The United States may become a surplus producer of sugar in the near future. If so, the government may be forced to purchase excess production, with the bill going to taxpayers.
Sugar producers in the United States have received varying degrees of government support for almost 200 years. Since the 1930s, that assistance has taken many forms: acreage restrictions, direct payments to producers, tariffs, and import quotas, the set of policies being collectively known as the sugar program. The most important of the policies used has been the import quota, whose level can be adjusted in relation to domestic supply and demand in order to maintain a high price for sugar. As a result, domestic sugar producers have benefited, consumers have had to pay high retail prices, and the government has been able to minimize costs to itself.
Recently, however, partially as a result of the sugar program, the structure of the sugar industry has changed enough to suggest that the program may no longer be able to operate as it has for so long without cost to the government. Indicative of the industry changes are higher levels of domestic sugar production, particularly of beet sugar, greater substitution of corn sweeteners, and lower per-capita sugar consumption. The demand for imports has accordingly shrunk, and if current trends continue, and the United States no longer needs imports, the government will not be able to support the sugar price without cost to the taxpayer.
As domestic production is unrestricted, and consumption is expected to remain about the same, growth of domestic output will cause the sugar price to fall if supply exceeds demand. If the government expects to maintain a high price for sugar, it will be forced to purchase surplus production—that is, output over and above the level that results in the desired support price—as is done with other supported commodities such as wheat and corn. Government purchases of surplus commodities generally entail costs for storage and disposal, usually at low prices. Thus, taxpayers would have to share the burden of the sugar program along with consumers. This would be an unwelcome prospect at a time of high budget deficits and close budget scrutiny.
A drop in demand
In recent years, U.S. sugar output grew from 5.8 million tons in 1983/84 to more than 7 million tons in 1987/88. Much of the increase in domestic output came from expansion of beet sugar production, which grew from 2.6 million tons in 1979/ 80 to 3.6 million tons in 1987/88. Meanwhile, imports fell by more than two-thirds in just four years—from over 3 million short tons in 1983/84 to less than a million tons in 1987/88. Part of the fall in imports has been due to declining sugar consumption. As in other industrialized countries, per-capita consumption of sweeteners in the United States is already high—more than 130 pounds of caloric sweeteners per person in 1988. Consequently, demand is relatively inelastic or unresponsive to price and income changes, though some growth occurs as population increases.
Another factor contributing to the decline in sugar demand since the mid-1970s has been the development of corn sweeteners, particularly high-fructose corn syrup (HFCS), a lower-cost alternative that can be substituted for sugar in many industrial uses. Consumption of HFCS increased from half a million tons in 1975 to 5.8 million tons in 1987, which represents 31 percent of the sweetener market as compared with 4 percent in the earlier year. The share of refined sugar consumption dropped from 71 percent to 40 percent during the same period of time.
HFCS consumption is believed to have peaked, although the long-term threat remains from the development of a low-cost crystalline or dry fructose product which would compete directly with table sugar consumption. Substantial profits from HFCS production are now going into research to develop the crystalline alternative. A small portion of the sweetener market was also lost to low- and non-caloric sweeteners, which held about 13 percent of the market in 1987.
Structure of the sugar program
The basic structure of the sugar program that influenced much of the industry's development was defined by the Sugar Act of 1934. Legislation since then has altered significant details, but the program's overall goals and structure remain essentially the same. The aims of the program as defined in 1934 were to balance the needs of producers and consumers. Specifically, the legislation sought to retain domestic sugar beet and sugarcane production in the continental United States, to ensure adequate sugar supplies at reasonable prices for domestic consumers, and to control expansion of domestic production.
The program was successful in assisting producers. It did so by maintaining a high and stable price for domestic sugar relative to the world price. (The world price is used in this context as a reference price, or a basis for comparing what the domestic sugar price might have been if government policies had not intervened.) Until 1974, the main policy instruments were an annual price objective—which was similar to a target price—a foreign import quota, and domestic acreage restrictions. The import quota, determined as the difference between anticipated domestic production and estimated annual consumption requirements, was adjusted throughout the year to ensure that the predetermined price objective was met as closely as possible. The success of the program in achieving the price objective and maintaining the domestic price above the world price can be seen in figure 1. Between 1950 and 1974, the U.S. price of raw sugar fell below the world price in just one year (1963), and then by less than 4 percent.
