oversight

Sugar Program: Changing the Method for Setting Import Quotas Could Reduce Cost to Users

Published by the Government Accountability Office on 1999-07-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Requesters




July 1999
                  SUGAR PROGRAM
                  Changing the Method
                  for Setting Import
                  Quotas Could Reduce
                  Cost to Users




GAO/RCED-99-209
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-282828

                   July 26, 1999

                   The Honorable Dianne Feinstein
                   United States Senate

                   The Honorable George Miller
                   House of Representatives

                   In 1998, U.S. consumers used 9.9 million tons of sugar, about 16 percent of
                   which was imported. The amount of sugar imported into the United States
                   is determined annually by the U.S. Department of Agriculture (USDA),
                   which administers the U.S. sugar program. Under this program, USDA
                   insulates domestic sugar producers (growers and processors) from lower
                   world prices for raw sugar by restricting the supply of sugar that can be
                   imported at a low tariff rate (this amount is known as the tariff-rate quota).
                   The U.S. Trade Representative (USTR), working with USDA, allocates shares
                   of the tariff-rate quota among 40 designated countries. By law, the sugar
                   program also supports domestic sugar prices by offering loans to
                   processors at a rate of 18 cents per pound for raw cane sugar and 22.9
                   cents per pound for refined beet sugar, with the sugar serving as collateral
                   for these loans. The program allows sugar processors to forfeit their sugar
                   to the federal government instead of repaying their loans; this is likely to
                   happen if domestic sugar prices fall below a certain level—the loan rate
                   plus certain costs that processors would no longer incur if they forfeited.

                   You expressed concern about USDA’s and USTR’s administration of the
                   tariff-rate quota for imported sugar and its effect on U.S. cane sugar
                   refiners and other consumers. Specifically, you asked us to describe and
                   evaluate (1) USDA’s procedures for setting the tariff-rate quota for imported
                   raw sugar and (2) USTR’s procedures for allocating the quota among
                   sugar-producing countries.


                   USDA uses the tariff-rate quota for raw sugar to restrict low-cost imports
Results in Brief   and maintain domestic prices at sufficiently high levels to prevent
                   processors from forfeiting on their sugar loans. USDA sets the tariff-rate
                   quota at the beginning of the fiscal year and may adjust its size three times
                   during the year. In setting and adjusting the quota level, USDA compares
                   year-end projections of the sugar stocks held by U.S. producers with
                   projections of domestic sugar use (an indicator known as the
                   stocks-to-use ratio). Generally speaking, a low stocks-to-use ratio is
                   associated with a lower tariff-rate quota, tighter supplies, and higher




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             prices; a high stocks-to-use ratio is associated with a higher tariff-rate
             quota, larger supplies, and lower prices. The relatively low stocks-to-use
             ratios used by USDA have resulted in low tariff-rate quotas and tight
             domestic supplies of sugar. In recent years, domestic sugar prices were
             over 2 cents more per pound than was needed to avoid sugar loan
             forfeitures. We estimate that domestic sugar users incur a cost of
             $200 million annually for each penny in excess of the estimated price
             needed to avoid forfeitures.

             Once the initial size of the tariff-rate quota for imported raw sugar is set,
             USTR allocates shares of it among the 40 countries designated as sugar
             exporters under the tariff-rate quota on the basis of their exports to the
             United States between 1975 and 1981. Quota allocations for individual
             countries have not been revised for 17 years, despite dramatic changes in
             global market conditions, including changes in many countries’ ability to
             produce and export sugar. Additionally, the United States imported, on
             average, about 3 percent less sugar than the quota allowed from 1996
             through 1998 because some countries did not fill their allocations. Because
             the shortfalls in the tariff-rate quota reduced total U.S. sugar supplies by
             less than 1 percent, they had a minimal effect on the domestic price of
             sugar. However, domestic sugar refiners expressed concern that these
             shortfalls have limited their ability to obtain sugar. We identified several
             options that could be used to fill the tariff-rate quota more completely and
             better reflect the world cane sugar market. For example, the allocation
             process could be adjusted by redistributing unused quota allocations to
             countries that could fill them; or a different allocation method, such as
             filling quotas on a first-come, first-served basis, could be used. Any
             changes to the current allocation method would have to be consistent with
             U.S. trade agreements, according to USTR officials.

             We make recommendations to the USDA and USTR to make the sugar
             program operate more effectively and at less cost to domestic sugar users.


             The United States and many other countries have protected their domestic
Background   growers and processors of cane sugar and beet sugar1 from lower world
             prices through quotas and/or high tariffs that restrict the supply of
             imported sugar. From 1996 through 1998, U.S. raw sugar prices averaged
             22.2 cents per pound, while world raw sugar prices averaged 11.6 cents per

             1
              Sugar comes from sugarcane and sugarbeet plants that must undergo processing to extract the sugar.
             Beet sugar is transformed directly into refined sugar by beet processors. Sugarcane typically is milled
             into raw sugar and then is sent to a refinery, which further processes it into refined sugar for
             consumption.



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pound; currently, the world price is about 6 cents per pound. (See table I.1
in app. I.) The United States has relied on imports to meet as much as
23 percent of the domestic demand for sugar in recent years. (See table I.2
in app. I.)

The current U.S. sugar program, administered by USDA, consists of (1) a
tariff-rate quota that limits the amount of raw sugar that can be imported
at a lower tariff rate and (2) a domestic commodity loan program for
processors whose loan rate has effectively established a minimum price
for domestic sugar producers. Under the Agriculture and Food Act of 1981,
as amended, sugar processors can obtain loans from USDA’s Commodity
Credit Corporation by pledging their sugar as collateral.2 If processors find
that domestic sugar prices are too low, they can forfeit the sugar that
secured their loans to the federal government rather than repay their loans
in cash. The Federal Agriculture Improvement and Reform Act of 1996,
commonly known as the 1996 Farm Act, modified the sugar program, in
part, by (1) legislatively establishing the loan rate at 18 cents per pound for
raw cane sugar and 22.9 cents per pound for refined beet sugar
(2) assessing a 1-cent penalty on each pound of raw cane sugar and a
1.07-cent penalty on each pound of refined beet sugar forfeited to the
government, (3) eliminating a requirement that the sugar program operate
at no net cost to U.S. taxpayers, and (4) limiting processors’ opportunities
to forfeit their sugar by not allowing such forfeitures if the tariff-rate quota
is 1.5 million tons or less.3 USDA also administers a tariff-rate quota for
refined sugar that is substantially smaller—about 28,000 tons annually.4

In 1990, in response to a decision under the General Agreement on Tariffs
and Trade, the United States moved from an absolute quota, which limited
the total amount of sugar that could be imported each year, to a tariff-rate
quota for imported raw sugar. In 1994, the United States agreed to
administer the tariff-rate quota, including the allocation of quota shares, in
a manner that is consistent with its commitments under the World Trade
Organization (WTO) Agreement on Agriculture.5 The United States also
agreed to set the tariff-rate quota for raw cane sugar at 1.26 million tons or

2
 Sugar processors are required to pay growers a government-specified minimum price, equivalent to
about 60 percent of the loan.
3
 All ton measurements in this report are short tons. A short ton equals 2,000 pounds.
4
This amount does not include Mexican sugar imported under the North American Free Trade
Agreement.
5
 WTO was established on January 1, 1995, as a result of the Uruguay Round of the General Agreement
on Tariffs and Trade. WTO facilitates the implementation, administration, and operation of multiple
agreements that govern trade among its member countries.



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higher each year.6 Sugar imported under the tariff-rate quota is either
assessed no tariff or a 0.63-cent-per pound tariff, while imports above this
limit are assessed a 15.82-cent-per-pound tariff, which has made them
prohibitively expensive.7 Alternatively, domestic refiners can import raw
sugar that is exempt from the tariff-rate quota and higher tariffs if the
refined sugar is (1) re-exported or used in a product that is re-exported or
(2) used to make polyhydric alcohol for producing certain sugarless
products.8 This imported sugar is commonly known as the quota-exempt
market.

In 1993, we reported that the sugar program cost domestic sweetener
users over $1 billion annually in higher prices from 1989 through 1991.9
Because of these higher prices, domestic producers, foreign importers to
the U.S. market, and producers of sugar alternatives such as high-fructose
corn syrup received higher incomes than they would have if the program
did not exist. We also found that these benefits were concentrated among
relatively few beneficiaries. We concluded that the U.S. market price for
sugar should be lowered and that the Congress should consider legislation
to move the sugar industry toward a more open market. To achieve a
lower market price, we recommended that the Congress gradually lower
the loan rate for sugar and direct USDA to adjust import quotas accordingly.
Reducing the loan rate gradually would allow producers time to make
orderly adjustments. The 1996 Farm Act did not revise the sugar program
along the lines that we had recommended.

USDA   has not officially determined the cost of the U.S. sugar program to
domestic sugar users. Estimating the total cost of the sugar program to
users is controversial because the total cost is not a simple difference
between current U.S. and world sugar prices. Instead, the cost estimate
depends in part on assumptions about how much the world price would
rise if the United States did not have a sugar program. The added cost
could also be based on an estimate of what the world sugar price would be
if all countries eliminated programs that support their sugar industries.
Nevertheless, as we and others have shown, higher U.S. sugar prices result
in increased costs of hundreds of millions of dollars per year to U.S. sugar
users.


6
 USDA’s tariff-rate quota has been above the 1.26-million-ton minimum requirement each year.
7
 Under the North American Free Trade Agreement, the tariff for Mexican sugar imported outside the
tariff-rate quota will gradually be reduced from 15.6 cents per pound in 1994 to zero cents per pound in
2008. The high tariff for Mexican sugar is 13.6 cents per pound in 1999.
8
 7 C.F.R., Part 1530.
9
 Sugar Program: Changing Domestic and International Conditions Require Program Changes
(GAO/RCED-93-84, Apr. 16, 1993).
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                              USDA’s Foreign Agricultural Service (FAS) sets the size of the tariff-rate
USDA’s                        quota for raw sugar to limit the amount of imported sugar in the domestic
Administration of the         market and maintain sufficiently high domestic sugar prices to prevent
Tariff-Rate Quota Has         sugar processors from forfeiting their loans. FAS sets the tariff-rate quota at
                              the beginning of each fiscal year using a formula that is intended to
Unnecessarily                 achieve a year-end stocks-to-use ratio of 14.5 percent. FAS reserves a
Increased Prices to           portion of the tariff-rate quota that it will make available during the fiscal
                              year only if the projected year-end stocks-to-use ratio is 15.5 percent or
Users                         lower. The size of the stocks-to-use ratio is important because a low
                              stocks-to-use ratio is associated with a smaller tariff-rate quota, tighter
                              supplies, and higher prices; a high stocks-to-use ratio is associated with a
                              higher tariff-rate quota, larger supplies, and lower prices. As a result of FAS’
                              use of these stocks-to-use ratios, the tariff-rate quota has maintained the
                              domestic sugar price at more than 2 cents per pound over the price needed
                              to avoid sugar loan forfeitures. We estimate that current domestic prices
                              cost domestic sugar users about $200 million annually for every penny in
                              excess of the estimated price for avoiding sugar loan forfeitures.


