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Trade Disputes in an Unsettled Industry: Mexican Sugar. Sugar cane production is concentrated in the warmer areas of Central Mexico. Source: Rabobank from SAGARPA data. Consumption of sugar by major use categories:2000. Background to conflict. Private management and government intervention

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Sugar cane production is concentrated in the warmer areas of central mexico l.jpg
Sugar cane production is concentrated in the warmer areas of Central Mexico

Source: Rabobank from SAGARPA data



Background to conflict l.jpg
Background to conflict Central Mexico

  • Private management and government intervention

    • Early attempts to regulate market

    • Growth from WWII to the 1960’s

    • Price controls

    • Decreto cañero

    • Contrato Ley

  • Government management of the mills (1970 – 1988)

    • Profits squeezed

    • Government rescues mills control goes from19 to 49 out of a total 66

    • Productivity falls in mills and campo (4.1 ha.)

    • Subsidies grow

    • Mexico shifts from net exporter to net importer


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Background to conflict Central Mexico

  • Government sells the mills (1988 - 1992)

    • Policy moves to more market orientation

    • Budgetary concerns also forces sales of state assets

    • Mills sold in highly leveraged operations – up to 80%

    • Implicit understanding that tight controls over domestic prices

    • Yet, imports grew depressing mills sending them anew into crisis

    • Government support to mills to pay cañeros

    • Interest rates following economic crisis and debt grows


Nafta l.jpg
NAFTA Central Mexico

  • Mexico negotiates structural change

  • U.S. and Canada negotiate trade agreement

  • Mexico negotiations sugar sector

  • U.S. Negotiates sweetner sector

  • Mexico net importer of sugar

  • U.S.net importer of sugar

  • Mexico and U.S. protect domestic markets

  • Low level of HFCS trade


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Mexico’s foreign trade in sugar Central Mexico(million dollars)


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NAFTA from agreement to confustion Central Mexico

  • Net production surplus – the side letters

    • English

      definition “shall includeconsumption of high fructose corn syrup provided for in…”

    • Spanish

      “la determinación de´excedente de producción neto´incluirá para efectos de Sección A del Anexo Anexo 703.2, fructosa de maíz, descrita...¨

  • NPS

    • U.S. = Psugar – (Consumptionsug + ConsumptionHFCS)

    • Mexico = (Psugar+PHFCS) – (Consumptionsug + ConsumptionHFCS)

  • Letter not ratified by Mexican senate

  • Mexico’s quota en years 7 – 14 fixed at 250,000 MT or “up to” 250,00

    • Similar to corn discussions

    • Mexico goes to panel


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NAFTA from agreement to conf Central Mexicorontation: HFCS

  • U.S. surplus corn producer

  • Government supports (aka subsidies) for corn

  • HFCS capacity grows

  • Displaces sugar in carbonated beverages

  • Limited opportunities for HFCS in other food products

    Lacks sparkle

  • Excess capacity looks for new markets

    • Did it grow looking to Mexico?

  • Mexico initiates dumping demand

    • U.S. loses and goes to panel


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Mexico’s imports of HFCS Central Mexico

Imports of HFCS (55)

(‘000 mt)

Source: Rabobank with data from the Secretaria de Economia


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Sugar cane area Central Mexico(‘000 ha.)


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Sugar cane yields Central Mexico(tons per ha.)


Sugar cane production million mt l.jpg
Sugar cane production Central Mexico(Million mt)


Sugar production million mt l.jpg
Sugar production Central Mexico(Million mt)


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Sugar production per hectare Central Mexico(Million mt)


Efficiency varies greatly from company to company time lost in mills l.jpg
Efficiency varies greatly from company to company: Central MexicoTime lost in mills

Average


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Recent events Central Mexico

  • Consolidation of the milling sector of the industry

  • GAM goes into default

  • 2001 found the domestic market in disarray

    • Low domestic prices

    • “Dumping of sugar on domestic market”

    • SAGARPA under state of siege by cane growers and threats by mill workers

  • Mills of four companies expropriated

  • Government sets up agency to run mills and to eventually privatize them



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Seasonal nature of Mexico’s sugar harvest Central Mexico(mt per week)


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Recent events Central Mexico(cont.)

  • Congress enacts excise tax on HFCS used in soda pop

    • Congress flexing muscle

    • Frustrated with slow pace is resolving dispute

    • Upset with SE decision to negotiate

    • Cañeros strength in Congress

  • National Sugar Policy (Feb. 2002)

    • Bring order to the market

    • Mixed capital export company

    • Inventory financing

    • Modernize market

      • Contrato Ley

      • Decreto cañero

  • Temporary suspension of HFCS tax

    • Steel for HFCS?

    • Until Sep. 30

    • Criticized by industry and Congress


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The future: 2 Central Mexicoand tier tariffs

  • Allows for free imports of sugar paying declining tariffs

  • U.S. WTO sugar quota

    • Trade policy, foreign policy or subsidies for holders of quotas

  • Imports of sugar paying tariffs will displace quota sugar

  • USDA baseline projection document raises question of dumping of Mexican sugar



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NAFTA high-tier Mexican sugar exports to the U.S. U.S.

Source: Rabobank from USDA baseline projections


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NAFTA high-tier Mexican sugar exports to the U.S. U.S.

U.S. WTO import commitment

Source: Rabobank from USDA baseline projections


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U.S. sugar prices U.S.(cents per pound)


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The future: 3 scenarios U.S.

  • U.S.opens market to sugar imports

    • As Mexican imports grows U.S. recognizes that they can’t compete

    • Abandons all supports rather than support Mexican industry

    • 3rd party countries displace Mexican producers

  • Creation of NAFTA sugar market

    • Mexico sugar displaces quota sugar

    • U.S. holders, and others, invest in Mexican mills

    • Minimal domestic pain

    • HCFS south and sugar north – happy corn growers and share holders

  • U.S. refuses to open border


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The future: Spoilers U.S.

  • Cuba

    • Life after Castro

  • FTAA

    • Brazil takes over the market (4 cents lbs. break even)



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