A Thesis Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College in partial fulfillment of the requirements for the degree of Master of Science in The Department of Agricultural Economics and Agribusiness

by Daniel Ryan Petrolia B.A., Louisiana State University and A&M College, 1999 B.S., Louisiana State University and A&M College, 1999 August 2001

To my parents

ACKNOWLEDGEMENTS I would like to thank my advisor, Professor Lynn Kennedy, for his guidance and support throughout my program, and especially with the writing of this work. I would also like to express my gratitude to my committee members, Professor Steve Henning and Professor Rich Kazmierczak, for their assistance in developing my plan of study and in completing this thesis. Special thanks also to the entire faculty, staff, and fellow students of the Department of Agricultural Economics & Agribusiness, without which none of this would be possible. I would like to thank Mr. Bill Messina of the University of Florida for the wealth of information he provided me on Cuba, as well as the Middleton Library staff for their help in government document research. I should also express my appreciation for Mr. Jimmy Buffett, whose song A Havana Daydreamin’@ both inspired this research and provided a catchy title. Lastly, I wish to thank my parents and family for their continued support in everything I do. You are the reason for my success.


TABLE OF CONTENTS ACKNOWLEDGMENTS ............................................................................................. iii LIST OF TABLES ....................................................................................................... vii LIST OF FIGURES ..................................................................................................... viii ABSTRACT...................................................................................................................ix INTRODUCTION.......................................................................................................... 1 CHAPTER ONE: SUGAR PRODUCTION AND THE WORLD SUGAR MARKET SITUATION.............................. 4 World Sugar Production........................................................................................................ 4 Cuba............................................................................................................... 4 Mexico ......................................................................................................... 10 United States................................................................................................ 13 CHAPTER TWO: LITERATURE REVIEW ............................................................. 18 CHAPTER THREE: THEORETICAL AND EMPIRICAL FRAMEWORKS ................................................................................. 23 Theoretical Framework ............................................................................... 23 Empirical Framework .................................................................................. 26 Description of the ModPle Internationale Simplifié de Simulation ............. 26 Application of Empirical Model.................................................................. 28 CHAPTER FOUR: DATA.......................................................................................... 31 Prices and Quantities .......................................................................................... 31 Elasticities.................................................................................................... 31 CHAPTER FIVE: TRADE LIBERALIZATION SCENARIOS ................................ 40 Simulation Results: Prices, Supply, and Demand ...................................... 42 Simulation Results: Using Short-Run Elasticities ...................................... 43 Simulation Results: Using Long-Run Elasticities ...................................... 47 Comparison of Results ................................................................................ 48 CHAPTER SIX: WELFARE ANALYSIS AND POLICY OPTIONS.................................................................................................... 51 Welfare Analysis ......................................................................................... 51 Policy Options ............................................................................................. 55 iv

..................... 67 VITA................ 61 BIBLIOGRAPHY ........................................... 71 v ........................................................................................................................................CONCLUSION ..........................................................................................................................

...S.2 Table 4.......................................................7 Table 4....... 33 Monthly U............ FY 1999 .................. 38 Own-price supply and demand elasticities used in MISS ...LIST OF TABLES Table 1.....................9 Table 4... in 1........000 MTRV.... 34 U......... percentage of ROW total..............8 Table 4............... Dollar exchange rates for Mexican Peso. 39 Scenarios simulated in MISS ...............000 MTRV ................ and weighted own-price elasticities of demand....6 Table 4............... 36 ROW cane sugar production....... cents per pound ...000 MTRV.........................................000 MTRV. FY 1999 ... FY 1999 ..... and world refined sugar prices...... FY 1999 ...... 14 Provisions of the NAFTA pertaining to sugar......S. 15 Production.......... in 1..........3 Table 4......................S... in 1...................... by country............ sugar trade for FY 1999.. 35 Own-price supply and demand elasticities for Cuba and Mexico .1 Table 4..4 Table 4......... in 1..5 Table 4............... and weighted own-price supply elasticities...1 High-tier sugar tariffs of most countries compared to those of Mexico....... 32 U.......2 Table 1.......10 Table 4... and weighted own-price supply elasticities. in 1. supply........S..000 MTRV... 32 U........................000 MTRV...... 37 ROW sugar consumption...S................................... as percentage of world total.......... and distribution of sugar........................ in 1. FY 1999.................. Mexican....... percentage of ROW total...... 42 vi Table 1.11 Table 5..1 ............ by country. 36 ROW beet sugar production by country.................... in U.. FY 1999 .......... 14 Provisions of Uruguay Round agreement pertaining to sugar ... own-price elasticities of sugar supply and demand ....... 34 Base-year quantity data used in MISS.............3 Table 4.........

...........S....................................................2 Refined sugar price changes relative to the base.. supply and demand changes relative to the base.... 44 Cuban supply and demand changes relative to the base....4 Table 5........ sugar trade liberalization from Koo (2000)........Table 5... in 1.......... 45 ROW supply and demand changes relative to the base............. 49 U.000 MTRV ... 43 U........ in 1..S..................1 vii ....................3 Table 5..........S................ 46 Results of U.........................................................6 Table 6..... changes in consumer and producer surplus and net welfare gains .......... 53 Table 5....5 Table 5.................... with percentage change from 1999 actual shown in parentheses .........................000 MTRV ................................000 MTRV .................... in 1. in 1..000 MTRV ...................

... 5 Effect of import quota on producer and consumer surplus of an importing country..S........1 Quarterly Caribbean and U........3 viii .................... 1985-2000.............................S.... 52 Effect of import quota on producer and consumer surplus of an exporting country ........ cents per pound ........ 59 Figure 6................... in U..........2 Figure 6................................... 54 Effect of levying a sales tax on producer and consumer surplus .... raw sugar prices........................1 Figure 6......................LIST OF FIGURES Figure 1...........

the United States. ix . benefiting sugar users while hurting producers. indicating that the United States exhibits small. Mexico. imports. Results indicate that increased imports would generate up to $505 million in U. The use of a consumer tax. increased consumer surplus. and an aggregated Rest of the World was developed in order to simulate increases in sugar imports by the United States from Cuba and Mexico due to the NAFTA and a reinstatement of Cuba as a sugar supplier.S. and no increased government expenditures. no net producer surplus change. Policy options are then analyzed which could redistribute gains to compensate producers. resulting in significant increases in the world sugar market price. which allows the supply price to fall to world levels. while retaining higher demand prices would result in more efficient production and trade based on comparative advantage. These results contrast with previous studies which indicate that the United States would exhibit large-country effects on the world market. net welfare gains. Results also indicate that world prices experience a minimal increase due to increased U.S.country effects on the world sugar market.ABSTRACT A world sugar model consisting of Cuba.

and prices. Mexico. has not even been seriously considered as a trading partner for the near future. supplier of over one-third of total sugar requirements to the United States (Alvarez and Castellanos. more restrictions on trade with Cuba were enacted with the Torricelli Bill. the world’s fifth. 1995). which prohibits United States subsidiaries in third countries from trading with the island. due to the response of the Soviet Union to come to Castro’s aid for the duration of the Cold War. and Mexican sugar production. Even those states still under communist regimes. demand. Beginning in the year 2000. Today. and many see the agreement as the beginnings of a trade disaster. only ninety miles from Florida.largest sugar exporter. The embargo was not completely effective. This concern also holds true for the case of Cuba. Mexico will be able to 1 .S. However. Another looming issue is the economic embargo on Cuba by the United States enacted by President Eisenhower in 1960. The NAFTA is not without opposition. Canada. In 1996. Of major concern is the NAFTA’s influence on U. however.INTRODUCTION With the signing of the North American Free Trade Agreement and its implementation on January 1. in 1992. Both the NAFTA and impending trade with Cuba create an environment of uncertainty in U. the United States has opened trade routes with many former Soviet-bloc nations.S. however. and prior to the revolution of 1959. and the United States took a step toward creating a common North American market. the HelmsBurton Bill was passed to further tighten restrictions. with the Cold War over. ma rkets. Cuba. 1994. have begun to establish trade relations with the United States. namely China and Vietnam. In fact.

prices. The purpose of this study was to identify the status-quo of the sugar markets of Cuba. introduced in the House. which focus on the U. sugar policy. Mexico. market. though. Such actions include the introduction of the Cuban Humanitarian Trade Act of 1999.S. Chapter 2 .export up to 250.S. more recent actions by Congress indicate a move toward cooperation with Cuba. and attempt to simulate permutations to the status-quo and their subsequent effect on both domestic and international sugar markets. Chapter Two is a review of trade liberalization literature. ultimately determines much of the aforementioned factors. which include other countries. an aggregated rest of the world within the models. as well as the United States-Cuba Trade Act of 2000. despite the Torricelli and Helms-Burton Bills. undoubtedly. which. market. and often. was the current policy situation for sugar in these states. Thus. introduced in both the House and Senate. introduced in the Senate. the Cuban Food and Medicine Security Act of 1999. segmented into domestic studies. it is evident that future trade relations with Cuba are slowly moving forward and.000 metric tons to the U. Of primary importance.S. which drives the study. Also. and trade. and international studies. and the United States. The theoretical and empirical frameworks are explained in Chapter Three. and their respective price elasticities. The work begins in Chapter One by discussing the current economic and political environment within Cuba and Mexico. and by the year 2008. will have unlimited access. Factors identified included production. consumption. and follows with a discussion of U. including a description of the MISS and its application. sugar trade will play a substantial role in this process.

while Chapter Five expounds on the specific scenarios simulated during the study and their respective results.Four covers all data used and their respective sources. followed by the conclusion. including a comparison of results to a prior study. Chapter Six includes a discussion on welfare analysis and outlines some policy options that exist based on the results. 3 .

Sugarcane is a tall perennial grass that is produced in tropical and subtropical climate zones. The cane is then converted into raw sugar which is shipped to a refinery for further processing. India. beets are directly processed into refined sugar. which operate throughout the year.. remove the film of molasses and impurities that surround the sugar crystals (Benirschka et. 1996). China. sugar beets are always grown in crop rotations. al. and the United States. (1996) provide an excellent discussion on sugar production and the world sugar market. called ratoons. respectively. Like sugarcane.. al. al. while sugarcane producers may export either raw. al. or both (Benirschka et. It matures in twelve to sixteen months and each plant yields several crops. and hence. The top five sugar producers for that year were Brazil. sugarcane mills are located close to the cane fields. 1996). processing facilities tend to be close to the fields.CHAPTER ONE: SUGAR PRODUCTION AND THE WORLD SUGAR MARKET SITUATION World Sugar Production Benirschka et. the European Union. Unlike sugarcane. and thus. In order to minimize transportation costs and sucrose losses. cane sugar comprised 75% of total world sugar production. which is summarized here. and both are traded internationally. refined. raw sugar is a product of sugarcane only (Benirschka et. Raw and refined sugar are two distinct goods. Sugar beet producing countries export only refined sugar. Refineries. In fiscal year 1999. Sugar beets are an annual crop grown in temperate climate zones. The top five exporters were Brazil. the sucrose begins to break down. Because of disease problems. 1996). Once the cane is harvested. the European 4 .. sugar beets are bulky and costly to transport.

but is a net exporter (Benirschka et. Also. the United States. in U. Thailand. Australia. cents per pound. sugar prices from 1985 to 2000.S. 19852000.S. raw sugar prices. In most years. which illustrates the volatility in world prices..U. over 70 percent of world sugar production is consumed domestically. the European Union. implying that only a small proportion of world production is traded on the world market. Japan. Figure 1.S.S. Raw Sugar Prices. and Indonesia (Coalition for Sugar Reform.1 shows quarterly Caribbean and U. a significant share of this trade is the result of bilateral longterm agreements or on preferential terms such as the U.S. 2000). Lome Agreement. Quarterly Caribbean and U. It should be noted that the European Union imports sugar due to obligations under the Lome Agreement. al. while the top importers were Russia. and sugar prices are among the most unstable in international trade. 1985-2000 U. Cents/Pound 25 20 15 10 5 0 -1 00 -1 99 -1 98 -1 97 -1 96 -1 95 -1 94 -1 93 -1 92 -1 91 -1 90 -1 89 -1 88 -1 87 -1 86 -1 85 US Raw World Raw Quarter Figure 1.1. Since only a small portion of world production is traded freely. 1996). and Cuba.Union. small changes in production or government policies tend to have la rge effects on world sugar markets. 5 .S. sugar quota or the E. The Caribbean raw sugar price is usually Quarterly Caribbean and U. respective ly.

