    Sugar Program: Supporting Sugar Prices Has Increased Users' Costs While
    Benefiting Producers (Letter Report, 06/09/2000, GAO/RCED-00-126).

    Pursuant to a congressional request, GAO estimated the Department of
    Agriculture's (USDA) sugar program's: (1) costs to domestic sweetener
    users; (2) benefits to domestic sugar and high-fructose corn syrup
    producers; and (3) net effects on the U.S. economy--the differences
    between the costs to users and the benefits to producers that result
    from artificially high sweetener prices.

    GAO noted that: (1) GAO estimates that the sugar program cost domestic
    sweetener users about $1.5 billion in 1996 and about $1.9 billion in
    1998; (2) sweetener users included: (a) sugarcane refiners that bought
    raw cane sugar; (b) food manufacturers that bought refined sugar and
    other sweeteners; and (c) final consumers who bought sweeteners and
    sweetener-containing products; (3) the program's costs to U.S. sweetener
    users depend on the world price of sugar and can vary from year to
    year--they will be higher, other things being equal, when the difference
    between the domestic and the world price is greater; (4) in 1998, for
    example, the program's costs to users were higher than in 1996 because
    the world price dropped while the domestic price remained about the
    same; (5) the primary beneficiaries of the sugar program's higher prices
    are domestic sugar beet and sugarcane producers who, GAO estimates,
    received benefits of about $800 million in 1996 and about $1 billion in
    1998; (6) about 70 percent of the benefits went to sugar beet growers
    and processors; (7) sugarcane producers received about 30 percent of the
    benefits; (8) GAO estimates that the sugar program resulted in net
    losses to the U.S. economy of about $700 million in 1996 and about $900
    million in 1998; (9) GAO net loss estimates include economic
    inefficiencies and transfers to foreign producers; (10) economic
    inefficiencies occurred, for example, when the sugar program's
    artificially high domestic prices encouraged farmers to grow sugar beets
    instead of another crop, such as wheat, that, without the sugar program,
    might have been relatively more profitable; (11) inefficiencies also
    occurred when artificially high sugar prices discouraged consumers from
    purchasing sugar; (12) the cost of these inefficiencies totalled about
    $300 million in 1996 and about $500 million in 1998; (13) transfers from
    the U.S. economy to foreign producers occurred because foreign producers
    received artificially high prices for the raw sugar they exported to the
    United States; (14) GAO estimates that these transfers amounted to about
    $400 million in both 1996 and 1998; and (15) the transfers were about
    the same in each year despite the larger difference between domestic and
    world prices in 1998 because the United States imported less sugar in
    1998.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  RCED-00-126
         TITLE:  Sugar Program: Supporting Sugar Prices Has Increased
    	     Users' Costs While Benefiting Producers
          DATE:  06/09/2000
       SUBJECT:  Projections
    	     Sugar
    	     Agricultural production
    	     Agricultural industry
    	     Importing
    	     Prices and pricing
    	     Foreign trade agreements
    	     Price supports
    	     Agricultural programs
    	     Economic analysis
    IDENTIFIER:  USDA Sugar Program

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Testimony.                                               **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO/RCED-00-126

    Appendix I: The U.S. Sugar Program and Recent Price and
    Production Trends

    12

    Appendix II: Estimating Economic Gains and Losses From
    the U.S. Sugar Program

    20

    Appendix III: Structure of the CARD International Sugar Model

    46

    Appendix IV: Economic Analysis of a Tariff-Rate Quota

    50

    Appendix V: Estimated Net Losses to the U.S. Economy Accruing
    to Foreign Sugar Importers, Fiscal Year 1998

    53

    Appendix VI: Comments From the U.S. Department of Agriculture

    55

    Appendix VII: Comments From the American Sugar Alliance

    78

    Appendix VIII: Comments From the U.S. Cane Sugar Refiners'
    Association

    102

    Appendix IX: GAO Contacts and Staff Acknowledgments

    104

    Table 1: U.S. and World Prices for Raw and Refined Sugar,
    1985-98 14

    Table 2: Acres of Sugarcane and Sugar Beets Harvested, by State,
    Crop Years 1995-99 16

    Table 3: Cane Sugar and Beet Sugar Production and USDA Loans,
    by State, Crop Years 1997 and 1999 18

    Table 4: U.S. Prices for HFCS, 1985-98 19

    Table 5: Estimated Economic Gains and Losses Resulting From
    the Sugar Program, 1996 and 1998 21

    Table 6: Estimated Distribution Among User Groups of Benefits of Eliminating
    the Sugar Program Under Different Pass-Through Assumptions, 1996 and 1998 23

    Table 7: Estimated Effect of Eliminating the Sugar Program on
    Prices and Production 25

    Table 8: Estimated Longer Term Economic Gains and Losses if
    the Sugar Program Were Eliminated 26

    Figure 1: U.S. Sugar Production (in thousands of short tons),
    Fiscal Years 1990-2000 15

    Figure 2: Effects of Removing the TRQ and USDA's Loan Program
    on U.S. Prices and Quantities of Raw Sugar 30

    Figure 3: The TRQ's Effect on Imports 51

    ASA American Sugar Alliance

    CARD Center for Agricultural and Rural Development at Iowa State University

    EV equivalent variation

    HFCS high-fructose corn syrup

    NAFTA North American Free Trade Agreement

    SIC standard industrial classification

    TRQ tariff-rate quota

    USDA U.S. Department of Agriculture

    Resources, Community, and
    Economic Development Division

    B-285072

    June 9, 2000

    The Honorable Dianne Feinstein
    United States Senate

    The Honorable George Miller
    The Honorable Dan Miller
    House of Representatives

    The sugar program, administered by the U.S. Department of Agriculture
    (USDA), guarantees domestic cane sugar and beet sugar producers (growers and
    processors) a minimum price for sugar, which at times during the past year
    was about three times the world market price. The sugar program supports
    domestic sugar prices by offering loans to sugar processors at a rate
    established by law: 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. (See app. I.) The program has allowed processors to forfeit their
    sugar to the federal government instead of repaying their loans--which some
    processors might do if domestic sugar prices fall below the level of the
    loan rate plus certain costs that processors would no longer incur if they
    forfeited. To minimize the likelihood of forfeitures, a direct cost to
    taxpayers, the sugar program has maintained artificially high sugar prices
    by restricting the amount of sugar that can be imported at a low tariff
    rate.

    Our April 1993 report,1 requested by then Representative Charles E. Schumer,
    estimated that the sugar program cost the domestic users of sugar and other
    sweeteners about $1.4 billion (in 1991 dollars) annually from 1989 through
    1991 and found that the program primarily benefited U.S. sugar producers and
    manufacturers of high-fructose corn syrup (HFCS), a sweetener primarily used
    in soft drinks. We recommended that the Congress gradually lower the loan
    rate for sugar and direct USDA to adjust import quotas accordingly to
    achieve a lower U.S. market price. The 1996 Farm Act did not revise the
    sugar program along the lines that we had recommended.

    To account for changing conditions in U.S. and world sweetener markets in
    recent years, you requested that we update the analysis in our 1993 report.
    Specifically, you asked us to estimate the U.S. sugar program's (1) costs to
    domestic sweetener users, (2) benefits to domestic sugar and HFCS producers,
    and (3) net effects on the U.S. economy--that is, the differences between
    the costs to users and the benefits to producers that result from
    artificially high sweetener prices.

    Because USDA does not have a comprehensive economic model of the U.S. and
    world sweetener markets, we developed a model for analyzing the costs,
    benefits, and net effects of the U.S. sugar program. Our model used data on
    sweetener prices and quantities for the U.S. and world markets and estimated
    sugar prices for both markets in the absence of the U.S. sugar program. (See
    apps. II and III for descriptions of the model's U.S. and world markets.)
    Specifically, we used our model to compare--for both 1996 and 1998--the
    domestic and world prices for sugar, HFCS, and other corn sweeteners with
    estimated domestic and world prices if there were no sugar program.2 Our
    model then used these price comparisons to estimate the program's costs,
    benefits, and net effects. As in any modeling effort, there is uncertainty
    associated with the estimates that we developed because of uncertainty about
    the model's structure, data, and assumptions. These estimates, therefore,
    should be interpreted as indicative of the order of magnitude of benefits
    and costs, rather than as precise estimates. Despite this uncertainty, we
    believe that the process for developing our model has been rigorous and that
    our model is both comprehensive and methodologically sound. As agreed with
    your offices, we did not analyze how the gradual reduction of U.S. tariffs
    for Mexican sugar through 2008 under the North American Free Trade Agreement
    might affect domestic sugar prices. However, our model could be used for
    this analysis as well as for other types of analyses in the future.

    This letter summarizes our findings. More detailed information on our
    model's results is presented in appendix II.

    We estimate that the sugar program cost domestic sweetener users about $1.5
    billion in 1996 and about $1.9 billion in 1998.3 Sweetener users included
    (1) sugarcane refiners that bought raw cane sugar, (2) food manufacturers
    that bought refined sugar and other sweeteners, and (3) final consumers who
    bought sweeteners and sweetener-containing products. The program's costs to
    U.S. sweetener users depend on the world price of sugar and can vary from
    year to year--they will be higher, other things being equal, when the
    difference between the domestic and the world price is greater. In 1998, for
    example, the program's costs to users were higher than in 1996 because the
    world price dropped while the domestic price remained about the same.

    If the sugar program were eliminated and the domestic price of sugar fell,
    it would be difficult to predict the extent to which and the speed with
    which sugar refiners and manufacturers of sugar-containing foods would pass
    their cost reductions through to final consumers. This would depend on,
    among other things, the degree of competition in their markets. For example,
    the market for table sugar is likely to be more price-competitive than the
    markets for sugar-containing foods for several reasons, including that table
    sugar varies little from brand to brand while most sugar-containing foods
    have greater product differentiation. As a result, sugar refiners that
    market table sugar might be more likely than manufacturers of
    sugar-containing foods (such as candy makers) to lower their prices, and
    this pass-through might occur more quickly. Assuming that, in absence of a
    sugar program, competition among sugar refiners had caused them to pass all
    of their cost reductions for table sugar through to consumers and the
    manufacturers of sugar-containing foods had not passed through any of their
    cost reductions, we estimate that final consumers could have benefited
    generally by about $800 million using 1998 data and by about $600 million
    using 1996 data. If both sugar refiners and the manufacturers of
    sugar-containing foods passed through all of their cost reductions, the
    maximum annual benefit to final consumers would be about $1.9 billion using
    1998 data and about $1.4 billion using 1996 data. Table 6 in appendix II
    provides additional information on the benefits accruing to all sweetener
    users (refiners, food manufacturers, and final consumers) under these
    alternative assumptions about the degree to which cost reductions are passed
    through.

    The primary beneficiaries of the sugar program's higher prices are domestic
    sugar beet and sugarcane producers who, we estimate, received benefits of
    about $800 million in 1996 and about $1 billion in 1998.4 About 70 percent
    of the benefits went to sugar beet growers and processors. Sugarcane
    producers received about 30 percent of the benefits.

    HFCS producers received little, if any, benefit from the sugar program in
    either 1996 or 1998, according to our current model's estimates. This result
    contrasts with our finding in 1993. At that time, HFCS cost a few cents per
    pound less than domestic sugar, and both products cost about twice as much
    as sugar on the world market. Thus, if the domestic price of sugar had
    fallen in 1993, HFCS producers would have had to reduce their prices to
    remain competitive. Since 1993, the price of HFCS has fallen, and today it
    is much lower than the wholesale price of sugar in the United States.
    Furthermore, the possibilities for substitution between sugar and HFCS are
    more limited than in prior years because technological advances have
    improved HFCS products and created more specialized sweetener markets. As a
    result, even if the sugar program were removed and the price of domestic
    sugar fell substantially, the impact on the price of HFCS would be
    limited--HFCS producers might no longer need to lower their prices to remain
    competitive. Executives from the Corn Refiners' Association, which
    represents HFCS manufacturers, agreed with our model's results as they
    pertained to HFCS, stating that HFCS producers do not benefit from the sugar
    program because domestic HFCS prices are no longer linked to sugar prices.

    We estimate that the sugar program resulted in net losses to the U.S.
    economy of about $700 million in 1996 and about $900 million in 1998. Our
    net loss estimates include economic inefficiencies and transfers to foreign
    producers. Economic inefficiencies occurred, for example, when the sugar
    program's artificially high domestic prices encouraged farmers to grow sugar
    beets instead of another crop, such as wheat, that, without the sugar
    program, might have been relatively more profitable. Inefficiencies also
    occurred when artificially high sugar prices discouraged consumers from
    purchasing sugar. The cost of these inefficiencies totaled about $300
    million in 1996 and about $500 million in 1998. Transfers from the U.S.
    economy to foreign producers occurred because foreign producers received
    artificially high prices for the raw sugar they exported to the United
    States. (See app. V.) We estimate that these transfers amounted to about
    $400 million in both 1996 and 1998. The transfers were about the same in
    each year despite the larger difference between domestic and world prices in
    1998 because the United States imported less sugar in 1998.

    We provided the U.S. Department of Agriculture; the American Sugar Alliance,
    which represents sugarcane and sugar beet growers; and the U.S. Cane Sugar
    Refiners' Association with a draft of this report for review and comment.

    The U.S. Department of Agriculture stated that our model's results were
    suspect and should not be quoted authoritatively, citing three broad areas
    of concerns. First, the Department stated that the report's methodology was
    not adequately developed or justified. We disagree. We took several actions
    to help ensure that our model was methodologically sound. Initially, we
    contracted with a well-known expert in modeling the international trade of
    agricultural commodities and with a prominent agricultural economist to work
    with us in developing the model. Then, in December 1999, we sent our
    proposed model to four outside academicians who specialize in agricultural
    economics and international trade economics and revised the model in
    response to their comments. We also sent the proposed model to the
    Department at that time, but the Department did not provide comments.
    Finally, our process for obtaining agency comments on draft reports served
    as a last check of our methodology. In response to these comments, we
    adjusted our model to more fully account for certain transportation costs in
    our final estimates. Second, the Department stated that documentation of the
    economic model was inadequate. We disagree. We included two appendixes in
    the draft report that provided detailed information about the model. While
    we believe that our model was adequately documented, the Department
    suggested some useful clarifications that we incorporated. Third, the
    Department stated that in numerous places the model's results are
    inconsistent with our description of the model or alternative data sources.
    For example, the Department disagrees with our model's finding that HFCS
    producers would experience few economic losses if the sugar program were
    eliminated. We continue to believe that this finding is accurate. Recent
    price data show that while HFCS producers benefited from the sugar program
    in the 1980s and early 1990s, the domestic HFCS and sugar markets have since
    been decoupled because of domestic price, cost, and market conditions. After
    thoroughly examining this and each of the Department's other concerns about
    our model's results and discussing them with experts outside GAO, we
    continue to believe that the model's results are reasonable. See appendix VI
    for the Department's written comments and our responses.

