Trade Liberalization and the U.S. Sugar Industry By Stuart Nakamoto Revised February 1996 KEYWORDS: costs of production, GATT, world price

This article presents one viewpoint of how recent and proposed trade policies will affect U.S. sugar producers. According to U.S. Department of Agriculture (USDA) estimates for the 1992/93 crop year, the area represented by the Western Extension Marketing Committee has 38 percent of the total U.S. sugar beet acreage and 45 percent of the sugar beet production. For sugarcane, Hawaii has 20 percent of U.S. production with less than 7 percent of the acreage because of its high yields. In total, the region has over 600 thousand acres in sugar.

Both domestic policies and international agreements such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) are moving toward liberalization of trade in sugar. The U.S. will probably reduce or eliminate import quotas, which in turn will result in lower U.S. prices for raw sugar. An earlier study examined the impacts of trade liberalization on the U.S. sugar industry. Figure 1 summarizes some of that work's results.

The researchers estimated a supply curve for U.S. raw sugar using USDA 1985 data, and considered each state's contribution according to its cost of production. The estimated cost for producing a pound of raw sugar ranged from as high as 12.5 cents in Hawaii to as low as 6.1 cents in Minnesota and North Dakota. The "U.S. price" is the average farmgate value for the entire country while the "world price" is the estimate of where the farmgate price would be with free trade.

The study concluded that trade liberalization would likely lead to major restructuring of the U.S. sugar industry. The graph shows that Hawaii (HI) would be the first state to go out of production, followed by California (CA), Texas sugar beet (TX-B), Texas sugarcane (TX-C), and Florida (FL). If prices drop lower than the world price estimated in the research, Idaho, Oregon, Kansas, Colorado, Nebraska, and Louisiana would be next to go out of production. Most of the cane producers would be first affected, and the impact on the western region would depend on how far prices were to decline, that is, on what the actual trade policies involved.

Again, these results were based on 1985 data. Table 1 presents a "quick and dirty" update of the earlier research, using 1991 USDA data. The USDA's Total Economic Costs per acre was first reduced by interest costs, which were not available for all areas. Yield per acre was converted to its raw sugar equivalent, then dividing cost per acre by yield gave the estimated cost per pound of raw sugar. As in the earlier study, these computed costs of production range considerably from a low of 11.3 cents per pound in Louisiana to a high of 17.5 cents per pound in Western Idaho and Oregon. California is the second highest-cost producer in both periods.

Costs have apparently increased in all areas but at disproportionate rates. Increases seem to have been slower in the cane producing areas and greatest in several western areas. Of particular note, the three highest-cost regions (i.e., most likely to go out of production) are, with the exception of Nebraska, in the western states. The analysis did not look into why costs changed so dramatically or in the manner that they did, nor are the reasons apparent. Possible factors include changes in input prices and quantities used, weather conditions that affected yields, and changes in technology.

How accurate or reliable are either set of predictions? It is difficult to say--the only observation I have made (and that is very limited) is that several large plantations have gone out of business in Hawaii, but a number of different reasons other than only trade liberalization are involved. For one, it is likely that the more inefficient firms stopped production.

It is clear that liberalization and freer trade in world markets will lead to dramatic changes in U.S. sugar production. It seems the western region is likely to be severely impacted as producing areas cease to be competitive. A better understanding of these changes could lead to improved ability to anticipate, plan, and adjust to trade liberalization.

+ Only 10 areas reported in 1985.

Source: From data in Sugar and Sweetener Situation and Outlook Report, USDA Economic Research Service, Sept. 1992.

From Nakamoto, Halloran, and Martin. "Trade Liberalization, Policy Reform, and the U.S. Sugar Industry," Journal of International Food and Agribusiness Marketing 2(1):21-35, 1990.

Stuart Nakamoto is a member of the Western Extension Marketing Committee (WEMC) and is an Extension Economist at the Department of Agricultural and Resource Economics, University of Hawaii at Manoa. The views expressed in this article do not necessarily represent the official positions of the University of Hawaii or the WEMC.

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