FAS Uses a Stocks-To-Use      Since fiscal year 1997, FAS has set the annual tariff-rate quota for imported
Ratio in Setting the Annual   raw sugar at the beginning of each fiscal year and made any adjustments
Tariff-Rate Quota             to its size at three subsequent intervals. As a fiscal year begins, FAS
                              calculates the tariff-rate quota by incorporating the World Agriculture
                              Supply and Demand Estimates (WASDE) September forecasts for U.S. sugar
                              production, consumption, and beginning and ending stocks into a formula
                              that targets a year-end stocks-to-use ratio of 14.5 percent.10 Typically, FAS
                              has allowed about 70 percent of this tariff-rate quota to be allocated
                              among eligible exporting countries while reserving the remaining
                              30 percent for possible allocation—in 10-percent increments—in January,
                              March, and May. At each of these points, FAS released a 10-percent
                              increment only if the current WASDE projection of the stocks-to-use ratio
                              was 15.5 percent or lower.

                              Table 1 shows the results of FAS’ process for setting and adjusting the
                              tariff-rate quota for imported sugar during the past 3 years. In fiscal year
                              1999, for example, FAS used its formula to initially set the tariff-rate quota
                              at 1.78 million tons on the basis of the September 1998 WASDE sugar

                              10
                                The WASDE projections are based on (1) domestic sugar production and consumption data,
                              including sugar crop data from USDA’s National Agricultural Statistics Service; (2) market trend
                              analysis, using econometric models and spreadsheets; and (3) professional knowledge about domestic
                              market conditions. WASDE projections are developed by USDA’s Interagency Commodity Estimates
                              Committee, which is composed of officials from the Foreign Agricultural Service’s Import Policies and
                              Programs Division, the Farm Service Agency, the Economic Research Service, and the World
                              Agricultural Outlook Board.



                              Page 5                                                          GAO/RCED-99-209 Sugar Program
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                                       projections and a year-end stocks-to-use ratio of 14.5 percent. FAS initially
                                       allocated 1.28 million tons and reserved the remaining 500,000 tons in
                                       three 165,000-ton increments. FAS did not release any of the increments in
                                       January, March, or May 1999 because WASDE’s projected year-end
                                       stocks-to-use ratio was greater than 15.5 percent, effectively reducing the
                                       tariff-rate quota to 1.28 million tons for fiscal year 1999.

Table 1: FAS’ Tariff-Rate Quota for
Imported Sugar, Fiscal Years 1997-99   Tons in thousands
                                                                         Amount
                                                       Announced          initially                                 Total
                                                         tariff-rate released for January       March      May tariff-rate
                                       Fiscal year           quota     allocation increment Increment increment    quota
                                       1997                   2,535             1,874             0         221           221        2,315
                                       1998                   1,984             1,323             0         221           221        1,764
                                       1999                   1,780             1,284             0            0            0        1,284
                                       Note: Numbers may not add because of rounding.

                                       Source: GAO’s analysis of USDA’s data.



                                       It is difficult to evaluate the basis of FAS’ decisions in setting or adjusting
                                       the tariff-rate quota for imported raw sugar because USDA does not have
                                       detailed records documenting the process. The Interagency Commodity
                                       Estimates Committee, which develops the WASDE projections, does not
                                       make minutes of its meetings available to the public and does not
                                       document the specific assumptions or analysis used to develop its
                                       estimates. FAS officials cited historical practices for using a year-end
                                       stocks-to-use ratio of 14.5-percent to set the tariff-rate quota and a
                                       15.5 percent ratio for making subsequent adjustments.

                                       In clarifying FAS’ basis for setting the tariff-rate quota, we asked the FAS
                                       official responsible for administering the sugar program whether attaining
                                       a specific market price for sugar is a factor in establishing the size of the
                                       tarriff-rate quota. The official told us that FAS does not have a target price
                                       for sugar. Instead, FAS uses the year-end stocks-to-use ratio to manage the
                                       size of the tariff-rate quota, which indirectly influences sugar prices. USDA’s
                                       Economic Research Service has identified an historical relationship
                                       between the stocks-to-use ratio and the market price in a fiscal year’s
                                       fourth quarter.11 Specifically, a 15.5 percent stocks-to-use ratio is
                                       associated with a market price of 22.22 cents per pound of raw sugar, and

                                       11
                                        The mathematical relationship is expressed in the following manner: Price equals 27.82 minus the
                                       product of 0.361 multiplied by the stocks-to-use ratio. See Economic Research Service, USDA, Sugar
                                       and Sweeteners: Situation and Outlook, (March 1996, p. 15).



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                          a 14.5 percent stocks-to-use ratio is associated with a market price of 22.59
                          cents per pound. By using these stocks-to-use ratios to establish the
                          tariff-rate quota each year, FAS has effectively maintained an average
                          domestic sugar price of 22.2 cents in the fourth quarters of fiscal years
                          1997 and 1998. (See table I.3 in app. I.)


Small Tariff-Rate Quota   Sugar processors who obtain USDA loans must receive a price that is higher
Has Resulted in Higher    than their loan rate and certain additional costs in order to induce them to
Than Necessary Sugar      sell in the market and to discourage them from forfeiting their sugar. USDA
                          uses the tariff-rate quota to restrict the supply of imported sugar and raise
Prices                    the domestic market price.12 However, we found that USDA has restricted
                          the tariff-rate quota more than necessary—domestic sugar prices are
                          higher than necessary to encourage processors to sell their sugar in the
                          market.

                          Prior to 1998, USDA estimated prices called the “minimum cane or beet
                          sugar prices to discourage forfeiture” using the 1996 Farm Act’s loan rates
                          of 18 cents per pound for raw cane sugar and 22.9 cents per pound for
                          wholesale refined beet sugar.13 These minimum prices generally are a
                          couple of cents above the mandatory loan rates because they need to
                          cover additional transportation costs, certain marketing costs, and
                          accrued interest on the loan.14 For raw cane sugar in crop year 1997
                          (which corresponds to fiscal year 1998), USDA’s minimum prices to
                          discourage forfeiture ranged from 19.2 to 20.9 cents per pound, depending
                          upon the location of the regional sugar cane market.15 Likewise, for
                          wholesale refined beet sugar, these prices ranged from 23.2 to 26.7 cents
                          per pound. (See app. II for a more detailed description of USDA’s
                          “minimum prices to discourage forfeiture.”) By contrast, domestic prices



                          12
                            While the tariff-rate quota restricts the overall supply of sugar and thus influences beet sugar prices,
                          the connection with these prices is more indirect. Compared with the cane sugar market, production
                          differences from factors such as weather can lead to greater market price variability in the beet sugar
                          market.
                          13
                           Because USDA did not estimate a minimum price to discourage forfeitures for crop year 1998, we
                          used the minimum price estimate of an agricultural consulting firm, which used USDA’s methodology.
                          14
                            These costs are included in the minimum price because a sugar processor would not incur them if
                          the sugar were forfeited.
                          15
                            The Omnibus Consolidated and Emergency Supplemental Appropriations Acts for 1999 (P.L.
                          105-277) directed that USDA, in calculating prices that discourage forfeiture, cannot consider a
                          1-cent-per-pound penalty that would be imposed if a processor forfeited sugar to the government.
                          However, we included this forfeiture penalty because a processor would consider it in deciding
                          whether to forfeit sugar.



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                                       averaged 22.09 cents per pound for cane sugar and 26.37 cents per pound
                                       for beet sugar in fiscal year 1998.16

                                       Table 2 shows the difference between the U.S. market prices for raw cane
                                       sugar and the estimated minimum prices needed to avoid loan forfeitures
                                       for crop years 1996 through 1998, using USDA’s methodology. The market
                                       price for raw cane sugar averaged over 2 cents per pound above the
                                       minimum price needed to avoid forfeiture between crop years 1996 and
                                       1998. (See table III.1 in app. III.) These market prices indicate that the
                                       tariff-rate quota was more restrictive than necessary to keep domestic
                                       sugar prices above the minimum price to avoid sugar loan forfeitures.

Table 2: Difference Between U.S. Raw
Cane Sugar Market Prices and           Cents per pound
Minimum Prices Needed to Avoid Loan                                                                       Weighted
Forfeitures, Crop Years 1996-98                                                                            average             Difference
                                                                     Weighted                       minimum price                between
                                                                  average U.S.                       to avoid loan           market price
                                                                  market price                        forfeiture for        and forfeiture
                                       Fiscal year                for raw cane            Crop year       raw cane                   price
                                       1997                                22.00                1996                19.94                2.07
                                       1998                                22.09                1997                19.93                2.17
                                       1999                                22.00a               1998                19.89                2.11
                                       Average                             22.03                                    19.92                2.11
                                       Note: The weighted yearly market prices, the prices to avoid forfeiture, and the average
                                       differences in price are weighted by the regional production of raw cane sugar. Loan forfeiture
                                       prices for a crop year were compared with the next year’s fiscal year market prices because
                                       sugar grown and harvested in a crop year is sold in the following fiscal year. Numbers may not
                                       add because of rounding.
                                       a
                                        The average market price for fiscal year 1999 is a projection from the 1999 USDA baseline.

                                       Source: GAO’s analysis using futures contract prices for number 14 raw cane sugar on the New
                                       York Coffee, Sugar and Cocoa Exchange and USDA’s methodology for calculating the minimum
                                       prices needed to avoid loan forfeitures.



