Intervention South of the Border Sours Sugar Market
An unprecedented flood of sugar imports from Mexico has sent refined sugar prices spiraling down 57 percent in the past 24 months. As a result, prices are currently limping along at about 25 cents per pound – back to the lows of the 1980s.
Low prices are nothing new for sugar producers. Sugar prices have been under 30 cents for 24 of the last 30 years. What is new for sugar farmers are rock-bottom prices in the face of substantially higher production costs, which were somewhat offset temporarily by improved prices in 2010 and 2011.
“It would be like the price of corn suddenly tanking and falling from $7 a bushel to the 1980s-level of $2 a bushel,” Jack Roney, an economist with the American Sugar Alliance, said in an interview with Farm Policy Facts. “You just can’t make the numbers work.”
With today’s ever-climbing production costs and regulatory burden, sugar farmers will be hard pressed to survive if current market conditions persist, Roney explained. And the future of the U.S. market largely rests with actions in Mexico, he said.
Mexico has shown an unwillingness to let inefficient segments of its industry go out of business. In fact, when half of all U.S. sugar facilities closed because of reduced margins in the 1980s, 1990s, and 2000s, the Mexican government took direct ownership of half its country’s sugar production. Today, it still owns one-fifth of the industry.
“Because the Mexican government won’t let bad businesses fail, the country is over producing and flooding the U.S. market with its excess sugar,” said Roney. “The government is actually Mexico’s biggest sugar exporter.”
And those exports have exploded in recent years. Mexican sugar entries to the United States have grown from almost nothing before 2008 to more than 2 million tons thisyear. That represents about 20 percent of the entire U.S. market.
To make matters worse, press reports have surfaced of more than $110 million in new direct Mexican subsidies to help sugarcane growerscope with the oversupply problem they created.
“Without Mexican government intervention, the North American market and U.S. farmers wouldn’t be in the mess we’re in today,” said Roney. “Simply put, it’s impossible for efficient U.S. producers to compete with the treasury of a foreign country.”
U.S. sugar policy is the only buffer domestic producers have right now.
That policy gives growers some relief on the government-backed operating loans. Loans aren’t forgiven, but sugar policy enables loans to be repaid with collateral crops instead of cash, as is the case with USDA non-recourse loans for other commodities.
Significant collateral repayments occurred this year for just the first time since 2000, Roney said. Yet, it has come under attack during current Farm Bill discussions.
“We’ve had five recorded sugar policy votes since Farm Bill debate started, “ he explained. “Three in the Senate and two in the House.”
The latest vote, which occurred last Saturday, ended just like others, with Congress voting in support of U.S. farmers and the current policy.
“Congress has sent a clear message to Mexico and the rest of the world: We will not unilaterally disarm in the face of rampant foreign subsidization,” said Roney.
However, U.S. producers have expressed an interest in ending all sugar subsidies worldwide once and for all. It’s called the zero-for-zero sugar policy, where U.S. sugar farmers would eliminate their policy in exchange for other countries doing the same.
“We are highly efficient and would thrive in a free market,” Roney noted. “But before we can thrive in a free market, we have to get rid of the foreign subsidies that enable inefficient production and manipulate prices.”
The American Sugar Alliance hopes that’s exactly where Congress will turn its attention once the Farm Bill is finally passed.
But until then, U.S. sugar growers will probably have to cope with prices that are artificially depressed by foreign government action.