However. 1996). implying that relatively small changes in demand can have significant price effects. consumption. al.. The fall of the Soviet Union in the late 1980s crippled the Cuban economy. production remains high. Once in place. sugar production is relatively price inelastic in the short run. Therefore. An increase in sugar production in response to rising prices requires significant investment in processing facilities. attracting 6 . Thus. when prices fall. The island has begun to take on more free-market characteristics. but it appears that a slow recovery has begun. It was believed that this action would strangle the Cuban economy and force Castro from power. and trade flows often reflect domestic sugar policies rather than comparative advantage (Benirschka et. Government policies may aggravate this instability by insulating domestic producers and consumers from world price fluctuations. sugar policies can alter sugar production by stimulating production in countries that would produce less or no sugar in the absence of policy. which take time before becoming available. One reason for volatile world prices could be the asymmetric supply response to price changes due to high fixed costs of production. however. this was largely avoided through aid from Moscow. in response to Cuba’s nationalization of numerous American properties. Cuba Trade between the United States and Cuba has been non-existent since President Eisenhower enacted a complete economic embargo in late 1960. they tend to be used at capacity to spread fixed costs. Since price signals are not transmitted to domestic markets. In short.considered to be the world market price for sugar. production. In addition to increasing world market instability. domestic supply and demand are not responsive to changing world conditions.

tobacco. argued that “Even if Cuba opened up for American business. British. and Mexico have extended credit lines to Cuba. and Spanish firms have engaged in joint ventures with the Cuban government in this capacity (Leonard. By the mid-1990s. we’d wait a long time because of issues related to instability. and fertilizer firms as major beneficiaries to open trade (Heuer. Canadian. Andreas cited seed. and citrus fruits. Trade relations have also opened between Cuba and China. 1995). equipment. Chile. However. spare parts. and consumer goods. North Korea. profit repatriation. The governments of Brazil. As a result. Australian. argued that open commerce is the most reliable way to bring democracy and prosperity to Cuba. spokesman for American Cyanamid. 7 . the United States was a major importer of Cuban sugar.” However. and collection.foreign investment through joint ventures. Archer-Daniels-Midland CEO Dwayne Andreas. the number of foreign firms operating in Cuba increased fourfold since 1987 to five hundred. 1999). an early supporter of trade with the former Soviet Union. The country’s collapsed. Mexican. and Vietnam. and may result in costing the United States economy a share of the quickly growing Cuban market. Jim Thrift. Italy. Thus. profit sharing. Jordan. while the United States supplied the island with machinery. and Spanish firms have expanded to Cuba. German. communications technology. The tourism industry has also expanded as Australian. railroad harbor equipment. It is very likely that a resumption of trade today would bring about a very similar trade relationship (Leonard. and tax exemption. some American agri-business leaders see little promise in Cuba. In 1995. Prior to the embargo. credit. Chilean. 1999). it appears that the United States policy of economic strangulation of Cuba has been ineffective in unseating Castro.

Iran. American policy towards Cuba has been left to special. Alarmed by Cuba’s success in building trade and investment relationships with Canadian. favor easing it. before and since Castro assumed power. the group has been dominated by Cuban émigrés. The degree of American hostility remains a central preoccupation in Havana. Before 1959. but rather. this group wants to give the embargo extra-territorial force.interest groups whose agendas were not always in the interests of either nation. Of all U. The second group. Even some extremists find this both disproportionate and inhumane (Mead.Of course. Only a small number of Americans have any first-hand knowledge of Cuban conditions and views. sanctions. composed of more moderate opinions. political. and it is likely that they will continue to dominate CubanAmerican relations in the future (Mead. and the result is a heated policy debate that does not provide much guidance. and Latin-American partners. However. Since the Cuban revolution. the inclusion of food and medicine is unique to the Cuban embargo. this pressure group was composed of American investors and expatriates in Cuba. Lifting the United States embargo on Cuba will present many economic and political issues for both sides. The embargo against Cuba is even tighter than those against Iraq. and in some cases. and Serbia. but Cuba is of marginal concern within the United States.S. believes that there is no need to intensify the embargo. A small but vitally interested pressure group still largely shapes United States policy towards Cuba. most of the Cuban debate within the United States is economic at all. Positions are divided between two groups. Of great importance will be issues concerning the sugar 8 . 1995). 1995). The first group favors an intensification of the embargo. European.

However. when the embargo is finally lifted.S. given its dominant role in the Cuban economy. and South Afr ica. The main issue.sector.94 million metric tons in 1959. As Alvarez (1992) points out. Panama.95 million MT had been exported to the United States when trade was suspended in July of 1960 (Alvarez. 1992). 1. it is improbable that Cuba could be given its original quota level. Cuban sugar exports to the United States were 2. it is not unlikely that some type of provision may need to be made by the U. 1995). The successful 1999 crop represents an important psychological boost for Cuba’s 9 . Congress for sugar imports from Cuba. In the case of Nicaragua. Also. and the historical protection afforded American sugar producers through the United States sugar program. but rather in what manner and to what degree. This is due to increased domestic production and the advent of other caloric sweeteners (Alvarez and Castellanos. the average annual amount of sugar exported to the United States from Cuba during 1958 and 1959 represents twice the amount of total United States sugar imported today.” The 1965 amendment to the Sugar Act reallocated the 50 percent Cuban share of American sugar requirements on a pro-rata basis to other quota-holding countries. production remained well below the 7 million tons that Cuba experienced during the Cold War. which was the previous year’s production level. will not be whether Cuban sugar will again be imported. Thus. Cuban sugar production in fiscal year 1999 exceeded earlier expectations at an estimated 3. more than the original target of 3. however. “Since sugar exports are the main source of Cuban foreign exchange.6 million.78 million metric tons. Despite the year’s higher crop. Congress reinstated sugar quotas withheld for political reasons at levels that reflected current United States import requirements (Alvarez and Castellanos. 1995).

5 percent in nominal terms during the first six months of 2000. These problems are inherent in the present system. will not easily disappear. Also. Mexico The outlook for the Mexican economy continues to improve after the uncertainty caused by the economic crises in Russia. Mexico’s exports increased about 24. some improvements may have occurred by utilizing only the more efficient mills and by reducing costs throughout the industry from field to mill. which have resulted in efforts to increase efficiency in all production aspects. High oil prices and a robust U. economy are the primary reasons for these improvements. The United States remains.000 MTRV for fiscal year 2000. Even with increased production. Cuban consumption is estimated at 730. 2000).sugar economy. which has been struggling to recover from drastic output declines due to over-harvesting and shortages of spare parts. by far. The recent increase in oil prices combined with Mexico’s conservative fiscal and monetary policies have led to considerable strength in the Mexican economy. further gains are possible due to changes in management strategy. Asia. the most important market for Mexico’s exports (87 percent in 10 . However. revenue from sugar will fall as a result of low world market prices (F. strict directives ha ve been issued which prohibit the cutting of young cane. 1999). a ten thousand ton increase from the previous year’s estimates (USDA-ERS. fertilizer.O. and thus. and Brazil during the latter part of 1998 and early 1999. though. relative to those of the same period for 1999. In addition. Imports rose by about 25 percent during the same period.S. and fuel. Licht.

98 million metric tons raw value (MTRV). the sugar industry faces excess capacity and financial problems. According to private sources. 2000.4 million metric tons. 2000). Presently. 2001). 2000). Private sources indicate that refined sugar consumption by the soft drink 11 .industry. prices. and high sugar inventories. Bancomext. With almost no sources of credit. Industry sources estimate sugar production for marketing year 2000 as 4.and long-term capital (FAS. However. but also accounts for the drier-than. sugarcane workers did not receive June and July wages for 2000. In addition. financial strategies. in which the whole chain of production—planting. very close to 1999. distribution. cash flow problems. This law would also create a National Sugar Institute responsible for the development of policies. which means that there will be no special access to credit for the sugar industry (FAS. This estimate is based on the relatively good weather experienced during the growing season. however. the Mexican government decided to liquidate FINASA. industrialization. and trading—would be of national interest. strategic planning for the sector. a December 2000 proposal in the Mexican House of Representatives seeks to develop a national sugar agro. Sugar consumption for marketing year 2000 is estimated to continue at 4. domestic reserves. working through FINASA (the Mexican Sugar Financing Bank) approved a financial assistance program. and its main source of foreign short.1999).normal weather that reduced some yields. imports (74 percent). very few mills have benefited because the loans had to be paid back by November 30. To help the industry and prevent unrest. The lack of growth is attributed to the increased use of alternative sweeteners. and trade (FAS.

no agreement had been reached and Mexico had filed for a NAFTA dispute resolution panel.000 metric tons. but unprofitable due to low world prices (FAS. This industry also consumes between 200. Sugar exports for marketing year 2000 are approximately 540.industry for 2000 was between 1 and 1. 2000). tariffs on HFCS range between US$55 and US$175 per metric ton.S. Domestic sugar prices. given the increased access to the U. in which Mexico was allocated 105. although low.2 million metric tons. sweetener use could change dramatically. market by the NAFTA. food processing. This could change. The remainder of HFCS is used by the bakery. Mexican sugar producers. are higher than international prices. which it estimates at over 500. As sugar becomes more expensive and HFCS prices fall (currently. in addition to the normal 4% ad-valorem duty). however. have requested that the government close the border to U. Mexico believes it should have complete access for all of its excess sugar. exports are a double-edged sword—they are necessary to reduce storage costs. fruit and juice canning.000 and 250.000 metric tons.000 metric tons of high. 12 . the USDA announced the fiscal year 2001 tariff-rate quota allocations for sugar. HFCS. As of October 2000. Mexico and the United States underwent difficult negotiations due to the ambiguous nature of the original NAFTA document and a “side-letter” allowing different quantities of Mexican sugar to enter the United States.788 metric tons. Thus. and yogurt industries. 2000. On September 19. however. to comply with the NAFTA.fructose corn syrup.S.

and May if the ending fiscal year stocks-to. or high. the incomes of producers are indirectly supported by limiting the amount of imported sugar through import quotas (Jurenas.5 percent.S. the high-tier duty is subject to reductions under the Uruguay Round of the General Agreement on Tariffs and Trade. one or more of the allocations will be cancelled (Henneberry and Haley. 13 . the high. and the U.holding countries which allow the import of specific quantities of sugar produced in those nations at a first-tier. cents in 2000 (ASA. 1998). cents per pound.S. Consequently. 1994). However. Three of these TRQ allocations are made in January. The USDA sets the TRQ at the beginning of the fiscal year. 1999). 1999).S. which ranges from zero to 0. rice. March. This hightier duty has historically been high enough to discourage the importation of sugar above the low-tier quota (Henneberry and Haley.S.tier.tier rate is decreasing fifteen percent over six years to 15. if the ending fiscal year stocks-to-use ratio projection is above 15.36 U. or low-tier. and cotton programs in that the USDA makes no income transfers to beet or cane growers. As Table 1. duty.1 shows. Quota allocations are given to quota. duty rate. 1998). The sugar program’s provision of no net cost to the federal government also brought about the use of the import quota to support domestic prices and prevent loan forfeitures (Uri and Boyd.United States The 1996 U. Instead. sugar program continues to differ from the grains.use ratio projection is below 15. Trade Representative makes an initial amount available for allocation.5 percent. Imports above the allocated tariff-rate quota from either the quota-holding countries or other countries are subject to a second-tier.625 U.

High-tier sugar tariffs of most countries compared to those of Mexico.11 1996 17. ability of U.81 2001 15.17 18. to meet domestic demand (Jurenas.S.61 2003 15.01 2004 15.1394 million metric tons of foreign sugar be allowed to enter the United States annually (See Table 1.27 17.60 16. Source : ASA (1999).09 12.07 9.12 14.42 2000 15. No provision limits the Table 1.72 17.36 16.08 19.S.S.36 16.17 14.The U.60 2008 15.80 15.21 0 0 Source: Lord (1994).51 1.20 16.36 cents in 2000.69 13. Market Import restrictions reduced to TRQ has minimum of 1.S.36 16.60 15. High-tier tariff drops 15% over 6 years 15% minimum to 15.36 16. Sugar Tariffs 36% average.53 4.65 14.1.1394 million MT Access ensure at least 3-5% (well in excess of 3-5% minimum).58 11.26 1998 16.21 4. cents per pound.84 1999 15. Uruguay Round: Agreement on Agriculture Reduction Effect on U.21 6. market access commitment made during the Uruguay Round of the GATT guarantees that a minimum of 1. High-Tier Tariffs for Raw and Refined Sugar Most Countries Mexico Raw Raw Refined Refined Cane Cane Base 18.08 16.21 7.2.36 16. 14 .21 3.2).20 2007 15. Table 1. 1999). Provisions of Uruguay Round agreement pertaining to sugar (ASA. U.56 8.21 12.36 16.21 10.00 16. policymakers to allow additional sugar to enter.21 2002 15.36 16.21 9. if necessary.S.40 15.95 1994 NA NA 15.02 3.21 1.81 2006 15. in U.00 14. 1999).36 16. consumption from imports.60 14.41 2005 15.53 1995 17.69 1997 16.04 6.82 16.36 16.62 18.

