1. The U.S. Sugar Regime: Options for Reform David Blandford Penn State University German Marshall Fund Luncheon Washington, DC. November 16, 2005

2. Two scenarios examined Focus on impact of duty-free imports of sugar from Mexico from 2007/08 Low imports – increase in duty-free imports of roughly 200,000 short tons High imports – increase in duty-free imports of sugar of over 1.3 million short tons (use of HFCS in Mexican beverages is a key factor) Note: all the numbers for future years (FY2006 – 2015) are projections not forecasts!

3. U.S. sugar prices: the two scenarios

4. Bottom line… A significant increase in imports from Mexico would mean that the sugar program could not operate on a no-cost basis Would a shift to a “standard” commodity program be feasible? Key elements - elimination of marketing allotments, reduction in loan rates, use of direct payments

5. Parameters for the standard program scenario CaneBeets Loan rate12 cents/lb.16.48 cents/lb. Direct payment3 cents/lb.3 cents/lb.* Target price20 cents/lb.20 cents/lb.* Base area1 mil. acres1.497 mil. acres Program yield4.27 tons/acre3.22 tons/acre* *Except for loan rates, beet sugar provisions are expressed in raw sugar equivalents. Counter-cyclical payment rates for both cane and beet sugar are determined by the following formula: max(0, (Target price - Direct payment rate - NY raw sugar price)

6. Sugar and sweetener prices (high import assumption FY 2008-15 average) BaselineScenario% Difference Raw cane sugar (cents/lb.) 18.716.9-10 Refined beet sugar (cents/lb.) 21.018.5-12 Retail sugar (cents/lb.) 41.138.0-8 HFCS (cents/lb.)11.410.7-6 Sugar cane/ton$25.33$22.86-10 Sugar beets/ton$37.08$33.79-9

7. Producer returns ($) (high import assumption FY 2008-15 average) BaselineScenarioDifference Cane market value/ harvested acre 910805-105 Cane DP/base acren.a.218 Cane CCP/base acren.a.17 Cane LDP/harv. acren.a.00 Beet market value/ harvested acre 845770-75 Beet DP/base acren.a.164 Beet CCP/base acren.a.13 Beet LDP/base acren.a.18

8. Sugar payments (high import assumption FY 2008-15 average, mill. $) CaneBeetsTotal Direct payments218246463 Counter-cyclical payments 171936 Loan deficiency payments 023 Total sugar payments 234287521* * With no payment limitations; $224 million with payment limitations?

9. Government outlays (high import assumption FY 2008-15 average, mill. $) Total New sugar payments 521 Change in sugar storage & loan costs -176 Change in corn CCPs +16 Net of above362* With no payment limitations; $64 million with payment limitations? Approximate “break-even” direct payments gives net cost of $100 million

10. The full AFBF sugar study can be found at http://dblandford.aers.psu.edu Environment and natural resources Community economic development Food and agricultural systems