WILLINGNESS TO PAY FOR SURPLUS SUGAR IN THE UNITED STATES

Abstract

I. INTRODUCTION The U.S. sugar program guarantees sugar producers a minimum price for their sugar through a combination of import quotas and restrictions on domestic marketing. The minimum price is called the loan rate because sugar producers can use sugar as collateral for a loan from the Commodity Credit Corporation, a federal corporation in the U.S. Department of Agriculture (USDA). The amount of the loan equals the loan rate multiplied by the quantity of sugar put up as collateral. The loan is a non-recourse loan because the USDA has no recourse to collect payment other than to take ownership of the collateral sugar, which is either refined or raw sugar. If domestic production plus imports exceed domestic consumption at the loan rate, then surplus sugar may be absorbed by the USDA through purchasing at the open market. Otherwise, the sugar price will fall below the loan rate and sugar will flow to the USDA through forfeiture of collateral sugar. Whichever way the USDA accumulates surplus sugar, it will incur program costs to acquire and store surplus sugar. In recent history, the USDA had to acquire and then subsequently dispose of surplus sugar on several occasions. Specifically, in 2000, it entered the sugar market for the first time since 1986 to purchase sugar in an attempt to maintain sugar prices. It also accumulated sugar through loan forfeitures. However, the USDA managed to clear its sugar inventories the following years and succeeded in operating the sugar program at no net cost to taxpayers for the period covered by the last farm bill (2002-2007). Most of the sugar in the USDA inventory was either released through the payment-in-kind (PIK) program or sold to storing warehouse operators. Under the PIK program, sugar producers could reduce their sugar production in return for payment, which was in the form of sugar in government inventory. Because the USDA is required to operate the sugar program at no taxpayer cost, it tries to avoid acquiring sugar. Cuts in future marketing allotments or import quotas have been used to manage domestic sugar supply to support prices at the loan rates. But the ability to restrict imports is becoming more difficult due to trade liberalization agreements that came into effect recently or will become effective in the near future. Notably, beginning in January 2008, Mexico is allowed to export sugar to the United States without restriction. Mexico has the potential to produce exportable sugar, so many feel that the ability to support U.S. sugar prices above world price levels is in jeopardy. (1) In response to these fears Congress created the Feedstock Flexibility Program in the Food, Conservation, and Energy Act (the 2008 farm bill). This program, more commonly known as the sugar-to-ethanol program, is designed to divert surplus sugar from food markets into fuel markets by having the USDA sell its sugar to ethanol producers through competitive procedures. In addition to this program, the farm bill authorizes the USDA to sell surplus sugar to sugar producers who agree to reduce their production by the amount of sale. (2) However, the law does not require the USDA to exercise this authority. The extent to which the domestic sugar industry can be protected from increased import competition depends on the price that the USDA will receive for its surplus sugar and the target of a sugar program operating at no net cost to taxpayers. If the willingness to pay (WTP) for sugar is significantly less than the loan rate, then either taxpayers will have to cover the difference or the U.S. sugar program will have to be modified. The lawmakers who championed the sugar-to-ethanol program insisted that it would reduce the nation's dependence on foreign oil and help protect against imported sugar. The skeptics, including the previous Bush administration, claimed that only at a huge loss could the surplus sugar be sold to ethanol facilities. The objective of this paper is to provide insight into the WTP for surplus sugar by sugar and ethanol producers, that is, the maximum price that these producers are willing to bid for surplus sugar. …