ASA Under the 2008 Farm Bill, April 1 is the first day of the year that the U.S. Department of Agriculture can tinker with foreign sugar import quotas.
Large food manufacturers have started the full-court press, aggressively lobbying ag officials to increase import levels above the 1.3 million metric tons of sugar that the United States has already committed to import in 2009.
Before making its decision, the USDA now must wrestle with a number of questions: Is the market adequately supplied? Are food manufacturers really struggling? What would happen if imports were increased?
Is the Market Adequately Supplied?
Jack Roney, an economist with the American Sugar Alliance (ASA), says there is no better indicator of supplies than price. Unfortunately for sugar producers, sugar prices are weak.
“Raw sugar prices plummeted by 15 percent from summer to mid-March,” he said, explaining that during that period prices were well below the break-even level.
While raw prices have rebounded slightly in the past week, they are still lower than normal and barely hovering around the break-even point. “Obviously there’s enough sugar,” he said.
Roney also explained that he speaks with sugar producers every day and is unaware of a single case where sugar buyers can’t find enough sugar.
And, things could get worse for sugar growers hoping for higher prices. The USDA recently received word from Mexico that there’s going to be even more Mexican sugar entering the U.S. market this year.
In a Jan. 28 letter, Gerardo Ruiz Mateos, Mexico’s Secretary of the Economy, warned, “[E]xports to the US market are expected to reach around 750,000 to 800,000 ton this year, much higher than [USDA] projections (571,000 tons).”
“I respectfully ask you to consider the new figures provided before allocating any import quotas to third countries,” he concluded.
Are Food Manufacturers Really Struggling?
Industrial sugar buyers have long used financial arguments to urge import increases. An oversupplied market equals lower ingredient costs and higher profits for food companies. But the story of economic woe they’re spinning in Washington doesn’t jive with what they’re telling Wall Street.
The New York Times reported on March 25 that candy companies are nearly recession proof and are turning sweet profits during tough economic times.
“Many big candy makers are reporting rising sales and surprising profits even as manufacturers of other products are struggling to stay afloat,” the paper reported. “Cadbury reported a 30 percent rise in profits for 2008 while Nestle’s profits grew by 10.9 percent, according to public filings. Hershey…saw profits jump by 8.5 percent in the fourth quarter.”
This conclusion is consistent with a report released by the National Confectioners Association in 2008, which found: “Not only is confectionery a large product category at $28.2 billion in retail sales, it is a high profit category. Margins average more than 35% for the category.”
What Would Happen if Imports Were Increased?
No one disagrees that food manufacturers would make more money if additional subsidized foreign imports flooded the sugar market, although, Jack Roney of the ASA noted this will not translate to cheaper grocery bills for everyday citizens.
And, he cautions that the economic pressure oversupplies will place on domestic producers could actually harm candy companies in the long run. This is a sentiment echoed by the country’s sugar refiners.
Increasing imports would “jeopardize the ability of U.S. cane sugar refiners and beet processors to meet market needs by weakening an industry already under pressure from rising costs and stagnant prices,” according to a March 31 report by the American Cane Sugar Refiners’ Association.
“Without a vibrant U.S. cane and beet sugar industry, and without cane refiners providing the elasticity to process both domestic and foreign raws, industrial users and consumers would face the three monumental problems of ensuring quality, supply, and stable prices,” that report concluded.
McKeany-Flavell Company, a highly regarded commodity research firm from California, issued a similar warning to food manufacturers in a February study that examined the ramifications of losing the domestic sugar industry.
“Our recommendation: be careful. Significantly greater United States dependence on imported sugar may not guarantee lower sugar pricing over the long term,” the company wrote, while noting the inconsistent quality and delivery issues that would result if America had to depend on foreign sugar.
All the answers the USDA needs are readily available. Sugar producers are hopeful the USDA is paying attention and will leave import levels alone.
As the cane refiners’ report explained: “It is imperative that the Department not act precipitously to increase the quota since sugar, once entered into the U.S., cannot be removed. Conversely, additional imports can always be bled into the system should a genuine need materialize at a later date.”