    The American Sugar Alliance also disagreed with the draft report's analysis.
    Its concerns also fell into three general areas. First, the Alliance stated
    that our methodology for estimating the sugar program's cost to users was
    flawed because our model used world prices of raw sugar that did not reflect
    each country's cost of production--the Alliance asserted that our model's
    world prices were distorted by, among other things, subsidies provided by
    other countries and differences in labor and environmental standards. We
    believe that our methodology is appropriate. Our model estimated the impact
    of the U.S. sugar program in the world as it exists today--not in a
    hypothetical "free market" environment, as the Alliance suggested. To
    isolate the sugar program's effects, we made the analytical assumption that
    all factors, other than the U.S. sugar program, would remain unchanged.
    Second, the Alliance stated that our model incorrectly assumed that food
    manufacturers and retailers would pass through 100 percent of their savings
    to final consumers if the sugar program were eliminated. In fact, the draft
    report noted that the extent to which cost reductions would be passed
    through to consumers would depend on the degree of competition in their
    markets. We revised the report, however, to further clarify the different
    assumptions we used in discussing the extent to which final consumers could
    benefit if the sugar program were eliminated. Third, the Alliance stated
    that we did not sufficiently assess the benefits and costs of the sugar
    program, noting among other things that rural areas would suffer if the
    sugar program were eliminated. As stated in our study objectives, this
    report focuses on the U.S. sugar program's (1) costs to domestic sweetener
    users, (2) benefits to domestic sugar and HFCS producers, and (3) net
    effects on the U.S. economy. The American Sugar Alliance also provided
    comments to clarify what it perceived to be misleading statements and
    analytical errors in the draft report. We address each of these comments in
    appendix VII, which contains the American Sugar Alliance's complete written
    comments and our responses.

    The U.S. Cane Sugar Refiners' Association stated that we had done a thorough
    job of illuminating the very significant impact of the sugar program on
    different interests. The Association also provided comments to improve the
    report's technical accuracy, which we incorporated as appropriate. See
    appendix VIII for the written comments of the U.S. Cane Sugar Refiners'
    Association.

    Estimating the total cost of the sugar program to users is controversial
    because the total cost is not a simple difference between the 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. In developing our model, we:

    � Contracted with Professor John C. Beghin, who heads the Trade and
    Agricultural Policy Division at Iowa State University's Center for
    Agricultural and Rural Development, to work with our staff economists to
    integrate an economic model of the U.S. sweetener market with the Center's
    international trade model for agricultural commodities. Professor Beghin is
    a recognized expert in agricultural trade policy and has extensive
    experience in developing econometric models of the U.S. and world markets
    for agricultural commodities. We also contracted with Professor Bruce
    Gardner, of the University of Maryland and a former USDA Assistant Secretary
    for Economics, to consult with Professor Beghin and our economists in
    developing our model, assessing the reasonableness of its results, and
    responding to comments from outside consultants and organizations.

    � Provided our proposed model for review and comment in December 1999 to
    Professor James Anderson of Boston College, Professor Andrew Schmitz of the
    University of Florida, Professor Daniel Sumner of the University of
    California at Davis, and Professor Michael Wohlgenant of North Carolina
    State University. We incorporated many of their comments as we revised the
    proposed model. We also provided our proposed model to USDA for review and
    comment in December 1999. However, USDA did not provide comments.

    � Obtained extensive data on sweetener prices and quantities for the U.S.
    and world markets in 1996 and 1998. These included data on (1) production
    and prices for sugar, HFCS, and other corn sweeteners and (2) the use of
    sweeteners by U.S. industries, disaggregated to the fourth level of the U.S.
    Bureau of the Census' Standard Industrial Classification. We obtained these
    data from USDA's Economic Research Service; the Bureau of the Census and the
    Bureau of Economic Analysis, within the Department of Commerce; the Bureau
    of Labor Statistics, within the Department of Labor; and private industry
    organizations. We selected 1998 because it is the most current year for
    which price and quantity data were available when we developed our model and
    1996 because it was a recent year that provided a contrast in the world
    price of sugar and the U.S. prices of corn, wheat, and other crops.

    � Used the model to estimate the effect of terminating the U.S. sugar
    program on (1) the U.S. and world prices of sugar and (2) U.S. sweetener
    producers and users. The U.S. sweetener part of the model is the U.S.
    component of the CARD world sugar model, extended on the supply side to
    include linkages with the corn, HFCS, and wheat markets. In addition,
    Professor Beghin, in collaboration with our economists, extended the demand
    side of the CARD domestic sweetener model to include the demand for
    sweeteners from food processors, as well as the direct demand for sweeteners
    by final consumers. We interpreted the sugar program's estimated costs in
    1996 and 1998 as the opposite of estimated benefits that would be derived by
    the program's elimination. While our model primarily examined the short-run
    effects of eliminating the sugar program, we also assessed longer-term
    effects by using alternative elasticities for the supply of sweeteners.5

    � Obtained the comments of Professor Gardner and Professor Wohlgenant on the
    final design of our model and its preliminary results before we provided a
    draft of our report to USDA for comment.

    We conducted our work between August 1999 and May 2000 in accordance with
    generally accepted government auditing standards. We did not independently
    verify the data that we obtained from USDA, Commerce, Labor, or industry
    sources and used in our economic model. However, these are the best data
    available on U.S. and world prices and production. The estimates in this
    report apply only to the 2 years that we analyzed. Estimates for other years
    might be larger or smaller than our 1996 and 1998 estimates, depending on
    the difference between the domestic and world prices of sugar.

    We are sending 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 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
    IX.

    Robert E. Robertson
    Associate Director, Food
    and Agriculture Issues

    The U.S. Sugar Program and Recent Price and Production Trends

    The United States was the fifth largest producer and the fourth largest
    consumer of sugar in the world in 1998. Historically, the United States and
    other countries have protected their domestic growers and processors of cane
    sugar and beet sugar6 from lower world prices through quotas and/or high
    tariffs that restrict sugar imports.

    The U.S. sugar program guarantees domestic sugar producers (growers and
    processors) a minimum price for sugar by (1) offering loans to sugar
    processors at a rate established by law and (2) using a tariff-rate quota
    (TRQ) to restrict the supply of sugar that can be imported at a low tariff
    rate. The Agriculture and Food Act of 1981 allowed sugar processors to
    obtain loans from the U.S. Department of Agriculture's (USDA) Commodity
    Credit Corporation by pledging their sugar as collateral.7 The act also gave
    processors the option to forfeit the sugar that secures their loans to the
    federal government rather than repay their loans in cash, effectively
    establishing the loan rate as a floor for domestic sugar prices. Since 1990,
    USDA has used a TRQ for raw sugar to restrict low-priced imports and
    maintain domestic prices at levels that are high enough to prevent producers
    from forfeiting on their sugar loans.8 Under the TRQ, imported sugar up to
    the quota is either assessed no tariff or a 0.63-cent-per-pound tariff,
    while imports above the quota are assessed a 15.82-cents-per-pound tariff,
    making them prohibitively expensive.9 In 1994, the United States agreed to
    set the TRQ for imported sugar at 1.26 million tons or more each year and to
    administer the TRQ in a manner consistent with its commitments under the
    World Trade Organization Agreement on Agriculture. USDA normally sets the
    size of the TRQ at the beginning of a fiscal year. The U.S. Trade
    Representative then allocates shares of it among 40 designated countries on
    the basis of their exports to the United States from 1975 through 1981.

    The Federal Agriculture Improvement and Reform Act of 1996, commonly known
    as the 1996 Farm Act, modified the sugar program by (1) legislatively
    establishing USDA's 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,
    (4) limiting processors' opportunities to forfeit their sugar to the
    Commodity Credit Corporation by not allowing such forfeitures if the TRQ is
    1.5 million tons or less, (5) eliminating USDA's authority to impose
    marketing allotments for sugar, and (6) increasing the assessment on
    processors to 0.2475 cents per pound for of raw cane sugar and 0.2654 cents
    per pound for beet sugar.10

    USDA has established a TRQ greater than 1.5 million tons each year since the
    1996 Farm Act was enacted. As a result, processors that have obtained
    Commodity Credit Corporation loans have had the option to forfeit their
    pledged sugar instead of repaying their loans. This option becomes important
    to processors if domestic sugar prices drop below USDA's loan rate plus
    transportation and interest costs but minus the 1-cent-per-pound penalty. If
    sugar is forfeited, USDA can choose to immediately resell the sugar on the
    domestic market, sell it for such restricted uses as ethanol manufacture,
    store it, or donate it for humanitarian purposes.

    Table 1 shows that, since 1985, the sugar program has resulted in U.S. raw
    sugar prices that have been more than 8 cents per pound higher than world
    raw sugar prices.11 In 1998, the U.S. raw sugar price was more than 10 cents
    per pound higher than the world price.

     Prices in cents per pound
                       U.S. wholesale                              World
     Year U.S. raw     refined beet      U.S. retail   World raw   refined
          cane sugara                    refined sugar sugarb
                       sugar                                       sugarc
     1985 20.34        23.18             35.34         4.04        6.79
     1986 20.95        23.38             35.08         6.05        8.47
     1987 21.83        23.60             35.28         6.71        8.75
     1988 22.12        25.44             36.60         10.17       12.01
     1989 22.81        29.06             40.03         12.79       17.16
     1990 23.26        29.97             42.78         12.55       17.32
     1991 21.57        25.65             42.80         9.04        13.41
     1992 21.31        25.44             41.53         9.09        12.39
     1993 21.62        25.15             40.54         10.03       12.79
     1994 22.04        25.15             39.99         12.13       15.66
     1995 22.96        25.83             39.83         13.44       17.99
     1996 22.40        29.20             41.79         12.24       16.64
     1997 21.96        27.09             43.26         12.06       14.33
     1998 22.06        26.12             42.98         9.68        11.59

    Note: U.S. and world prices are in nominal dollars.

    a U.S. prices are based on futures contract prices for number 14 raw cane
    sugar on the New York Coffee, Sugar, and Cocoa Exchange.

    b World prices are based on bulk spot contracts for number 11 raw cane sugar
    on the New York Coffee, Sugar, and Cocoa Exchange (free on board stowed
    Caribbean port, including Brazil). To compare the world and U.S. prices, 1.5
    cents per pound needs to be added to the world price to account for the cost
    of transporting raw sugar from the Caribbean to New York.

    c World prices are based on spot contracts for number 5 refined sugar,
    London Daily Price (free on board Europe).

    Source: Sugar and Sweetener Situation and Outlook, Economic Research
    Service, USDA (Sept. 1999), and the New York Coffee, Sugar, and Cocoa
    Exchange.

    Figure 1 shows that domestic sugar production has grown by about 25 percent
    in recent years--from 7.2 million tons in fiscal year 1997 to a projected 9
    million tons in fiscal year 2000.12

    1990-2000

    This growth reflects an 8-percent increase in the estimated acres of
    sugarcane and sugar beets harvested in 2000 compared with the actual acres
    harvested in 1997. (See table 2.) Many farmers have increased the size of
    their sugarcane and sugar beet crops because these crops have offered better
    returns than cotton, wheat, or other crops that the farmers grew in the
    past. In addition, sugarcane and sugar beet farmers have increased their
    crop yields per acre, and sugarcane farmers, in particular, have improved
    their sugar-per-acre recovery rates.

     State        1995       1996       1997       1998      1999
     Sugarcane
     Florida      417,000    417,000    421,000    426,000   436,000
     Hawaii       48,500     42,900     32,000     30,300    32,600
     Louisiana    368,000    335,000    380,000    400,000   441,800
     Texas        41,200     34,600     27,300     32,000    30,700
     Subtotal     874,700    829,500    860,300    888,300   941,100
     Sugar beets
     California   114,000    82,000     99,000     100,000   105,000
     Colorado     41,100     51,100     66,400     57,300    67,900
     Idaho        197,000    184,000    197,000    203,000   210,000
     Michigan     188,000    130,000    160,000    173,000   187,000
     Minnesota    420,000    438,000    446,000    458,000   469,000
     Montana      55,500     57,500     58,300     62,400    61,800
     Nebraska     72,300     51,200     60,300     47,400    66,800
     New Mexico   a          900        1,600      0         0
     North Dakota 204,200    225,300    227,500    242,600   253,000
     Ohio         15,300     4,600      900        1,100     1,200
     Oregon       17,800     16,300     17,400     17,500    19,700
     Texas        19,300     12,600     15,000     0         0
     Washington   a          13,000     18,000     36,000    27,000
     Wyoming      61,500     56,800     60,900     53,300    57,000
     Subtotal     1,406,000  1,323,300  1,428,300  1,451,600 1,525,400
     Total        2,280,700  2,152,800  2,288,600  2,339,900 2,466,500

    Note: USDA's World Agricultural Outlook Board estimates that 939,000 acres
    of sugarcane and 1,527,000 acres of sugar beets will be harvested in crop
    year 2000.

    a In 1995, the acreage harvested in New Mexico and Washington was included
    in 14,100 acres listed as other states.

    Source: Sugar and Sweetener Situation and Outlook, Economic Research
    Service, USDA (Sept. 1999).

    In November 1999, USDA announced that the TRQ for raw sugar imports in
    fiscal year 2000 would be slightly higher than 1.5 million tons, giving
    sugar processors that obtained USDA loans the option to forfeit their sugar
    to the government if domestic prices drop below the loan rate plus certain
    costs that processors would no longer incur if they forfeit.13 In February
    2000, U.S. raw sugar prices on the New York Coffee, Sugar, and Cocoa
    Exchange dropped to 16.5 cents per pound as a result of the increasing
    supply of sugar. As of May 1, 2000, raw sugar prices had recovered to about
    19.7 cents per pound14--around the minimum price necessary to provide an
    economic incentive to U.S. sugar processors to repay their USDA loans rather
    than forfeit the sugar that secures their loans to the government.15

    In May 2000, USDA announced that it would seek to purchase 150,000 tons of
    domestic sugar to reduce the cost of expected sugar program loan forfeitures
    later this fiscal year. While data on the total amount of USDA loans to
    sugar processors in 2000 were not available, table 3 shows that sugarcane
    processors substantially increased their use of USDA loans in 1999, as
    compared with 1997. U.S. sugar processors have not forfeited sugar to the
    government since 1994, when small amounts were forfeited.

