The Cost of Protecting the United States Sugar Industry

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Protectionist sentiments in the U.S. sugar industry are as old as the country itself. In 1789, Congress levied the first ever tariff on foreign producers of sugar.

This propping up of the domestic sugar industry has persisted to this day, through the passage of farm bills that began in 1990.

The United States supports the domestic sugar industry in three main ways: generous loan programs, price floors, and quantity-restricting quotas.

One way the domestic sugar industry is supported is through non-recourse loans.

Continued through the Agricultural Act of 2014 and extended through FY 2018, the government grants loans with nine-month maximum maturities to sugar producers through the Commodity Credit Corporation, at below-market rates.

The 2014 legislation allows sugar producers to obtain loans for their products at 80 percent of the prevailing market rate. The current national loan rate for raw cane sugar is 18.75 cents/pound, at a time when the market price for U.S. sugar is 26 cents/pound. Once the loan term is up, sugar producers may either sell their excess sugar to the government, or they may sell it to the market.

A second way sugar is propped up is through sale restrictions. The United States Department of Agriculture (USDA) allocates a maximum quantity each sugar producer may sell to the market every year; producers are not allowed to sell more than the allotted quantity, and must store any excess they produce until the next fiscal year.

For raw cane sugar, the state of Hawaii is allotted 650 million pounds, while allocations in the mainland states of Louisiana and Florida are assigned based on the state’s production history. If, for some reason, a producer cannot meet the required allotment, that allotment is reassigned to another producer within that state first, and to other mainland states if the requirement still cannot be met. This is effectively an artificial price floor, as supply is restricted to inflate prices.

The third, and arguably most expensive, protection of the sugar industry comes in the form of tariff-rate quotas. Each year, the USDA allots a maximum amount of metric tons of sugar to be imported from several foreign countries under a low tariff rate. If the maximum is exceeded, a larger tariff is charged. These tariff-rate quotas are arguably the most expensive support given to the domestic sugar industry, with significant effects on U.S. consumers and employers.

Effects on Consumers

Tariff-rate quotas are distortionary to the workings of the free market, as willing consumers and producers cannot meet to execute mutually beneficial transactions. The USDA takes this to the extreme; it allows only about 10 percent of American demand for sugar to be met by foreign producers, so domestic suppliers practically own the entire market.

Each year, the USDA assigns a maximum amount of metric tons of sugar to be imported into the United States, and the U.S. Trade Representative (USTR) allocates this maximum amount among different foreign producers. Amounts are assigned among 40 sugar producing countries, based on their exports to the United States between the years of 1975 to 1981.

For FY 2018, the maximum allowable amount is 1.1 million metric tons, the minimum amount allowed under World Trade Organization (WTO) agreements.

According to the WTO database, the out-of-quota tariff rate for imported raw cane sugar is currently 33.87 cents/kg, translating to roughly 15.38 cents/pound. This is over 100 percent of the price of raw sugar on the world market, which in turn is about half the price of raw sugar in the U.S. market.

Although the difference between world and domestic prices narrowed in the period 2010-2013 due to an increase in excess sugar reserves from the year-earlier, the difference widened again after 2013, with domestic sugar prices now nearly 200 percent of world prices.

Consumers in America pay much more for sugar than those in other countries due to the tariff-rate quota.

In 2016, the average American’s consumption of refined cane and beet sugar was about 69.7 pounds during the year. The population of the United States is 323.1 million people, as of the latest data from 2016. That adds up to a country that demands and consumes about 22.5 billion pounds of refined sugar a year. According to WTO requirements and the USTR’s maximum allocation amount, 1.1 million metric tons (2.4 billion pounds) of sugar was imported from foreign producers at a low tax rate, and an additional 1.1 million metric tons was imported from Mexico under the high tariff rate of 15.38 cents/pound. Hence, foreign producers supplied only about 20 percent of the U.S. domestic demand, leaving producers at home to supply about 80 percent of the market. At a domestic price of 26.90 cents/pound compared to a world price of 16.59 cents/pound, American consumers paid $2.2 billion in 2016 to support the artificial quantity restrictions imposed by the government.

