Sugar Program: Changing the Method for Setting Import Quotas Could Reduce
Cost to Users (Letter Report, 07/26/1999, GAO/RCED-99-209).
In 1998, U.S. consumers used nearly 10 million tons of sugar, about 16
percent of which was imported. The amount of sugar imported into this
country is set each year by the Department of Agriculture (USDA). Under
the U.S. sugar program, USDA insulates domestic growers and processors
from lower world prices for raw sugar by restricting the supply of sugar
that can be imported at a low tariff rate. The U.S. Trade
Representative, working with USDA, allocates shares of the tariff-rate
quota among 40 countries. By law, the sugar program also supports
domestic sugar prices by offering loans to processors at a rate of 18
cents per pound for raw cane sugar and about 23 cents per pound for
refined beet sugar, with the sugar serving as collateral for the loans.
The program allows sugar processors to forfeit their sugar to their
federal government instead of repaying their loans--a likely outcome if
domestic sugar prices fall below a certain level. This report describes
and evaluates (1) USDA's procedures for setting the tariff-rate quota
for imported raw sugar and (2) the U.S. Trade Representatives'
procedures for allocating the quota among sugar-producing countries.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-209
TITLE: Sugar Program: Changing the Method for Setting Import
Quotas Could Reduce Cost to Users
DATE: 07/26/1999
SUBJECT: Import restriction
Sugar
Agricultural production
Prices and pricing
Agricultural programs
Import regulation
Foreign trade policies
Farm income stabilization programs
Tariffs
IDENTIFIER: USDA Sugar Program
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United States General Accounting Office GAO Report
to Congressional Requesters July 1999 SUGAR PROGRAM
Changing the Method for Setting Import Quotas Could Reduce Cost to
Users GAO/RCED-99-209 GAO United States General
Accounting Office Washington, D.C. 20548 Resources, Community, and
Economic Development Division B-282828 July 26, 1999 The Honorable
Dianne Feinstein United States Senate The Honorable George Miller
House of Representatives In 1998, U.S. consumers used 9.9 million
tons of sugar, about 16 percent of which was imported. The amount
of sugar imported into the United States is determined annually by
the U.S. Department of Agriculture (USDA), which administers the
U.S. sugar program. Under this program, USDA insulates domestic
sugar producers (growers and processors) from lower world prices
for raw sugar by restricting the supply of sugar that can be
imported at a low tariff rate (this amount is known as the tariff-
rate quota). The U.S. Trade Representative (USTR), working with
USDA, allocates shares of the tariff-rate quota among 40
designated countries. By law, the sugar program also supports
domestic sugar prices by offering loans to processors at a rate of
18 cents per pound for raw cane sugar and 22.9 cents per pound for
refined beet sugar, with the sugar serving as collateral for these
loans. The program allows sugar processors to forfeit their sugar
to the federal government instead of repaying their loans; this is
likely to happen if domestic sugar prices fall below a certain
level-the loan rate plus certain costs that processors would no
longer incur if they forfeited. You expressed concern about USDA's
and USTR's administration of the tariff-rate quota for imported
sugar and its effect on U.S. cane sugar refiners and other
consumers. Specifically, you asked us to describe and evaluate (1)
USDA's procedures for setting the tariff-rate quota for imported
raw sugar and (2) USTR's procedures for allocating the quota among
sugar-producing countries. Results in Brief USDA uses the
tariff-rate quota for raw sugar to restrict low-cost imports and
maintain domestic prices at sufficiently high levels to prevent
processors from forfeiting on their sugar loans. USDA sets the
tariff-rate quota at the beginning of the fiscal year and may
adjust its size three times during the year. In setting and
adjusting the quota level, USDA compares year-end projections of
the sugar stocks held by U.S. producers with projections of
domestic sugar use (an indicator known as the stocks-to-use
ratio). Generally speaking, a low stocks-to-use ratio is
associated with a lower tariff-rate quota, tighter supplies, and
higher Page 1 GAO/RCED-
99-209 Sugar Program B-282828 prices; a high stocks-to-use ratio
is associated with a higher tariff-rate quota, larger supplies,
and lower prices. The relatively low stocks-to-use ratios used by
USDA have resulted in low tariff-rate quotas and tight domestic
supplies of sugar. In recent years, domestic sugar prices were
over 2 cents more per pound than was needed to avoid sugar loan
forfeitures. We estimate that domestic sugar users incur a cost of
$200 million annually for each penny in excess of the estimated
price needed to avoid forfeitures. Once the initial size of the
tariff-rate quota for imported raw sugar is set, USTR allocates
shares of it among the 40 countries designated as sugar exporters
under the tariff-rate quota on the basis of their exports to the
United States between 1975 and 1981. Quota allocations for
individual countries have not been revised for 17 years, despite
dramatic changes in global market conditions, including changes in
many countries' ability to produce and export sugar. Additionally,
the United States imported, on average, about 3 percent less sugar
than the quota allowed from 1996 through 1998 because some
countries did not fill their allocations. Because the shortfalls
in the tariff-rate quota reduced total U.S. sugar supplies by less
than 1 percent, they had a minimal effect on the domestic price of
sugar. However, domestic sugar refiners expressed concern that
these shortfalls have limited their ability to obtain sugar. We
identified several options that could be used to fill the tariff-
rate quota more completely and better reflect the world cane sugar
market. For example, the allocation process could be adjusted by
redistributing unused quota allocations to countries that could
fill them; or a different allocation method, such as filling
quotas on a first-come, first-served basis, could be used. Any
changes to the current allocation method would have to be
consistent with U.S. trade agreements, according to USTR
officials. We make recommendations to the USDA and USTR to make
the sugar program operate more effectively and at less cost to
domestic sugar users. Background The United States and many
other countries have protected their domestic growers and
processors of cane sugar and beet sugar1 from lower world prices
through quotas and/or high tariffs that restrict the supply of
imported sugar. From 1996 through 1998, U.S. raw sugar prices
averaged 22.2 cents per pound, while world raw sugar prices
averaged 11.6 cents per 1Sugar comes from sugarcane and sugarbeet
plants that must undergo processing to extract the sugar. Beet
sugar is transformed directly into refined sugar by beet
processors. Sugarcane typically is milled into raw sugar and then
is sent to a refinery, which further processes it into refined
sugar for consumption. Page 2
GAO/RCED-99-209 Sugar Program B-282828 pound; currently, the world
price is about 6 cents per pound. (See table I.1 in app. I.) The
United States has relied on imports to meet as much as 23 percent
of the domestic demand for sugar in recent years. (See table I.2
in app. I.) The current U.S. sugar program, administered by USDA,
consists of (1) a tariff-rate quota that limits the amount of raw
sugar that can be imported at a lower tariff rate and (2) a
domestic commodity loan program for processors whose loan rate has
effectively established a minimum price for domestic sugar
producers. Under the Agriculture and Food Act of 1981, as amended,
sugar processors can obtain loans from USDA's Commodity Credit
Corporation by pledging their sugar as collateral.2 If processors
find that domestic sugar prices are too low, they can forfeit the
sugar that secured their loans to the federal government rather
than repay their loans in cash. The Federal Agriculture
Improvement and Reform Act of 1996, commonly known as the 1996
Farm Act, modified the sugar program, in part, by (1)
legislatively establishing the loan rate at 18 cents per pound for
raw cane sugar and 22.9 cents per pound for refined beet sugar (2)
assessing a 1-cent penalty on each pound of raw cane sugar and a
1.07-cent penalty on each pound of refined beet sugar forfeited to
the government, (3) eliminating a requirement that the sugar
program operate at no net cost to U.S. taxpayers, and (4) limiting
processors' opportunities to forfeit their sugar by not allowing
such forfeitures if the tariff-rate quota is 1.5 million tons or
less.3 USDA also administers a tariff-rate quota for refined sugar
that is substantially smaller-about 28,000 tons annually.4 In
1990, in response to a decision under the General Agreement on
Tariffs and Trade, the United States moved from an absolute quota,
which limited the total amount of sugar that could be imported
each year, to a tariff-rate quota for imported raw sugar. In 1994,
the United States agreed to administer the tariff-rate quota,
including the allocation of quota shares, in a manner that is
consistent with its commitments under the World Trade Organization
(WTO) Agreement on Agriculture.5 The United States also agreed to
set the tariff-rate quota for raw cane sugar at 1.26 million tons
or 2Sugar processors are required to pay growers a government-
specified minimum price, equivalent to about 60 percent of the
loan. 3All ton measurements in this report are short tons. A short
ton equals 2,000 pounds. 4This amount does not include Mexican
sugar imported under the North American Free Trade Agreement. 5WTO
was established on January 1, 1995, as a result of the Uruguay
Round of the General Agreement on Tariffs and Trade. WTO
facilitates the implementation, administration, and operation of
multiple agreements that govern trade among its member countries.
