U.S. sugar policies are complex.
A century ago, there was a joke in Europe that the sharpest graduates of the Imperial German army general staff college, who went into the railroad scheduling bureau, would end up in insane asylums after a few years of dealing with the intricacies of moving millions of troops to the French and Russian frontiers.
The same is true for those trying to master U.S. sugar and sweetener policies — but bear with me.
The policies are so complex because the politics are so complex. It was simpler a century ago. A long-established import tariff raised the price of foreign-made sugar, allowing U.S. cane producers in Gulf Coast states and Hawaii, together with beet-growers in sundry regions, to remain profitable. Imports back then from our new colonies of Puerto Rico and the Philippines and our quasi-colony of Cuba got special treatment in the form of preferential quotas.
People did use other sweeteners, including corn syrup, but sugar itself had an overwhelming market share. Imports of candy and other finished foods were small.
Fast-forward 100 years, and some things are the same. Cane and beet growers, now as then a small fraction of all farmers, still wield disproportionate political power. And these producers thus are protected from international competition by import restrictions, now in the form of a “tariff-rate quota.”
But they also enjoy a statutory price floor requiring the government to step in if the price falls below either 18 cents or 22.9 cents per pound for raw cane or refined beet sugar, respectively. As with many other commodities under the Agricultural Adjustment Act of 1933, this is accomplished with “non-recourse loans.” Producers get loans from the U.S. Department of Agriculture by pledging sugar as collateral. It is valued at the floor price specified in law. If the market price falls below this, the producer can simply not repay the loan and the government has no legal recourse other than to take ownership of the sugar. In practice, it is a mechanism for the government to buy sugar if it ever falls below the supported price.
However, unlike programs for wheat, cotton, corn and other commodities in the 1950s and 1960s, there is no intent that this happen regularly. The import quotas are calibrated to keep U.S. domestic “market” prices high enough that sugar purchases by the government usually are not necessary. Higher prices for producers come out of the pockets of consumers in the form of higher sugar prices and not from the pockets of taxpayers. This year, however, is of one of the unusual times.
And there are other complications: Because of new technology and in great part because of artificially high sugar prices as a result of these policies, high fructose corn syrup has taken over a large share of the total sweetener market. This artificial increase in demand for their product makes some 300,000 U.S. corn producers enthusiastic supporters of policies that, on the surface, only benefit a few thousand actual sugar producers.
Because U.S. domestic sugar production has not fallen, the adjustment in demand to increased high fructose sweetener use has come in reduced sugar imports. That hurts U.S. sugar refiners that historically were in the business of refining imports. Largely located in port cities such as New Orleans or Charleston, N.C., on the Gulf or southern Atlantic coasts, these businesses were established to service traditional imports from the Caribbean. But that business has diminished over time.
This segment of the refining industry has some political power, and it has banded together to lobby for its interests in a way that it did not 20 or 30 years ago.
As an additional complication, changes in trade patterns, particularly as a result of the North American Free Trade Agreement, mean that food manufacturers, especially of candy and confectionary items, face competition from Canadian and Mexican companies that have access to cheaper sugar. Even sugar-containing food ingredients, such as some powdered cocoa, made in these countries, have a cost advantage over identical products made here. As a result, U.S.- headquartered food businesses have an incentive to move plants north or south of the border. So the sugar-using industries have also formed a lobbying association.
This increasing level of political organizing has made sugar policy more of a minefield for politicians. Consumers, who bear the brunt of the program through higher prices at the cash register, are about the only group that is not organized and vocal.
Another complication, this one for the USDA, exists in the form of a statutory mandate that the department operate the program at lowest possible cost to the Treasury. Simply buying up sugar by accepting it as defaulted collateral on non-recourse loans would cost some $300 million this year. Further cutting imports on short notice would outrage refiners. So, the USDA is using a complicated mechanism to subsidize exports even though we will remain a net importer. The subsidies go to the coastal refiners to pay them for refining U.S.-produced raw sugar and then exporting it.
People who look at this objectively have to shake their heads. No one seems to be asking the underlying question of why consumers in general should be transferring money to sugar growers, who are some of the wealthiest farmers in the country. (Why that is true is the subject of another column.) The effect of the program is greater personal wealth for sugar producers funded by a tax on food, perhaps the most regressive tax one could imagine.
Yes, the sugar lobby will always wave the bloody shirt of subsidies to sugar producers elsewhere in the world, although these are highly overstated. And yes, there are distortionary policies in Europe and other areas, too. So the “world price” of sugar is not a free-market price by any means. Nor is it necessarily the price that would prevail if we started importing sugar freely.
Yet given all that, the sugar program remains a poster child for what is wrong with U.S. governance today: a small but well-entrenched special interest group can use its political muscle to take money from the general populace.