S. country” share of the import quota under the current sugar program. Provisions of the NAFTA pertaining to sugar (ASA. the United States reduced its high-tier tariff rate by fifteen percent (See Table 1. At the same time. Provisions Years 1-6 (1994-1999) Mexico not surplus producer Greater of 7.free access was provided.S.000 MT Sugar production minus sugar and HFCS Surplus producer definition consumption.258 MT or "other country" share of import quota.000 metric tons. During the remaining nine years. 1999). including corn sweeteners). duty. sugar production for fiscal year 2000 is estimated at a record 8.000 MT Years 7-14 (2000-2007) Mexico not surplus producer Greater of 7. or the quantity allowed under the definition of “net surplus producer. After the fifteen year transition period.Mexico faces different import rules under the NAFTA. Mexico’s duty.S. U. and Mexican tariffs on bilateral sugar trade will be linearly reduced to zero. 1998).” In any of these years that Mexico reached net surplus producer status (production exceeding consumption. up to 25.000 MT more than 1999.258 MT or "other country" share of import quota. implemented in January.000 metric tons. the “other Table 1.2 million MTRV—almost 635.S. For years 2000-2008. that figure jumps to 250.3. Mexico was to align its tariff regime with that of the U.free quota from 1994-1999 was the greater of: 7.3).258 metric tons. there will be free trade in sugar between the two countries (USDAFAS. One reason for this increase is record 15 . 1994 (See Table 1. Mexico surplus producer 250. During the first six years. Mexico surplus producer 25.1). NAFTA Sugar Provisions Mexican Access to U. U.

One of the three remaining Hawaiian sugar companies ceased operations in November 2000. Total U. sugar imports under the TRQs have amounted to 288. Total deliveries for the fiscal year are projected at 9.421 million MTRV. 2000). or about 25 percent of the amount projected to enter for the fiscal year. the Sugar-Containing Products Program. and Puerto Rico are expected to more than offset declines in Louisiana and Hawaii. Hawaii cane sugar production for fiscal year 2001 is projected at 240. Texas. which now surpasses Florida in sugarcane acreage. Although Louisiana sugarcane area harvested has increased 35. while cane sugar production is projected at 3. sugar production for fiscal year 2001 is presently projected at 7.200 MTRV including 331. Production increases in Florida.000 MTRV under the combined Refined Sugar Re-export Program. As of January 8. Also.rate quotas (TRQs) are currently projected at 1. sugarcane production is estimated down 250. sugar yields in Louisiana. and another closed a processing facility. Sugar exports under the Refined Sugar Re-export Program for FY 2001 are projected at 158. have risen more than 34 percent since 1995 as more acreage is devoted to highyielding varieties (USDA-ERS.000 metric tons.78 million MTRV.215 MTRV. much lower than the previous year estimates. Sugar imports under the raw and refined sugar tariff.000 acres over last year. Sugar imports outside the sugar TRQ for fiscal year 2001 are projected to total 467. and the Polyhydric Alcohol Program. spurred by higher expected returns compared with substitute crops. After subtracting deliveries made for the Sugar-Containing Products and 16 .75 MTRV.750 MTRV.S. 2001.area harvested.157 million MTRV.96 million MTRV. Beet sugar production for fiscal year 2001 is currently projected at 3.000 MT due to a continuing lack of adequate moisture.

domestic food and beverage deliveries are projected at 9.276 million MTRV. for an ending stocks-to-use ratio of 18.8 percent. 17 .987 million MTRV.3 percent higher than fiscal year 2000. about 2. Of the total. Ending stocks are currently projected at 1. the Commodity Credit Corporation (CCC) owns 39.Polyhydric Alcohol Programs and deliveries for livestock feeding.004 MTRV in October 2000 as a result of loan forfeitures (USDA-ERS. 2001). The CCC acquired 720.9 percent.

Texas and Hawaii had the greatest negative response to raw sugar production. Three less-protective trade policies were compared with the sugar loan rate program of 1989. He assumes a total elimination of sugar policy to estimate the cost on the U. suggesting that relaxing sugar policy did not discourage the substitution of HFCS for raw sugar. and the 18 . sweetener sector.CHAPTER TWO: LITERATURE REVIEW This literature review summarizes recent studies focusing on trade liberalization with respect to sugar. the Northwest and Far West experienced the most severe negative impacts from trade reform. medium.S. and consumer welfare in the United States. and simulations were determined for the short. Sigua (1992) analyzed the effects of partial sugar trade reform on regional production. These scenarios were simulated using the SWOPSIM model. and long run. and international studies. Results indicated that the imposition of less. Also.42 cents per pound with imports adjusted to retain this price. It is organized into two categories: domestic studies. which focus only on the U. Haley (1998) models regional sugar processing and uses detailed sectoral analysis of sweeteners demand using an Almost Ideal Demand System approach. trade. Among beet regions. economy.protective trade policies affected the sugarcane-producing regions more than that of sugar beets. With respect to sugarcane. All scenarios implied positive consumer surplus due to reduced prices. which include other countries within the models.S. consumption. shifts in demand for raw sugar due to changes in HFCS use were small. a status quo with the domestic price of raw sugar kept at 18. He creates two scenarios: the first.

Also.Abur et. His results show a fall in the domestic raw sugar price of 4. confectioneries.3 cents. and HFCS. quota elimination enhances raw sugar refining along with refined sugar consumption and processing. Additionally. baking. economy.second. a decrease in refined price of 3.5 million tons. HFCS price falls by 5% and production decreases by almost two-thirds of the baseline. Also.7 million tons. Their results show that removing the sugar quota leads to sharply reduced sugar prices (about a 29% drop) and more than a 50% decline in raw sugar production. Their analysis suggests that a complete elimination of the sugar program would reduce output for all producing sectors by about $2. Also. Uri and Boyd (1994) examined the effect of the sugar tariff-rate quota program on the U.5 million tons. Thus. HFCS loses its competitive position. using a computable general-equilibrium model. For production sectors other than 19 .S. al.85 billion. and canning. a simulation where the domestic price equals the world price. while greatly curtailing domestic sugar production.2 cents per pound.000 tons.6 cents. Also included are import possibilities for raw sugar as well as domestic demand and export possibilities for refined sugar. look at effects of sugar policy changes from a total agricultural sector perspective using a base-year.1 million tons. gluten feed (produced from corn along with HFCS). (1993). while fructose price falls by 1. comparative-statics approach. demand for sugar increases by over 1. where supply of raw sugar increases by 2. Tanyeri. They model HFCS and sugar as substitutes in beverages. Imports increase by 5. with beet production dropping by just over 900.fold. Raw sugar imports rise by more than five. domestic cane production falls by 1.000 tons. Finally. fructose production drops by 660.

agricultural program crops.fructose corn syrups (HFCS) from the U. government revenue would decrease by roughly $15 million.S.750 MT. (1995). respectively.4%.02% and 0. and petroleum refining sectors.690 MT and 4. Additionally. Also. caused by Mexico’s opportunity to import improved U. suga rcane and sugarbeet production. and by 2005. as a result of price declines and income increases. respectively. They also predicted that in 1996 and 1997.S. output would increase by about $2. lower-priced inputs such as fertilizer. and the increased availability of U. partial-equilibrium world sugar trade model to analyze the trade creation and diversion effects of the NAFTA on U. al. Consequently. crude oil. capital to modernize Mexican production facilities. the effect on sugar consumption in Mexico will be relatively small. sugar imports from Mexico. U. Their results show that the agreement will have a mild negative effect on U. used a non-spatial.7%. respectively. would reduce its imports from other countries by 5. although total caloric sweetener consumption will increase significantly. there would be an increase of about $197 million and $121 million in the consumption of goods and services and in welfare. other quota-holding 20 . market that will be substituted for sugar. Actual figures show a much larger decrease in quota allocations (USDA-ERS.98 billion. Mexico will export the maximum amount of 250. Devadoss et.S. sugar demand would increase to about eleven million metric tons by 2007.S. 1999). They also predict an average increase in Mexican production of about 11. Also.S.S. the U. They also predict that Mexican imports will increase modestly beginning in 2000. technology. They attribute this to increased availability of high.000 MT to the United States. with an average annual decrease of 0.S.

05 and 0. while the world refined price falls 21.3 percent of baseline projections. including corn and feed. imports by 32 percent. The Caribbean raw sugar price rises by 1. while decreasing the U.S. sugar program cost domestic sweetener users $1. They also estimated that the U.market approach.S. while sugar beet production falls 6. which were 0. Benirschka and Koo (1997) used a dynamic partial equilibrium model of the world sugar market to study the effects of United States tariff.4 percent while cane declines by 0. import price by 16. A scenario increasing the import quota annually by 10 percent increases U.7%. sugar. These production results were undoubtedly a function of the supply elasticities used during the simulation. In response to lower prices. respectively.S. Results showed that the U.4 percent. This model includes 29 sugarproducing nations. American production falls by 2. sugar using Iowa State University’s Center for Agricultural and Rural Development (CARD) world sweetener model.8%.4 percent. and HFCS. 21 . Sugarcane production falls only 1.3% of the 1998 base.10 for sugarcane and sugar beets. multi.nations will see a more prominent decrease in market access during these latter stages due to the higher Mexican export quota. The General Accounting Office (2000) estimated welfare gains and losses due to the U. while gains to sugarcane and sugar beet producers were about $1 billion.S.4%.6 percent.9 billion in 1998.rate quota liberalization. wholesale refined price falls 38. while quota rent for exporters with United States quota allocations declines by 12. and was extended to include a more detailed.7 percent: beet production falls by 4.S.

and disaggregated the world sugar market into three sectors composed of seventeen countries: beet sugar. and beet and cane sugar producing countries. 22 . This model used a base and alternative scenarios approach.6 percent. When the United States includes Cuba as a trading partner.S. cane sugar. and a 28 percent decrease in the United States wholesale price for the 2001-2004 period. the Caribbean raw price rises only 32 percent and the United States wholesale beet price falls 30. Koo developed a global sugar policy simulation model to analyze major issues facing the U. This is primarily due to the fact that Cuba can supply large amounts of sugar to the United States at lower shipping costs. Results show an increase in the Caribbean raw sugar price of about 36 percent.Koo (2000) investigated the implications of a trade liberalization scenario in which the United States eliminates import restrictions while other countries maintain their respective sugar programs. sugar industry and the impacts of alternative trade liberalization policies in the United States and European Union.

ZSk ) = [S1k (PSk . PD2k . ZSk ). Johnson et. ZDk ). al. DNk (PDk . ZSk )].CHAPTER THREE: THEORETICAL AND EMPIRICAL FRAMEWORKS Theoretical Framework Consider the initial market model utilized by Mahé et. consumption. (1992). demand. and excess demand are used to describe aggregate levels of production. S2k (PSk . …. given prices. …. ZDk ). and endowments for the supply sector of country k.1) Sk (PSk . PSNk) is the vector of prices observed by the supply sector and ZSk is a vector of exogenous variables. and trade in each country. al. and traded by K countries. PS2k . …. input prices. where PDk = (PD1k.2) Dk (PDk . Vectors of supply. SNk (PSk . technology. The aggregate level of trade in the N commodities for country k is described by the excess demand functions: 23 . D2k (PDk . and endowments. PDNk) is the vector of prices observed by the final demand sector and ZDk is a vector of exogenous variables for country k. The vector of demand functions describes aggregate consumption of the N commodities: (3. ZSk ). Aggregate production of the N commodities is describ ed by the vector of supply functions: (3. ZDk )]. and Kennedy (1994) in which N commodities are produced. …. The supply sector in country k produces some combination of the N commodities in order to maximize producer rents. such as technology. consumed. where P Sk = (PS1k. (1988). ZDk ) = [D1k (PDk .

denoted as Aθ Sik for producers and AθDik for consumers of good i in country k. denoted as Aπ Sik for producers and Aθ Sik for consumers of commodity i in country k. With the world price of commodity i represented as PW i . ZSk ) where Mk = (M1k . MNk) and Mik > 0 indicates net imports and Mik < 0 indicates net exports of commodity i for i = 1. M2k .Sk (PSk . A price instrument. PDk . ZSk .making process. affect the prices observed by the supply and final demand sectors. 2. PW i) and PDik = PDik (AπDik .5) ZSk = ZSk (Aθ Sk .3) Mk (PSk . the vectors ZSk and ZDk are defined as follows: (3. the domestic price functions for country k are: (3. Supply/demand shift instruments. 2. Examples include input subsidies.4) PSik = PSik (AπSik .(3. N. ZDk ) . …. PW i) for i = 1. 24 . To make these supply and demand shifters explicit. N. Z*Sk ) and ZDk = ZDk (AθDk . are implicit elements of vectors ZSk and ZDk which shift supply and demand functions by modifying non-price elements of a producer’s or consumer’s decision. ZDk ) = Dk (PDk . Z*Dk ). …. …. acreage reduction schemes. and food stamps. The government of a country may intervene in the domestic market either through the use of price (π ) or supply/demand shift ( θ) instruments.

