Tag Archives: sugar

The Sugar Swamp

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(June 25, 2017)
As the US, Mexico and Canada get ready to begin talks on the re-negotiation of NAFTA – possibly as early as August – governments are giving a lot of attention to one particular product:  sugar.   The outcome will predictably be a sweet deal for the US sugar industry, quite the opposite of Trump promises to “drain the swamp” of disproportionate influence in Washington by special interests.

It’s an old story, in the US as in other industrialized countries.  The politically powerful sugar producers receive protection in the form of tariffs and quotas on imports, to keep the domestic price of sugar far higher than the price in such low-cost supplier countries as Brazil, Australia, the Dominican Republic, the Philippines, and Mexico.

Sugar in NAFTA

As part of NAFTA, the US was supposed to open up the American sugar market to Mexico.   Indeed sugar was one of the few products in which free trade meant the removal of high US barriers, whereas the Mexicans had high barriers on many US products that NAFTA required them to remove.  But the required sugar liberalization was delayed long after NAFTA took effect in 1994.

Mexican sugar exports to the US did not rise strongly until 2013.  Then when they did, American producers and refiners lost no time in seeking protection.  The Commerce Department decided to give it to them:  tariffs up to 80%. This threat forced Mexico to agree in 2014 to limit its sugar exports and to explicitly prop up the US price.

Mexico this month apparently agreed to extend the limits.   According to Commerce Secretary Wilbur Ross, “The Mexican side agreed to nearly every request by the US industry.”  (The recent agreement apparently has as much to do with protecting American refiners per se by tightening the limits on trade in raw sugar, as with any adjustment in the overall level of protection of the sugar industry a whole.)

Why is sugar protection bad?   Consider some cost/benefit analysis.

Let’s start with the benefits, because the list is short.  The beneficiaries are American sugar growers – particularly a small group of wealthy cane producers concentrated in Florida plus sugar beet farmers in places like Minnesota and the Dakotas.  They have a long history of generous campaign contributions to the relevant politicians.  For example the famous Fanjul brothers, Alfonso and Jose (who incidentally are Palm Beach neighbors and friends of Secretary Ross), reportedly gave a half million dollars for the inauguration ceremonies of President Trump in January.  Another company, US Sugar, has been donating equally generously to Florida Governor Rick Scott.

Economic costs of sugar protection

The costs of measures to protect the sugar industry are far more numerous than the benefits.

  • As with trade barriers in most industries, American consumers are hurt by the high price of US sugar, which has been double the world price on average over the last 35 years.  The cost to consumers has been estimated at $3 billion a year.
  • Candy and ice cream companies of course use sugar in their production and so are also hurt by the distortedly high price. They have been shedding employment for years, as confectioners move their factories offshore where their chief input is less expensive.   (Outsourcing of manufacturing jobs, anyone?)  The International Trade Agency of the US Commerce Department found that “sugar costs are a major factor in relocation decisions” and estimated that “For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.”
  • One might think that making sugar expensive would at least have big benefits for Americans’ health. But no.  For one thing, the artificially high price of the white crystals was partly responsible historically for the explosion in the production of high-fructose corn syrup as a substitute and its use in a startlingly wide variety of foods.  HFCS is at least as bad as sugar health-wise.
  • Sugar cane in Mexico is produced by hundreds of thousands of small, mostly poor, farmers. Depriving them of their livelihood is bad foreign policy.  Think of the undesirable alternatives to which those farmers might turn.  Or think of the larger message that is sent to the world when our actions are seen to contradict its lectures about the virtues of the market system.
  • Limiting imports is also bad for our exporters. The macroeconomic channels may not be obvious.  But if Mexicans can’t earn dollars by exporting to the US, they won’t have dollars to spend on US goods; the dollar will appreciate against the peso and so render US exports uncompetitive.  More tangibly, if the US were to ratchet up tariffs against Mexican sugar as  we threaten (which we would do in the name of fighting dumping and subsidies), the Mexicans would immediately respond by raising tariffs against our exports (again in the name of fighting dumping and subsidies).
  • The taxpayer is on the hook as well. Besides import barriers, another way that the US government protects domestic sugar farmers is a policy of putting a floor under the price via non-recourse marketing loans (from the USDA’s Commodity Credit Corporation).   When the domestic price dips down near the floor, as it did in 1999 and 2013, the government in practice subsidizes the producers at taxpayer expense (despite “no-cost” promises to the contrary).