Page 3
GAO/RCED-99-209 Sugar Program B-282828 higher each year.6 Sugar
imported under the tariff-rate quota is either assessed no tariff
or a 0.63-cent-per pound tariff, while imports above this limit
are assessed a 15.82-cent-per-pound tariff, which has made them
prohibitively expensive.7 Alternatively, domestic refiners can
import raw sugar that is exempt from the tariff-rate quota and
higher tariffs if the refined sugar is (1) re-exported or used in
a product that is re-exported or (2) used to make polyhydric
alcohol for producing certain sugarless products.8 This imported
sugar is commonly known as the quota-exempt market. In 1993, we
reported that the sugar program cost domestic sweetener users over
$1 billion annually in higher prices from 1989 through 1991.9
Because of these higher prices, domestic producers, foreign
importers to the U.S. market, and producers of sugar alternatives
such as high-fructose corn syrup received higher incomes than they
would have if the program did not exist. We also found that these
benefits were concentrated among relatively few beneficiaries. We
concluded that the U.S. market price for sugar should be lowered
and that the Congress should consider legislation to move the
sugar industry toward a more open market. To achieve a lower
market price, we recommended that the Congress gradually lower the
loan rate for sugar and direct USDA to adjust import quotas
accordingly. Reducing the loan rate gradually would allow
producers time to make orderly adjustments. The 1996 Farm Act did
not revise the sugar program along the lines that we had
recommended. USDA has not officially determined the cost of the
U.S. sugar program to domestic sugar users. Estimating the total
cost of the sugar program to users is controversial because the
total cost is not a simple difference between current U.S. and
world sugar prices. Instead, the cost estimate depends in part on
assumptions about how much the world price would rise if the
United States did not have a sugar program. The added cost could
also be based on an estimate of what the world sugar price would
be if all countries eliminated programs that support their sugar
industries. Nevertheless, as we and others have shown, higher U.S.
sugar prices result in increased costs of hundreds of millions of
dollars per year to U.S. sugar users. 6USDA's tariff-rate quota
has been above the 1.26-million-ton minimum requirement each year.
7Under the North American Free Trade Agreement, the tariff for
Mexican sugar imported outside the tariff-rate quota will
gradually be reduced from 15.6 cents per pound in 1994 to zero
cents per pound in 2008. The high tariff for Mexican sugar is 13.6
cents per pound in 1999. 87 C.F.R., Part 1530. 9Sugar Program:
Changing Domestic and International Conditions Require Program
Changes (GAO/RCED-93-84, Apr. 16, 1993). Page 4
GAO/RCED-99-209 Sugar Program B-282828 USDA's
USDA's Foreign Agricultural Service (FAS) sets the size of the
tariff-rate Administration of the quota for raw sugar to
limit the amount of imported sugar in the domestic market and
maintain sufficiently high domestic sugar prices to prevent
Tariff-Rate Quota Has sugar processors from forfeiting
their loans. FAS sets the tariff-rate quota at Unnecessarily
the beginning of each fiscal year using a formula that is intended
to achieve a year-end stocks-to-use ratio of 14.5 percent. FAS
reserves a Increased Prices to portion of the tariff-
rate quota that it will make available during the fiscal Users
year only if the projected year-end stocks-to-use ratio is 15.5
percent or lower. The size of the stocks-to-use ratio is important
because a low stocks-to-use ratio is associated with a smaller
tariff-rate quota, tighter supplies, and higher prices; a high
stocks-to-use ratio is associated with a higher tariff-rate quota,
larger supplies, and lower prices. As a result of FAS' use of
these stocks-to-use ratios, the tariff-rate quota has maintained
the domestic sugar price at more than 2 cents per pound over the
price needed to avoid sugar loan forfeitures. We estimate that
current domestic prices cost domestic sugar users about $200
million annually for every penny in excess of the estimated price
for avoiding sugar loan forfeitures. FAS Uses a Stocks-To-Use
Since fiscal year 1997, FAS has set the annual tariff-rate quota
for imported Ratio in Setting the Annual raw sugar at the
beginning of each fiscal year and made any adjustments Tariff-Rate
Quota to its size at three subsequent intervals. As a
fiscal year begins, FAS calculates the tariff-rate quota by
incorporating the World Agriculture Supply and Demand Estimates
(WASDE) September forecasts for U.S. sugar production,
consumption, and beginning and ending stocks into a formula that
targets a year-end stocks-to-use ratio of 14.5 percent.10
Typically, FAS has allowed about 70 percent of this tariff-rate
quota to be allocated among eligible exporting countries while
reserving the remaining 30 percent for possible allocation-in 10-
percent increments-in January, March, and May. At each of these
points, FAS released a 10-percent increment only if the current
WASDE projection of the stocks-to-use ratio was 15.5 percent or
lower. Table 1 shows the results of FAS' process for setting and
adjusting the tariff-rate quota for imported sugar during the past
3 years. In fiscal year 1999, for example, FAS used its formula to
initially set the tariff-rate quota at 1.78 million tons on the
basis of the September 1998 WASDE sugar 10The WASDE projections
are based on (1) domestic sugar production and consumption data,
including sugar crop data from USDA's National Agricultural
Statistics Service; (2) market trend analysis, using econometric
models and spreadsheets; and (3) professional knowledge about
domestic market conditions. WASDE projections are developed by
USDA's Interagency Commodity Estimates Committee, which is
composed of officials from the Foreign Agricultural Service's
Import Policies and Programs Division, the Farm Service Agency,
the Economic Research Service, and the World Agricultural Outlook
Board. Page 5
GAO/RCED-99-209 Sugar Program B-282828 projections and a year-end
stocks-to-use ratio of 14.5 percent. FAS initially allocated 1.28
million tons and reserved the remaining 500,000 tons in three
165,000-ton increments. FAS did not release any of the increments
in January, March, or May 1999 because WASDE's projected year-end
stocks-to-use ratio was greater than 15.5 percent, effectively
reducing the tariff-rate quota to 1.28 million tons for fiscal
year 1999. Table 1: FAS' Tariff-Rate Quota for Imported Sugar,
Fiscal Years 1997-99 Tons in thousands Amount Announced
initially Total
tariff-rate released for January March
May tariff-rate Fiscal year quota allocation
increment Increment increment quota 1997
2,535 1,874 0 221 221
2,315 1998 1,984 1,323
0 221 221 1,764 1999
1,780 1,284 0 0 0
1,284 Note: Numbers may not add because of rounding. Source: GAO's
analysis of USDA's data. It is difficult to evaluate the basis of
FAS' decisions in setting or adjusting the tariff-rate quota for
imported raw sugar because USDA does not have detailed records
documenting the process. The Interagency Commodity Estimates
Committee, which develops the WASDE projections, does not make
minutes of its meetings available to the public and does not
document the specific assumptions or analysis used to develop its
estimates. FAS officials cited historical practices for using a
year-end stocks-to-use ratio of 14.5-percent to set the tariff-
rate quota and a 15.5 percent ratio for making subsequent
adjustments. In clarifying FAS' basis for setting the tariff-rate
quota, we asked the FAS official responsible for administering the
sugar program whether attaining a specific market price for sugar
is a factor in establishing the size of the tarriff-rate quota.
The official told us that FAS does not have a target price for
sugar. Instead, FAS uses the year-end stocks-to-use ratio to
manage the size of the tariff-rate quota, which indirectly
influences sugar prices. USDA's Economic Research Service has
identified an historical relationship between the stocks-to-use
ratio and the market price in a fiscal year's fourth quarter.11
Specifically, a 15.5 percent stocks-to-use ratio is associated
with a market price of 22.22 cents per pound of raw sugar, and
11The mathematical relationship is expressed in the following
manner: Price equals 27.82 minus the product of 0.361 multiplied
by the stocks-to-use ratio. See Economic Research Service, USDA,
Sugar and Sweeteners: Situation and Outlook, (March 1996, p. 15).
Page 6
GAO/RCED-99-209 Sugar Program B-282828 a 14.5 percent stocks-to-
use ratio is associated with a market price of 22.59 cents per
pound. By using these stocks-to-use ratios to establish the
tariff-rate quota each year, FAS has effectively maintained an
average domestic sugar price of 22.2 cents in the fourth quarters
of fiscal years 1997 and 1998. (See table I.3 in app. I.) Small
Tariff-Rate Quota Sugar processors who obtain USDA loans must
receive a price that is higher Has Resulted in Higher than
their loan rate and certain additional costs in order to induce
them to Than Necessary Sugar sell in the market and to
discourage them from forfeiting their sugar. USDA Prices
uses the tariff-rate quota to restrict the supply of imported
sugar and raise the domestic market price.12 However, we found
that USDA has restricted the tariff-rate quota more than
necessary-domestic sugar prices are higher than necessary to
encourage processors to sell their sugar in the market. Prior to
1998, USDA estimated prices called the "minimum cane or beet sugar
prices to discourage forfeiture" using the 1996 Farm Act's loan
rates of 18 cents per pound for raw cane sugar and 22.9 cents per
pound for wholesale refined beet sugar.13 These minimum prices
generally are a couple of cents above the mandatory loan rates
because they need to cover additional transportation costs,
certain marketing costs, and accrued interest on the loan.14 For
raw cane sugar in crop year 1997 (which corresponds to fiscal year
1998), USDA's minimum prices to discourage forfeiture ranged from
19.2 to 20.9 cents per pound, depending upon the location of the
regional sugar cane market.15 Likewise, for wholesale refined beet
sugar, these prices ranged from 23.2 to 26.7 cents per pound. (See
app. II for a more detailed description of USDA's "minimum prices
to discourage forfeiture.") By contrast, domestic prices 12While
the tariff-rate quota restricts the overall supply of sugar and
thus influences beet sugar prices, the connection with these
prices is more indirect. Compared with the cane sugar market,
production differences from factors such as weather can lead to
greater market price variability in the beet sugar market.
13Because USDA did not estimate a minimum price to discourage
forfeitures for crop year 1998, we used the minimum price estimate
of an agricultural consulting firm, which used USDA's methodology.
