The Sugar Industry and Corporate Welfare

By Jason Lee Steorts 
First published by The National Review, July 18, 2005

Editor’s note: While the author makes some absurd statements in his advocacy for the so-called Central American “Free Trade” Agreement, this is an excellent case study in how even relatively small special interest groups can extract billions of dollars in taxpayer subsidies so long as we allow large private investment in politcal campaigns.

In a hall of fame for corporate-welfare queens, the sugar industry would occupy a place of special honor. For decades, powerful sugar growers have gotten politicians to enrich them with a protectionist scheme that inflates domestic sugar prices to the detriment of American consumers, American manufacturers, American farmers, and the American economy as a whole. In that congeries of absurdities known as U.S. farm policy, sugar’s sweet deal stands out as perhaps the most damaging and least defensible program. Now, more than ever, it needs to be scrapped.

The program allows sugar processors to take out loans from the USDA by pledging sugar as collateral. The loan rates – 18 cents per pound for cane sugar, 22.9 cents per pound for beet sugar – are significantly higher than average world sugar prices. These loans must be repaid within nine months, but processors also have the option of forfeiting their sugar to the government in lieu of repaying their debt.

This arrangement effectively guarantees that the processors receive a price for their sugar that is no lower than the loan value: If prices fell below that level, they would simply forfeit their sugar and keep the government’s money. In order to avoid that scenario, the USDA must prop up the domestic price of sugar. It does this by controlling supply through two mechanisms. First, it sets quotas on how much foreign sugar can be imported without facing prohibitive tariffs; second, it regulates the amount of sugar that domestic processors can sell.

The consequence is that sugar in the U.S. has, over the past decade, cost two to three times the average world price. The sugar industry likes to point out that the program requires no government outlays, since processors repay their loans each year (assuming the government keeps sugar prices sufficiently high). This argument is sound if one regards the sugar program as a question of federal bookkeeping, but that is only because, in this case, the government does an uncharacteristically efficient job of plundering taxpayers to pay off a special interest: It simply cuts itself out as middleman. Each time you buy sugar or a product made with sugar, the difference between the price you pay and the lower price you would pay absent the sugar program’s dirigisme an be thought of as a sugar tax. Unlike most taxes, this tax never finds its way to government accounts. Instead, it passes directly from your pocket to the sugar industry’s profit statements.

A GAO study found that, between 1989 and 1991, the sugar tax cost American consumers an average of $1.4 billion per year. By 1998, that number had risen to $1.9 billion. Other costs are borne by manufacturers who use sugar as an input. Faced with high domestic prices, some confectioners have moved to countries without sugar price supports, such as Canada. Others have simply shut down. A study commissioned by the Sweetener Users Association found that between 7,500 and 10,000 jobs were lost from 1997 to 2003 as a result of high sugar prices. Seven thousand candy-making jobs have been lost in Chicago alone over the past decade. If opportunity costs are taken into account, those numbers certainly underestimate the sugar program’s impact on employment: Without the program, resources currently devoted to sugar production would shift to more efficient sectors of the economy and create new jobs.

The sugar program is a case study in how small, concentrated interests can trump larger but more diffuse ones. By any measure, the U.S. sugar industry is minuscule. It employs only 62,000 people and comprises less than 0.5 percent of U.S. farms. But because it profits so richly from the current protectionist scheme, it has a powerful incentive to keep that scheme in place.

It does so by donating extravagantly to political candidates. One lobbyist who works with trade issues says, “[The sugar industry] is collecting monopoly rents. Any industry in a position of collecting monopoly rents will spend back a significant portion of those rents to maintain those monopolies.” Although sugar accounts for just 1 percent of U.S. farm receipts, 17 percent of all campaign contributions from the agricultural sector between 1990 and 2004 came from the sugar lobby.

Perhaps no political investment has brought a higher return. The GAO report found that sugar producers gain around $1 billion a year from the artificially high prices that the sugar program guarantees. Some growers have gotten exceedingly rich – most notably the Fanjul brothers of Florida, who are worth hundreds of millions of dollars, and whose cane-growing company Flo-Sun contributed $573,000 to candidates in the last elections. The Fanjuls befriend politicians with bipartisan pragmatism. José Fanjul donates generously to Republican campaigns; Alfonso is a lifelong Democrat whose clout is so great that Bill Clinton once interrupted a meeting with Monica Lewinsky to take his phone call.