                           Sugar production in short tons (raw value)

                                    USDA loans made for                USDA loans made for
                                           1997                               1999
                       Estimated  Production              Estimated  Production
       State   Farmsa     1997     covered   Dollar value    1999      covered  Dollar value
                      production  by loans               production   by loans
     Cane sugar
     Florida   152    1,925,000   56,000     $20,000,000 2,125,000   470,000    $167,798,000
     Hawaii    13     363,000     0          0           380,000     0          0
     Louisiana 705    1,262,000   126,000    46,171,000  1,615,000   354,000    129,975,000
     Texas     103    80,000      18,000     5,851,000   100,000     24,000     8,659,000
     Subtotal  973    3,630,000   200,000    $72,022,000 4,220,000   848,000    $306,432,000
     Beet sugar
     California449    436,000     0          $0          450,000     0          $0
     Colorado  530    192,000     0          0           203,000     0          0
     Idahob    921    765,000     422,000    189,506,000 734,000     320,000    142,302,000
     Michigan  1,182  446,000     175,000    83,245,000  465,000     146,000    69,237,000
     Minnesota 1,622  1,212,000   0          0           1,361,000   180,000    82,008,000
     Montana   415    180,000     0          0           201,000     0          0
     Nebraska  367    149,000     0          0           183,000     0          0
     New Mexico5      7,000       0          0           0           0          0
     North
     Dakota    873    618,000     0          0           752,000     18,000     8,201,000
     Ohio      33     2,000       0          0           3,000       0          0
     Oregon    167    73,000      0          0           68,000      0          0
     Texas     119    40,000      0          0           0           0          0
     Washington58     87,000      0          0           119,000     28,000     12,499,000
     Wyoming   356    182,000     0          0           162,000     0          0
     Subtotal  7,097c 4,389,000   597,000    $272,751,0004,701,000   692,000    $314,247,000
     Total     8,070  8,019,000   797,000    $344,773,0008,921,000   1,540,000  $620,679,000

    Note: USDA loans are in nominal dollars.

    a USDA's 1997 census of agriculture estimate of the farms that grew
    sugarcane and sugar beets. In contrast, USDA's Farm Service Agency estimated
    that about 11,800 farms grew sugar beets nationwide in 1997. The census of
    agriculture uses a more restrictive definition of a farm that, for example,
    counts as a single farm land that has been subdivided into several smaller
    units that, in some cases, are operated by different family members.

    b USDA loans were with a sugar beet processor that has its corporate
    headquarters in Utah and processing facilities mainly in Idaho.

    c Subtotal excludes two farms in Illinois and three farms in Kansas that
    USDA's 1997 census of agriculture identified because sugar beet production
    data for these states were not available.

    Source: USDA's 1997 census of agriculture, Economic Research Service, and
    Farm Service Agency.

    High-fructose corn syrup (HFCS) competes with sugar for leadership in the
    U.S. sweetener market. Each year from 1985 through 1994, the weighted
    average HFCS price was consistently at least 3 cents per pound lower than
    the wholesale refined beet sugar price. Since 1992, the weighted average
    HFCS price dropped from 22 cents per pound to 12.4 cents per pound in
    1998--13.7 cents per pound less than the wholesale refined beet sugar price.
    (See table 4; prices are in nominal dollars.) Because of this cost
    advantage, the domestic supply of HFCS grew by almost 40 percent, from 6.8
    million tons (dry weight) in 1992 to 9.5 million tons (dry weight) in 1999.
    HFCS now accounts for more than half of the total U.S. sweetener output,
    with approximately 75 percent of the entire HFCS supply going to the
    beverage industry. However, HFCS represented only about 6 percent of total
    U.S. corn usage in 1998.

     Prices in cents per pound (dry weight)
                              Weighted average
     Year                                       U.S. wholesale refined beet
          HFCS-42a  HFCS-55b  HFCS price        sugar price
     1985 17.75     19.95     19.18             23.18
     1986 18.07     19.96     19.30             23.38
     1987 16.50     17.46     17.11             23.60
     1988 16.47     18.68     17.80             25.44
     1989 19.24     21.41     20.54             29.06
     1990 19.69     21.88     20.99             29.97
     1991 20.93     23.32     22.34             25.65
     1992 20.70     23.00     22.03             25.44
     1993 18.83     20.95     20.08             25.15
     1994 18.77     22.51     21.01             25.15
     1995 15.63     19.00     17.67             25.83
     1996 14.46     20.60     18.28             29.20
     1997 10.70     13.98     12.78             27.09
     1998 10.58     13.43     12.40             26.12

    Note: U.S. prices for HFCS and wholesale refined beet sugar are in nominal
    dollars.

    a HFCS-42 is used in canned fruits, condiments, and other processed foods
    that need mild sweetness.

    b HFCS-55 is used to make soft drinks, ice cream, and frozen desserts.

    Source: GAO's analysis of data from USDA and the sweetener industry.

    Estimating Economic Gains and Losses From the U.S. Sugar Program

    The sugar program has used farm commodity and trade policy instruments to
    maintain domestic sugar prices at levels that exceed world prices without
    requiring the government to buy large quantities of domestic sugar. Our
    economic model analyzed the effects of eliminating the sugar program on
    prices and production by linking a multimarket domestic sweetener model to a
    multicountry world sweetener model. We estimated the economic welfare16
    effects of the program--the gains and losses to the most heavily affected
    producer and consumer groups--by interpreting the estimated welfare loss
    (gain) resulting from the elimination of the sugar program as an estimate of
    the gain (loss) accruing to each group from the presence of the program.17
    Our analysis included the markets for sugar beet and sugarcane production,
    corn and HFCS production, sugar refining, food processing, and the final
    consumption of sugar and food products containing sweeteners. In addition,
    we estimated the net loss to the U.S. economy (economic welfare gains minus
    losses) resulting from artificially high sweetener prices. This net loss
    includes economic inefficiencies (known as deadweight losses) and economic
    rent transfers to foreign sugar exporters.

    This appendix provides (1) our model's estimates of the sugar program's
    costs and benefits; (2) an overview of our modeling process; (3) a
    description of the policy simulations used in our analysis; (4) a more
    detailed discussion of the theoretical economic framework of our U.S. sugar
    model, including the methods used to estimate welfare gains and losses for
    participants in the various affected markets; and (5) a description of the
    data and data sources used.

    Our model estimated the costs and benefits of the sugar program by
    comparing--for both 1996 and 1998--the actual domestic and world prices for
    sugar, HFCS, and other sweeteners with the estimated domestic and world
    prices if the sugar program were eliminated. Both the estimated costs of the
    sugar program to sweetener users and the estimated benefits to sugar beet
    and sugarcane producers were higher in 1998 when the difference between the
    domestic and world prices for sugar was greater.

    As shown in table 5, we estimated that the sugar program cost domestic
    sweetener users--sugarcane refiners, food manufacturers, and final
    consumers--about $1.5 billion in 1996 and about $1.9 billion in 1998. In our
    analysis, the distribution of these welfare losses resulting from the sugar
    program among the sweetener user groups depends on assumptions about the
    extent to which refiners' and manufacturers' cost reductions from
    eliminating the sugar program would be passed on to consumers.

     1999 dollars in millions
     Category                                   1996      1998
     Welfare gains accruing to producers        $788      $1,045
     Sugarcane producers                        241       307
     Sugar beet growers                         490       650
     Sugar beet processors                      58        89
     HFCS manufacturers and corn growers        (1)       (1)
     Welfare losses accruing to sweetener users ($1,471)  ($1,938)
     Net loss to the U.S. economy               ($683)    ($893)
     Economic inefficiencies                    (273)     (532)
     Transfers to foreign suppliers             (410)     (361)

    Note: Numbers in parentheses are economic losses.

    We estimated that the total welfare gains by domestic sugar beet and
    sugarcane producers were about $800 million in 1996 and about $1 billion in
    1998. About 70 percent of these benefits went to sugar beet growers and
    processors, while the remaining 30 percent went to sugarcane producers.

    We estimated that HFCS producers did not receive welfare gains from the
    sugar program in either 1996 or 1998 primarily because (1) HFCS prices have
    been much lower than the wholesale price of sugar in the United States since
    1995 and (2) the possibilities for substitution between sugar and HFCS are
    more limited than in prior years because technological advances have
    improved the HFCS product and created more specialized sweetener markets.18
    Thus, HFCS producers would not need to lower their price further to remain
    competitive if the sugar program were eliminated. In contrast, our 1993
    model of the sweetener markets in the late 1980s and early 1990s--when the
    price of HFCS was considerably higher--found that a fall in the domestic
    price of sugar would have put pressure on HFCS producers to lower the price
    of HFCS to remain competitive. As a result, our 1993 model found that HFCS
    producers received substantial welfare gains from the sugar program.
    Executives from the Corn Refiners' Association, which represents HFCS
    manufacturers, agreed with our results as they pertained to HFCS. They told
    us that the domestic HFCS market was "decoupled" from the domestic sugar
    market--HFCS prices are no longer linked to sugar prices, and the soft drink
    industry has relied on competition among HFCS manufacturers to minimize its
    sweetener costs.

    We estimated that the sugar program resulted in net losses to the U.S.
    economy of about $700 million in 1996 and about $900 billion in 1998 because
    total welfare losses exceeded gains. These net losses included (1)
    production and consumption inefficiencies of $300 million in 1996 and $500
    million in 1998 and (2) transfers of $400 million in 1996 and in 1998 to
    foreign countries allocated a portion of the TRQ for sugar imports to the
    United States.

    Eliminated

    If the sugar program were eliminated, it would be difficult to predict the
    extent to which or the speed with which intermediate users of sweeteners
    would pass through lower sugar costs to final consumers. Table 6 presents
    two estimates of how the benefits of eliminating the sugar program might be
    distributed based on two different sets of pass-through assumptions.

                              1999 dollars in millions
                                   1996                          1998

     Distribution of      Partial          Full            Partial       Full
        benefits       pass-through    pass-through     pass-through     pass-
                                                                       through
     Final consumers  $587            $1,434           $769            $1,960
     Food
     manufacturers    715             (60)             999             (85)
     Sugarcane
     refiners         95              97               61              63
     Total            $1,397          $1,471           $1,829          $1,938

    Note: The partial pass-through results represent a full pass-through of cost
    reductions by sugar refiners and no pass-through by food processors to
    consumers with the elimination of the sugar program. The full pass-through
    results assume all cost reductions are passed through to final consumers.
    Numbers in parentheses are economic losses.

    The first set of estimates is based on the assumption that (1) competition
    would lead sugar refiners to pass cost reductions associated with
    eliminating the sugar program through to final consumers in the form of
    lower prices for table sugar but (2) manufacturers of sugar-containing foods
    would retain their cost savings. Under this "partial pass-through"
    assumption, final consumers would have gained about $600 million using 1996
    data and about $800 million using 1998 data if the sugar program had been
    eliminated.19 We chose to present estimates based on this assumption because
    refined white sugar is more homogeneous than sweetener-containing food
    goods. With a homogeneous product such as sugar, each brand is almost
    perfectly substitutable for another. When substitutability between products
    is nearly perfect, it is more difficult for sellers to insulate their
    products from the price competition of rivals. In contrast, when products
    are highly differentiated, as many sweetener-containing food products are,
    firms may be less able to attract customers from competitors by offering
    lower prices, so there is less incentive to compete by lowering prices.
    Instead, firms may use other nonprice forms of competition, such as greater
    advertising. In addition, in sugar refining, the cost of raw sugar is a much
    larger share of the total cost of production compared with its share in the
    production of other food products. Therefore, a change in the cost of raw
    sugar would be likely to have a larger effect on the price of table sugar
    than on the prices of sugar-containing products.

    Our second set of estimates is based on the assumption that competition
    among both food manufacturers and sugar refiners is such that all cost
    reductions that would result from eliminating the sugar program would be
    passed on to final consumers. This "full pass-through" assumption yields an
    upper bound to the potential savings to consumers. Under this assumption, we
    estimate that the benefits to final consumers of eliminating the sugar
    program would have been about $1.5 billion in 1996 and about $1.9 billion in
    1998.

    Table 7 compares actual sugar prices and production in 1996 and 1998 with
    our model's estimates, which assume the termination of the sugar program. In
    particular, our model shows that if the sugar program had been eliminated,
    the domestic price of raw sugar would have dropped from about 22 cents per
    pound to about 14.9 cents per pound in 1996 and to about 12.5 cents per
    pound in 1998, with comparable declines in the wholesale price of domestic
    refined sugar. We estimated that raw sugar imports would have increased by
    about 1.1 million tons in 1996 and by about 1.6 million tons in 1998 if the
    sugar program had been eliminated, reflecting both the increased domestic
    demand for sugar and the decreased domestic production of sugar beets and
    sugarcane.

      Price in cents per pound and production and imports in millions of short
                                  tons (raw value)
                                     1996                        1998

                             Actual     Without the      Actual    Without the
                                       sugar program              sugar program
     U.S. raw sugar price   22.40     14.91            22.06      12.46
     World raw sugar pricea 12.24     13.41            9.68       10.96
     U.S. wholesale refined
     sugar price            29.20     21.77            26.12      16.12
     World wholesale
     refined sugar priceb   16.64     19.77            11.59      14.12
     Sugarcane
     Acres harvestedc       953,700   941,300          931,500    916,200
     Production             29.1      28.7             30.0       29.5
     Sugar beets
     Acres harvestedc       1,420,100 1,350,300        1,428,300  1,338,600
     Production             28.1      26.7             29.9       28.0
     Raw sugar imports      2.2       3.3              1.7        3.3

    Note: Our model's estimates of prices without the sugar program are
    expressed in 1999 dollars, while the acutal prices are expressed in nominal
    dollars.

    a The world price for raw sugar is based on a Caribbean location. As
    compared with the U.S. price, the world price for raw sugar does not include
    1.5 cents per pound in cost to transport the sugar to New York.

    b As compared with the U.S. price, the world price for refined sugar does
    not include 2 cents per pound for transportation.

    cAcreage harvested during the previous crop year.

    Table 8 presents our estimates of the welfare changes that would have
    resulted from eliminating the sugar program in 1998, using larger supply
    elasticities than the ones we used to obtain our primary estimates to
    simulate shorter-term changes. Our supply elasticity estimates are arc
    elasticities evaluated for 1998 between historical and post-reform values.
    In particular, our short-run domestic supply elasticities were 0.05 for
    sugarcane and 0.10 for sugar beets, and our short-run import supply
    elasticity was 7.26. To obtain longer-term welfare estimates, we used a
    double Nerlovian domestic supply response with supply elasticities of 0.20
    for cane and 0.26 for sugar beets and an import supply elasticity of 10.17.
    These larger elasticities can be interpreted as longer-term elasticities.
    Therefore, the resulting estimates from our simulation can be interpreted as
    the welfare gains and losses after more time has passed for the economy to
    adjust to the lower sugar prices that would result from eliminating the
    sugar program.

     Dollars in millions
     Category                                  Gain or (loss)
     Welfare losses accruing to producers      ($1,017)
     Sugarcane producers                       (301)
     Sugar beet growers                        (530)
     Sugar beet processors                     (187)
     HFCS manufacturers and corn growers       1
     Welfare gains accruing to sweetener users $1,947
     Final consumer                            1,953
     Food manufacturers                        (84)
     Sugarcane refiners                        78
     Net gain to the U.S. economy              $930
     Economic inefficiencies                   572
     Transfers to foreign suppliers            358

    Note: These results assume a double Nerlovian supply response and a full
    pass-through of program costs to final consumers. Numbers in parentheses are
    economic losses.

    Estimating the welfare gains and losses from the U.S. sugar program requires
    several steps. First, we simulate the elimination of the program to
    determine price and production responses in both domestic and international
    sugar markets. This simulation involves specifying complete U.S. and world
    sweetener models in the presence of the U.S. sugar TRQ and commodity loan
    program. To do this, we used Iowa State University's Center for Agricultural
    and Rural Development (CARD) world sweetener model (see app. III), which
    contains the U.S. domestic sweetener economy as one of its component
    countries. However, we extended and modified the U.S. domestic sweetener
    model to include a more detailed, multimarket approach, including such
    markets as corn and feed, sugar, and HFCS. In the U.S. domestic model, we
    simulated the sugar program's elimination by removing the TRQ for raw and
    refined sugar and allowing more domestic demand to be satisfied by
    lower-priced world imports. Simultaneously, as the U.S. demand for sugar
    increased, the world sugar prices rose somewhat. We also removed USDA's loan
    program for sugar processors and allowed the domestic market prices of sugar
    to fall below the loan rate levels. After these program changes, U.S.
    domestic raw sugar prices approximated the world prices.

