Reforms to Next Farm Bill in Jeopardy

Even before work on the next farm bill officially begins, which Congress will undertake early in 2007, difficulties have arisen domestically and from abroad that could hamper reforms to the system of rich subsidies and price-supports typical of U.S. agriculture policy.

In late July, World Trade Organization negotiators from the United States, European Union and other industrialized countries killed ongoing talks. The cause of contention was European farm subsidies—more specifically, sugar subsidies.

The tension dates back to April 2005, when the WTO ruled E.U. sugar subsidies illegal, accusing them of lowering the price of sugar on world markets and hindering competition in Europe. The E.U. has since said it has no plans to adopt further sugar policy reforms or to comply with WTO regulations.

“A lot of [the farm bill] is tied to the Doha round and our obligations under the WTO,” said Rep. Jeff Flake (R.-Ariz.). “That’s driving part of the process.”

Flake said the U.S. needs to reform its sugar policy regardless of what other countries do in their own markets. “We ought to do this simply because we want lower costs and we shouldn’t be about subsidies.”

But with market controls on sugar the standard practice in most countries, Flake concedes, the chances of initiating sweeping reforms at home are diminished.

“Politically, it’s a lot tougher to get rid of these subsidies when the other countries are doing it,” Flake said.

In July Flake was joined by a bipartisan coalition of 106 House members in signing a letter that asked the House Committee on Agriculture for “market-oriented reforms to the sugar price support program,” maintained in the 2002 Farm Bill.

Authors of the letter blame the U.S. sugar price-support program for “artificially high prices of sugar,” and the loss of jobs in food industry sectors like confectionery and breakfast cereal manufacturing where sugar is a staple ingredient.  

Others disagree.

“It’s not terribly surprising to see a letter like that,” said Jack Roney, director of economics and policy analysis for the American Sugar Alliance, noting that the number of signers represents less than half of those who traditionally vote for sugar policy.

“We’ve enjoyed large and increasing margins of victory each time that sugar has been voted on,” Roney said. “I think that Congress understands that this is a commodity policy that is working uniquely well because it’s the only commodity policy that is operating at no cost to tax payers.”

But, clearly, not everyone shares Roney’s sanguine perspective on sugar policy.

“Sugar industry representatives can say, I think disingenuously, that it is a no-cost program,” said Daniel Griswold, director of the CATO Institute’s Center for Trade Policy Studies. “It’s no-cost in terms of taxpayer outlays; it is costly everyday of every year in terms of higher consumer prices.”  

In the U.S. retail consumers paid about 43 cents per pound for refined sugar in 2005, the price for the second quarter of 2006 averaged 49 cents per pound, according to the USDA.

At the heart of U.S. sugar policy is an import quota regime that sets the amount of sugar imported into the U.S. on a country-by-country basis. The federal government then, essentially, sets the price of sugar through a series of support loans, import quotas and restrictions on the domestic supply of sugar.

Typically, 85% of sugar consumed in the U.S. is produced domestically. In 2005, U.S. farmers produced 7.8 million tons of refined sugar, while 1.2 million tons were imported.

Current sugar policy works on a system of guaranteed loans and price supports. The government loans money to sugar processors, generally co-operatives and corporations, who agree to pay sugar cane and sugar beet growers government-determined prices for the refined product, putting up sugar as collateral. Cane sugar is set at 18 cents per pound and beet sugar at 22.9 cents per pound.  

These processors can decide to pay off the loans with interest and sell the sugar on the domestic market, or forfeit the sugar and keep the loaned cash. If domestic sugar prices drop below the loaned rate, the processors can forfeit to the government up to 10% of the sugar at a one cent per pound penalty instead of paying the loans.

Policies on sugar have been part of American agriculture since the country’s inception. In 1789 the nation’s first Congress imposed tariffs on imported sugar as a means of raising revenues for the fledgling government and bolstering domestic sugar production.

The first federal sugar policy was enacted in 1934—the Jones-Costigan Act—which set domestic production limits, set prices, set limits on imported sugar, and raised a tax on sugar processing which was used to make direct payments to sugar producers.

The 1934 act remained the law of the land until expiring in1974. Upon the policy’s expiration sugar prices soared in the short-run but quickly dropped.

By 1981 the Department of Agriculture mandated a price support system and set the loan guarantee system for sugar cane and beet farmers. The policy has remained mostly unchanged since.

Critics of the program say it is high time to end sugar policy which many blame for artificially high costs of sugar and sugar containing products sold in the marketplace and even job losses in connected industries.

A recent Department of Commerce study of sugar policy was equally critical. The study said that in addition to the higher wholesale price for refined sugar in the U.S.—23.5 cents per pound, compared to the world price at 10.9 cents—price supports have cost the U.S. confectionery industry thousands of jobs.

Authors estimated that for each sugar industry job higher consumer prices saved, three jobs were lost in the confectionery manufacturing field.

Chicago, once a hub of American confectionery, lost 4,000 jobs in the industry between 1991 and 2001. Many of those jobs migrated to Mexico or even Canada.

Sugar industry commissioned studies have blamed the job flight more on costs of labor and health insurance than sugar prices.

The Commerce study, however, estimates that each job saved in the sugar industry costs consumers $826,000 per year.

The American Sugar Alliance disputes Commerce’s study, saying that its authors used flawed methodology and inaccurate numbers.

“That was a seriously flawed study,” Roney said, “And I think before long we are going to see the Commerce Department have to retract it because there has been so much uproar at how poorly it was done.”

Among the contested findings, Roney said, Commerce assumed U.S. sugar policy protects slightly more than 2,000 jobs. The American Sugar Alliance said the actual number is more like 140,000.

That figure comes from taking into account not only the 61,000 jobs in sugar production but all the jobs linked to the industry such as suppliers of fertilizer, seed and tires for trucks, among others.

Still, detractors say, sugar policy artificially props up sectors of an industry that can’t compete in an open market place without price supports and tariffs. Sugar beet farmers, traditionally, have reaped the benefits from sugar policy.

“There is no way they can compete in a global market,” Griswold said of sugar beet farmers. “They simply can not produce sugar for less than 20 cents per pound.

“They’re just inherently non-competitive and exist only because of this expensive sugar program.”

Roney said that simply isn’t true, noting that despite the fact the U.S. is the world’s second largest importer of sugar, the industry still moves forward.

Citing the Commerce study, Roney said, the sweetened food sector of America’s food industry grew at a 10% rate between 1997 and 2002 while the non-sweetened food sector grew at barely 5%. An indication that domestic sugar is still viable even after the hit it took when the soda pop industry, once a major purchaser of sugar, made the switch to High Fructose Corn Syrup.

Yet Roney, when asked about the industry’s competitiveness, said: “What you see is an industry that’s operating on the edge of profit and loss.” If that is the case with American sugar, then it seems likely that price supports are keeping much of the industry solvent.

Critics like Griswold see the sugar program as a hindrance to free-market competition and think that, in the end, it’s not just American consumers that will suffer but the sugar industry itself.

“In effect the U.S. sugar industry is slowly pricing itself out of the daily diets of Americans.”