Protection for the US sugar industry is losing political support; Sugar has cost taxpayers $278.2m in 2013

November 14, 2013 7:31 pm

Commodities: A sweet deal

By Gregory Meyer in New York and Stephanie Kirchgaessner in Washington

The US government’s vast assets include office buildings, mineral resources, aircraft carriers and national parks. This year it added mountains of sugar. Warehouses from North Dakota to Louisiana are piled high with 296,500 tons of the sweet crystal, since October 1 the property of the Department of Agriculture. In coming days, the agency says it plans to sell off its stocks at a “substantial loss per pound”. Sugar has cost taxpayers $278.2m in 2013.In an age of spending cuts, the unusual transfer into the government’s reluctant hands is an embarrassment for backers of US sugar policy, which is meant to keep domestic prices higher than world sugar prices without costing taxpayers a dime.

The programme, in place since 1981, is up for debate in Congress as part of the farm bill, which is negotiated every five years. “We’re hoping to keep our friends with us. It’s been a tougher sell, but we aren’t done yet,” says Paul Rutherford, who grows sugar beet on 550 acres in Minnesota.

Although political support for protecting sugar is waning, Mr Rutherford has no immediate need to worry. Even as food subsidies for the poor and payments to grain farmers face cuts, there is universal agreement that sugar will stay protected.

The survival of a programme that supports fewer than 5,000 US sugar farms testifies to the clout of small but intensely focused industry lobbies in Washington. The American Sugar Alliance, one such group, has spent about $2.2m this year alone.

It also illustrates the difficulty of adhering to free-trade principles in a commodity that is heavily subsidised around the world. Despite protectionist measures, the US sweet tooth requires millions of tons of raw sugar imports – imports that led to this year’s government sugar purchases. Protection of sugar will be a sticking point in the Trans-Pacific Partnership trade talks between the US and 11 other nations.

The US sugar industry unites an alliance of growers from the far south and north of the country. Cane interests are concentrated in Florida and Louisiana and include groups such as the politically influential Fanjul family, which rebuilt a sugar dynasty in the US after fleeing Fidel Castro’s Cuba. Sugar beet are rotated with grain and soyabeans beside the oxbows of the Red River between Minnesota and North Dakota.

Cane and beet tend to rot. On the shores of Florida’s Lake Okeechobee, west of Palm Beach, this means cut cane must be processed quickly at nearby mills. The Red River valley’s brutal winters are an ideal climate for storing beet outdoors in 1,000ft piles, allowing processors to run at full capacity for several months. The overnight temperature at the Moorhead, Minnesota, headquarters of the American Crystal Sugar beet co-operative plunged to minus 14C on Monday night.

“We don’t complain when it’s cold,” says Mohamed Khan, sugar beet specialist at the universities of Minnesota and North Dakota State.

The problem of spoilage differentiates sugar from commodities such as corn and soyabeans, which farmers can hoard in bins until prices favour a sale. Cane and beet must be processed into crystal sugar before it can be traded and stored. Recognising this fact, the US sugar programme is aimed at processors, not individual farmers.

While grain farmers receive direct government payments and subsidised crop insurance, the US sugar programme “supports US sugar prices above comparable levels in the world market”, the USDA’s economic research service says. The law outlines a uniquely top-down approach to achieving this goal.

First, the USDA makes marketing loans to processors at a fixed value per pound of sugar. If sugar prices fall below this value, processors are at liberty to hand the government collateral in the form of sugar instead of repaying cash.

Second, to avoid loan defaults, Tom Vilsack, the USDA secretary, declares how much each processing company may sell into the domestic food market, much as Opec rations oil output. This year’s quota of 9.8m tons is allocated with precision, from 940,017 tons for the Fanjuls’ Florida Crystals to 371,529 tons for the Minn-Dak Farmers Cooperative of Wahpeton, North Dakota. Companies exceeding quotas face a penalty three times the value of their illicit sales.

The elaborate plan crafted in Washington each year filters down to individual farmers. At American Crystal Sugar, contracts with its roughly 2,700 farmer-shareholders determine how many acres each must plant every year. Farmers pledge to plough under any surplus beet. “When you become a shareholder you have to provide a certain amount of sugar beet to the factory. If you don’t, you will be fined,” says Mr Khan.

The third prong of the sugar programme restricts imports. Mr Vilsack, former governor of the farming state of Iowa, dictates how much raw sugar from a list of 40 foreign countries including Brazil and the Philippines may enter the US with low tariffs, regulating supplies.

The US is not alone in protecting sugar. Economists dub sugar, rice and milk the “rice pudding commodities” for their heavy government support. In Japan, government transfers comprise more than half sugar farms’ gross receipts while in the US they are 18 per cent, according to the OECD.

The USDA’s painstakingly managed system has now unravelled. As US supply surged to 14.2m tons in the year to September 30, domestic sugar prices fell and forced officials to scramble to prevent defaults by processors. In the same period, only 12m tons were used, making Washington’s attempts to balance supply and demand increasingly fraught.

Despite official efforts, processors forfeited 85,375 tons of sugar valued at $34.6m for loans due in August. On the eve of the federal government shutdown at the end of September they handed over another 296,500 tons worth $136.9m. The second batch is now heaped in borrowers’ warehouses at a cost of $575,000 a month as the government searches for a buyer.