    On the supply side of the domestic market, we used the domestic component of
    the CARD sugar model to estimate the welfare changes due to the change in
    the price of sugar. The new U.S. raw sugar price filtered through the
    domestic U.S. sugarcane, sugar beet, corn, and HFCS markets, leading to new
    production quantities. For each of these producing industries, we measured
    the changes in realized quasi-profits, or producer surplus, that would
    result from a change in the quantity demanded and/or the price if the sugar
    program were eliminated.

    Within the domestic sweetener model, we estimated welfare changes for a
    comprehensive demand sector, including sugar processors and refiners,
    sweetener-using industries, and the final consumer. We estimated the changes
    in realized quasi-profits resulting from higher sweetener prices for
    sweetener-using food industries, at the 4-digit Standard Industrial
    Classification (SIC)20 level, using economic methods to derive industry cost
    and demand functions for sugar and HFCS. As part of this analysis, we
    integrated different assumptions about the market power of these industries.

    Furthermore, we developed two estimates of the welfare effects on consumers
    by using different assumptions about the extent to which the benefits of
    eliminating the sugar program would be passed along to the final consumers
    of sugar and sweetener-containing products. Consumers are directly affected
    by the sugar program's elimination through changes in the prices of both
    refined sugar and food items containing a significant amount of sweetener
    that they purchase. We applied an incomplete demand system approach called
    LINQUAD21 and used an exact welfare measure, equivalent variation (EV),22 to
    estimate changes in consumers' expenditures for these items.

    Finally, we aggregated all welfare gains and losses from these groups by
    treating the welfare loss (gain) experienced from eliminating the sugar
    program as an estimate of the gain (loss) accruing to each group from the
    presence of the program. The difference between welfare gains and losses
    accruing from the program is the net loss to the U.S. economy, which
    consists of (1) transfers to foreign producers that resulted from
    artificially high prices for the raw sugar they exported to the United
    States and
    (2) economic inefficiencies, known as deadweight losses. These
    inefficiencies resulted from the use of higher-cost domestic resources to
    produce sweeteners (instead of importing lower-priced sugar) and reduced
    total sugar consumption. These losses did not redistribute income from
    consumers to producers.

    Using this approach, we specified a subset of closely related agricultural
    markets--sugar, HFCS, and corn--that are important in estimating the welfare
    gains and losses from the sugar program. We also included the influence of
    wheat prices on planted sugar beet acreage. One possible limitation of our
    model is that a more general equilibrium approach of modeling the entire
    agricultural sector may have been able to give us more long-term effects by,
    for example, identifying what alternative crops would be produced in the
    absence of the program or how many producers would leave the industry
    entirely. However, general equilibrium models take a more broad-brushed
    approach, often leaving out important market details. Our approach is
    designed to represent the most important sweetener market relationships with
    the available data, while keeping the model tractable.

    The policy scenario for this analysis removes the TRQs for imported raw and
    refined sugar and USDA's loan program for sugar processors that supports the
    price of domestic sugar (see app. IV for a discussion of the economics of
    the TRQ).23 Figure 2 shows the effects of removing both the raw sugar TRQ
    and USDA's loan program: the first panel (a) represents the domestic raw
    sugar market, while the second panel (b) represents the world raw sugar
    market.

    In panel (b), we show two world excess supply situations, ES1 and ES2,
    corresponding to different trade scenarios. As discussed in appendix IV, in
    the presence of a TRQ, the United States faces a kinked world excess supply
    function, as in the bold line, ES1. The vertical line segment, BC, on ES1
    represents the level of the TRQ, below and beyond which there is a supply
    response to price by foreign exporters. Moreover, at import levels below the
    quota, QTRQ, the in-quota tariff applies, and beyond that level, the
    out-of-quota tariff applies. The other excess supply curve, ES2, corresponds
    to the world excess supply in the absence of import restrictions in the
    United States.

    The effect of the TRQ on U.S. imports and prices depends on the location of
    the U.S. excess demand for imports relative to the excess supply. In panel
    (b), we display three potential U.S. import demand situations, ED1, ED2, and
    ED3. The excess demand curve, ED1, represents an import demand schedule that
    intersects the excess supply schedule below the level of the TRQ, while the
    excess demand curve, ED3, represents an import demand schedule that
    intersects the excess supply schedule above the level of the TRQ. With
    excess demand schedule ED2, the TRQ is binding. Price and quantity reach
    equilibrium at the intersection of the U.S. excess demand curve, ED2 and the
    kinked excess supply curve, ES1, on its vertical segment, BC. With the
    removal of the TRQ, increased imports of raw cane sugar drive down domestic
    prices. With the same excess demand schedule, this situation corresponds to
    a new equilibrium level: the point where ED2 intersects ES2, the excess
    supply curve without import restrictions in the United States, with imports
    rising to demand of QFM.

    Because of USDA's loan program for sugar processors, however, domestic
    prices would still not be free to drop to the world price level. Under the
    loan program, producers would still be eligible to forfeit their sugar to
    the government and receive the loan rate, PLR. The loan rate mechanism
    provides a price floor for domestic sugar producers, maintaining domestic
    sugar prices at the loan level, PLR, as in panel (a). However, with the
    simultaneous elimination of the TRQ and the sugar loan program, the domestic
    sugar price is free to fall below the loan rate level. In panel (b) of
    figure 2, this situation corresponds to a new price and trade equilibrium
    level. In the domestic market in panel (a), this corresponds to imports
    increasing from Q2Q3 to Q1Q4. These increased imports lead to a drop in the
    domestic price from P1 to P2. However, P2 is higher than the original world
    price of PW.

    Similarly, we removed the TRQ for imported refined, or "white," sugar. World
    trade in refined sugar has increased because of policies in the European
    Community, the entry of toll refiners,24 and a decrease in freight and
    refining costs. In general, removing the TRQ for refined sugar would have
    the same effect as removing the TRQ for raw sugar-the U.S. price for refined
    sugar would decrease with an increase in imports of refined sugar. A lower
    U.S. refined sugar price would then cause a decrease in the quantity of
    domestic refined sugar supplied and a decline in refiners' demand for
    domestic raw sugar.

    the U.S. Sugar Program

    This section describes our framework for modeling the economic gains and
    losses to the various groups affected by the removal of the sugar program.
    First, we describe the agricultural markets that transform sugar beets and
    sugarcane into white sugar and corn into HFCS, an alternative to sugar in
    soft drinks and other food products. The removal of import restrictions
    under the TRQ would affect the raw cane and refined beet and cane sugar
    markets by allowing free imports in these domestic markets. Second, we
    estimate the welfare effects to sweetener processors, such as cane refiners,
    HFCS refiners, and beet processors. Since a lower price for refined sugar
    would increase the demand for it and could decrease the use of HFCS, the
    price of HFCS could also decrease. The lower price for refined sugar would
    also lead to a decrease in the quantity supplied by refiners, which in turn
    would decrease the demand for sugar beets and sugarcane and, thus, the price
    received by their producers. Third, lower prices for refined sugar and HFCS
    would, other things being equal, lower the cost of production to
    sweetener-intensive food goods industries. As a result, final consumers
    would gain from lower prices for these foods as well as a lower price for
    white table sugar.

    Using the CARD sweetener model, we estimated the welfare effects to sugar
    beet producers by specifying the supply of sugar beets, BS, as a function of
    its price, Pb, the price of competing crops, Pg, and the price of an
    aggregate input, Pf. The CARD domestic sugar model simultaneously solves for
    sugar beet prices as well as acreage, yield, and production levels. Assuming
    a quadratic form for profit in beet production, we can obtain a linear sugar
    beet supply by taking the first derivative of profit with respect to the
    price of beets:

    with λ and μ summarizing the information on parameters bi and
    prices Pg and Pf .25

    Similarly, the supply of cane, CS, is a function of the price of cane, Pc,
    and the price of an aggregate input, Pf . As in the case of beets, the
    extended CARD domestic sugar model simultaneously solves for sugarcane
    prices, acreage, yield, and production levels. Using these parameter
    estimates, we again assume quadratic profits in cane production, and we
    obtain a linear supply of cane:

    If we assume a constant extraction margin ace and marginal cost pricing in
    cane extraction, the cost function of raw cane sugar production is
    Crcs=[(1/γc)Pc+ace]RCSS, where RCSS equals raw cane sugar supply.
    Prices in raw cane sugar production, Prcs , obey the following arbitrage
    condition to express marginal cost pricing in the extraction of raw sugar
    from cane, with γc denoting the exogenous extraction rate:

    We assume constant returns to scale in sugarcane processing, which implies
    that there will be no welfare changes to sugarcane processors from price
    changes due to an elimination of the program. Thus, we estimate changes in
    economic welfare by the changes in quasi-profit or producer surplus realized
    by cane and beet producers, Δ∏c and Δ∏b, defined as:

    Parameter estimates of α, β, λ, μ, γc and ace are
    available from the CARD sugar model.

    With the lower price of sugar, the demand for corn might decrease if food
    processors replace HFCS with sugar in production. We assume that the supply
    of corn, COS, is determined by the maximum of the loan rate for corn,
    LRcorn, or the market price of corn, Pcorn:

    If the market price were higher than the loan rate, as it was earlier in the
    1990s, then corn farmers would respond to this price. If there were a
    decrease in the demand for corn caused by reduced HFCS production, corn
    farmers would lose through a decrease in corn price and production.
    Therefore, corn farmers would lose:

    However, when the loan rate is higher than the market price, as it currently
    is, the price signal perceived by corn farmers is the fixed loan rate. In
    this case, farmers are eligible to receive loan deficiency payments from the
    government.

    Domestic sugar beet processors would also experience changes in economic
    welfare from the extraction process. The domestic supply of white sugar,
    WSS, comes from two sources that are perfect substitutes in supply: beet
    sugar supply, WBS, and refined cane sugar supply. The supply of white sugar
    from beets is a totally inelastic derived demand that comes from the
    extraction of white sugar from sugar beets. With γb denoting the
    exogenous rate of extraction of sugar from beets, prices in beet production
    obey the following condition to express marginal cost pricing:

    where abe denotes the extraction margin parameter in beet sugar extraction.

    Finally, the welfare change for beet processors is then estimated as:

    Because HFCS is an alternative to sugar in many foods, a change in the price
    of sugar may affect the demand for HFCS, and in turn the price of HFCS,
    translating into a change in economic welfare for HFCS producers. The supply
    of HFCS, HFCSS, comes from extracting fructose from corn production with an
    increasing marginal cost of extraction, Phfcs=(1/γcorn)
    Pcorn+awmHFCSS, leading to the supply:

    with awm denoting the marginal margin parameter in HFCS extraction and
    γ being the actual extraction rate for HFCS from corn. Since we
    extended the CARD sugar model to include linkages to the corn and HFCS
    markets, we obtained all parameter estimates for these markets, as well as
    extraction rates and margin parameters, from CARD. Rendleman and Hertel26
    argue that because of feedback through by-product prices, HFCS supply is not
    very price responsive. Equation 11 estimates the change in the welfare of
    HFCS suppliers as captured by the change in the industry's producer surplus:

    Cane sugar refiners experience changes in economic welfare with the
    elimination of the TRQs for raw and refined sugar. Domestic refined cane
    sugar comes from refining domestic and imported raw cane sugar. For cane
    sugar refining, we assume that the supply of white cane sugar, WCS, is
    competitive. Assuming the cost of producing refined cane sugar increases in
    output, this cost consists of the cost of raw cane sugar and the refining
    cost characterized by the margin parameter, arm. We also assume a fixed
    proportion, γrc, between raw cane sugar and refined sugar. The
    marginal cost of refining is equated to the output price to obtain a supply
    schedule:

    There is competitive price arbitrage between domestic sources of white
    sugar, which equates the marginal cost of white cane sugar and beet sugar to
    the white sugar price. Using this arbitrage condition and equations
    (3) and (5), we have:

    Therefore, the welfare change for domestic cane sugar refiners is obtained
    by looking at the change in their quasi-profit, or producer surplus,
    Δ∏wcs, resulting from the change in policy via Prcs (P0rcs to
    P1rcs), output price (from P0ws to P1ws), and output change (from WCS0 to
    WCS1):

    We then estimate the economic welfare effects from changes in sweetener
    prices for food-processing industries under two scenarios. The first
    scenario assumes a constant markup, and thus a full pass-through of benefits
    to consumers of lower input prices and thus output prices. The second
    scenario holds output prices constant but allows food processors to absorb
    the lower sweetener costs from eliminating the program in their marginal
    cost function and thus in their profit margin.

    The derived demand for refined sugar comes from food-processing industries
    producing sweetener-intensive food goods. For food processing, we describe
    the total cost function of each industry i in food processing as:

    where C represents total cost, c~ represents the cost of a composite
    sweetener (sugar and HFCS), "a" is an intercept term, b is a scaling term,
    Ps is the price of white sugar, PHFCS is the price of high-fructose corn
    syrup, Qfgi is output produced by food sector i, and A represents
    information from the prices of other inputs. The derivative of the cost
    function of the composite sweetener (15), with respect to the price of
    sugar, is a nonhomothetic transformation of a Cobb-Douglas functional form27
    and represents the output-constant industrial white sugar demand:

    for all i in sweetener-using food goods where "a" is an intercept term and b
    is a scaling factor to calibrate the own-price elasticity of demand
    between -0.1 and -0.2.28 Similarly, the derivative of (15) with respect to
    HFCS in each food-processing industry represents HFCS demand, HFCSD:

    for all i in sweetener-using food goods where c is an intercept term and
    once again b is a scaling factor to calibrate the own-price elasticity of
    demand between -0.1 and -0.2.

    Using this type of specification implies constant returns to scale in the
    cost structure. Starting from each industry's cost function (15), we derive
    the marginal cost underlying supply decisions:

    where d is an intercept term that reflects the cost of other inputs.

