Don't Repeat Our Mistakes

Published in the November 2012 Issue Published online: Nov 06, 2012 Patrick Chatenay

As Congress crafts the 2012 Farm Bill, large food manufacturers are lobbying to let foreign sugar supplies flood the U.S. market, which they say will lower prices and improve competitiveness.

These arguments match those made by industrial sugar users in the European Union before it overhauled its sugar policy in 2006, but the unintended consequences since that reform have included job loss, higher consumer prices and increased taxpayer cost.

Before the reform, E.U. sugar policy bore a close resemblance to U.S. sugar policy, so it is worthwhile asking: What lessons can U.S. lawmakers take from the E.U. model?

The first lesson is that "liberalization" breeds supply uncertainty and price instability. After dropping initially by 22 percent, bulk refined sugar prices in Europe are now 10 percent higher than they were before the reform.

Since the end of 2010, the E.U. sugar market has been characterized by high and volatile prices, and a shortage of supplies. The sugar users who lobbied hard for the reform-companies such as Nestlé and Kraft-are complaining just as loudly as before.

The E.U. is now realizing that the world market is a poor benchmark by which to set a proper sugar policy. Not only is it intrinsically unstable, but it remains the outlet for heavily subsidized production, not least from the world's major exporter, Brazil, where half the sugarcane is sold onto government-controlled markets.

The second lesson is the horrendous social costs attached to lower margins and to reduced domestic production. In the E.U., 83 mills were closed, causing some 120,000 job losses and irreparable damage to the farming communities involved. Five E.U. member countries gave up sugar production entirely; five others more than halved production.

Two traditional developing country suppliers shut down their industries and more will follow. In the remaining developing country suppliers, cost-cutting is shrinking investment and the provision of social services at the risk of destabilizing whole communities.

In the current public finance environment, another lesson is important: whereas the old E.U. Sugar Regime carried no cost to the general taxpayer, the reformed Sugar Regime is costing the public purse about $1.6 billion a year. In addition, to soften the blow to developing countries of expected lower prices, an aid package of $1.4 billion was agreed, and it may not be the last.

Last but not least, examination of the data doesn't support the assumption that lower sugar prices will be transmitted to the end consumer. The food manufacturers and the retailers have pocketed any price drops, and E.U. grocery shoppers are today paying 20 percent more for sweetened goods.

Even the European Court of Auditors concluded that there would be no pass-through of savings to consumers after examining studies commissioned by the E.U.

In short, the 2006 E.U. Sugar Regime reform implemented many of the ideas promoted by opponents of the current U.S. sugar policy. At considerable cost to stakeholders and without any measurable benefit to the consumer, the European Union has thus put at risk the safety of its supply of sugar.

Surely, there are lessons to be pondered here as American policymakers look to decide on the future of U.S. sugar policy. Hopefully, they won't repeat our mistakes.