Thursday, March 14, 2013

Thoughts on the Sugar Support Program

The sugar program is back in the news.

Alexandra Wexler of the Wall Street Journal reported this week, Big Sugar Is Set for a Sweet Bailout: Candy Makers Will Suffer if the U.S. Government Buys Sugar.

I am not usually moved to write about my concerns for the candy industry. My concern about sugar generally goes in the other direction. For example, consider the upcoming IATP webinar, Sickly Sweet: The Science and Policy of Fructose Overconsumption in America (Mon., Mar. 18, 2013 11:00 a.m - 12:00 p.m. CDT) and the recent book by Michael Moss, Salt Sugar Fat: How the Food Giants Hooked Us.

However, my interest peaked when I read the news reports that our "no-cost" federal sugar program may cost U.S. taxpayers a significant amount of money this year. And yet, I recently heard from a friend in Minnesota that sugar beet profits are way high - great crop last fall. So, I wanted to explore -

The sugar program has been around for a long time. Although sugar support goes back to the 1934 Sugar Act, the origin of our current policy is found in the Agriculture and Food Act of 1981. The focus is on supporting the domestic sugar industry.  For an excellent critique of the program, packaged within a clever illustration of trade policies affecting the "American coffee service" (coffee, cream and sugar), see Jim Chen's article, Around the World in Eighty Centiliters, 15 Minnesota Journal of International Law 11 (2006).

In 2000, the GAO issued a report that was sharply critical of of the program, Sugar Program: Supporting Sugar Prices Has Increased User Costs While Benefitting Producers, GAO/RCED-00-126 (June 2000), arguing that the program had a significant net cost to the U.S. economy.  Nevertheless, it persists.

Part of its longevity is that the program is continually touted as operating "at no cost to the federal government." Marketing allotments restrict the amount that sugar processors can sell and import quotas restrict the quantity of foreign sugar allowed to enter the U.S. market.  This keeps sugar prices high and ensures farmer and processor profitability. For a good description of how this is supposed to work, see the USDA Economic Research Service Sugar and Sweeteners policy webpage.

As Remy Jurenas of the Congressional Research Service wrote in the report, Sugar Program Proposals for the 2012 Farm Bill, "[s]ince the program records no outlays, its future did not receive attention among the proposals submitted to the House and Senate Agriculture Committees for revising the farm safety net and reducing farm program spending."

However, as the 2000 GAO Report pointed out, and as the food manufacturing industry has long argued, keeping sugar prices high means that the cost is passed on to consumers. The GAO estimated the program's cost to the U.S. economy at $700 million in 1996 and $900 million in 1998. The Wall Street Journal reports that "[t]he National Confectioners Association, which represents about 350 candy companies, including Mars, Hershey and Nestlé, estimates that the U.S. Sugar Program has cost consumers about $14 billion since the Farm Bill's passage in 2008."

Should we care that sugar is too expensive?  I have long been an advocate for farm policies that are based on good food policies.  So, generally, no, I don't mind that the price of sugar is higher than it would otherwise be.

However, here are some of the related problems. First, high sugar prices are often listed as a factor in the ubiquitous use of high fructose corn syrup as a sugar substitute. We have created an entire industry supported by high sugar prices.

Second, the environmental problems associated with the domestic sugar cane industry raise serious questions about the wisdom of providing support. Wetland drainage and flood control efforts by the sugar cane industry (often supported with other federal subsidies) have been devastating to the Everglades in Florida. As sugarcane production is very chemically intensive, agricultural pesticides and fertilizers have significantly worsened the water quality problems there.  For an informative rant on the government favors and the problems associated with sugar cane production, see Big Sugar, see Timothy Carney's opinion piece on the American Conservative blog, Not So Sweet: How Big Sugar Made Slaves out of Guest Workers (June 5, 2006).

Third, the sugar beet industry has been very profitable, some argue, too profitable. While the processors fend off labor complaints, other farmers complain that sugar beet farmers drive farm rent prices too high, pricing others out of the market.  The GAO report expressed concern that "[e]conomic inefficiencies" occur because "the sugar program’s artificially high domestic prices encourage[] farmers to grow sugar beets instead of another crop, such as wheat."

So, here we are, once again, encouraging farmers to use our precious soil and water resources to grow a crop that we now realize is not good for us.

The situation becomes even more complex when you recognize that sugar beet farming is a closed universe. Not everyone gets to grow sugar beets. You have to belong to the sugar beet cooperative in order to have a market for your product. Coop membership is a very valuable asset in and of itself.  It is a pretty sweet system (pun intended), at least if you are a sugar beet grower or processor. Even aside from whether or not we should be "growing sugar," shouldn't this be the kind of set up that could work in a free market?

Well, maybe or maybe not -  add to the list a new problem -  this year, there may be a direct cost associated with the "no cost" sugar program.  This brings us back to the current news.  Bloomberg Businessweek reports that the U.S. has the "biggest [sugar] glut in more than a decade."  Raw sugar prices are down 37%. This raises a problem with respect to the non-recourse loans that the USDA has made to the processors. Under the USDA non-recourse loan programs, loan recipients can elect to either pay back the loan, keeping the crop (if the price is high) or forfeit the crop (if prices are low).  Based on current prices, the USDA may end up with a lot of sugar.  While the Wall Street Journal references 400,000 tons, Bloomberg speculates that the number could be double that.

The financial cost comes from of a provision in the 2008 Farm Bill that requires the USDA to sell forfeited sugar to our corn-based ethanol producers.

According to the USDA economist quoted by the Wall Street Journal, "[t]o entice ethanol producers to buy sugar to mix in with corn, the USDA expects it will have to take a 10-cent loss on every pound of sugar it sells, bringing the total to $80 million if 400,000 tons are purchased."

Some days, I am really glad that I am not Secretary Vilsack, trying to sort this stuff out.

A lot of people talk about throwing away the complicated tax code and starting over.  I think we could use a wholesale, thoughtful look at all of the farm programs.  Even the "no cost" programs.  What should we support, how should we spend limited dollars, how should we spend limited natural resources, and what kind of food do we want?



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