    From profit maximization with market power and conjectural variation,29
    food-processing firms set price above marginal cost with markup coefficient,
    θ, such that

    Therefore, the price schedule of industry i is:

    Equations (16), (17), (18), (19), and (20) determine the transmission of
    lower sweetener prices into lower prices Pfgi to consumers of
    sweetener-containing food goods. Several factors have a role in the price
    transmission: the cost share of sweeteners in the cost of food processing,
    the substitution possibilities within sweeteners (fructose and sugar) and
    between sweeteners and other inputs, and finally the markup and its
    evolution as prices change (McCorriston30 et al.).31 In equation (18), we
    calibrated to replicate a "historical" marginal cost for the industry using
    data from the Bureau of Economic Analysis on output price indexes for
    4-digit SIC industries 2023 to 2099. The historical marginal cost is
    estimated to be the historical price divided by 1.2, or a constant
    20-percent markup of price over marginal cost. We use a 20-percent markup of
    price over marginal cost as this figure is well within the estimates of
    other analysts for the food manufacturing sector.32

    Trade in food industries is ignored because net trade is a very small share
    of total consumption or production in all food industries; these industries
    tend to produce differentiated products, which do not face a strict price
    discipline from the world market; and trade data are scarce and are only
    available up to 1994. Hence, the equilibrium condition in the
    food-processing markets is found by equating the price schedule (20) of each
    industry to the corresponding Marshallian demand (24) as:

    The welfare effect of the sugar program on each food industry is estimated
    by the change in its profit, Δ∏fgi, resulting from the price and
    output changes induced by the policy reform (from P1 to P0 and from FGS0 to
    FGS1):

    We estimated the welfare cost to the final sugar and HFCS consumer by
    assuming a representative consumer with expenditure function E(P, U). In
    this expenditure function, P is a vector of relevant consumer prices and U
    denotes utility. We are interested in two types of goods: white sugar, WS,
    and a vector of sweetener-containing food goods, FG. In addition, we have a
    third aggregate, other goods, OG, for completeness. We use an incomplete
    demand system approach-LINQUAD-as specified in LaFrance33 and Agnew.34 This
    approach allows us to derive an exact welfare measure from an incomplete
    demand system. In addition, we impose restrictions on the structure of
    cross-price responses to reduce the number of parameters to be calibrated.
    The price vector P is decomposed into P=(Pws , Pfg , Pog ), and income is
    denoted by M, with subscripts indicating the respective commodities. The
    subvector Pog is then dropped from the incomplete system. The Marshallian
    demands for the two types of goods of interest, white sugar and
    sweetener-containing food goods, denoted WSD and FGD, are:

    for all i industries containing sweeteners. We use a system of consensus
    estimates of own- and cross-price responses and income responses based on
    Devadoss and Kropf,35 Bhuyan and Lopez,36 and Wohlgenant37 to derive
    parameters ξ, ν, and χ. We solve the following system of
    equations:

    Equations (23) and (24) lead to an equivalent variation, EV, equal to:

    Thus, we compute the change in expenditure, that would produce a change in
    utility equivalent to the price changes, with superscripts 0 and 1 denoting
    initial and final prices.

    Finally, we list the welfare gains and losses from the presence of the sugar
    program accruing to the various groups represented in the model.

    Welfare Losses From the Presence of the Sugar Program

    Losses to consumers (all prices higher as a result of the program):

    Net losses to sweetener-using food processors (higher sweetener input prices
    and higher output price):

    Changes in quasi-profits to cane refiners (higher output price but
    significantly higher input prices):

    Welfare Gains From the Presence of the Sugar Program

    Gains to beet producers (higher output price):

    Gains to beet processors (higher white sugar price partly offset by higher
    beet input prices):

    Gains to cane producers (higher output price):

    Net gains to HFCS producers (higher output price, net of slightly higher
    corn input price):

    Changes in quasi-profits to corn farmers:

    Net gains to the foreign suppliers of raw sugar that have been given quota
    rights consist of the unit rent times the total amount of the TRQ:

    The net welfare loss is the difference between the additional costs of the
    sugar program to the users of sweeteners and the gains to domestic sweetener
    producers and processors:

    This net welfare loss that results from the sugar program consists of
    (1) production and consumption inefficiencies and (2) the transfer of rents
    to foreign suppliers.

    On the supply side, all data, parameters, and extraction rates used in the
    U.S. component of the world sugar model are from CARD. To estimate welfare
    effects for the food-processing industry, we identified a subset of 21
    sweetener-using industries at the 4-digit SIC level (2023 to 2099). We took
    these industries from the major categories of (1) dairy and frozen desserts,
    (2) canned and preserved fruits and vegetables, (3) bread and bakery
    products, (4) confectionery and chocolate products, (5) beverages, and (6)
    miscellaneous food products industries. To calculate the demand and marginal
    cost for sweeteners from these industries, we used data on the value of
    shipments for each industry, the price of sugar and HFCS, and the total
    quantities of sugar and HFCS sold for the years 1996 and 1998. For 1998 HFCS
    cost data, we scaled each industry proportionately, using 1997 Bureau of the
    Census data, to reproduce the exact total disappearance of HFCS in 1998. For
    1996 HFCS data, we used cost data on corn sweeteners from the Bureau of
    Economic Analysis. We obtained price data for sugar, HFCS-42, and HFCS-55
    from USDA and industry sources.

    For the LINQUAD model of final consumer demand, we used producer price index
    data from the Bureau of Labor Statistics for each of our 21
    4-digit SIC industries. We rebased the index numbers such that 1992=100. We
    then divided each index number by the consumer price index number for that
    year, also based with 1992=100, to capture how prices for each food group
    compared with prices in the overall economy. USDA provided data on total
    deliveries of sugar and HFCS. As previously noted, we obtained data on
    income elasticities and own- and cross-price elasticities from several
    sources in the economics literature.

    Structure of the CARD International Sugar Model

    The CARD International Sugar Model is a nonspatial, partial equilibrium
    econometric world sugar model consisting of 29 countries/regions, including
    a component for the rest of the world, to close the model.38 Major sugar
    producing, exporting, and importing countries are included in the CARD
    International Sugar Model. The model specifies only raw sugar trade between
    countries/regions and does not disaggregate refined sugar trade from raw
    sugar trade. Consequently, importers are not categorized as refiners or toll
    refiners because the countries that specialize in these roles are well known
    and stable over time. The model covers the following countries/regions:

     Algeria   Colombia             Guatemala  Mexico        South Korea
     Argentina Cuba                 India      Morocco       Thailand
     Australia Eastern Europe       Indonesia  Pakistan      Turkey
     Brazil    Egypt                Iran       Peru          Venezuela
     Canada    European Union       Japan      Philippines   Rest of the World
     China     Former Soviet Union  Malaysia   South Africa

    The general structure of the submodel for each country includes behavioral
    equations for the area harvested, yield, sugarcane and sugar beet production
    on the supply side, and per-capita consumption and ending stocks on the
    demand side. Equilibrium prices, quantities, and net trade are determined by
    equating excess supply and excess demand across countries and regions. The
    domestic price for each country or region is linked with a representative
    world price through exchange rates and other policy wedges, such as tariffs
    and transfer-service margins. Because of the overall scope of the model, it
    is not feasible to include the complete empirical model in the text of this
    report. The general framework for the submodel for each country consists of
    the following:

    AHt = f (AHt-1, RSPPt-1, RGPt-1, Trend),

    Yield = f (Yieldt-1, Trend),

    Cane and beet production = f (AH, Yield),

    Per-capita sugar consumption = f (RSP, PCRGDP), and

    Ending stocks = f (ESt-1, SC, RSP),

    with AH denoting acreage, RSPP the cane or beet price, RGP the price of
    alternative crops, PCRGDP real income per capita, ES ending stocks, SC sugar
    consumption, and RSP the real raw sugar price. In many countries, beet or
    cane prices are set by policy and can be treated as predetermined. Because
    some countries lack information on the agricultural price, the model uses
    the raw cane sugar price, RSP, instead of the agricultural price in
    specifying the acreage response. In some countries, yield improvements are
    captured by a time trend.

    Although the CARD model in general can be used in either a dynamic or static
    framework, we used its static version. In this way, the CARD international
    sugar model uses contemporaneous price responses in supply, consumption and
    inventory demand. Lagged acreage is fixed at the previous year level in the
    acreage equations. Short-term supply elasticities are based on the
    short-term price responses of the acreage equations, which reflect the cost
    of adjustment between desired acreage and actual acreage. Long-term
    responses are obtained by using the Nerlovian long-term response, which is
    the short-term response divided by the partial adjustment coefficient of the
    corresponding acreage equation. In addition, the elasticity values our
    analysis uses are arc elasticities evaluated for 1998 between the historical
    and post-reform levels.

    We obtained data for the area harvested, yield, and sugarcane and sugar beet
    production from the Food and Agricultural Organization of the United Nations
    and data for sugar production, consumption, and ending stocks from USDA's
    Production, Supply, and Distribution database. Cane and beet production is
    tied to sugar production through the extraction rate. We obtained
    macroeconomic data, such as the real gross domestic product, consumer price
    index, population, and exchange rate from sources including the WEFA Group;
    Project Link; and S&P/DRI.

    We estimated the model for the period 1980 through 1998. We used simple
    linear specifications and ordinary least squares in the estimation of these
    equations to save degrees of freedom, given the short time series used. This
    estimation approach overlooks the potential endogeneity of each country's
    domestic sugar prices and treats them as exogenous in estimating acreage
    response equations. The Caribbean raw sugar price is generally considered to
    be the world market price.

    Most elasticities in the CARD model are comparable to those used by Devadoss
    and Kropf (1996), 39 Hafi et al. (1993),40 and Wohlgenant (1999).41 The
    lagged own-price supply elasticities for sugarcane for Australia (0.02),
    Brazil (0.07), Colombia (0.05), Cuba (0.01), Guatemala (0.02), Mexico
    (0.002), South Africa (0.005), and Thailand (0.014) are highly inelastic in
    the short run. This is consistent with the fact that these countries are
    large producers of sugarcane and exporters of sugar and can harvest several
    annual crops, called ratoons, from one planting of sugarcane. Therefore,
    there is limited acreage adjustment to price fluctuations in the short run.
    These low elasticities are largely the result of the historical policy of
    acreage allotment. The own-price supply elasticities for sugar beet
    production are generally not as inelastic as they are for sugarcane, except
    for the former Soviet Union (0.002).

    The own-price demand and income elasticities reflect the fact that in many
    developing countries, sugar is considered a staple in the diet and consumers
    look to sugar to fulfill basic caloric requirements. The elasticities
    implied in the CARD model are very comparable to ones reported in the
    literature. For several countries, when more recent data were not available
    for the econometric estimation, we borrowed elasticities from Hafi et al.
    (1993) and from Devadoss and Kropf (1996).

    Although the CARD international sugar model does not disaggregate raw and
    refined sugar, we complemented the existing model with an additional
    equation to endogenize the world price of refined sugar following the
    removal of the refined sugar TRQ in the United States. Consistent with Hafi
    et al. (1993), we specified a reduced form to approximate the
    rest-of-the-world supply faced by the United States. However, there is no
    explicit aggregation of excess supply in the various countries to derive
    this equation, as is the case for the raw sugar market. This equation is of
    the form

    IWSrow =a(Pwws)αws (Pwrcs)βcs

    where IWS is imports of white sugar and the elasticities of white sugar and
    raw cane sugar are αws = 0.83 and βcs = -0.44, respectively.

    These elasticity values come from Hafi et al. (1993) and are medium-run
    estimates. Parameter a is chosen to calibrate the IWS to the existing
    refined sugar TRQ level in the United States, prior to the TRQ's removal.

    This equation is treated as the rest-of-the-world supply, which underlies
    the import supply faced by the United States. The latter is then equated to
    the U.S. excess demand for white sugar to close the white sugar market in
    our analysis, once the TRQ is removed.

    Economic Analysis of a Tariff-Rate Quota

    The sugar program includes the use of a TRQ to limit imports of raw and
    refined sugar that come into the United States. Under a TRQ, a lower,
    "in-quota" tariff applies to a limited quantity of imports, while a higher,
    often prohibitive, "over-quota" tariff applies to any imports that exceed
    the quota. Our model follows Moschini,42 as well as Meilke and Lariviere,43
    in its representation of the import supply under a TRQ.

    Figure 3 illustrates the effects of the TRQ on the excess supply curve and
    shows how this type of policy affects the incentive to import. Our model
    describes three excess supply conditions-ESf , ES1 , and ES2. ESf represents
    the excess supply curve facing the United States if it did not have import
    restrictions, while ES2 is the excess supply curve under the in-quota
    tariff. However, under the current U.S. sugar TRQ, producers from very few
    quota-holding countries pay the in-quota tariff and most pay none because of
    preferential arrangements. Therefore, without loss of generality, we will
    assume that ES2 is actually the free trade excess supply curve facing the
    United States in the absence of import restrictions.

    Overall, the TRQ introduces a discontinuity in the excess supply curve
    facing an importing country at the level of the quota, as shown in the bold
    curve ES1.44 As figure 3 illustrates, the TRQ can result in three potential
    trade and price outcomes, depending on the U.S. excess demand for foreign
    sugar. First, if the excess demand schedule intersects the segment AB on the
    lower portion of the excess supply curve, such as ED1 , then there is a
    supply response to shifts in the excess demand schedule and both quantity
    and price will change. In this area of the curve--the "in-quota" portion of
    excess supply--the domestic price equals the world price because the
    importing country is actually not imposing any border measures. Second, if
    the excess demand schedule intersects the excess supply schedule at the
    level of the TRQ, such as ED2 , the domestic price will equal P1 and the
    world price PW . Rents are generated for the holders of the quota rights
    corresponding to the binding TRQ. In this case, the quota rent will be equal
    to the difference between the domestic price and the world price. This
    situation corresponds to the current U.S. sugar import situation. Third, if
    the excess demand schedule intersects the excess supply schedule
    sufficiently beyond the TRQ, such as ED3 , both the price and the quantity
    of imports supplied will respond to shifts in the excess demand for the
    imports and the rest of the world will satisfy this demand.

    Estimated Net Losses to the U.S. Economy Accruing to Foreign Sugar
    Importers, Fiscal Year 1998

                  Allocation and imports in short tons (raw value

            Country        TRQ allocationa  Actual imports  Estimated economic
                                                                   loss
     Argentina             72,300           72,200         $14,600,000
     Australia             139,500          140,100        28,400,000
     Barbados              8,600            0              0
     Belize                18,500           18,500         3,800,000
     Bolivia               13,400           12,600         2,600,000
     Brazil                243,700          242,900        49,300,000
     Colombia              40,300           37,200         7,500,000
     Congo                 8,000            8,000          1,600,000
     Costa Rica            25,200           25,200         5,100,000
     Cote d'Ivoire         8,000            30             6,000
     Dominican Republic    295,800          294,500        59,700,000
     Ecuador               18,500           18,500         3,800,000
     El Salvador           43,700           44,000         8,900,000
     Fiji                  15,100           11,900         2,400,000
     Gabon                 8,000            0              0
     Guatemala             80,700           80,400         16,300,000
     Guyana                20,200           20,200         4,100,000
     Haiti                 8,000            0              0
     Honduras              16,800           16,900         3,400,000
     India                 13,400           13,800         2,800,000
     Jamaica               18,500           18,300         3,700,000
     Madagascar            8,000            8,100          1,600,000
     Malawi                16,800           13,200         2,700,000
     Mauritius             20,200           20,400         4,100,000
     Mexico                27,600           27,600         5,600,000
     Mozambique            21,800           22,100         4,500,000
     Nicaragua             35,300           35,400         7,200,000
     Panama                48,700           48,700         9,900,000
     Papua New Guinea      8,000            100            20,000
     Paraguay              8,000            5,500          1,100,000
     Peru                  68,900           69,000         14,000,000
     Philippines           226,900          222,800        45,200,000
     St. Christopher-Nevis 8,000            8,000          1,600,000
     South Africa          38,700           38,800         7,900,000
     Swaziland             26,900           27,000         5,500,000
     Taiwan                20,200           20,200         4,100,000
     Thailand              23,500           23,500         4,800,000
     Trinidad-Tobago       11,800           12,100         2,400,000
     Uruguay               8,000            8,200          1,700,000
     Zimbabwe              20,200           20,100         4,100,000
     Total                 1,763,700        1,706,030      $346,026,000

    Note: Each country supplying sugar to the United States under the TRQ 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: Sugar and Sweetener Situation and Outlook, Economic Research
    Service, USDA (Sept. 1999).

