Sugar Low Is $300 Million Aid Headache for U.S. Taxpayers

(Bloomberg) – Federal aid to U.S. sugar growers has helped spur near-record domestic production just as a free trade deal is encouraging a flood of Mexican imports — triggering emergency measures that may cost taxpayers $300 million.

Domestic sugar producers have long been protected by federal programs that help establish a price floor, as well as quotas to limit imports from outside North America. Prices declined sharply anyway this year, showing that the government’s strategies haven’t stemmed losses from overproduction, both supporters and critics say.

Since June, the glut led the U.S. Department of Agriculture to buy sweetener to prop up prices, sell it at a loss to biofuels producers and take steps to reduce imports. The efforts have barely dented the surplus.

“The government is still supporting growers to produce more sugar than we actually consume,” Arthur Liming, a Chicago-based futures specialist at Citigroup Inc. said in a telephone interview.

The total cost to the government of subsidizing the sugar industry for this year’s crops may be between $200 million and $300 million, according to Tom Earley, an economist with Agralytica, a food and agriculture consulting firm based in Alexandria, Virginia.

Manipulated Market

“The way the sugar program manipulates the market is the cause” of the oversupply, Jennifer Cummings, a spokeswoman for the Coalition for Sugar Reform, a Washington-based group that includes the U.S. Chamber of Commerce, the American Bakers Association and the National Association of Manufacturers, said in a telephone interview. “The USDA is doing the best it can to manage this, but the taxpayer costs are only going to rise.”

That estimate includes forfeitures already made, anticipated future losses, and the cost of other government efforts including direct sweetener purchases and losses from sugar-to-ethanol sales.

While Americans are eating the most sugar since the 1970s, that’s still not enough to absorb increasing supply. Sugar-beet harvests expanded almost twice as fast as demand in the past four years, and the cane crop in the year ended Sept. 30 was the biggest since 2004. The 2013 crop is forecast to total 9.015 million tons, just short of the all-time high, according to the USDA. Sugar beets, grown in northern states, may reach a record, the agency estimates.

Sugar Stockpile

Under the main form of support, the government issues loans to processors backed by the sugar itself. When prices drop below a pre-determined point, companies find themselves with sugar worth less than the value of the outstanding loan. Federal law lets them forfeit the collateral and leave the government with a mountain of sweetener.

The terms of the program restrict how the government may get rid of its stockpile: Authorities can sell it for fuel, but not for food production, to avoid competing with private producers.

The USDA has twice this year auctioned it off to ethanol producers — hoping to reduce its surplus at the same time it aids the biofuels industry. Soft demand for sugar-based ethanol, however, have resulted in losses as the agency sells for less than the value of the defaulted loans. The most recent round, announced last week, resulted in a loss of $53.3 million.

The government’s efforts have reduced the losses, though the record glut remains a challenge, Agriculture Secretary Tom Vilsack said. “As time goes on we get a better understanding of what the surplus is and what the challenges are,” he told reporters last week.

‘Dumping Ground’

The oversupply has been building since 2008, when limits on Mexican sugar were lifted under the North American Free Trade Agreement, Earley said in a telephone interview.

Before Nafta, Mexican sugar imports were restricted under a global quota system that remains in effect for other countries. The treaty gives Mexico unlimited access to the U.S. while quotas elsewhere still leaves American sugar at an artificially high price, making the domestic market attractive to Mexican sellers, said Earley, who has done analysis for the sugar-reform coalition.

The USDA has also exchanged part of the inventory it took from forfeitures for import credits held by refiners who typically would bring raw sugar from overseas to later re-export it.

Mexican Production

High prices from 2009 to 2011 encouraged Mexican producers to expand output and increase shipments to the U.S.

“The United States has become the favorite dumping ground for unneeded, subsidized Mexican sugar — a significant portion produced at government-owned factories,” said Judy Sanchez, a spokeswoman for U.S. Sugar Corp., a Clewiston, Florida-based processor, in a statement.

Low prices are expected to discourage production in the coming year. The USDA projects that the sugar crop produced in the fiscal year that began Oct. 1 will be 3.5 percent smaller than the previous year.

If that boosts prices, it would allay the government burden.

Trading Price

Domestic unrefined sugar for May delivery closed at 21.7 cents a pound today on ICE Futures U.S. in New York, above the roughly 21-cent federal default level. While prices climbed 17 percent from a record low 18.7 cents on July 8, after the USDA began taking steps to curb the surplus, sugar is down 12 percent from a year-earlier and 41 percent cheaper than two years ago.

Separate bills in the U.S. House and Senate approved this year to reauthorize U.S. farm subsidies for the next five years left the sugar program unchanged. In both chambers, amendments to roll back subsidies narrowly lost. Congress has yet to give final approval to a law, which would replace programs that expired Sept. 30.

“The USDA is not trying to come up with an equilibrium price,” Liming said. “It’s a political mandate and the point is to support farmers.”

Ending government buybacks and other steps to control the sugar market are unlikely to stave off surpluses in the near future, said Jack Roney, economics director for the Arlington, Virginia-based American Sugar Alliance, a collection of grower groups in 16 states.

“The problem isn’t U.S. sugar policy, it’s a flaw in Nafta,” Roney said. “We’re on the brink of closing some operations here, and that will cost jobs.”

Any lasting solution to ease the glut will have to come from the market, not government, Earley said.

“High prices encouraged production, and low prices will reduce it,” he said. “The free market works, but it’s going to be painful for some people.”