Apart from large cane growers like the Fanjuls and their rival, U.S. Sugar Corp., the sugar lobby is dominated by consortia of sugar-beet farmers in the upper Midwest. Individually, these farmers are small, but they are highly organized and can bring enormous pressure to bear on the politicians who represent them. The single largest sugar donor in the 2004 elections, with total contributions of $851,000, was American Crystal, a sugar-beet cooperative in the Red River Valley of North Dakota and Minnesota.

CONTRA CAFTA 

Nowhere does the sugar lobby pursue its interests more ferociously than in debates on free trade. Having successfully lobbied the Bush administration to exclude sugar from the recently ratified free-trade agreement with Australia, sugar producers are now determined to kill the Central American Free Trade Agreement, on which Congress will vote sometime this summer.

CAFTA, which would eliminate most trade barriers between the U.S. and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, is, if anything, embarrassingly deferential toward the sugar lobby. After its full implementation over a 15-year period, it would allow participating states to increase their sugar exports to the U.S. by only 1.7 percent of current U.S. sugar production. The sugar industry is nevertheless intransigently opposed to the pact, and has rejected every suggested compromise.

If the sugar lobby derails CAFTA, its success will, once again, represent the triumph of the few at the expense of the many. CAFTA would bring modest but not insignificant economic gains to both the U.S. and Central America. Perhaps more important, it would advance efforts to create a Free Trade Area of the Americas, and would strengthen the Central American middle class while making the economic and legal systems of participating states more open and transparent. This, in turn, would shore up democracy in the region at a time when Daniel Ortega has resurged as a destructive force in Nicaragua and the anti-democratic message of Venezuela’s Hugo Chávez gains ever-wider currency throughout Latin America.

These advantages notwithstanding, it would be understandable for a legislator to oppose CAFTA in the sincere belief that it would be, on balance, bad for his state. What is remarkable is that the sugar industry has won “no” votes from legislators whose constituencies would clearly benefit from CAFTA.

Among U.S. states, the top two exporters to the CAFTA region are Florida and Louisiana, at number one and number two, respectively. A study by James A. Richardson of Louisiana State University estimates that, after one year, CAFTA could boost Louisiana’s sales in all industries by $339 million and create 2,769 new jobs. The U.S. Chamber of Commerce predicts that, in the same time, CAFTA would increase Florida’s sales by $985 million and create 7,008 new jobs; after nine years, those numbers would rise to $5.2 billion and 36,982. CAFTA would be widely beneficial not only to manufacturing concerns in Florida and Louisiana, but also to agricultural interests, of which sugar is but a small part. The sugar industry comprises 2.4 percent of Louisiana’s farms and 16.5 percent of its farm income; in Florida, it comprises 0.3 percent of farms and 8.7 percent of farm income. Yet the sugar lobby has somehow overridden all competing interests, with the result that almost no one from the congressional delegations of Louisiana and Florida is supporting CAFTA. (The heroic – or simply rational? – exceptions are Reps. Jim McCrery and William Jefferson in Louisiana, and, in Florida, Reps. Katherine Harris, Ileana Ros-Lehtinen, and E. Clay Shaw Jr.)

It is deeply exasperating that a tiny sector on which CAFTA’s effect would be almost negligible is within striking distance of scuttling the agreement. The obstinacy of sugar producers looks especially unreasonable when one considers that protectionism has increased their share of the domestic market from 55 percent in the late 1970s to 89 percent in 2002, and when one notes that population growth over the next decade is likely to increase demand for sugar, thereby offsetting any lost income to the industry.

Seen from another perspective, however, the sugar lobby’s alarm is understandable. Owing to a trade dispute, Mexico does not export as much sugar to the U.S. as is allowed under NAFTA. A resolution of that dispute – along with the complete elimination in 2008 of tariffs on Mexican sugar imports – could put U.S. producers under intense pressure from their competitors south of the Rio Grande. And while the sugar provisions in CAFTA might not amount to much, ratification of the pact would set the precedent that sugar is not off the table in future trade negotiations. With the Bush administration moving forward on talks with Thailand, Colombia, and South Africa – sugar producers all – the domestic sugar industry is probably right to suspect that the end draws nigh.

