This is a blog entry about sugar:Now, since this is not a condiment blog, why focus an entire blog entry on sugar, you ask? What possible dark manipulations could hide in the crystalline sweetness of sugar?

 

No.

Well, a lot, as it turns out. For the last 100 years, the US administration and sugar growers have been playing a high-stakes game of manipulation worth around $3B a year, with several casualties as a result. So let’s dive in. Warning: you may never look at sugar quite the same way again after this post!

 

The core problem, you see, is that the US is not a great place to grow sugar. Sugar grows best in warm, tropical climates. You can grow it in the south of the US, but you can never grow it for the same price as growers that are blessed with more sunshine and a longer growing season. The problem started in the US infancy, just after we were a colony. Sugar was a needed commodity, and so growers sprang up throughout the South to provide it. By the mid-1800’s, when trade had matured enough that buyers of sugar could have gotten it cheaper from abroad, sugar growing was already a major industry that could affect policy. So the growers convinced the fledgling government to pass import duties on foreign sugar. At that time, the argument went that, without protection, no one would buy expensive US sugar, and the collapse of those mega farms (with all of their slaves) would cause massive drops in the value of slaves, endangering the whole economy. So the government passed import tariffs aimed at keeping out cheap, foreign sugar.

Those quotas stayed in placed until 1974, when Congress, shocked at the cost to consumers of keeping high sugar prices (around $3B a year) decided to do away with the tariffs (and the argument that cheap sugar would endanger slave prices didn’t carry as much weight then, apparently). Then Reagan came into power, and was heavily lobbied by US sugar growers who were getting their lunch eaten (literally) by cheap sugar manufacturers who lived in countries where it is actually economical to grow sugar. Reagan was in a bind, though – he had promised to abolish government waste, and he saw expensive tariffs as waste. But he also wanted to help the sugar growers and their lobbyists, and he finally came up with a good idea on how to do both in 1982: Reagan introduced sugar quotas: there were no tariffs (i.e. foreign manufacturers could sell their sugar in the US at whatever price they wanted), but they could only sell so much. And Reagan’s administration actually calculated the ‘so much’ carefully, basically ensuring that there was a constant shortage of sugar in the US. Since there was a shortage, price went up, and so US manufacturers of sugar could survive, without any obvious tariff or protectionist legislation that would make Reagan seem less ‘market-driven’ than he wanted to appear. Win-win. The only losers were foreign manufacturers, and of course everyone who was buying sugar in the US.

 

The manipulation worked so well, in fact, that eventually two of these sugar buyers got fed up of paying artificial high prices for sugar, and decided to find a substitute. The problem? These two buyers were Pepsi and Coca Cola, two of the world’s largest buyers of sugar. When they announced, on the same day, that they were switching from sugar to high-fructose corn syrup, the market for sugar collapsed. In a very real sense, the manipulation to keep sugar prices artificially high had wrecked the market for sugar.

What followed after this was a series of comical consequences as the US government stubbornly continued to try to maintain high sugar prices for the small number of sugar growers in the US, and with each manipulation created more terrible and unforeseen consequences…

For example, since import of sugar became very difficult into the US, foreign manufacturers found a manipulative way of bypassing the law. Sure, you couldn’t bring in sugar into the US, but you could import sugary products without any problem. So began a cat-and-mouse game where manufacturers would produce a high-sugar product, like a fruit drink, a tea, or a candy, and import that to the US, where the sugar would be stripped out of the mix and sold. It was still cheaper to do this than to grow sugar in the US, by the way. The federal agents, on the other hand, would eventually catch on, and ban that sugary product from entry, leading the manufacturers to find another ‘carrier’ product. Since sugar is ubiquitous, the game was only limited by the imagination of the players, and with millions at stake people got very creative indeed.

"It's a sculpture, I tell you! Just a normal, non-sugar sculpture!"

