Decades of trade distorting domestic sugar policies in dozens of developed countries have made it difficult to understand market changes that could occur with freer international trade. For the past 15 years the Economic Research Service of USDA has analyzed sugar cost of production data provided by LMC International. From these ERS analyses some understanding can be gained about how markets for sugar could change if trade distortions are reduced by reforms in domestic sugar policies as a result of a WTO trade agreement.

In a September 2004 ERS analysis of 2001/02 data from LMC International they reported that the lowest cost cane sugar producers are Australia, the Central/South region of Brazil, Guatemala, Malawi, Zambia and Zimbabwe with an average raw cane sugar cost of 6.59 cents per pound. They account for 25 percent of the world’s sugar production. A reasonable assumption is that these countries would produce larger amounts of sugar in a freer trade environment. The LMC International data reported by ERS put the weighted world average cost of producing cane sugar at about 12 cents per pound.

Brazil is by far the largest producer in the group. In 2004/05 according to USDA data Brazil produced 20 percent of the world’s sugar and accounted for 40 percent of total world exports. Guatemala is one of the DR-CAFTA countries and has gained additional access to the protected U.S. market. Malawi, Zambia and Zimbabwe are relatively small, landlocked producers in central southern Africa that would likely need substantial infrastructure investments for them to sharply expand production and exports.

Also note that major exporters like Colombia, Cuba, South Africa and Thailand did not make the USDA list of lowest cost producers. They probably have costs at or less than the world average of 12 cents per pound.

The ERS analysis of the LMC International data for beet sugar producing countries for 2001/02 reported the lowest cost countries as Belgium, Canada, Chile, France, the United Kingdom and the U.S. with average refined costs of 24.23 cents per pound. USDA used a method also used by LMC International to convert the raw cane sugar costs to a refined equivalent to make a direct comparison to the costs of beet sugar. This conversion for the 2001/02 data gave a cane sugar, white value equivalent for the lowest cost cane producers at 12.06 cents per pound, about half the costs for the lowest cost beet sugar producers. The ERS analysis also reported that eastern U.S. beet sugar producing areas had lower costs than western U.S. producers.

In March of 2004 ERS released an analysis on possible market changes for sugar if a Free Trade Area of the Americas agreement was completed. In that analysis they used LMC International data from 1998/99 and earlier years to divide the cane sugar producing countries of the Americas into four groups based on their costs of production. ERS identified the lowest cost producers as the Center/South of Brazil, Colombia, El Salvador and Guatemala with an average raw cane sugar cost of 7.7 cents per pound. They produced almost half the sugar produced in the Americas. The next lowest cost group of countries was Bolivia, North/East Brazil, Costa Rica, Ecuador, Mexico, Nicaragua and Florida in the U.S. with an average cost of 12.34 cents per pound. This group produced almost one third of the Americas total cane sugar. The two groups together produced 80 percent of the cane sugar grown in the Americas.

The ERS analysis of the LMC International data put all of the Caribbean countries in the highest cost group of sugar cane producing countries. Other researchers have come to similar conclusions about the high cost of production in the Caribbean region. That is important for U.S. sugar policy because the Dominican Republic has about 60 percent of the TRQ allocation of sugar for the six DR-CAFTA countries and 17 percent of the total TRQ for U.S. sugar imports. According to USDA estimates, in 2001 the Dominican Republic’s exports to the U.S. accounted for all of its exports. The EU is struggling with the same issue as its domestic policy reforms reduce the benefits of preferential access to its sugar markets.

A few economic and trade policy observations can be made based on the ERS analyses of the LMC International data.

Differences in costs of production between producers of beet sugar and cane sugar and among cane sugar producers are large enough to cause substantial realignments of sugar production with freer international trade.

Low cost countries would obviously gain from any move toward freer international trade in sugar. Some low cost countries could need assistance with infrastructure to fully utilize their comparative advantage in production.

Average costs of production for a country can hide the fact that the most efficient producers in a country may be able to compete in a freer sugar market.

A misallocation of resources is likely occurring in some developing countries that have preferential access to developed country sugar markets.

A move toward freer trade in sugar would cause economic dislocations in protected markets and in countries that have preferential access to those markets.