14These costs are included in the minimum price because a sugar
processor would not incur them if the sugar were forfeited. 15The
Omnibus Consolidated and Emergency Supplemental Appropriations
Acts for 1999 (P.L. 105-277) directed that USDA, in calculating
prices that discourage forfeiture, cannot consider a 1-cent-per-
pound penalty that would be imposed if a processor forfeited sugar
to the government. However, we included this forfeiture penalty
because a processor would consider it in deciding whether to
forfeit sugar. Page 7
GAO/RCED-99-209 Sugar Program B-282828 averaged 22.09 cents per
pound for cane sugar and 26.37 cents per pound for beet sugar in
fiscal year 1998.16 Table 2 shows the difference between the U.S.
market prices for raw cane sugar and the estimated minimum prices
needed to avoid loan forfeitures for crop years 1996 through 1998,
using USDA's methodology. The market price for raw cane sugar
averaged over 2 cents per pound above the minimum price needed to
avoid forfeiture between crop years 1996 and 1998. (See table
III.1 in app. III.) These market prices indicate that the tariff-
rate quota was more restrictive than necessary to keep domestic
sugar prices above the minimum price to avoid sugar loan
forfeitures. Table 2: Difference Between U.S. Raw Cane Sugar
Market Prices and Cents per pound Minimum Prices Needed
to Avoid Loan
Weighted Forfeitures, Crop Years 1996-98
average Difference Weighted
minimum price between average U.S.
to avoid loan market price market price
forfeiture for and forfeiture Fiscal year for raw
cane Crop year raw cane
price 1997 22.00 1996
19.94 2.07 1998
22.09 1997 19.93
2.17 1999 22.00a 1998
19.89 2.11 Average
22.03 19.92
2.11 Note: The weighted yearly market prices, the prices to avoid
forfeiture, and the average differences in price are weighted by
the regional production of raw cane sugar. Loan forfeiture prices
for a crop year were compared with the next year's fiscal year
market prices because sugar grown and harvested in a crop year is
sold in the following fiscal year. Numbers may not add because of
rounding. aThe average market price for fiscal year 1999 is a
projection from the 1999 USDA baseline. Source: GAO's analysis
using futures contract prices for number 14 raw cane sugar on the
New York Coffee, Sugar and Cocoa Exchange and USDA's methodology
for calculating the minimum prices needed to avoid loan
forfeitures. Table 3 shows the differences between U.S. wholesale
refined beet prices and the estimated minimum prices needed to
avoid loan forfeitures for crop years 1996 through 1998. We found
that the market price for refined beet sugar averaged more than 3
cents higher than the minimum price needed to avoid forfeiture,
suggesting again that the tariff-rate quota was unnecessarily
restrictive for operating the sugar program without forfeitures.
In the Red River Valley area of Minnesota and eastern North
Dakota-the largest U.S. beet-producing region-the average price
spread 16Average sugar prices are based on regional sugar
production estimates. Page 8
GAO/RCED-99-209 Sugar Program B-282828 between the estimated
minimum price and the market price during 1998 was over 4 cents
per pound. (See table III.2 in app. III.) The spread was somewhat
smaller in other regions and in fact was slightly negative in 1997
in two of the seven regions where production was smaller.17
Nevertheless, there were no loan forfeitures in any region during
this time. Table 3: Difference Between U.S. Wholesale Refined Beet
Sugar Prices Cents per pound and Minimum Prices Needed to
Avoid
Weighted Difference Loan Forfeitures, Crop Years 1996-
98 Weighted
average between average U.S.
minimum price average wholesale
to avoid market price refined beet
forfeiture for and forfeiture Fiscal year
price Crop year beets
price 1997 28.55
1996 24.31 4.24 1998
26.37 1997 24.40
1.97 1999 27.76a 1998
24.37 3.38 Average
27.56 24.36
3.20 Note: The yearly average refined beet prices, the prices to
avoid forfeiture, and the differences in price are all weighted by
the regional production of beet sugar for crop years 1996 through
1998. Loan forfeiture prices for a crop year were compared with
the following fiscal year's market prices because sugar grown and
harvested in a crop year is sold in the following fiscal year.
Numbers may not add because of rounding. aThe average wholesale
refined beet market price is an average of the fiscal year to
date, through May 1999. Source: GAO's analysis using U.S.
wholesale refined beet sugar prices from Milling and Baking News,
midwestern and western markets, and USDA's methodology for
calculating minimum prices needed to avoid loan forfeitures. Since
market prices for cane and beet sugar are higher than the minimum
price needed to avoid forfeitures, they result in higher costs for
refiners and sugar users. We estimate that, with total cane and
beet sugar consumption of about 10 million tons in 1998 and other
things being equal, a 1-cent per pound difference in the price of
sugar translates into an additional cost to sugar users of about
$200 million per year.18 17In crop year 1997, the market price was
slightly below the loan forfeiture price in the Michigan and Ohio
region (0.05 cents per pound) and the Texas region (0.43 cents per
pound). These regions constituted about 9 percent and less than 1
percent, respectively, of total yearly sugar beet production for
the 1996 through 1998 crop years. 18This estimate was derived by
multiplying 1 cent by total sugar consumption of approximately 10
million tons in 1998 multiplied by 2,000 pounds per ton. Page 9
GAO/RCED-99-209 Sugar Program B-282828 Adjustments to
Once the tariff-rate quota is established, USTR allocates shares
of it among Current Allocation the 40 countries that
were designated in 1982 as sugar exporters to the United States
under the tariff-rate quota on the basis of their exports to the
May More Completely United States between 1975 and
1981. However, the allocations of the Fill the Tariff-Rate
tariff-rate quota, which have remained substantially unchanged for
17 years, do not reflect many countries' current capacities to
produce and Quota and Better export sugar. In
addition, the current allocation process has resulted in Reflect
World Market fewer sugar imports than allowed under the
tariff-rate quota. From 1996 Conditions
through 1998, U.S. raw sugar imports averaged about 75,000 tons
less annually than the amount USDA allowed USTR to allocate under
the tariff-rate quota. According to domestic refinery officials,
this shortfall19 has exacerbated recent declines in the overall
availability of raw cane sugar in the U.S. market. USTR could
adjust its current allocation method or consider using other
allocation methods that would (1) better reflect the current
production capacities of countries exporting sugar to the United
States and (2) close the gap between the allowed quota and the
amount of sugar actually imported. Allocations Under the
USTR allocates the tariff-rate quota for raw sugar using a method
known as Tariff-Rate Quota Do Not the historical shares
approach, which is consistent with WTO requirements, Reflect
Countries' Current according to USTR officials. In 1982, the
quota for imported raw sugar was Production and Export
divided among 40 countries on the basis of their share of the U.S.
market 20 Capacities during the 1975-81
period, when imports of sugar were relatively unrestricted. (See
app. IV for each country's share of the quota.) The Dominican
Republic (17.6 percent), Brazil (14.5 percent), and the
Philippines (13.5 percent) were allocated almost half of the
quota. These quota allocations do not reflect many exporting
countries' current production and export capabilities, as
demonstrated in the following ways: * On average, from 1993
through 1998, 10 of the 40 countries were net importers of sugar.
These countries need to import sugar from the world market to meet
their own needs and to replace their annual exports to the United
States.21 * Some countries have substantially reduced their
production compared with the amount of sugar they are allowed to
export to the United States. 19Throughout the remainder of this
report, we define shortfall as the amount by which imports are
less than the allocated tariff-rate quota. 20Market shares were
determined on the basis of the Olympic average of countries'
exports to the United States from 1975 through 1981, according to
USDA officials. USDA was responsible for administering the tariff-
rate quota allocations until fiscal year 1997. 21A country may
export only domestically grown sugar to fill its share of the
tariff-rate quota. Page 10
GAO/RCED-99-209 Sugar Program B-282828 For example, since the
allocations were made, the Dominican Republic and the Philippines
have experienced a 50-percent and 27-percent decline in total
sugar production, respectively, while their shares of the
allocation have remained the same. * Some countries have
substantially increased their production compared with the amount
of sugar they are allowed to export to the United States. For
example, since the allocations were made, Guatemala, Colombia, and
Australia have increased their production by 219 percent, 96
percent, and 61 percent, respectively, while their shares of the
allocation have remained the same. * The quota allocations for 11
of the 40 countries exceeded those countries' average world
exports from 1993 through 1998. For example, during this time,
Peru was allocated an average of approximately 83,000 tons, while
it exported an average of only 72,000 tons of sugar to all
countries. * Several countries with quota allocations are among
the world's smallest sugar exporters. Conversely, some countries
without quota allocations produce and export significantly more
than smaller producing countries with quota allocations. * Some
countries have similar quota allocations despite dramatically
different export capabilities. For example, figure 1 shows that
Brazil and the Philippines have similar allocations (14.5 and 13.5
percent of the quota, respectively), but Brazil exports about 21
times more sugar than the Philippines. Page 11
GAO/RCED-99-209 Sugar Program B-282828 Figure 1: Allocations of
Brazil and the Philippines Compared With Their
Tons in thousands Average World Exports, 1993-98 6000 5,215 5000
4000 3000 2000 1000 293
259 249 0 Brazil
Philippines Allocation Exports Source: GAO's analysis of USDA's
data. A comparison of exports under the U.S. tariff-rate quota
with exports in the U.S. quota-exempt market for raw cane sugar
provides another indication that the tariff-rate quota shares are
not allocated among the countries according to their current
capacity to produce and export sugar. The quota-exempt market is a
relatively unrestricted market and provides a market-based
incentive for U.S. buyers to select countries that can
economically produce sugar and transport it to the U.S. market.22
This 22While sugar imported from most suppliers to the U.S. quota-
exempt market is exempt from a 0.625-cent-per-pound tariff, U.S.
