February 5, 2015 10:07AM

Managing Sugar Markets Gets Even Messier

In a previous blog post I discussed the implications of the proposed agreement to settle the antidumping and countervailing duty (AD/CVD) cases brought by U.S. sugar producers against imports from Mexico.  That article amounted to a lament on the difficulties of trying to balance sugar supply and demand by government fiat.  Market managers employed by the U.S. Department of Agriculture (USDA) and the Department of Commerce (DOC) have a really hard job, as do their counterparts in the Mexican government.  Not only do the supply, demand, and price of sugar tend not to stay quiet and well behaved, but important firms involved in the business also can prove (from the perspective of the program managers) to be vexing and disputatious.

Such is the case with Imperial Sugar Company and AmCane Sugar, both of which are U.S. cane refiners that rely on ample supplies of raw sugar to run their operations.  Much of that raw sugar comes from other countries; in recent years Mexico has been the largest supplier to the United States.  It now appears that U.S. cane refiners were not too happy with either the original proposed settlement that was announced on October 27, 2014, or the final suspension agreements announced December 19 that set aside the underlying AD/CVD investigations. 

One source of that unhappiness seems to have been that the initial proposal would have allowed 60 percent of imports from Mexico to be in the form of refined sugar rather than raw.  The U.S. and Mexican governments acknowledged that concern in the December 19 agreement by reducing the allowable level of refined sugar imports to 53 percent.  Another issue bothering U.S. refiners likely was the relatively narrow spread between the original proposal’s import reference prices, which were 20.75 cents per pound for raw sugar and 23.75 cents per pound for refined.  U.S. refiners may have feared suppression of their processing margins, if imported refined sugar from Mexico could have been sold at only 3 cents per pound above the price of raw sugar imports.  The December 19 version increased that price spread to 3.75 cents (22.25 cents for raw and 26.0 cents for refined).  From the standpoint of the refiners, that margin still may be uncomfortably narrow.

Given those adjustments in the terms of the suspension agreements, many observers were surprised when on January 8, 2015, Imperial and AmCane took the unprecedented step of filing a challenge to the pact.  They petitioned the U.S. International Trade Commission (ITC) to determine whether the suspension agreements actually “eliminated completely” the “injurious effect of imports” on the domestic industry.  This is the first time that provision of law has been exercised since it was added to the statute in 1979.  If the ITC determines that injury has been fully ameliorated, the suspension agreements will remain in effect.  On the other hand, if the ITC determines that injury was not completely eliminated, the suspension agreements would be scrapped and both the ITC and DOC would resume work on the underlying AD/CVD investigations.

The statute grants the ITC only 75 days from the filing date to make this determination, which means the process needs to be completed by March 24.  Having never before done this type of investigation, the Commission issued a notice seeking input as to how it should evaluate whether the injury has been completely eliminated by the suspension agreements.  The ITC will hold a public meeting on February 19 “to receive oral presentations from parties to the reviews.”

Without delving into the wide variety of arguments that could be presented to the Commission, it seems reasonable to assume that Imperial and AmCane believe they will be able to provide convincing evidence – likely through use of non-public “business proprietary information” (BPI) – that the suspension agreements do not entirely eliminate their injury.  It may be challenging for supporters of the agreements to prove otherwise. 

Notwithstanding the unusual petition to the ITC, Imperial and AmCane also filed requests on January 16 with the DOC asking that the suspension agreements be terminated and the AD/CVD investigations be continued.  Sugar producers in both the United States and Mexico are not enamored with the thought that the suspension agreements might be overturned, so are challenging the legal standing of the refiners to make such requests.  DOC is seeking comments on that issue; it all appears to be quite contentious.  (There is no similar question regarding standing with respect to the refiners’ petition to the ITC.)

It’s fair to say that the overall situation is rather fluid right now.   If the refiners are found to have standing in the DOC proceeding, the AD/CVD investigations will move forward toward an eventual decision by the ITC as to whether the duties determined by DOC should be imposed.  Even if it is decided that the refiners don’t have standing at the DOC, the ITC investigation as to whether the suspension agreements entirely eliminate the domestic industry’s injury will proceed. 

It is interesting to note that both Imperial and AmCane have made clear that they are quite willing to agree to a market-management scheme that better suits their interests.  Talks with all parties to the suspension agreements may yet produce new versions that achieve consensus.  However, such a negotiation must overcome a significant hurdle.  This is basically a zero-sum game in which some other player would have to earn less money from the pact in order for the refiners to earn more.  These discussions – if they occur – could be more than just a bit fractious.

So why are the U.S. refiners apparently willing to upset the whole applecart?  Obviously they must believe they would be better off with any of three possible outcomes: 

  • An eventual negative decision by the ITC on the merits of the AD/CVD cases would mean that no duties would be applied to imports from Mexico, so refiners would have the same access to raw sugar supplies as they’ve had since the sugar provisions of NAFTA were fully implemented in 2008. 
  • An eventual affirmative ITC decision on the AD/CVD cases would mean the imposition of antidumping duties on imports of sugar from Mexico in the neighborhood of 40 percent, plus anti-subsidy duties of up to 17 percent.  Those duties likely are high enough to prevent any imports from Mexico.  How would managers of the U.S. sugar program respond to the loss of more than a million tons of Mexican sugar from the U.S. market?  Refiners may have concluded that government officials would have no choice other than to increase the tariff-rate quota (TRQ) amounts for the 40 TRQ-holding countries in order to keep the U.S. market adequately supplied.  All of that additional sugar would be in raw form, so all of it would require refining in the United States. 
  • Since U.S. refiners have demonstrated that they are willing to gum up the works of the government-regulated sugar market if their interests aren’t sufficiently taken into account, perhaps there will be a renegotiation of the suspension agreements that will treat them more favorably. 

Ahhh, the challenges of managing the U.S. and Mexican sugar markets just seem to become greater and greater.  One wonders how the United States of America has gotten itself into this dirigiste situation.  Perhaps we will live long enough to see U.S. sugar policy reformed by ending all import restrictions and domestic support measures.  (More on this topic will be available in an upcoming paper.)  If the marketplace was made open and competitive, there is little doubt that sugar still would be produced in the United States, that some of it still would be imported from other countries, and that consumers would buy some combination of the two.  If supply and demand were allowed to guide sugar production, marketing, and consumption, resource allocation and economic efficiency would improve a great deal.  Deadweight losses to the economy would be reduced.  And the former government managers of the sugar program would likely find more satisfying work and suffer fewer headaches.