    Comments From the U.S. Department of Agriculture

    The following are GAO's comments on the U.S. Department of Agriculture's
    written response to our draft report dated May 16, 2000. Based on agency and
    industry comments, we adjusted our model to more fully account for certain
    transportation costs. As a result, cost and benefit estimates referenced in
    USDA's comments do not reflect those contained in the final report.

    1. After thoroughly examining each of the Department's concerns and
    discussing them with experts outside GAO, we continue to believe that our
    analytical approach and model for estimating the costs and benefits of the
    sugar program are comprehensive and methodologically sound and that the
    estimates yielded by our model are reasonable. In developing the model, we
    took a number of actions to ensure that it was methodologically sound.
    First, we contracted with a well-known expert in modeling the international
    trade of agricultural commodities and with a prominent agricultural
    economist to work with us in developing the model. In December 1999, we sent
    our proposed model to four outside academicians specializing in agricultural
    economics and international trade economics and revised the model in
    response to their comments. We also sent our proposed model to USDA for
    review at that time. However, USDA did not provide any comments.
    Furthermore, we asked two of the agricultural economists to review our final
    model and results before we sent our draft report to USDA for comment.

    2. Our approach is not strictly based on a traditional "gains-to-trade"
    argument, and its validity does not depend on world prices being free of
    market distortions. We did not distinguish between the effects of
    comparative advantage and export subsidies or other forms of market
    intervention in determining the price at which U.S. sugar users would be
    able to purchase sugar. To estimate the costs and benefits of the sugar
    program, our model compared baseline domestic and world prices for sugar in
    1996 and 1998 with the domestic and world prices that we estimated would
    occur if the sugar program were eliminated, other things being equal. These
    estimated prices were higher than the baseline world prices because our
    model accounted for the impact on world prices of the higher U.S. sugar
    imports that would have occurred if the program had been eliminated.
    Comparing these estimated prices with the baseline prices was appropriate
    for estimating the effects of the sugar program because the estimated world
    prices reflect what domestic sugar users would have been expected to pay for
    sugar in those years if the sugar program had been eliminated. This
    comparison remains appropriate regardless of whether the world price is
    influenced by subsidies by countries with surplus production.

    3. While the world sugar price that would result from multilateral reform is
    uncertain, we believe that several elements of the Schmitz and Vercammen
    analysis (University of California, Berkeley, 1990) led to a high price
    estimate that is unlikely to be observed. In particular, they assume a
    relatively high (in absolute value) excess demand elasticity of −0.5
    and a very inelastic excess supply schedule from the rest of the world. That
    is, they assume that a small increase in the world price will lead to a
    large reduction in the quantity of sugar demanded but only a small increase
    in the quantity of sugar that producers in other countries would want to
    supply. Both assumptions tend to cause the world price to rise more
    following multilateral reform than would happen if assumptions of less
    elastic excess demand and more elastic excess supply were used. Schmitz and
    Vercammen also overstate the world price that would follow multilateral
    reform because they do not account for the supply responses of all exporting
    countries.

    4. On the basis of our review of the literature, we believe that the effect
    of multilateral reform of sweetener markets on world sugar prices is highly
    uncertain. Even if world prices were to rise, this increase would likely be
    gradual because the reforms would likely be phased in over a substantial
    period of time. Therefore, we regard as speculative USDA's view that
    multilateral reform following the elimination of the U.S. sugar program
    would erase the welfare gains that we attributed to the program's
    elimination.

    5. We disagree with USDA's assertion that our model is not well documented
    and includes incomplete references. However, we added language to the scope
    and methodology section of our report to explain further the relationship
    between the model we used in our analysis and the CARD model.

    6. We clarified where on the linear supply schedule the supply elasticities
    that we use were estimated.

    7. We disagree with USDA that the import supply elasticities are
    inconsistent with our model. We clarified our report to indicate that these
    elasticities are derived explicitly from the CARD model, which includes the
    sugar sectors of the countries listed in appendix III.

    8. We disagree with USDA's assertion that our model presumes instantaneous
    and costless adjustments within the United States. In fact, our short-run
    elasticities are smaller than our longer-term elasticities because they take
    adjustment costs into account. However, we added clarifying language to
    appendix III.

    9. We disagree. Our draft report defined each of the symbols describing the
    variables used in the LINQUAD model.

    10. We disagree with USDA's assertion that the LINQUAD model is experimental
    and not well documented. The LINQUAD approach is the latest development of
    the incomplete demand system approach pioneered by Professor Jeffrey
    LaFrance at the University of California, Berkeley. The LINQUAD approach is
    fully documented in several working papers that are publicly available, and
    Professor LaFrance's work on incomplete demand systems has appeared in many
    leading economics journals. Professor LaFrance first published his results
    in 1990 in an article of the Australian Journal of Agricultural Economics.
    The method was first empirically implemented in an application to dairy in a
    1991 article of the American Journal of Agricultural Economics. The model
    was also documented in a thesis that received the American Agricultural
    Economics Association's Outstanding Thesis Award in 1999. The incomplete
    demand system model was appropriate for our work in modeling sugar demand
    because it allowed us to compute a consistent welfare measure that included
    direct and indirect sugar consumption in food.

    11. We disagree that our model's treatment of the sugar-processing sector
    was inadequate. Although no equations for sugarcane and sugar beet acreage
    are presented in the report, our model solves for acreage as well as prices
    and production levels. We clarified this point in appendix II.

    12. We disagree with USDA's characterization of equation 15 (now equation
    13). This equation establishes a condition that must be met for the model to
    solve--at the margin, the cost of producing more white cane sugar and more
    beet sugar must be equal to each other and to the price of white sugar.
    Although we do not explicitly model the decision to exit the industry, the
    parameter representing the refining margin takes into account changes in
    output.

    13. Our draft report inadvertently reported slopes rather than elasticities.
    We revised the report to present the correct elasticities, which are much
    lower. The supply response reported in table 7 is consistent with these
    lower elasticities.

    14. We agree with USDA that the revenues that producers receive are based on
    contracts with processors. However, we believe that the contractual
    arrangements, and the sugar program itself, lead to stable price
    expectations for producers that are captured in equations 3 and 4 (now
    equations 1 and 2) -- producers' supply functions. In our model, prices at
    all stages are determined simultaneously by the satisfaction of equilibrium
    conditions in all markets.

    15. We do not think that producers' ownership of processing plants is an
    important issue in our analysis. If producers' ownership were an important
    influence on the supply responses of producers to price changes, the
    expected direction of that influence would be to make supply less elastic
    (that is, producers might reduce supply less in response to a price decline
    than if they did not own the processing plants). We do not believe that
    incorporating this possibility into our model would have much effect because
    the supply elasticities we use are already low.

    16. The requirement for minimum payments from processors to producers is not
    a concern for our model because the supply decisions in our model are
    calibrated using historical data that include minimum payments when
    relevant.

    17. We added language to the report to clarify that the model's assumption
    of constant returns to scale in sugarcane processing implies that there are
    no welfare changes to sugarcane processors from price changes due to the
    elimination of the sugar program. Accordingly, we did not report any welfare
    effects.

    18. We disagree with USDA that conducting the analysis at the national level
    implies any misspecification of our model, although we agree that more
    detail about regional production might be interesting. Our model does not
    specifically account for regional differences in cost structure or
    alternative crops and we agree with USDA that producers in different regions
    would be affected differently. Nevertheless, we remain confident that our
    model measures the total effects of the U.S. sugar program appropriately.

    19. We revised our discussion of equation 20 (now equation 18) to say that
    the intercept term represents the cost to food manufacturers of inputs other
    than sweeteners (rather than a reflection of market power). As shown in
    equation 22 (now equation 20), market power results in a markup of price
    above marginal cost.

    20. We added a definition of "conjectural variation" and explained how this
    parameter of market interdependence is related to industry markup.

    21. We disagree with USDA's assertion that our model did not include some of
    the factors cited by McCorriston et al. For example, our model includes the
    influence of the retail price elasticity of demand on price pass-through. It
    also includes the influences of substitution between sugar and HFCS and the
    cost share of sweeteners in food products, but it does not include the role
    of marketing inputs.

    22. We clarified that the ES2 supply curve in figure 2 (and the ESf supply
    curve in figure 3) refer to the excess supply curves that would exist in the
    absence of import restrictions in the United States. They were not meant to
    represent excess supply curves that would result from free trade in all
    world sugar markets.

    23. USDA's conjecture that the domestic sugar industry could successfully
    pursue an antidumping action that would raise the price of foreign sugar for
    U.S. sugar users is speculative. Accordingly, we believe that it is
    appropriate to compare baseline prices with estimated world prices in the
    absence of the program, other things being equal, as we have done. See
    comment 2.

    24. See comment 3.

    25. We do not question the objective of pursuing international trade reform
    and free world markets through trade negotiation. To estimate the effects of
    the U.S. sugar program in this report, we needed to make the analytical
    assumption that all other factors, including other countries' sugar
    programs, would remain unchanged. If we had not done so, we would not have
    been able to separate the effects of the U.S. program from those of other
    countries' programs. Accordingly, when we say that domestic sugar prices are
    artificially high, we mean in comparison with the prices that would prevail
    if the U.S. sugar program were eliminated and other conditions remained
    unchanged. See also comment 37.

    26. We disagree with USDA and stand behind our finding that eliminating the
    sugar program would have a limited impact on the price of HFCS. While HFCS
    producers benefited from the sugar program in the 1980s and early 1990s, we
    believe that the domestic HFCS and sugar markets have since been decoupled
    because of domestic price, cost, and market conditions. The president of the
    U.S. Corn Refiners' Association has also expressed that view. As shown in
    table 4 in appendix I, the weighted average wholesale price of HFCS dropped
    from 22 cents per pound (dry weight) in 1992 to 12.4 cents per pound (dry
    weight) in 1998, while the U.S. wholesale price of refined beet sugar was
    above 25 cents per pound throughout this period. The likelihood of
    substitution between sugar and HFCS is less than in prior years because
    technological advances have improved HFCS products and created more
    specialized sweetener markets.

    27. We revised appendix II to clarify that the functional form we used does
    not imply that the cost shares of sugar and HFCS need to remain constant as
    the price of sugar changes.

    28. We added references to the literature on the price elasticity of demand
    for sugar and HFCS.

    29. We added language to the report to indicate that the lack of
    substitution between sugar and HFCS is due not just to the relative prices
    of the sweeteners but also to the increasingly specialized uses of
    sweeteners, which have limited the substitutability between sugar and HFCS.

    30. In our model, the relationship between raw and refined sugar prices
    depends on the refining margin as well as on technical coefficients involved
    in the refining process. Since the refining margin will be smaller at lower
    levels of output, our model takes into account the lower margins for
    domestic cane refiners that will result from increased imports of refined
    cane sugar.

    31. We disagree with USDA's assertion that we have not adequately analyzed
    the increased competition that the domestic refining industry could face as
    a result of the elimination of the refined sugar TRQ. If imports of refined
    sugar increased following the elimination of the refined sugar TRQ, the
    refining margin for domestic refiners would decline, according to our model.
    See comment 30.

    32. Our report does not predict the degree to which cost reductions
    resulting from the elimination of the sugar program would be passed through
    to consumers. We present two estimates of potential benefits to consumers
    based on different assumptions about the pass-through of cost reductions
    from food manufacturers to consumers; both estimates are based on a full
    pass-through of cost reductions for the production of table sugar. For
    reasons given in the report, we believe that a full pass-through is more
    likely for table sugar than for sugar-containing products. In estimating
    potential benefits, we assumed "other things being equal" (no other changes
    in input costs) while the data that USDA presents on changes in wholesale
    and retail prices do not. Changes in the prices of marketing inputs could
    have offset the reduction in wholesale prices in determining retail prices.

    33. It is unclear what effect accounting for marketing inputs would have had
    on our results.

    34. See comment 32.

    35. We disagree with USDA's assertion that a comparison of our estimate of
    the benefits that sugar beet growers receive from the program with data on
    growers' revenues and expenses implies that our estimate is clearly
    overstated. The benefits of a program that keeps price substantially higher
    than it otherwise would be can be very high in the short run, when supply
    elasticities are low. In the long run, the benefits of maintaining the sugar
    program are less because in the absence of the program a wider set of
    adjustment opportunities would be available to producers, implying larger
    supply elasticities.

    36. We revised the report to address USDA's concern.

    37. We disagree that our characterization of domestic sugar prices as
    artificially high is inflammatory and unprofessional. The sugar program
    keeps domestic sugar prices above the level at which they would be if the
    program were eliminated (other things being equal), which is what we mean by
    artificially high. Furthermore, USDA has some flexibility in its
    implementation of the sugar program, and our report entitled Sugar Program:
    Changing the Method for Setting Import Quotas Could Reduce Cost to Users
    (GAO/RCED-99-209, July 26, 1999) found that, from 1996 through 1998,
    domestic sugar prices were over 2 cents per pound higher than necessary to
    avoid sugar loan forfeitures.

    38. We agree that the current conditions in sugar markets differ from those
    observed in 1996 and 1998. However, 1998 was the most recent year for which
    price and quantity data were available for our analysis when we began our
    study. As stated in the report, our estimates apply only to 1996 and 1998.

    39. We agree that the North American Free Trade Agreement has the potential
    to significantly influence the operation of the sugar program and the
    domestic sugar market. We note in appendix I that USDA will spend
    substantial federal funds this fiscal year because the sugar program has
    resulted in significantly increased domestic sugar production--USDA recently
    announced that it will seek to purchase 150,000 tons of domestic sugar to
    reduce the cost of expected sugar program forfeitures. Because of our need
    to establish a base case for our economic model, we examined 1998, the most
    recent year for which sweetener price and quantity data were available.
    Accordingly, we state on page 4 of our report, "we did not analyze how the
    gradual reduction of U.S. tariffs for Mexican sugar through 2008 under the
    North American Free Trade Agreement might affect domestic sugar prices.
    However, our model could be used for this analysis as well as other types of
    analyses in the future."

    40. The comments of former Under Secretary Moos on our 1993 report contrast
    with USDA's official written comments in 1993 (included as an appendix to
    the 1993 report), which state, "Overall, this is a reasonable report with no
    major data problems. The costs and benefits, derived using assumptions of
    hypothetical policy alternatives, are well within the range of most
    research." We continue to believe that our 1993 report provided a reasonable
    estimate of the cost of the sugar program to U.S. sugar users for the period
    analyzed. More important, we believe that although the precise level of the
    price premium is subject to debate, the program and policy problems we
    identified in 1993 are still relevant.

