How Much Do You Know About American Sugar Policy?

Some Say Profitable, Others Say Problematic

June is National Candy Month and therefore, the perfect time for those of us who enjoy economics to talk about sugar policy in the U.S. and how it helps or hurts food prices domestically. Really, it's an interesting topic as we consider building back domestic food production and supporting food manufacturing here in America. If we work to protect production rather than rely on imports, will it drive up food prices, or will fewer import costs offset new domestic production costs? While we can’t necessarily apply sugar policy to all agricultural sectors, it’s worth examining the pros and cons of protecting American industries versus sourcing the cheapest options available.

Globally, the sugar market is a distorted one, and purchase prices in the U.S. are typically two to three times higher than they are elsewhere in the world. Sugar, too, is one of those interesting commodities that has experienced inflation but then fallen back to historic lows. Demand is high, and all over the world, markets are influenced by quotas, tariffs, export subsidies, and input subsidies, making it possible to purchase sugar for less than it costs to produce in some instances.

Understanding U.S. Sugar Policy

Roughly 75% of sugar consumed in the United States comes from American farms, and current estimates suggest that 4 billion pounds of sugar will make its way into next year’s market. Sugar policy is unique in that it focuses on supporting not sugar cane or sugar beets, but on processing those plants into sugar. Sugarcane and sugar beets, being large and quickly perishable items, means they must be processed quickly. USDA loan support forces processors and producers to have strong relationships, and money trickles down the line, creating a favorable dynamic for both parties. 

U.S. policy also makes use of overall allotment quantities with specific production limits to control supply. Allotments are based on historical production capacity and are doled out state by state. If a quantity allotment is not met, it can be absorbed first by another state before another country can vie for the sale. Import limits are also managed through tariff rate quotas. While the U.S. does rely on some sugar imports, only a small percentage can be exported duty-free to the country. Anything above quotes is subject to that fiscal year’s tariff rate, which directly affects food manufacturing companies looking to source cheaper sugar.

Is Protection Policy Problematic?

Certain American food manufacturing companies argue that sugar policy limits their access to less expensive sugar options, which reduces their net income. At two to three times more costly than sugar sourced from Brazil, Thailand, or India, the more expensive American sugar adds costs to food production and, they conclude, equals price increases for consumers. 

In 2002, Kraft Foods moved production of its candy line, Life Savers, from Michigan to Canada, citing a $90 million savings over 15 years in sugar purchases as the primary motivation to relocate.  Similarly, a year later, Spangler Candy, which makes Dum-Dums, conversation hearts, and Necco Wafers, announced their move to Mexico, also prompted by cheaper sugar prices. For companies such as these, whose final product is somewhere in the vicinity of 70% sugar, the cheaper the sugar, the greater the profit. 

In 2006, the Commerce Department conducted a study that revealed that for every farming or processing job saved by sugar policy, three manufacturing or confectionery jobs were lost. And, a more recent paper by economists at Iowa State University and North Carolina State University concluded that American consumers absorb $2 to $4 billion annually due to high-priced sugar.

How do Food and Beverage Companies Profit Under Sugar Policy?

Policy is protective of the growers and processors, ensuring they have a market for their goods by restricting imports of global sugar supplies that are often heavily subsidized. But, other economists argue, higher-priced sugar isn’t harming food and beverage companies. Instead, protecting production in the U.S. has contributed to robust infrastructure and stable supply chains for the sugar industry, which also carries its own financial value.

Rather than just looking at the cost of sugar as an ingredient and the price a candy bar can be sold for, current policy backers see a bigger picture. Giving food manufacturers easier access to global sugar supplies might mean they can purchase less expensive sugar, but it also comes with potentially expensive risks and costly variables.

As it stands, food manufacturers don’t have to invest much in the way of infrastructure. Processing plants, storage facilities, and shipping routes are well established in the United States, and typically these structures are in close proximity to food manufacturing plants. If companies were to purchase from outside the United States, they would have to consider investing in the building of more efficient supply chains. Sure, the sugar might be less expensive, but getting it where it is needed could cost more.

Additionally, the allotment system means sugar prices and supply remain stable. We know how much sugar we plan to produce and process, and make available as a food supply. Amounts are never so depressed that prices skyrocket, and any gaps in supply can be filled quickly, either domestically or by procuring it through global supplies. As a result, the budget for sugar stays consistent for food companies. If the current sugar policy were to disappear and food companies had more of an option to purchase cheaper sugar, they would be at the mercy of less efficient supply chains and more volatile pricing. Some even believe that sugar production would dry up completely in the U.S., which would tighten global supply since America is the fifth largest producer, and sugar prices would go up anyway.

It circles back to what seems to be an age-old question: what has a more positive impact on a company's bottom line, predictability, or healthy competition? By employing a policy that protects America’s farm families and sugar processing operations, we’ve removed global competition. It’s easier to budget for sugar when we know what it costs, even if it is more expensive than in other places. But, for businesses that rely primarily on sugar as an ingredient, the option to buy it at a lower price creates a path for increasing net income where it otherwise would have been relatively fixed.