refiners and other users that import sugar from some countries,
such as Australia, are required to pay this tariff. However, this
tariff is reimbursed when the refined sugar is exported, according
to USDA. Page 12
GAO/RCED-99-209 Sugar Program B-282828 comparison shows that the
dominant suppliers in the quota-exempt market have relatively
small shares under the tariff-rate quota. As shown in figure 2,
Guatemala and Colombia supplied 59 percent of the U.S. quota-
exempt market from 1993 through 1995 but have only 7 percent of
the tariff-rate quota allocation. In contrast, countries with 70
percent of the tariff-rate quota's allocation collectively
represented only 1.6 percent of the exports to the U.S. quota-
exempt market. Furthermore, the primary countries supplying the
U.S. quota-exempt market exported at least 3 million tons of sugar
annually during 1997 and 1998, exceeding the combined U.S. imports
under the tariff-rate quota and the quota-exempt market by at
least 240,000 tons. Figure 2: Differences in Exporting Countries'
Market Shares in the Quota-Exempt Market and the Tariff-Rate Quota
Market Quota-exempt suppliers' market shares
Tariff-rate quota's historical shares (Average 1993-95)
Other Other 2%
2% Colombia 5% Guatemala
20% Colombia 24% Other Central American
69% Guatemala
and Caribbean 39%
Countries Other Central 39% American and
Caribbean Countries Source: Economic Research Service, USDA. The
Current Allocation Many countries do not
completely fill their sugar quota allocations. As a Process
Resulted in result, U.S. raw sugar imports
averaged about 75,000 tons less than Domestic Shortfalls in
allowed from 1996 through 1998 (see table 4). Because the
shortfalls Filling the Tariff-Rate during this
period reduced total U.S. sugar supplies by less than 1 percent,
Quota they had a minimal
effect on the domestic price of sugar. In addition, the Page 13
GAO/RCED-99-209 Sugar Program B-282828 level of shortfalls during
the 3-year period has declined. However, U.S. cane sugar refiners
told us that these shortfalls have further exacerbated problems
associated with steady declines in the supply of raw sugar
available for refining in recent years. In particular, they
pointed out that 12 of the 22 U.S. cane sugar refineries operating
in 1981 have closed and some of the remaining refineries have been
operating at between one-half and two-thirds capacity this year.23
While this is a substantial decline, USTR officials noted that
several factors have contributed to the closing of refineries
since 1981, including the use of high-fructose corn syrup instead
of sugar as a sweetener for soft drinks and the marked increase in
consumption of artificial sweeteners. USDA officials told us that
the shortfalls are not significant enough to justify changing
USTR's current allocation method. U.S. cane sugar refinery
representatives also noted that the current allocation process may
result in additional costs associated with lower quality sugar
and/or higher transportation expenses because they cannot import
sugar from their preferred foreign suppliers. Table 4: U.S. Raw
Sugar Imports Under the Tariff-Rate Quota, Fiscal Years Tons
in thousands 1996-98
Imports Percentage Announced
Tariff-rate under the of tariff-rate
tariff-rate quota tariff-rate Import
quota not Fiscal year quota allocated
quota shortfalla filled 1996
2,389 2,389 2,285 103
4.3 1997 2,535 2,315
2,253 63 2.7 1998
1,984 1,764 1,706 58
3.3 Average 2,303 2,156
2,081 75 3.5 aThe shortfall is the
difference between the allocated tariff-rate quota and imports.
Source: GAO's analysis of USDA's data. Current Allocation Method
We identified several options to adjust the current method for
allocating Could Be Adjusted to the tariff-
rate quota for raw sugar that may more completely fill it and
Better Reflect Market better reflect countries'
production and export capabilities. According to Conditions and
More USTR officials, these options are
consistent with the nation's WTO Completely Fill the Quota
commitments; however, each option could be subject to challenge by
WTO countries currently holding allocations for the sugar tariff-
rate quota. These options may also have other foreign policy
implications. 23The U.S. Sugar Corporation recently opened a
refinery, primarily to refine its own cane sugar. Page 14
GAO/RCED-99-209 Sugar Program B-282828 First, USTR could
reallocate unused portions of the quota to countries with the
capacity to export more sugar than their original allocation
allows. USTR officials told us that if they use this method, they
would reallocate quota shares to the countries that already
receive an allocation (including countries not filling their quota
shares) and the reallocation would reflect countries' historical
shares. However, according to USDA officials, reallocations
presented a significant administrative burden in 1995 when USDA
conducted the last U.S. sugar reallocation under the historical
shares method.24 Second, USTR could establish a new historical
shares period that represents current market conditions. According
to USTR officials, reestablishing this period would involve
allowing the tariff-rate quota to be filled on a first-come,
first-served basis for 3 years and then using this 3-year period
as a basis for establishing individual countries' quota shares for
subsequent years. This method would update the set of countries
exporting to the U.S. market. Furthermore, since the tariff-rate
quota would remain open until filled, it could help ensure that
the quota would be filled completely. However, this method might
encourage countries to rush their shipments to the United States
because U.S. raw sugar prices are higher than world prices,
causing temporary supply and demand imbalances. To reduce the
effects of this rush to the market, the United States could choose
to administer the tariff-rate quota using quarterly or monthly
allocations rather than an annual allocation, according to USTR
officials. Instead of adjusting the current allocation method,
USTR and USDA could choose an alternative method for allocating
quota shares, provided that the method is consistent with U.S.
obligations under WTO. For example, the United States could choose
to permanently administer the tariff-rate quota on a first-come,
first-served basis. If administered in this manner, any U.S.
trading partner could export raw cane sugar until the annual
tariff-rate quota amount is met. Any excess sugar would be subject
to the higher tariff. However, using a first-come, first-served
process on a permanent basis would be subject to the concerns
discussed above in using it to establish a new historical shares
period. Finally, the United States could choose to administer the
tariff-rate quota by auctioning the rights to exporting countries.
In an auction, foreign countries would submit bids in an effort to
gain access to the U.S. sugar 24As an alternative to reallocating
shortfalls, USDA officials noted that USDA has reserved the right
to increase the size of the tariff-rate quota at any time. The
officials believe that it would be easier to increase the tariff-
rate quota than to reallocate shortfalls. Page 15
GAO/RCED-99-209 Sugar Program B-282828 market. These bids would
specify an import amount and fee that would be paid to the U.S.
Treasury for these rights. The highest bidders would be awarded
the right to ship sugar to the United States. The auctioning
method has two key advantages: (1) the United States would gain
revenues from the fees paid25 and (2) the countries with the
lowest production and transportation costs would have an advantage
in bidding for the rights, thereby generating a set of suppliers
that would more likely reflect free market conditions. These
countries would be paying for the right to ship sugar to the
United States and, therefore, might be more likely to ship sugar,
thus removing much of the concern over whether supplying countries
would be unable to fill their quota. However, USTR officials do
not favor the use of auctions in administering tariff-rate quotas
for commodities because of a concern that foreign countries' use
of the auction method could adversely affect U.S. exporters if
administered, for example, in a nontransparent manner. In
addition, the fees that could be collected could be constrained by
certain provisions under WTO agreements, according to USTR
officials. Conclusions In the past we have recommended that the
federal government take steps toward moving the sugar industry
toward a more open market, gradually phasing out the federal sugar
program. Until such actions are taken, we believe that USDA should
operate the program in a manner that minimizes costs to sugar
users. It currently does not do so. More specifically, in recent
years, USDA has continued to target the same stocks-to-use ratios
for determining annual tariff-rate quotas, despite the fact that
the resulting quotas have maintained domestic market prices that
are 2 or more cents higher than necessary for avoiding loan
forfeitures. This imposes unnecessary costs on U.S. sugar users-
about $400 million annually. Additionally, USTR's current process
for allocating the sugar tariff-rate quota does not ensure that
all of the sugar allowed under the quota reaches the U.S. market.
Filling the tariff-rate quota may help U.S. cane sugar refiners
improve their operating efficiency. However, the significance of
the shortfall is arguable, and therefore may not, by itself,
justify actions to change the allocation process. The
justification for change becomes stronger when considering the
additional value of reallocating the quota among countries to
reflect current production and exporting capacities, rather than
the capacities of more than 17 years ago. Adjustments could be
made to the current allocation process, or an 25Exporting
countries would be willing to pay these fees to obtain the right
to import into the United States because U.S. sugar prices are
above the world price. Currently, foreign sugar producers who
supply sugar to the U.S. market receive the benefits of the quota-
induced higher prices. Page 16
GAO/RCED-99-209 Sugar Program B-282828 entirely different process
could be introduced that may more completely fill the tariff-rate
quota and better reflect world raw sugar market conditions.
Recommendations To make the sugar program less costly to
domestic sugar users, we recommend that the Secretary of
Agriculture gradually increase the size of the tariff-rate quota
so that the resulting domestic sugar prices are more consistent
with the estimated minimum prices for avoiding sugar loan
forfeitures. To better ensure that the tariff-rate quota is
completely filled and better reflects world market conditions for
raw sugar, we recommend that the U.S. Trade Representative
consider changing the current process for allocating the tariff-
rate quota in a way that is consistent with U.S. trade agreements
while ensuring that any administrative changes are not unduly
burdensome. Changes could include such actions as providing a
means of reallocating current unfilled quota or selecting an
entirely new basis for allocating quota shares. Agency Comments
We provided the U.S. Department of Agriculture and the U.S. Trade
and Our Evaluation Representative with a draft of this report
for review and comment. The Department disagreed with our
recommendation that it gradually increase the size of the tariff-
rate quota and disagreed with much of the analysis supporting this
recommendation. It stated that domestic sugar prices are already
consistent with the estimated minimum prices needed to avoid loan
forfeitures and that therefore there was no need to change the
tariff-rate quota. Furthermore, it stated that the recommendation
was based on an analysis of national average prices, even though
processors respond to regional price differences when deciding
whether to forfeit their sugar to USDA. Because regional average
prices were not available for cane sugar, we used national average
prices. However, our analysis accounted for regional price
differences by using the Department's estimates of regional
impacts (see app. II.) Therefore, we continue to believe that the
Department's restrictive tariff-rate quota for imported raw sugar
has resulted in higher domestic sugar prices than necessary for
users and that it should be changed as we have recommended. In
addition, the Department questioned the need for our
recommendation that the U.S. Trade Representative consider
modifying the current process for allocating the tariff-rate quota
in a way that is consistent with U.S. trade agreements, noting
that alternative processes could be administratively Page 17
GAO/RCED-99-209 Sugar Program B-282828 burdensome. To address this
concern, we revised our recommendation to state that the U.S.
