By Dr. Andrew Stainback - January 2020
In the United States there is a long history of subsidizing sugar through a complex set of policies to keep the price of sugar in the domestic market above prevailing world prices. These policies cost consumers directly through higher prices at the grocery store and indirectly through lost jobs in food processing industries, inflated agricultural land prices, and environmental damages generated by growing and harvesting.
This document will give a brief overview of how sugar subsidies in the US work, the impact that they have on the profitability of growing sugar in Florida, and their impact on consumers.
Most sugar produced in the State of Florida comes from the Everglades Agriculture Area (EAA) comprising all or parts of Palm Beach and Hendry counties. Typically, around 400,000 acres are planted in sugarcane every year. These numbers vary year to year based on weather and market conditions. Once sugarcane is harvested, it must be processed in sugar mills and sugar refineries. Most sugar mills and refineries in Florida are owned by the same businesses that plant sugar in the EAA.
How Sugar Subsidies Work
Information regarding the federal sugar price support system was obtained from the Congressional Research Service.
Sugar refiners can take out a loan (called a recourse loan) at a specified loan rate based on how much sugar they pledge to produce. For example, in 2014 the loan rate was set at 18.75 cents per lb. for cane sugar. If the price of sugar falls below a predetermined price level (called the loan forfeiture level) then the cane refiner can forfeit the sugar to the US government instead of repaying the loan. The loan forfeiture level is set to account for the loan rate (e.g. 18.75 cents per lb.), the interest incurred on the loan, and marketing expenses. In 2014, the loan forfeiture was set at 20.95 cents per lb.
The 2018 Farm Bill (as previous farm bills) instructs the United States Department of Agriculture (USDA) to take actions to prevent the price of sugar from falling below the loan forfeiture level. There are three basic tools that USDA uses to accomplish this.
1. MARKETING ALLOTMENTS TO LIMIT THE AMOUNT OF SUGAR THAT EACH PROCESSOR CAN SELL
The USDA uses marketing allotments to limit the amount of sugar that domestic processors can sell each year. The overall allotment quantity is set at a level intended to ensure high domestic sugar prices.
2. IMPORT QUOTAS TO RESTRICT THE AMOUNT OF SUGAR ALLOWED TO ENTER THE U.S. MARKET
The farm bill instructs USDA to set quotas for the amount of sugar that can be imported into the US to comply with various trade agreements and to prevent the domestic market price of sugar from falling below the forfeiture level.
3. A SUGAR-TO-ETHANOL (FEEDSTOCK FLEXIBILITY) BACKSTOP
If domestic market prices for sugar fall below the forfeiture level, then USDA must buy sugar on the market and sell it for processing into biofuel (typically at a loss). This is intended to reduce the supply of sugar available for human consumption.
Using these tools, the USDA has been able to keep the domestic price of sugar above the loan forfeiture levels in most years. However, by doing this, the domestic price of raw sugar is typically almost twice the world price.
Impact of Sugar Subsidies on Profitability of Growing Sugarcane in the EAA
To estimate the impact of sugar subsidies on the profitability of growing sugar in the EAA, the net revenue produced from a typical sugarcane farm in the EAA assuming the price of sugar is the world price was calculated and compared to the net revenue achieved on the same farm assuming the price of sugar is the US domestic price.
Nominal US sugar prices were obtained from the USDA. Prices were converted to 2017 $ using the consumer price index from the US Bureau of Labor Statistics.
Following a method used by the Institute of Food and Agriculture (IFAS) at the University of Florida in calculating the net returns for sugar farming on both muck and mineral soils, the net revenue from growing sugarcane in the EAA was based on revenue and costs that would be typical on a 5,000 acre farm. Muck soils are highly productive organic soils typical of most areas in the EAA. Mineral, or sandy soils, are less productive and are mostly found further away from Lake Okeechobee around the fringes of the EAA. Assumptions concerning yields, costs, and land distributions were based on data from IFAS. As with raw sugar prices, all costs were converted to 2017 $ using the consumer price index from the US Bureau of Labor Statistics.
Figures 2 and 3 show the calculated net revenues per acre for this hypothetical farm growing sugar on muck or mineral soils respectively for the years 2000 to 2017. As can be seen, muck soils generate substantially greater net revenues than mineral soils. This is primarily due to their greater productivity. On both soil types, subsidies significantly increase the net returns to sugar farming. In fact, the results indicate that without subsides, growing sugar in the EAA would not be profitable. For muck soils, the average net return with subsidized US prices is $468 per acre per year while it is -$43 per acre per year with world prices. For mineral soils, the net returns with subsidized US prices is $120 per acre per year and -$236 per acre per year with world prices. Negative returns mean that the revenue received from selling raw sugar does not cover the cost of growing it.