3*) Mk [PSk (AπSk . AθDk . AθDk . PW ). Z*Dk ] where PHk (AπHk . PDk (AπDk .5) to obtain: (3. PW )] for H = S.1).2). …. AθSk . P W ). PH2 (AπH2 . D. the world price vector is the function: (3. Z*Dk ].6) Σ Kk=1 Mk [PSk (AπSk . Thus. PW ) = [PH1 (AπH1 . respectively.2*) Dk [PDk (AπDk . AθSk . (3.4) and the function of explicit variables (3. and (3. Z*Sk .1*) Sk [PSk (AπSk . Z*Dk ) for k = 1. PW ). World markets are competitive by assumption. PW ). and excess demand equations. AπDk . and (3. AθSk . Z*Sk . demand.The aggregate supply. 25 . K. Z*Dk ] = 0 where the right-hand side of (3. policy instruments. AθDk .6) is an n x 1 null vector. PW ). (3. AθSk .7) PW = PW (AπSk . PW ). AθDk. and world prices adjust to clear world markets. 2. Therefore: (3. PW ). PHN (AπHN.3). and exogenous variables by substituting the domestic price functions (3. PW ). …. Z*Sk . (3. World prices are defined as functions of the actions of individual countries. Z* Sk ]. can be expressed as functions of world price. PDk (AπDk .

the effects of various policy actions. in this case. Description of the Modèle Internationale Simplifié de Simulation The following is a descriptio n of the notation used in the empirical model. by simulating a North American customs union.Empirical Framework The empirical framework is provided by the Modèle Internationale Simplifié de Simulation (MISS). K = 4 26 . It is a multiproduct. N = 1 country index: k = 1. Upper case letters represent variables of amount. N. while lower case letters denote a percentage change in the respective quantity variable. multi-regional. K. the United States. …. world trade model. Kennedy and Hughes (1998) again used the MISS to analyze welfare effects of agricultural trading blocs. The model consisted of seven commodities and four regions: the European Union. and a centrally-planned rest of the world. and Trochet (1988). in a comparative-static framework. (1988) used the MISS for an analysis of the interaction between European and United States policies. a market-based rest of the world. …. and the rest of the world. in this case. the United States. A variable with a “naught” superscript indicates a base-year value. Mahé et al. which simulates. This model consisted of seven commodities and three sectors: the European Union. i: k: commodity index: i = 1. Lynn Kennedy (1994) utilized the MISS to study policy decisions made during the Uruguay Round of GATT negotiations. partial-equilibrium. non-spatial. developed by Mahé. Tavèra.

Initial equilibrium in the model is shown as (4. for good i in country k matrices of supply elasticities with respect to output prices matrices of final demand elasticities with respect to consumer prices world price of good i border price of good i margin coefficient representing transportation costs.S°ik . represents number of currency units in country k which can be exchanged for one US Dollar initial world stock of good i quantity shifters for production and final demand. 27 . d ik : The MISS uses several identities in order to derive the effects of policy changes on the sectors of production and final demand for the various countries. and thus. resulting in changes in supply and demand. a rebalancing of world trade. …. such that THik = PHik ÷ P Wik . such that PBik = PW ik · Wk protection coefficients for production and final demand.. respectively. e. respectively. respectively. TDik : Ck : production final demand. insurance. N. for good i in country k I°i s ik . for H = S. PDik : E*ik : Gik : PW i : PBik : Wk : TSik . Any policy change undertaken by either country causes an adjustment in the world price levels. etc. freight.g.1) Sk S°ik = Sk D°ik + Sk I°ik for all i = 1.. D currency exchange rate. for good i in country k for the base year domestic prices for production and final demand. respectively. The model operates on the principle of Walrasian equilibrium. D°ik : PSik .

The processes by which beet and cane become refined sugar are quite dissimilar and obviously more involved than this model specifies. the levels of supply can be directly compared to the levels of demand. K. Final equilibrium for the model. However. Thus. …. D. where Wk is fixed (4. N and k = 1. and is sold to the consumer. Thus.….6) Ek S°ik · sik = Sk Dºik · dik for all i = 1. the model assumes sugar is produced by the 28 . and the reader is encouraged to consult the section on sugar production for more detail. the United States. in logarithmic terms.….4) PHjk = PW j · Ck · THjk · Wk or. Application of Empirical Model The following discussion describes how the preceding empirical model was applied to the present problem. N and k = 1. Mexico. using the previous equations. by expressing beet and cane production in terms of sugar produced rather than beet or cane produced. only one commodity is specified within the model: refined sugar. In order to create a model in which cane sugar and beet sugar are perfect substitutes. K.5) PHjk = PW j + ck + tHjk for H = S. this model assumes that the beet and cane sugar which is produced by the farmer eventually becomes refined sugar.Change in supply is shown as (4.2) sik = Sj (E*ik · pSjk ) + s ik Change in final demand is shown as (4. The domestic/world price linkage is shown by the equation (4.3) qik = Sj Gik · pDjk + δ ik for all i = 1. and an aggr egated “Rest of the World” (hereafter referred to as ROW).…. is shown as (4. for all i = 1. The model consists of four regions: Cuba.…. N.

only one price is specified as well. This model makes use of the London Daily Price for refined sugar reported by USDA as the world refined sugar price. and thus. is required under the NAFTA to implement a similar import control system. One demand sector is specified. wholesale refined beet sugar price. has a protection coefficient of one.S. Mexico has some sugarbeet production. which. this coefficient is based on the U. Of course. Mexico’s exchange rate is taken from monthly averages reported by the Federal Reserve. which represents aggregate consumption of sugar by both industrial and non-industrial users. Mexico’s protection coefficient is based on refined sugar prices reported in the USDA FAS GAIN Attache Reports (hereafter referred to as FAS). To model domestic price departure from world prices.farmer and sold directly to the consumer. Cuba is assumed to respond to the world market price. are specified in each region which produce the same commodity. However. to capture supply response differences between beet and cane production. In the case of the United States. Dollar is used as the base currency.S. Exchange rates are specified within the model. protection coefficients are specified for each region. but none has been reported since 1996). This is also true of Mexico. Since only one commodity is specified within the model. Since 29 . reported by Milling & Baking News and listed in the USDA ERS Sugar and Sweetener Situation and Outlook Reports (hereafter referred to as SSR). beginning in the year 2000. since Cuba and Mexico produce sugar from sugarcane alone. sugarbeet producers and sugarcane producers. and the U. protection coefficients for supply and demand are equal. Since the United States utilizes an import quota to support domestic prices. Midwest Markets. their respective levels of sugarbeet production are zero (Actually. two distinct production sectors.

The rest-of-the-world region is also expressed in U. 30 . Dollar terms.Cuba’s exchange rate is not reported by the Federal Reserve. a general ‘world stocks’ is specified. a one-to-one ratio was used concerning the exchange rate for Cuba. In addition. other sources were consulted.S. the online currency converter fxtop. each region has a margin coefficient of one. al.S. which accounts for world excess supply/demand in order to balance the model. Rather. Therefore.S. Dollar terms rather than domestic currency. MISS does not specify beginning and ending stocks for each region.com reports a Cuban exchange rate for U. therefore. transportation costs are assumed to be zero. (1996) expressed Cuban prices in U. Benirschka et. Dollars of approximately one to one. For simplicity.

8 contains ROW beet sugar production data reported by SSR and FAS. and world data were taken from SSR. Mexico. Table 4. U. and is reported in the following tables. Table 4. while fiscal year averages are reported in both local terms and in US Dollars per metric ton.6 summarizes various own-price elasticities reported for U. U. while Mexican data were taken from FAS. Elasticities The elasticities used in the empirical model were taken from outside sources. They are categorized according to short-run. Table 4. Table 4.7 contains various own-price supply and demand elasticities for Cuba and Mexico. sugar supply and demand. supply.5 summarizes the quantity data used in the MISS.S. Table 4. Monthly levels are reported in local terms.S. quota-exempt sugar for re-export is excluded from trade levels within the model since it is eventually re-imported and consumed domestically. Table 4. and world average monthly price levels for refined sugar.3 contains Mexican. also taken from SSR. reported in SSR. For this analysis. long-run. as well as own-price supply elasticites 31 . as specified by the sources. the United States. Table 4. United States. Table 4. and the ROW.S. or term indefinite elasticities.1 contains production.2 itemizes United States’ sugar trade.CHAPTER FOUR: DATA Prices and Quantities The data discussed above was taken from various sources. and distribution data for Cuba.4 contains average monthly exchange rates for the Mexican Peso reported by the Federal Reserve.

4 Canada.400 720 110.158 665 150 28. Production. percentage shares of world production were calculated. FY 1999 (1. for export 0 Source: USDA Sugar and Sweetener S&O/SSS-228/May 2000 reported by Tyers and Anderson (1992).357 30. Table 4.9 alcohol Total Exports 209 Quota-exempt for re-export 209 Other 0 CCC disposal. FY 1999. Source: USDA Sugar and Sweetener S&O/SSS-228/May 2000 ** Taken from various FAS GAIN Reports.669 Imports 1.000 MTRV.780 114. U.2.307 28. in 1. in 1.487 670 290 23. Sugar Trade. and distribution of sugar.921 4.310 85. U.341 25. high-duty 165.792 35.000 MTRV.Table 4. and Cuba from World Totals. Mexico.11 summarizes the own-price supply 32 . while Table 4.079 Ending Stocks 1.985 3.997 130.309 0 0 34. Using the production levels.1.655 Exports 209 Domestic Consumption 9. Fiscal Year 1999 (1000 MTRV) Total Imports 1654. and then used as weights for the respective elasticities to arrive at ROW own-price elasticities of supply.584 4.200 31.10 does likewise with respect to ROW demand.000 MTRV) Beginning Production Stocks United States Beet Cane Mexico Cuba ROW * Beet ** Cane ** Total 1. Supply.597 4.9 accomplishes the same with respect to cane sugar production.S.7 TRQ 1139. and Distribution of Sugar.3 Quota-exempt for polyhydric 10. supply.S. Table 4.265 590 3.643 All figures rounded to the nearest whole number * Calculated by subtracting US. Production.013 3. Table 4.523 7.920 124.920 35. sugar trade for FY 1999.1 Quota-exempt for re-export 339.

Pesos/50 Kg.71 8. U. Mexican data taken from USDA FAS GAIN Report.93 9.83 9.02 244.21 Source: U. Mexico Sugar Annual 2000. U.00 251. since sugar is the only commodity within the model. FY 1999.S. Wholesale Mexican Refined World Refined Cents/lb.01 10.04 Sep-99 27.90 244.81 US$/MT $595.12 $216.00 239.50 Mar-99 27. 33 . and World Refined Sugar Prices for Fiscal Year 1999 U.00 243.00 242.22 10.13 251.99 Feb-99 27.00 233.. Oct-98 26. Mexican.00 Nov-98 27.50 9.S.13 Jun-99 27.00 245.20 250.93 Jul-99 27.41 10.3. Since sugarbeets and sugarcane do not compete for land. and world refined sugar prices..S.00 241.28 10.78 Dec-98 27.47 Aug-99 27. Also.79 May-99 27. Cents/lb.52 $504. there are no cross-price elasticities of demand.62 9.S. cross-price elasticities of supply were assumed to be zero.83 9.77 10.35 9.and demand elasticities chosen for the model.00 250.28 FY 1999 27.00 8.97 Jan-99 27. Mexican. Table 4. and World data taken from USDA ERS Sugar and Sweetener/SSS-229/September 2000.00 239.85 Apr-99 27.

www.000 MTRV US Beet Supply Cane Supply Sugar Demand 4013 3584 9079 Mexico 0 4985 4400 Cuba 0 3780 720 ROW 28310 85997 110158 World Stocks * 6312 * MISS does not consider beginning and ending stocks.52 July 1999 9. it uses 'world stocks' to balance the model.000 MTRV. FY 1999. Base-Year Quantity Data Used in MISS.34 FY 1999 Mean 9.43 May 1999 9. Dollar exchange rates for Mexican Peso. in 1.S.73 April 1999 9.40 June 1999 9.01 March 1999 9.40 September 1999 9.91 January 1999 10.16 November 1998 9.gov Table 4. Source : USDA Sugar and Sweetener S&O/SSS-228/May & September 2000.13 February 1999 10. Rather.4.federalreserve.5.70 Source : Federal Reserve Statistical Release. Monthly U.97 December 1998 9.37 August 1999 9.Table 4. 1. Monthly US Dollar Exchange Rates for Mexican Peso. FY 1999 US $1 = X Mexican Pesos October 1998 10. Base-year quantity data used in MISS. 34 .

