Sweets for the Sweet The Costly Benefits of the US Sugar Program by Michael K. Wohlgenant Sweets for the Sweet The Costly Benefits of the US Sugar Program by Michael K. Wohlgenant Introduction The US sugar industry receives enormous government support and protection from foreign competition. The sugar program has changed over time, becoming a complex set of rules developed to promote sugar production primarily at the expense of domestic consumers. The program has also affected foreign producers and consumers through import restrictions that have significantly reduced the world sugar price. Since the mid-1970s, as a result of the sugar program, the price of sugar in the United States has been almost twice as high as the price of sugar on the world market in most years. Michael K. Wohlgenant ([email protected]) is the William Neal Reynolds Distinguished Professor in the Department of Agricultural & Resource Economics at North Carolina State University. 1 The resulting estimated costs to US consumers program on the mix of sweeteners and mix of have averaged $2.4 billion per year, with producers sugars. Policy recommendations are provided in benefiting by about $1.4 billion per year. So the net the conclusion. costs of income transfers to producers have averaged about $1 billion per year. Distortions due to the Structure of the US Sugar Industry sugar program have also led to the development of the high-fructose corn syrup (HFCS) industry and extensive use of HFCS as a substitute for sugar in Sugar in the United States is produced using soft drinks and other sweetened products. In addi- both sugar cane and sugar beets. Historically, tion, in most years, the sugar program has caused sugar-beet production was slightly greater than world market prices to be about 8.5 percent lower sugar-cane production, and the trend has moved than they would otherwise be, with concomitant slowly in favor of sugar beets over time. Techno- adverse effects on the incomes of some of the world’s logical change due to improved plant varieties and poorest farmers. improved harvesting and processing methods has The 2008 Farm Bill shifted the conservation focus led to increased yields. Trends in sugar-beet and from land-retirement to working-land programs. sugar-cane production are shown in figure 1 over The traditional reliance on voluntary approaches to the period 1975–2008. Figure 2 shows trends in solving environmental problems was reaffirmed by real prices (1982–84 constant dollars) of sugar the use of a consolidated set of financial-assistance cane and sugar beets. The trends move downward, programs supported by research and education. reflecting technological improvements over time. The current sugar program, which relies on a Sugar-beet production is concentrated in eleven tariff rate quota system that raises domestic prices states encompassing the upper Great Plains, upper and restricts imports, has been in place for many Midwest, and far West. Minnesota and North Dakota years and is a costly way of transferring income to account for about 55 percent of all sugar-beet acreage. producers. Alternate income-transfer polices such Of sugar-beet acreage, Michigan accounts for about as straightforward loan-rate programs or direct 12 percent; the upper Great Plains states (western cash-transfer payments are costly to taxpayers and, North Dakota, Montana, Wyoming, Colorado, and especially in the current climate, politically infea- Nebraska) account for 14 percent; Idaho, Washing- sible. Another option is a buyout program through ton, and Oregon account for almost 15 percent; and which producers receive a one-time payment and California accounts for the remaining 4 percent.1 the program is discontinued. That would also likely Sugar beets are generally produced on relatively be an expensive option, involving multiple billions small farms. In 2007, the average farm size was of taxpayer dollars. Given the current high world 312 acres. The number of farms has decreased over prices for sugar and near-record returns and time as average farm size has increased, yet there are incomes for sugar-beet and sugar-cane farmers, still about four thousand sugar-beet farms.2 many elements of the sugar program currently do Sugar-cane production is limited to subtropical not come into play. Now may be the right time for and tropical areas of the country: (in order of out- Congress to end the program. put) Florida, Louisiana, Texas, and Hawaii. Sugar- The purpose of this paper is to review the struc- cane production has been growing the fastest in ture of the US sugar industry, trace the evolution of Louisiana, with substantial growth also in Florida government intervention in sugar, and quantify and Texas. Hawaiian production has declined the costs of the sugar program. In addition, indi- significantly over time due to the high opportunity rect costs associated with the distortions of the cost of land for other nonagricultural uses.3 The program are discussed, including the effects of the growth of sugar-cane production in Florida has 2 American Boondoggle: Fixing the 2012 Farm Bill Figure 1: Trends in US Sugar Beets and Sugar Cane, 1975–2008 6000 slowed in recent years due to e u l a 5000 pollution problems. In 2008, V w 4000 a Florida proposed a buyout of R , s 3000 n sugar-cane production to o T 2000 0 improve water quality in the 0 0 1000 sugar beets produced sugar cane produced , Everglades. The planned buy- 1 0 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 out of all sugar production 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 Year and milling for $1.75 billion SOURCE: US Department of Agriculture (USDA), “Sugar and Sweeteners: Background,” www.ers.usda.gov/Briefing/Sugar/Background.htm devolved into a partial buyout (accessed May 2, 2011). of just $175 million.4 Like sugar-beet farms, sugar-cane farms have also Figure 2: Real US Sugar-Beet and Sugar-Cane Prices, 1975–2008 increased in average size. Sugar-cane production is 70 ) 60 d real refined sugar-beet price real raw sugar-cane price n concentrated in the largest u 50 o P / 40 s farms. The share of produc- t n e 30 C tion for farms larger than ( 20 e c i r 10 2,000 acres is almost 60 per- P cent. The share of production 0 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 for farms greater than 500 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 acres is over 90 percent. Year Farms smaller than 250 acres SOURCE: USDA, “Sugar and Sweeteners: Background,” www.ers.usda.gov/Briefing/Sugar/Background.htm (accessed May 2, 2011). account for only 3 percent of sugar-caneproduction.5 A major difference between sugar cane and sugar into refined sugar but also into a range of prod- beets is that sugar cane is a perennial crop that ucts containing sugar, including bakery products, requires less management. Sugar-cane harvesting beverages (canned, frozen, and bottled), confections, occurs continually, as needed by mills for processing, and dairy.8 while beet harvesting in the northern United States As figure 3 shows, the US sugar industry has faced occurs in September and October to avoid the beets competition from HFCS in the last several decades. freezing in the ground. In fact, the industry came into existence largely Both sugar beets and sugar cane must be processed because of high sugar prices resulting from the sugar into refined sugar (sugar beets) and raw sugar (sugar program. The HFCS industry has grown, and now cane) soon after harvesting. Sugar beets can be stored HFCS represents over 50 percent of all sweeteners. for a short time after harvest before being refined The relationship between sugar prices and HFCS into sugar. This means the number and location of prices is apparent in figure 4. In the 1970s and 1980s, sugar-processing plants are critical to sugar produc- the high relative sugar price induced substitution of tion. Without sugar-beet refineries and sugar- HFCS for sugar. Since about 1990, there has not cane mills, sugar beets and sugar cane have little or no been much movement in the relative sugar price. economic value.6 Consequently, only small substitution of HFCS for The number of sugar refineries has declined sig- sugar has occurred.