US sugar price supports have massively distorted market, consultant says

“The 2008 farm bill changes have destabilized the US and Mexican markets.  In the initial years from 2008 to 2012, as a result of those provisions, the USDA kept supplies in the US unduly tight,”​ said Tom Earley, vice president of Agralytica.

“The short story is producers in US and Mexico responded to those by increasing production, and now we have too much sugar,”​ Earley said in a conference call with journalists hosted by the National Foreign Trade Council discussing the firm’s latest paper on the subject of sugar policy. The NFTC is advocating for a number of changes to the way sugar prices and supplies are regulated.

The US House of Representatives is gearing up to debate the 2013 farm bill in the coming weeks.  An effort to include an amendment in the bill revising the sugar price support program has already been voted down 55-45 in the Senate.

Distortions from 2008 farm bill​

Early asserted that changes made in the 2008 farm bill that altered the situation that had prevailed previously under the 2002 farm bill have had serious negative impacts, leading to a boom and bust cycle in both sugar prices and production capacity.

“The average whole sale refined sugar price under the 2002 farm bill averaged 28 cents a pound,”​ Earley said. “Thus far under the 2008 farm bill it averages 46 cents a pound.”​

“During the (years of the) 2002 farm bill sugar production was pretty flat from 2002 to 2007,”​ Earley said. “As prices rose to record levels and averaged very -1high  levels in 2008  the response has been to increase production both in the US and in Mexico. Sugar production since 2008 is up 25% in both countries.​

“That is the typical argument we’ve made is why we need sugar reform.  The surpluses that have been generated have now started to overwhelm the system,” ​Earley said.

Government-owned sugar​

A provision of the farm bill allows sugar producers to get low cost loans from the government, using their sugar as collateral.  When the time comes to pay the principal and interest on the loan, and the price of sugar is down, producers can forfeit their product instead of forking over cash. As a result, the government can end up owning large quantities of sugar, which then must be sold as possible (generally at a loss) without distorting the market, and that sugar racks up warehousing costs in the meantime. All of these costs are borne by taxpayers, Earley said.

“The government does not want to own sugar. Raw sugar prices are now at a level where it makes sense for a producer to forfeit,”​ Earley said.

Sugar prices have plunged, brought on a by a fairly sudden oversupply, Earley said.  Mexican producers have been increasing their acreage for several years but recent poor harvests have blunted the effect.  But this harvest season conditions were favorable, and all those extra acres have come into play.

“In Mexico, they have had gradually increasing acreage but have had poorer than average cane yields.  This year the crop is 7 million metric tons, up 2 million tons over last year.  That is a lot of sugar and it is a problem both for Mexico and for the United States,”​ Earley said.

Sugar for ethanol​

Another provision that distorts markets, and one that the NFTC recommends eliminating, is a provision by which surplus sugar owned by the government can be diverted to ethanol production.  It allows ethanol producers to play corn prices against sugar, to try to get the best deal on feed stocks, Earley said.

“This year and next we estimate the USDA will have to divert 1 million tons of sugar to ethanol to balance the market at a cost of $250 million. If we have a big corn crop and corn prices go down, a bigger subsidy will be required,”​ Earley said.

Reform prospects​

Bill Reinsch, president of the NFTC, said prospects for reform of the sugar price support system are better in the House.  The Senate is always a tough nut to crack, because sugar growers and producers have operations in 13 states, potentially lining 26 Senators up against any price support reform even before any debate has begun.

“There are a huge number of people in the House who have no constituent interest in the issue,”​ Reinsch said.

The Agralytica paper on the subject recommended ending the ethanol diversion program, putting the loan guarantee levels back to those of the 2002 farm bill, reforming supply restrictions and making “reasonable prices”​ one of the criteria for import quotas.