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2008 Farm bill. SUGAR POLICY IN THE US: SUBSIDIES AND QUOTAS Presented By: Ali Alhosani & Joshua Annas. OVERVIEW. On June 19th, 2008, Congress enacted the complete Food, Conservation and Energy Act of 2008 (i.e. 2008 Farm Bill)

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2008 Farm bill

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2008 farm bill

2008 Farm bill

SUGAR POLICY IN THE US: SUBSIDIES AND QUOTAS

Presented By:

Ali Alhosani & Joshua Annas


Overview

OVERVIEW

  • On June 19th, 2008, Congress enacted the complete Food, Conservation and Energy Act of 2008 (i.e. 2008 Farm Bill)

    • It authorizes spending of up to $307 billion over five fiscal years to support our food and farm policies.

    • If market conditions push government expenditures above the forecast level, Congress can approve a “supplemental” appropriation without having to rewrite the Farm Bill

    • After a Presidential veto, the House and the Senate voted overwhelmingly to override the veto and pass the 2008 Farm Bill.

  • The farm bill is a package of federal legislation enacted every five to seven years to set the general direction for America’s farm and food policy.


Historical background

HISTORICAL BACKGROUND

  • Congress enacted the first farm bill in the wake of the Great Depression. The Agricultural Adjustment Act of 1933 was in effect the first farm bill in the United States

    • Objective: to get cash to rural, predominantly agricultural focused areas via farm programs

    • Congress imposed the first major controls on the domestic sugar market with the Jones-Costigan Act of 1934, which established quotas on production of cane and beet sugar.

  • 1960s - Targeting Surplus

    • Surpluses were still the norm in the 1960s, and the government continued the fight for supply control

  • 1980s - Conservation Policy

    • Increased public awareness about the deleterious effects farming had on not only soil quality, but also water, air, and wildlife, came to life.

  • 1996 – Freedom to Farm

    • Congress enacted some pro-market agriculture reforms, allowed farmers greater flexibility in their planting decisions and moved toward greater reliance on market supply and demand (without cutting subsidies)


Sugar subsidies and the farm bill

SUGAR SUBSIDIES AND THE FARM BILL

  • The USDA distributes between $10 billion and $30 billion in cash subsidies to farmers and owners of farmland each year.

  • It guarantees the sugar industry a minimum price for sugar.

  • In order to prevent the subsidies from causing oversupply, Department of Agriculture maintains marketing allotments, preventing producers from growing too much.

  • Quotas are also in place to limits the amount of sugar that can be imported into the country.


Sugar subsidies continued

SUGAR SUBSIDIES-CONTINUED

FOUR BASIC COMPONENTS OF THE FEDERAL SUGAR

PROGRAM:

  • Price Support- To set artificially high sugar prices, the USDA makes loans to sugar processors, with processors using their sugar as collateral. In return, processors agree to pay sugar growers minimum prices set by the USDA. If the market price of sugar rises, processors sell their product on the market and pay back the loan.

  • Trade Restrictions- Import barriers help to maintain artificially high domestic sugar prices. The government applies a two-tier system of tariff rate quotas to limit imports. A lower tariff, the “in-quota” tariff, is for imports within a set quota volume. A higher tariff, the “over-quota” tariff, applies to imports in excess of the quota.

  • Domestic Quotas- The federal government not only controls sugar imports, it imposes detailed quotas, or “marketing allotments,” on U.S. production in order to control supply.

