697. Memorandum from Bromley Smith to the NSC Standing Group, July 91

[Facsimile Page 1]

Attached is a “Contingent Plan for Increasing World Production of Sugar” which was prepared by the Department of Agriculture in consultation with the Department of State, for consideration by the Standing Group. Discussion of the plan is scheduled for the July 16th Standing Group meeting.

Bromley Smith
[Facsimile Page 2]



This paper has been prepared in response to a directive from the Standing Group that a plan be developed that would be effective in reducing the world price of sugar.

Whether this plan—or any other plan for the purpose—should be adopted was reserved for later consideration. Accordingly, the scheme outlined herein is presented only as a contingent plan and does not at this point represent a formal recommendation by either Agriculture, State, or AID.

[Typeset Page 1791]

A. The Sugar Price Outlook

Spurred by the favorable price outlook, world sugar production is rebounding strongly from the decline of the past two years. Even in the absence of any new U.S. programs to provide additional incentive, world production should overtake consumption in the 1963–64 crop year that is now beginning and exceed consumption by 2 million short tons2 in 1964–65.

The production-consumption outlook through 1966–67 is shown on the attached chart and table. Assuming that sugar from Cuba and the Soviet satellites continues to enter the free world market in about the current volume, the world market price should drift steadily downward—reaching 5 cents in 1964–65 and 4 cents by 1966–67.

The projected production increase of 4.6 million tons in 1963–64 reflects the emphasis now being placed on obtaining the maximum sugar yield from existing beet and cane acreages. Present and prospective prices appear to be providing considerable incentive for increasing the use of fertilizer and adopting other improved cultural practices, extending the grinding seasons to include lower-yield cane, and expanding and modernizing mill capacity. The projection for West Europe assumes that the weather there will be at least average for the balance of the season.

[Facsimile Page 3]

The projected increases for the United States reflect the removal of acreage controls on domestic sugar beet production through 1965 and cane production through 1964.

Prior to 1962–63, world consumption was increasing 2 million tons per year. The increase was cut in half in 1962–63 because of higher prices. While the price increases thus far have had only limited effect on consumption in the Bloc and in large industrialized countries such as the United States and Western Europe, low income countries, including exporting countries wishing to capitalize on current high prices, are tending to cut down on domestic consumption. But consumption should reach its former rate of increase by 1964–65, as prices decline.

The excess of world production over consumption for the next five years will be entirely in the Bloc. Even by 1966–67 Free World production will be slightly below consumption. The big question is how much of the Bloc sugar will be shipped to the Free World. In the calendar year 1962, such exports totaled about 3.5 million tons. Traditionally, most of the sugar exports from Poland and Czechoslovakia—which together produce over 2.5 million tons—have gone to the Free World.

[Typeset Page 1792]

The exact amount of Bloc sugar which will be transferred to the Free World during the years ahead depends largely upon political decisions. Certainly for the next year or so, the Bloc will be in a good bargaining position as Free World supplies will continue very tight and efforts will be made to build-up reserves. After this period, as Free World supplies again build up, the Bloc will be in a less favorable position.

Such information as we have on Bloc shipments in 1961–62 and 1962–63 indicates that about 18 percent of Bloc production is moving into Free World markets. Should this proportion prevail over the five-year period, a total of 16.2 million tons would be transferred from the Bloc to the Free World. The net effect of such a movement would be to reduce Bloc stocks by 800,000 tons, but most of this drawdown would be in the Soviet Union where stocks are now abnormally high. The figures include an allowance for a small carryover in Cuba by the end of the period. The Cuban carryover at the end of 1961–62 was negligible.

Free World stocks would increase by 6.8 million tons, which would not place them above normal levels. The increase in Free World supplies—production plus imports from the Bloc—in 1963–64 and 1964–65 will not quite offset the drop in the previous two seasons.