The program was not quite as successful in meeting its other goals. It neither kept the cost of sugar down for consumers nor prevented industry expansion. Expanded sugar production did not pose much of a problem prior to 1974 because acreage restrictions could be imposed legally to prevent surpluses. Although the program had always had its critics, consumer dissatisfaction had not generally been a problem. After all, sugar represented only a small portion of the total consumer food budget.
But when world and U.S. sugar prices virtually tripled within a year in 1974, consumer opposition rose sharply. The high consumer costs of the program had long been under attack by legislative and other opponents. They now sought the termination of the program and succeeded in mobilizing consumer and legislative support to end it. Besides, the price of sugar was high enough that no support was necessary.
However, protection was not suspended for long. The strength of the program's supporters endured. When world prices began to fall again from their record 1974 levels, the government started to phase in price supports again in 1977. Statutory approval for a comprehensive program was renewed in 1981.
The present program
The current sugar program, established by the Agriculture and Food Act of 1981, consists of a price-support-loan program, a defined minimum support price for raw cane sugar, and a market stabilization price (MSP). As with other agricultural commodity programs, the loan rate is the legislated price per pound at which sugar processors can receive financing from the government by committing raw cane sugar or refined beet sugar as collateral. If prices are favorable, the processor can repay the loan and market the crop commercially. If not, the sugar is forfeited to the Commodity Credit Corporation (CCC), the federal agency charged with implementing the commodity programs. Forfeitures entail budgetary costs for storage and disposal of surpluses, generally at prices lower than the support rate. However, the Food Security Act of 1985 required the program to be operated at no cost to the federal government after 1986. In fact, the program has operated without budget cost in the 1980s except in 1984.
The minimum support price for raw cane sugar is set at 18 cents per pound for 1986/90; the beet sugar loan rate is somewhat higher, since it must be set at a fair price in relation to the sugarcane loan rate. (One of the effects of the higher support price for beet sugar has been to stimulate production.) The MSP is established at the level at which processors would prefer to sell raw sugar commercially rather than forfeit it to the CCC. It is determined as the sum of the loan rate plus interest charged on the loan, a freight charge, and a small marketing incentive.
The key instrument enabling the program to function without cost to the government is still the import quota. The quota, which was kept at non-binding levels between 1975 and 1981 when prices were generally high, was once again made restrictive in 1982. The authority for the quota derives from the Tariff Schedules of the United States, and is vested in the president. The quota is required to be set with due consideration given to the interests of domestic producers and materially affected contracting parties in the General Agreement on Tariffs and Trade (GATT).
The considerable flexibility provided by the import quota has enabled the sugar program of the 1980s to be as successful as the earlier program in keeping the price of U.S. sugar well above the world price (figure 1). The average price of raw sugar in the United States in 1987 was about 22¢/1b as compared with a world price of 6.7¢/1b. The retail price of refined sugar in the United States was close to 38¢/1b.
However, by insulating the United States from the world, the program has provided incentives for production, consumption, and trade different from those that would prevail if there were no program, and has redistributed income among such groups as producers and consumers. It has also created strong incentives for particular groups to exert political pressure on the program.
Gains and losses
Historically, the main beneficiaries of the sugar program have been sugar and other sweetener producers (growers and processors), refiners, and foreign suppliers. Domestic producers have benefited directly from the high and stable domestic prices guaranteed by the sugar program. Until 1974, the benefits accrued primarily from higher earnings due to the high support price. But in the 1980s, since there are no longer production restraints, producers have also benefited from increased volume as they expand output in response to the support price incentives.
Figure 1. U.S. and world raw sugar price comparisons
In recent years, program benefits to producers, as measured by the difference between the value of production at actual prices and at prices that would prevail if sugar were unprotected, have been estimated at $1 billion to 1.5 billion annually. The gains are unequally distributed, and larger producers stand to gain more, as benefits accrue according to output size. The benefits are concentrated among fewer than 10,000 sugar growers—in Hawaii, 5 corporations produce 90 percent of the sugarcane, and in Florida, 2 corporations produce more than half the crop.
