Michael Salassi | 8/9/2005 6:24:52 PM
News Release Distributed 08/03/05
Passage of the free-trade agreement with Central America, known as CAFTA, has set the stage for possible changes in Louisiana agriculture, say experts from the LSU AgCenter.
CAFTA ends tariffs on goods that move between the United States and five Central American countries – Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua – and the Dominican Republic, a country in the Caribbean which shares the same island with Haiti. Many of those tariffs include agricultural commodities.
“For Louisiana, rice and sugarcane are the two biggest crops it’s going to affect,” said Dr. Michael Salassi, an LSU AgCenter economist.
Sugar, he said, could face difficult consequences.
“Sugar is import-sensitive,” Salassi said. To maintain prices to farmers, the government restricts imports and domestic sales through marketing allotments.
CAFTA would let additional sugar into U.S. markets, reducing prices. While the permitted sugar imports are relatively small as a percentage of the U.S. supply, “additional sugar complicates the price support mechanism,” Salassi said.
The economist said sugar growers are concerned about the pact because it sets a precedent for future agreements with other countries or groups of countries. In addition, it affects marketing allotments.
“For the past 10 to 15 years, domestic production increased, so imports were reduced to minimum levels” permitted by the international General Agreement on Tariffs and Trade (GATT), Salassi said.
Along with import restrictions, the 2002 farm bill requires the U.S. Department of Agriculture to set an overall allotment quantity sugar production each year.
“By letting foreign sugar in, we’re going to have to reduce domestic production to maintain the price,” Salassi said. “The only way is to reduce allotments.”
Salassi said that about a year ago the LSU AgCenter conducted a study that estimated CAFTA would reduce prices to farmers by 1/2 to 3/4 cents per pound of raw sugar.
“It’s a relatively small reduction in gross income, but in terms of net returns, it’s a large percentage,” Salassi said.
He said that if the average yield is 7,000 tons per acre, grower net returns above all production costs for 2005 are about 0.3 cents per pound of sugar.
“A small change in gross income is a major, major change in net income,” Salassi said.
CAFTA, on the other hand, could be of some benefit for rice farmers, Salassi said. “It’s not going to be a major increase in exports.”
South and Central America are major export markets for Louisiana rice, Salassi said. CAFTA sets minimum export levels of rice to those countries, and the level will increase over time.
Salassi said that the United States is already exporting more than the minimum, so the agreement won’t result in an immediate increase in rice exports. The pact, however, will secure markets and increase exports over time as the levels increase, and those countries are obliged to increase rice purchases.
“Anytime you have a potential expanded market is a positive for our producers,” said Dr. Kurt Guidry, an LSU AgCenter economist. “But the opportunity for most commodities is kind of hit and miss.”
Guidry said the United States exports relatively small quantities of soybeans, corn, sorghum, wheat and cotton to the CAFTA countries. They typically purchase about 5 to 10 percent of the U.S. exports of corn and wheat and about 1 percent of the exports of soybeans and cotton.
“The markets don’t look to be big enough to have much effect on U.S. prices,” Guidry said. He pointed out that the Central American countries already buy most of their agricultural commodities from the United States.
“They’re not huge markets,” Guidry said. “As those countries continue to develop and change their standard of living, they could be better markets. That would be much further down the road.”