141 -0. (1995) Uri (1993) ** Tyers and Anderson (1992) Sigua (1992) # Gardiner et. U. own-price elasticities of sugar supply and demand.5 -0.246 0.89 -0.054 0.7 0. U. (1989) Leu and Knutson (1987) *** Vroomen (1984) **** Cane Sugar Aggregate Sugar 0.Abur et.16 0.254 0.24 -0.201 2.32 0. al.103 0.17 0. Own-Price Elasticities Sugar Supply Beet Sugar Short-Run Elasticities Tyers and Anderson (1992) Lopez (1990) Lopez (1989) Sudaryanto (1987) * Leong (1985) * Long-Run Elasticities Tyers and Anderson (1992) Lopez (1990) Lopez (1989) Sudaryanto (1987) * Leong (1985) * Term-Indefinite Elasticities Devadoss et.2 0. al.74 0.479 0.412 -0.042 -0.297 0.135 * Taken from Sigua (1992) ** Taken from Uri and Boyd (1994) *** Taken from Tanyeri.114 0.354 1. al.S.28 0.15 -0.6.28 0.Table 4.579 0.29 0.231 0.51 0.5 -0.07 0.597 -0. (1993) **** Taken from Messina and Seale (1993) # Average of reported regional elasticities 35 .215 -0.S.1 Demand Sugar 0.

1 0. Elasticities taken from Tyers and Anderson (1992).33% 57.4 0. ROW beet sugar production by country.0016 0.67% 13. as percentage of world total.78% 0.85 -0.1 0.14 0.32 0. and weighted own-price supply elasticities.7.45 0. FY 1999.8.0295 0. 36 .0090 0.7 0.13 0.04% 5.1 0.1 0.0998 0. in 1.5 0. Europe E. Europe Former Soviet Union Egypt Pakistan China Japan ROW Total Production 93 16222 1321 190 3897 3983 220 11 1693 680 28310 % of World Total 0.05 0.0155 0.00% Price Elasticities of Supply SR LR LR Weighted Weighted 0.4307 SR Source: Production data taken from USDA ERS Sugar and Sweetener S&O/SSS-229/May 2000.891 0.21 0. (1989) 0.1 0.11 0.2865 0.0327 0. (1995) Tyers and Anderson (1992) (LR) Gardiner et.0526 0.98% 2.77% 14. 1.0110 0. Own-price supply and demand elasticities for Cuba and Mexico.5 0.13 LR 0. Data for countries producing both beet and cane taken from various USDA FAS GAIN Reports.0025 0.88 0.2 -0.08 0.0024 0.15 0.5 0. Own-Price Supply and Demand Elasticities for Cuba and Mexico Supply SR Cuba Tyers and Anderson (1992) Mexico Devadoss et.30% 4.67% 0. al.0003 0.Table 4.40% 100.15 0.0065 0.000 MTRV Country/Region Canada EU * Portugal & Spain Other W.000 MTRV.0069 0.0011 0.32 0.0120 0.68 Termindefinite Demand -1. FY 1999 ROW Beet Sugar Production and Weighted Supply Elasticities .07% 0.16 0.0573 0.00004 0.al.0008 0.6 Table 4.019 -0.0021 0.0001 0.

51 0.0003 0.27% 0. 1. Elasticities taken from Tyers and Anderson (1992).0001 0. Republic of Nigeria Sub-Saharan Africa N.0001 0.7 0.00002 0.59 0.1 0.0127 0.0021 0.92% 3.0015 0.13 0.32 0.12 0.35 0.8 0.0939 0.0147 0.3 0.2 0.0232 0.0933 0.69 0.0613 0.0077 0.000 MTRV.0102 0.28% 10.9.15 0.38% 0.19% 8.30% 4.1 0.68 0. percentage of ROW total. FY 1999 ROW Cane Sugar Production and Weighted Own-Price Elasticities.0243 0.0010 0. Africa Middle East Bangladesh China Japan India Indonesia Pakistan Philippines Taiwan Thailand Other Asia Australia & Oceania ROW Total Production 1830 18300 8929 794 3195 4940 263 12 960 2808 16 3909 5087 1120 3967 165 7276 172 17436 1492 3780 1630 312 5386 919 5315 85997 % of ROW Total 2.17 0.1 0.07% 6. 37 .17 0.4 0.25 0.0052 0.2330 0.00% SR 0.5 0.59 0.0219 0.14 0.36% 6.74% 0.55% 5. in 1.0057 0.Table 4.0309 0.0007 0.0098 0.92% 1.0044 0.2 0.39 0.0011 0.72% 5.4 1.18% 100.0129 0. by country.26% 1.0118 0.0083 0.13% 21.5 0.0036 0.0005 0.0033 0.1 0.61% 0.0010 0.00003 0.51 0.46 0.0062 0.4 Supply Elasticities SR LR LR Weighted Weighted 0.0851 0.1 0.2 0.13 0.90% 0.20% 20. Africa. ROW cane sugar production. Africa & Middle East N.51 0.0002 0.0059 0. and weighted own-price supply elasticities.12% 3.000 MTRV Country/Region Argentina Brazil Other Latin America Caribbean Central America Other South America EU * Spain & Portugal Egypt S.1 0.0745 0.73% 4.40% 1.0415 0.0025 0.1 0.5 0. Data for countries producing both beet and cane taken from various USDA FAS GAIN Attache Reports.0011 0.5 0.1702 0.88 0.01% 1.02% 4.31% 0. FY 1999.28% 1.6233 Source: Production data taken from USDA ERS Sugar and Sweetener S&O/SSS-229/May 2000.3 0.1 0.46% 0.0015 0.

0138 -0.77% 0.68% 1. Africa Middle East S.8 -1.41% 2.1 -0. FY 1999 ROW Sugar Consumption and Weighted Own-Price Elasticities of Demand Country/Region Canada Argentina Brazil Other Latin America Caribbean Central America Other South America EU * Spain & Portugal Other W.6 -0.0022 -0.10.0291 -0.0036 -0.6 -0.98% 8.48% 1. in 1.28% 4.0009 -0.5 -0.6442 Source: Consumption data taken from USDA ERS Sugar and Sweetener S&O/SSS-228/May 2000 and USDA FAS EU Attach Report.49% 3.61% 9.0472 -0.0278 -0. Elasticities taken from Tyers and Anderson (1992).73% 0.26% 5.0042 -0.0241 -0.12 -0.93% 0.18 -0.4 -0. Europe Former Soviet Union Egypt Nigeria N.54% 2.44% 2.66% 2.0305 -0. ROW sugar consumption.24 -0. Africa.1226 -0.2 -0.78% 1.1233 -0.0142 -0.0083 -0.0356 -0.10% 1.13% 1.17% 15.68% 0.8 -1 -1. by country.0010 -0. and weighted own-price elasticities of demand.0037 -0.8 -1 -1.45% 1.0496 -0.8 -0.20% 100. 38 .Table 4.0087 -0.25% 3.000 MTRV.61% 1. 2000.0081 -0.6 -0.6 -0. Europe E. percentage of ROW total.12 -0.38% 8. Africa & Middle East N.76% 1. April 10.0318 -0.8 -0.00% Price Elasticities of Demand Reported Weighted -0.0075 -0.55% 0.5 -0.05 -0. Republic of Sub-Saharan Africa Bangladesh China India Indonesia Japan Korea Pakistan Philippines Taiwan Thailand Other Asia Australia & Oceania Total Consumption 1240 1520 9100 6530 674 1404 4452 12648 1709 542 4383 9560 1950 675 10403 2955 7448 1375 4048 460 9000 16977 2800 2313 1118 3210 1900 495 1825 3057 1320 110158 % of ROW Total 1.02% 2.8 -0.0116 -0.0006 -0.8 -0.0294 -0.42% 8.91% 1.7 -1 -0.04% 11.0049 -0. FY 1999.68% 6.08 -0.

64 -0.40 0.73 -1.11. Own-price supply and demand elasticities used in MISS.40 -0.Table 4.62 Demand US Mexico Cuba ROW US Mexico Cuba ROW Sugar -0.64 39 .23 0.40 -0.73 -1.50 -0.34 0.67 0.10 0.14 -0.14 0.68 0. Own-Price Supply and Demand Elasticities Used in MISS Short-Run Elasticities Long-Run Elasticities Supply US Mexico Cuba ROW US Mexico Cuba ROW Beet 0.43 Cane 0.86 0.13 0.18 0.

due to the fungibility characterisitic. suppose the United States increases domestic sugar supply by importing 1 million MT from Cuba. regardless of origin. for 1 million MT of sugar. Eight trade liberalization scenarios were developed in which the United States import quota was gradually increased relative to the base year. excluding Mexico. Since current sugar policies utilize specific quantities. either. and the would-be buyer of the Cuban sugar must look to other sources. regardless of whether that sugar was from Cuba or any other nation. market due to liberalization will be the same. That means that 1 million MT of sugar is diverted from the world market. the origin of the commodity is unknown.S. It should be noted that the levels of sugar imported under the tariffrate quota program. ceteris paribus. These scenarios are carried out to simulate increased imports of sugar to the United States from both Mexico and Cuba. it can be assumed that the effects on the U. The world price is not sensitive to origin. Alternatively. Any quantity of sugar diverted from the world market.CHAPTER FIVE: TRADE LIBERALIZATION SCENARIOS Changes in import quotas are carried out in the MISS by specifying a percentage increase or decrease relative to a country’s base net-export level. suppose the United States increases domestic supply by importing 1 million MT of sugar from Australia. Since the MISS is a non-spatial model. would have the same effect on the world market. like Australia. are held constant throughout all simulations. since sugar is a fungible commodity. For example. a percentage change was determined that corresponded to specific quantity levels. Again. However. 1 million MT of sugar is diverted from the world 40 .

and. exporting 500.market. respectively. demand. Scenarios 3 and 4 gradually increase Cuba’s allocation to 100. while 41 .S.000 MTRV of refined sugar. Scenario 2 simulates Mexico’s accession of 250. the world price rises and the U. the supply. if the United States had imported the sugar from Australia.000 MTRV to the United States. Either way. Table 5. under an unlimited access status. The only difference is who gains from access to the higher-priced market.S. Since the base year contains Mexico’s previously allocated 25.1 summarizes the scenarios used for the study.000. domestic price falls. Alternatively. and 250. that sugar which is diverted from the world market is. regardless of who is assumed to have exported sugar to an importing country. Scenario 1 imposes a quota increase of 225.000 MTRV. Therefore. Thus.000 MTRV. replaced by the would-be exporter.000 MTRV. for 1 million MT of sugar.000 MTRV. and price effects are the same. market of 250. 1 million MT of sugar would have still been diverted from the world market. holding constant Mexico’s access of 250. resulting in the same world and domestic price adjustments. and the would-be buyer of Australian sugar must turn to a different source.000 MTRV to Cuba. ceteris paribus. and this can simply be calculated outside of the model by multiplying the assumed quantity of sugar exported from a country by the simulated domestic price. to arrive at country-specific gains/losses.000 MTRV. Scenario 1 simulates Mexican accession into the U. 1 million MT is diverted from the world market. Scenario 5 simulates Mexico. plus a quota allocation of 25. theoretically. like Cuba. Another approach is to consider that the United States increases supply by importing 1 million MT of sugar from Cuba.

