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Capitol Comment

    Capitol Comment 160 - Can You Differentiate a Taxpayer From a Consumer at the Grocery Store?

    06/13/1997

    The federal sugar program fixes the price of sugar bought in the United States at roughly double the world price, costing consumers 1.4 billion dollars a year.1 Yet, program supporters claim the program does not hurt Americans, pointing to the small budget cost to the taxpayer. The distinction between a taxpayer and a consumer is a curious one -- since the two cannot be distinguished at the checkout line. In fact, consumers are hit twice by the program. First, with higher taxes -- regardless of how "small" the burden is -- and second through higher prices for the food they purchase.

    The federal sugar program fixes the price of sugar bought in the United States at roughly double the world price, costing consumers 1.4 billion dollars a year.1 Yet, program supporters claim the program does not hurt Americans, pointing to the small budget cost to the taxpayer. The distinction between a taxpayer and a consumer is a curious one -- since the two cannot be distinguished at the checkout line. In fact, consumers are hit twice by the program. First, with higher taxes -- regardless of how "small" the burden is -- and second through higher prices for the food they purchase. It is difficult to justify a program that increases the costs for consumers or taxpayers simply to benefit a few sugar growers. The program should be ended -- providing taxpayers and consumers with much needed relief.

    Ending the price support system for sugar will help the consumer in the checkout line, and stop the windfall to an elite group of recipients.

    H.R. 1387, key legislation introduced by Representatives Dan Miller (R-Fla.) and Charles Schumer (D-N.Y.), would help end the U.S. sugar program by phasing it out over five years. Similar legislation failed by only five votes in the House last year. That failure, however, was in large part because the proposal got tied up in the politics of the farm bill. This year Congress has the opportunity to end the federal sugar program without a farm bill getting in the way.

    How the sugar program operates. Sugar processors borrow money from the federal government to pay growers for their beets and cane when it arrives at the processing facility. The processors pay out an average of 60 percent of the loan to the growers at that time, but individual arrangements vary by contract. After the processor sells the sugar, a final payment is made to the grower based on the price at which the sugar was sold.

    The loan program unfairly guarantees sugar producers a minimum price for their product, unlike just about every other business. The loan is secured by the United States Department of Agriculture (USDA), using the processor's sugar as collateral. This is called a non-recourse loan because it allows producers to simply forfeit their sugar rather than repay the loan if the market price does not allow them to recoup the cost of loan interest payments, cost of transporting raw sugar to a refiner, and interest expense of the sugar placed under loan. Many of the growers defend the program based on the fact that they are not receiving a subsidy. Instead they receive program benefits, which are the amount growers receive for sugar beyond the amount they would earn without a sugar program. Given these incentives, it is in the USDA's interest to keep the price floor for sugar as high as possible to allow producers to recover their costs. Otherwise processors will opt for forfeiture, leaving the USDA with unprocessed sugar. Unfortunately for consumers, this means keeping the price of sugar well above the open market price.

    The loan program alone keeps the price of sugar higher than the world price, but the USDA has other tools that keep the price of sugar even higher. The USDA keeps prices high by limiting the amount of raw cane sugar coming into the country. This means that while the budgetary cost of the sugar program is small, it costs consumers dearly. When we consume groceries we literally eat the inflated cost -- and it's not just the price we pay for a bag of sugar. The cost of sugar is hidden in many of the foods we eat every day. Cereal, cake mixes, dairy products, and even bread contain sugar.

    Who benefits from the sugar program? The federal government does not benefit. According to the General Accounting Office, the government spends an additional $90 million dollars each fiscal year when it purchases food because of the sugar program. Forty-two percent of the benefits go to 1 percent of the recipients. Growers receive about 60 percent of the benefit and processors 40 percent. Grower benefits are divided about equally between cane growers and beet growers. Seventeen cane sugar growers receive over one-half of all cane grower benefits. This compares with about 2000 sugar beet growers receiving one-half of the total beet grower benefits. One "family sugar cane farm" received over $65 million.

    The Miller-Schumer legislation ends this unfair deal.It amends the Agricultural Market Transition Act, known as the "Freedom to Farm Act," by requiring sugar processors to repay their government loans in dollars, not sugar. At the same time, the legislation would gradually reduce the loan rate from 18 cents per pound for the 1996 through 1998 crops to 14 cents per pound for the 2002 crop, and would terminate the program altogether in the year 2003. These steps would reduce consumer costs by eliminating the high price floor for sugar created by the sugar program.

    The current government-controlled system is propping up inefficiency. The inefficient producers who exist because of the program would be the group most likely to find themselves in difficulty without a sugar program. However, efficient producers might even produce more sugar without a program. The Miller-Schumer legislation coincides with the weaning of commodities from federal support as enacted in the "Freedom to Farm Act." Gradual phase out would reduce the risks associated with transitioning from a government-controlled price support program. A phase out of the price support system would encourage more sugar trade, which would result in lower prices for Americans.

    The sugar program is not necessary. If U.S. domestic sugar production only occurred as a result of government protection, that would be a clear sign that sugar production did not need to occur at all. But sugar production will continue without federal price fixing. Ending the price support system for sugar will help the consumer in the checkout line, and stop the windfall to an elite group of recipients.

    1 Sugar Program: Changing Domestic and International Conditions Require Program Changes, United States General Accounting Office, GAO/RCED-93-84, April 1993.