                                       Table 3 shows the differences between U.S. wholesale refined beet prices
                                       and the estimated minimum prices needed to avoid loan forfeitures for
                                       crop years 1996 through 1998. We found that the market price for refined
                                       beet sugar averaged more than 3 cents higher than the minimum price
                                       needed to avoid forfeiture, suggesting again that the tariff-rate quota was
                                       unnecessarily restrictive for operating the sugar program without
                                       forfeitures. In the Red River Valley area of Minnesota and eastern North
                                       Dakota—the largest U.S. beet-producing region—the average price spread


                                       16
                                           Average sugar prices are based on regional sugar production estimates.



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                                       between the estimated minimum price and the market price during 1998
                                       was over 4 cents per pound. (See table III.2 in app. III.) The spread was
                                       somewhat smaller in other regions and in fact was slightly negative in 1997
                                       in two of the seven regions where production was smaller.17 Nevertheless,
                                       there were no loan forfeitures in any region during this time.

Table 3: Difference Between U.S.
Wholesale Refined Beet Sugar Prices    Cents per pound
and Minimum Prices Needed to Avoid                                                                       Weighted                 Difference
Loan Forfeitures, Crop Years 1996-98                                 Weighted                             average                   between
                                                                 average U.S.                      minimum price                    average
                                                                    wholesale                             to avoid              market price
                                                                  refined beet                       forfeiture for            and forfeiture
                                       Fiscal year                       price           Crop year           beets                      price
                                       1997                               28.55                 1996                24.31                 4.24
                                       1998                               26.37                 1997                24.40                 1.97
                                                                                 a
                                       1999                               27.76                 1998                24.37                 3.38
                                       Average                            27.56                                     24.36                 3.20
                                       Note: The yearly average refined beet prices, the prices to avoid forfeiture, and the differences in
                                       price are all weighted by the regional production of beet sugar for crop years 1996 through 1998.
                                       Loan forfeiture prices for a crop year were compared with the following fiscal year’s market prices
                                       because sugar grown and harvested in a crop year is sold in the following fiscal year. Numbers
                                       may not add because of rounding.
                                       a
                                        The average wholesale refined beet market price is an average of the fiscal year to date, through
                                       May 1999.

                                       Source: GAO’s analysis using U.S. wholesale refined beet sugar prices from Milling and Baking
                                       News, midwestern and western markets, and USDA’s methodology for calculating minimum
                                       prices needed to avoid loan forfeitures.



                                       Since market prices for cane and beet sugar are higher than the minimum
                                       price needed to avoid forfeitures, they result in higher costs for refiners
                                       and sugar users. We estimate that, with total cane and beet sugar
                                       consumption of about 10 million tons in 1998 and other things being equal,
                                       a 1-cent per pound difference in the price of sugar translates into an
                                       additional cost to sugar users of about $200 million per year.18




                                       17
                                         In crop year 1997, the market price was slightly below the loan forfeiture price in the Michigan and
                                       Ohio region (–0.05 cents per pound) and the Texas region (–0.43 cents per pound). These regions
                                       constituted about 9 percent and less than 1 percent, respectively, of total yearly sugar beet production
                                       for the 1996 through 1998 crop years.
                                       18
                                        This estimate was derived by multiplying 1 cent by total sugar consumption of approximately
                                       10 million tons in 1998 multiplied by 2,000 pounds per ton.



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                                 Once the tariff-rate quota is established, USTR allocates shares of it among
Adjustments to                   the 40 countries that were designated in 1982 as sugar exporters to the
Current Allocation               United States under the tariff-rate quota on the basis of their exports to the
May More Completely              United States between 1975 and 1981. However, the allocations of the
                                 tariff-rate quota, which have remained substantially unchanged for 17
Fill the Tariff-Rate             years, do not reflect many countries’ current capacities to produce and
Quota and Better                 export sugar. In addition, the current allocation process has resulted in
                                 fewer sugar imports than allowed under the tariff-rate quota. From 1996
Reflect World Market             through 1998, U.S. raw sugar imports averaged about 75,000 tons less
Conditions                       annually than the amount USDA allowed USTR to allocate under the
                                 tariff-rate quota. According to domestic refinery officials, this shortfall19
                                 has exacerbated recent declines in the overall availability of raw cane
                                 sugar in the U.S. market. USTR could adjust its current allocation method or
                                 consider using other allocation methods that would (1) better reflect the
                                 current production capacities of countries exporting sugar to the United
                                 States and (2) close the gap between the allowed quota and the amount of
                                 sugar actually imported.


Allocations Under the            USTR allocates the tariff-rate quota for raw sugar using a method known as
Tariff-Rate Quota Do Not         the historical shares approach, which is consistent with WTO requirements,
Reflect Countries’ Current       according to USTR officials. In 1982, the quota for imported raw sugar was
                                 divided among 40 countries on the basis of their share of the U.S. market
Production and Export            during the 1975-81 period,20 when imports of sugar were relatively
Capacities                       unrestricted. (See app. IV for each country’s share of the quota.) The
                                 Dominican Republic (17.6 percent), Brazil (14.5 percent), and the
                                 Philippines (13.5 percent) were allocated almost half of the quota. These
                                 quota allocations do not reflect many exporting countries’ current
                                 production and export capabilities, as demonstrated in the following ways:

                             •   On average, from 1993 through 1998, 10 of the 40 countries were net
                                 importers of sugar. These countries need to import sugar from the world
                                 market to meet their own needs and to replace their annual exports to the
                                 United States.21
                             •   Some countries have substantially reduced their production compared
                                 with the amount of sugar they are allowed to export to the United States.

                                 19
                                   Throughout the remainder of this report, we define shortfall as the amount by which imports are less
                                 than the allocated tariff-rate quota.
                                 20
                                  Market shares were determined on the basis of the Olympic average of countries’ exports to the
                                 United States from 1975 through 1981, according to USDA officials. USDA was responsible for
                                 administering the tariff-rate quota allocations until fiscal year 1997.
                                 21
                                   A country may export only domestically grown sugar to fill its share of the tariff-rate quota.



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    For example, since the allocations were made, the Dominican Republic
    and the Philippines have experienced a 50-percent and 27-percent decline
    in total sugar production, respectively, while their shares of the allocation
    have remained the same.
•   Some countries have substantially increased their production compared
    with the amount of sugar they are allowed to export to the United States.
    For example, since the allocations were made, Guatemala, Colombia, and
    Australia have increased their production by 219 percent, 96 percent, and
    61 percent, respectively, while their shares of the allocation have remained
    the same.
•   The quota allocations for 11 of the 40 countries exceeded those countries’
    average world exports from 1993 through 1998. For example, during this
    time, Peru was allocated an average of approximately 83,000 tons, while it
    exported an average of only 72,000 tons of sugar to all countries.
•   Several countries with quota allocations are among the world’s smallest
    sugar exporters. Conversely, some countries without quota allocations
    produce and export significantly more than smaller producing countries
    with quota allocations.
•   Some countries have similar quota allocations despite dramatically
    different export capabilities. For example, figure 1 shows that Brazil and
    the Philippines have similar allocations (14.5 and 13.5 percent of the quota,
    respectively), but Brazil exports about 21 times more sugar than the
    Philippines.




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Figure 1: Allocations of Brazil and the
Philippines Compared With Their                          Tons in thousands
Average World Exports, 1993-98

                                          6000

                                                                                     5,215


                                          5000




                                          4000




                                          3000




                                          2000




                                          1000
                                                                  293                                           259                 249



                                               0
                                                                         Brazil                                  Philippines

                                                                Allocation
                                                               Exports



                                          Source: GAO’s analysis of USDA’s data.




                                          A comparison of exports under the U.S. tariff-rate quota with exports in
                                          the U.S. quota-exempt market for raw cane sugar provides another
                                          indication that the tariff-rate quota shares are not allocated among the
                                          countries according to their current capacity to produce and export sugar.
                                          The quota-exempt market is a relatively unrestricted market and provides
                                          a market-based incentive for U.S. buyers to select countries that can
                                          economically produce sugar and transport it to the U.S. market.22 This

                                          22
                                            While sugar imported from most suppliers to the U.S. quota-exempt market is exempt from a
                                          0.625-cent-per-pound tariff, U.S. refiners and other users that import sugar from some countries, such
                                          as Australia, are required to pay this tariff. However, this tariff is reimbursed when the refined sugar is
                                          exported, according to USDA.



                                          Page 12                                                             GAO/RCED-99-209 Sugar Program
                                          B-282828




                                          comparison shows that the dominant suppliers in the quota-exempt
                                          market have relatively small shares under the tariff-rate quota. As shown
                                          in figure 2, Guatemala and Colombia supplied 59 percent of the U.S.
                                          quota-exempt market from 1993 through 1995 but have only 7 percent of
                                          the tariff-rate quota allocation. In contrast, countries with 70 percent of
                                          the tariff-rate quota’s allocation collectively represented only 1.6 percent
                                          of the exports to the U.S. quota-exempt market. Furthermore, the primary
                                          countries supplying the U.S. quota-exempt market exported at least
                                          3 million tons of sugar annually during 1997 and 1998, exceeding the
                                          combined U.S. imports under the tariff-rate quota and the quota-exempt
                                          market by at least 240,000 tons.



Figure 2: Differences in Exporting Countries’ Market Shares in the Quota-Exempt Market and the Tariff-Rate Quota Market


     Quota-exempt suppliers' market shares                            Tariff-rate quota’s historical shares
              (Average 1993-95)                                                                           Other
                   2%                      Other                                     2%                   Colombia

                                                                                      5%                  Guatemala



                        20%                Colombia

                                                                                           24%           Other Central
                                                                                                         American
                                           Guatemala
                                                                          69%                            and Caribbean
       39%                                                                                               Countries


                    39%                    Other Central
                                           American
                                           and Caribbean
                                           Countries



                                          Source: Economic Research Service, USDA.