By far the largest group of losers from the U.S. sugar program is consumers. They pay more both for direct sugar consumption and for sugar-containing products. The net consumer cost of the program in 1972 was estimated to be between $1 billion and 1.5 billion (in constant 1982 dollars); by the early 1980s estimates of consumer costs had risen to more than $2 billion. The annual cost of the program works out to about $40 for an average family of four. Moreover, the burden is disproportionately greater on low-income consumers, who spend a larger share of their budget on food.
Corn sweetener producers have gained from high sugar prices and the associated incentives for higher production. By keeping sugar prices well above the cost of manufacturing HFCS, the program has helped the development of the corn sweetener industry. The increasing substitution of corn sweeteners for sugar has meant the transfer of benefits estimated at $1 billion from sugar producers to producers of HFCS. Users of these sugar substitutes, including beverage and food product manufacturers and consumers, have also derived some benefits from substituting the lower-priced product.
Exporters of sugar to the United States have long enjoyed the benefits of earning quota rents, defined as the difference between the U.S. and world prices times the export quantity sold in the U.S. market. In 1982/83 the foreign quota rent was estimated at $650 million. Thus exports to the U.S. market represented an important source of foreign exchange earnings for developing countries like the Philippines and Brazil and the Caribbean nations.
In the 1980s, quota rents have shrunk as imports have fallen. They were estimated at $184 million for 1987/88. Particularly hard hit have been the countries that have exported a large share of their output to the United States. Cuts in the U.S. quota over the past four years are believed to have cost the Philippines $150 million annually. Shrinking U.S. imports have in turn depressed world prices further. Thus, exporting countries are also hurt by earning less revenue from sugar sales to countries other than the United States. U.S. consumers, meanwhile, are no better off because they continue to pay the high maintained price.
Other former beneficiaries of the sugar program who have recently become losers are sugar refiners. A virtual ban (including a tariff and sanitary standards) on imported refined and liquid sugar long protected mainland sugar refiners. But now declining quotas for imported sugar have reduced demand for refining capacity and caused employment losses in that industry.
The domestic food manufacturing sector has also been affected. It has sustained increasing competition from imports of lower-priced sugar-containing foods. Imported processed foods containing sugar have a cost advantage from access to sugar at lower world prices. Inability to compete with these lower-priced imports could cause domestic food manufacturers to go out of business or induce them to move processing facilities overseas. In either case, the United States would suffer employment losses.
As the structure of the U.S. sugar market changes in response to the varying incentives provided by the sugar program, the incidence of gains and losses also shifts. If recent trends continue and the United States becomes a surplus producer, federal budget costs will arise as the government will be compelled to purchase, store, and dispose of surplus sugar if it wants to continue to maintain a high price for sugar. Taxpayers will thus be forced to share the cost of the program, along with consumers.
The option of sugar policy reform
That taxpayers may have to pay the bill is not inevitable. Such an outcome can be avoided in a number of ways. Sugar producers could opt to voluntarily impose production restraints upon themselves. Alternatively, the government could impose mandatory production controls or marketing quotas that would continue to place the burden of support on consumers rather than taxpayers. However, mandatory controls raise yet another set of problems, as does any market intervention program.
A less drastic alternative for the government would be to attempt to reduce incentives for domestic production by gradually lowering the loan rate. How-ever, recent attempts to do so have not been successful. For example, a modest proposal in 1985 to lower the support rate from 18¢/lb to l5¢/lb was defeated in the House of Representatives.
A significant stumbling block in sugar policy reform is the historical strength of the producer lobby. Recently, the producer lobby has gained even more strength from corn and corn sweetener producers, and from the general farm lobby as well. By contrast, consumers, who are the main losers from the program, represent a large and diversified group with varied interests. As such, they are difficult to mobilize to press for reform except in an unusual year such as 1974.
However, reform cannot be avoided much longer. Although the 1988 drought offered a temporary reprieve, technological developments, program pressures, and the budgetary deficit are likely to force the issue, perhaps as early as the next farm policy debate in 1990.
Rekha Mehra is a policy associate at the National Center for Food and Agricultural Policy. This article is drawn from research she is conducting on U.S. sugar policy under a cooperative agreement with the Economic Research Service of the U.S. Department of Agriculture.
A version of this article appeared in print in the January 1989 issue of Resources magazine.