  • Sugar to Ethanol – government takes control and auctions off any excess sugar to biofuel facilities


Key elements of u s sugar policy in the new farm bill

KEY ELEMENTS OF U.S. SUGAR POLICY IN THE NEW FARM BILL

  • Retains inventory management approach in order to balance sugar supply and demand

  • New market balancing mechanism: Limited sucrose-ethanol program, which are used only when sugar imports oversupply the US market

  • Minimum Overall Allotment Quantity (OAQ): U.S. producers’ allowable sales, set at 85% of domestic consumption

    • Forty exporting countries retain guaranteed preferential access to U.S. market under WTO and FTA rules; Mexico access unlimited

  • Set initial TRQ at trade-agreement-mandated minimum (WTO + CAFTA + Peru)

  • Loan rate increase: three-quarters of a cent per pound, raw value, phased in over four years – no change for 2008 crop; ¼ cent increases in crop years 2009-11

    • First loan rate increase since 1985


2008 farm bill and wto doha agenda

2008 FARM BILL AND WTO: DOHA AGENDA

Doha Agreement would bring new commitments:

  • The 2008 Farm Bill introduces a new optional program for farmers called the Average Crop Revenue Election, or ACRE. ACRE is an income insurance program that is meant to protect farmers against both low yields and price drops.

    • ACRE has also been presented as a way to make US commodity programs more WTO compliant by factoring yield (and not just price) into domestic support payments

    • It is likely that other WTO members will seek to classify the program in the amber box (trade distorting and tied to current price/production), since part of the Aggregate Measures of Support formula includes “quantity of production” as an AMS payment factor (Agreement on Agriculture, Annex 3, paragraph 8)

    • The current authorized limit for AMS for the United States is $19.1 billion per year; the U.S. commitment as of the May 19th version of the Doha agreement would reduce that to $7.6 billion per year.

  • Top US agriculture officials were even harsher in their criticism. “This farm bill heads in the wrong direction in terms of our international obligations,” Deputy Agriculture Secretary Chuck Conner said in a press briefing.

  • Brazil and Canada might now press ahead with their broader WTO dispute on US subsidies, which they had put aside while the new legislation was in the making.


Side by side comparison 2002 2007 and 2008

SIDE BY SIDE COMPARISON 2002-2007 AND 2008

  • 2008 Farm Bill

    • Reauthorizes nonrecourse loan program through FY 2013. Loan rate for raw cane sugar is:

      • 18 cents/lb in FY 2009

      • 18.25 cents/lb in FY 2010

      • 18.50 cents/lb in FY 2011

      • 18.75 cents/lb in FY 2012-13

      • Loan rate for refined beet sugar is:

      • 22.9 cents/lb in FY 2009

      • 128.5% of loan rate for raw cane sugar in FY 2010-13

    • Retains Provision

    • Retains Provision

    • Retains Provision

    • Does not extend authority to reduce loan rates.

  • 2002-2007

    • Reauthorized nonrecourse loan program for processors of domestically grown sugar through fiscal year (FY) 2008 at 18 cents/lb for raw cane sugar and 22.9 cents/lb for refined beet sugar.

    • For producers who deliver sugar beets and sugarcane to processors, processors had to provide payments proportional to the value of nonrecourse loans processors received for these commodities.

    • Loans could not be made earlier than beginning of fiscal year. Loans matured at earlier of end of 9 months or end of fiscal year in which loan was made.

    • For loans made in last 3 months of a fiscal year, processor could repledge sugar as collateral for second loan in subsequent fiscal year. These supplemental loans were made at loan rate in effect at time first loan was made, and matured in 9 months minus period of time that first loan was in effect.

    • Loan rates could be reduced, at Secretary's discretion, if foreign producers reduced export subsidies and support levels below their current World Trade Organization (WTO) commitments.


2002 2007 vs 2008 farm bill budget breakdown

2002-2007 vs. 2008 FARM BILL BUDGET BREAKDOWN

Commodities – 11%

Other – 12%

Other – 15%

Commodities – 23%

Conservation – 8%

Nutrition – 68%

Nutrition – 62%


Major problems

MAJOR PROBLEMS

Sugar policy distorts relationship between supply and demand by setting an artificially high domestic price of sugar through price floors and Tariff Rate Quotas (TRQs).  As seen on next slide.

Domestic consumers are hurt through increased prices for sugar and foods which rely on sugar as an ingredient.