Trade Representative should ensure that any administrative changes
are not unduly burdensome. The Department also provided numerous
technical comments to clarify what it perceived to be misleading
statements, factual errors, and analytical problems in the draft
report. We address each of these comments in appendix V, which
contains the Department's complete written comments and our
response. None of the Department's technical comments resulted in
changes that affected the report's conclusions. We met with U.S.
Trade Representative officials, including the Associate General
Counsel in the Office of General Counsel. Generally, the U.S.
Trade Representative agreed with the report's factual description
of the operation of the tariff-rate quota for imported raw sugar.
However, the U.S. Trade Representative expressed some reservations
about whether our recommendation that it consider changing the
current allocation process would be practical or beneficial to the
various stakeholders. Furthermore, the U.S. Trade Representative
stated that the allocation alternatives, while theoretically
possible, would require careful consideration as to whether they
could be implemented in a manner that is consistent with
commercial and other requirements without introducing unreasonable
levels of commercial uncertainty. This was particularly true of
the changes involving the use of a first-come, first-served
approach. We continue to believe that the inefficiencies
associated with the current process merit the U.S. Trade
Representative's consideration of alternatives for allocating the
tariff-rate quota. However, as discussed in this report, we
recognize that any change to the current allocation process needs
careful consideration and should be approached cautiously. The
U.S. Trade Representative also noted that (1) many factors
contributed to the declining number of sugar refineries since 1981
in addition to decreases in the availability of raw cane sugar;
and (2) although shortfalls-the amount by which imported sugar is
less than the allocated tariff-rate quota-averaged 75,000 tons per
year from 1996 through 1998, the level of shortfalls declined
during that period. We agree, and we have incorporated these
observations into this report. Scope and To describe and
evaluate USDA's procedures for setting the tariff-rate quota
Methodology for imported raw sugar, we interviewed and obtained
information from officials involved in the administration of the
quota in USDA's Foreign Agricultural Service, Farm Service Agency,
Economic Research Service, and World Agricultural Outlook Board.
In addition, we discussed the Page 18
GAO/RCED-99-209 Sugar Program B-282828 process for setting the
tariff-rate quota and its effects with experts and representatives
of the sugar industry-including sugar producer and sugar user
groups-and with academia. To compare market prices for sugar with
minimum prices to avoid loan forfeitures, we spoke with and
obtained information from several agricultural consulting firms,
the Congressional Research Service, USDA's Farm Service Agency and
Economic Research Service, and other sugar commodity analysts. To
describe and evaluate the allocation procedures for the tariff-
rate quota, we interviewed and obtained information from cognizant
officials of USTR and USDA's Foreign Agricultural Service and
Economic Research Service. In addition, we spoke with cognizant
officials of the U.S. Department of State and WTO. We did not
independently verify the data used in this report. We conducted
our work between December 1998 and June 1999 in accordance with
generally accepted government auditing standards. As arranged with
your offices, unless you publicly announce its contents earlier,
we plan no further distribution of this report until 14 days after
the date of this letter. At that time, we will send copies of this
report to the Senate Committee on Agriculture, Nutrition, and
Forestry; the House Committee on Agriculture; and other
appropriate congressional committees; the Honorable Dan Glickman,
Secretary of Agriculture; the Honorable Charlene Barshefsky, U.S.
Trade Representative; the Honorable Jacob Lew, Director, Office of
Management and Budget; and other interested parties. We will also
make copies available to others upon request. Please contact me at
(202) 512-5138 if you or your staff have any questions about this
report. Key contributors to this report are listed in appendix VI.
Robert E. Robertson Associate Director, Food and Agriculture
Issues Page 19
GAO/RCED-99-209 Sugar Program Contents Letter
1 Appendix I
24 U.S. Sugar Production and Consumption Appendix II
26 Estimation of Minimum Prices Needed to Discourage Forfeitures
for Raw Sugar Cane and Wholesale Refined Beet Sugar Appendix III
30 Estimation of the Difference Between the Market Price and the
Price to Avoid Loan Forfeitures for Raw Cane Sugar and Wholesale
Refined Beet Sugar Appendix IV
32 Countries' Tariff-Rate Quota Allocation and Sugar Production
and Consumption, 1998 Page 20 GAO/RCED-99-209 Sugar Program
Contents Appendix V
34 Comments From the GAO Comments
45 U.S. Department of Agriculture Appendix VI
51 GAO Contacts and Staff Acknowledgments Tables
Table 1: FAS' Tariff-Rate Quota for Imported Sugar, Fiscal Years
6 1997-99 Table 2: Difference Between U.S. Raw Cane Sugar Market
Prices 8 and Minimum Prices Needed to Avoid Loan
Forfeitures, Crop Years 1996-98 Table 3: Difference Between U.S.
Wholesale Refined Beet Sugar 9 Prices and Minimum
Prices Needed to Avoid Loan Forfeitures, Crop Years 1996-98 Table
4: U.S. Raw Sugar Imports Under the Tariff-Rate Quota,
14 Fiscal Years 1996-98 Table I.1: Comparison of U.S. Prices,
USDA's Loan Rate, and 24 World Prices for Raw Cane
Sugar, Fiscal Years 1996-98 Table I.2: U.S. Sugar Production, Raw
Sugar Imports, and Sugar 24 Consumption, Fiscal Years
1996-98 Table I.3: Comparison of the Stocks-to-Use Ratio With the
25 Domestic Price of Raw Sugar in the Fourth Quarter of Fiscal
Years 1986-98 Table II.1: Estimation of Minimum Raw Cane Sugar
Price Needed 27 to Discourage Forfeitures, 1997 Crop
Year Table II.2 Estimation of Minimum Beet Sugar Price Needed to
28 Discourage Forfeitures, 1997 Crop Year Table III.1: Difference
Between U.S. Raw Cane Sugar Market 30 Prices and the
Minimum Prices Needed to Avoid Loan Forfeitures, by Producing
Region and Nationally, 1996-98 Table III.2: Difference Between
U.S. Wholesale Refined Beet 31 Sugar Prices and the
Minimum Prices Needed to Avoid Loan Forfeitures, by Producing
Region and Nationally, 1996-98 Page 21
GAO/RCED-99-209 Sugar Program Contents Figures Figure 1:
Allocations of Brazil and the Philippines Compared 12
With Their Average World Exports, 1993-98 Figure 2: Differences in
Exporting Countries' Market Shares in 13 the Quota-
Exempt Market and the Tariff-Rate Quota Market Abbreviations FAS
Foreign Agricultural Service ICEC Interagency Commodity
Estimates Committee USDA United States Department of
Agriculture USTR U.S. Trade Representative WASDE
World Agriculture Supply and Demand Estimates WTO World
Trade Organization Page 22
GAO/RCED-99-209 Sugar Program Page 23 GAO/RCED-99-209 Sugar
Program Appendix I U.S. Sugar Production and Consumption Table
I.1: Comparison of U.S. Prices, USDA's Loan Rate, and World Prices
Average cents per pound for Raw Cane Sugar, Fiscal Years
Fiscal year U.S. market pricea
Loan rate World market priceb 1996-98
1996 22.50
18 12.40 1997
22.00 18 11.67 1998
22.09 18 10.80 Average
1996-98 22.19 18
11.62 aU.S. market prices are based on futures contract prices for
number 14 raw cane sugar on the New York Coffee, Sugar, and Cocoa
Exchange. bWorld bulk spot prices are based on contracts for
number 11 raw cane sugar on the New York Coffee, Sugar, and Cocoa
Exchange. Source: GAO's analysis of data from the U.S. Department
of Agriculture (USDA) and the New York Coffee, Sugar, and Cocoa
Exchange. Table I.2: U.S. Sugar Production, Raw Sugar Imports, and
Sugar Short tons in thousands (raw value)
Consumption, Fiscal Years 1996-98
Fiscal year 1996 Fiscal year 1997 Fiscal year 1998
Cane sugar 3,454
3,192 3,632 Beet sugar
3,916 4,013 4,389 Total
domestic production 7,370
7,205 8,021 Imports under the tariff-rate quota
for raw sugar 2,285
2,253 1,706 Quota-exempt imports
540 493 349 Other imports
1 4 85 Total U.S.
sugar supplya 10,196 9,955
10,161 Total U.S.sugar consumptionb
9,896 9,983 9,992 aExcludes
refined sugar imports. bExcludes U.S. sugar exports of 385,000
short tons in fiscal year 1996; 211,000 short tons in fiscal year
1997; and 179,000 short tons in fiscal year 1998. Source: GAO's
analysis of USDA's data. Page 24
GAO/RCED-99-209 Sugar Program Appendix I U.S. Sugar Production and
Consumption Table I.3: Comparison of the Stocks-To-Use Ratio With
the Cents per pound Domestic Price of Raw Sugar in
the Stocks-to-use
Actual domestic Fourth Quarter of Fiscal Years 1986-98 Fiscal
year ratio (percent) Predicted
pricea price 1986
19.37 20.83 20.90 1987
16.92 21.71 21.94 1988
15.24 22.32 22.37 1989
13.96 22.78 23.54 1990
13.19 23.06 23.31 1991
16.04 22.03 21.71 1992
15.47 22.24 21.33 1993
17.66 21.44 21.90 1994
13.65 22.89 22.11 1995
12.57 23.28 23.62 1996
15.08 22.38 22.23 1997
14.89 22.44 22.18 1998
16.80 21.76 22.26 aThe fourth-
quarter price was estimated using a regression model developed by
USDA's Economic Research Service. The mathematical relationship is
expressed in the following manner: Price equals 27.82 minus the
product of 0.361 multiplied by the stocks-to-use ratio. See
Economic Research Service, USDA, Sugar and Sweeteners: Situation
and Outlook, (March 1996, p. 15). Source: GAO's analysis of USDA's
data and futures contract prices for number 14 raw cane sugar on
the New York Coffee, Sugar, and Cocoa Exchange. Page 25
GAO/RCED-99-209 Sugar Program Appendix II Estimation of Minimum
Prices Needed to Discourage Forfeitures for Raw Sugar Cane and
Wholesale Refined Beet Sugar Under the sugar program, processors
can obtain loans from USDA by pledging their sugar as collateral.