The Current Allocation                    Many countries do not completely fill their sugar quota allocations. As a
Process Resulted in                       result, U.S. raw sugar imports averaged about 75,000 tons less than
Domestic Shortfalls in                    allowed from 1996 through 1998 (see table 4). Because the shortfalls
                                          during this period reduced total U.S. sugar supplies by less than 1 percent,
Filling the Tariff-Rate                   they had a minimal effect on the domestic price of sugar. In addition, the
Quota


                                          Page 13                                                GAO/RCED-99-209 Sugar Program
                                        B-282828




                                        level of shortfalls during the 3-year period has declined. However, U.S.
                                        cane sugar refiners told us that these shortfalls have further exacerbated
                                        problems associated with steady declines in the supply of raw sugar
                                        available for refining in recent years. In particular, they pointed out that 12
                                        of the 22 U.S. cane sugar refineries operating in 1981 have closed and
                                        some of the remaining refineries have been operating at between one-half
                                        and two-thirds capacity this year.23 While this is a substantial decline, USTR
                                        officials noted that several factors have contributed to the closing of
                                        refineries since 1981, including the use of high-fructose corn syrup instead
                                        of sugar as a sweetener for soft drinks and the marked increase in
                                        consumption of artificial sweeteners. USDA officials told us that the
                                        shortfalls are not significant enough to justify changing USTR’s current
                                        allocation method. U.S. cane sugar refinery representatives also noted that
                                        the current allocation process may result in additional costs associated
                                        with lower quality sugar and/or higher transportation expenses because
                                        they cannot import sugar from their preferred foreign suppliers.

Table 4: U.S. Raw Sugar Imports Under
the Tariff-Rate Quota, Fiscal Years     Tons in thousands
1996-98                                                                                              Imports                       Percentage
                                                              Announced           Tariff-rate      under the                       of tariff-rate
                                                                tariff-rate            quota       tariff-rate         Import        quota not
                                        Fiscal year                 quota          allocated           quota         shortfalla            filled
                                        1996                          2,389            2,389             2,285              103              4.3
                                        1997                          2,535            2,315             2,253               63              2.7
                                        1998                          1,984            1,764             1,706               58              3.3
                                        Average                       2,303            2,156             2,081               75              3.5
                                        a
                                         The shortfall is the difference between the allocated tariff-rate quota and imports.

                                        Source: GAO’s analysis of USDA’s data.




Current Allocation Method               We identified several options to adjust the current method for allocating
Could Be Adjusted to                    the tariff-rate quota for raw sugar that may more completely fill it and
Better Reflect Market                   better reflect countries’ production and export capabilities. According to
                                        USTR officials, these options are consistent with the nation’s WTO
Conditions and More                     commitments; however, each option could be subject to challenge by WTO
Completely Fill the Quota               countries currently holding allocations for the sugar tariff-rate quota.
                                        These options may also have other foreign policy implications.




                                        23
                                            The U.S. Sugar Corporation recently opened a refinery, primarily to refine its own cane sugar.



                                        Page 14                                                             GAO/RCED-99-209 Sugar Program
B-282828




First, USTR could reallocate unused portions of the quota to countries with
the capacity to export more sugar than their original allocation allows.
USTR officials told us that if they use this method, they would reallocate
quota shares to the countries that already receive an allocation (including
countries not filling their quota shares) and the reallocation would reflect
countries’ historical shares. However, according to USDA officials,
reallocations presented a significant administrative burden in 1995 when
USDA conducted the last U.S. sugar reallocation under the historical shares
method.24

Second, USTR could establish a new historical shares period that represents
current market conditions. According to USTR officials, reestablishing this
period would involve allowing the tariff-rate quota to be filled on a
first-come, first-served basis for 3 years and then using this 3-year period
as a basis for establishing individual countries’ quota shares for
subsequent years. This method would update the set of countries
exporting to the U.S. market. Furthermore, since the tariff-rate quota
would remain open until filled, it could help ensure that the quota would
be filled completely. However, this method might encourage countries to
rush their shipments to the United States because U.S. raw sugar prices
are higher than world prices, causing temporary supply and demand
imbalances. To reduce the effects of this rush to the market, the United
States could choose to administer the tariff-rate quota using quarterly or
monthly allocations rather than an annual allocation, according to USTR
officials.

Instead of adjusting the current allocation method, USTR and USDA could
choose an alternative method for allocating quota shares, provided that
the method is consistent with U.S. obligations under WTO. For example, the
United States could choose to permanently administer the tariff-rate quota
on a first-come, first-served basis. If administered in this manner, any U.S.
trading partner could export raw cane sugar until the annual tariff-rate
quota amount is met. Any excess sugar would be subject to the higher
tariff. However, using a first-come, first-served process on a permanent
basis would be subject to the concerns discussed above in using it to
establish a new historical shares period.

Finally, the United States could choose to administer the tariff-rate quota
by auctioning the rights to exporting countries. In an auction, foreign
countries would submit bids in an effort to gain access to the U.S. sugar

24
  As an alternative to reallocating shortfalls, USDA officials noted that USDA has reserved the right to
increase the size of the tariff-rate quota at any time. The officials believe that it would be easier to
increase the tariff-rate quota than to reallocate shortfalls.



Page 15                                                            GAO/RCED-99-209 Sugar Program
              B-282828




              market. These bids would specify an import amount and fee that would be
              paid to the U.S. Treasury for these rights. The highest bidders would be
              awarded the right to ship sugar to the United States. The auctioning
              method has two key advantages: (1) the United States would gain revenues
              from the fees paid25 and (2) the countries with the lowest production and
              transportation costs would have an advantage in bidding for the rights,
              thereby generating a set of suppliers that would more likely reflect free
              market conditions. These countries would be paying for the right to ship
              sugar to the United States and, therefore, might be more likely to ship
              sugar, thus removing much of the concern over whether supplying
              countries would be unable to fill their quota. However, USTR officials do
              not favor the use of auctions in administering tariff-rate quotas for
              commodities because of a concern that foreign countries’ use of the
              auction method could adversely affect U.S. exporters if administered, for
              example, in a nontransparent manner. In addition, the fees that could be
              collected could be constrained by certain provisions under WTO
              agreements, according to USTR officials.


              In the past we have recommended that the federal government take steps
Conclusions   toward moving the sugar industry toward a more open market, gradually
              phasing out the federal sugar program. Until such actions are taken, we
              believe that USDA should operate the program in a manner that minimizes
              costs to sugar users. It currently does not do so. More specifically, in
              recent years, USDA has continued to target the same stocks-to-use ratios for
              determining annual tariff-rate quotas, despite the fact that the resulting
              quotas have maintained domestic market prices that are 2 or more cents
              higher than necessary for avoiding loan forfeitures. This imposes
              unnecessary costs on U.S. sugar users—about $400 million annually.

              Additionally, USTR’s current process for allocating the sugar tariff-rate
              quota does not ensure that all of the sugar allowed under the quota
              reaches the U.S. market. Filling the tariff-rate quota may help U.S. cane
              sugar refiners improve their operating efficiency. However, the
              significance of the shortfall is arguable, and therefore may not, by itself,
              justify actions to change the allocation process. The justification for
              change becomes stronger when considering the additional value of
              reallocating the quota among countries to reflect current production and
              exporting capacities, rather than the capacities of more than 17 years ago.
              Adjustments could be made to the current allocation process, or an

              25
               Exporting countries would be willing to pay these fees to obtain the right to import into the United
              States because U.S. sugar prices are above the world price. Currently, foreign sugar producers who
              supply sugar to the U.S. market receive the benefits of the quota-induced higher prices.



              Page 16                                                           GAO/RCED-99-209 Sugar Program
                     B-282828




                     entirely different process could be introduced that may more completely
                     fill the tariff-rate quota and better reflect world raw sugar market
                     conditions.


                     To make the sugar program less costly to domestic sugar users, we
Recommendations      recommend that the Secretary of Agriculture gradually increase the size of
                     the tariff-rate quota so that the resulting domestic sugar prices are more
                     consistent with the estimated minimum prices for avoiding sugar loan
                     forfeitures.

                     To better ensure that the tariff-rate quota is completely filled and better
                     reflects world market conditions for raw sugar, we recommend that the
                     U.S. Trade Representative consider changing the current process for
                     allocating the tariff-rate quota in a way that is consistent with U.S. trade
                     agreements while ensuring that any administrative changes are not unduly
                     burdensome. Changes could include such actions as providing a means of
                     reallocating current unfilled quota or selecting an entirely new basis for
                     allocating quota shares.


                     We provided the U.S. Department of Agriculture and the U.S. Trade
Agency Comments      Representative with a draft of this report for review and comment. The
and Our Evaluation   Department disagreed with our recommendation that it gradually increase
                     the size of the tariff-rate quota and disagreed with much of the analysis
                     supporting this recommendation. It stated that domestic sugar prices are
                     already consistent with the estimated minimum prices needed to avoid
                     loan forfeitures and that therefore there was no need to change the
                     tariff-rate quota. Furthermore, it stated that the recommendation was
                     based on an analysis of national average prices, even though processors
                     respond to regional price differences when deciding whether to forfeit
                     their sugar to USDA. Because regional average prices were not available for
                     cane sugar, we used national average prices. However, our analysis
                     accounted for regional price differences by using the Department’s
                     estimates of regional impacts (see app. II.) Therefore, we continue to
                     believe that the Department’s restrictive tariff-rate quota for imported raw
                     sugar has resulted in higher domestic sugar prices than necessary for
                     users and that it should be changed as we have recommended. In addition,
                     the Department questioned the need for our recommendation that the U.S.
                     Trade Representative consider modifying the current process for
                     allocating the tariff-rate quota in a way that is consistent with U.S. trade
                     agreements, noting that alternative processes could be administratively



                     Page 17                                         GAO/RCED-99-209 Sugar Program
              B-282828




              burdensome. To address this concern, we revised our recommendation to
              state that the U.S. Trade Representative should ensure that any
              administrative changes are not unduly burdensome. The Department also
              provided numerous technical comments to clarify what it perceived to be
              misleading statements, factual errors, and analytical problems in the draft
              report. We address each of these comments in appendix V, which contains
              the Department’s complete written comments and our response. None of
              the Department’s technical comments resulted in changes that affected the
              report’s conclusions.

