Our Massive Sugar Subsidy Scheme Is Not So Sweet for Consumers or Most Farmers

Imagine a market where the government controls both the price of goods and how much producers can sell, and where excess goods are bought up by the government and steered toward government-favored industries and away from consumers.

Think you’d have to go back in time to the Soviet Union to find such a program? Or maybe travel to North Korea? Unfortunately, these measures are alive and well today in America’s backward, anti-competitive sugar program.

Created in the 1930s to prop up sugar farmers at a time when the Great Depression was wreaking havoc on the farm economy, the federal sugar program still serves as the main support to both cane sugar and beet sugar producers.

The convoluted cycle begins with price supports that come in the form of loans to sugar processors. These loans require the processors to provide payments to farmers that are proportional to the value the loan brings the producer, thus propping up the price for farmers.

So how does the government make sure these loans are repaid? By controlling the amount of sugar sold in the United States for domestic consumption. The government sets an “overall allotment quantity” that both aims to keep prices high and to adequately supply domestic demand. This allotment is then divided between cane sugar and beet sugar, which, for cane sugar, is divvied up between the sugar-producing states and their processors, and for beet sugar, is divvied up simply among producers.

If anything happens to disrupt this centrally planned scheme – such as a processor being unable to produce their allotted quantity – special rules exist to ensure the allotments are given to other processors.

Further complicating matters, the processors guarantee their loans using the sugar as collateral. In the event that they can’t make good on the loans, the sugar is forfeited to the government. In an effort to avoid this scenario, the government creates programs such as the “Feedstock Flexibility Program,” where it buys sugar from processors for use in ethanol production. And in the case that the government does obtain forfeited sugar, that sugar is also sold for ethanol production, but not for domestic use.

To prop up this incredibly complicated scheme, the U.S. Department of Agriculture limits the amount of imported sugar by imposing a progressive tariff scheme. Below a certain amount, reset each year by USDA, sugar can be imported with a tariff of 0.625 cents per pound, but anything above the level set by USDA receives a tariff of 15.36 cents per pound for raw sugar and 16.21 cents per pound for refined sugar.

This, of course, puts the United States at odds with many trading partners, and adjustments have been made for countries with which we have free trade agreements. However, for those in favor of the program, free trade is noted as a challenge, not a blessing for consumers. According to the USDA’s Economic Research Center,  the “main challenge to the program comes from sugar imports from Mexico that now enter duty-free under the terms of the North American Free Trade Agreement (NAFTA).”

In the end, the program simply boils down to a massive subsidy scheme aimed at benefitting a small number of farmers. The government guarantees prices through loans, and then bends over backwards to keep those loans good, both by controlling domestic supply and then buying unmarketable sugar for use in ethanol.

How many farms does it take to justify such a generous program? Less than 6,000. Currently, there are around 5,000 sugar beet farms and slightly less than 1,000 sugar cane farms. The farms support around 61,000 jobs and, without federal support, it’s clear that those farmers would suffer due to world competition. So this very concentrated lobby gets its way each time the Farm Bill comes up in Congress – as we all know, it’s hard for Congressmen to look their constituents in the eye and admit that their actions might cost them their jobs.

The problem is the seen and unseen costs of the program. First, the program forces the consumer to pay significantly more for sugar than the world price, sometimes more than double the price. And despite the government’s best efforts to make the program costless by selling sugar for ethanol, the program does lose money at times, including a $295 million loss in 2000.

But beyond these immediate costs, the hidden effects are much more sinister. The program arguably supports some American jobs, but at the cost of others, in the form of decreased manufacturing employment. Numerous industries use sugar as an input, and the artificially high prices hurt their ability to hire workers.

According to the Coalition for Sugar Reform, an industry group dedicated to fairer sugar policy, nearly 127,000 jobs in sugar-using industries were lost between 1997 and 2011. A study by the International Trade Administration once estimated that each farming job saved costs three manufacturing jobs, an incredibly high price to pay. Furthermore, high sugar prices drive plants overseas, where input prices are lower.

These are the unfortunate consequences that arise when the government gets in the business of picking winners and losers. Fortunately, a few brave congressmen have realized this over the years and championed reform. Last year, ten members of the  House Agriculture Committee voted for an amendment by Rep. Bob Goodlatte, R-Va.,  to reform the program by loosening import restrictions. On the Senate side, a bipartisan reform effort spearheaded by Sen. Jeanne Shaheen, D-N.H., was tabled in committee.

But as is often the case with special interests, the sugar lobby won in the end.  Currently, two bills sit in committee in both the House and Senate to reform these sugar market controls, but their fate looks dim, given the history of the program.

It’s worth asking why the manufacturing industry lobby loses, particularly when the government is stressing the need to create manufacturing jobs. The truth is, the government has given some goodies to the industry to attempt to assuage their concerns. To keep U.S. manufacturers competitive in world markets, they’re allowed to participate in a re-export program that allows them to buy sugar cheaper than the average consumer if the final product will be sold abroad. This does help lower the burden in some ways, but it’s a completely nonsensical solution that deepens the unfairness for the American customer. In typical Washington fashion, unfair regulation leads to more unfair regulation as each group is appeased, as Congress applies a series of bandages rather than offering a cure.

Unfortunately, this year’s Farm Bill likely will leave the program unchanged. Both the House and Senate drafts offer no reform, and unless things change when the bills are debated on the floor, the taxpayer will be on the hook for this wasteful spending for years to come. It’s infuriating that at a time when taxpayers are being squeezed, the sequester is causing furloughs and unemployment remains high, Congress seems incapable of acting to eliminate wasteful, harmful programs. The taxpayer deserves the sweet deal, not Big Sugar.

Lori Sanders is a Senior Fellow and Outreach Manager of the R Street Institute.