USDA Considering Sugar PIK Program

July 27, 2000

USDA is considering a payment-in-kind (PIK) program for sugar beet producers in an effort to reduce production in fiscal 2001. August Schumacher, Jr., under secretary at USDA, told the Senate Agriculture Committee that appears to be "the most feasible use of surplus sugar." The committee hearing was remarkable in that it involved some of the fiercest arguments heard in public testimony for some time on a federal agricultural program, in this case, the sugar program.

"USDA has analyzed many potential outlets for the surplus sugar, but most have serious disadvantages or limitations," he said. "Foreign donation, ethanol and restricted use sales are possible but either expensive or reduce the price of other commodities with already depressed prices."

The department, through the Commodity Credit Corporation, can use existing authority to accept bids from producers for the conversion of planted acres to diverted acres in return for PIK payments from CCC sugar stocks, Schumacher explained. "We are assessing this option because the PIK option would eliminate the $264,000 per month cost of storage for the 132,000 tons of sugar currently in inventory as well as storage costs for any forfeited sugar utilized for this program, and may reduce CCC outlays next year as the sugar surplus is expected to be larger in FY 2001 than FY 2000."

If nonrecourse loans are mandated in fiscal 2001, a PIK program may save CCC more than the cost of the purchases, he continued. PIK payments are limited by statute to $20,000 per year per person but are not aggregated in the other payment limitations. "A sugar PIK program is not expected to solve the oversupply problem for the domestic industry because the program would be limited by the availability of CCC inventories and the payment limitation severely limits the number of acres that can be diverted per farm. Also, the planted acres also are under contract to processors who may not be willing to forego the production," said Schumacher.

USDA projects that domestic sugar production is not likely to increase for the next several years as the domestic industry adjusts to the recent lower price levels which are expected to continue through the remainder of the 1996 farm law, he added. "Production lost through plant closures is expected to be made up by continuing productivity improvements in the remaining factories and increased productivity will occur on the farm," he said.

The Clinton Administration "is committed to work with this committee and the sugar industry to reform the program in a sustainable manner that will support our nation's sugar farmers while maintaining a stable supply of sugar for American consumers," said Schumacher. "However, it should be our collective position that we take steps to help farmers thrive, not just survive."

Former U.S. Trade Representative General Counsel and Ambassador Ira Shapiro, testifying for the Coalition for Sugar Reform, told the committee the sugar program was "the Achilles Heel of U.S. trade policy." In a scathing indictment of the program, he cautioned that "achieving the committee's goals of opening foreign markets to U.S. food exports will be impossible unless the sugar program is reformed. Government economists now project will cost taxpayers more than $1 billion during the next five years."

Shapiro added, "Maintaining the sugar price support program in anything like its present form will undercut our ability to open foreign markets for a whole range of U.S. products and services, particularly agricultural commodities and value- added products. This is not simply about the price of a five-pound bag of sugar, or even the $2 billion extra that consumers spend annually because of our sugar program. It is actually about our ability to deliver on the promise to open markets more fully around the world for our farmers, ranchers, food processors and everyone else who is part of America's food industry."

The U.S. sugar program "stands as one of the principal impediments to our hopes for continuing agricultural trade liberalization," he added. "First, the program makes our calls for `a fair and market oriented system’ sound hollow and hypocritical. If we saw this program in another country, we would regard it as a major and unacceptable distortion of trade."

Senator Byron L. Dorgan (D-ND) defended the sugar program, opposing "those who are bound and determined to tear this program apart. I find it incredible that this push continues now ... especially at a time when our family farmers across the country are in the depths of an economic crisis."

Dorgan took direct aim at the Coalition for Sugar Reform, which Shapiro represented in his testimony.

He went on to say there is no free trade in sugar. "It is not the case that the price that is described as the world price for sugar represents a free trade price. The truth of the matter is that 75% of the world's sugar production is bought and sold on contracts between countries. These contracts are highly profitable, allowing the remaining excess sugar production to be dumped well below the cost of production on what is commonly called the world sugar market. The current price of this excess or dumped sugar is around 8 cents a pound.

"No one can raise sugar for 8 cents a pound. No one. The average cost of producing sugar world-wide is 18 cents a pound. And yet this Coalition for Sugar Reform would have us believe that this cheap sugar would always be there, saving American consumers millions of dollars."

Committee Chairman Richard Lugar (R-IN) said the sugar program is "a sour deal that has failed sugar producers, sweetener users, consumers and taxpayers. "Farmers have found that producing sugar in America is more lucrative than farming other commodities. And despite the very apparent oversupply of sugar, farmers continue to grow sugar because the federal sugar program masks market signals," said Lugar, who has long opposed the sugar program.

"Recent purchases of sugar by the USDA have not affected forfeitures because the inducements to plant more sugar are still there. Without the guide of market signals, we will be destined to overproduce sugar. The policy is a failure and should be ended."