4 summarizes Cuban supply and demand changes relative to the base.S.000 1. Scenarios simulated in MISS. respectively. and since Mexico’s domestic price is protected from the world market.000 600.000 MTRV each.000 750.000 2 25.000 6 250. Import Quantity Allocated (MT) Scenario Cuba Mexico Total Base 0 25.5.000 and 750. Since no policy changes are simulated for Mexico. they experience no production or 42 .3 summarizes U.000 Cuba is allocated 100. both Cuba and Mexico are allocated 500.000 MTRV. Simulation Results: Prices.1. and world refined sugar price changes relative to the base in cents per pound. dollars per metric ton. all percentage changes discussed are relative to the base.000 4 250.S.000 750. Supply.000 250. using both short. and percentage terms. Cuba’s allocation is increased to 250.000 25.000 1 0 250. In Scenario 6. and Demand Table 5.000 8 750.Table 5.and long-run supply elasticities.000 350.000 250. production. Scenarios Simulated in MISS U.000 500.500. but are reported in Table 5.000 275.S. Table 5.000 250.000 1. in both metric tons and percentage terms. in both metric tons and percentage terms . Table 5.000 250.000 MTRV. Since ROW quantities and percentage changes are of minimal concern.000 7 500.2 summarizes U. and its effect on prices. Further. they are not discussed. and consumption. The following discussion addresses each scenario.000 5 100.000 500.000 500.000 500.000 3 100. supply and demand changes relative to the base. and in Scenarios 7 and 8.000. Again.

consumption changes throughout all simulations. Mexico’s increase in imports to the United States is a case of trade diversion, rather than trade creation. Counterintuitively, this could be viewed as the removal of trade diversion resulting from the initial U.S. policy. Table 5.2. Refined sugar price changes relative to the base, in 1,000 MTRV . Refined Sugar Price Changes Relative to the Base (1,000 MTRV)
United States Refined Sugar Price Using Short-Run Elasticities Using Long-Run Elasticities U.S. Quota Scenario % Level Cents/lb. $/MT Cents/lb. $/MT % Change Change Base 25 26.98 594.58 26.98 594.58 1 250 25.10 553.19 -6.96% 26.00 572.99 -3.63% 2 275 24.90 548.74 -7.71% 25.89 570.62 -4.03% 3 350 24.31 535.83 -9.88% 25.57 563.60 -5.21% 4 500 23.15 510.27 -14.18% 24.93 549.45 -7.59% 5 600 22.42 494.09 -16.90% 24.51 540.23 -9.14% 6 750 21.35 470.55 -20.86% 23.89 526.50 -11.45% 7 1000 19.67 433.39 -27.11% 22.86 503.84 -15.26% 8 1500 16.66 367.15 -38.25% 20.88 460.14 -22.61% World Refined Sugar Price Using Short-Run Elasticities Using Long-Run Elasticities % Cents/lb. $/MT Cents/lb. $/MT % Change Change 9.81 216.21 9.81 216.21 9.83 216.73 0.24% 9.83 216.55 0.16% 9.84 216.79 0.27% 9.83 216.60 0.18% 9.84 216.95 0.34% 9.83 216.71 0.23% 9.86 217.29 0.50% 9.84 216.95 0.34% 9.87 217.53 0.61% 9.85 217.10 0.41% 9.89 217.87 0.77% 9.86 217.34 0.52% 9.91 218.46 1.04% 9.88 217.73 0.70% 9.96 219.62 1.58% 9.91 218.51 1.06%

Scenario Base 1 2 3 4 5 6 7 8

U.S. Quota Level 25 250 275 350 500 600 750 1000 1500

Simulation Results: Using Short -Run Elasticities Scenario 1 simulates Mexico’s accession into the U.S. sugar market of 250,000 metric tons. The U.S. refined sugar price falls 6.96% relative to the base, to 25.1 cents


per pound. The world refined price rises slightly, by 0.24%, to 9.83 ¢/lb. U.S. beet production drops by 2.42%, while cane production falls by 1%. U.S. demand rises by 1.02%, to 9.17 million MT. Cuba experiences mild changes due to the rise in world price, increasing cane production by 0.03%, while demand falls by 0.34%. Table 5.3. U.S. supply and demand changes relative to the base, in 1,000 MTRV. United States Supply and Demand Changes Relative to the Base (1,000 MTRV)
Scenario Base 1 2 3 4 5 6 7 8 Quota Level 25 250 275 350 500 600 750 1000 1500 Using Short-Run Elasticities Beet % Cane % Supply Change Supply Change 4013.00 3584.00 3915.89 -2.42% 3548.16 -1.00% 3905.05 -2.69% 3543.86 -1.12% 3873.35 -3.48% 3532.03 -1.45% 3809.54 -5.07% 3508.02 -2.12% 3768.21 -6.10% 3492.25 -2.56% 3706.01 -7.65% 3468.60 -3.22% 3604.08 -10.19% 3428.81 -4.33% 3406.23 -15.12% 3349.96 -6.53% Using Long-Run Elasticities Beet % Cane % Supply Change Supply Change 4013.00 3584.00 3887.39 -3.13% 3531.32 -1.47% 3873.35 -3.48% 3525.58 -1.63% 3832.42 -4.50% 3508.02 -2.12% 3749.75 -6.56% 3472.54 -3.11% 3695.57 -7.91% 3449.24 -3.76% 3614.51 -9.93% 3413.76 -4.75% 3480.47 -13.27% 3354.27 -6.41% 3219.23 -19.78% 3234.92 -9.74% Demand % Change 9079.00 9171.61 9181.59 9212.46 9275.11 9317.78 9381.33 9490.28 9712.71 1.02% 1.13% 1.47% 2.16% 2.63% 3.33% 4.53% 6.98%

Scenario Base 1 2 3 4 5 6 7 8

Quota Level 25 250 275 350 500 600 750 1000 1500

Demand % Change 9079.00 9126.21 9131.66 9147.09 9179.78 9201.57 9235.16 9292.36 9410.38 0.52% 0.58% 0.75% 1.11% 1.35% 1.72% 2.35% 3.65%

Scenarios 2, 3, and 4 hold constant Mexico’s quota of 250,000 MT, and allocate 25,000, 100,000, and 250,000 MT, respectively, to Cuba. Scenario 2 results in a 7.71% drop in the U.S. price to 24.9 ¢/lb. World price rises only 0.27% to 9.84 ¢/lb. U.S. production falls by 2.69% for beets, and 1.12% for cane, while demand


rises by 1.13%, to 9.18 million MT. Cuba increases supply by 0.04%, and demand falls by 0.38%. Scenario 3 results in a 9.88% drop in U.S. price, while the world price rises slightly to 9.84 ¢/lb. U.S. production falls 3.48% for beets and 1.45% for cane, while demand rises 1.47%. Cuban production remains at 0.04% higher than the base, while consumption falls 0.47%. During Scenario 4, the U.S. price falls 14.18%, to 23.15 ¢/lb., while the world price rises to 9.86 ¢/lb. U.S. production falls 5.07% for beets, and 2.21% for cane, while demand rises 2.16%. Cuban supply rises by 0.06%, while demand falls by 0.7%. Table 5.4. Cuban supply and demand changes relative to the base, in 1,000 MTRV. Cuban Supply and Demand Changes Relative to the Base (1,000 MT)
Scenario Base 1 2 3 4 5 6 7 8 Using Short-Run Elasticities U.S Quota Cane Supply % Change Demand For Cuba 0 3780.00 720 0 3781.13 0.03% 717.55 25 3781.51 0.04% 717.26 100 3781.51 0.04% 716.62 250 3782.27 0.06% 714.96 100 3783.02 0.08% 713.88 250 3783.78 0.10% 712.30 500 3784.91 0.13% 709.63 750 3787.56 0.20% 704.38 Using Long-Run Elasticities Scenario Base 1 2 3 4 5 6 7 8 U.S. Quota Cane Supply % Change For Cuba 0 3780.00 0 3784.16 0.11% 25 3784.54 0.12% 100 3786.05 0.16% 250 3788.69 0.23% 100 3790.58 0.28% 250 3793.23 0.35% 500 3798.14 0.48% 750 3807.22 0.72% Demand 720.00 718.42 718.20 717.70 716.62 715.90 714.82 713.02 709.42 % Change -0.22% -0.25% -0.32% -0.47% -0.57% -0.72% -0.97% -1.47% % Change -0.34% -0.38% -0.47% -0.70% -0.85% -1.07% -1.44% -2.17%


Table 5.5. ROW supply and demand changes relative to the base, in 1,000 MTRV. ROW Supply and Demand Changes Relative to the Base (1,000 MTRV)
Using Short-Run Elasticities Scenario Base 1 2 3 4 5 6 7 8 U.S. Quota Level 25 250 275 350 500 600 750 1000 1500 Beet Supply 28310.00 28315.00 28318.49 28318.49 28324.15 28326.99 28332.65 28338.31 28355.30 % Change 0.02% 0.03% 0.03% 0.05% 0.06% 0.08% 0.10% 0.16% Cane Supply 85997.00 86048.60 86048.60 86065.80 86091.59 86117.40 86151.80 86203.39 86306.59 % Demand Change 0.06% 0.06% 0.08% 0.11% 0.14% 0.18% 0.24% 0.36% 110158.00 109992.76 109970.74 109915.66 109805.50 109728.38 109618.22 109430.96 109056.42 % Change -0.15% -0.17% -0.22% -0.32% -0.39% -0.49% -0.66% -1.00%

Using Long-Run Supply Elasticities Scenario Base 1 2 3 4 5 6 7 8 U.S. Quota Level 25 250 275 350 500 600 750 1000 1500 Beet Supply 28310.00 28329.82 28332.65 28338.31 28352.46 28360.96 28372.28 28394.93 28437.39 % Change 0.07% 0.08% 0.10% 0.15% 0.18% 0.22% 0.30% 0.45% Cane Supply 85997.00 86083.00 86091.59 86117.40 86177.59 86211.99 86272.19 86366.79 86564.58 % Demand Change 0.10% 0.11% 0.14% 0.21% 0.25% 0.32% 0.43% 0.66% 110158.00 110047.84 110025.82 109992.64 109915.66 109871.58 109794.48 109662.28 109419.94 % Change -0.10% -0.12% -0.15% -0.22% -0.26% -0.33% -0.45% -0.67%

Scenarios 5, 6, and 7 simulate Mexico, under an unlimited access status, exporting 500,000 MT to the United States. Also, Cuba is given a quota of 100,000 MT, 250,000 MT, and 500,000 MT, respectively. During scenario 5, U.S. price decreases 16.9%, and world price increases 0.61%. U.S. beet supply falls 6.1%, while cane supply falls 2.56%. Demand rises 2.63%, to 9.32 million MT. Cuban supply rises 0.08%, while demand falls 0.85%. During Scenario 6, U.S. price falls 20.86%, while world price rises 0.77%. U.S. production drops 7.65% for beets, and 3.22% for


47%.98%.S.83 ¢/lb. while the world price rises 0.07%. to 9.53% for cane. U.48% for beets.23%.S. however. During Scenario 2.12% for cane. Cuba increases supply by 0.22%. under unlimited access status. while U. During Scenario 7.89 ¢/lb. Cuba increases cane production by 0. production falls 4. to 9. while demand 47 . and 6.11%.25%.cane.S. During Scenario 1. U. and world price increases 1. price falls 38. Demand rises 4. while demand falls by 0.13%.71 million MT.96 ¢/lb.04%.12% for beets.000 MT to the U.63% for cane. to 26 ¢/lb.33%.S. the U. while demand rises by 0. Scenario 8 simulates Mexico. while the world price rises 1. and cane production falls by 1.S. by 0.18% to 9.49 million MT.12%. production falls 15. while demand rises 6.53%. price drops 4.S.11%.52%. while cane supply falls 4.63% relative to the base. Simulation Results: Using Long-Run Elasticities The use of long-run elasticities result in similar. while consumption rises 3.58%.S. demand rises by 0. while demand falls 1. but more modest. U. Cuban production increases 0.58%. Production changes. to 9.44%. exporting 750.17%. are more dramatic. while demand falls 1.. and demand falls by 0. price decreases 27.S. U.S. while consumption falls 2.S. to 9. changes in prices and demand.5% for beets and 2. production falls by 3..S. to 16.S. while Cuba receives a quota of 750.33%.21% drop in U.16%. beet supply falls 10. World price rises only 0. Cuban supply rises 0. The world refined price rises slightly. U.66 ¢/lb.13%. U. refined sugar price falls 3.03% to 25. price.2%.1%. Cuban production rises 0.25%.19%. U. U.83 ¢/lb. Scenario 3 results in a 5. beet production drops by 3.000 MT. and 1.

