Sugar Daddy

US subsidies to domestic sugar cane and sugar beet growers have resulted in huge collateral damage to domestic industries and overseas producers.

In 2004, U.S. companies paid 23.5 cents for a pound of refined sugar while the “world price” was 10.9 cents. The candy and chocolate industries were some of the hardest hit when U.S. sugar prices rose as much as three times the world price in the late 1990s. The U.S. Commerce Department attributed the closing and migration of these industries to Mexico and Canada to artificially high domestic sugar prices (WSJ 2/9/2006).

This gaping differential between domestic and world sugar price has been maintained by a sugar import quota system aimed at protecting the sugar growers in the U.S. To keep the domestic price stable, the import quota is lowered or raised depending on the domestic output. But the absence of domestic output restriction on sugar canes and sugar beets and rising competition from artificial sweeteners and corn syrups has led to ever lower quotas to keep the U.S. price stable. 1989 figures showed that imports shrank by 63% since 1982 (BW5/8/1989).

Not surprisingly, sugar cane and sugar beet growers are doing well. A 1990 Fair Farm Policy study of Minnesota farm data showed that beet growers made an average profit of $206 an acre from 1984 to 1988. That is about 8 times what corn and soybeans made (WSJ 6/26/1990). Large beet growers took in $100,000 to $200,000 each of sugar benefits.

Such largesse of over $1 billion a year (BW 5/8/1989) comes directly from sugar consumers through high prices for sugar-containing goods. And to maintain this windfall profit, the sugar lobby has contributed generously to the campaign funds of federal lawmakers. Such contributions amounted to $3.3 million in the 1983-1989 period (WSJ 6/26/1990).

Wheat and corn farmers are doubly hurt in Minnesota. Because they are not members of the local sugar cooperative, they cannot switch to producing sugar beets. But sugar beet producers can expand their output to the capacity of the cooperative’s processing plant. As a result, they bid up the rent of farmland for the less-richly-supported wheat and corn farmers.

But the circle of hurt is much wider. Throughout the 1980s, shrinking U.S. sugar imports has allegedly pushed many sugar growers in the Andes to coca production. And the supported expansion of Florida’s sugar cane industry has been linked to the degradation of the Everglades.

Sugar protection is a classic case of price support leading to excess supply or surplus. The price support sets up a price floor (above the market-clearing price) below which the supported price is not allowed to fall. This artificially high price encourages quantity supplied and discourages quantity demanded leading to excess supply or surplus. This surplus is absorbed by reducing import quotas. As a result, overseas low-cost producers are denied a legitimate market in the U.S. Although the sugar industries are happy, the collateral damage to the rest of the American society is very high.