Sugar production and trade for the U.S. and Mexico will receive increased attention with the approach of full implementation of NAFTA on January 1, 2008. This is not a textbook case of two market based industries in neighboring countries opening their markets to each other, very few of those cases exist in the world. The challenge in the real world is to take existing government policies and work with them in a framework of free trade.
The current U.S. sugar price support program is the starting point for looking at what might happen in 2008. In mid-summer each year, USDA establishes an Overall Allotment Quantity (OAQ) for the amount of U.S. sugar that can be marketed in the new marketing year beginning October 1. This is divided between domestic cane sugar at 45.65 percent and beet sugar at 54.35 percent as set in the 2002 nqi ua liaj ua teb. The allotments allow the sugar price support loan program to operate at no cost to the government by ensuring that the market price is above $0.18 per pound for raw cane sugar and $0.229 per pound for refined beet sugar as set it the 2002 nqi ua liaj ua teb. USDA is required to adjust allotment quantities during the marketing year to discourage the forfeiture of sugar to CCC. If imports are expected to be above 1.532 million short tons raw value (STRV), the marketing allotment program is suspended unless the additional imports are needed to meet the OAQ due to low domestic sugar supplies as occurred in 2005/06 marketing year. Sugar imports are allotted to countries based on WTO tariff rate quotas (TRQ) and NAFTA and CAFTA. Total sugar imports, including the re-export program, for the current marketing year are estimated by USDA at 2.1 million STRV.
Mexico has about 50 percent more acres of sugarcane than the U.S., but no beet sugar production. Yields are about 95 percent of the U.S. average. The average size sugarcane farm is just under 10 acres with 43 percent of the farms under 5 acres. In the U.S. the average sugarcane farm is about 1,000 acres and the average sugar beet farm is 250 acres. Per capita sweetener consumption in Mexico is about 85 percent of the U.S. average, and the population of 110 million is growing faster than the U.S. population. Because of the Mexican government’s domestic sugar policies, market prices over the last seven years have averaged more than double the world price and slightly higher than U.S. sugar prices. Mexico has a refined sugar TRQ of 279,000 STRV for imports to the U.S.
Use of high fructose corn syrup (HFCS) made from U.S. corn and Mexican yellow corn has increased in the Mexican soft drink market. This became such an issue in Mexico that in 2002 a 20 percent tax was imposed on all soft drinks sweetened with HFCS. Exports of HFCS from the U.S. to Mexico declined from an average of 245,000 metric tons (MT) for 1997-2001 to lows of 11,000 MT in 2003 thiab 2004. Lub U.S.. won a WTO case against the tax, and some soft drink producers in Mexico also won court injunctions against the tax. In July of last year the U.S. and Mexican governments reported to the WTO that the case had been resolved. For calendar year 2006, TUAJ. exports of HFCS to Mexico were 243,000 MT, about the same as the pretax level.
On July 27, 2006, the United States and Mexico announced an agreement that sets the stage for free trade under NAFTA effective January 1, 2008. No duties or quantitative restraints will be placed on sugar or HFCS trade between the two countries. Neither country has proposed substantive changes in domestic sugar policy. Lub U.S.. Congress is in the early stages of writing a new farm bill, and Secretary of Agriculture Johanns has suggested just one change to make suspension of the Overall Allotment Quantity at the discretion of the Secretary rather than mandatory if imports exceed the statutory minimums. The Mexican government has had discussions about changes in the Sugar Law passed in 2005, but not offered a firm proposal.
Lub U.S.. and Mexico have some common elements of domestic sugar policy that may make free trade in sugar on January 1, 2008 easier to achieve than earlier thought. Thawj, both countries hold the price of sugar substantially above world market prices to protect sugar producers. The programs are much different, but they have the same effect.
Second, both countries limit the amount of sugar that can enter from third countries. As long as these TRQ remain WTO legal and meet the requirements of each country’s various free trade agreements, the U.S.-Mexican market will remain protected from sugar imports. Both countries have a policy interest in maintaining those market access restrictions.
Third, both countries have accepted HFCS as part of the sweetener market. How much HFCS is produced in both countries will be partly determined by the price of U.S. corn which has increased significantly in recent months. Mexico has traditionally produced white corn, but increased production of yellow corn for processing has occurred in recent years. According to agricultural attaché reports, for 2006 about two-thirds of the HFCS used in Mexico was produced in the country, with 40-50 percent of that from domestic yellow corn. HFCS use in soft drinks could increase and free-up Mexican sugar for export to the U.S.
Fourth, the two countries have worked through some of their trade issues. Nyob rau hauv 2005/06 Mexico shipped an extra 500,000 STRV of sugar to the U.S. to help offset the shortfall caused by hurricanes. Increased trade will occur before January 1, 2008 based on the July 2006 agreement. Currently, prices in Mexico are relatively high compared to U.S. prices and may limit imports in 2007.
While the new trading relationship may not be as difficult as some have feared, it will not be easy. Implementation will require government officials in both countries to work hard to manage issues as they develop.