              We met with U.S. Trade Representative officials, including the Associate
              General Counsel in the Office of General Counsel. Generally, the U.S.
              Trade Representative agreed with the report’s factual description of the
              operation of the tariff-rate quota for imported raw sugar. However, the
              U.S. Trade Representative expressed some reservations about whether our
              recommendation that it consider changing the current allocation process
              would be practical or beneficial to the various stakeholders. Furthermore,
              the U.S. Trade Representative stated that the allocation alternatives, while
              theoretically possible, would require careful consideration as to whether
              they could be implemented in a manner that is consistent with commercial
              and other requirements without introducing unreasonable levels of
              commercial uncertainty. This was particularly true of the changes
              involving the use of a first-come, first-served approach. We continue to
              believe that the inefficiencies associated with the current process merit
              the U.S. Trade Representative’s consideration of alternatives for allocating
              the tariff-rate quota. However, as discussed in this report, we recognize
              that any change to the current allocation process needs careful
              consideration and should be approached cautiously. The U.S. Trade
              Representative also noted that (1) many factors contributed to the
              declining number of sugar refineries since 1981 in addition to decreases in
              the availability of raw cane sugar; and (2) although shortfalls—the amount
              by which imported sugar is less than the allocated tariff-rate
              quota—averaged 75,000 tons per year from 1996 through 1998, the level of
              shortfalls declined during that period. We agree, and we have incorporated
              these observations into this report.


              To describe and evaluate USDA’s procedures for setting the tariff-rate quota
Scope and     for imported raw sugar, we interviewed and obtained information from
Methodology   officials involved in the administration of the quota in USDA’s Foreign
              Agricultural Service, Farm Service Agency, Economic Research Service,
              and World Agricultural Outlook Board. In addition, we discussed the



              Page 18                                         GAO/RCED-99-209 Sugar Program
B-282828




process for setting the tariff-rate quota and its effects with experts and
representatives of the sugar industry—including sugar producer and sugar
user groups—and with academia. To compare market prices for sugar
with minimum prices to avoid loan forfeitures, we spoke with and
obtained information from several agricultural consulting firms, the
Congressional Research Service, USDA’s Farm Service Agency and
Economic Research Service, and other sugar commodity analysts. To
describe and evaluate the allocation procedures for the tariff-rate quota,
we interviewed and obtained information from cognizant officials of USTR
and USDA’s Foreign Agricultural Service and Economic Research Service.
In addition, we spoke with cognizant officials of the U.S. Department of
State and WTO. We did not independently verify the data used in this report.
We conducted our work between December 1998 and June 1999 in
accordance with generally accepted government auditing standards.


As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 14 days after the
date of this letter. At that time, we will send copies of this report to the
Senate Committee on Agriculture, Nutrition, and Forestry; the House
Committee on Agriculture; and other appropriate congressional
committees; the Honorable Dan Glickman, Secretary of Agriculture; the
Honorable Charlene Barshefsky, U.S. Trade Representative; the Honorable
Jacob Lew, Director, Office of Management and Budget; and other
interested parties. We will also make copies available to others upon
request. Please contact me at (202) 512-5138 if you or your staff have any
questions about this report. Key contributors to this report are listed in
appendix VI.




Robert E. Robertson
Associate Director, Food
  and Agriculture Issues




Page 19                                           GAO/RCED-99-209 Sugar Program
Contents



Letter                                                        1


Appendix I                                                   24

U.S. Sugar Production
and Consumption
Appendix II                                                  26

Estimation of
Minimum Prices
Needed to Discourage
Forfeitures for Raw
Sugar Cane and
Wholesale Refined
Beet Sugar
Appendix III                                                 30

Estimation of the
Difference Between
the Market Price and
the Price to Avoid
Loan Forfeitures for
Raw Cane Sugar and
Wholesale Refined
Beet Sugar
Appendix IV                                                  32

Countries’ Tariff-Rate
Quota Allocation and
Sugar Production and
Consumption, 1998




                         Page 20   GAO/RCED-99-209 Sugar Program
                     Contents




Appendix V                                                                                   34
                     GAO Comments                                                            45
Comments From the
U.S. Department of
Agriculture
Appendix VI                                                                                  51

GAO Contacts and
Staff
Acknowledgments
Tables               Table 1: FAS’ Tariff-Rate Quota for Imported Sugar, Fiscal Years         6
                      1997-99
                     Table 2: Difference Between U.S. Raw Cane Sugar Market Prices            8
                      and Minimum Prices Needed to Avoid Loan Forfeitures, Crop
                      Years 1996-98
                     Table 3: Difference Between U.S. Wholesale Refined Beet Sugar            9
                      Prices and Minimum Prices Needed to Avoid Loan Forfeitures,
                      Crop Years 1996-98
                     Table 4: U.S. Raw Sugar Imports Under the Tariff-Rate Quota,            14
                      Fiscal Years 1996-98
                     Table I.1: Comparison of U.S. Prices, USDA’s Loan Rate, and             24
                      World Prices for Raw Cane Sugar, Fiscal Years 1996-98
                     Table I.2: U.S. Sugar Production, Raw Sugar Imports, and Sugar          24
                      Consumption, Fiscal Years 1996-98
                     Table I.3: Comparison of the Stocks-to-Use Ratio With the               25
                      Domestic Price of Raw Sugar in the Fourth Quarter of Fiscal
                      Years 1986-98
                     Table II.1: Estimation of Minimum Raw Cane Sugar Price Needed           27
                      to Discourage Forfeitures, 1997 Crop Year
                     Table II.2 Estimation of Minimum Beet Sugar Price Needed to             28
                      Discourage Forfeitures, 1997 Crop Year
                     Table III.1: Difference Between U.S. Raw Cane Sugar Market              30
                      Prices and the Minimum Prices Needed to Avoid Loan
                      Forfeitures, by Producing Region and Nationally, 1996-98
                     Table III.2: Difference Between U.S. Wholesale Refined Beet             31
                      Sugar Prices and the Minimum Prices Needed to Avoid Loan
                      Forfeitures, by Producing Region and Nationally, 1996-98




                     Page 21                                       GAO/RCED-99-209 Sugar Program
          Contents




Figures   Figure 1: Allocations of Brazil and the Philippines Compared             12
            With Their Average World Exports, 1993-98
          Figure 2: Differences in Exporting Countries’ Market Shares in           13
            the Quota-Exempt Market and the Tariff-Rate Quota Market




          Abbreviations

          FAS        Foreign Agricultural Service
          ICEC       Interagency Commodity Estimates Committee
          USDA       United States Department of Agriculture
          USTR       U.S. Trade Representative
          WASDE      World Agriculture Supply and Demand Estimates
          WTO        World Trade Organization


          Page 22                                        GAO/RCED-99-209 Sugar Program
Page 23   GAO/RCED-99-209 Sugar Program
Appendix I

U.S. Sugar Production and Consumption


Table I.1: Comparison of U.S. Prices,
USDA’s Loan Rate, and World Prices      Average cents per pound
for Raw Cane Sugar, Fiscal Years        Fiscal year                  U.S. market pricea                Loan rate      World market priceb
1996-98
                                        1996                                         22.50                      18                      12.40
                                        1997                                         22.00                      18                      11.67
                                        1998                                         22.09                      18                      10.80
                                        Average 1996-98                              22.19                      18                      11.62
                                        a
                                        U.S. market prices are based on futures contract prices for number 14 raw cane sugar on the
                                        New York Coffee, Sugar, and Cocoa Exchange.
                                        b
                                         World bulk spot prices are based on contracts for number 11 raw cane sugar on the New York
                                        Coffee, Sugar, and Cocoa Exchange.

                                        Source: GAO’s analysis of data from the U.S. Department of Agriculture (USDA) and the New
                                        York Coffee, Sugar, and Cocoa Exchange.



Table I.2: U.S. Sugar Production, Raw
Sugar Imports, and Sugar                Short tons in thousands (raw value)
Consumption, Fiscal Years 1996-98                                          Fiscal year 1996        Fiscal year 1997        Fiscal year 1998
                                        Cane sugar                                      3,454                   3,192                   3,632
                                        Beet sugar                                      3,916                   4,013                   4,389
                                        Total domestic
                                        production                                      7,370                   7,205                   8,021
                                        Imports under the
                                        tariff-rate quota for raw
                                        sugar                                           2,285                   2,253                   1,706
                                        Quota-exempt imports                              540                     493                     349
                                        Other imports                                        1                       4                         85
                                                                    a
                                        Total U.S. sugar supply                        10,196                   9,955                  10,161
                                        Total U.S.sugar
                                        consumptionb                                    9,896                   9,983                   9,992
                                        a
                                        Excludes refined sugar imports.
                                        b
                                         Excludes U.S. sugar exports of 385,000 short tons in fiscal year 1996; 211,000 short tons in fiscal
                                        year 1997; and 179,000 short tons in fiscal year 1998.

                                        Source: GAO’s analysis of USDA’s data.




                                        Page 24                                                          GAO/RCED-99-209 Sugar Program
                                         Appendix I
                                         U.S. Sugar Production and Consumption




Table I.3: Comparison of the
Stocks-To-Use Ratio With the             Cents per pound
Domestic Price of Raw Sugar in the                                          Stocks-to-use                              Actual domestic
Fourth Quarter of Fiscal Years 1986-98   Fiscal year                        ratio (percent)      Predicted pricea                price
                                         1986                                         19.37                  20.83                  20.90
                                         1987                                         16.92                  21.71                  21.94
                                         1988                                         15.24                  22.32                  22.37
                                         1989                                         13.96                  22.78                  23.54
                                         1990                                         13.19                  23.06                  23.31
                                         1991                                         16.04                  22.03                  21.71
                                         1992                                         15.47                  22.24                  21.33
                                         1993                                         17.66                  21.44                  21.90
                                         1994                                         13.65                  22.89                  22.11
                                         1995                                         12.57                  23.28                  23.62
                                         1996                                         15.08                  22.38                  22.23
                                         1997                                         14.89                  22.44                  22.18
                                         1998                                         16.80                  21.76                  22.26
                                         a
                                          The fourth-quarter price was estimated using a regression model developed by USDA’s
                                         Economic Research Service. The mathematical relationship is expressed in the following manner:
                                         Price equals 27.82 minus the product of 0.361 multiplied by the stocks-to-use ratio. See
                                         Economic Research Service, USDA, Sugar and Sweeteners: Situation and Outlook, (March 1996,
                                         p. 15).

                                         Source: GAO’s analysis of USDA’s data and futures contract prices for number 14 raw cane
                                         sugar on the New York Coffee, Sugar, and Cocoa Exchange.




