USA case study

11 March 2019

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The USA is unusual amongst the seven countries highlighted as it is a deficit producer with minimal exports, and its support policy is differently structured from most other countries. The US sugar industry is shared between beet and cane, with beet typically contributing about 53%.

The Policy Environment

US sugar policy is highly regulated and based on a combination of price support, production limitation, marketing and import controls. It also includes a market clearing mechanism linked to its ethanol industry.

US sugar policy is set out in the ‘Sugar Program’, authorised by the 2014 Farm Bill¹ .

The Sugar Program has the following key facets:

Price support – the government ‘loan rate’ system

The US government offers loans to US sugar producers by establishing a ‘Loan Rate’ each year which gives producers an alternative sales option if market prices are disappointing after harvest. Should domestic market prices fall below the Loan Rate, producers can forfeit sugar to the Commodity Credit Corporation of the US Department of Agriculture (the USDA), in return for receiving the cash value of the sugar forfeited. It is then the USDA’s responsibility to dispose of it.

This effectively sets a minimum floor price for sugar sold on the domestic market. Also, as Congress has legislated that the Sugar Program should be budget neutral, the USDA is incentivised to keep sugar market prices sufficiently above the Loan Rate to prevent producers forfeiting their sugar.

In 2012/13, due to weaker than expected domestic prices, producers defaulted on 382,000 tonnes of sugar which were purchased by the USDA under this scheme. The USDA then disposed of the forfeited tonnage to non-food markets at reduced prices via the  Feedstock Flexibility Program (see below), at a cost to US taxpayers of US$280m².

To qualify for loans, processors must agree to pass on a minimum proportion of the value of the agreed loan to cane and beet farmers, and the USDA has the authority to set minimum farmer payments. This ensures that the benefits of the loan rate support system are passed to farm suppliers, and effectively acts as a minimum beet and cane price regime.

Marketing allotments

Legally binding limits (‘marketing allotments’) are set by the government which restrict the quantity of sugar each processor and miller can sell on the domestic market, so acting as a de facto quota system. The national aggregate of all the company marketing allotments (the ‘overall allotment quantity’) is calculated by reference to US sugar demand, so that domestic production is planned to account for about 85% of total US sugar consumption³. The overall allotment quantity is shared between the beet and cane sectors in the ratio 54% and 46% respectively.

The Feedstock Flexibility Program

To enable the loan rate system to work effectively, a market clearing mechanism is needed to allow the USDA to dispose of defaulted sugar stocks. This is provided by the Feedstock Flexibility Program⁴. This requires the Commodity Credit Corporation to divert forfeited sugar at reduced prices from food to ethanol use, so shoring up the sugar market price and minimising the risk of further forfeits. As this sugar is sold to the ethanol industry by auction at reduced prices, it also provides the sector with access to subsidised raw materials financed by US taxpayers. This program has only ever been used in one year since its introduction in the 2008 Farm Bill.

Import controls

The US seals its domestic market from the world market by charging penal import duties. The exceptions are the limited World Trade Organisation (WTO) Tariff-Rate Quota (TRQ) for developing countries at a small import tariff and the zero tariff for imports from Mexico as a result of the North American Free Trade Agreement (NAFTA). Although in principle Mexico has free access to the US sugar market, in practice the US intent to apply anti-dumping and countervailing duties on Mexican exports has forced Mexico to agree to control its export volumes to avoid oversupplying the US market and to observe minimum prices for its exports to the US⁵.

Mexico has priority to supply what the US cannot produce itself once preferential imports under the TRQ are allowed for.

Re-export Program

The result of the import controls is that non-preferential origins can only supply sugar to US refiners under the Re-export Program where the sugar has to be re-exported rather than being sold within America (this is equivalent to toll refining in the EU).

WTO notifications

In common with all WTO members, the USA is required to notify the WTO of its agricultural support programmes. For its most recent Aggregate Measure of Support (AMS) notification (for 2014/15), it listed support for sugar as some US$1.5bn, which was nearly half the total US agricultural AMS for all commodities for that year⁶.

Our Analysis

The USA operates a highly regulated and protectionist sugar policy, which is based on domestic price support and production constraint. Prices are maintained through a system of ‘Loan Rates’ which set a minimum floor in the market and manufacturers are entitled to forfeit sugar to the government, if prices fall below these agreed levels. 

One method for clearing forfeited sugar from the market is where the government auctions it to ethanol producers at, in effect, heavily discounted prices.

Production is restricted through a system of ‘marketing allotments’ which are de facto quotas allocated to sugar beet and cane producers. The aggregate of the allotments is set equal to 85% of estimated demand which is the proportion of the domestic market reserved for US producers. 

The restricted share of the US market available for imports means that, in effect, the US market is closed to imports, apart from the preferential origins under the WTO TRQ and Mexico under NAFTA.