91 ¢/lb.93 ¢/lb. price falls 11.7%.93% for beets.S.. U.65%.7.1% from the base-year 1999 price of 23. and world price increases 0. contained in Table 5. Cuban production rises 0.16%.S. to 9. while demand falls 0. Using an econometric approach.32%. U. U. beet supply falls 7..S. During scenario 5. and 4.41%.48%. while consumption falls 0.75% for cane.47%. to 9. beet supply falls 13.11% for cane. Cuban production increases 0. to 9. During Scenario 4.35%. production falls 19. U. while the world price rises 1.28%. and world price increases 0.27%.61%.56% for beets. and 9. while cane supply falls 3. while world price rises 0.29 million MT.S.S. Under Scenario 8.S.11%.52%.S. while demand falls 0.S.57%.35%.84 ¢/lb.72%. to 20.76%.41 million MT.06%. price falls 7.59%.28 48 . wholesale sugar price to increase 6.97%. price decreases 15. Cuban supply rises 0.S. U.rises 0.41%. U. U.74% for cane. During Scenario 7. the U.S.78% for beets.72%. to 24. Cuban supply rises by 0. while consumption rises 1. while cane supply falls 6. while demand rises 1. Demand rises 1. Demand rises 2. During Scenario 6.23%. and 3.45%. while demand falls by 0.72%. Cuban supply rises 0. production falls 6.26%. to 9.91%.88 ¢/lb. Cuban production rises 0. while demand rises 3. U.2 million MT. production drops 9. Comparison of Results Let us compare the results of the present work to those of Won Koo (2000). while consumption falls 1.S. Koo (2000) forecasts the U. while demand falls 0. U.47%.75%. while the world price rises to 9.35%. price falls 22. price decreases 9.14%.

which is a much more drastic scenario than the gradual reductions simulated here.17 (-30.8 (3.9 23.3 3428. A direct comparison of world prices cannot be made.000 MT) Imports (1. The present study treats all sugar produced outside of Cuba. Of course. With Cuba as a trading partner. with percentage change from 1999 actual shown in parentheses.000 MT) Beet Sugar Cane Sugar Consumption (1. Results of U. Wholesale Price (¢/lb.4%) 2956 (-13.28 2004 with Liberalization in the U. the United States completely eliminates import restrictions and the sugar loan program. while the current study reports only mild price increases. since Koo only reports the Caribbean raw price.2%) 10518. These results fall between those of the present study’s short-run and long-run elasticity results (see Table 5.2%) 11494 (14%) 4948 (125. The world refined price increases only 1. under Koo’s simulation. the present study utilizes the world refined price and aggregates beet and cane sugar into one category.S. Koo does report significant world price increases as high as 36. while the present study reports only the world refined price.4%) 24.) 4577. However.2%) 3536. he indicates a 28% price decrease relative to the base year.8 (4. Another possibility for the disparity is the structure of the model. the decrease is 30. Mexico.5%) 16.S.9%) 3216 (-6.Table 5. in the most liberalized scenario.2 (4.000 MT) U.1 2190.5%) cents per pound during the 2000-2004 period.1 10083.7% with liberalization.8%) 16. and the United States as one large aggregated market.3%) 2308.58% under short-run elasticities.6. Results from Koo (2000) 1999 Actual Production (1. In addition. and even less under long-run elasticities.2). sugar trade liberalization from Koo (2000). thus representing a larger market which is less price sensitive to supply and demand changes.8 (5.75 (-28%) 3668 (-19.8%) 11426 (13. Under elimination of import restrictions and the sugar loan program.3%) 4722 (115.5%.7 (6.S. and 49 . Base Without Cuba With Cuba 4768.1%) 3733 (-18.

however. 50 . making the U.S. indicates that even with significant sugar liberalization.bases its price changes accordingly. Therefore. Koo lends credence to this possibility in his opening statement that “Less than 30 percent of world sugar production is traded internationally. 2000). market less attractive to exporters. although the United States is the second. whereas Koo may base his price changes on a small. the world price rises significantly. exporters still have a great incentive to export to the United States. it acts as a small.largest importer of sugar (CSR. the world price remains almost unchanged. which means continued outside pressure on the United States to further open trade.S.country with regard to the world sugar market. residual market. liberalizes trade. The present study. these results have very important implications.” Nonetheless. Koo’s results indicate that as the U.

Now. Note that the initial price is not at the intersection of the demand and supply curves. and D (area A just changes hands from the producer to the consumer). the quantity imported increases to QD1 – QS1 . B. the economy. however. As the import quota is inc reased. and D.1 illustrates the effects of a price change on consumer and producer surplus within an importing country.CHAPTER SIX: WELFARE ANALYSIS AND POLICY OPTIONS Welfare Analysis A common method of measuring efficiency gains in economics is through analysis of consumer and producer surplus. 51 . gaining areas A. and although consumers win and producers lose. This approach was utilized to analyze efficiency gains in the present study. The quantity imported is represented by QD0 – QS0 . is better off than it was before increasing the quota.1 summarizes consumer and producer surplus and net welfare gains relative to the base for the United States domestic sugar market for the eight scenarios. and thus. losing area A. Nevertheless. C. which were unavailable under price P0 . has decreased. Consumer surplus consists of the area above the price line and to the left of the demand curve. consumer surplus has increased. C. Producer surplus consists of the area below the price line and to the left of the supply curve. Therefore. the intersection represents the autarkic price. taken aggregately. Producer surplus. Price P0 represents the initial domestic price. there is a net welfare gain equal to the sum of areas B. Table 6. as this country is an importer. there are efficiency gains due to increased trade. and there is a price decrease from P0 to P1 . Figure 6.

1.243 billion. results.7 million to $2. ranging from $312 million to $1. consumer surplus gains. Again.7 million in Scenario 8. ranging from $66 million in Scenario 1. from $377. any move toward liberalization results in producer surplus losses. respectively.5 million to $1.P S P0 A P1 B C D D QS1 QS0 Q D0 QD1 Q Figure 6. consumer surplus increases relative to the base. decreases relative to the base. however.632 billion. using both short. while producer surplus losses ranged from $162 million to $945 million. to $298 million in Scenario 8. ranging from $34 million in Scenario 1.137 billion. Long-run elasticities produced similar. Producer surplus. to $504. there were net welfare gains. as imports progressively increase from Scenario 1 to Scenario 8. In short.and long-run supply elasticities. Using short-run elasticities. There is a net welfare gain for all scenarios. Effect of import quota on producer and consumer surplus of an importing country. and a net welfare gain for the 52 . yet more mild. Cons umer surplus gains ranged from $196.

468.354.460 535.122 -$1.191 3.23 $496.410.330 470. changes in consumer and producer surplus and net welfare gains.000 9.19 $377.83 $537.09 $924.302 Net Gain $34.905.532.079.472.45 $412.717.171.608. U.915.584.381.60 $282.311.50 $623.750 3.380.99 $196.570 3.230 3.688.163.020 9.137 $504.971 $317.279 3.844.480.27 $773.749.960 9.653 $38.532.006 -$497.390 3.507 -$628.212.147.394 3.303 Scenario Base 1 2 3 4 5 6 7 8 53 Scenario Base 1 2 3 4 5 6 7 8 Net Gain $66.638 -$440.490 -$400.591.768. United States Changes in Consumer and Producer Surplus and Net Welfare Gains Using Short-Run Elasticities Quantities (MTRV) Surplus Changes US$/MT Beet Cane Demand Consumer Producer 4.512.531.240 9.590 548.349.548.780 549.094.612.320 9.726.380 460.680.768.695.496.632.543.569.470 3.000 594.242 -$162.277 3.322.317.013.14 $1.707 -$179.604.210 572.013.1.710 367.723.189 $77.078 3.000 3.365 -$916.241 3.000 594.774.725 $144.230 $177.219.941.350 3.540 3.110 510.706.160 9.165.397.712.559 $298.090 563.994.518.833.809.570 540.414.860 9.510 3.374 -$311.589 3.810 9.050 3.009.944 $73.211 -$746.131.600 9.946 3.280 433.913 3.803 $125.508.179.580 9.899.873.15 $2.007.651.181.817.821 .173.525.079.371 -$334.000 9.S.126.428.694.584.740.303 -$1.660 570.832.852.610 553.696.513.337.346.201.430.420 3.873.136.74 $418.010 3.030 9.687 3.780 494.540 9.39 $1.124 -$944.270 9.179.020 9.492.406.449.000 3.230 3.Table 6.856.985 3.887.58 3.061.58 3.465 $50.723 -$344.257 3.350 3.84 $833.55 $1.144.413.508.508.092 $96.755.001 Using Long-Run Elasticities Quantities (MTRV) Surplus Changes US$/MT Beet Cane Demand Consumer Producer 4.292.250 9.095.133 $228.603 -$654.525.360 503.495.466 $96.234.890 3.430 3.080 3.134 -$231.616.62 $218.275.816 $178.920 9.235.160 526.242.760 9.614.210 3.044 3.490.

any welfare change estimates using the refined price would tend to overstate gains to the island. Looking at Figure 6. when it is more likely that Cuba would export raw cane sugar to the United States. Without the P A Demand Supply PUS B C D PW E G F QD QS1 QW H QS QUS Q QD Figure 6. the gains that would accrue to Cuba in more general terms. Alternatively. since Cuban consumers are assumed to pay the world price for sugar. Hence.2. With regard to Cuba. and consumer surplus is represented by areas A and B. illustrate graphically. 54 . Effect of import quota on producer and consumer surplus of an exporting country. We can.economy. but this would introduce much greater room for error in such estimates.2. the assumption could be made that the raw price changes by the same percentage as the refined price. however. they consume up to QD. welfare analysis is less straightforward because this model utilizes the refined sugar price.

price represented on the graph would be lower than the price prevailing prior to the allocation of the quota. producer surplus was the area below the world price line and to the left of the supply curve. Policy Options Table 6. Cuban producers would produce up to Q S. It is not a simple task. exports would equal QS – QD. market price. The main obstacle is the current political economy of the U. excess supply is segmented in two parts: that which is exported to the world market at the world market price.U. Q S1 – QD.S. QS – Q S1 . and producer surplus would be represented by areas E. we can observe from the graph that if the U. price now comprises the upper boundary for that quantity. and H. Of course. quota. F. however. Cuba diverts exports equal to the quota from the world market to the U.S. The playing field in which this 55 . Without the quota.S.S. this analysis assumes that the world price does not change as Cuba diverts exports to the United States (the results from the present study suggest the same). Thus. With the quota. and that which is exported to the United States at U. because the U. receiving the world price. G.S. sugar market. market. However. and producer surplus increases by an amount equal to area D. the U. A similar analysis would also apply to Mexico. but this prior price is irrelevant to Cubans. Also. since they never experience it. however. price for that quantity. and receives the U.S. rectangle D would decrease in area.1 makes evident the welfare gains achieved through liberalization. domestic price falls due to liberalization and the world price rises (the two prices would approach each other). With the quota.S. producers now receive a higher price for that quantity sent to the United States. The arrows below the graph indicate the same. indicating the decreasing incentive to for an exporter to sell to the United States.S. to make these gains a reality.

only those policies that would fall into the “green box”. Not only do sugar producers lobby for sugar price protection.field advantage to producers. However. such an outcome is difficult to achieve in the political realm. a small change in the price of sugar has little effect on the quantity demanded. sugar producers comprise only a small fraction of the populace. approach the issue of gains and losses more carefully. Therefore. or the 56 .political game takes place gives a distinct home. while liberalization appears to be the optimal move based on the economic theory of welfare analysis. Various policy options are available which can aid in capturing some or all of these welfare gains. the domestic market could be without any sugar at all. while a price decrease brought on by increased imports favors consumers and increases the net welfare of the economy.S. In a worstcase scenario. While U. and hence. they are easily able to come together and lobby against such measures. Accordingly. Conversely. little public sentiment exists to promote this outcome. they have a distinct advantage in terms of political clout. On the other hand. there is no great lobbying force for sugar consumers. sugar. makes up only a small fraction of disposable income for most American consumers. many policy options are considered as trade distorting. like food in general. illegal. We must. Therefore.6). Thus. given WTO agreements. those policies which are the least trade distorting. and being a small interest group. therefore. Producers also have on their side the argument of food security. Also. since high sugar prices translate into increased HFCS demand. which basically states that too much dependence on foreign markets makes the domestic market susceptible to outside actions. a price decrease hurts producers. This is evidenced by the ‘inelastic’ price elasticities of demand reported by most studies (see Table 4. corn producers also have a stake in the price of sugar.

given current trends in budget reduction. however. Table 6. the most abstract. Under Scenario 2. make this option less politically palatable. and consumers are still better off by an amount equal to the net welfare gain. will not be considered. but not illegal by WTO standards. while this option may result in a Pareto outcome. which indicate policies that are somewhat distorting. marketing loans. policy makers would 57 . for example. It is also important to mention that current sugar price support operates at no cost to the federal government. etc. policy option. and what percentage of such a payment. This approach would lead to the greatest net welfare gains. putting it into action is more complicated. Basically. this approach is not likely. especially with regard to agriculture. payments tied to production. is more complicated. What this introduces.1 makes evident the most obvious. consumers would reap the full benefits of the lower price. For exa mple. thus any policy option that would require budgetary expenditures would be more difficult to implement. Of course.. are budgetary costs. will be considered here. How this surplus is extracted from consumers. where producers are not harmed. but also.1. Thus. Another issue is deciding which entities on the production side receive the payment. producers would absorb the loss in surplus. and as stated earlier. and not get involved in producer compensation. The first option for policy makers would be to remain passive.“blue box”. The alternative to the previous option is a fixed payment by the government to producers equal to the loss in producer surplus. capturing all consumer surplus gains reported in Table 6. In this case. however. given the political power of sugar lobbyists. and cut back on production. This would result in a Pareto optimal condition. This option would entail transfer payments from consumers to producers equal to the producer surplus loss.

