USDA to roll out controversial sugar purchase program

Source: Amanda Peterka, E&E reporter • Posted: Monday, July 29, 2013

The Agriculture Department on Monday will roll out a program that allows the government to buy up excess sugar in the marketplace and sell it to ethanol producers.

The Feedstock Flexibility Program is one of several actions the department is taking this year to combat sugar prices that have fallen nearly 12 percent since December. Although the program was created in 2008, it has never been put in place until now.

“Atypical market conditions have necessitated USDA to take a number of actions this crop year to manage the sugar supply at the least cost to the federal government,” the Farm Service Agency, a division of USDA’s Commodity Credit Corp., said in a statement today. “If needed, FFP is an additional tool to manage the domestic sugar surplus.”

A final rule implementing the program, which the department first proposed to use in 2011, will be published in Monday’s Federal Register. The program will also become effective at that point, and USDA could begin sugar purchases before Thursday. A draft of the final rule is currently available for public inspection.

Under the broader federal sugar program put in place in the 2008 farm bill, which has many foes on Capitol Hill, USDA’s Commodity Credit Corp. is required to maintain a domestic supply of sugar that keeps prices at or above specific levels. The program allows sugar processors to borrow from the CCC when the sugar harvest begins and requires them to pay it back in full or forfeit their sugar as collateral to the government.

The CCC is required by law to operate the program at no cost to the federal government wherever possible. Falling sugar prices this year, though, mean sugar producers are in danger of loan forfeiture.

Through Feedstock Flexibility, the Commodity Credit Corp. may acquire sugar either through forfeitures of sugar loans or through actual purchases of sugar and then sell it to ethanol producers until prices are brought back to target levels.

In a May report, the Congressional Budget Office projected that using the program for sugar would cost $51 million this fiscal year and nearly $240 million over the next 10 years.

Current law gives USDA the authority to run Feedstock Flexibility through the 2013 sugar crop year ending Sept. 30, 2014, and mandates that the secretary estimate by Sept. 1 the likelihood of sugar forfeitures for the following year and how much sugar will be available for ethanol production. Under the rule, the Commodity Credit Corp. will also make quarterly announcements of the same information.

The rule does not, however, specify how the corporation will calculate expected forfeitures. The last year in which sugar loan forfeitures occurred was 2004.

“FFP is expected to be unnecessary in most years, as USDA’s long term projections indicate a generally strong domestic sugar market in the future,” the final rule says.

But if sugar prices remain below the forfeiture level, the government may be required to purchase excess sugar as early as Aug. 1 for Feedstock Flexibility. The Farm Service Agency will publish an invitation to sugar producers to sell their sugar and then open up a bidding process for ethanol producers, though it may also contract directly with buyers and sellers.

Ethanol facilities must purchase the sugar within 30 days of the government buying it from sugar producers. Because the value of the sugar will likely be less than market cost, creating an incentive for it to be sold for human consumption, the Commodity Credit Corp. will require proof from each bioenergy producer that the sugar will indeed be used for biofuel production rather than human consumption.

The farm bill does not require that the sugar go to domestic biofuel producers. Though the Commodity Credit Corp. initially proposed to restrict eligibility to U.S. ethanol facilities, the agency decided in its final rule to strip that restriction and allow the government to sell the sugar to biofuel producers anywhere in the world.

The farm bill “expressly provides that the sale of sugar to bioenergy producers must be conducted in a manner that ensures the sugar program is operated at no cost to the government by avoiding forfeitures to CCC,” the final rule says. “To restrict eligible buyers to those bioenergy producers whose production facilities are located in the United States may restrict the pool of sugar buyers, potentially increasing the cost to the Federal Government and the likelihood of forfeitures to CCC.

The agency estimated that “few if any” prospective buyers would use the sugar outside the United States because of the costs associated with transporting it to ethanol facilities abroad.

CCC first published a proposed rule to implement the program in October 2011 and received just six comments, half of which supported the program. Industries that use sugar, including beverage companies and candy makers, oppose it.

In recent months, the program has been swept up in a political battle over the broader array of sugar supports, which critics say have kept domestic sugar prices at an artificially high level — on average, 68 percent higher than they were under the 2002 farm bill.

“Changes to the sugar program in the 2008 farm bill made a bad program even worse and have destabilized the U.S. sugar market,” said Tom Earley, vice president of Agralytica, a food and agriculture consulting firm, and author of a report for the Coalition for Sugar Reform detailing program costs. “Those changes are to blame for both the shortages and high prices we have experienced over the past four years, as well as the current surplus that could force USDA, and ultimately taxpayers, to spend up to $250 million to purchase excess sugar and sell it to fuel ethanol plants at a loss this year and next.”

The agency is not making any major changes to the rule in response to the comments it received.

“CCC has determined, based on the evenly balanced opposing and supporting comments for specific changes, that the proposed rule equitably balances the conflicting interests of sugar producers and sugar users,” the final rule says.

The Renewable Fuels Association, an ethanol industry trade group, said it had not yet seen the final rule but generally supports access to additional feedstocks.

The American Sugar Alliance, a coalition of sugar producers, applauded the program and said it would help U.S. producers deal with a surplus of subsidized Mexican sugar entering the market.

“We are pleased that the USDA has completed the rulemaking for implementation of this program,” the alliance said in an emailed statement. “The FFP will save money relative to the cost to the government from the sugar loan forfeitures that would otherwise result from the flood of subsidized Mexican sugar this year.”