Analyzing Price Stabilization Effects of Government Sugar Programs: Pre- and Post-NAFTA

Abstract

This paper measures the price stabilization effects of the U.S. sugar programs in the midst of complete sugar market liberalization with Mexico under the NAFTA. Previous research reveals that market liberalization in terms of opening a domestic market can either stabilize or increase the volatility of the domestic prices depending on the characteristics of market liberalization. In this regard, we measure the effectiveness of three sugar program pillars (marketing allotments, price support, and tariff rate quota) on mean price and volatility separately. Given the possibility of time-varying volatility reflected by the heteroscedasticity of the error terms, we utilize the Generalized Least Squares model to the U.S. raw cane sugar market, based on monthly data for the period of FY1991-FY2016. The estimation results indicate that the price volatility was exceptionally widened during the NAFTA as it is further evidenced by relatively high value of coefficient of variation. We found that price support through loan program performed as a price shifter while the elimination of import quotas on Mexican sugar weakened the price stabilization effects of the program.