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Sugar Tariffs, extended (Huntley)

First, here are data to help you remember that import prices are not everything. Prices effectively triple between the wholesale price sugar farmers such as the Fanjul brothers receive, and the price you pay in a store. A big baker will pay something much closer to the wholesale than the retail price - if you buy by the train car (not the truckload!), delivery costs per pound are very low. The price gap between Brazilian and US sugar is about 40%. So even if the tariff was eliminated, the price would only fall by about 6¢ wholesale, and by about the same retail. How eager would consumers be to fight over 6¢ per pound? Even though I do some baking,
it takes me over 1 year to use a 5 lb bag!

Prices 1980's Average 2013
Brazil Raw Sugar Price - 14 cents
U.S. Raw Sugar Price 22.16 cents 20.46 cents
US Wholesale Refined Sugar Price 27.06 cents 27.22 cents
Grocery Store Refined Sugar Price 33.59 cents 64.32 cents

Source: US Sugar Prices - American Sugar Alliance, IndexMundi for the Brazil price and XE.com for the Brazilian Real / US$ exchange rate.

Then there is the political economy. The first sugar tariff dates to 1789. Protection was strengthened during the Great Depression with the 1934 Sugar Act, including policies to raise farmer's incomes while at the same time using rationing (esp during WWII) to avoid raising consumer prices. That Act expired in 1974, but in view of his pending election campaign President Ford tripled the import tariff. Presidents Reagan, and George HW Bush also implemented protective measures, while George H Bush was able to veto the Farm Bill in 2008 knowing that Congress would (did!) override his veto. Both Carter (a farmer!) and Clinton (who grew up in a farm district) turned down policies that would have increased sugar protection. There were no changes under Obama. See the Coalition for Sugar Reform for details.

In both the EU and the US the sugar that you buy in a store or get in a restaurant sugar packet is beet sugar. Production dates to the 19th century, when new cultivars with higher sugar content made it a profitable crop, first in Europe and then in the US. In Japan sugar beets were cultivated in the 19th century, but then the expansion of the Empire southward to Taiwan (1895) led to more sugar cane. Today 2/3rds of Japan's sugar is imported, and there remains enough near-tropical land that 20% of domestic output is from sugar cane. Sugar beets are still the overwhelming domestic source. Oh, and that's because of tariffs in all 3 regions.

Sugar growers are a powerful lobby. The Fanjul brothers own over 150,000 acres of Palm Beach County, Florida. That's a potential swing state in national elections (do you know the term "hanging chad"?). Both are politically active – one a Republican, the other not by chance a Democrat. In the Midwest corn farmers are a potent lobby, and in a handful of states so are sugar beet growers. The Senate thus has a big block in favor of agricultural protection. This political economy – enough farmers in enough electoral districts that their vote is essential – is true in Japan, the European Union and NAFTA. In the former two, unless I'm mistaken, direct and indirect farm subsidies are greater than aggregate farm income. The CAP (Common Agricultural Policy) is the single biggest item in the EU budget. Through the good fortune of geography agriculture in the US is inherently more productive, so our overall subsidies are less. It is nevertheless the sector where trade is most constrained by a web of quotas, tariffs, subsidies, cropping restrictions, loan programs and tax breaks.

...trade in sugar could have sweetened the Doha Round...

This matters not just because it was a barrier to the continued integration of the European economies – agriculture has been the biggest sticking point in the various EU expansions, and with attempts to create greater policy cohesion among existing members. On the global trade front, the Doha Round was intended to extend the WTO to cover agriculture, which largely left the sector untouched, other than requesting countries adopt tariffs in place of quotas. [See the textbook for why tariffs are far the better means of protection.] But the politics – dispersed consumers but a geographically concentrated industry, big enough to affect a significant minority of electoral districts in every high-income economy – meant no progress was made. Without progress, however, there was little "benefit" for negotiators from developing countries to take home. The talks have effectively collapsed, and there is no near-term ability to renew them.

