The cost of the U.S. sugar program revisited

Contemporary Economic Policy, Jan, 2003 by John C. Beghin, Barbara El Osta, Jay R. Cherlow, Samarendu Mohanty

I. INTRODUCTION

The sugar program has used farm commodity and trade policy instruments to maintain domestic sugar prices at levels that exceed world prices without requiring the government to buy large quantities of domestic sugar in most years. (1) This article analyzes the effects of eliminating the sugar program on prices, production, and welfare using a multimarket model of the domestic and world sweetener markets. Here are estimated the economic welfare effects of the program by assessing welfare losses and gains resulting from the elimination of the sugar program as an estimate of the gains (losses) accruing to each group potentially affected by the presence of the program. This analysis includes the U.S. markets for sugar beet and sugarcane production, corn and high-fructose corn syrup (HFCS) production, sugar refining, food processing, and the final consumption of sugar and food products containing sweeteners. This domestic model is embedded into a world sugar model to estimate the impact of the U.S. sugar program on world prices of sugar. In addition, the net loss to the U.S. economy (economic welfare gains minus losses) resulting from artificially high sweetener prices is estimated. This net loss includes economic inefficiencies (deadweight losses) and economic rent transfers to foreign sugar exporters.

The analysis deals explicitly with three issues that often have been raised in the context of U.S. sugar policy but never addressed simultaneously in previous work (Congressional Research Service [CRS], 2001; Koo, forthcoming; Marks and Maskus, 1993; Sumner, 1999; U.S. General Accounting Office [GAO], 1993). First is the recognition that the United States is a large country in the world sugar market and that U.S. policy changes affect the import price of sugar. The second focus of this analysis relates to the linkage between sugar market prices and prices paid by the consumer for goods containing sugar. The price of sugar influences the cost and price of sweetener-intensive food items and creates a pass-through effect of the sugar program on processed food to consumers. Third, the article considers imperfect competition and profit in food processing. The eventuality of a profit markup influences the extent of the pass-through of sweetener costs to consumers and therefore the distribution and size of the welfa re gains from removing the sugar program. (2)

The authors estimate (all figures in 1999 dollars) that with the removal of the program, U.S. cane growers, sugar beet growers, and beet processors in 1998 would have lost about $307 million, $650 million, and $89 million, respectively. Sweetener users would have gained about $1.9 billion. The deadweight loss of the current sugar program for 1998 was estimated at around $532 million, and the net loss to the U.S. economy was $893 million. World sugar prices would increase by 13.2% with the removal of the U.S. sugar program. The magnitude of these aggregate gains is relatively insensitive to changes in assumptions regarding the industrial organization of the food industry, the extent of price pass-through, and the time horizon considered. However, these assumptions affect the distribution of gains within sweetener users (food industry, final consumers). This point is elaborated later.

Several motivations underlie this investigation. First, the divergence of interests between the domestic coalition of sugar crop growers and raw cane processors on one side and cane refiners and food processors on the other has been rapidly widening with the recent increasing disparity between domestic and world raw cane prices. Second, the U.S. sugar program is a disproportionate contributor to the aggregate measure of support (AMS) monitored by the World Trade Organization (WTO) under the Uruguay Round Agreement on Agriculture. Among U.S. farmers, sugar producers received the highest policy transfer (in percentage of crop value) for the policies falling under the scrutiny of the WTO in the so-called amber box. The 1998-2000 average AMS for sugar was equal to 50% of crop value, compared to an average of 7% for all crops during this period (Hart and Babcock, 2001). The Doha round of WTO negotiations has just started, and the domestic policy debate regarding the 2002 farm bill is emphasizing compliance with ex isting WTO limits on trade distorting subsidies. The two policies are now more interdependent than ever because of increased WTO pressures to lower these limits in the Doha Round (Sumner, 2000). Hence, it is propitious to revisit the social cost of such large transfers and distortions in the double context of the changing political economy of the sugar program and the ongoing debates on farm and trade policy reforms.

The U.S. sugar program has been repeatedly analyzed over the years, because it not only has evolved but also resisted trade liberalization and has become one of the last bastions of protectionism in U.S. agriculture. Examples of recent analyses of distortions in the U.S. and world sugar markets include Boyd et al. (1996), Haley (1998), Koo (forthcoming), Marks and Maskus (1993), Sheales et al. (1999), and Wohlgenant (1999). These studies combine various degrees of sophistication in their assessment of the U.S. sugar program and its impact on world markets and in their treatment of sweetener demand by food processing and final consumers. This article's comprehensive approach is a novel and useful complement to these previous studies.