Ed Lotterman: Why do we treat sugar differently than oil?

December 6, 2013 

In our nation we often follow radically different policies with regard to products that aren’t all that different from an economic perspective. Why we do so often isn’t clear, but these anomalies can really make one think.

Take petroleum for example. I was traveling on the Gulf Coast, and everywhere you go from Baton Rouge to New Orleans, Gulfport, Biloxi, Pascagoula and Mobile, oil related economic activity is striking.

Obviously, sustained high prices are fueling prosperity in the petroleum sector. But think of how much more there might be if we took a few simple steps. What if we restricted imports of crude oil? We could set a minimum price for gasoline above the world price with the government offering to buy up any amount that refineries could not sell at that price. Think of how many more jobs there would be and how much spending both by producer firms and their well-compensated employees!

Somehow, I don’t think this idea is going to fly. The argument that the nation is better off by increasing the price of gasoline never is a winner among the general public or, by extension, politicians. So why does no one complain when we do those very things for sugar?

The question is relevant because the U.S. Treasury is paying out about $53 million to compensate sugar companies, largely farmer-owned cooperatives, for selling sugar at a loss to ethanol plants to convert into fuel alcohol. That seems crazy. Yet neither voters nor taxpayers ever get upset about the situation.

One might rephrase an old adage so that it goes: “Oh, what a tangled mess can arise when first we practice to subsidize.” For that is what we are doing, using the power of government to raise the income of a target group, in this case sugar beet and cane farmers, above what it would be in a free market. We avoid making the sort of direct payments from the U.S. Treasury to sugar producers that we commonly do to growers of wheat, corn and other field crops. Thus, the sugar subsidies are indirect, but they remain subsidies, nevertheless.

The most basic step is that we restrict imports of sugar. We do this via a “tariff-rate quota” that levies a tax on them. But it is not a flat tax across the board on all sugar imports. Instead, many countries are each given a slice of an overall quota that can be brought in paying a low tariff. Each country’s share of the quota depends on its share of U.S. imports about 40 years ago.

Above that specified amount, sugar imports are subject to a higher tariff. These two restrictions, a relatively low tax on one tier of imports plus a higher tax on additional ones, has the intended effect of raising the prices that U.S. sugar producers get above world levels. Of course, that also means U.S. consumers pay more for sweeteners, just as they would if we tried to increase the income of U.S. domestic oil producers by taxing imports of petroleum.

Just how much extra they pay is not clear. Much of the world’s sugar trade involves preferential deals between countries that are far from free-market. Many countries subsidize their sugar industries to some extent. The “world price” is a residual for whatever does not fall into non-market trade deals. The same price would not prevail if the United States, the world’s largest sugar importer in absolute terms, did away with all remaining import restrictions.

But these restrictions do have some effect and probably result in a retail sugar price that is 3 to 10 cents per pound higher than it would be if we treated sugar like crude oil and allowed its free importation.

Because we consume about 45 pounds per person per year, this means a family of four might pay an extra $5 to $18 per year. Compared to common gasoline price fluctuations, this is peanuts. On a national basis, it implies a transfer of $400 million to $1.4 billion from the pockets of consumers to those of producers. Perhaps that is infuriating, but it’s not large compared to other “rent-seeking” activities.

But there are further complications. Sugar consumption has dropped considerably in recent decades, but that of sweeteners has not. Higher sugar prices resulting from U.S. policies make high-fructose corn sweetener a more viable alternative to sugar in beverages and other processed foods. U.S. consumers don’t just pay more for sugar itself or for foods containing it, they pay more for all sweetened foods, even those containing sugar substitutes. And use of sugar substitutes is about as large as sugar itself.

So it is not just a few thousand sugar beet or cane farmers who benefit, but a few hundred thousand corn producers.

There are still further wrinkles. We guarantee a minimum price to sugar companies via “nonrecourse loans.” The companies can borrow from USDA, putting sugar up as collateral at the fixed minimum price. If the market price falls below this, the companies can default on the loans and the government has no recourse except to seize the sugar.

But there is also a provision to operate the program at lowest net cost to the government. That turns out to be simply paying some sugar companies to sell enough sugar to ethanol plants to keep the market price up to a point where the government does not ending up owning thousands of tons of sugar. That is what is going on right now.

One could go still further about how higher sweetener prices raise rents and sale prices for land where corn can be grown. That benefits absentee landlords like me, but not young farmers. And the effects of the Canadian-U.S. Trade Agreement and its successor North American Free Trade Agreement are a further complication. The mess gets more and more tangled, the further you get into it. And no one, except for the libertarian wing of the tea party, pays much attention to it.

Write Ed Lotterman at ed@edlotterman.com.

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