...comparative advantage implies we benefit from unilaterally making importing easier...

One real challenge is that several large developing countries are themselves facing pressure to subsidize farmers. China may not be a democracy, but the majority of urban residents have close relatives back on the farm. Keeping urban areas quiet requires making life better in the countryside. Most Chinese farmers now receive cash subsidies. Ten years ago they might have gladly offered many "concessions" to the US and Europe and Japan in agriculture. Now that dynamic is changing. We all lose. Comparative advantage implies we benefit from unilaterally making importing easier. That includes agricultural products. If we're concerned with issues of urban poverty, as is the case now in China, then agricultural imports are particularly beneficial. But because of the politics of "reciprocity," the agricultural sector impedes continued global negotiations. That would be fine if we could rest on our laurels. However, economies are not static, and so areas where all would benefit (healthcare-related sectors, under the rubric of "intellectual property") cannot be addressed because the horse-trading, multilateral most-favored-nation process of global trade negotiations has fallen under the weight of agricultural lobbies. The very real fear is that trade deals are like bicycles: unless they keep moving forward, they fall over and retrogress. Trade in sugar could have sweetened the Doha Round. Politics nixed that.

I will need to address Voluntary Export Restraints in a separate blog post (if at all).

19 thoughts on “Sugar Tariffs, extended (Huntley)

  1. mitchelld20

    It is interesting to compare the profit farmers made in the 1980s to now because they are only making an extra 2 cents per sugar unit they sell to wholesale grocery stores, however wholesale grocery stores are making almost double what they made in the 1980s. I credit this to a few things. First, the whole notion that the Fanjul brothers essentially have a monopoly over the sugar industry, while owning 150,000 acres of farm land in Florida, so they have no reason to increase the sugar prices, and if they did it would be unethical of them to do so because wholesale grocery stores do not have many other options. Likewise, the grocery stores are all in competition with each other, so the increasing of prices is necessary in order to find the legitimate market price. It would be very interesting to see what might have happened if the Fanjul brothers did in fact raise there prices similarly to how the grocery stores did, whether there would be a shortage of sugar in grocery stores or if they could sell just as much sugar while making much more profit. Obviously because their prices have only marginally increased, they are happy with their profit margins, but nonetheless it would be intriguing to see what would amount from an increase of wholesale sugar prices.

    1. the prof

      Good observation. I missed it altogether.

      Since when did monopolists care about consumers (the Fanjul brothers also own several major sugar refiners/brands)? Apple could price the iPhone far lower, at one point they were earning 60% on sales, an extraordinary profit margin, but instead they chose to soak consumers to the last penny. Likewise, because of competition grocery stores earn (low) single-digits, they are a high-volume low-margin business. So your two explanations fail. Of course that's an Econ 101 topic...from how long ago? Monopoly isn't one of our topics this term!

      So we should look for other explanations, such as a rise in labor costs not matched by a rise in intl prices – there was a lot inflation in the early 1980s. Furthermore, retail competition doesn't necessarily mean the price for any given good will be low. A shift in retail demand such that the demand for sugar became more inelastic, allowing stores to charge more, is another possibility. If we retail consumers mainly buy sugar for our coffee, and not for baking, then demand is driven by complementarity, we would be willing to pay a very high price per cup of coffee. Even with competition, oligopoly models predict that goods with very inelastic demand will be priced higher.