As American appetites for sugar keep on increasing (while USTR restrictions do not increase in tandem) this $2.2 billion number will keep rising in the years and decades to come, as it has been rising in a majority of the years since 2008.

Employment Effects

The negative effects of sugar protectionism are not limited to directly higher prices for consumers; there are also downstream employment effects. Hundreds of thousands of American workers are employed in industries that rely heavily on sugar, with the top three industries (bread and bakery, frozen food, and canned fruits and vegetables) employing over 300k workers.

Although a significant number of American workers are currently employed in the confectionery industry, over the years many domestic candy producers have found that they could no longer operate profitably in the United States.

In 2003, the maker of Dum Dums, the Spangler Candy Company, moved 200 jobs from Ohio to Juarez, Mexico, citing the “much better price for sugar in Mexico than [in the United States]” as the reason for the move.

Adams & Brooks, a candy maker from the California area, followed suit, moving nearly two-thirds of its workforce to Tijuana, its president remorsefully expressing that “you move or you go out of business.”

In 2011, the Hershey Company closed one of its plants in Pennsylvania and moved those jobs to Monterrey, citing high sugar costs in the U.S. as one of the reasons for the move.

The evidence for these employment losses goes beyond just being anecdotal. A study from Iowa State University quantifies just how much the candy industry has suffered due to the supports afforded to domestic sugar producers.

If sugar protections were eliminated, 17,000 to 20,000 new jobs would be created annually in the food manufacturing sector and related industries. These calculations are done by assuming that industries that use sugar as an input get two benefits from the elimination of sugar supports: the U.S. price of refined sugar falls by a modest 6 to 8 percent, but that in turn creates a large increase in the output of these sectors, in the range of 18 to 23 percent, on average. Employment in the affected industries grows in line with this increase in output.

Interestingly enough, the sugar industry would see gains in employment from the elimination of sugar supports, and more gains over time. This happens because once sugar producers are forced to compete on the global marketplace, they become more efficient and can price competitively, allowing them to target the global market in addition to the domestic one they already operated in. This finding calls into question the basic argument behind sugar protectionism, to shield sugar producers from the employment losses that would come from forcing them to compete in the global market.

The above figures represent thousands of Americans that could be put to work, and since confectioneries tend to locate in smaller towns, this could be a boon for rural employment.

Confectioneries would be able to produce more of their product, with the largest increases in output being in the Chocolate & Confectionery sector (39 percent to 58 percent increase in output), and in the Non-Chocolate Confectionery sector (19 percent to 27 percent increase in output). A paper from the U.S. Department of Commerce echoes these numbers. According to the study, for each job saved in the sugar industry through high prices, three confectionery-manufacturing jobs are lost. In addition, employment in industries involving sugar decreased by 10,000 jobs in the years between 1997 and 2002.

Sugar quotas and price supports are hurting American workers.

Sugar protections in the United States, perhaps once useful to help an infant industry to survive, have severely outgrown their usefulness.

There are large aggregate gains that could be created with a scale-back or elimination of sugar support programs. These gains would involve the $2.2 billion in cost savings to American consumers as the U.S. price of sugar falls in line with world prices, and the employment gains that would arise in industries that use sugar as an intermediate input.

While it is difficult to quantity the value of the jobs created, studies have found that several thousand jobs could be created in downstream industries. On average, American consumers lose 20k per job in the sugar industry, totaling $600 million in net losses to society.

Elimination or even a decrease of sugar supports in this country would bring large benefits to consumers.

The American public has much to gain from the reconsideration of these supports in this country, including gains to consumers, employment benefits, and ultimately a more competitive and efficient sugar industry.

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Jenny Grimberg

Jenny Grimberg is a current graduate student at Georgetown University, studying applied economics while interning part time at a libertarian think tank. Prior to moving to Washington, DC, she spent two years working in the financial industry in New York. For fun, Jenny loves to read and travel.

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