Major problems the economic inefficiency of a quota

MAJOR PROBLEMSThe Economic Inefficiency of a Quota:


Major problems1

MAJOR PROBLEMS

  • Raises price of production for domestic producers who rely on sugar for their products

    • Many companies which use sugar as a large production input have had to move their production operations outside of the U.S. to reduce costs, resulting in thousands of lost domestic jobs.

    • Examples:

      • Lifesavers (a subsidiary of the Wrigley Company) moved its production from Michigan to Quebec in 2002 due to exorbitant US sugar prices (each lifesaver is 95 percent sugar).

      • Fannie May and Fanny Farmer closed 242 candy stores in 2004; closed candy plant in Chicago and moved production to Mexico

      • Ferrara Pan Candy Co. moved production to Mexico and Canada in early 2000’s.


Major problems2

MAJOR PROBLEMS

  • Represents an obstacle to lowering foreign trade barriers to U.S. exports (this hurts U.S. exporters, reduces jobs in exporting sector of economy).

  • Reduces exports of sugar producers in least developed countries (Anti-Development)

    • “Poverty in developing countries is disproportionately affected by growth or non-growth in the agricultural sector” (Virata).

    • “The [World] Bank estimates that developing countries could gain about $350 billion by 2015 from a substantial reduction in agricultural protectionism. This would lift 140 million people out of poverty and the benefits would greatly exceed those that could be gained from development assistance” (Virata).


Major problems3

MAJOR PROBLEMS

  • Several studies have found that U.S. sugar policy constitutes a net welfare reduction to society as a whole

    • One study estimates that the deadweight loss of the sugar policy in one year alone (1998) to be $532 million, with a net loss to the U.S. economy of $893 million.

  • Relatively few (domestic sugar producers) enjoy the benefits of this policy while everyone else bears the costs.

    • One study revealed the benefits from no government involvement in the domestic sugar industry would spread to ALL sectors of the economy with the exception of sugar producers.


One central issuse

ONE CENTRAL ISSUSE

  • US SUGAR POLICY INHIBITS GLOBAL TRADE LIBERALIZATION

    • By sheltering the domestic sugar industry from outside competition, the US is undermining its capacity to speak credibly on the world stage about the removal of trade barriers and general trade liberalization to other countries.

    • In response to US protectionist trade policy, other countries may employ countervailing measures, seek redress within the WTO Dispute Resolution System, or retain existing trade barriers citing US agricultural trade restrictions.


One central issue

ONE CENTRAL ISSUE

  • THE IMPACTS

    • Positively Impacted: US sugar producers, employees of US sugar producing firms, select foreign sugar producers given preferential treatment to import within the quota.

    • Negatively Impacted: US consumers, US exporters, US companies that use sugar as a principal production input, developing countries’ export sectors, US government and US taxpayers (USDA must buy and store excess sugar produced to maintain artificially high price).


One central issue1

ONE CENTRAL ISSUE

IS U.S. SUGAR POLICY SHORT SIGHTED?

A STUDY BY THE CENTER FOR TRADE POLICY STUDIES CONCLUDED THAT:

“By undermining America’s broader agenda of trade expansion, sugar quotas have reduced the chance of successfully negotiating bilateral agreements with trading partners such as Australia, or an FTAA, or a new agreement with other members of the WTO. Unilaterally dismantling our sugar program protections would put the United States in a much more powerful position to advance the free-trade agenda that has served our economic interests so well” (CTPS).


One central issue2

ONE CENTRAL ISSUE

  • WHY NOT CHANGE POLICY?

    • Powerful and well funded sugar industry lobbies U.S. policymakers to keep the industry protected from competition.

    • Example: In the 2000 election cycle, just one sugar producer, Flo-Sun, contributed $690,750 in “soft money” to both Republicans and Democrats and $78,200 in direct campaign contributions. Much of this went to influential agricultural policy makers in Congress (e.g. Chairmen of the House and Senate agricultural committees)

    • More directly: Lack of change is indicative of the challenge of concentrated benefits vs. diffused cost

      • Sugar producers gain immensely from the subsidies and quotas, while those who bear the costs (almost everyone else) do not bear enough of those costs individually to provide an incentive to lobby government strongly.


