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International Sugar Model

The FAPRI International Sugar Model examines and projects the area, production, usage, stocks, prices, and trade for sugar for several countries and regions of the world.

Structure of the FAPRI/CARD International Sugar Model

The FAPRI/CARD International Sugar Model is a non-spatial, partial-equilibrium econometric world model consisting of several countries/regions, including a rest-of-the-world aggregate to close the model. The model is used to establish the sugar component of the FAPRI baseline and for policy analysis. Major sugar producing, exporting, and importing countries are included in the model. The model specifies only raw sugar production, use, and trade between countries/regions and does not disaggregate refined trade from raw trade. Consequently, there is no categorization between importers as refiners or toll refiners because the countries that specialize in that role are well known and stable over time.

The general structure of the country submodel includes behavioral equations for area harvested, yield, production for sugar beet and sugar cane on the supply side, and per capita consumption and ending stocks for raw sugar on the demand side. Equilibrium prices, quantities, and net trade are determined by equating excess supply and excess demand across countries and regions. Using price transmission equations, the domestic price of each country or region is linked with a representative world price (Caribbean FOB price) through exchange rates and other price policy wedges, such as tariffs, and transfer-service margins. Planted area is modeled as a function of lagged planted area, the lagged cane or beet sugar price, the lagged prices of alternative crops, and a trend. Yield is modeled as a function of lagged yield and a trend. Crop production is the product of planted area and yield. Total sugar production is obtained by converting beet and cane production into raw sugar equivalent.

Sugar consumption per capita is determined by the real consumer price of raw sugar and income per capita. Total demand is the product of per capita consumption and population. Inventory demand is a function of lagged ending stock, sugar consumption, and the real consumer price of raw sugar.

In many countries, the beet or cane prices are set by policy and can be treated as being predetermined. Some countries lack information on the agricultural price of raw sugar, so the real consumer price is used instead of the agricultural prices in the specification of the acreage response. In some countries, yield improvements are captured by a time trend.

The excess demand (supply) of each country enters into the world market for raw sugar and the sum of all excess demands and supplies is equal to zero by market clearing to determine the world market price. The Caribbean raw sugar price is generally considered to be the representative world market price. Sugar is a homogeneous commodity.

The sugar model uses price transmission elasticities to link the world and domestic markets for each country. The price transmission equation assumes that agents in each country are price-takers in the world market. Countries are either natural importers or exporters if their autarkic price falls above or below the world price, respectively. Abstracting from any spatial consideration and assuming an "ad valorem tariff only" regime, the domestic price can be expressed as Pd = α + β · Pw · r ยท (1+d), where Pd is the domestic price, Pw is the world price of sugar including international transportation cost if the country is an importer (FOB price for exporters), r is the exchange rate, and d summarizes policy interventions between the world and domestic markets and is expressed in ad valorem form. Parameter α captures the divergence of the domestic and border price that does not depend on the price level but rather reflects transaction costs arising between farmgate and the marketplace, and/or marketing markups. Parameter β allows imperfect transmission between world and domestic prices. Depending on data availability, domestic prices in the sugar model can be farm, wholesale, or retail prices. Because of the homogeneous nature of sugar, quality adjustments are not incorporated in the price transmission equations. In general, only one domestic price is used in the model. Consumer and producer prices are differentially specified only in countries that have a deficiency type of producer support or explicit tax on consumption.

This general structure is slightly modified to accommodate policy interventions other than price distortions, such as quantitative restrictions on area, supply, or trade flows. For example, imports constrained by binding tariff rate quotas are treated as exogenous and domestic prices are solved endogenously. Policy interventions providing a price floor are treated as such and are effective whenever the domestic producer price falls to the price floor level (for example, the U.S. loan rate). The interaction with other components of the FAPRI commodity models is limited to cross-price effects in supply (wheat, rice, and soybeans). There are no links in consumption.

Data for sugar production, consumption, and ending stocks are obtained from the USDA-FAS (Foreign Agricultural Service) Production, Supply, and Distribution (PS&D) data set. Additional data for area, yield, sugarcane and sugar beet production are gathered from the Food and Agricultural Organization (FAO) of the United Nations. Cane and beet production is tied to sugar production through the extraction rate. Macroeconomic data such as real GDP, GDP deflator, population, and exchange rate were gathered from various sources, including the International Monetary Fund and Global Insight.

Demand and supply price responses and income response of demand are econometric estimates or, when not available, consensus estimates. Simple linear specifications and ordinary least squares are used in the estimation of the equations to save degrees of freedom, given the short time-series used. This estimation approach treats sugar prices as exogenous for estimation purpose. The own-price elasticities of sugarcane supply are highly inelastic in the short run. This feature is consistent with the fact that several annual crops can be harvested from one planting of sugarcane. Therefore, there is limited acreage adjustment to price fluctuations in the short run. The own-price supply elasticities for sugar beet production are generally not as inelastic as they are for sugarcane since beet is an annual crop. On the demand side, the own-price and income elasticities reflect the fact the in many developing countries, sugar is considered a staple in the diet. Consumers look to sugar to fulfill basic caloric requirements.

View the current FAPRI-ISU 2011 World Agricultural Outlook.

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