[Facsimile Page 4]

B. The Objective: 1.5 Million Tons More

The World market price can be brought down more rapidly only if Free World supplies can be expanded at a rate more rapid than is projected. An increase of about 1.5 million tons in Free World supplies would be required in 1964–65 to lower the price in that season from 5 to 4 cents per pound.

A part of this amount could be obtained from U.S. sources if domestic marketing quotas were increased. The remainder would have to be obtained from friendly foreign countries.

It should be emphasized that the 1.5 million ton figure is far from precise. It is a residual figure derived from estimates of production and consumption and assumptions about Bloc export policy—all of which involve great uncertainties. The USDA is therefore undertaking, in cooperation with other agencies, to revise these projections bi-monthly, or oftener if significant new data appears, to provide a current basis for policy-making. The first revision will be prepared for distribution September 1.

As of this date, however, the 1.5 million ton estimate is the best attainable figure and should be accepted as the objective of the contingent plan.

[Typeset Page 1793]

C. The Contingent Plan

A plan to increase world supplies should consist of two parts:

1. An increase in the domestic marketing quotas.

The quotas would be raised to cover a substantial increase in domestic production. Of this amount, perhaps 200,000 tons could be obtained by 1964–65, primarily from Florida cane. Most of the increased output from the beet area would be available at the beginning of the following crop year—that is, October 1965. Domestic political considerations would require that any increase in cane and beet acreage be kept in balance. A total increase for both in the range of 500,000–600,000 tons might be appropriate.

The increased domestic quota would have to come initially from the global quota of 1.5 million tons which is set aside for eventual restoration to Cuba, but in order that the global quota may be reserved for its original purpose it is proposed to borrow from it, with the repayment to come out of future increases in total U.S. consumption.

U.S. consumption rises at the rate of about 170,000 tons a year. Of this increase, 65%—or about 110,000—is allocated to domestic producers and the remainder to foreign countries having quotas. It is proposed that equal proportions of the foreign and domestic shares be applied to repaying the amounts borrowed from the global quota.

[Facsimile Page 5]

If the entire increment could be used, the repayment rate would of course be 170,000 tons a year.

But domestic producers have regarded their share of the increment as barely enough to cover productivity increases and hence would argue against applying their entire share to repaying the global quota borrowing. But it would appear not inequitable to use a major share of the increment for that purpose, and at least half would have to be insisted upon.

2. Inducement to foreign producing countries to expand production.

As noted at the outset, considerable expansion of production is taking place, mainly through relatively inexpensive, short-run measures to boost output from existing acreage and mill capacity.

The potential probably exists for achieving the entire foreign share of the 1.5 million tons through such short-run measures, without attempting to induce the heavier and far more risky investment required for new acreage and new refineries. The amount sought, in relation to Free World production by the net exporting countries, is about 8 percent. If just some of the less efficient producers could be brought up toward the average, that alone would produce the necessary results.

It seems clear, however, that the objective cannot be achieved unless the U.S. offers the foreign producers some kind of market and price [Typeset Page 1794] guarantee, accompanied by credit and technical assistance as necessary. The latter alone would not do the job.

Moreover, there are important U.S. policy considerations that would militate against our encouraging friendly countries to go heavily into expanded sugar production without market and price protection. The new investment would not pay off, even in the short run, if the price reached or fell below 4 cents, and the U.S. would have to share the responsibility.

The simplest effective way to assure market and price protection for the new investment would be to utilize the country-quota, premium-price system that is in the Sugar Act for that purpose.

It is proposed, therefore, to use additional temporary quota assignments as inducements to producing countries to commit themselves to achieve by 1964–65 a volume of exports higher than that which is now in prospect.

[Facsimile Page 6]

The additional quota allocations would have to come from the global quota. But since the new investment to be encouraged is of the short-run, yield-increasing type, the price guarantees could be short-run also. Hence, the additional quotas, as in the case of the increased quotas for domestic producers, could be borrowed rather than assigned permanently.

