United States, Mexico draft sweet agreement

by Ron Sterk
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The governments of the United States and Mexico drafted an historic sugar trade agreement Oct. 27 in an effort to avoid potential U.S. import duties of more than 50% and the possibility of an escalating trade war. If ratified, it likely will be the biggest news in the sugar market since Jan. 1, 2008, when the North American Free Trade Agreement opened the door to unrestricted trade of sweeteners between the two countries.

But this time the intent is to control sugar exports from Mexico that in the past couple of years have been record high, contributing to lower U.S. sugar prices and loan forfeitures in 2013. If successful, the result also may be reining in sugar cane production in Mexico that has been increasing since 2008, in part because Mexico basically saw the United States as an “easy” market to sell surplus sugar.

U.S. sugar producers, who filed countervailing duty and antidumping petitions with the U.S. Department of Commerce and the U.S. International Trade Commission on March 28 claiming Mexico was dumping subsidized sugar on the U.S. market, welcomed news of the agreement.

“U.S. government officials should be commended for their hard work and diligence in reaching an agreement with the Mexican government that could serve as the basis for suspending the pending countervailing duty and antidumping duty cases,” said Phillip Hayes, spokesman for the American Sugar Alliance, which represents U.S. sugar producers and was the key player in the petitions that claimed Mexican sugar exports cost U.S. producers $1 billion in the marketing year that ended Sept. 30.

At the same time, sugar users expressed grave concern about any agreement that may restrict supplies in the United States.

“We are deeply concerned about the implications of the proposed suspension agreements for the U.S. sugar market,” said the Sweetener Users Association. “Contrary to the U.S. sugar producers’ claims, further restricting imports would be detrimental to the U.S. sugar-using industry, and ultimately all American consumers.”

American Bakers Association president and chief executive officer Robb MacKie said, “While A.B.A. is still reviewing the specifics of the agreement, any further controls placed on sugar supplies is not good for bakers or all other sugar users.”

The baking industry uses nearly a fourth of total sugar used in the United States.

Both producers and users appear to have valid arguments, although the producers have been “winning” since the petitions were filed, and likely would benefit most should the trade agreement be ratified or the duties be continued.

Digging into the details

As may be expected, the details are complicated, but the gist of the draft agreement sets the minimum price for refined sugar imports from Mexico at 23.57c a lb f.o.b. and for all other sugar covered in the agreement (mostly raw sugar or semi-refined estandar) at 20.75c a lb f.o.b., while restricting refined sugar imports to 60% of total shipments from Mexico. In comparison, loan rates (floor prices) for U.S. sugar average 24.09c a lb for refined beet sugar and 18.75c a lb for raw cane sugar, although rates for both vary by region.

The trade deal also limits the total amount of sugar Mexico may export to the United States and provides for timing of shipments so as to minimize the impact on U.S. producers while maintaining a more even supply. The export level will be determined by a seemingly complicated formula based on data from the U.S. Department of Agriculture’s World Agricultural Supply and Demand Estimates with the first “Export limit period” based on the December 2014 WASDE. In subsequent years the export limit will be 70% of the target quantity of U.S. sugar needs based on the July WASDE (effective Oct. 1) with upward revisions if necessary based on the September, December and March WASDE reports with the export limit ratcheting up to 80% of needs on Jan. 1 and 100% on April 1, if necessary.

Further, no more than 30% of the export limit calculated in July may be exported to the United States from Oct. 1 to Dec. 31 and no more than 55% of the December limit effective Jan. 1 may be exported from Oct. 1 to March 31.

It gets more complicated. The U.S.D.A. by law cannot adjust the tariff rate quota (of which NAFTA exports from Mexico do not apply) until April 1 of each marketing year. Now the U.S.D.A. may request the D.O.C. to adjust export limits for Mexico before or after April 1 if the U.S.D.A. determines there is a potential shortage of sugar in the United States. That provision may go a long way in solving an ongoing dilemma the U.S.D.A. faced in not being able to increase T.R.Q. sugar imports prior to April 1, thus smoothing sugar supplies, although it may also reduce the U.S. market for non-Mexican suppliers.

Mexican producers unhappy

Mexico actively had sought an agreement while the trade investigation was advancing, threatening to eventually take the case to the World Trade Organization should duties be imposed. But Mexican producers appeared less than enamored with the draft agreement.

“How can you think that this is positive when before we had free trade, and now we’ll have restrictions,” said Carlos Rello, head of the FEESA fund that operates Mexico’s nine government-owned mills that produce more than 20% of the country’s sugar, told Reuters.

FEESA was slapped with the highest import duties, a combined 56.55%, based on 17.01% countervailing duties and 39.54% antidumping duties. Duties on sugar exports from the privately held GAM Group totaled 50.25%, and duties on sugar from all remaining sources totaled 55.63%. The D.O.C. initially set countervailing duties (on exports it viewed as subsidized) ranging from 2.99% to 17.01% in late August, then added antidumping duties of 39.54% to 47.26% on Oct. 27. Countervailing duties have been collected since Sept. 2 and held in escrow. If the trade agreement is ratified, the investigation and duties will be suspended and collected funds returned.

While many in the United States for some time expected a managed trade agreement would be the ultimate result (and the U.S.D.A. encouraged one as a way to avoid an escalating trade war), there remains considerable opposition, as noted earlier. But perhaps the greatest challenge may be requirements put on the Mexican government to ensure its sugar mills and exporters comply with the agreement. One of the greatest frustrations faced by the U.S. sugar industry and by the U.S.D.A. has been getting accurate data out of Mexico during the NAFTA era, although the information flow and data quality have been improving.

Now, the Mexican government will be directed to establish an export limit licensing and enforcement program, to ensure sugar covered by the agreement and exported to the United States does not exceed the limit for a specific export limit period, and to permit full verification of information related to the agreement at least annually. Mexico also was directed to prevent circumvention of the agreement, impose strict measures in the event any Mexican company does not comply with the agreement and respond to requests from the D.O.C. about allegations of circumvention.

While any managed agreement likely will not be to the liking of U.S. sugar users, its provisions close significant loopholes in NAFTA that have contributed, in part, to wide swings in sugar supplies and prices in the United States for several years. Both cash and futures sugar markets have gyrated since the initial petitions were filed March 28. Bulk refined sugar prices for spot through Sept. 30, 2015, were trading around 26.5c to 27c a lb f.o.b. in late March, before the petitions were filed, but by mid-September offers had climbed to 37c to 40c a lb f.o.b., showing gains of 40% to about 50%, although it should be noted trading was mostly slow during that period due to uncertainty surrounding the final outcome of the trade case, and much of the sugar actually being used during the period had been contracted earlier at lower price levels. On Oct. 23 one major processor reduced its offer price for beet and cane sugar from 40c to 36c a lb f.o.b.

Prices for the thinly-traded domestic raw sugar futures nearby contract, meanwhile, were around 22c a lb in late March, rose above 26c in late June and neared 27c in mid-October before tumbling to 25c a lb early last week on news of the trade agreement.

The story on sugar trade with Mexico isn’t finished, but a climactic chapter may have been written last week. Public comments, which should be ample, on the draft agreement are due by Nov. 10.

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