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Disagreement persists among theU.S. and Mexican sugar industriesand the U.S. high-fructose cornsyrup (HFCS) industry over interpretationof the North American Free Trade Agree-ment (NAFTA). Trade in sweetenersbetween Mexico and the U.S. is addresseddirectly by provisions of NAFTA, as wellas other trade agreements, but as theseindustries have grown, pressure on tradeagreements has increased, leaving thefuture of U.S.-Mexico sweetener tradeuncertain.The Changing Mexican Sugar & U.S. HFCS IndustriesBehind the Mexican sugar industry’sinterest in this dispute is the remarkablerebound in Mexican sugar productionsince implementation of NAFTA. Asrecently as the November-October marketing year 1994, Mexico producedonly 3.8 million MTRV (metric tons, rawvalue) of sugar. By marketing-year 1998,Mexico produced a record of nearly 5.5million. Although USDA forecasts adecrease to 5.04 million for marketing-year 1999, the year’s production wouldstill be the second highest on record.USDA projections for marketing-year2000 put production at 5.15 millionMTRV. A combination of increased sugarcanearea harvested and recently institutedtechnological and producer incentivemeasures is behind growth in Mexicansugar production. Harvested area hadreached a low in 1992 of under 482,000hectares, about 18 percent lower than1987. By 1997, producers increased har-vested hectares to the 1987 level, butsugar production was 22 percent higherthan the 1987 level. New technologieshave increased sugar recovery rates—thepercent of cane recovered as sugar—from9.08 percent in 1992 to 10.77 percent in1997, and the effective milling seasonexpanded from 130 to 175 days. Competi-tion arising from increased efficiencies inthe sector has apparently led to severefinancial problems for some sugar compa-nies, but many have been able to adapttheir production processes to more mod-ern methods.The Mexican government, by providingseveral different forms of support, enablesthe domestic sugar industry to maintainboth high domestic prices and high pro-duction levels. A government-controlleddevelopment bank for the sugar industry,the Financiera Nacional Azucarera SA(FINASA), is estimated to hold overUS$1.3 billion of the Mexican sugarindustry’s debt. FINASA has providedextensive restructuring assistance to troubled sugar companies with high debt loads. Since 1997 the government has coordinat-ed the amount of sugar that can be mar-keted domestically, which effectivelyestablishes the quantity of sugar that mustbe exported or held in stocks. The exporttotal is divided among sugar companieson a pro rata basis. A penalty system dis-courages companies from selling theirassigned exports on the domestic market.In addition, the government has subsi-dized domestic stockholding, helping tokeep 600,000 MTRV out of the domesticmarket. The government also provides support tothe industry by controlling sugar imports.It currently maintains tariff rates of39.586 cents per kg, high enough to pre-vent imports of world-price sugar thatwould undercut domestic prices. UnderNAFTA, however, Mexico is required bythe sixth year, 2000, to adapt a tariff-ratequota (TRQ) system with rates applied tothird countries that match the tariff levelsmaintained by the U.S.Despite government assistance, Mexicansugar companies face an uncertain future.In addition to the high debt loads of manycompanies, productivity gains have notbeen shared among all 61 sugar mills, andmarketing expertise is also unevenly dis-tributed. Although domestic sale pricesare high at about 20 cents per pound inJune and July, exports are currently beingsold at much lower world prices of 5-7cents per pound. NAFTA has allowed for some duty-freeaccess to higher priced U.S. markets inrecent years. Under NAFTA, Mexico’sprojected net surplus production of sugarfor fiscal year 1997 gave it a duty-freequota of 25,000 MTRV to be shipped aseither raw or refined sugar. Since then,Mexico has qualified as a net surplus pro-ducer in both FY1998 and FY1999 andthus has qualified each year for NAFTAduty-free exports up to 25,000 MTRV. The U.S. HFCS industry’s interest in thesweetener dispute stems from expecta-tions that the NAFTA provisions regard-ing HFCS might provide another marketWorld Agriculture & TradeAgricultural Outlook/September 1999 Economic Research Service/USDA 17U.S.-Mexico Sweetener TradeMired in DisputeStephen Haleyfor U.S.-produced HFCS. The U.S. indus-try has been plagued with excess capaci-ty—the larger HFCS companies haveadded significant production capacity, andseveral new plants have opened. Someexperts have estimated that HFCS annualproduction capacity may have grown by3.5 million tons (dry basis) between 1994and 1997.Although domestic HFCS sales haveincreased by more than 13 percent duringthis period, the increases have not beensufficient to absorb increases in capacity.Prices have declined as supply outstripsdemand. The ratio of the HFCS-42 spotprice to the beet-sugar wholesale pricebegan to fall below 0.60 in the fourthquarter of 1995, averaged 0.40 for both1997 and 1998, then rose to 0.42 in thefirst quarter of 1999. HFCS-42 (42 per-cent fructose) is used mostly in confec-tions and other processed foods and inbeverages. The Bureau of Labor Statisticsproducer price index for the HFCS indus-try (June 1985=100) fell from 117.6 in thelast 3 months of 1995 to an average of77.6 in 1998, a 34-percent reduction. As aresult, the sector faced tough adjustments,with some smaller operations leaving thebusiness and others selling to or attractinginvestors from among larger companies.Increased HFCS-55 exports to Mexicoraised expectations during this period.HFCS-55 (55 percent fructose) is usedprimarily in soft drinks. Estimates placesugar use by the Mexican soft drinkindustry in the neighborhood of 1.4 mil-lion tons in the late 1990’s, offering aclose natural outlet for excess U.S. HFCSproductive capacity. The U.S. CustomsService reports that HFCS-55 syrup andsolids exports to Mexico rose from nearly52,000 metric tons in 1995 to over179,000 mt in 1997 and over 207,000metric tons in 1998. The Mexican govern-ment reports substantially higher levels ofU.S. exports—338,500 metric tons for1997 and 285,500 for 1998.NAFTA Sugar Provisions Remain in Dispute . . .U.S. sugar producers closely monitor thepotential impacts of the sweetener tradedisagreements under NAFTA. The origi-nal NAFTA document, in effect since January 1994, contained provisions relat-ed to trade in sugar that were

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