Overview
The United States has maintained a system of protections for our domestic agricultural products dating back to our Founding, recognizing that a reliable food supply was critical to our nation’s health, wealth and safety.
The specific policies for specific types of agricultural products have changed over the years, with a new “farm bill” coming before Congress approximately every five years in recent times. Indeed, the last farm bill was approved in 2008, and a new one is being considered in 2013.
Some frequently asked questions…
When talking about the U.S. “sugar program,” what exactly are people referring to since domestic sugar producers do not receive direct taxpayer subsidies?
U.S. tariffs, non-recourse loan structure, and marketing quotas.
Today’s sugar policies actually were created after foreign dependence on sugar led to rationing in World War II way back in the 1940s. The program was completely eliminated in the early 1980s, but was reinstated because of unexpected price spikes caused by global shortages.
Didn’t the Government Accounting Office (GAO) issue a report some years ago criticizing the sugar program and used its research to call for ending protective quotas and tariffs for the U.S. sugar industry?
Yes, it did. Wayback in 2000, long before the full effects of NAFTA kicked in.
It should also be noted that the U.S. Department of Agriculture itself strongly disagreed with the GAO’s conclusions, stating that the report’s “methodology was not adequately developed or justified,” that the “documentation of the economic model was inadequate,” and that “in numerous places the model’s results are inconsistent with (the Agriculture Department’s) description of the model or alternative sources.”
Indeed, in a letter to the GAO on May 16, 2000, Keith Kelly of the USDA specifically wrote that “The validity of the results are suspect and should not be quoted authoritatively.”
It should also be noted that in 2000, the difference between world sugar prices and U.S. sugar prices was far greater than it is today. Since 2010, there have been a convergence of U.S. and world markets to the point that, today, it is more expensive to ship in sugar from abroad than to source it domestically.
How do other nations distort the world price of sugar?
As explained by the U.S. Department of Agriculture in a letter to the GAO in 2000, “The world price is significantly below estimates of costs of production for even the major world sugar producers….
“Most developing sugar-producing nations pursue policies that simultaneously limit sugar imports (eliminating competition to their sugar producers), restrict domestic sales into their own markets (extract rents through high consumer prices), and then export the remainder into the world market (lower the world price of sugar).”
No country has as profound effect on global markets as Brazil, which controls nearly half of global sugar exports. Brazil’s rise to dominance was directly fueled through a complex web of subsidies, including direct payments, ethanol usage mandates, preferential loans, and debt forgiveness. A detailed examination of its subsidization can be found here.
What does “dump” sugar mean?
Approximately 80% of the sugar produced around the globe is consumed in the country where it is produced and is never traded on an open market. The remaining 20% is what sugar’s opponents call the world market. It is what the American Sugar Alliance calls the “dump market” because it consists of excess sugar that, through the use of subsidies, has traditionally sold at much lower prices than world average production costs. Countries dump it onto that market in order to remove excesses from their domestic markets, which could depress domestic prices and threaten their sugar industries. America doesn’t put any sugar onto the dump market.
In comparing the cost of sugar in the U.S. to the world market price, are we comparing apples to apples?
No.
The U.S. sugar price includes transportation and storage costs factored in. The world price includes neither, which is why comparing U.S. to world prices is not a fair apples-to-apples comparison. For raw sugar, it costs 3 cents per pound to ship into the U.S. For refined sugar, it costs 6 cents per pound (because refined is food grade and must be shipped in a sterile environment).
To get a fair apples-to-apples comparison of U.S. and world prices, the transportation needs to be added to world price, since a buyer would have to pay that transportation cost if they purchased the sugar off the world market.
Hasn’t the United States lost manufacturing jobs because candy-makers such as Brach and Hershey moved operations to countries with lower-priced sugar?
While it’s true that some candy-makers have relocated some manufacturing operations out of the country, those decisions have less to do with the cost of sugar than the cost of labor, high taxes and government regulations.
Indeed, over the last decade or so, we’ve witnessed all manner of U.S. manufacturers that have absolutely nothing to do with sugar moving some or all of their operations overseas. This is not something unique to the sugar industry.
In fact, wholesale refined sugar prices are higher in both Mexico and Canada than they are in the United States and, in recent years, confectioners have been expanding and building new facilities in the U.S.
Isn’t it true that the government is buying surplus sugar from American farmers at inflated prices to use in ethanol?
Sugar producers like other crops and industries can qualify for operating loans that are repaid with interest. If sugar prices fall to historic lows and make it difficult for loans to be repaid, current sugar policy allows the government to purchase some of the surplus caused by subsidized foreign sugar to avoid loan defaults and ultimately reduce taxpayer cost. This sugar may be used in ethanol production but does not have to be.
Such actions are very rare. A $40 million purchase was made in July 2013, the first time sugar policy has cost taxpayers a dime since 2002.
If sweets and other products that use sugar were able to get cheaper foreign sugar, wouldn’t that save consumers money in lower food costs?
Not necessarily. That assumes that lower sugar prices would be passed along to consumers through cheaper product prices. That doesn’t happen because sugar is such a small percentage of a product’s price (it represents about 2 pennies in a candy bar).
As the American Sugar Alliance has pointed out, food manufacturers and retailers push for lower producer prices for one purpose, “to increase their corporate profit margins” rather than “pass lower ingredient costs along to consumers.”
For example, in 1983 a Hershey bar cost 35-cents. It contained 2-cents worth of sugar, which cost about 20-cents a pound. Today, a Hershey bar costs $1.39. It still contains 2-cents worth of sugar, which cost about 20-cents a pound.
Obviously, sugar farmers aren’t the ones responsible for higher food bills.
In fact, since sugar prices have plummeted in the last two years, food prices have not gone down but have actually gone up as manufacturers maximize profits.
What is the “NAFTA Loophole” as it relates to sugar?
US trade negotiators left a loophole in the NAFTA agreement for sugar that is now killing the U.S. sugar industry. It was probably unintentional, but that loophole essentially enables Mexico to become a portal for foreign sugar to enter the U.S. market. Here’s how…
If sugar is of Mexican origin (grown or refined in Mexico) then Mexico can ship an unlimited amount of that sugar to the U.S. Mexico can and does intentionally short its own market, then they import from Colombia, Brazil and others to fill the shortage – i.e. backfill their market.
All subsequent trade deals have closed this loophole. For example, under CAFTA, Central American countries must be surplus sugar producers in order to export. In other words, they must first fill their own market before sending here.
Mexico has used this loophole to 1) boost its own domestic prices to benefit its inefficient producers, and 2) dump sugar in America to artificially depress U.S. prices and harm its main competitors.
Is the “zero-for-zero” strategy of simultaneous worldwide elimination of all government subsidies, quotas and tariffs a realistic objective?
It’s a longshot, but that doesn’t mean we shouldn’t try.
Unless foreign subsidies are targeted (especially from the big exporters like Brazil, Thailand, Colombia, Mexico, etc.), then a free market can never take shape. And the first step to a free market cannot be U.S. disarmament while others refuse reform.
As the U.S. Department of Agriculture wrote in way back in 2000, “Awareness of the distortions in the world market for sugar is the reason that USDA prefers total world market liberalization rather than unilateral disarmament.”
That’s the essences of the “zero for zero” strategy.