If domestic sugar prices were too low, processors could forfeit
the sugar that secured their loans to USDA rather than repay their
loans in cash. Prior to the 1998 crop year, USDA estimated a price
called the "minimum cane or beet sugar prices to discourage
forfeiture."1 This price was composed of (1) the legislatively
established loan rate for sugar processors of 18 cents per pound
for cane sugar and 22.9 cents per pound for refined beet sugar and
(2) certain transportation, marketing, and accrued interest costs,
along with the penalty charge for loan forfeiture. In general,
processors would be unlikely to forfeit sugar if domestic market
prices were above this minimum price. However, if market prices
were below this level, processors might find it to their economic
advantage to forfeit their sugar. As a result, sugar loan
recipients would have to receive at least this "minimum" price to
make them indifferent to repaying the loan and selling in the
marketplace or forfeiting their sugar to USDA. In this appendix,
we explain how USDA computed these prices to avoid loan forfeiture
for both raw cane sugar and refined beet sugar. Estimation of
Minimum In general, for raw cane sugar, the components of
the estimation of the Price Needed to Avoid Raw "minimum raw
sugar price to discourage forfeiture" consisted of the loan Cane
Sugar Forfeitures rate, the forfeiture penalty, interest
expense, transportation costs, and the location discount. We
explain each of these components below. Table II.1 provides an
example of the 1997 estimation of USDA's "minimum raw sugar price
to discourage forfeiture." It displays the minimum forfeiture
prices for the sugar cane growing regions of Florida, Hawaii,
Louisiana, Texas, and Puerto Rico. 1Because USDA no longer
estimates a price to discourage forfeiture, we used estimates
provided by an agricultural consulting firm that used USDA's
methodology to estimate a minimum price to avoid forfeiture for
crop year 1998/99. Page 26
GAO/RCED-99-209 Sugar Program Appendix II Estimation of Minimum
Prices Needed to Discourage Forfeitures for Raw Sugar Cane and
Wholesale Refined Beet Sugar Table II.1: Estimation of Minimum Raw
Cane Sugar Price Needed to Cents per pound
Discourage Forfeitures, 1997 Crop Cost category
Florida Hawaii Louisiana Texas Puerto
Rico Year Loan rate
17.88 17.77 18.30 18.06
18.09 Forfeiture penalty 1.00 1.00
1.00 1.00 1.00 Net loan proceeds
16.88 16.77 17.30 17.06
17.09 Cost of loan redemption and marketing Interest expense
0.87 0.87 0.89 0.88
0.88 Transportation costs 1.95
2.00 1.21 1.07 0.52
Location discounts 0.00 1.25
0.65 0.20 0.00 Minimum price to avoid
forfeitures 19.70 20.89
20.05 19.21 18.49 Source: Farm Service
Agency, USDA. The minimum price to avoid loan forfeitures for raw
cane sugar is estimated using the following items: * Regional loan
rates consist of the national average loan rate for raw sugar cane
of 18 cents per pound and an adjustment-positive or negative-for
transportation differentials. According to USDA, these
differentials consist of freight charges only. Regional loan rates
are set by location because USDA attempts to equalize the risk of
forfeiture across regions. For example, if an area has lower than
average transportation costs, the loan rate would be higher than
18 cents per pound. * The forfeiture penalty is subtracted from
the area loan rate to obtain the net proceeds received from
forfeiture. The current farm program requires that a 1-cent-per-
pound penalty for cane sugar and a 1.07-cent-per-pound penalty for
refined beet sugar be paid if a processor forfeits sugar.2 * USDA
calculates interest expense on the loan as the product of the
regional loan rate times the annual loan interest rate (6.5
percent) times 0.75 (because it is a 9-month loan). 2The Omnibus
Consolidated and Emergency Supplemental Appropriations Acts for
1999 (P.L. 105-277) directed that USDA not consider the 1-cent
penalty when calculating prices that discourage forfeiture.
However, since the processor is required by law to pay this
penalty, we believe that the processor would consider it when
deciding whether to forfeit sugar to the government. Page 27
GAO/RCED-99-209 Sugar Program Appendix II Estimation of Minimum
Prices Needed to Discourage Forfeitures for Raw Sugar Cane and
Wholesale Refined Beet Sugar * transportation costs consist of all
transportation and distribution costs incurred in moving the sugar
to the refiner, including all charges for the commercial sale of
the raw cane sugar, such as freight, transportation insurance,
transportation taxes, interest on storage, and terminal charges. *
Location discounts are considered a marketing cost to the cane
processors, which reflects the fact that they may represent a
captive market to some cane refiners. These discounts, required by
certain refiners, reflect the higher cost to the cane processor of
transporting raw sugar from certain production areas to
alternative refiners. Estimation of Minimum
The components of USDA's estimation of the minimum beet sugar
price to Price Needed to Avoid discourage
forfeiture consisted of the regional loan rate, the forfeiture
Wholesale Refined Beet penalty, the interest
expense on the loan, and the cash discount. Table II.2 Sugar
Forfeitures is an example of this
estimation for sugar beets for the 1997 marketing year. Table II.2
Estimation of Minimum Beet Sugar Price Needed to Discourage
Forfeitures, 1997 Crop Year Cents per pound Western North
Colorado, Dakota, Minnesota and
Nebraska, Montana, Michigan and
eastern North eastern and western
Oregon and Cost category Ohio Dakota
Wyoming Texas Wyoming Idaho
California Loan rate 23.79 22.73
23.01 23.61 22.19 22.48 23.62
Forfeiture penalty 1.07 1.07 1.07
1.07 1.07 1.07 1.07 Net loan proceeds
22.72 21.66 21.94 22.54
21.12 21.41 22.55 Cost of loan redemption and
marketing Interest expense 2.47 1.11
2.95 3.03 2.85 2.88 3.03
Cash discounts 0.51 0.46
0.51 0.52 0.49 0.50 0.52
Minimum price to avoid forfeitures 25.71
23.23 25.40 26.09 24.46
24.79 26.10 Source: Farm Service Agency, USDA. In 1997,
for wholesale refined beet sugar, USDA's minimum price to avoid
loan forfeitures was estimated using the following factors: Page
28 GAO/RCED-99-
209 Sugar Program Appendix II Estimation of Minimum Prices Needed
to Discourage Forfeitures for Raw Sugar Cane and Wholesale Refined
Beet Sugar * As with the regional loan rates for raw cane sugar,
the loan rates for the beet regions reflect transportation
differentials and are calculated by adjusting the national average
loan rate of 22.9 cents per pound for freight charges. Again,
these are adjusted to equalize the risk of loan forfeiture across
beet-producing regions. * The forfeiture penalty of 1.07 cents per
pound is subtracted from the loan rates. * Unlike sugar cane
processors, beet processors do not share the interest expense of
the government's loan with growers and must recover the entire
interest expense of loan repayment in their share of the sugar's
selling price. Therefore, interest expense is calculated as the
product of the regional loan rate times the annual interest rate
(6.5 percent) times 0.75 (because it is the 9-month loan period),
all divided by the processor's share of the selling price. * Beet
sugar is normally sold subject to a 2-percent cash discount for
all regions. Unlike raw cane sugar, the minimum price needed to
avoid loan forfeiture for beet sugar does not include
transportation costs, since beet sugar is priced at the processing
level and is not further refined. Page 29
GAO/RCED-99-209 Sugar Program Appendix III Estimation of the
Difference Between the Market Price and the Price to Avoid Loan
Forfeitures for Raw Cane Sugar and Wholesale Refined Beet Sugar We
estimated the difference between raw cane and refined beet sugar
market prices and the prices necessary to avoid loan forfeiture on
a regional and on a national weighted average basis for crop years
1996 through 1998. In order to estimate these differences, we
compared crop year loan forfeiture prices with market prices for
the following fiscal year because sugar grown and harvested in a
crop year is sold in the following fiscal year. Table III.1:
Difference Between U.S. Raw Cane Sugar Market Prices and the
Cents per pound Minimum Prices Needed to Avoid Loan
Weighted Forfeitures, by Producing Region and
yearly Nationally, 1996-98
average Year Florida Hawaii
Louisiana Texas differencea 1996
2.30 1.11 1.95 2.79
2.07 1997 2.39 1.20
2.04 2.88 2.17 1998
2.33 1.15 1.95 2.84
2.11 Average 2.34 1.16
1.98 2.84 2.11 aThe weighted yearly
average difference in price is weighted by the regional production
of cane sugar for 1996 through 1998. Source: GAO's analysis using
USDA's minimum prices to avoid loan forfeitures for crop years
1996 and 1997 and an agricultural consulting firm's minimum prices
for crop year 1998. For raw cane sugar market prices, number 14
contract prices on the New York Coffee, Sugar, and Cocoa Exchange
were used for fiscal years 1997 through 1999 (fiscal year 1999 was
a USDA projection). Data used to estimate weights were obtained
from USDA's Sugar and Sweeteners: Situation and Outlook. Page 30
GAO/RCED-99-209 Sugar Program Appendix III Estimation of the
Difference Between the Market Price and the Price to Avoid Loan
Forfeitures for Raw Cane Sugar and Wholesale Refined Beet Sugar
Table III.2: Difference Between U.S. Wholesale Refined Beet Sugar
Prices and the Minimum Prices Needed to Avoid Loan Forfeitures, by
Producing Region and Nationally, 1996-98 Cents per pound Colorado,
Montana, Nebraska, northwest
Weighted Minnesota and Wyoming,
and yearly
Michigan and eastern southeastern
northwest North Idaho and average
Year and Ohio North Dakota Wyoming Texas
Dakota Oregon California differencea 1996
2.35 4.83 2.66 1.97
3.60 4.79 3.96 4.24 1997
0.05 2.43 0.26 0.43
1.20 2.94 2.28 1.97 1998
1.73 4.14 1.55 1.06
2.77 3.71 2.38 3.38 Average
1.34 3.8 1.49 0.87
2.52 3.81 2.87 3.20 aThe
weighted yearly average difference in price is weighted by the
regional production of beet sugar for 1996 through 1998. Source:
GAO's analysis using USDA's minimum prices to avoid loan
forfeitures for crop years 1996 and 1997 and an agricultural
consulting firm's prices for crop year 1998. Wholesale refined
beet sugar prices taken from Milling and Baking News, Midwest and
Western markets, fiscal years 1997 through 1999 (1999 price was
fiscal year average as of May). Data used to estimate weights were
obtained from USDA's Sugar and Sweeteners: Situation and Outlook.
