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U.S. Sugar Market Facing Change From External Market Forces

U.S. sugar prices have traditionally been far above and largely independent of world prices due to import restrictions and provisions of the U.S. sugar program (price supports and domestic marketin...

U.S. sugar prices have traditionally been far above and largely independent of world prices due to import restrictions and provisions of the U.S. sugar program (price supports and domestic marketin allotments). In particular, a tariff-rate quota (TRQ) insulate the domestic market from global price spikes by putting a ceiling on the quantity of sugar that the U.S. is required to import, so domestic prices are set primarily by internal supply and demand conditions.

The minimum amount of sugar under the TRQ is an obligation set by the World Trade Organization (WTO) agreement. The TRQ grants preferential, lower tariff duties on imports up to the limit required by the WTO, but places much higher "over-quota" tariffs (above 15 cents/pound) on imports beyond that level.      Since fiscal year (FY) 2000 (October 1999 to September 2000), yearly imports under the TRQ have averaged 1.48 million short tons, raw value (STRV), which is equivalent to less than 15% of average annual U.S. consumption. In some years, such as FY 2008, the U.S. authorized additional TRQ entries to relieve upward pressure on domestic prices, but TRQ imports more commonly fall somewhat short of designated levels because some of the countries with quota rights are no longer competitive exporters.      However, the full implementation of the North American Free Trade Agreement (NAFTA) in 2008 means that external market forces now have a more significant impact on the U.S. sugar market. While the United States is not fully exposed to global price movements, it has to adapt to the expanded access of Mexican sugar.      Under NAFTA, the U.S. gradually liberalized, and, in 2008, completely freed Mexican sugar imports from any tariff. High U.S. sugar prices, and initially low Mexican prices, resulted in Mexican exports to the United States nearly doubling in 2008/09 to a record 1.402 million tons. Mexico subsequently experienced short supplies and is expected to import far more sugar from other countries (904,000 STRV) than it will export to the United States (430,000 STRV) in 2009/10.      Although imports from countries other than Mexico are still effectively bound by WTO agreements under normal circumstances (with some discretion for increases by USDA), free trade with Mexico has opened a channel through which market developments outside of the United States can affect the domestic market. High U.S. prices and low prices in Mexico could encourage Mexico to export sugar to the U.S. and allow lower priced imports from Central or South America.      However, Mexico’s sugar sector is also heavily regulated by government policies, including restrictions on imports. Policy decisions by the Mexican government will likely be based on concern for its own supply-and-demand balance and the effect on prices within Mexico. As a result, the U.S. sugar supply is more exposed to Mexican supply and prices, as well as to Mexican policymakers’ decisions about import restrictions of their own. ~ by Don Lilleboe

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