Foreign Relations of the United States, 1961–1963, American Republics; Cuba 1961–1962; Cuban Missile Crisis and Aftermath, Volumes X/XI/XII, Microfiche Supplement
681. Memorandum from Bromley Smith to the NSC Standing Group, May 271
Attached is a paper which will be discussed at the Standing Group meeting on May 28, 5:00 PM.
Attachment
THE WORLD PRICE OF SUGAR
The Situation
The world price of sugar has risen to present levels because of a sharp drop in world supply in the face of steadily rising demand. The poor European beet crops of the last two years coincided with the severe reduction in Cuban production and the loss of most of that production to the communist bloc.
Cuban production has fallen from a 1961 level of 7.5 million short tons2 to an estimated 3.8 to 4.2 million this year. Cuba has bartered more than this output to the Sino-Soviet bloc (3.3 million tons to the Soviet Union, 1.3 million to China, and 700,000 to the satellites), but has been permitted to sell about 1.25 million tons in the free world [Typeset Page 1743] market so far this year. Following are world production and consumption figures, in millions of short tons:
| Crop year | Production | Consumption | Stock change |
| 1957–58 . . . . | 49.1 | 49.0 | +0.1 |
| 1958–59 . . . . | 54.5 | 51.0 | +3.5 |
| 1959–60 . . . . | 53.9 | 53.0 | +0.9 |
| 1960–61 . . . . | 60.1 | 55.0 | +5.1 |
| 1961–62 . . . . | 56.0 | 57.0 | −1.0 |
| 1962–63 . . . . | 54.3 | 58.5 | −4.2 |
While these figures suggest that the 1962–63 decline in stocks is only an adjustment from the earlier buildup, it is complicated by the fact that most of the 1960–61 buildup was in the Soviet Union and its satellites.
As always, the real shortage is intensified by scare-buying. Beginning late last year, sugar users and distributors in this country have added 600,000 tons to their stocks, and the buying rate since April 1 has been up 30 percent. Presumably, inventory-building is also going on in the other developed countries.
At the same time, some supplies are being held off the market in producing countries in anticipation of higher prices.
Among countries with heavy stocks is the Soviet Union, which has been taking most of the Cuban output even though it has not permitted enough rise in consumption levels to utilize the additional quantities. [Facsimile Page 3] Its stocks at the end of 1962 are estimated at 4 to 4.5 million tons—about 50 percent above normal. Poland also had above normal supplies. The Soviet bloc, before it obtained the Cuban supplies, had been a net exporter of sugar.
Tab A shows recent price movements, Tab B charts world production and consumption, and Tab C breaks the production figures down by countries.
The Outlook
There is no prospect for relief in the tight supply situation until this year’s beet harvest, at the earliest, and little prospect for a really easy balance between supply and demand for 3 or 4 years—assuming that a substantial additional Cuban supply does not re-enter the world market. It will probably be much longer before the world sugar price again reaches the low levels of last year.
Unfortunately, this year’s beet crop in Western Europe got off to a slow start because of unfavorable weather and the yield may be again less than normal. Current high prices are encouraging some expansion in practically all areas of sugar beet and cane production, but bringing in new cane acreage requires 18 months and new beet acreage almost [Typeset Page 1744] as long. No immediate large-scale expansion appears to be underway anywhere in the free world.
Scare-buying has probably not yet ended. At the time of the Korean crisis, inventory-building among U.S. users and distributors reached a million tons, and only 60 percent of that potential over-buying has occurred so far.
When the supply situation eases, prices can move downward as quickly as they have been moving up. The worst should be over when this year’s beet crop is harvested in October. But a poor European crop could mean another year of extraordinary high prices. The futures market on deliveries for July and September 1964 has recently been rising rapidly, indicating that traders expect no real relief within 16 months which is far into the future as the market extends.
The Soviet Union could bring the world price down at any time by releasing its excess stocks for sale in the world market. If the world price began to fall without such action, Soviet dumping could accelerate the down trend. We have no evidence now, however, that the Soviet Union contemplates any substantial sales. It has been suggested that if an authoritative estimate of the size of Soviet stocks were made known, this alone might affect price.