This obsession about maintaining high sugar prices had all sorts of other, unforeseen consequences. The US administration would periodically make sure that other nations knew that it was an open, capitalistic market, where they could sell sugar at high prices and compete ‘fairly’.  One of the first free trade agreements, actually, was called the Caribbean Basic Initiative, and sugar was a major part of it. But, as soon as nations in the Caribbean actually started to send over sugar, though, the US slashed their quotas (sometimes by 75%) to preserve the US growers price. Farmers in those countries that had invested in growing equipment, farms, etc… and who were now shut out of the US market had to find another crop to grow. It turns out that sugar thrives under the same conditions as all sorts of things, several of which had an ever higher market value than sugar.

So, by keeping sugar out, the US essentially created the supply base for a lot of opium and marijuana production in tropical countries.

Ironically, the government recognized the impact of quota cuts on these poor nations, and eventually had to create a Quota Offset Program, which was essentially free food given to countries that were hurt when the US cut sugar quotas. In the 80s, that program was costing $200M alone. The US was literally forced to pay people for not growing cheap sugar that could be imported into the US, all to try and protect the US sugar growers.

But it IS free.

Who were these sugar growers, by the way? The CATO institute estimated that, in 1996, there were only about 16,000 American workers employed by the sugar industry. Most are concentrated in a few Southern states, like Florida, and a few large growers get the disproportionate share of benefits from the US sugar program.

 

While the growers were keeping out the foreign cheap sugar, they were not standing still at home either. The growers had managed to convince Washington that they needed, beyond protectionist measure, a ‘floor’ for prices. Again, to avoid simply handing out money to the sugar producers as a “subsidy”, the government created a system of forgivable loans, only available for sugar growers. Basically, if you grew sugar, you could use a complex series of loans that would mean that if prices fell below a certain amount, the US government would, in effect, buy your sugar. The use of loans was driven by the rationale that, under that system, no one could argue that the US was giving US growers free money (they were simply providing “commercial loans”).

This kind of system worked for a while, as federal agents kept the system in check. But now that growers had, in effect, an insurance system, they expanded their activities. They bought more land, they grew more sugar. And before you knew it, they were producing so much sugar that the local prices began to fall… much faster than the government had planned. As prices fell, the loan program began to be called upon as growers increasingly defaulted on their loans, unwilling to sell the sugar on the open market. In 2000, for example, around 10% of all the sugar produced in the US was in warehouses owned and paid for by the government, as growers, unsatisfied with the prices, essentially forced the government to buy their production. Now the US was paying local producers to buy and warehouses their sugar, while at the same time paying sugar manufacturers abroad to not sell into the US market.

Picture this. 200 times over. Then triple it.

But things didn’t stop there. Because of the insurance policy, as growers expanded, they tended to displace other growers, who did not have the special ‘loan’ program and could not compete with the sugar farmers. This raised all sorts of issues, from contamination of the Everglades (which the government had to create and fund a special $200M program to remedy) to displacement of other businesses such as soybean farmers, who essentially had to compete against a subsidized product.

Let’s summarize: to protect a remarkably few US sugar manufacturers, the government over the years has tried to manipulate the price of sugar by offering free loans to growers, imposing quotas on cheap foreign sugar, banning high sugar imports, giving away free food to growers in other nations, and carving out ‘sugar exemptions’ in every major farm bill that has passed Congress. In return, they got warehouses full of overpriced, useless sugar, an exodus of manufacturing companies that rely on cheap sugar to make products (like candy manufacturers) , environmental catastrophes like the Everglades cleanup, ridicule on the world stage, and displaced non-sugar farmers who cannot compete with the sugar subsidies. And, of course, a population that regularly overpays for sugar to the tune of $2B or so.

Why would any government allow this to happen?

The simple answer is, a bit of lobbying and a good story. In 2012 alone, sugar manufacturers gave $2.1 M to Congress. They always target politicians who sit on Agriculture and Trade committees, and that certainly helps. But the sugar manufacturers also try to spin the story in their favor. Check out their web page, and notice a few things: the emphasis on protecting US manufacturers in a hostile world. The repeated notion that the industry receives “not one dime” from the government (again, true – the sugar program is complex and designed entirely so that that one sentence can be true. None of the programs are direct grants – they are quotas, ‘loans’, and other manipulations).

Simple stuff, you may say, but sometimes simple works… Few manipulations last long, and yet this one has worked flawlessly for close to 200 years. Simple, but effective…