The House Agriculture Committee held a hearing June 3 to examine the rapid increase of foreign agricultural subsidies. Lawmakers expressed concern about the subsidies and encouraged the U.S. government to be vigilant about leveling the playing field at the World Trade Organization (WTO).
The following is an excerpt from testimony provided by Jack Roney of the American Sugar Alliance. Roney’s testimony can be read in its entirety at www.sugaralliance.org.
Since U.S. sugar growers are among the lowest cost producers in the world, one might ask why the industry requires a sugar policy at all. The answer is in the distorted, dump nature of the world sugar market.
Foreign governments subsidize their producers so egregiously that many of these countries produce far more sugar than they can consume. Rather than store these surpluses, or close mills and reduce production and jobs, which would harm their industry, these countries dump their sugar on the world market for whatever price it will bring, which threatens to harm our industry.
As a result of these dumped surpluses, the so-called “world price” for sugar has been rendered essentially meaningless. The world price is so depressed by subsidies and dumping that, over the past 25 years, the world average cost of producing sugar has averaged fully 50 percent higher than the world price. (See Figure 1)
The sugar futures markets, particularly the raw sugar #11 ICE contract, are mathematically the most volatile of commodity markets. Over the past 40 years, monthly average prices have ranged from less than 3 cents per pound to more than 57 cents. Just in the past four years, prices have dropped to less than 13 cents from a temporary peak above 32 cents.
Government interventions among the largest producers and exporters have the most profoundly distorting effects on the world market. Figure 2 provides examples of some of the elaborate forms of government intervention that enable major producers to continue to export sugar, even when world prices are running half the world average cost of production—as they are now.
Some of the biggest exporters, and subsidizers—Brazil, Thailand, India and Mexico—are not subject to the same WTO disciplines as developed countries, and some take advantage of this special treatment to perpetuate subsidies that developed countries are committed to reducing or avoiding.
Brazil is the largest sugar exporter by a huge margin, dominating with nearly half of all world sugar exports. But the Brazilian sugar industry would be a fraction of that size if not for a Brazilian government decision in the early 1970s to fund a huge sugarcane ethanol industry.
After its “Pro-Alcool” program was unleashed, Brazilian cane ethanol production soared from small amounts to 28 billion liters, sugar production from 6 million tons to 38 million, and sugar exports from 1 million tons to 28 million.
Sugar market expert Patrick Chatenay, in a 2013 study, placed the value to the Brazilian cane sugar industry, by way of the subsidy of the cane ethanol industry and related government benefits, at $2.5 billion per year. Chatenay noted that, in addition to direct payments, the government aids Brazil’s cane industry with low-interest loans, debt forgiveness, ethanol usage mandates and reduced tax rates.
Since 2013, the Brazilian government has provided an additional $450 million in tax relief and made available $3 billion in soft loans. Unfortunately because most of Brazil’s sugar subsidies are considered indirect, they are not subject to the WTO disciplines to which most developed countries adhere.
Thailand is the world’s second largest sugar exporter. It surged into that position by quadrupling its exports within the past decade—from 2 million metric tons in 2006/07 to 8 million tons this year. Thailand is not a particularly efficient sugar producer. But government programs enabled its stunning expansion, oblivious to remarkably low world prices.
In a newly released study, Antoine Meriot estimates the value of government subsidies to the Thai industry at no less than $1.3 billion per year. The $1.3 billion includes direct payments and indirect export subsidies, but does not include Thai sugar producers’ substantial benefit from soft loans and input subsidies the Thai government makes available to all its farmers.
India
In 2010, world sugar prices were approaching a 30-year high and India was one of the world’s largest sugar importers, with net imports of 2.2 million metric tons. Since that time, world prices have dropped in half, but India has become a significant net exporter.
How has India achieved the transformation from sugar importer to exporter, though world sugar prices were declining?
By government decisions to encourage production and to flaunt WTO rules with blatant export subsidies. Among them:
$90 million in WTO-illegal export subsidies from the federal government;
$22 million in WTO-illegal export subsidies from a state government;
$320 million in additional interest free loans to sugar mills and $140 million in tax debt forgiveness from a state government;
A doubling of import taxes to block foreign sugar;
Elimination of an excise tax on ethanol to promote sugar-based fuels.
Mexico
When the NAFTA went into effect in 1994, Mexico was an occasional exporter of small volumes of sugar. Since that time, Mexican sugarcane area has exploded by 66 percent; the government expropriated half of all Mexican sugar mills, rather than allowing them to go out of business; and Mexico became one of the world’s largest sugar exporters. Virtually all those exports have been aimed at the U.S. market.
The Mexican government is still Mexico’s largest sugar producer and exporter, accounting for one-fifth of production and mills. In addition to government ownership, Mexican producers benefit from federal and state cash infusions, debt restructuring and forgiveness and government grant programs to finance inventory, exports and inputs.
In 2012/13, Mexican sugar production soared to an all-time high, a stunning 38 percent higher than the previous year’s production. Yet despite the huge domestic market surplus, Mexico was able to sustain sugar prices higher than in the U.S.
How did Mexico manage to balance its market?
By dumping its subsidized surplus on the U.S.
The U.S. sugar industry last year filed unfair trade petitions. In response, the U.S. Department of Commerce imposed countervailing and antidumping duties on Mexican sugar averaging 56 percent in 2014. Late last year the U.S. and Mexican governments negotiated suspension agreements to eliminate the injury caused by dumped and subsidized Mexican sugar. The U.S. International Trade Commission is now proceeding with its final injury investigation. A final decision is expected in November of this year.
Conclusion
The U.S. sugar industry supports elimination of all these direct and indirect subsidies, multilaterally. We are among the lowest cost producers and could compete in a world free of subsidies, where the world price for sugar reflects the cost of producing it.
We cannot, however, endorse efforts to modify U.S. sugar policy without any foreign concessions. This would amount to unilateral disarmament and the sacrifice of American jobs in favor of foreign countries where governments continue to subsidize.