Government Intervention Equals Soaring Sugar Prices

In our earlier post Food Crisis Watch: Sugar On Fire- Writing On The Wall? we attributed the current runaway prices in world sugar partly to adverse weather (in India) which has affected supply, growing world demand, and most importantly, the unintended effects from government policies (e.g. export bans).

The Wall Street Journal gives a US perspective on the current sugar pricing dynamics... (all bold highlights mine-our comment below)

``Some of America's biggest food companies say the U.S. could "virtually run out of sugar" if the Obama administration doesn't ease import restrictions amid soaring prices for the key commodity.

``In a letter to Agriculture Secretary Thomas Vilsack, the big brands -- including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. -- bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.

``The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn't allow them to import more tariff-free sugar. Current import quotas limit the amount of tariff-free sugar the food companies can import in a given year, except from Mexico, suppressing supplies from major producers such as Brazil.

``While agricultural economists scoff at the notion of an America bereft of sugar, the food companies warn in their letter to Mr. Vilsack that, without freer access to cheaper imported sugar, "consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted."

``Officials of many food companies -- several of which are enjoying rising profits this year despite the recession -- declined to comment on how much they might raise prices if they don't get their way in Washington.

``The letter is the latest salvo fired in a long-simmering dispute between U.S. food companies and the sugar industry over federal policy that artificially inflates the domestic price of U.S.-produced sugar in order to support the incomes of politically savvy sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South. Most years, the price food companies pay for U.S. sugar is twice the world level.

``Ron Lucchesi, head of procurement for Gonnella Frozen Products in Chicago, which signed the letter, said current U.S. sugar policy distorts pricing. Though sugar accounts for only 0.5% of total costs at Gonnella, soaring sugar prices are "part of the equation" that already has led the company to raise prices for kaiser rolls, hamburgers and hot dogs, all of which include sugar.

``The issue is coming to a boil again because sugar prices, both in the U.S. and globally, have soared to unusually high levels for more than a year and show little sign of easing any time soon. Prices of sugar futures contracts have risen 95% so far this year, hitting a 28-year high in recent days. On Wednesday, raw-sugar futures jumped 4.8% to 22.97 cents a pound at the Intercontinental Exchange.

``Prices are up because the world is consuming more sugar than farmers are producing. One big factor: The world's largest sugar producer, Brazil, is diverting huge amounts of its cane crop to making ethanol fuel. Likewise, the food industry has complained bitterly in recent years about the U.S. ethanol industry's ravenous appetite for corn, which helped push up prices for that key ingredient too.

``More than half of Brazil's sugar-cane crop is processed into ethanol while about one-third of the U.S. corn crop is made into the alternative fuel. An erratic monsoon season in India also has led sugar analysts to reduce their production forecasts for the world's second-largest sugar producer.

``At the same time, U.S. sugar supplies are tight. In its monthly report on global farm markets released Wednesday, the Agriculture Department said it expects U.S. sugar supplies by September 2010 to drop 43% from this fall."

Some insights from the article:

-Import quotas limits sugar imports (hence limit supply)

-Import quotas signify as subsidy to the sugar industry.

-Limited supply against greater demand equals high prices.

-Consumers ultimately pay for higher prices from which the sugar industry benefits.

Hence subsidy is a form of taxation where to quote Murray Rothbard, ``Subsidy has always meant that one set of people has been taxed and the funds transferred to another group: that Peter has been taxed to pay Paul."

Ergo, consumers are taxed and the funds/rent go to the sugar industry.

-Moreover, ethanol "clean air" mandates (another set of subsidies) have been shifting the supply and demand patterns as agri feedstocks (US corn and Brazil's sugar) for biofuel based energy now compete with food.

-End result: shortages and skyrocketing prices. In short, runaway sugar prices is a prologue to similar patterns in agricultural produce.

Lesson: To quote Milton Friedman ``If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand!”