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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