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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
Sugar cane production is concentrated in the warmer areas of Central Mexico

Source: Rabobank from SAGARPA data

background to conflict
Background to conflict
  • 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
background to conflict5
Background to conflict
  • 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
  • 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
  • importer of sugar
  • Mexico and U.S. protect domestic markets
  • Low level of HFCS trade
nafta from agreement to confustion
NAFTA from agreement to confustion
  • 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
nafta from agreement to conf rontation hfcs
NAFTA from agreement to confrontation: 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
mexico s imports of hfcs
Mexico’s imports of HFCS

Imports of HFCS (55)

(‘000 mt)

Source: Rabobank with data from the Secretaria de Economia

recent events
Recent events
  • 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
recent events cont
Recent events (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
the future 2 and tier tariffs
The future: 2and 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
nafta high tier mexican sugar exports to the u s
NAFTA high-tier Mexican sugar exports to the U.S.

Source: Rabobank from USDA baseline projections

nafta high tier mexican sugar exports to the u s24
NAFTA high-tier Mexican sugar exports to the U.S.

U.S. WTO import commitment

Source: Rabobank from USDA baseline projections

the future 3 scenarios
The future: 3 scenarios
  • 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
the future spoilers
The future: Spoilers
  • Cuba
    • Life after Castro
  • FTAA
    • Brazil takes over the market (4 cents lbs. break even)