Since the global quota, by coincidence, is equal to the 1.5-million-ton objective, it could be assigned on a ton-for-ton basis to achieve the desired result. The basic problem is that what is sought is an increase above that already in prospect, and the latter figure cannot be established on a country-by-country basis. The best approach to a solution appears to compute the percentage increase in prospective exports for the exporting countries of the Free World, as a group, and to give additional temporary quotas to countries committing themselves to an increase beyond that percentage.

Using a two-year period, 1961–63, as the base, the percentage increase projected for the two years 1964–65 is about 10 percent (although the figure would have to be computed more precisely if the plan is considered further). If a given country agreed to boost its exports from an annual average of 100,000 tons in the base period to 120,000 tons in the two coming years, it would receive 10,000 tons additional allocation as a temporary addition to its country quota. If it projected an increase to 130,000 tons, its addition would be 20,000.

As soon as possible after enactment of the Act, countries would be invited to submit their proposed commitments. If the total additional quota applied for exceeded the total available, it is suggested that all countries receive the same proportionate share—that is, an additional quota equal to the difference between 110% and, say, 125% of their [Typeset Page 1795] exports during the base period. This should be modified, however, by an additional allowance for small exporting countries, which should also be worked out on an automatic formula basis.

The additional temporary quotas should be available for the two years 1964 and 1965. However, it should be made clear in the statute that performance under this proposal would be taken into account in future legislation relating to country quotas, leaving the implication that they would be available until such time as Cuba returns to the family of free nations.

It is suggested that the additional quotas be available only to Western Hemisphere countries and such other countries as have supplied sugar to the United States during the year ending June 30, 1963.

[Facsimile Page 7]

In order to give the additional quotas meaning, the import fee in the Sugar Act would be extended through 1966 at no more than the level to which it will rise by the time the foreign quotas in the present Act expire next year—that is, 30 percent of the difference between the U.S. price and the world price.

D. Considerations Against Adopting the Entire Plan

The following considerations weigh against the second element of proposed plan:

1. Economic Warfare.

It would be difficult to disguise the fact that the proposal is economic warfare waged by the U.S. against a small country run by a revolutionary government which we do not like. The Latin American and African countries are very sensitive to actions of this kind, and many of them would condemn the U.S. for this action, even though their own sugar industries were perfectly happy with the scheme.

2. Utilization of the Global Quota.

Under the proposal, the global quota now reserved for Cuba would be largely borrowed, but the beneficiary countries would come to regard it as theirs by right.

3. Damage to our Relations with Friendly Countries.

The U.S. Government through various international forums in the commodity field is presently endeavoring to assure the less developed countries a stable and increasing income from the sale of primary products. For the U.S. to sponsor a program deliberately designed to reduce the world price of sugar to 4 cents per pound, a level below the cost of production of a number of friendly countries, would appear to fly in the face of this policy and be damaging to our relations with the less developed countries.

Moreover, production capacity created by this or any other effective plan would remain in being after the temporary objectives were [Typeset Page 1796] achieved. Consequently, if U.S. policy forces the world price to 4 cents in two years there is no assurance the decline would stop there. In all likelihood, it would not.

[Facsimile Page 8]

It can be argued that continuation of premium prices for that part of each country’s output sold to the U.S. under quota more than compensates the country for the low prices it would receive for that portion sold on the world market. But the benefits would not be spread evenly, and the Castroites in every country could blame each price decline and production cutback on the U.S.

Even a short-run program could be counter-productive to the economic development objectives in aid-receiving countries. Increased production stimulated by U.S. legislation would likely be interpreted as a change in current U.S. policy which is to encourage agricultural diversification in these countries. A tendency to concentrate resources to stimulate sugar production without permanent price level assurance for the entire output could boomerang and create a situation increasing the demand and need for AID dollar support.

4. Administrative Difficulties.

These include such problems as inadequate or unreliable statistics, the incentive on producing countries to curtail consumption inordinately, and the difficulty of devising and applying penalties for failure to perform according to the commitments for which the quotas were granted.