                                         Page 25                                                      GAO/RCED-99-209 Sugar Program
Appendix II

Estimation of Minimum Prices Needed to
Discourage Forfeitures for Raw Sugar Cane
and Wholesale Refined Beet Sugar
                            Under the sugar program, processors can obtain loans from USDA by
                            pledging their sugar as collateral. If domestic sugar prices were too low,
                            processors could forfeit the sugar that secured their loans to USDA rather
                            than repay their loans in cash. Prior to the 1998 crop year, USDA estimated
                            a price called the “minimum cane or beet sugar prices to discourage
                            forfeiture.”1 This price was composed of (1) the legislatively established
                            loan rate for sugar processors of 18 cents per pound for cane sugar and
                            22.9 cents per pound for refined beet sugar and (2) certain transportation,
                            marketing, and accrued interest costs, along with the penalty charge for
                            loan forfeiture. In general, processors would be unlikely to forfeit sugar if
                            domestic market prices were above this minimum price. However, if
                            market prices were below this level, processors might find it to their
                            economic advantage to forfeit their sugar. As a result, sugar loan
                            recipients would have to receive at least this “minimum” price to make
                            them indifferent to repaying the loan and selling in the marketplace or
                            forfeiting their sugar to USDA. In this appendix, we explain how USDA
                            computed these prices to avoid loan forfeiture for both raw cane sugar
                            and refined beet sugar.


Estimation of Minimum       In general, for raw cane sugar, the components of the estimation of the
Price Needed to Avoid Raw   “minimum raw sugar price to discourage forfeiture” consisted of the loan
Cane Sugar Forfeitures      rate, the forfeiture penalty, interest expense, transportation costs, and the
                            location discount. We explain each of these components below. Table II.1
                            provides an example of the 1997 estimation of USDA’s “minimum raw sugar
                            price to discourage forfeiture.” It displays the minimum forfeiture prices
                            for the sugar cane growing regions of Florida, Hawaii, Louisiana, Texas,
                            and Puerto Rico.




                            1
                             Because USDA no longer estimates a price to discourage forfeiture, we used estimates provided by an
                            agricultural consulting firm that used USDA’s methodology to estimate a minimum price to avoid
                            forfeiture for crop year 1998/99.



                            Page 26                                                        GAO/RCED-99-209 Sugar Program
                                            Appendix II
                                            Estimation of Minimum Prices Needed to
                                            Discourage Forfeitures for Raw Sugar Cane
                                            and Wholesale Refined Beet Sugar




Table II.1: Estimation of Minimum Raw
Cane Sugar Price Needed to                  Cents per pound
Discourage Forfeitures, 1997 Crop           Cost category            Florida           Hawaii       Louisiana             Texas     Puerto Rico
Year
                                            Loan rate                  17.88            17.77             18.30            18.06            18.09
                                            Forfeiture
                                            penalty                    –1.00            –1.00             –1.00            –1.00            –1.00
                                            Net loan
                                            proceeds                   16.88            16.77             17.30            17.06            17.09
                                            Cost of loan
                                            redemption
                                            and marketing
                                            Interest
                                            expense                      0.87             0.87             0.89             0.88             0.88
                                            Transportation
                                            costs                        1.95             2.00             1.21             1.07             0.52
                                            Location
                                            discounts                    0.00             1.25             0.65             0.20             0.00
                                            Minimum
                                            price to avoid
                                            forfeitures                19.70            20.89             20.05            19.21            18.49
                                            Source: Farm Service Agency, USDA.



                                            The minimum price to avoid loan forfeitures for raw cane sugar is
                                            estimated using the following items:

                                        •   Regional loan rates consist of the national average loan rate for raw sugar
                                            cane of 18 cents per pound and an adjustment—positive or negative—for
                                            transportation differentials. According to USDA, these differentials consist
                                            of freight charges only. Regional loan rates are set by location because
                                            USDA attempts to equalize the risk of forfeiture across regions. For
                                            example, if an area has lower than average transportation costs, the loan
                                            rate would be higher than 18 cents per pound.
                                        •   The forfeiture penalty is subtracted from the area loan rate to obtain the
                                            net proceeds received from forfeiture. The current farm program
                                            requires that a 1-cent-per-pound penalty for cane sugar and a
                                            1.07-cent-per-pound penalty for refined beet sugar be paid if a processor
                                            forfeits sugar.2
                                        •   USDA calculates interest expense on the loan as the product of the regional
                                            loan rate times the annual loan interest rate (6.5 percent) times 0.75
                                            (because it is a 9-month loan).

                                            2
                                             The Omnibus Consolidated and Emergency Supplemental Appropriations Acts for 1999 (P.L.
                                            105-277) directed that USDA not consider the 1-cent penalty when calculating prices that discourage
                                            forfeiture. However, since the processor is required by law to pay this penalty, we believe that the
                                            processor would consider it when deciding whether to forfeit sugar to the government.



                                            Page 27                                                          GAO/RCED-99-209 Sugar Program
                                           Appendix II
                                           Estimation of Minimum Prices Needed to
                                           Discourage Forfeitures for Raw Sugar Cane
                                           and Wholesale Refined Beet Sugar




                                       •   transportation costs consist of all transportation and distribution costs
                                           incurred in moving the sugar to the refiner, including all charges for the
                                           commercial sale of the raw cane sugar, such as freight, transportation
                                           insurance, transportation taxes, interest on storage, and terminal charges.
                                       •   Location discounts are considered a marketing cost to the cane
                                           processors, which reflects the fact that they may represent a captive
                                           market to some cane refiners. These discounts, required by certain
                                           refiners, reflect the higher cost to the cane processor of transporting raw
                                           sugar from certain production areas to alternative refiners.


Estimation of Minimum                      The components of USDA’s estimation of the minimum beet sugar price to
Price Needed to Avoid                      discourage forfeiture consisted of the regional loan rate, the forfeiture
Wholesale Refined Beet                     penalty, the interest expense on the loan, and the cash discount. Table II.2
                                           is an example of this estimation for sugar beets for the 1997 marketing
Sugar Forfeitures                          year.


Table II.2 Estimation of Minimum Beet Sugar Price Needed to Discourage Forfeitures, 1997 Crop Year
Cents per pound
                                                                                         Western
                                                                                            North
                                                           Colorado,                      Dakota,
                                  Minnesota and            Nebraska,                    Montana,
                     Michigan and eastern North              eastern                  and western    Oregon and
Cost category                Ohio       Dakota             Wyoming              Texas   Wyoming           Idaho   California
Loan rate                   23.79             22.73             23.01            23.61      22.19         22.48       23.62
Forfeiture penalty          –1.07             –1.07             –1.07            –1.07      –1.07         –1.07       –1.07
Net loan proceeds           22.72             21.66             21.94            22.54      21.12         21.41       22.55
Cost of loan
redemption and
marketing
Interest expense              2.47             1.11              2.95             3.03       2.85          2.88        3.03
Cash discounts                0.51             0.46              0.51             0.52       0.49          0.50        0.52
Minimum price to
avoid forfeitures           25.71             23.23             25.40            26.09      24.46         24.79       26.10
                                           Source: Farm Service Agency, USDA.



                                           In 1997, for wholesale refined beet sugar, USDA’s minimum price to avoid
                                           loan forfeitures was estimated using the following factors:




                                           Page 28                                            GAO/RCED-99-209 Sugar Program
    Appendix II
    Estimation of Minimum Prices Needed to
    Discourage Forfeitures for Raw Sugar Cane
    and Wholesale Refined Beet Sugar




•   As with the regional loan rates for raw cane sugar, the loan rates for the
    beet regions reflect transportation differentials and are calculated by
    adjusting the national average loan rate of 22.9 cents per pound for freight
    charges. Again, these are adjusted to equalize the risk of loan forfeiture
    across beet-producing regions.
•   The forfeiture penalty of 1.07 cents per pound is subtracted from the loan
    rates.
•   Unlike sugar cane processors, beet processors do not share the interest
    expense of the government’s loan with growers and must recover the
    entire interest expense of loan repayment in their share of the sugar’s
    selling price. Therefore, interest expense is calculated as the product of
    the regional loan rate times the annual interest rate (6.5 percent) times
    0.75 (because it is the 9-month loan period), all divided by the processor’s
    share of the selling price.
•   Beet sugar is normally sold subject to a 2-percent cash discount for all
    regions.

    Unlike raw cane sugar, the minimum price needed to avoid loan forfeiture
    for beet sugar does not include transportation costs, since beet sugar is
    priced at the processing level and is not further refined.




    Page 29                                         GAO/RCED-99-209 Sugar Program
Appendix III

Estimation of the Difference Between the
Market Price and the Price to Avoid Loan
Forfeitures for Raw Cane Sugar and
Wholesale Refined Beet Sugar
                                       We estimated the difference between raw cane and refined beet sugar
                                       market prices and the prices necessary to avoid loan forfeiture on a
                                       regional and on a national weighted average basis for crop years 1996
                                       through 1998. In order to estimate these differences, we compared crop
                                       year loan forfeiture prices with market prices for the following fiscal year
                                       because sugar grown and harvested in a crop year is sold in the following
                                       fiscal year.

Table III.1: Difference Between U.S.
Raw Cane Sugar Market Prices and the   Cents per pound
Minimum Prices Needed to Avoid Loan                                                                                            Weighted
Forfeitures, by Producing Region and                                                                                               yearly
Nationally, 1996-98                                                                                                              average
                                       Year                    Florida           Hawaii      Louisiana             Texas      differencea
                                       1996                        2.30             1.11            1.95             2.79                2.07
                                       1997                        2.39             1.20            2.04             2.88                2.17
                                       1998                        2.33             1.15            1.95             2.84                2.11
                                       Average                     2.34             1.16            1.98             2.84                2.11
                                       a
                                        The weighted yearly average difference in price is weighted by the regional production of cane
                                       sugar for 1996 through 1998.

                                       Source: GAO’s analysis using USDA’s minimum prices to avoid loan forfeitures for crop years
                                       1996 and 1997 and an agricultural consulting firm’s minimum prices for crop year 1998. For raw
                                       cane sugar market prices, number 14 contract prices on the New York Coffee, Sugar, and Cocoa
                                       Exchange were used for fiscal years 1997 through 1999 (fiscal year 1999 was a USDA
                                       projection). Data used to estimate weights were obtained from USDA’s Sugar and Sweeteners:
                                       Situation and Outlook.