    41. In preparing this report, we developed a more comprehensive model than
    the one we used for our 1993 report. Under our current approach, the
    estimated prices that would exist in the absence of the sugar program were
    derived by our model rather than assumed from outside the model, as was done
    for the 1993 report. Comparing these estimated prices with the baseline
    prices was appropriate for estimating the effects of the sugar program
    because the estimated world price reflects what domestic sugar users would
    have been expected to pay for sugar in those years if the sugar program had
    been eliminated. To estimate the effects of the U.S. sugar program by
    itself, we needed to make the analytical assumption that all other factors,
    including other countries' sugar programs, would remain unchanged. Without
    this assumption, we would not have been able to isolate the effects of the
    U.S. program from the effects of other countries' programs. In preparing the
    1993 report, if we had chosen to use a price that seemed more consistent
    with the elimination of the U.S. program alone, we might have selected a
    lower price for the "no program" scenario, which would have led to higher
    estimates of the cost of the program to sugar users and the benefits to
    producers.

    42. We revised the report to address USDA's concern.

    43. We revised the report to indicate that while the minimum requirement of
    the refined sugar TRQ is 30,900 tons, USDA has set the TRQ above this level
    in recent years.

    44. We revised the report to address USDA's concern. The Agriculture
    Appropriations Act for fiscal year 2000 suspended the sugar marketing
    assessment for fiscal years 2000 and 2001.

    45. We revised the report to address USDA's concern.

    46. We revised table 1 to note that the basis point for the world raw sugar
    contract price is the Caribbean. According to a sugar market expert, the
    cost to transport raw sugar from the Caribbean to the United States is about
    1.5 cents per pound. We also refined our model to more fully account for
    these transportation costs in our welfare analysis.

    47. We revised the report to address USDA's concern.

    48. We did not include a line in table 5 for the revenues that the federal
    government derives from sugar marketing assessments because those revenues
    represent only part of the sugar program's financial effects on the federal
    government. For example, other effects include increases in the government's
    costs of purchasing food and conducting food assistance programs because the
    prices for sugar and sugar-containing foods are higher under the sugar
    program. Several years ago, we estimated that the government's additional
    cost of purchasing food and providing the level of food assistance that it
    delivered in 1994 was approximately $90 million. At that time, the
    government collected about $30 million annually in marketing assessments.

    49. We did not include a line for the benefits of the sugar program to
    sugarcane processors because they would see no welfare change from the
    elimination of the sugar program. See comment 17. The cost reported in table
    5 for HFCS manufacturers and corn growers is very small; in general, the
    sugar program has little effect on these groups because of the decoupling of
    the sugar and HFCS markets. See comment 26.

    50. We adjusted our model to more fully account for certain transportation
    costs. As a result, the 1996 estimated U.S. wholesale refined sugar price
    without the sugar program increased from 20.5 cents per pound in the draft
    report to 21.77 cents per pound in the final report. This revised price is
    higher than the 1996 average price of HFCS-55 of 20.6 cents per pound. To
    further clarify our model's results, the final report states that
    specialization in sweetener use was also important in estimating the effect
    of the sugar program on HFCS producers. See comment 29.

    51. We continue to believe that transfers to foreign sugar producers that
    receive quota allocations are appropriately treated as a component of
    estimated net losses to the U.S. economy due to the sugar program. The
    additional revenues that they receive from higher prices as a result of the
    program represent a transfer outside the United States and, therefore, are a
    net loss to the U.S. economy. By suggesting that these transfers are more of
    a foreign policy issue than a sugar program issue, USDA implies that in the
    absence of the program the United States would provide the quota-holding
    countries with other forms of assistance equal to the benefits their
    producers currently derive from the program. We believe such a conclusion is
    speculative.

    52. Although the estimated refining margin for 1996 is high, it is not as
    high relative to other years once adjustments are made for price level
    differences (see table 1 in app. I). Our estimate of 6.89 cents per pound
    for 1996 is in 1999 dollars. Expressed in 1999 dollars, the 14-year high
    (achieved in 1990) was 5.73 cents per pound, not 4.77 cents. Nonetheless,
    one limitation of our model is that the world refined and raw sugar markets
    are not fully linked. If our estimated price for refined sugar without the
    program is too high relative to the estimated no-program price for raw sugar
    for 1996, the implication is that we have overestimated the benefits to
    refiners and underestimated the benefits to other sugar users (food
    manufacturers and consumers) from eliminating the sugar program.

    53. See comment 13.

    54. We revised the report to address USDA's concern.

    55. Our model does not conduct a general equilibrium analysis to determine
    the effects of eliminating the sugar program on the prices of other crops
    because of acreage being transferred from sugar to these other crops.
    However, we believe that any transfers out of sugar would likely have
    minimal effects on the total production of most other crops because of the
    relatively small acreage involved compared with the acreage already planted
    in those crops.

    56. We added language to the report to show that the 20-percent markup we
    use is consistent with what others have used in their analyses.

    Comments From the American Sugar Alliance

    The following are GAO's comments on the American Sugar Alliance's (ASA)
    written response to our draft report dated May 5, 2000. Based on USDA and
    industry comments, we revised our model's final estimates to more fully
    account for certain transportation costs. As a result, cost and benefit
    estimates referenced in ASA's comments do not reflect those contained in the
    final report.

    1. We disagree that the methodology used in our 1993 report on the sugar
    program was flawed. Nonetheless, we developed a more comprehensive economic
    model for our current analysis, and while we acknowledge that no economic
    model completely depicts reality, we are convinced that our current model is
    methodologically sound and that the estimates yielded by our model are
    reasonable. In developing the model, we took a number of actions to ensure
    that it was methodologically sound. First, we contracted with a well-known
    expert in modeling the international trade of agricultural commodities and
    with a prominent agricultural economist to work with us in developing the
    model. In December 1999, we sent our proposed model to four outside
    academicians specializing in agricultural economics and international trade
    economics and revised the model in response to their comments. We also sent
    our proposed model to USDA for review at that time. However, USDA did not to
    provide any comments. Furthermore, we asked two of the agricultural
    economists to review our final model and results before we sent our draft
    report to USDA, ASA, and the U.S. Cane Sugar Refiners' Association for
    comment.

    2. We disagree with ASA's assertion that our findings are based on
    comparisons with a meaningless world price. In estimating the costs and
    benefits of the sugar program, our model compared baseline domestic and
    world sugar prices with an estimate of the domestic and world prices that
    would have been observed if the sugar program had been eliminated, other
    things being equal. Regarding the extent to which cost reductions would be
    passed through to consumers in the absence of the sugar program, the report
    presents two estimates showing how the benefits might be distributed based
    on two different sets of pass-through assumptions. We did not predict the
    extent to which cost reductions would be passed through to final consumers.
    See comments 4 and 5.

    3. We disagree that our report is biased toward the views of the sugar
    program's critics. We used a standard economic welfare analysis methodology
    that many economists have applied to evaluate how different groups within a
    society are affected by specific economic policies.45 Our report provides a
    quantitative analysis of the U.S. sugar program's effects, but we do not
    take a position on what modifications, if any, need to be made. Those
    decisions rest with the Congress. See comment 5 for a discussion of our
    assumptions about manufacturers' and retailers' behavior in passing through
    cost reductions.

    4. As discussed in comment 2, we disagree with ASA's assertion that our
    findings are based on comparisons with a meaningless world price. Our model
    estimated domestic and world sugar prices in the absence of the program.
    These estimated prices were higher than the baseline world prices because
    our model accounted for the impact on world prices of higher U.S. sugar
    imports that would have occurred if the program had been eliminated.
    Comparing these estimated prices with the baseline prices was appropriate
    for estimating the effects of the sugar program because the estimated world
    price reflects what domestic sugar users would have been expected to pay for
    sugar in those years if the sugar program had been eliminated. This
    comparison remains appropriate regardless of whether the world price is
    influenced by subsidies by countries with surplus production or whether
    sugar is produced in countries with lower labor and environmental standards.

    5. As discussed in comment 2, we disagree with ASA's assertion that our
    findings are based on the assumption that food manufacturers and retailers
    would pass all of their cost reductions through to final consumers. Our
    report estimated the total cost of the sugar program to sweetener
    users--sugarcane refiners, manufacturers of sugar-containing foods, and
    final consumers. We did not predict the extent to which cost reductions
    would be passed through to final consumers. Instead, we presented two
    estimates of the benefits to consumers if the sugar program were eliminated,
    using different assumptions about the pass-through of cost reductions. One
    estimate assumed that (1) cost reductions for table sugar were passed
    through to final consumers (because it is a homogeneous product and likely
    to be more price competitive) but (2) cost reductions for sugar-containing
    food were not passed through. The other estimate, which shows the maximum
    benefit that consumers could receive, is based on the assumption that all
    cost reductions were passed through to consumers. We revised our discussion
    on page 4of the pass-through of cost reductions if the sugar program were
    eliminated to further clarify the effects under alternative pass-through
    scenarios.

    6. We agree with ASA that other countries intervene in the world sugar
    market. However, to estimate the effects of the U.S. sugar program by
    itself, we needed to make the analytical assumption that all other factors,
    including other countries' sugar programs, would remain unchanged. Without
    this assumption, we could not isolate the effects of the U.S. program from
    the effects of other countries' programs. Our estimates represent the actual
    cost of the sugar program to the U.S. economy under conditions as they were
    in 1996 and 1998.

    7. As discussed in comment 6, we did not attempt to estimate the free trade
    price of sugar. In addition, as discussed in comment 4, we believe that the
    appropriate price comparison is between baseline domestic and world sugar
    prices in 1996 and 1998 and an estimate of the prices that would have been
    observed if the sugar program had been eliminated, other things being equal.

    8. As stated in the objectives, this report focuses on the U.S. sugar
    program's (1) costs to domestic sweetener users, (2) benefits to domestic
    sugar and HFCS producers, and (3) net effects on the U.S. economy. Both the
    resport's letter and appendix II present the results of our model, including
    the estimated benefits to sugarcase, sugar beet and HFCS producers. However,
    our model does not attempt to quantify every indirect cost and benefit
    associated with the program. See comments 13 and 17.

    9. We disagree with ASA that our estimates of the net costs of the sugar
    program are "misleadingly high." See comments 10 and 11.

    10. We disagree that transfers from the U.S. economy to foreign sugar
    producers should not be considered as a component of the estimated net
    losses associated with the sugar program. From the perspective of the U.S.
    economy, higher prices paid by domestic sugar users and received by domestic
    producers and processors as a result of the program are internal transfers
    with no net effect. However, foreign producers selling sugar in the United
    States also receive higher prices because of the program. The additional
    revenues they receive as a result of the program represent a transfer
    outside the United States and, therefore, are a net loss to the U.S.
    economy. Whether the United States would incur similar costs if the sugar
    program did not exist in the form of either direct aid to countries whose
    producers are benefiting from the program or costs resulting from
    instability, as suggested by ASA, is speculative.

    11. We disagree with ASA's assertion that our model assumes that U.S. sugar
    producers are inefficient. The types of efficiency losses we discuss occur
    when efficient producers produce too much of the wrong crop, or consumers
    consume too little of certain foods, because government programs maintain
    artificially high prices.

    12. The report does not state that sugar production is a less efficient use
    of resources than any other agricultural enterprise.

    13. We agree that we did not estimate the effects on other crops if acreage
    were transferred out of sugar, but we disagree that not doing so was
    egregious. Our model does not conduct a general equilibrium analysis to
    determine the effects on acreage and price of all other commodities.
    However, we believe that any transfers out of sugar into other field crops
    would likely have minimal effects on total production because of the
    relatively small acreage involved compared with the acreage already planted
    in those crops. For example, a transfer of 33 percent of sugar beet acreage
    into hard red spring wheat acreage, would have increased the hard red spring
    wheat acreage by only about 3 percent in 1998. See comment 17.

    14. We disagree. Using generally accepted economic principles, total U.S.
    consumption of sugar and sweetener-containing products would rise, other
    things being equal, as U.S. sugar prices were reduced.

    15. In the absence of the sugar program, we believe that it is unlikely that
    no cost reductions would be passed through to final consumers, particularly
    in the case of table sugar. In our analysis, we assumed "other things being
    equal" (no changes in other input costs), while the data that ASA presents
    comparing prices at different levels--especially for sugar-containing
    foods--do not. Changes in the prices of other food inputs between 1990 and
    1999 could have been more important and could have overwhelmed the effect of
    declining wholesale refined sugar prices on retail prices. Moreover,
    wholesale refined sugar prices did not stay down continuously over the
    entire decade, but increased again in 1996, 1997, and 1998. See comment 5.

    16. We recognize that the demand for table sugar and many sugar-related
    products is relatively inelastic with respect to price (that is, price
    increases will lead to only relatively small declines in consumption), and
    we included these assumptions in our model. However, we disagree with ASA's
    assertion that there would be no effect on consumption at higher prices.

    17. We recognize that we did not consider indirect effects associated with
    the elimination of the sugar program in our analysis. These effects could
    include losses to some groups, as suggested by ASA, but could also include
    gains by other groups. For example, if sugar users paid lower prices for
    sugar, they would be able to spend more on other items, which could lead to
    increased economic activity in some other sectors. Our approach estimated
    the program's major costs and benefits, while still maintaining tractability
    as well as appropriate market detail. A general equilibrium analysis would
    take both these gains and losses into account. We added to the report a
    discussion of the differences between the partial equilibrium approach we
    used and a general equilibrium analysis, indicating that using the latter
    approach would require sacrificing considerable detail.

    18. We did not assess the competitiveness of U.S. sugar producers relative
    to producers in other countries. We assessed the costs and benefits of the
    sugar program in the context of the world market in 1996 and 1998. See also
    comment 6.

    19. See comment 11.

    20. We disagree that comparing U.S. and foreign retail sugar prices would
    have been the most direct way to assess the effect of the U.S. sugar program
    on consumers. Retail sugar prices in other countries do not represent the
    price at which U.S. sugar users could have obtained sugar in the absence of
    the program, which is the appropriate price to compare with current U.S.
    prices (see comment 4). As a result, we did not compare U.S. retail sugar
    prices with other countries' retail sugar prices. However, ASA's chart C
    shows that countries whose retail sugar prices were higher than the U.S.
    prices are mostly countries from the European Union and Japan, where support
    for sugar producers is also high. (The Organization for Economic Cooperation
    and Development estimates that sugar consumer support in the European Union
    was even higher than in the United States in 1998.) Chart C also shows that
    retail sugar prices in Australia and Canada, which have relatively free
    trade in sugar, were lower than prices in the United States and the other
    countries shown.

    21. The minutes worked analysis in chart D may be a misleading indicator of
    low sugar prices for U.S. consumers in comparison with consumers in other
    countries. This analysis appears to be more dependent on a country's average
    wage rate than on the retail price of sugar in explaining the differences in
    the minutes of work required to buy a pound of sugar among countries. See
    also comment 20.

    22. We agree that U.S. sugar processors have not forfeited sugar to the
    government since 1994. However, USDA recently announced plans to purchase
    150,000 tons of sugar to reduce the cost of expected sugar program
    forfeitures this fiscal year.