63 billion. is to auction sugar quotas to exporters. the government could levy a tax on sugar consumption and use the revenue to compensate producers. which has been mentioned in the past. Under Scenario 8. a tax is considered to create dead-weight losses. that figure would jump to $1. such that the exporting countries receive all of the revenue from selling in the U. production. a quota auction would remove much of the benefits that would accrue to Cuba. but in 58 . These quotas provide additional surplus to exporters. most recently by Skully (1998). adopting this scheme would rob policy makers of some political leverage.45 million to compensate producers. Currently.S. many of the current quotas are used as political tools. Normally. depending on domestic and world prices. Also. This scheme simultaneously bases imports on efficient production by exporting countries. market. rather than on politics. Thus. As Skully argues.2. Another approach. Finally. This is due to the assumption that exporters will not rationally bid more than the difference between the U. The major drawback to this option is the possibility that the revenue from such auctions may not be sufficient to compensate producers. were the United States to pursue some policy for rebuilding the Cuban sugar market. Thus. since Mexico’s access is stipulated within the context of the NAFTA. and consumption. Alternatively. this auction probably would not apply to Mexico. sugar quotas under the TariffRate Quota scheme are given away. given the apathetic nature of consumers with regard to sugar prices.need to allocate $3. as illustrated in Figure 6. the revenue from the auction could be used to compensate producers for surplus losses.S. the revenue generated would equal the difference between the domestic and world price times the amount of the quota auctioned. Under such a scheme. domestic price and their marginal cost.

afterwards. P1 + t. then producers will be fully compensated by the transfer payment. imagine raising the price line representing P1 + t until A decreases in area and D increases in area. although still higher than the price under free trade. P0 represents the domestic price before increased imports.3. since the tax is used to compensate producers. Figure 6. To visualize this. and government revenue increases by areas C and D. If. To ensure that producers are fully compensated.this case.3 shows such a policy. When area A equals area D. than that under reduced 59 . t. the tax t must be set high enough that area D equals area A. consumers gain areas A and B. The benefits of such a program are that the government experiences no net increase in expenditure. consumers still experience a lower price. although a tax is levied on consumption. and P1 . the resulting price would still be lower than the current price. increases imports. when the government P S P0 A P1 + t P1 C D B D QSt QD t QD1 Q Figure 6. The government then uses the revenue to compensate producers. Also. Effect of levying a sales tax on producer and consumer surplus. then producers lose areas A and C. on all sugar consumed. it simultaneously imposes a sales tax.

there would be some administrative costs associated with tax collection and direct payment distribution. Thus. The downside of such an approach is the reduction in quantity demanded equal to QD1 . this approach results in net welfare gains. such a policy would allow for production decisions to be made based on market prices rather than artificial prices determined by the current program. due to the higher consumer price.exports.QDt. as long as the payment is not tied to production. P0 . 60 . inefficient producers would no longer have an incentive to produce. Also. In addition. Thus. and gain surplus equal to areas A and B.

both on the loans and on storage for the forfeited sugar. and according to the present study’s results under short-run elasticities. which also means increased government spending. but also much more volatile than U. such a program may entail further government expenditures. policy makers must be mindful of such effects when considering liberalization.000 MT would be sufficient to trigger these loans. such programs increase government expenditures not only for the buyout itself. such as sugar buyout programs. The current loan rate for beets is 22. but also of sugar storage. the world sugar price is not only significantly lower. Again. it ignores gains and losses outside of the sugar market. while the use of a partial-equilibrium framework allows for an adequate analysis of the sugar market. a quota increase of 600. Of equal concern is the increased price volatility and uncertainty that would be introduced as a result of increased trade liberalization. As Figure 1. would likely occur more frequently if the quota was increased without any other changes to sugar policy. Other short-term policy tools.S. Again. prices. communities and businesses dependent on sugar production could be significantly damaged due to such changes in supply.9 cents per pound. policymakers may wish to consider such effects and devise some program to allow for a smoother transition away from sugar production. However. which is usually the most costly aspect of such programs. Hence. Therefore. If such actions as those mentioned here were undertaken. Another issue is that domestic sugar prices. but also 61 . could lead to increased loan forfeitures.1 makes evident. if it is the goal of policymakers to not only sustain higher prices. if sufficiently depressed. For example.CONCLUSION This study illustrates the economic gains possible through liberalization of sugar trade.

. price volatility would translate into uncertain and volatile government spending levels. the incentive to export to the United States will remain intact. 1993). Sugar and HFCS are substitutes in beverages. They hold that even if the sugar program were eliminated. moves toward liberalization could seriously undermine such policies. and these costs would determine how quickly such a change took place. the world price remains almost unchanged. al. However. the results of this study show that even with liberalization. argues that the possibilities for substitution between sugar and HFCS are more limited than in the past due to technological advances which have created a more specialized sweetener market. This adds doubt to the argument that as the United States liberalizes trade. Further. there are some costs associated with switching from HFCS to sugar. confectionaries. and that HFCS producers would not need to lower prices to remain competitive. however. Instead. however. The 2000 GAO report. they will continue to use HFCS until the sugar price falls below that of HFCS. As the price of sugar falls. the impact on HFCS prices wo uld be limited.to promote price certainty. and there would then be a complete shift in demand from HFCS to sugar. lessening the gap between domestic and world prices. exporters will have less of an incentive to export because the world price would rise dramatically. The effect sugar liberalization will have on the HFCS market is controversial. users will not shift a certain percentage of their HFCS use to sugar. and unless the domestic price is allowed to equal world levels. the world price remains relatively low. and canning (Tanyeri-Abur et. baking. if policies such as target prices were undertaken. Also. On the contrary. since such expenditures are based on the difference between current market price levels and the target price. 62 .

while low raw sugar prices mean low returns for domestic cane producers. on the market. makes a dramatic difference when arguing that sugar trade liberalization hurts producers. since they are the ones that pay the raw cane price and the wholesale beet price. Thus. while growers are forced to decrease production due to lower prices. refiners and industrial users of sugar are considered to be on the demand side.S. negatively impacts growers and refiners. International Trade Commission.An interesting conclusion that is not obvious from the present study’s results is that there are gains that accrue to the domestic production side. since Mexico is able to export either raw or refined sugar under the NAFTA. respectively. but benefits everyone else along the supply chain. who use refined sugar as a factor of production. This slight difference in assessing the situation. Raw sugar liberalization hurts growers. since imported refined sugar comes in direct competition with domestically refined sugar. and hence. there are gains to the supply side which are not readily apparent.000 MT quota will be composed of refined sugar in the coming years is yet to be determined. a lower price at which refined sugar can be sold to industrial users. Mexican refined sugar and refined-sugar-containing products exported to the United States has remained below 30. Refined sugar liberalization. How much of Mexico’s current 250. on the other hand. while the producer surplus results presented in Table 6. What makes this not readily apparent is that in this study. such as bakers and beverage producers. considering refiners as consumers rather than as producers. According to data provided by the U. it is uncertain what effects Mexico will have on the domestic market. Therefore. Thus.1 indicate losses to the production side.000 MT from 1997-2000 63 . refiners and industrial users may be able to increase production due to lower input costs. Therefore. they also mean low input prices for raw sugar refiners.

future research should attempt to quantify these potential gains by refiners and sugar users. Moss and Schmitz (2000) begin to analyze such possibilities in the sugar industry under vertical integration. Of course. the year 2000 was the first of the annual 250. estimated consumer gains due to trade liberalization may be too conservative. there will be greater incentive for Mexico to send its surplus to the United States. the wholesale beet price. and the ability to increase refining capacity. Only one price. Hence. a significant portion of sugar is bought at the retail price. However. and thus. Whether this quantity will change depends on several factors. Also. and only affect the magnitude of the estimates somewhat. In either case. As the NAFTA stipulates. to offset imports of Mexican sugar. which is typically 12-16 cents per pound greater than the wholesale price. What this 64 . who would experience losses due to lower prices. including Mexico’s ability to increase and sustain investment in sugar production. market. such deviations should not be looked upon as critical. the domestic raw cane price is typically a few cents per pound less than the wholesale price.S.000 MT allocation. TRQs for other countries will be cut. since they would not change the direction of the welfare changes.(this includes all products under Harmonized Tariff Schedule codes 17019105001701995000) (USITC. was used to represent the U. Conversely. 2001). research attempting to forecast the composition of Mexico’s future exports as raw or refined sugar would also be of great interest to both policy makers and the sugar industry. producer surplus losses may be somewhat overstated. As tariffs on Mexican sugar imports fall. if necessary. and possibly devise some scheme in which these gains could be shared with growers. It should be noted that there are some distortions in the estimated welfare changes reported here. However.

equipment. It is likely that such investments in Cuban sugar infrastructure would also translate into gains for U. with all other TRQs being cancelled. it alludes to a broader and more critical issue. While strong opposition remains with regard to resuming trade with Cuba. This could lead to increased investment by both domestic and foreign sources. U. Hence.S. and improved production and refining capacity. Also. In addition. are not following suit.means in terms of trade relations with the rest of the world remains to be seen. prices. would give their sugar industry an immediate boost. the United States must be mindful not to allow itself to be a victim of its own policies. However. While this study makes evident the specific gains from liberalizing sugar trade. the very use of the TRQ as a quantitative limit to imports will come under severe pressure as trade barriers are lowered and eventually dissolved for Mexico. With Cuba in such close proximity to the United States 65 . In the extreme case.S. since sugar is a major player in the Cuban economy. but are beginning to invest in Cuba. after the transition period. Certainly. as mentioned in Chapter One. be it countervailing duties imposed on the United States or some future negotiations allowing more foreign sugar into the United States. sugar policy may very well become ineffective as a means of supporting prices through import quotas. While the objective of the embargo is to limit Cuba economically. only Mexican sugar wo uld be imported into the United States. other countries. With regard to Cuba. sugar imports. at U.S.S. allowing them a fraction of total U. fertilizer. any move toward trade would certainly aid in restoring economic stability to the island. it can be expected that those countries whose sugar is displaced by that of Mexico will seek some type of reconciliation. Mexican sugar will be free to flow into the domestic market at will. and seed firms.

and get a foothold in the development boom that is likely to transpire in a post-Castro Cuba.and with so many opportunities for investment and development. 66 . With sugar being such a major player in the Cuban economy. the United States should seriously consider its political objectives with respect to the island and weigh these against its long-term economic objectives. it may serve as the easiest means for the United States to reacquaint itself with the island.

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U. and attended school in nearby Independence.VITA Daniel Ryan Petrolia was born on November 9. for his master’s degree in agricultural economics. Dan remained at L. and enrolled at Louisiana State University that fall as a member of the Honors College. Louisiana. Dan received a bachelor’s degree in political science and another bachelor’s degree in animal. as a USDA National Needs Fellow. Dan graduated from Independence High School in May of 1995. dairy. and will graduate in August of 2001. Dan will begin his doctoral program in September of 2001. 1977. 71 . and poultry sciences in May of 1999.S. He was raised in rural Tickfaw. Louisiana. in New Orleans. in the University of Minnesota’s Department of Applied Economics.

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