A Subsidy For the Rich That Will Have You Clutching Your Head

Agricultural lobbies often make economists who care about the general economic wellbeing of society clutch their heads in their hands. Not only do these lobbies seek subsidies that will mainly flow to farmers who are much wealthier and have much higher incomes than the average U.S. household, but they also generally appear to pay little attention to any ancillary damage that may spillover to other sectors of the economy. In addition, many of the subsidy programs they support potentially violate U.S. commitments under international trade agreements which are helpful to consumers and other sectors of the American economy.

The sugar lobby is a current case in point. In March of this year, the American Sugar Coalition filed a petition with the U.S. International Trade Commission claiming that increased sugar imports from Mexico were causing "material injury" to American sugar producers and processors.

What is material injury? The answer, according the American Sugar Coalition, is any decline in sugar prices. And why is Mexico at fault? Because, under the terms of the 1994 North American Free Trade Agreement - NAFTA to most of us - Mexico's sugar industry has had a completely open access to U.S. markets since 2008 (after its agreement to a 15 year delay ran out), and Mexico is now legally exporting more sugar to the United States.

But is Mexico really the major cause of lower U.S. sugar prices? The answer is almost certainly "No." Sugar prices in the United States have certainly fallen from recent record high levels in 2010, 2011 and 2012 (59.5 cents per pound at the peak). But the same price increases and price decreases occurred in world sugar prices. In fact, globally and in the United States, sugar prices are now close to their more typical long run average range of 13 cents to 18 cents a pound.

The real question is why were world and U.S. sugar prices so high between 2010 and 2012? The answer is a combination of events. One major reason was poor weather in major regions of the world where sugar cane grows in 2010 and 2011 (for example, the major hurricanes that swept through Central America and the Caribbean and the typhoons that damaged sugar crops in the Pacific). These weather events substantially reduced global sugar production causing world prices to reach record highs, much to the economic benefit of U.S sugar beet and cane farmers and processors.

Another factor was Brazil's extensive use of sugar to produce ethanol. In 2012 and 2013, the weather was better and global sugar production returned to long run trend levels. And, guess what? World sugar prices returned to their long run trend levels too.

So, to make the case that Mexico was the source of the material injury associated with lower sugar prices, one would have to ignore the role of global supply shocks in the world market for sugar.

What has really been asserted by the U.S. sugar lobby is that Mexico has increased its sugar production, through government subsidies, and perhaps allowed for transshipments of sugar from other countries as a means of increasing exports to the United States. Certainly, increased exports augment the amount of sugar supplied to the United States domestic market and put downward pressure on U.S prices. The result is that the U.S. government is then forced to use its price support program to prop up domestic sugar prices at the farm bill legislated intervention (loan rate) price of 24.09 cents per pound for refined sugar from sugar beets.

So, what has actually happened in Mexico since 2008 when constraints on their sugar exports to the U.S. were terminated under NAFTA? Well, Mexico's exports to the U.S. began to increase immediately after 2008, as did exports from many other countries. However, any effects on the U.S. domestic market were barely noticed and largely ignored as world and U.S. sugar prices surged between 2009 and 2012. But, when world prices declined in 2012 and 2013, total U.S. imports of sugar also fell, even though Mexico's exports to the United States continued to increase. It is difficult to believe that U.S. prices declined in 2012 and 2013 because of increased imports from Mexico, since total U.S. sugar imports have actually declined since 2011. The real culprit was the increase in world sugar production, including increased U.S. domestic sugar output.

So why have Mexico's exports of sugar increased since 2008? First, Mexico's sugar production has increased by about 25 percent, not least because of very high global prices between 2009 and 2011 which encouraged expansion of the industry, and also because of the prospect of expanded access to U.S. markets.

Second, over the same period, sugar consumption in Mexico fell by about one million tons, mainly because high sugar prices drove Mexico's food processing and soft drink sector to shift from using sugar to high fructose corn syrup (HFCS). Interestingly, about 30 years ago the same thing happened in the U.S. as a result of the U.S. sugar program (which costs 310 million U.S. consumers about $3.4 billion every year to enhance the incomes of about 20,000 sugar beet and cane growers and processors). And where does all that HFCS that Mexico now consumes come from? Answer; mainly the United States!!!

So, more domestic sugar production and less domestic sugar consumption left Mexico with more sugar to export. Though the U.S. sugar lobby would like to claim that Mexico's increased exports are partly caused by illegal shipments of sugar through Mexico from countries whose exports to the U.S. are legitimately constrained under the terms of the current WTO agreement. But there is no evidence of that; Mexico's sugar imports from other countries have actually declined quite sharply since 2010.

What the sugar lobby should complain about are increased U.S. exports of HFCS to Mexican processors. In other words, they should complain that U.S. corn prices are relatively low, making HFCS competitive with sugar even at relatively low world sugar prices. And, by the way, the U.S. sugar lobby should also complain about their own members contributing to lower prices by increasing their sugar production substantially in recent years thanks to technical innovations associated in part with the use of GMO technologies.

And now, of course, we realize that once again when it comes to farm lobby arguments we have entered an Alice in Wonderland world of economic logic. The real shame is that in June of this year the U.S. International Trade Commission allowed the US sugar lobby's claims to move forward to a full hearing, finding myopic evidence of "material damage."

Hopefully, sanity will reassert itself; the sugar lobby won't get to restrict sugar imports from Mexico, further reducing the credibility of the U.S. government in its attempts to open markets to U.S. exporters in other sectors through trade negotiations. And, perhaps, the real costs of the U.S. sugar program will become more transparent as tax payers, not just every consumer in the United States, start to bear more of the costs of subsidizing the U.S. sugar industry.