    23. We revised the report by adding these increased assessments to the list
    of the 1996 Farm Act's modifications. According to a USDA official, the
    assessment on processors raised revenues of about $30 million in fiscal year
    1998 but has been suspended for fiscal years 2000 and 2001. We note,
    however, that these revenues represent only part of the sugar program's
    financial effects on the federal government. The higher domestic cost of
    sugar increases the government's expenditures for the military's food
    purchases and for funding domestic food assistance programs. Several years
    ago, we estimated that the sugar program increased the government's
    expenditures for these purposes by about $90 million in 1994.

    24. As discussed in comment 31, we disagree with ASA's statement that we
    underestimated the number of U.S. sugar producers. As discussed in comment
    28, we also disagree with ASA's assertion that the corn sweetener industry
    continues to benefit from the sugar program.

    25. We disagree with ASA that the benefits received by producers are derived
    "theoretical" benefits. Gains that result from higher prices paid by sugar
    users--rather than from direct government payments to producers--are
    nonetheless real gains in income to producers and are a direct result of the
    sugar program.

    26. The production and acreage levels we report were the results of our
    simulation of the impact of eliminating the sugar program, as estimated by
    our model. We agree with ASA that over time, larger production responses are
    likely to result than in the short run.

    27. We revised page 25 of the draft report (now on page xx) to clarify that
    our model analyzed the HFCS market to determine whether lower refined sugar
    prices resulting from the program's elimination would cause a substitution
    from HFCS to sugar in certain markets for sugar-containing products. We
    found that eliminating the sugar program had a limited effect on the HFCS
    market. See comment 28.

    28. We disagree with ASA's assertion that refined sugar from the world
    market would replace HFCS if the sugar program were eliminated. While HFCS
    producers benefited from the sugar program in the 1980s and early 1990s, we
    believe that the domestic HFCS and sugar markets have since been decoupled
    because of domestic price, cost, and market conditions. The president of the
    U.S. Corn Refiners' Association has also expressed this view. As shown in
    table 4 in appendix I, the weighted average wholesale price of HFCS in the
    United States dropped from 22 cents per pound (dry weight) in 1992 to 12.4
    cents per pound (dry weight) in 1998, while the U.S. wholesale refined beet
    sugar price was above 25 cents per pound throughout this period. In
    particular, for 1998, the higher-priced HFCS-55 (13.43 cents per pound) was
    below our model's estimated world refined sugar price (14.12 cents per
    pound) if the sugar program were eliminated. Furthermore, the likelihood of
    substitution between sugar and HFCS is more limited than in prior years
    because technological advances have improved the HFCS product and created
    more specialized sweetener markets. See also comments 24 and 27.

    29. Although the 1996 Farm Act made some changes to the sugar program, we
    disagree that it substantially pared back the U.S. sugar program because the
    basic structure of USDA's loan program and the TRQ remained unchanged. In
    addition, we disagree with ASA's implication that a fall in the U.S. price
    for refined sugar should necessarily result in a lower estimate of the cost
    of the program. Because the cost of the program depends on the difference
    between domestic and world sugar prices, changes in the world price are also
    important in determining the program's cost.

    30. We disagree with ASA's argument for using a world cost-of-production
    estimate as a benchmark. Because of a scarcity of data, estimating the
    international cost of production would require numerous assumptions about
    other countries' costs of production as well as the effects of their
    policies to support producers. See also comments 4 and 7.

    31. We used the 1997 census of agriculture, conducted by USDA's National
    Agricultural Statistics Service, to identify the number of sugarcane farms
    and sugar beet farms for table 3 in appendix 1. USDA's census of agriculture
    provided a consistent and rigorous methodology for estimating the number of
    sugarcane and sugar beet farms. However, as ASA mentioned, table 3 also
    notes that the census of agriculture's estimate of 7,102 beet farms varied
    substantially from the USDA Farm Service Agency's estimate of 11,800 sugar
    beet farms in 1997. This difference reflects differences in the definition
    of what constitutes a farm. In any case, the draft and final reports include
    both estimates.

    32. We disagree with ASA's conclusion. See comments 1 and 3 on our
    methodology and objectivity.

    Comments From the U.S. Cane Sugar Refiners' Association

    The following are GAO's comments on the letter of the U.S. Cane Sugar
    Refiners' Association to our draft report.

    1. We revised the report to address the concern of the U.S. Cane Sugar
    Refiners' Association.

    2. We revised table 1 to note that the basis point for the world raw sugar
    contract price is the Caribbean. According to a sugar market expert, the
    cost to transport raw sugar from the Caribbean to the United States is about
    1.5 cents per pound. We also refined our model to more fully account for
    certain transportation costs in our welfare analysis.

    3. We revised the report to clarify that USDA's census of agriculture and
    the Farm Service Agency used different definitions of a "farm".

    GAO Contacts and Staff Acknowledgments

    Robert E. Robertson (202) 512-5138

    Richard Cheston (202) 512-5138

    In addition to those named above, Jay Cherlow and Barbara J. El-Osta made
    key contributions to this report.

    (150155)

    Table 1: U.S. and World Prices for Raw and Refined Sugar,
    1985-98 14

    Table 2: Acres of Sugarcane and Sugar Beets Harvested, by State,
    Crop Years 1995-99 16

    Table 3: Cane Sugar and Beet Sugar Production and USDA Loans,
    by State, Crop Years 1997 and 1999 18

    Table 4: U.S. Prices for HFCS, 1985-98 19

    Table 5: Estimated Economic Gains and Losses Resulting From
    the Sugar Program, 1996 and 1998 21

    Table 6: Estimated Distribution Among User Groups of Benefits of Eliminating
    the Sugar Program Under Different Pass-Through Assumptions, 1996 and 1998 23

    Table 7: Estimated Effect of Eliminating the Sugar Program on
    Prices and Production 25

    Table 8: Estimated Longer Term Economic Gains and Losses if
    the Sugar Program Were Eliminated 26

    Figure 1: U.S. Sugar Production (in thousands of short tons),
    Fiscal Years 1990-2000 15

    Figure 2: Effects of Removing the TRQ and USDA's Loan Program
    on U.S. Prices and Quantities of Raw Sugar 30

    Figure 3: The TRQ's Effect on Imports 51

    1. Sugar Program: Changing Domestic and International Conditions Require
    Program Changes (GAO/RCED-93-84 , Apr. 16, 1993).

    2. To estimate the effect of no sugar program, we simulated the elimination
    of USDA's loan program for sugar processors and the tariff-rate quota for
    both raw sugar and refined sugar imports. (The tariff-rate quota is the
    amount of sugar that can be imported during a fiscal year at a low tariff
    rate.) The most current year for which sweetener price and quantity data are
    available is 1998.

    3. All estimates are in 1999 dollars. See app. II for our assumptions about
    short-run and longer term supply elasticities.

    4. Producers include both growers and processors. According to USDA's 1997
    census of agriculture, 973 farms grew sugarcane and 7,097 farms grew sugar
    beets. USDA's Farm Service Agency, using a different definition of a farm,
    estimated that 11,800 farms grew sugar beets in 1997.

    5. These elasticities measured the extent to which the quantity of sugar
    supplied would respond to changes in price.

    6. Sugar comes from sugarcane and sugar beet plants, both of which are
    processed to extract the sugar. Sugarcane typically is milled into raw cane
    sugar and is then sent to a refinery, which further processes it into
    refined sugar for consumption. Beet sugar is transformed directly into
    refined sugar by beet processors. Almost all sugar imported into the United
    States is raw cane sugar.

    7. Sugar processors are required to pay growers a government-specified
    minimum price, equivalent to about 60 percent of the loan.

    8. USDA also administers a TRQ for imported refined sugar of at least 30,900
    tons each year. The refined sugar TRQ was set at 66,000 tons for fiscal year
    2000.

    9. Under the North American Free Trade Agreement, the tariff for Mexican
    sugar imported outside the TRQ will gradually be reduced from 15.6 cents per
    pound in 1994 to zero cents per pound in 2008. The high-tier tariff for
    Mexican sugar is 12.1 cents per pound in 2000.

    10. The Agriculture Appropriations Act for fiscal year 2000 suspended the
    sugar marketing assessment for fiscal years 2000 and 2001.

    11. The basis point for world raw sugar prices is a Caribbean port,
    including Brazil, while the basis for domestic prices is New York City. To
    compare these prices, we added 1.5 cents per pound to the world price to
    cover transportation costs from the Caribbean.

    12. All ton measurements in this report are short tons--a short ton equals
    2,000 pounds.

    13. USDA also announced plans to allow 1.25 million tons of raw sugar to be
    imported during fiscal year 2000, sufficient to fulfill its trade agreement
    obligations.

    14. World raw sugar prices similarly recovered to about 6.53 cents per pound
    as of May 1, 2000, after dropping below 5 cents per pound in Feb. 2000.

    15. See Sugar Program: Changing the Method for Setting Import Quotas Could
    Reduce Cost to Users (GAO/RCED-99-209 , July 26, 1999).

    16. Welfare analysis uses quantitative measures to analyze how an
    intervention in a market redistributes economic rents among various groups
    in the economy. In the context of agricultural markets, income
    redistribution to all or some farmers and processors could be measured as
    their gains in economic rents at the expense of losses to consumers' or
    taxpayers' incomes.

    17. Our primary estimates of the welfare effects of eliminating the program
    are based on supply elasticities of sugar that can be interpreted as
    short-run elasticities. We also estimated these effects using higher
    elasticities that can be interpreted as longer-term elasticities. These
    effects would show the welfare losses and gains after more time had passed
    for the economy to adjust to the lower sugar prices that would result from
    eliminating the program.

    18. Edward A. Evans and Carlton G. Davis, "Dynamics of the United States
    High Fructose Corn Sweetener Market," presented at the Conference on
    Sweetener Markets in the 21st Century, Miami, Fla. (Nov. 1999).

    19. Our different pass-through assumptions also resulted in slightly
    different estimates of the total gains to sweetener users if the sugar
    program were eliminated, primarily because consumers would be expected to
    increase their sweetener consumption somewhat if manufacturers of
    sugar-containing foods lowered their prices. We estimated that the total
    welfare gains from eliminating the sugar program would have been about $1.4
    billion in 1996 and $1.8 billion in 1998 if only sugarcane refiners had
    passed cost reductions through to consumers.

    20. The SIC system classifies each industrial establishment according to its
    primary activity. This system, last revised in 1987, was established to
    promote more uniform and comparable data.

    21. The LINQUAD is a functional form within the incomplete demand system
    approach that provides a practical model for estimation that reflects
    theoretically sound preference ordering. In particular, the LINQUAD
    quasi-expenditure function produces demand functions that are linear in
    deflated income and linear and quadratic in deflated prices.

    22. EV is the amount of money that, when paid to the consumer, allows the
    consumer to achieve the same level of utility before the change that the
    consumer would enjoy with the economic change. EV represents the minimum
    amount that a consumer would require to willingly forgo the change.

    23. Our presentation follows Moschini: (Agricultural Economics (5), 1991),
    Meike and Lariviere (International Trade Research Consortium, Mar. 1999),
    and Morath and Sheldon (MIMEO, Feb. 1999.)

    24. Toll refiners export refined sugar processed from imported raw sugar.

    25. We have the following definitions: λ=bs +bg (Pg /Pf ) and μ=bb
    /Pf . If the price of a competing crop changes, then λ will change as
    well.

    26. C.M. Rendleman and T.W. Hertel. "Do Corn Farmers Have Too Much Faith in
    the Sugar Program?" Journal of Agricultural and Resource Economics Vol. 18
    (1993), pp. 86-95.

    27. In the nonhomothetic transformation of a Cobb-Douglas functional form,
    the cost shares of inputs are not held constant.

    28. We assumed that the derived demand for sugar, as well as HFCS, is price
    inelastic and small. References to the price elasticities of demand for
    sugar and other agricultural inputs include Lopez and Sepulveda
    (Northeastern Journal of Agricultural and Resource Economics, Oct. 1985);
    Shui, Beghin, and Wohlgenant (American Journal of Agricultural Economics,
    Aug. 1993), Devadoss and Kropf (Agricultural Economics, Jan. 1996), and
    Wohlgenaut (FAO, 1999).

    29. Conjectural variation is a parameter that measures how firms with market
    power recognize their mutual interdependence. Specifically, it is the
    percentage change in all other firms' output that a firm expects in response
    to a 1 percent change in its own output. This variable can also be defined
    in terms of price behavior.

    30. S. McCorriston, C.W. Morgan, and A.J. Rayner, "Processing Technology,
    Market Power, and Price Transmission," Journal of Agricultural Economics,
    Vol. 49, No. 2 (Spring 1998),
    pp. 185-201.

    31. The parameter θ can be defined as the firm's conjectural variation
    elasticity divided by its own price elasticity of demand (see Bhuyan and
    Lopez (American Journal of Agricultural Economics, Aug. 1997)).

    32. See Bhuyan and Lopez (American Journal of Agricultural Economics, Aug.
    1997) and Morrison (NBER Working Paper #3355, 1990).

    33. Jeffrey LaFrance, "The LINQUAD Almost Complete Demand Model,"
    Unpublished manuscript, Department of Agricultural and Resource Economics,
    University of California, Berkeley.

    34. Gates Kennedy Agnew, LINQUAD: An Incomplete Demand System Approach to
    Demand Estimation and Exact Welfare Measures. Master's Thesis, Agricultural
    and Resource Economics, University of Arizona (1998).

    35. Stephen Devadoss and Jurgen Kropf. "Impacts of Trade Liberalization
    Under the Uruguay Round on the World Sugar Market," Agricultural Economics,
    Vol. 15 (1996), pp. 83-96.

    36. Sanjib Bhuyan and Rigoberto A. Lopez, "Oligopoly Power in the Food and
    Tobacco Industries," American Journal of Agricultural Economics (Aug. 1997),
    pp. 1035-1043.

    37. Michael K. Wohlgenant, Effects of Trade Liberalization on the World
    Sugar Market, prepared for the Food and Agriculture Organization of the
    United Nations, Rome (1999).

    38. Our analysis replaced the U.S. sugar module of the CARD model with the
    model described in app. II.

    39. S. Devadoss and J. Kropf. Cited in app. II.

    40. A. Hafi, P. Connell, and R. Sturgiss, "Market Potential for Refined
    Sugar Exports From Australia," Australian Bureau of Agricultural and
    Resource Economics Research, Report 93.17, Canberra, (1993).

    41. M.K. Wohlgenant. Cited in app. II.

    42. G. Moschini, "Economic Issues in Tariffication: An Overview,"
    Agricultural Economics, Vol. 5 (1991), pp. 101-120.

    43. Karl Meilke and Sylvain Lariviere, "The Problems and Pitfalls in
    Modeling International Dairy Trade Liberalization," Working Paper #99-3,
    International Agricultural Trade Research Consortium (Mar. 1999).

    44. We employed the "large country" assumption in our analysis of excess
    supply under a TRQ, in the sense that changes in U.S. imports would be
    sufficient to affect international prices. Thus, the excess supply curve is
    upward sloping at import volumes in ranges other than where the TRQ is
    binding.

    45. For example, see La France (American Journal of Agricultural Economics,
    1991), La France and de Gorter (American Journal of Agricultural Economics,
    1985), Thurman (American Journal of Agricultural Economics, 1991), Rucker
    and Thurman (Journal of Law and Economics, 1990).
    *** End of document. ***