                                       Page 30                                                        GAO/RCED-99-209 Sugar Program
                                         Appendix III
                                         Estimation of the Difference Between the
                                         Market Price and the Price to Avoid Loan
                                         Forfeitures for Raw Cane Sugar and
                                         Wholesale Refined Beet Sugar




Table III.2: Difference Between U.S. Wholesale Refined Beet Sugar Prices and the Minimum Prices Needed to Avoid Loan
Forfeitures, by Producing Region and Nationally, 1996-98
Cents per pound
                                      Colorado,                              Montana,
                                      Nebraska,                             northwest                                            Weighted
                         Minnesota          and                         Wyoming, and                                                 yearly
              Michigan and eastern southeastern                        northwest North          Idaho and                          average
Year          and Ohio North Dakota   Wyoming               Texas              Dakota              Oregon        California     differencea
1996               2.35         4.83          2.66            1.97                    3.60             4.79            3.96                4.24
1997             –0.05          2.43          0.26           –0.43                    1.20             2.94            2.28                1.97
1998               1.73         4.14          1.55            1.06                    2.77             3.71            2.38                3.38
Average            1.34          3.8          1.49            0.87                    2.52             3.81            2.87                3.20
                                         a
                                          The weighted yearly average difference in price is weighted by the regional production of beet
                                         sugar for 1996 through 1998.

                                         Source: GAO’s analysis using USDA’s minimum prices to avoid loan forfeitures for crop years
                                         1996 and 1997 and an agricultural consulting firm’s prices for crop year 1998. Wholesale refined
                                         beet sugar prices taken from Milling and Baking News, Midwest and Western markets, fiscal
                                         years 1997 through 1999 (1999 price was fiscal year average as of May). Data used to estimate
                                         weights were obtained from USDA’s Sugar and Sweeteners: Situation and Outlook.




                                         Page 31                                                        GAO/RCED-99-209 Sugar Program
Appendix IV

Countries’ Tariff-Rate Quota Allocation and
Sugar Production and Consumption, 1998


Short tons in thousands
                              Tariff-rate quota       Tariff-rate quota                                      Production minus
Country                   allocationa (percent)              allocation   1998 production 1998 consumption       consumption
Argentina                                  4.3                      72             1,929             1,599                330
Australia                                  8.3                     140             6,137             1,091              5,046
Barbados                                   0.7                       9                51                18                 33
Belize                                     1.1                      18               130                15                115
Bolivia                                    0.8                      13               366               254                112
Brazil                                    14.5                     244            17,306             9,700              7,606
Colombia                                   2.4                      40             2,374             1,461                913
Congo                                      0.3                       8                44                39                  5
Costa Rica                                 1.5                      25               419               228                191
Cote d’Ivoire                              0.3                       8               127               182                –55
Dominican Republic                        17.6                     296               518               331                187
Ecuador                                    1.1                      18               208               413               –205
El Salvador                                2.6                      44               510               238                272
Fiji                                       0.9                      15               408                57                351
Gabon                                      0.3                       8                22                25                 –3
Guatemala                                  4.8                      81             1,896               493              1,403
Guyana                                     1.2                      20               273                35                238
Haiti                                      0.3                       8                11                83                –72
Honduras                                   1.0                      17               288               255                 33
India                                      0.8                      13            16,085            18,409             –2,324
Jamaica                                    1.1                      18               206               142                 64
Madagascar                                 0.3                       8               105               108                 –3
Malawi                                     1.0                      17               215               198                 17
Mauritius                                  1.2                      20               725                46                679
Mexico                                     0.3                      28             6,052             4,674              1,378
Mozambique                                 1.3                      22                44                77                –33
Nicaragua                                  2.1                      35               394               204                190
Panama                                     2.9                      49               187               100                 87
Papua New Guinea                           0.3                       8                44                35                  9
Paraguay                                   0.3                       8               143               128                 15
Peru                                       4.1                      69               507               998               –491
Philippines                               13.5                     227             1,986             2,094               –108
St. Christopher-Nevis                      0.3                       8                28                 4                 24
South Africa                               2.3                      39             2,660             1,507              1,153
Swaziland                                  1.6                      27               571               248                323
Taiwan                                     1.2                      20               364               540               –176
                                                                                                                   (continued)


                                            Page 32                                             GAO/RCED-99-209 Sugar Program
                                            Appendix IV
                                            Countries’ Tariff-Rate Quota Allocation and
                                            Sugar Production and Consumption, 1998




Short tons in thousands
                              Tariff-rate quota        Tariff-rate quota                                                     Production minus
Country                   allocationa (percent)               allocation       1998 production 1998 consumption                  consumption
Thailand                                   1.4                          24                  4,679                   1,872                       2,807
Trinidad-Tobago                            0.7                          12                      86                      93                        –7
Uruguay                                    0.3                           8                      22                     121                       –99
Zimbabwe                                   1.2                          20                    632                      367                       265

                                            Note: Each country supplying sugar to the United States under the tariff-rate quota is limited to
                                            exporting sugar that solely originated within that country.
                                            a
                                            Allocations are based on countries’ exports to the United States from 1975 through 1981.

                                            Source: USDA.




                                            Page 33                                                          GAO/RCED-99-209 Sugar Program
Appendix V

Comments From the U.S. Department of
Agriculture

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




                             Page 34   GAO/RCED-99-209 Sugar Program
                 Appendix V
                 Comments From the U.S. Department of
                 Agriculture




See comment 2.

See comment 3.




Now on p. 2.

Now on p. 5.

Now on p. 7.

Now on p. 9.


See comment 4.

See comment 5.




                 Page 35                                GAO/RCED-99-209 Sugar Program
                    Appendix V
                    Comments From the U.S. Department of
                    Agriculture




Now on pp. 10-13.

See comment 6.




Now on p. 10.

See comment 7.




Now on pp. 1-2.




Now on p. 3.

See comment 8.




                    Page 36                                GAO/RCED-99-209 Sugar Program
                  Appendix V
                  Comments From the U.S. Department of
                  Agriculture




See comment 9.




See comment 10.




See comment 11.




Now on p. 4.

See comment 12.




See comment 13.




                  Page 37                                GAO/RCED-99-209 Sugar Program
                  Appendix V
                  Comments From the U.S. Department of
                  Agriculture




Now on p. 4.

See comment 14.




Now on p. 5.

See comment 15.




Now on p. 6.

See comment 16.




See comment 17.




                  Page 38                                GAO/RCED-99-209 Sugar Program
                  Appendix V
                  Comments From the U.S. Department of
                  Agriculture




Now on p. 8.

See comment 18.




Now on p. 8.

See comment 19.




Now on p. 8.

See comment 20.




Now on p. 9.

See comment 21.




                  Page 39                                GAO/RCED-99-209 Sugar Program
                    Appendix V
                    Comments From the U.S. Department of
                    Agriculture




Now on pp. 12-13.

See comment 22.




Now on pp. 10-12.


See comment 23.




See comment 24.




                    Page 40                                GAO/RCED-99-209 Sugar Program
                  Appendix V
                  Comments From the U.S. Department of
                  Agriculture




Now on p. 14.

See comment 25.




Now on p. 1.


See comment 26.

Now on p. 2.


See comment 27.




Now on pp. 2-3.

See comment 28.




                  Page 41                                GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




Page 42                                GAO/RCED-99-209 Sugar Program
                  Appendix V
                  Comments From the U.S. Department of
                  Agriculture




Now on p. 3.




See comment 29.




See comment 30.




Now on p. 4.

See comment 31.




Now on p. 7.


See comment 32.



Now on p. 7.


See comment 33.




                  Page 43                                GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




Page 44                                GAO/RCED-99-209 Sugar Program
               Appendix V
               Comments From the U.S. Department of
               Agriculture




               The following are GAO’s comments on USDA’s letter dated July 8, 1999.
GAO Comments
               1. USDA’s claim of a decline of 0.72 cents per pound in the price of raw
               sugar overstates the reduction achieved under its new management plan.
               The domestic price for sugar in fiscal year 1995 was unusually high—23.62
               cents per pound—because of problems in administering the tariff-rate
               quota that resulted in a substantial shortfall in the tariff-rate quota.
               Furthermore, U.S. refining margins (revenues less costs) are affected by
               factors in addition to the sugar program, such as recent consolidations in
               the industry. In the years just prior to the period we reviewed, U.S. refining
               margins were much lower and even negative in certain months.

               2. We do not believe that our recommendation to the Secretary of
               Agriculture to increase the size of the tariff rate quota would result in any
               administrative costs because USDA would continue to use its current
               process. We agree that the implementation of this recommendation could
               increase the risk to the economic well-being of some sugar beet
               producers. As a result of lower domestic prices, some sugar beet
               processors could decide to forfeit their sugar to the government. However,
               producers in the primary cane sugar and sugar beet regions generally
               would still obtain prices at least equal to the price to avoid forfeiture.
               Furthermore, our recommendation states that the size of the tariff-rate
               quota should be increased gradually, enabling sugar beet growers to adjust
               their planting strategy.

               3. We recommended that the United States Trade Representative (USTR)
               consider options for allocating the tariff rate quota. As part of that
               consideration, USTR should evaluate the administrative burden associated
               with alternative allocation processes. We have modified our
               recommendation to note that any administrative changes should not be
               unduly burdensome.

               4. Our draft report recognized that processors respond to local prices
               when considering whether to forfeit sugar program loans, and we took this
               into account in our analysis. Because regional market price data for cane
               sugar were not available, we compared annual average market prices with
               regional minimum prices to avoid loan forfeitures. (See app. III.) In
               addition, regional loan rates were adjusted to estimate the minimum prices
               to avoid loan forfeitures to account for regional differences in prices
               caused by such factors as transportation costs and regional cash
               discounts. For beet sugar, we did not have market prices for each growing
               region, but we were able to use separate prices for the midwestern and



               Page 45                                          GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




western markets. (See app. II.) Furthermore, we weighted market prices
and prices to avoid loan forfeitures by production in that region in order to
obtain an estimate of the impact of the price difference. These regional
estimates were adjusted to account for such factors as transportation cost
differences and regional cash discounts.

