Time to End Big Sugar's Sweet Deal

Time to End Big Sugar's Sweet Deal

May 08, 2006

Sugar is already shaping up to be a contentious issue in upcoming debates on the 2007 omnibus farm bill. The call for dismantling the antiquated sugar support system comes from a wide range of people and organizations. The costs of the U.S. sugar regime include higher food prices for U.S. consumers and thousands of lost jobs in sugar-using industries. In addition, the U.S. sugar program causes environmental damage, particularly in Florida, and blights economic opportunities for many small farmers in developing countries.

As is true with many government programs, the sugar program’s benefits are concentrated and the costs are diffuse. It principally benefits large sugar cane producers in Florida and Louisiana and sugar beet farmers in 14 upper-Midwestern and Western states. For those who benefit, the rewards are significant—the General Accounting Office estimated in 1991 that 42 percent of the sugar grower benefits went to only 1 percent of all sugar farms, or 150 farms. Some 33 sugar farms received over $1 million in annual benefits.

No wonder the sugar industry wants to keep such a sweet deal.

However, this time around for a new farm bill, pressures to reform the sugar program are multiplying: The tighter federal budget, less solidarity among agricultural producers, loosening of some import restrictions on sugar, and agricultural reform looming in World Trade Organization (WTO) negotiations.

Tighter federal budgets and the need to reduce the federal deficit are sure to play an important role in shaping farm policy. Policy makers may finally look askance at providing generous support for agricultural programs that mainly benefit a small segment of the farm sector.

The driving force for any farm bill is the array of commodity programs that set out the workings of the complex system of farm subsidies, direct payments to farmers, counter-cyclical payments, price supports, and other programs to support farmers’ incomes and prices.  Besides this direct support, farm bills include other special farm assistance, such as agricultural loan programs, crop insurance and disaster assistance, rural development business assistance, land conservation and reserve programs, and programs for marketing agricultural products.

Stuck in the 1930s

Many of these farm programs had their origins during the Great Depression, when commodity prices plummeted as global demand for agricultural goods dropped sharply. Some of the agricultural support programs were to be temporary—to prop up farmers’ incomes when the bottom fell out. Others were enacted in recognition of the role that U.S. agriculture played in the nation’s economy.  In the U.S. in 1930, for example, 21 percent of the workforce was employed in agriculture, and agriculture’s share of the total Gross Domestic Product (GDP) was 6.8 percent, according to the U.S. Department of Agriculture’s Economic Research Service.

But the U.S. agricultural sector has changed radically since the 1930s. Today, very large and highly mechanized farms predominate, employing substantially fewer people. With the U.S. a highly diversified economy in the 21st century, farming accounted for only 1.4 percent of total U.S. employment in 2001, and only 0.7 percent of U.S. GDP.

The U.S. sugar program, with its price supports and import restrictions, also had its origins in the Great Depression. Restricting the sugar supply to ensure a minimum price for sugar farmers remains the crux of the program. The sugar program regulates both the amount of sugar cane and sugar beets domestic producers can sell in the U.S.—through the use of “marketing allotments”—and the supply of foreign sugar that can come into the country—through import quotas. To ensure a minimum price for sugar producers and processors, the U.S. Department of Agriculture (USDA) provides loans to sugar processors, with the proceeds of the loans then paid to the producers at the minimum payments levels set by USDA. As a result, sugar in the United States costs two to three times the world market price. A GAO study in 2000 estimated that eliminating the sugar program could have resulted in an estimated welfare gain in 1998 of up to $1.8 billion if cost savings were passed on to consumers. More recently, the OECD estimated that the cost of U.S. sugar policies to American consumers in 2004 was $1.5 billion.

New Competitive Pressures

Import quotas for sugar are administered by USDA and the U.S. Trade Representative, and must be consistent with the U.S. commitments to the World Trade Organization to allow 1.256 million short tons of imported sugar to enter the U.S. each year. That amount, allocated to 41 countries, can enter the U.S. duty-free or with a low tariff.  Import amounts above that quota face a stiff tariff, unless the U.S. domestic supply has a shortfall in meeting demand, as it did in 2005, especially after Hurricane Katrina.

However, under the North American Free Trade Agreement, in just a few years Mexico will be able to ship its sugar surplus to the U.S. market duty-free (although U.S. officials argue that a different agreement was made in a side letter). If indeed this occurs in January 2008, the U.S. will not be able to maintain the price support program, which depends on the government restricting the supply of sugar.

The U.S. is facing other international pressures to reform its domestic agricultural support programs, including the sugar program. With tight deadlines looming and not much progress to show, the World Trade Organization is struggling to advance the Doha Development Agenda to better integrate developing countries into the world trading system. The key to success is reform of protectionist agricultural programs. Sugar reform should be high on that agenda.

Political Tide Turning

In negotiations and debate on farm bills, usually the farm sector bands together to get broad support for commodity programs.  But the sugar industry’s aggressive lobbying against the U.S.–Central America–Dominican Republic Free Trade Agreement alienated many other agricultural interests that saw the trade pact as benefiting their producers. Large agricultural producers are still frustrated that a small segment of the industry can hold up agreements that they see as benefiting the vast majority of farm interests. Sugar cane and sugar beets account for only 1 percent of total U.S. farm cash receipts. 

Sweetener-using industries, too, are accelerating their long-time quest for sugar reform.  Facing steep domestic sugar prices, some candy manufacturers have moved their operations to other countries; others have experienced significant job losses, as domestic companies paying high sugar prices find it hard to compete in world markets. A U.S. Department of Commerce study in February 2006 found that limiting sugar imports was “a major factor” in the loss of 10,000 jobs in candy manufacturing.

A new force pressing to reform the sugar regime is the Sugar Reform Alliance (SRA). The SRA, coordinated by the Competitive Enterprise Institute, is a working group of non-profit organizations dedicated to the elimination of the U.S. sugar program. SRA participants include consumer groups, international aid organizations, environmental groups, taxpayer groups, and think tanks from across the political spectrum, including CEI, the National Taxpayers Union, Citizens Against Government Waste, Consumers Union, Consumer Alert, Consumer Federation of America, Americans for Tax Reform, Consumers for World Trade, Oxfam America, Hudson Institute’s Center for Global Food Issues, Foundation for Democracy in Africa, DKT Liberty Project, and the Free Enterprise Fund.

The Alliance points out the sugar program’s costs to consumers and taxpayers, the lost jobs in sugar-using industries, the environmental damage that the program encourages, and the harmful effects on developing countries denied access to the U.S. market.

SRA and other opponents of the sugar regime realize that pointing out the harmful effects of the program is not enough.  The next step is to provide alternatives for policy makers to consider in their deliberations on the 2007 farm bill.

A new white paper published by CEI points to some possible approaches to eliminate or phase out the sugar program (“Is the Sugar Program Solvable?” http://www.cei.org/gencon/025,05263.cfm). It won’t be a simple task—“Big Sugar” has enormous political clout in Congress and a formidable lobbying machine.  Yet with opponents beginning to coalesce and economic and trade pressures accelerating, opportunities for reform may be possible.