What the industry’s instinct for self-preservation will not allow it to acknowledge is that this is precisely as it should be. The United States has no reason to grow sugar, and every reason not to. It is a simple question of comparative advantage, as Dennis Avery, a former agriculture analyst for the Department of State, explains: “Yields of sugar in the tropics are twice as high and the costs half as high as growing sugar in temperate regions.” The U.S. sugar program thus defies both nature and economics; in guaranteeing an artificially high price for sugar, it encourages American farmers to plant sugar instead of crops they could grow more efficiently. Ending the domestic sugar program would require them to switch to the crops they should have been growing all along.

While liberalizing world farm trade would probably put a stop to domestic sugar production, it would also, according to Avery, mean that U.S. farmers who now grow sugar beets “could sell wheat to China and India, and make far more money than they do from this sugar.” Cane growers in Florida and Louisiana would have a somewhat harder time of it, since little else could grow on their lands. In the case of the Fanjuls, one is consoled by the thought that they won’t find themselves on welfare rolls any time soon. Smaller farmers could be compensated for their loss, and their transition eased by a gradual phase-out of the sugar program.

The benefits of ending domestic sugar production would not be merely economic; Avery sees liberalized farm trade as “both the leading environmental issue and the leading trade issue in the world.” Given long-term population trends, countries will have to specialize in crops for which they have a comparative advantage – or else undertake policies with disastrous environmental consequences. “We’re headed for a world in which we’re going to feed not 6.3 billion people, but close to 9 billion; and instead of a billion people affording high-quality diets, we’ll probably have 7 billion,” Avery says. “We’ll need nearly three times as much farm output worldwide. So instead of clearing the world’s remaining 16 million square miles of forest [for agriculture], we need to triple yields on land we’re already using. That means getting higher sugar yields in Brazil, and higher grain and oil-seed yields in the Red River Valley.”

HOW TO LOBBY BACK 

No matter what advantages would issue from the elimination of the sugar program, domestic producers will not acquiesce in the removal of their government-mandated profit margins. What is needed, then, is a more effective opposition to the sugar lobby.

While such an opposition would lack the organizational advantage of representing highly concentrated interests, it could exploit the fact that discontent with the sugar program transcends traditional political divides. A coalition to oppose the sugar lobby could draw support from free-trade advocates on the right, manufacturing and agricultural interests that stand to benefit from trade liberalization, and consumer groups that object to high sugar prices. On the left, many environmentalists favor farm-trade liberalization for the reasons discussed above, and are opposed to sugarcane farming in Florida because of the damage it inflicts on the Everglades. Groups concerned with the elimination of global poverty, such as Oxfam, are quick to point out that the U.S. sugar program, along with European export subsidies for sugar-beet growers, depresses world sugar prices and keeps cane-growing tropical nations poorer than they need to be.

As WTO members move toward final agreement on the Doha round of trade-liberalization talks, protectionist schemes for sugar and other crops will grow ever harder to defend. The EU has just announced a plan to cut its sugar subsidies by 39 percent; to the degree that its member states consent in liberalizing their sugar industries, pressure for U.S. reform will increase. Meanwhile, the sugar industry’s opposition to CAFTA has alienated agricultural lobbies traditionally sympathetic to sugar growers. Many such groups suspect that the exemption of sugar from the Australian free-trade agreement resulted in their getting fewer concessions in that pact than they otherwise would have won. John Frydenlund of Citizens Against Government Waste says, “There always has been a circle-the-wagons attitude in agriculture as far as protecting each other is concerned, but I think this time most of the rest of agriculture is starting to look at the sugar lobby as being off the reservation and out only for themselves.” Such frustration already appears to be influencing politicians. Trent Lott, expressing his annoyance with the sugar industry, recently said, “I’ve been in the unholy agricultural alliance for 33 years. I’ve voted for every damned ridiculous agricultural program and subsidy conceived by the minds of men. But I may not anymore.”

The real test will come in 2007, when the next farm bill is negotiated. Reformers should seek nothing less than the total dismantling of the sugar program. To achieve that end, they must begin moving public opinion in their favor now. Their case shouldn’t be too hard to make. They can simply ask Americans what reason there is to continue a policy that hurts consumers, costs jobs, harms the environment, sabotages U.S. trade relations – all to line the pockets of farmers who cannot survive in a competitive market. One suspects a solid majority will reply that there is no good reason at all.

© 2005 National Review