Recently, a professor at an acclaimed business school in the Midwest gave a lecture on the evils of U.S. sugar policy when it comes to free-market economics. One student in that class forwarded the lecture to the American Sugar Alliance and asked for our take.
While the lecture was a misguided assault on sugar policy, it is refreshing to see that some of the country’s best young business minds are still interested in getting multiple opinions and both sides of the story. Below is a portion of my reply.
Thank you for sharing the detailed power point from the lecture you attended.
We may never change the minds of dogmatic professors or zealous sugar buyers and their lobbyists, but I would highlight two themes of rebuttal—one philosophical, the other practical.
Philosophical
I sometimes introduce myself as “a recovering free trade economist.”
Economists are trained to be free trade and schooled in the David Riccardo/Adam Smith theory of comparative advantage—goods should be produced by the countries that can produce them at the lowest cost.
But after years of operating in the real world, I realize what Riccardo and Smith were missing: the pervasive role of government policies that distort apparent measures of comparative advantage.
To wit: Does a “low-cost” country whose government imposes little or no restraints, and costs, on producers to protect the environment, workers and consumers really have a comparative advantage over a developed country whose producers are highly capitalized and technologically efficient, but also face high government-imposed social-standard costs?
Obviously, American sugar producers fall into the latter category. We are rightfully proud that we manage to rank among the world’s lowest-cost sugar producers, while complying with arguably the world’s highest social standards and costs.
This reality of our efficiency contradicts another economic theory: If we are protected by import quotas and tariffs, we must therefore be inefficient and non-competitive.
Practical
Theorists who calculate a deadweight cost to society from U.S. sugar policy are using the wrong price series for their calculations. Invariably, the theorists compare U.S. producer prices with what we rightly call the world “dump market” price.
In reality, this so-called “world” market is relatively thinly traded (20-25 percent of global production), extremely volatile, and does not reflect the actual cost of producing sugar. As Chart 1 illustrates, the world average cost of producing sugar has averaged 50 percent more than the world dump market price over the past 25 years.
So how can there be a world sugar industry if prices don’t reflect the cost of producing the product over time?
It’s because the other 75-80 percent of production sells, in the markets where it is produced, at prices much higher than world prices, and higher than production costs. See Chart 2, showing actual average wholesale refined sugar prices among the largest sugar-consuming countries averaging nearly 50 percent higher than the world dump market price for refined sugar over time.
The governments in all these countries buffer their producers, and consumers, from the vagaries of the world dump market so that their producers can survive and their consumers can depend on reliable supplies and prices.
If one wishes to evaluate American consumer cost or benefit from sugar policy, one need only look at relative retail refined sugar prices around the world. Chart 3 illustrates that world average consumer prices for sugar are 14 percent higher than U.S. prices; the developed-country average is 24 percent higher. The benefit to American consumers is obvious.
Unfortunately, sugar policy critics compare U.S. and world dump-market raw sugar prices (though consumers do not consume raw sugar), assume the U.S. could access all its needs at a low world-market price without that price rising at all, and, incredibly, assume that food manufacturers and retailers will pass every penny of their savings on the cheaper sugar along to consumers.
Historically there is, in fact, no evidence that sweetened-product manufacturers pass their savings from lower sugar costs along to consumers. In practice, the manufacturers and retailers absorb lower input costs as increased profits. Hence, all the benefits from lower sugar prices have accrued to one narrow sector and have not flowed to consumers. (Chart 4 provides a recent illustration: producer prices for sugar down 40 percent since 2010, but retail sugar and sweetened-product prices continue to rise. Chart 5 provides a mini-case study: The producer price of sugar is irrelevant to the consumer cost of a Hershey bar over time.)
In conclusion, there are two legitimate ways to measure the deadweight benefit or loss to the economy from sugar policy:
1. Compare U.S. wholesale refined sugar prices with the domestic wholesale refined sugar prices in major sugar producing/consuming countries.
2. Compare U.S. retail refined sugar prices with prices paid by foreign consumers.
In both cases, the calculations would show a substantial gain to society from U.S. sugar policy, which also generates 142,000 jobs in 20 states and $20 billion per year in economic activity. Absent U.S. sugar policy, these jobs would flow to foreign producers, likely heavily subsidized. And history has shown that if U.S. sugar producer prices were to drop, the benefits would accrue strictly to the food-manufacturing sector and not to consumers, nor to the economy in general.
In short, your professor’s views are not surprising relative to economic theory but are inconsistent with market realities.
Editor’s note: Roney is the director of economics and policy analysis for the American Sugar Alliance and has worked with the U.S. sugar industry for 25 years. Previously, he had served for 15 years with the U.S. Department of Agriculture. Roney has earned a graduate degree in international public policy from Johns Hopkins University’s School of Advanced International Studies.