three year sugar pricesEven in 2013, as Washington DC tries to figure out how to reduce federal spending, some areas continue to be untouched. No one wants to talk about Social Security, few try to do anything with Medicare, and agriculture subsidies seem to be off the table for now too.

One crop is getting some extra special attention this year: sugar. The sugar industry is divided between the producers (farmers, processors) and consumers (everyone from Hershey’s to Starbucks, and us). We have a lot of sugar production in the United States when we really shouldn’t. Sugar produced in places like Brazil is far cheaper than it is here in the US. But a tariff system on sugar imports helps ensure that most of the sugar consumed in the US is produced here. As a result, we pay more for our sugar than someone in Brazil might.

So we all pay more for our sugar. If we had such a policy for US oil, we’d probably be looking at up to a 100% premium just to protect the oil companies. And it seems that may not even be enough to keep this industry going. Artificially high prices only go so far to keep a dying industry on life support. The Dept of Agriculture also offers a loan program to the processors which essentially locks in prices for them and the farmers. The processors use their own sugar as collateral. Here’s how it works in a world of falling sugar prices:

The USDA loans $1 million using 4 million pounds of sugar as collateral, an effective price of $0.25 per pound. If sugar prices go up then the producers just sell the sugar and pay back the loan. If prices fall, then the producers just default on the loan and the USDA is stuck with sugar worth less than they paid for it.

That’s exactly what’s about to go down. From the WSJ:

The action aims to prop up tumbling U.S. sugar prices, which have fallen 18% since the USDA made the nine-month operations-financing loans beginning in October. The purchases could leave the price-support program with an $80 million loss, its biggest in 13 years, said Barbara Fecso, an economist at the USDA, in an interview.
mountain of sugar

This works out to a bailout that isn’t very different than what the banks got. The sugar industry is very small as well, only about 142k jobs. So we’re not talking about any kind of systematic breakdown. The processors are not too big to fail. But we continue to hold them up. According to a trade group representing candy companies, all the sugar subsidies have collectively cost consumers $14 billion since 2008.

One cannot blame the sugar processors for taking advantage of such a program. It basically puts a price floor on their product. They don’t have to compete, innovate, or even control costs. But one has to wonder with all the outrage that goes to oil and financial companies, why does no one care that the government artificially keeps sugar prices high and stuff like high fructose corn syrup low?

Image: qmnonic

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categories: business, government