5. Limited Value to be Gained.

Our efforts would only accelerate the price trend already underway—advancing by perhaps 2 years the date when sugar reaches 4 cents. The difference to Cuba between 5-cent and 4-cent prices on a million tons exported to the Free World is $22.4 million. If the price were driven down to 3 cents, the loss would be $45 million. Presumably, Khrushchev would find a way to make up this difference. Do the limited cost and inconvenience to the Bloc justify the risks and difficulties inherent in the program?

E. Possibility of a More Limited Approach

If these objections prevail against adopting the second part of the plan in its entirety, a part of the objective could be achieved through a “crash” program of credit and technical assistance without assignment of additional quota. The first and third of the objections cited above would still apply but to a lesser degree. The additional production that could be obtained through such a “crash” program alone is highly speculative but might be in the range of 200,000 to 500,000 tons.

Perhaps an initial step would be to examine the possibility of such a “crash” program with Brazil and India, where the potentials appear greatest.

[Facsimile Page 9] [Typeset Page 1797] [Facsimile Page 10] [Typeset Page 1798]

World Sugar Production and Consumption
(1,000 short tons, raw value)

1962–63 1963–64 1964–65 1965–66 1966–67
Prod. Cons. Diff. Prod. Cons. Diff. Prod. Cons. Diff. Prod. Cons. Diff. Prod. Cons. Diff.
USSR 6,900 8,800 −1,900 7,200 9,000 −1,800 7,400 9,100 −1,700 7,900 9,200 −1,300 8,400 9,300 −900
East Europe 4,596 3,200 +1,396 4,700 3,300 +1,400 4,800 3,500 +1,300 5,200 3,600 +1,600 5,300 3,900 +1,400
Mainland China 562 1,700 −1,138 700 1,750 −1,050 800 1,800 −1,000 900 1,900 −1,000 1,000 2,100 −1,100
Cuba 4,100 390 +3,710 4,600 395 +4,205 4,800 500 +4,300 5,000 600 +4,400 5,200 620 +4,580
Total Bloc 16,158 14,090 +2,068 17,200 14,445 +2,755 17,800 14,900 +2,900 19,000 15,300 +3,700 19,900 15,920 +3,980
Free World
United States 5,523 9,800 −4,277 6,165 9,900 −3,735 6,390 10,100 −3,710 6,500 10,300 −3,800 6,650 10,500 −3,850
North America 10,168 12,428 −2,260 11,400 12,659 −1,259 12,290 13,037 −747 12,600 13,432 −832 13,000 13,855 −855
South America 6,789 5,125 +1,664 7,425 5,275 +2,150 8,200 5,460 +2,740 8,500 5,875 +2,625 8,600 6,100 +2,500
West Europe 7,978 12,550 −4,572 9,100 12,650 −3,550 9,750 12,850 −3,100 10,150 13,150 −3,000 10,500 13,450 −2,950
Africa 3,302 2,755 +547 3,500 2,756 +744 3,700 2,957 +743 3,900 3,123 +777 4,200 3,334 +866
Asia & Oceania 10,115 10,510 −395 10,500 10,670 −170 10,800 11,250 −450 11,350 11,770 −420 11,950 12,125 −175
Total Free World 38,352 43,368 −5,016 41,925 44,010 −2,085 44,740 45,554 −814 46,500 47,350 −850 48,250 48,864 −614
World Total 54,510 57,458 −2,948 59,125 58,455 +670 62,540 60,454 +2,086 65,500 62,650 +2,850 68,150 64,784 +3,366
  1. Transmits paper prepared by the Department of Agriculture entitled “Contingent Plan for Increasing World Production of Sugar.” Confidential. 10 pp. Kennedy Library, NSF, Countries Series, Cuba, General, Vol. X, 7/63.
  2. All tonnage figures in this paper represent short tons.