Tabs B and C project anticipated world production and consumption and production by countries through 1965–66, and Tab D provides a comentary on prospects for expansion in the principal producing countries.
What might be done to alter this outlook is discussed under the headings which follow.
[Facsimile Page 4]Increasing Domestic Production
All restrictions on sugar beet acreage have been removed for 1963, 1964, and 1965. U.S. production of beet sugar this year should reach a record level of 2.9 million tons—compared to 2.6 million last year—and should increase further in the next two years. Processing capacity is being expanded from 3 million to at least 3.3 million tons by 1965. There appears to be no need for additional incentives beyond the prospective high prices.
Acreage restrictions on mainland cane have been removed for 1963 and 1964. This should result in enough additional production in Florida to fill the mainland cane quota under the Sugar Act. To remove restrictions for 1965, as has been done in the case of beets, would provide additional incentive to produce, but the production could not be marketed within the statutory quota. The producers would probably be willing to take the risk if assured by the Administration that it will recommend the necessary quota increase when the Sugar Act is revised next year.
[Typeset Page 1745]Hawaii, Puerto Rico, and our offshore possessions have no restrictions on either acreage or marketing.
Increasing Foreign Supplies
This question breaks into three sub-questions:
Long-Range Expansion. Many parts of the world have potential for increased sugar production from cane, but bringing new acreage into production requires about 18 months. Opportunities also exist for expansion of production of beet sugar, which if started now could be accomplished in a slightly shorter time. Construction of processing capacity takes about the same length of time. New investment may take 20 years of reasonably good prices to pay off.
Spurred by present high prices, some countries are expanding production (See Tab D). However, they are held back by, among other things, uncertainty as to markets and prices in 1965 and thereafter. The United States is not in a good position to offer guarantees as to long-range markets. The Sugar Act contains limitations on each country in the form of country quotas. And, the global quota is reserved for returns to Cuba after Castro. We would indeed be embarrassed if we pushed other countries to fill the gap left by Cuba and then had to find room for resumption of Cuban deliveries. We would be embarrassed also if we pressed these countries to expand and the world price in a few years fell to levels approaching those of a year ago, when sugar production was being curtailed in many countries because it was unprofitable.
Even Philippine companies, which enjoy special access to the U.S. market because of a preferential tariff rate and a guaranteed quota until 1974, have been expressing reluctance to expand without assurances beyond that date.
[Facsimile Page 5]Short-Range Production Increases. On existing acreage, possibilities exist for improving cane yields per acre and increasing the recoverable quantities of sugar per ton of cane—by such means as increased use of fertilizer, modernization of existing mills, increased use of labor and improvement of cultural and factory practices. Moreover, where unused processing capacity exists, using that capacity requires only the investment necessary to add new acreage or substitute more productive for less productive land. With an attractive market opportunity for any increased output, these immediate short-range measures appear to be appropriate areas for United States assistance. AID and USDA are asking the AID missions and agricultural attachés to explore immediately the possibilities of, and need for, dollar and technical assistance for short-range measures. The Export-Import Bank has also been advised of the desirability of actions in these directions.
Pressure for Release of Supplies. Where supplies are being held off the market in anticipation of still higher prices, diplomatic pressure [Typeset Page 1746] might be effective. State has already made strong representations to Manila in an attempt to pry loose some stocks that are known to be held there.
Restraints on Demand
Inventory-building and scare-buying are difficult to deal with on a world-wide scale. To impose controls in the United States alone would have an effect on the world price, of course, but besides being highly controversial and unpopular, controls would require legislation and administrative machinery—with all the delay they would involve. The sugar companies have been doing some informal allocation of supplies among their customers, but stocks in the hands of industrial users and wholesalers and retailers are probably close to a million tons compared to a normal level of 400,000.
If housewives were to panic, severe additional price pressures could develop. So of this date, however, there has not been any sustained run on the grocery stores.
Some minor benefit might come from revising regulations, mainly those of the Food and Drug Administration, which limit the amount of sugar substitutes—primarily, corn sirup—which can be used in certain products. However, corn sirup production capacity is currently strained to the point where the principal producers have been declining additional orders—so this avenue offers no major hope of immediate relief.