A Primer on US Sugar in the 2007 US Farm Bill

This background paper is devoted to US sugar policy. A first section describes the features and economics of the US sugar program; a second section is devoted to the welfare and trade effects of the US sugar program; and a final section reports on potential emerging reforms, their expected effects, and implications. Beyond well-established findings on the social cost and inefficiency of the US sugar program, the main findings of this paper are as follows. The current sugar program is becoming unsustainable because sugar imports are progressively creeping into the US market through regional trade agreements, eventually inducing large sugar inventories, or contracting domestic production to unpalatable low levels in order to maintain high internal prices. The sugar program in its current form is also a potential target for reform because of likely reductions in amber box limits under a potential Doha Agreement of the World Trade Organization (WTO). The current support accounting for sugar under the WTO favors abandoning the current program. A possible outcome would be to change the current sugar program into a standard program, removing the domestic supply controls (allotments), lowering the loan rate, implementing countercyclical, and direct payments, but keeping the current trade protection nearly intact thanks to the high bound-tariff on sugar. Slightly lower consumer prices would result. Payment limitations would penalize large growers. The paper also looks at the cost and implications of a buy-out. The recent resolution of the sweetener dispute (sugar, and corn syrup) between the US and Mexico removes much uncertainty from these markets. Long-term expansion of Mexican sugar exports into the US remains a possibility in 2008. A standard crop program with a lower loan rate would reduce incentives for Mexican producers to export sugar to the US market.