5. We did not contradict ourselves in noting that two sugar beet growing
regions had slightly negative spreads when comparing their market prices
with the price to avoid forfeiture. These regions accounted for only
9 percent of sugar beet production, and the negative prices occurred in
1997 but not in 1996 or 1998. Prices in the primary cane sugar and beet
sugar regions generally were more than 2 cents higher than the price
needed to avoid forfeiture. Furthermore, our recommendation states that
the size of the tariff-rate quota should be increased gradually, enabling
sugar beet growers to adjust their planting strategy.

6. We recommended that USTR consider options for allocating the tariff-rate
quota and did not recommend a specific approach. We believe these
options are relevant because they could reduce the amount of shortfalls
and better reflect the world market for raw sugar. Although USDA states
that it accounts for these shortfalls in its quota-setting process, the fact
remains that there continue to be shortfalls each year. We believe that the
method of quota allocation can play a role in determining whether the
tariff-rate quota is completely filled, especially if shortfalls are not
reallocated and if the tariff-rate quota is not increased when a shortfall
becomes evident.

7. As our report shows, there is no need to have a shortfall in the tariff-rate
quota if an alternative allocation method is used. The current system is a
workaround to compensate for the inability of some countries to fill their
allocation. Furthermore, USDA has not adjusted the tariff-rate quota in
recent years to close the gap between imports and the quota. This gap has
exacerbated declines in recent years in the overall availability of raw cane
sugar in the U.S. market, according to domestic sugar refinery officials.

8. USDA did not articulated a definition of “reasonable prices” or provided
a basis for its use of a stocks-to-use ratio of 15.5-percent, which is
associated with a domestic raw sugar price of 22.22 cents per pound. Our
analysis is predicated on the minimum price needed to avoid loan
forfeitures, which is associated with the legislatively mandated loan rate of
18 cents per pound for raw cane sugar plus regional transportation and
other costs.



Page 46                                           GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




9. We recognize that trade agreements have affected USDA’s
implementation of the sugar program. We did not specifically examine the
tariff-rate quota for imported refined sugar in this report because USDA has
set it at about 28,000 tons annually, compared with an annual average of
2.3 million tons of imported raw sugar. USDA primarily uses the raw sugar
tariff-rate quota to manage the sugar program. We have noted this
exclusion in the report in response to USDA’s comment.

10. USDA is referring to comments that the Foreign Agricultural Service
(FAS) obtains annually from domestic sugar producers and users on its
plans for setting the tariff-rate quota. We did not refer to these comments
in our report because they advocate stocks-to-use ratios and other
administrative adjustments that reflect the sugar producers’ and users’
economic interests. Therefore, we do not consider the comments to
constitute a review of USDA’s administration of the tariff-rate quota.

11. We did not discuss the gradual decline in the high-tier tariff (imports
outside of the tariff-rate quota) under the Uruguay Round of the General
Agreement on Tariffs and Trade because sugar imported under these
tariffs is not economical and such imports do not occur. In addition, while
we agree that future reductions in the high-rate tariff for Mexican sugar
under the North American Free Trade Agreement will likely affect the
administration of the tariff-rate quota, we do not address these changes
because they were beyond the scope of our review. Currently, USDA
accounts for Mexican imports by adjusting the size of the tariff-rate quota
and using a 15.5-percent stocks-to-use ratio, which is associated with a
domestic market price of 22.22 cents per pound.

12. See comment 1.

13. Our report noted that the U.S. Sugar Corporation opened a new
refinery in 1998. While this refinery has initially increased U.S. capacity,
other refineries report that they are operating at far less than full
capacity—50 percent of capacity in one case—because they have been
unable to obtain sufficient supplies of raw sugar.

14. We agree that a welfare analysis of the costs and benefits of USDA’s
sugar program for domestic producers and sweetener users, which we
provided in our 1993 report, is important for accessing USDA’s sugar
program. However, such an analysis was beyond the scope of our review.




Page 47                                           GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




15. We agree that the actual stocks-to-use ratio may vary from USDA’s initial
target of 14.5 percent. Because we describe 14.5 percent as a target, we did
not revise the report in response to this comment.

16. We have modified our report to clarify the roles of FAS and USDA’s
Interagency Commodity Estimates Committee (ICEC) in setting the
tariff-rate quota. The Price Waterhouse review examined the ICEC’s process
for establishing World Agriculture Supply and Demand (WASDE) forecasts
for nine commodities. Although Price Waterhouse observed the ICEC
proceedings for sugar, its report does not specifically discuss the sugar
ICEC. While USDA states that the ICEC proceedings for sugar are not unique,
USDA officials told us that there were differences in the various ICEC
proceedings. We were denied specific information on the proceedings for
sugar and were not allowed to observe an actual meeting. Furthermore,
the chairman of the sugar ICEC told us that the Price Waterhouse
representatives had signed an agreement not to discuss the details of their
observations regarding the sugar ICEC.

17. We do not take issue with the WASDE sugar forecasts. However, we
believe that information on the meetings would help the public understand
the sugar ICEC’s process for translating its reasoning into quantitative
decisions affecting the WASDE forecasts. The sugar ICEC’s minutes are too
general to understand the basis for the committee’s decisions to change its
forecasts, and the committee’s published explanation does not provide
sufficient information on how decisions are reached, such as the
econometric models or spreadsheets used.

18. We agree with USDA that another way to reduce the price of refined
sugar would be to increase the size of the refined sugar tariff-rate quota,
which USDA has set at about 28,000 tons per year. See also comment 9.

19. Our draft report clearly stated that domestic prices for raw cane sugar
and refined beet sugar are linked. Although USDA states that it uses the raw
sugar tariff-rate quota to establish sufficient supplies of raw sugar, which
sets the framework for avoiding forfeitures by beet sugar processors, we
note that since the enactment of the 1996 Farm Act, USDA is no longer
required to operate the sugar program at no net cost to U.S. taxpayers. See
also comments 2, 4, and 5.

20. See comments 2, 4, and 5.




Page 48                                          GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




21. In this analysis, we consider “users” as the wholesale or intermediate
buyers of cane or beet sugar—food manufacturers and sugar refiners
because we cannot determine the extent to which costs (or savings) would
be passed on to consumers in the short term. However, we agree with USDA
that in the medium- to long-term, these costs would eventually be borne by
the final consumer.

22. We believe that we appropriately used the quota-exempt market as an
example of how the U.S. market would work if the allocation process
more accurately reflected the current world sugar market. As we said in
our report, the quota-exempt market allows U.S. buyers to select countries
that can economically produce sugar and transport it to the U.S. market.
Our point was to show that the current allocation process is out of
date—not to suggest that the quota-exempt market should be the basis for
allocating the tariff-rate quota. Furthermore, the example of the Canadian
market reinforces our point that the current U.S. allocation does not
reflect world market conditions. While Australia provides over half of
Canada’s raw sugar imports, its allocation is only 8.3 percent of the U.S.
tariff-rate quota. In contrast, the Philippines produced less sugar than it
consumed in 1998, yet its allocation is 13.5 percent of the U.S. tariff-rate
quota.

23. See comment 6.

24. It is unclear whether reallocating the unfilled tariff-rate quota late in
the year would substantially increase administrative costs. According to a
USTR official, that office would not necessarily follow the same reallocation
process that USDA used the last time it conducted such a reallocation—in
fiscal year 1995. Moreover, while USDA reserves the right to increase the
size of the tariff-rate quota at any time, the Department has not adjusted
the tariff-rate quota in recent years to close the gap between imports and
the quota. As we state in the report, while the significance of the gap is
arguable, it exacerbates the availability of raw cane sugar in the U.S.
market, according to domestic cane refinery representatives.

25. See comments 1 and 13.

26. We agree that loans are available for processors and have revised the
report accordingly.

27. We revised the report to state that the 1996 Farm Act removed the
no-cost provision of the U.S. sugar program.



Page 49                                          GAO/RCED-99-209 Sugar Program
Appendix V
Comments From the U.S. Department of
Agriculture




28. While we agree that other countries also have historically protected
their sugar markets, the degree of liberalization of other sugar producing
and importing nations was beyond the scope of this report. Our objective
in this report was to comment on potential options to improve the
administration of the current program.

29. We agree with USDA that processors can forfeit their sugar to the
government only if the tariff-rate quota is (1) initially set above 1.5 million
tons or (2) subsequently increased to above 1.5 million tons. In addition,
we note that the initial quota has always been set above that amount.
However, in fiscal year 1999, FAS allowed USTR to allocate only 1.28 million
tons of sugar, without achieving the 1.5-million-ton minimum requirement
for providing processors with the option to forfeit their sugar rather than
repay their loans.

30. We revised our report to state that the 1996 Farm Act revised the sugar
program to include penalties of 1 cent per pound for raw cane sugar and
1.07 cents per pound for refined beet sugar that is forfeited to the
Commodity Credit Corporation.

31. See comment 21.

32. We agree that a stocks-to-use ratio is associated with a fiscal year
fourth-quarter market price. Furthermore, the Economic Research Service
reported in 1996 that the coefficient of determination, or R2, for the
forecast was equal to 0.68, which indicates that variation the stocks-to-use
ratio accounts for 68 percent of the variation that occurred in the
fourth-quarter market price.

33. We have revised the sentence in response to USDA’s comment to state
that the average domestic sugar price was 22.2 cents in 1997 and 1998. We
do not believe that it is appropriate to include fiscal year 1995 in our
analysis, as USDA suggested . The domestic price that year was unusually
high—23.62 cents per pound—because of problems in administering the
tariff-rate quota. These problems resulted in the 1997 changes in how the
tariff-rate quota is set, which are still in effect.




Page 50                                           GAO/RCED-99-209 Sugar Program
Appendix VI

GAO Contacts and Staff Acknowledgments


                  Robert E. Robertson (202) 512-5138
GAO Contacts      Richard Cheston (202) 512-5138


                  In addition to those named above, Patricia A. Yorkman, Nancy Bowser, Jay
Acknowledgments   Cherlow, Daniel E. Coates, Barbara J. El-Osta, Leanne M. Flama, and Carol
                  Herrnstadt Shulman made key contributions to this report.




(150093)          Page 51                                       GAO/RCED-99-209 Sugar Program
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