Impact of Sugar Subsidies on American Consumers
There have been several economic studies that have explicitly looked at the costs that the inflated domestic price of sugar imposes on consumers and the US economy. These numbers converge on a cost to consumers of more than $10 per person per year totaling almost $4 billion (2017) annually. This cost results in a net job loss of 17,000 to 20,000 jobs in industries such as food processing. This means that even after taking into account job gains in the sugar industry resulting from the sugar program, there is at least a loss of 17,000 jobs as a result of the transfer of money from US consumers to the sugar industry.
It is important to note that the subsidies that the sugar industry gets through US policy are only part of the cost that is imposed on taxpayers and consumers. For example, there is significant economic costs (e.g. reduced tourism and real estate values) that result from the degradation of the Everglades. It has also been documented that taxpayers pay for a disproportionate share for water infrastructure and management that benefits the sugar industry in the EAA.
To maintain these policy advantages, the sugar industry expends considerable resources on political lobbying. Even though sugar represents only 2% of the value of US crops, the sugar industry typically expends 40% of the total lobbying expenditures of all crop industries.
In Conclusion
The profitability of growing sugar in the EAA is dependent on federal subsidies. Without the current price support policy in place, it is unlikely that it would be economically feasible to grow sugar in this area as the net return in many years would be negative. Sugar subsidies also impose a substantial cost onto consumers and cost more than 17,000 jobs. Finally, it is important to note that the subsidies that the sugar industry gets through U.S. policy is only part of the cost that is imposed on taxpayers and consumers.
References
1 McMinimy, M. A. (2014). Sugar Program: The Basics. Retrieved from http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R42535.pdf
2 United States Departement of Agricultiure. (2018). Sugar and Sweeteners Yearbook Tables. Retrieved October 12, 2018, from
3 Wright, A. L., & Hanlon, E. A. (2013). Organic Matter and Soil Structure in the Everglades Agricultural Area 1 Organic Matter in Histosols : Origins and Fate. Gainesville, FL.
4 Roka, F., Álvarez, J., & Baucum, L. (2009). Projected Costs and Returns for Sugarcane Production on Mineral Soils of South Florida, 2007-2008. Electronic Data Information Source (EDIS), Soil and Water Science Department, University of Florida. Gainesville, FL. Retrieved from http://edis.ifas.ufl.edu/sc087
5 Roka, F. M., Baucum, L. E., & Alvarez, J. (2010). Costs and Returns for Sugarcane Production on Muck Soils in Southern Florida 2008 – 2009. Gainesville, FL.
6 Beghin, J. C., & Elobeid, A. (2015). The Impact of the U.S. Sugar Program Redux1. Applied Economic Perspectives and Policy, 37(1), 1–33. Retrieved from http://dx.doi.org/10.1093/aepp/ppu028
7 Leu, G.-J. M., Schmitz, A., & Knutson, R. D. (1987). Gains and Losses of Sugar Program Policy Options. American Journal of Agricultural Economics, 69(3), 591–602. https://doi.org/10.2307/1241694
8 United States General Accounting Office. (2000). Sugar Program: Supporting Sugar Prices Has Increased Users’ Costs While Benefiting Producers. https://doi.org/10.1089/blr.2006.9996
9 Wohlgenant, M. K. (2011). Sweets for the Sweet: The Costly Benefits of the US Sugar Program. Retrieved from https://www.aei.org/research-products/report/sweets-for-the-sweet-the-costly-benefits-of-the-us-sugar-program/
10 Diamond, C. (2012). An update of “Analysis of Public Subsidies and Externalities Affecting Water Use in South Florida.” Retrieved from http://www.getcited.org/pub/103042834
11 Van Houtven, G., Reckhow, K., Loomis, R., Cunningham, J., & Casey, S. (2012). Enterprise Assessment for the Reduction of Nutrient Pollution in South Florida Waters: Final Report.
12 Riley, B. (2014). U.S. Trade Policy Gouges American Sugar Consumers. Backgrounder. Retrieved from http://www.heritage.org/research/reports/2014/06/us-trade-policy-gouges-american-sugar-consumers
Comments