American Crystal Sugar surrendered nearly 100,000 tons instead of repaying $46.6m. “Ultimately we chose to forfeit some sugar under the programme, which is an unfortunate situation, given the poor market that we’re operating in. But that’s what the programme is for and that’s why we utilised it the way we did,” says Kevin Price, director of government affairs at American Crystal.

The main reason for the disarray is the collision of the 32-year-old sugar programme with a separate policy: the 1994 North American Free Trade Agreement among Canada, Mexico and the US. The pact took effect for sugar in 2008, allowing Mexico to export virtually unlimited amounts. Mexican imports are forecast to continue flowing this year, pushing the US oversupply ratio to its highest level in 13 years.

The sugar programme is so entrenched that a permanent lobby group exists to reform it. The Sweetener Users Association, backed by sweet and food companies such as Mars and Mondelez, was founded in the early 1980s. “The thing they always were able to say is, ‘it doesn’t cost money’,” says Tom Hammer, who led the SUA in the 1990s.

As this year’s defaults undermined that argument, the coalition of programme critics has expanded in Congress. A House of Representatives proposal that would have reformed sugar policy failed 206 to 221 in October. Six years ago, an amendment that would have ended the sugar programme failed 144 to 282, a vote that showed much greater support for the status quo. In the Senate, a vote last year to phase out and ultimately abolish the sugar programme won the support of 46 senators, with 50 voting to quash it. Eleven years earlier, 71 senators voted to kill an almost identical measure. “That strikes me as significant progress,” says Pat Toomey, a Republican from Pennsylvania and advocate of ending the programme.

When the US signed a trade deal with Australia in 2004, sugar was excluded. Australia now wants the US to open up its sugar market more as part of the TPP negotiations, according to Bill Reinsch of the National Foreign Trade Council.

The sugar industry’s power is magnified in Congress by alliances with agriculture organisations. The American Farm Bureau Federation and National Farmers Union, two broad lobbies, both support the sugar programme. The sugar industry is “effective at working with other commodity groups. They scratch each other’s back,” says Gary Blumenthal, head of World Perspectives, an agriculture consultancy in Washington.

For some businesses, the sugar policy is an intractable obstacle. Jelly Belly, the US maker of gourmet jelly beans, in 2006 opened a factory in Thailand when it expanded international operations in part because of US policy, says Bob Simpson, company president.

The sugar industry argues the support is crucial in the face of protected competition abroad. “It’s in the public interest, it’s in the national security interest and it’s in food safety interest that the US is able to feed itself and not be dependent upon foreign countries for food supplies,” says Judy Sanchez of US Sugar, which grows cane on 160,000 acres in Florida.

Growers also point out that US raw sugar prices, averaging 21 cents per pound in the past fiscal year, are cheaper in nominal terms than when the programme began. The US price was also only a few cents higher than comparable world prices, shrinking from almost 15 cents a decade ago. And while the wholesale US sugar price has plummeted 35 per cent in the past year, consumers paid only 2.7 per cent less for sugar and sweets.

“US sugar prices are now lower than they were on average in the 1980s. We have a lot of farmers whose economic existence is in jeopardy,” says Jack Roney, chief economist at the American Sugar Alliance.

As he stood on the floor of the House last month to speak against reform of the US sugar programme, Collin Peterson, a Minnesota Democrat whose district includes the Red River valley, painted a grim picture. Far from engineering a “fat cat” deal at the expense of taxpayers, Mr Peterson lamented that the US was doing far more to “help other countries” by allowing huge sugar imports.

“I invite you to come to American Crystal’s meeting in December, where they are going to be reporting that they’ve lost money this year,” Mr Peterson said. He offered a warning to reformers: “I can guarantee you if you get rid of the sugar policy what you are going to have is a feast or famine situation and you might have low prices for a while but you are going to have a time when you have high prices that are going to do a lot more harm to you than the sugar programme does.”

Brazil: ‘A very nice combination’ unravels

In early 2010 Bunge, the biggest agricultural trading house in South America, bought a string of sugar mills in Brazil, write Gregory Meyer and Samantha Pearson.

The mills would produce sugar, ethanol and electricity from cane – “a very nice combination” with “very interesting returns”, Alberto Weisser, Bunge’s then-chief executive, said at the time.

Bunge’s experience has been interesting – but not in a good way. Last month the company began sounding out buyers for the mills after persistent losses in its sugar and bioenergy division.

Brazil is the largest producer and exporter of sugar, with half the global market. But companies that grow and process its cane are struggling.

Mills accounting for 37 per cent of sugar production in the country’s important centre-south region are either facing collapse or suffering a deterioration in their finances, according to Alexandre Figliolino, commercial director at Brazil’s Itaú BBA bank.

“We are still going through a very delicate time, where the focus is totally on survival and efficiency gains through cost reduction,” he says.

The mills were in recent years stuck with unused capacity after dry weather reduced the national cane harvest. Mills have limited options for replacing localised crop shortfalls because cane is bulky and perishable.

Now, as Brazil eyes a record harvest, world raw sugar prices have fallen. Government price caps for petrol have also made sugar-based ethanol less attractive for Brazil’sflex-fuel cars.

Weather and ethanol policy are “two structural unknowns”, Soren Schroder, Bunge’s chief executive since June, said last month. “That is the part that makes generating returns very difficult.”

Brazilian sugar exports to the US are limited by Washington. “The US sugar lobby continues to pursue a market isolation strategy, supported by a government-backed programme of price support, trade quotas and market manipulation instead of learning to compete in this global marketplace,” says Unica, Brazil’s sugar cane industry association.