  2. Ellie Bradach

    I really have never thought about sugar being such a big part of life let alone have such a great role in economics and politics. Then, I realize that sugar is in everything! Not to mention, sugar production requires so much time and work. Rising less than 2 cents, the US raw sugar price raw sugar production in the US has stayed about the price since the 1980s. In addition, the US wholesale refined sugar price has increased less than a 1/5 in 30 years. Although US sugar prices have plateaued, the grocery store price of sugar has almost doubled in the same time. This could mean that sugar production costs have stayed the same, the cost of operating grocery stores has increased. With a higher minimum wage and businesses seeking greater profits, grocery stores have jacked up sugar as well as other item prices. Switching gears, it was very surprising how much sugar can impact politics not only in the US but in the world. Thinking about how a politician’s stance on sugar can impact just a few brothers which affects a states, and can affect an entire election. This just shows how it is possible to some people to be elected and bills to be passed surprisingly to the public but the underlining motives provide a clear explanation.

    1. Khang Truong

      The discrepancy between the change in wholesale prices and the change in retail prices is certainly intriguing. As suspected, this trend is not unique to just sugar prices. A quick search of historical data shows a similar price increase for other groceries such as milk and flour. One, then, can speculate with a significant degree of certainty that the price jump has origins within the end retailer. I disagree with the premise that minimum wages have been the driving factor; adjusted for inflation, the minimum wage today is quite lower than it was in 1980 (which itself was low compared to the nearly eleven dollar minimum wage in 1968 (adjusted for inflation, of course)). It also seems unlikely that business-owners are just now beginning to crave high profit margins. That would seem to leave higher overhead costs for these supermarkets as the culprit.

      Sources:
      http://www.macrotrends.net/2534/wheat-prices-historical-chart-data
      http://future.aae.wisc.edu/data/monthly_values/by_area/10?area=US
      https://www.cnbc.com/2016/07/21/adjusted-for-inflation-the-federal-minimum-wage-is-worth-less-than-50-years-ago.html

      1. the prof

        Helpful to look at the data! Thanks! And fortunately I held off commenting on the minimum wage. If you like retail, you'd like Marc Levinson's The Great A&P.

  3. murrayc20

    If we gathered all of our grocery receipts over a year to expose the amount of pure sugar we buy, the money spent would be so insignificant compared to an average person's annual income. But then if we look to the other processed groceries we buy in a year (cookies, cereal, bread etc) the dollars can really add up. We forget that the sugar we buy per lb is the same sugar in these popular processed foods; it is sourced from the same areas and grown by the same people. So even though we think sugar is a minuscule aspect of our everyday life, it actually has a large economic impact. But even though it is a huge part of the world' economy and a pretty inelastic product, the price only increased by about 3 cents over 30+ years. You would think sellers would bump up the prices even more than they already do, especially because people rarely think twice about sugar prices upon buying it, but the sellers don't. Maybe it is because it could be imported for cheaper? But again, the price of sugar is rarely looked at by the average consumer.

  4. Kaitlyn Fitzsimmons

    I first learned about the Fanjul’s influence in sugar during an environmental studies class where we discussed the large subsidies the sugar industry receives from the U.S. government. Many in the class found issue with the government supporting the Fanjul’s fortune while small farmers struggle to receive government support and aid. Not to mention that sugar in itself is controversial. It’s disease and obesity- causing and the U.S. battles with both of these on a large scale. In sociology 101, we talked about the treatment of immigrant workers on the Fanjul sugar plants. This is a family strong enough to have managed to influence not one, but two, political parties, causing controversy that goes beyond their role in the sugar industry, but American politics and society. --Sorry the website wasn't letting me log in. Will work on it more just wanted to get blog up.

    1. the prof

      Thanks for additional details. Immigrant / migrant labor is a long-standing issue in agriculture, there's an interesting tie that way between Italy and Argentina in the 19th and early 20th century, think northern winter vs southern summer. In terms of trade Argentina was tied to the UK, not the US. In terms of population, the last names are Italian (and German), not Spanish.

  5. Julia Moody

    I think it's very interesting how much more expensive grocery store refined sugar has become over the years, and even more interesting that even though it pervade's almost everyone's everyday life, no one has really noticed or cared! As you were saying, the average person probably owns sugar at all times of the year for baking purposes, but it takes a pretty long time to go through an entire bag, even if one is an avid baker. When I thought about refined sugar consumption that way, I was less surprised. On a different note, I found it surprising that two brothers control such a large share of sugar trade in Florida. It makes sense that a certain state might have a monopoly over an agricultural product because of the climate, geography, and its history, but it's unordinary that the entirety of the resource comes from just one family!

