marketing quotas Both under intense international pressure to reform

The differences Degree of support – EU more generous US has both cane and beet, and major refining

industry EU subsidizes exports in a major way

3


NAFTA/WTO

FTA’S

Sugar product

imports

New Farm BillProvisions

2008

Cost/price

Squeeze

US sugar is winning battles …… but losing the war.

4

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundPressures on the US sugar

programDysfunctional program, repeated market imbalances, limited policy toolsProspect of free trade with Mexico in 2008Declining real support priceMarginal profitability at farm level Adverse effects of hurricane damageEroding demand structure Doha and FTA pressuresIsolation after peanut/tobacco reforms, CAFTAFederal budget concerns

5


US needs to import 2.5 million tons

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

88/89 92/93 96/97 00/01 04/05

1,000 strv

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Deliveries for food use

Production

Structural deficit(right axis)

10

-7.5

=2.5

6

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundUS prices reflect current

problems

16

20

24

28

32

36

40

44

2000 2001 2002 2003 2004 2005Calendar Year

cents per pound

Refined beet, fob Midwest

Raw cane, #14 futures

7


15.36 15.36 15.36 15.36 15.36 15.36

1.510

7.56

6.044.53

3.02

0

4

8

12

16

2003 2004 2005 2006 2007 2008

cent

s/lb

Other countries Mexico

Second tier duties on raw sugar

8

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundInflation is eroding real support

levelAll ag commodity prices are declining in real termsProductivity growth mostly keeping upCommodity ingredients becoming smaller portion of retail price18 cents in 2000 will be 13.4 cents in 2010 in real terms with 3% inflation rate

US raw sugar support price adjusted for inflation

0

5

10

15

20

25

30

35

1982

1987

1992

1997

2002

2007

Calendar Year

cent

s/lb

real p

rice

(20

00=

100)

9

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundErosion of net returns above

total costUS sugar beet returns

-200-100

0100200300400500600

81 84 87 90 93 96 99 02 05

Crop Year

$/ac

re

Returns lessoperatingcostsReturns lesstotal costs

10


Per Capita Consumption

60

65

70

75

80

85

90

1992 1994 1996 1998 2000 2002 2004

Calendar Year

poun

ds

Refined sugar

Corn sweeteners

11

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundUS imports of sugar in products

topped 1.3 million short tons last year

0

200

400

600

800

1000

1200

1400

96/97 98/99 00/01 02/03 04/05

1,00

0 st

rv

Imports Exports

12


Can US avoid granting more sugar access?

Thailand3 mmt

net exports

SACU1 mmt

net exportsAndean2 mmt

net exports

Doha?

FTAs

13


Real change just 2-3 years away

04

06 08---

-- D

oha Agre

ement?

---- E

U implements

WTO panel

---- D

oha Effects?

NAFTA free tr

ade ----

EU sugar r

eview ----

US Farm Bill

----

Everyth

ing but Arm

s ----0705 09

-----

US m

arket d

isruptio

n

14

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundThe European Commission

proposal40% price cut by mid-2007

Beet growers to get decoupled payments covering 60% of price cut

Buyout of inefficient sugar processors over 4 years via a $5.4 billion restructuring fund

Merging of A, B and C quotas into single quota

Doubling of isoglucose quota to 600,000 mt

Eventual elimination of most subsidized exports

€40 million compensation to ACP countries for 43% cut in their price to €303 or 16.5 cents/lb

Sugar regime extended through 2014/15

15

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundCommission proposed 39%

support cut

0

100

200

300

400

500

600

700

00/01 02/03 04/05 06/07 08/09

€/mt

16


2004 sugar prices

0

10

20

30

40

50

60

EU US

Wholesale

Retail

US cents/lb

Source: LMC International

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Expected impacts

Production expected to decline from 20 million mt to 12 million by 2012/13Imports increase from 2.3 million tons to 3.9 million, mostly due to EBA initiativeEU goes from being net exporter of 3+ million tons to net importer of 3+ million tonsNet expenditures remain at about €1 billion/yearMajor opportunity for other white sugar exportersBut some ACP suppliers reduce production and exports due to lower price

18

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundWho’s competitive in EU, who’s

not?Who’s competitive, who’s not?

19

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundReform impacts will vary by

countryDrastic Significant Limited

Greece Czech Rep. AustriaIreland Denmark BelgiumItaly Finland FrancePortugal Hungary Germany

Spain NetherlandsLatvia PolandLithuania SwedenSlovakia U.K.Slovenia

Production1.8 mmt 3.3 mmt 15.3 mmt

20


Effect on current ACP suppliersWinners:

Swaziland Zimbabwe

Survivors:

Malawi Tanzania Zambia

On the Bubble:

Belize Congo Fiji Guyana Mauritius

Losers:

Barbados Cote d'Ivoire Jamaica Madagascar St. Kitts and Nevis Trinidad and Tobago

Source: Paul Ryberg

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Latest developments

11 member states rejected proposed reforms Finland, Greece, Hungary, Ireland, Italy, Latvia,

Lithuania, Poland, Portugal, Slovenia, and Spain

WTO arbitrator rules EU must comply with panel decision by May 22, 2006 Case brought by Brazil, Australia and Thailand Must cut subsidized exports from 5 mmt to1.3 mmt Must cut export subsidies 75% to 0.5 billion euros

But there is no guarantee any of this will happen on scheduleNext decision point: Council meeting this month

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Implications for US

Example of major EU change adds pressureThe “level playing field” argument changesBuyout of factories and decoupled producer payments serve as examplesRole of preferential quotas reduced and more US quota holders will get out of sugar productionIncreased potential for US refined sugar exportsAny further strengthening of the dollar magnifies the implications

23

German Marshall German Marshall FundFundGerman Marshall German Marshall FundFundRefined sugar in cents per

poundUS cents/lb

0

5

10

15

20

25

30

35

40

World market

US beet, fob

EU support level

Documents

Sugar Policy in the United States: Pressures For Reform, Lessons From Europe German Marshall Fund November 10, 2005 Thomas Earley Executive Vice President