Page 31
GAO/RCED-99-209 Sugar Program Appendix IV Countries' Tariff-Rate
Quota Allocation and Sugar Production and Consumption, 1998 Short
tons in thousands Tariff-rate quota Tariff-rate quota
Production minus Country allocationa (percent)
allocation 1998 production 1998 consumption consumption
Argentina 4.3
72 1,929 1,599 330
Australia 8.3
140 6,137 1,091 5,046
Barbados 0.7
9 51 18 33 Belize
1.1 18 130
15 115 Bolivia
0.8 13 366
254 112 Brazil
14.5 244 17,306
9,700 7,606 Colombia
2.4 40 2,374
1,461 913 Congo
0.3 8 44
39 5 Costa Rica
1.5 25 419
228 191 Cote d'Ivoire
0.3 8 127
182 55 Dominican Republic
17.6 296 518
331 187 Ecuador
1.1 18 208
413 205 El Salvador
2.6 44 510
238 272 Fiji
0.9 15 408
57 351 Gabon
0.3 8 22
25 3 Guatemala
4.8 81 1,896
493 1,403 Guyana
1.2 20 273
35 238 Haiti
0.3 8 11
83 72 Honduras
1.0 17 288
255 33 India
0.8 13 16,085
18,409 2,324 Jamaica
1.1 18 206
142 64 Madagascar
0.3 8 105
108 3 Malawi
1.0 17 215
198 17 Mauritius
1.2 20 725
46 679 Mexico
0.3 28 6,052
4,674 1,378 Mozambique
1.3 22 44
77 33 Nicaragua
2.1 35 394
204 190 Panama
2.9 49 187
100 87 Papua New Guinea
0.3 8 44
35 9 Paraguay
0.3 8 143
128 15 Peru
4.1 69 507
998 491 Philippines
13.5 227 1,986
2,094 108 St. Christopher-Nevis
0.3 8 28
4 24 South Africa
2.3 39 2,660
1,507 1,153 Swaziland
1.6 27 571
248 323 Taiwan
1.2 20 364
540 176 (continued) Page 32
GAO/RCED-99-209 Sugar Program Appendix IV Countries' Tariff-Rate
Quota Allocation and Sugar Production and Consumption, 1998 Short
tons in thousands Tariff-rate quota Tariff-rate quota
Production minus Country allocationa (percent)
allocation 1998 production 1998 consumption
consumption Thailand 1.4
24 4,679 1,872
2,807 Trinidad-Tobago 0.7
12 86 93
7 Uruguay 0.3
8 22 121
99 Zimbabwe 1.2
20 632 367
265 Note: Each country supplying sugar to the United States under
the tariff-rate quota is limited to exporting sugar that solely
originated within that country. aAllocations are based on
countries' exports to the United States from 1975 through 1981.
Source: USDA. Page 33
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture Note: GAO comments supplementing those
in the report text appear at the end of this appendix. See comment
1. Page 34 GAO/RCED-99-209 Sugar Program Appendix V Comments
From the U.S. Department of Agriculture See comment 2. See comment
3. Now on p. 2. Now on p. 5. Now on p. 7. Now on p. 9. See comment
4. See comment 5. Page 35
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture Now on pp. 10-13. See comment 6. Now on
p. 10. See comment 7. Now on pp. 1-2. Now on p. 3. See comment 8.
Page 36 GAO/RCED-99-209 Sugar
Program Appendix V Comments From the U.S. Department of
Agriculture See comment 9. See comment 10. See comment 11. Now on
p. 4. See comment 12. See comment 13. Page 37
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture Now on p. 4. See comment 14. Now on p.
5. See comment 15. Now on p. 6. See comment 16. See comment 17.
Page 38 GAO/RCED-99-209 Sugar
Program Appendix V Comments From the U.S. Department of
Agriculture Now on p. 8. See comment 18. Now on p. 8. See comment
19. Now on p. 8. See comment 20. Now on p. 9. See comment 21. Page
39 GAO/RCED-99-209 Sugar Program
Appendix V Comments From the U.S. Department of Agriculture Now on
pp. 12-13. See comment 22. Now on pp. 10-12. See comment 23. See
comment 24. Page 40 GAO/RCED-99-
209 Sugar Program Appendix V Comments From the U.S. Department of
Agriculture Now on p. 14. See comment 25. Now on p. 1. See comment
26. Now on p. 2. See comment 27. Now on pp. 2-3. See comment 28.
Page 41 GAO/RCED-99-209 Sugar
Program Appendix V Comments From the U.S. Department of
Agriculture Page 42 GAO/RCED-99-
209 Sugar Program Appendix V Comments From the U.S. Department of
Agriculture Now on p. 3. See comment 29. See comment 30. Now on p.
4. See comment 31. Now on p. 7. See comment 32. Now on p. 7. See
comment 33. Page 43 GAO/RCED-99-
209 Sugar Program Appendix V Comments From the U.S. Department of
Agriculture Page 44 GAO/RCED-99-
209 Sugar Program Appendix V Comments From the U.S. Department of
Agriculture GAO Comments The following are GAO's comments on
USDA's letter dated July 8, 1999. 1. USDA's claim of a decline of
0.72 cents per pound in the price of raw sugar overstates the
reduction achieved under its new management plan. The domestic
price for sugar in fiscal year 1995 was unusually high-23.62 cents
per pound-because of problems in administering the tariff-rate
quota that resulted in a substantial shortfall in the tariff-rate
quota. Furthermore, U.S. refining margins (revenues less costs)
are affected by factors in addition to the sugar program, such as
recent consolidations in the industry. In the years just prior to
the period we reviewed, U.S. refining margins were much lower and
even negative in certain months. 2. We do not believe that our
recommendation to the Secretary of Agriculture to increase the
size of the tariff rate quota would result in any administrative
costs because USDA would continue to use its current process. We
agree that the implementation of this recommendation could
increase the risk to the economic well-being of some sugar beet
producers. As a result of lower domestic prices, some sugar beet
processors could decide to forfeit their sugar to the government.
However, producers in the primary cane sugar and sugar beet
regions generally would still obtain prices at least equal to the
price to avoid forfeiture. Furthermore, our recommendation states
that the size of the tariff-rate quota should be increased
gradually, enabling sugar beet growers to adjust their planting
strategy. 3. We recommended that the United States Trade
Representative (USTR) consider options for allocating the tariff
rate quota. As part of that consideration, USTR should evaluate
the administrative burden associated with alternative allocation
processes. We have modified our recommendation to note that any
administrative changes should not be unduly burdensome. 4. Our
draft report recognized that processors respond to local prices
when considering whether to forfeit sugar program loans, and we
took this into account in our analysis. Because regional market
price data for cane sugar were not available, we compared annual
average market prices with regional minimum prices to avoid loan
forfeitures. (See app. III.) In addition, regional loan rates were
adjusted to estimate the minimum prices to avoid loan forfeitures
to account for regional differences in prices caused by such
factors as transportation costs and regional cash discounts. For
beet sugar, we did not have market prices for each growing region,
but we were able to use separate prices for the midwestern and
Page 45 GAO/RCED-99-209
Sugar Program Appendix V Comments From the U.S. Department of
Agriculture western markets. (See app. II.) Furthermore, we
weighted market prices and prices to avoid loan forfeitures by
production in that region in order to obtain an estimate of the
impact of the price difference. These regional estimates were
adjusted to account for such factors as transportation cost
differences and regional cash discounts. 5. We did not contradict
ourselves in noting that two sugar beet growing regions had
slightly negative spreads when comparing their market prices with
the price to avoid forfeiture. These regions accounted for only 9
percent of sugar beet production, and the negative prices occurred
in 1997 but not in 1996 or 1998. Prices in the primary cane sugar
and beet sugar regions generally were more than 2 cents higher
than the price needed to avoid forfeiture. Furthermore, our
recommendation states that the size of the tariff-rate quota
should be increased gradually, enabling sugar beet growers to
adjust their planting strategy. 6. We recommended that USTR
consider options for allocating the tariff-rate quota and did not
recommend a specific approach. We believe these options are
relevant because they could reduce the amount of shortfalls and
better reflect the world market for raw sugar. Although USDA
states that it accounts for these shortfalls in its quota-setting
process, the fact remains that there continue to be shortfalls
each year. We believe that the method of quota allocation can play
a role in determining whether the tariff-rate quota is completely
filled, especially if shortfalls are not reallocated and if the
tariff-rate quota is not increased when a shortfall becomes
evident. 7. As our report shows, there is no need to have a
shortfall in the tariff-rate quota if an alternative allocation
method is used. The current system is a workaround to compensate
for the inability of some countries to fill their allocation.
