Academic journal article AEI Paper & Studies

Analysis of the US Sugar Program

Academic journal article AEI Paper & Studies

Analysis of the US Sugar Program

Article excerpt

NOVEMBER 2017

AGRICULTURAL POLICY IN DISARRAY REFORMING THE FARM BILL

Executive Summary

We review the key features of the US sugar program and its welfare, trade, and world price implications. The sugar program is a protectionist policy, which increases the domestic price of sugar above the corresponding world price. It restricts imports of raw and refined sugar, depresses world sugar prices, and substantially changes the mix of sweeteners used in processed food. Domestic markets are distorted, sugar users are effectively taxed by the program, and sugar producers are subsidized by it.

The welfare transfer to sugar growers and processors is quite large in the aggregate, hovering around $1.2 billion. Losses to households are diffused, about $10 per person per year but large for the population as a whole, in the range of $2.4-$4 billion. Net welfare losses are smaller and are in the order of $0.5-$1 billion. Gains to producers are concentrated in a few hands, especially in the cane sugar industry. Labor effects from lost activity in food industries are between 17,000 and 20,000 jobs annually. The sugar program distorts trade in sugar-intensive imports, which increase to abate the high cost of sugar. The North Atlantic Free Trade Agreement has created additional entanglements as US sugar interests have recently pushed the US government to impose trade management practices on sugar imports from Mexico.

The US sugar program is a protectionist scheme destined to transfer income to sugar growers and processors at the cost of sugar users and consumers. The program's nature has changed little over time, and it works by reducing the flow of sugar imports to the United States. Its existence had been threatened under the North American Free Trade Agreement (NAFTA) because of increasing imports from Mexico, but a recent bilateral US-Mexico agreement has removed this threat. The entrenched US sugar lobby has been effective at blocking any meaningful reform and removing threats from preferential agreements with other sugar-producing nations. Sugar interests are concentrated, whereas losses born by most consumers and users are more diffuse and small at the individual level. Yet collectively, the losses to consumers and users are large in aggregate for the country, in the order of $2.4-$4 billion. The US sugar program should be repealed.

In the following sections, we provide some background and review of the US sugar program's history; its key features; its impact on producers, consumers, and users; its cost to society; and its impact on trade and world prices. We also devote some attention to recent market and policy developments under NAFTA. Policy implications are drawn.

Background

The United States is one of the largest sugar producers in the world, surpassed only by Brazil, China, the European Union, India, and Thailand. In 2014-15, the United States produced almost 7.9 million metric tons raw value (mtrv) of sugar and is estimated to produce 8.2 million mtrv in 2015-16. (1) This accounts for 4.4 percent of world sugar production in 2015 and 4.9 percent in 2016. Table A1 provides detailed production, use, and trade information for the US sugar market.

Sugar producers and processors in the United States benefit from government support in the form of price support loans, domestic marketing allotments, tariff-rate quotas (TRQs), (2) and the diversion of excess sugar-to-ethanol production. The sugar policy is part of the US farm bill and is administered by the US Department of Agriculture (USDA) ideally at no budgetary cost to the federal government, when possible, by avoiding loan forfeitures. (3) Through the sugar program, sugar producers and sugar processors have enjoyed domestic raw sugar prices well above the world sugar prices, varying from 238 percent over the world price in 1999 to 17 percent over the world price in 2013 (see Table 1).

Brief History of the US Sugar Policy

The US sugar industry has enjoyed trade protections since 1789 when the first import tariff" against foreign-produced sugar was imposed to generate government revenue. …

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