One central issue3

ONE CENTRAL ISSUE

  • THE WTO’S ROLE

    • As part of the Uruguay Round, the United States obligated itself to importing at least 1.23 million short tons of raw cane sugar and 24,250 short tons of refined sugar a year.

    • The Uruguay Round also set restrictions on the TRQ which the U.S. could impose on imported sugar above the quota

    • Agricultural subsidies at the Doha Round have been called the “linchpin” for trade agreements. An inability to find common ground on agricultural subsidies among developed and developing nations has stalled the talks.


One central issue4

ONE CENTRAL ISSUE

Impasse reached as U.S. seeks elimination of agricultural export subsidies, an easing of tariffs and quotas, and reductions in trade-distorting domestic support, while unwilling or unable to abolish its own; of which domestic sugar protection through subsidies and quotas plays a large part.

Developing countries, meanwhile, argue that “their own producers cannot compete against surplus agricultural goods that the developed countries, principally the EU and the United States,…[are selling at] subsidized prices” (CRS Report).


Policy recommendations

POLICY RECOMMENDATIONS

  • Increase public awareness of impacts, i.e. benefits of trade liberalization

    • Food prices are already high and the projected budget savings from reducing farm subsidies are small, which reduces incentives for transfer of funds.

    • Continue support for the Doha Development Agenda

    • Improve agricultural sustainability and food production systems that maintain environmental quality


Policy recommendations1

POLICY RECOMMENDATIONS

Congress should match US free trade rhetoric with substantive policy.

Given strength of the US sugar lobby, this will not be easy.

Will require coalition of all those negatively impacted by current policy to lobby in aggregate for change.

The next farm bill, or an amendment to the current farm bill, should include provisions to gradually eliminate the outdated and protectionist subsidies and quotas for the domestic sugar industry.

Gradual removal over a period of years would be fair middle ground and would allow domestic sugar producers to reform their production to become more efficient to compete in the global market. Those who could not produce more efficiently and reduce costs would be forced to leave industry, this would create the loss of some jobs but should, in economic theory, increase total net societal welfare and increase jobs in other sectors of the economy.


Questions

QUESTIONS?


Sources

SOURCES

  • http://www.results.org/website/article.asp?id=358

  • http://www.whitehouse.gov/news/releases/2008/05/20080509.html

  • http://www.farmland.org/programs/farm-bill/analysis/documents/AFT-2008-Farm-Bill-brochure-August2008.pdf

  • http://www.usatoday.com/news/washington/2008-05-15-farmbill_N.htm

  • http://www.ers.usda.gov/FarmBill/2008/

  • http://www.twnside.org.sg/title2/wto.info/twninfo20080713.htm

  • http://ictsd.net/i/news/bridges/11997/

  • http://www.cato.org/downsizing/agriculture/

  • http://www.nationalaglawcenter.org/assets/crs/RL34103.pdf

  • http://www.forbes.com/2008/06/27/florida-sugar-crist-biz-beltway-cx_jz_0630sugar.html


Sources1

SOURCES

http://www.usda.gov/wps/portal/farmbill2008?navid=FARMBILL2008

http://www.freetrade.org/pubs/briefs/tbp-013.pdf

http://www.jstor.org/stable/1182911?seq=1&cookieSet=1

http://internationalecon.com/virata/Effects%20of%20US%20sugar%20policy%20on%20developing%20countries.pdf

http://www.sweetenerusers.org/Sugar%20U.S.%20Trade%20Policy.pdf

http://www3.interscience.wiley.com/cgi-bin/fulltext/120832449/PDFSTART?CRETRY=1&SRETRY=0

http://www.newyorker.com/archive/2006/11/27/061127ta_talk_surowiecki

http://www.pulpfusion.com/pulpfusion/uploadfiles/ASA_9/Key_Elements_FB_sugar_policy.pdf


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