Furthermore, USDA has not adjusted the tariff-rate quota in recent
years to close the gap between imports and the quota. This gap has
exacerbated declines in recent years in the overall availability
of raw cane sugar in the U.S. market, according to domestic sugar
refinery officials. 8. USDA did not articulated a definition of
"reasonable prices" or provided a basis for its use of a stocks-
to-use ratio of 15.5-percent, which is associated with a domestic
raw sugar price of 22.22 cents per pound. Our analysis is
predicated on the minimum price needed to avoid loan forfeitures,
which is associated with the legislatively mandated loan rate of
18 cents per pound for raw cane sugar plus regional transportation
and other costs. Page 46
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture 9. We recognize that trade agreements
have affected USDA's implementation of the sugar program. We did
not specifically examine the tariff-rate quota for imported
refined sugar in this report because USDA has set it at about
28,000 tons annually, compared with an annual average of 2.3
million tons of imported raw sugar. USDA primarily uses the raw
sugar tariff-rate quota to manage the sugar program. We have noted
this exclusion in the report in response to USDA's comment. 10.
USDA is referring to comments that the Foreign Agricultural
Service (FAS) obtains annually from domestic sugar producers and
users on its plans for setting the tariff-rate quota. We did not
refer to these comments in our report because they advocate
stocks-to-use ratios and other administrative adjustments that
reflect the sugar producers' and users' economic interests.
Therefore, we do not consider the comments to constitute a review
of USDA's administration of the tariff-rate quota. 11. We did not
discuss the gradual decline in the high-tier tariff (imports
outside of the tariff-rate quota) under the Uruguay Round of the
General Agreement on Tariffs and Trade because sugar imported
under these tariffs is not economical and such imports do not
occur. In addition, while we agree that future reductions in the
high-rate tariff for Mexican sugar under the North American Free
Trade Agreement will likely affect the administration of the
tariff-rate quota, we do not address these changes because they
were beyond the scope of our review. Currently, USDA accounts for
Mexican imports by adjusting the size of the tariff-rate quota and
using a 15.5-percent stocks-to-use ratio, which is associated with
a domestic market price of 22.22 cents per pound. 12. See comment
1. 13. Our report noted that the U.S. Sugar Corporation opened a
new refinery in 1998. While this refinery has initially increased
U.S. capacity, other refineries report that they are operating at
far less than full capacity-50 percent of capacity in one case-
because they have been unable to obtain sufficient supplies of raw
sugar. 14. We agree that a welfare analysis of the costs and
benefits of USDA's sugar program for domestic producers and
sweetener users, which we provided in our 1993 report, is
important for accessing USDA's sugar program. However, such an
analysis was beyond the scope of our review. Page 47
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture 15. We agree that the actual stocks-to-
use ratio may vary from USDA's initial target of 14.5 percent.
Because we describe 14.5 percent as a target, we did not revise
the report in response to this comment. 16. We have modified our
report to clarify the roles of FAS and USDA's Interagency
Commodity Estimates Committee (ICEC) in setting the tariff-rate
quota. The Price Waterhouse review examined the ICEC's process for
establishing World Agriculture Supply and Demand (WASDE) forecasts
for nine commodities. Although Price Waterhouse observed the ICEC
proceedings for sugar, its report does not specifically discuss
the sugar ICEC. While USDA states that the ICEC proceedings for
sugar are not unique, USDA officials told us that there were
differences in the various ICEC proceedings. We were denied
specific information on the proceedings for sugar and were not
allowed to observe an actual meeting. Furthermore, the chairman of
the sugar ICEC told us that the Price Waterhouse representatives
had signed an agreement not to discuss the details of their
observations regarding the sugar ICEC. 17. We do not take issue
with the WASDE sugar forecasts. However, we believe that
information on the meetings would help the public understand the
sugar ICEC's process for translating its reasoning into
quantitative decisions affecting the WASDE forecasts. The sugar
ICEC's minutes are too general to understand the basis for the
committee's decisions to change its forecasts, and the committee's
published explanation does not provide sufficient information on
how decisions are reached, such as the econometric models or
spreadsheets used. 18. We agree with USDA that another way to
reduce the price of refined sugar would be to increase the size of
the refined sugar tariff-rate quota, which USDA has set at about
28,000 tons per year. See also comment 9. 19. Our draft report
clearly stated that domestic prices for raw cane sugar and refined
beet sugar are linked. Although USDA states that it uses the raw
sugar tariff-rate quota to establish sufficient supplies of raw
sugar, which sets the framework for avoiding forfeitures by beet
sugar processors, we note that since the enactment of the 1996
Farm Act, USDA is no longer required to operate the sugar program
at no net cost to U.S. taxpayers. See also comments 2, 4, and 5.
20. See comments 2, 4, and 5. Page 48
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture 21. In this analysis, we consider
"users" as the wholesale or intermediate buyers of cane or beet
sugar-food manufacturers and sugar refiners because we cannot
determine the extent to which costs (or savings) would be passed
on to consumers in the short term. However, we agree with USDA
that in the medium- to long-term, these costs would eventually be
borne by the final consumer. 22. We believe that we appropriately
used the quota-exempt market as an example of how the U.S. market
would work if the allocation process more accurately reflected the
current world sugar market. As we said in our report, the quota-
exempt market allows U.S. buyers to select countries that can
economically produce sugar and transport it to the U.S. market.
Our point was to show that the current allocation process is out
of date-not to suggest that the quota-exempt market should be the
basis for allocating the tariff-rate quota. Furthermore, the
example of the Canadian market reinforces our point that the
current U.S. allocation does not reflect world market conditions.
While Australia provides over half of Canada's raw sugar imports,
its allocation is only 8.3 percent of the U.S. tariff-rate quota.
In contrast, the Philippines produced less sugar than it consumed
in 1998, yet its allocation is 13.5 percent of the U.S. tariff-
rate quota. 23. See comment 6. 24. It is unclear whether
reallocating the unfilled tariff-rate quota late in the year would
substantially increase administrative costs. According to a USTR
official, that office would not necessarily follow the same
reallocation process that USDA used the last time it conducted
such a reallocation-in fiscal year 1995. Moreover, while USDA
reserves the right to increase the size of the tariff-rate quota
at any time, the Department has not adjusted the tariff-rate quota
in recent years to close the gap between imports and the quota. As
we state in the report, while the significance of the gap is
arguable, it exacerbates the availability of raw cane sugar in the
U.S. market, according to domestic cane refinery representatives.
25. See comments 1 and 13. 26. We agree that loans are available
for processors and have revised the report accordingly. 27. We
revised the report to state that the 1996 Farm Act removed the no-
cost provision of the U.S. sugar program. Page 49
GAO/RCED-99-209 Sugar Program Appendix V Comments From the U.S.
Department of Agriculture 28. While we agree that other countries
also have historically protected their sugar markets, the degree
of liberalization of other sugar producing and importing nations
was beyond the scope of this report. Our objective in this report
was to comment on potential options to improve the administration
of the current program. 29. We agree with USDA that processors can
forfeit their sugar to the government only if the tariff-rate
quota is (1) initially set above 1.5 million tons or (2)
subsequently increased to above 1.5 million tons. In addition, we
note that the initial quota has always been set above that amount.
However, in fiscal year 1999, FAS allowed USTR to allocate only
1.28 million tons of sugar, without achieving the 1.5-million-ton
minimum requirement for providing processors with the option to
forfeit their sugar rather than repay their loans. 30. We revised
our report to state that the 1996 Farm Act revised the sugar
program to include penalties of 1 cent per pound for raw cane
sugar and 1.07 cents per pound for refined beet sugar that is
forfeited to the Commodity Credit Corporation. 31. See comment 21.
32. We agree that a stocks-to-use ratio is associated with a
fiscal year fourth-quarter market price. Furthermore, the Economic
Research Service reported in 1996 that the coefficient of
determination, or R2, for the forecast was equal to 0.68, which
indicates that variation the stocks-to-use ratio accounts for 68
percent of the variation that occurred in the fourth-quarter
market price. 33. We have revised the sentence in response to
USDA's comment to state that the average domestic sugar price was
22.2 cents in 1997 and 1998. We do not believe that it is
appropriate to include fiscal year 1995 in our analysis, as USDA
suggested . The domestic price that year was unusually high-23.62
cents per pound-because of problems in administering the tariff-
rate quota. These problems resulted in the 1997 changes in how the
tariff-rate quota is set, which are still in effect. Page 50
GAO/RCED-99-209 Sugar Program Appendix VI GAO Contacts and Staff
Acknowledgments GAO Contacts Robert E. Robertson (202) 512-
5138 Richard Cheston (202) 512-5138 Acknowledgments In addition
to those named above, Patricia A. Yorkman, Nancy Bowser, Jay
Cherlow, Daniel E. Coates, Barbara J. El-Osta, Leanne M. Flama,
and Carol Herrnstadt Shulman made key contributions to this
report. (150093) Page 51
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