Environmental costs of sugar protection

  • If the US hadn’t historically blocked sugar imports from countries such as Mexico and Brazil, it could have used sugar-based ethanol in auto gas tanks, at lower cost to both the environment and the consumer. (This policy failure was worse before 2012.  The American taxpayer paid directly to subsidize corn-based ethanol produced in Iowa, under an incorrect claim of environmental benefits.  At the same time, the US maintained a tariff of 54 cents per gallon on imports of sugar-based ethanol from Brazil, which is indeed good for the environment on net. Even after those egregious features were removed five years ago, an inefficiently high fraction of corn production is still diverted from food use into ethanol.)
  • Speaking of the environment, the last negative effect on the list brings us back to the topic of swamps.  The Everglades – the unique system of wetlands in southern Florida that includes a National Park – have suffered environmental degradation for a century.  They have shrunk to half their original size because the incoming flow of water was diverted by federal water projects early in the last century (by the US Army Corps of Engineers).  Furthermore, phosphorus run-off has altered the eco-system (choking out  sawgrass, feeding algae blooms).  In recent years, plans to reverse the damage to the “river of grass” legislated by Congress in 2000 have been delayed.   The main problem all along has been the nearby sugar cane industry, which demands the diverted water, supplies the phosphorus run-off, and lobbies politicians with some of the resulting profits.  Most recently, sugar interests have posed financial and political obstacles to efforts to build a reservoir (south of Lake Okeechobee) as part of the year-2000 Everglades restoration plan.

Under a free market, it would not be profitable to grow so much cane on valuable South Florida land, if any.  But Trump’s idea of “draining the swamp” in Washington is evidently to artificially stimulate the sugar industry through import protection and subsidies, and to let everyone else bear the cost:  consumers, candy manufacturers, Mexico, and the environment.  That includes draining the Everglades.

[A shorter version appeared at Project Syndicate.  Comments can be posted there or at Econbrowser.]

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Why Are So Many Commodity Prices Down in the US… Yet Up in Europe?

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Oil prices plummeted 43% during the course of 2014 – good news for oil-importing countries, but bad news for Russia, Nigeria, Venezuela, and other oil exporters. Some attribute the price drop to the US shale-energy boom. Others cite OPEC’s failure to agree on supply restrictions.

But that is not the whole story. The price of iron ore is down, too. So are gold, silver, and platinum prices. And the same is true of sugar, cotton, and soybean prices. In fact, most dollar commodity prices have fallen since the beginning of the year. Though a host of sector-specific factors affect the price of each commodity, the fact that the downswing is so broadly shared – as is often the case with big price swings – suggests that macroeconomic factors are at work.

So, what macroeconomic factors could be driving down commodity prices? Perhaps it is deflation. But, though inflation is very low, and even negative in a few countries, something more must be going on, because commodity prices are falling relative to the overall price level. In other words, real commodity prices are falling.

The most common explanation is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products. Indeed, growth has slowed and GDP forecasts have been revised downward in most countries.

But the United States is a major exception. The American expansion seems increasingly well established, with estimated annual growth even exceeding 4 % over the last two quarters.  Private employment has risen by more than 200,000 for each of the last ten consecutive months. And yet it is particularly in the US that commodity prices have been falling. The Economist’s euro-denominated Commodity Price Index, for example, has actually risen by 4 per cent over the 12 months; it is only the Index in terms of dollars – which is what gets all the attention – that is down 6%.

That brings us to monetary policy, the importance of which as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended Quantitative Easing in October and likely to raise short-term interest rates sometime in the coming year. Continue reading

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