  6. andersons20

    I found this information to be very shocking, both in regards to the spike of grocery store refined sugar prices and the dominance of the sugar industry by the Fanjul family. As an average consumer, this bothers me but will not influence my shopping habits. However, from a bigger picture perspective, one must ask when the price increasing will slow down or stop entirely. The Fanjul family reminds me of the discussion we had in class on Friday -- the sugar industry should be diversified in order to reduce potential volatility in several areas.

    1. the prof

      Shopping habits are one thing, political are another. It's the latter that is central in this case. I can strongly suspect that if you (and the other 200 million Americans who shop) don't change what you do at the store, you won't change what you do at the polls.

  7. compolir20

    According to the American Sugar Alliance, US raw and wholesale prices fell drastically (over 50%) from the years 2010 to 2013 due to Mexican imports generated by a well orchestrated government subsidy (https://sugaralliance.org/us-sugar-prices). I wonder if the prices of grocery store refined sugar fell as a result? That example of price plummeting due to trade brought on by comparative advantage does provide hope for a more competitive sugar market with larger volumes of sugars, however I do think the grocery stores are truly responsible for deciding a final retail price as an end retailer.

  8. the prof

    Lots of puzzles, though many of these are "micro" – such as the extent to which wholesale and retail prices correlate. The political economy is though more general: enough producers in enough electoral districts for candidates on the hustings to pay attention, while purchasers are widely dispersed and nowhere dense enough to mobilize opposition.

  9. denatalec20

    I had no idea that sugar tariffs were such a hot political topic! What I got from this blog post is that there must be a significant reform to the way the United States government financially assists the agricultural economy. It is alarming that although the United States has overwhelming potential for the production of wheat, corn, and other staples, farmers are still not able to turn a profit without quotas, tariffs, subsidies, cropping restrictions, loan programs and tax breaks. In microeconomics, we learned that although subsidies allow for producers to sell a greater amount of goods, and consumers that normally would not be able to afford that good the ability to enjoy it as well, the government incurs a massive cost in the process, which must eventually be paid for via taxes by everyone. There must be a simpler government intervention.

  10. mcconnellm20

    For many years, sugar has been something discussed by political parties and has been quite controversial. When I was in Palm Beach this summer, some of the locals were discussing the Fanjul brothers. I would have never thought these brothers could be so powerful for simply having more or less a monopoly on sugar. I never realized until then that sugar growers were such a powerful lobby. It turns out that sugar has a lot of power especially when it comes to politics. Sugar has been discussed in politics since the first sugar tariff in 1789. It seems that even today there is not the perfect solution for how to provide protection to the agricultural economy. The two political parties continue to collide over the issue, but clearly, something must be done to fix this issue.

  11. smithg20

    I was surprised to learn of the expansive history of sugar in economies across the globe. Like many others, I began to think about how comprehensive the sugar market is as various forms of sugar can be found in a great proportion of the foods we eat everyday. I was most interested to learn about the web of quotas, tariffs, subsidies, and other restrictions that hold back the industry due to large political powers, such as the Fanjul brothers. It was also compelling to connect this example with our lessons on comparative advantage, as it makes little sense to impede imports as they benefit both parties involved.

  12. laniere20

    I never would have though that sugar could have such a grand effect in politics, but due to the location of the Fanjul brothers, Florida becomes a swing state. Because the US has a large domestics source for growing sugar, our government has chosen to put a tariff on sugar so that we rely more on domestic sugar than imports. The article also states that tariffs aha been issued in a ll three of the major regions where beet sugar is grown, doesn't the tariff reduce international trade since each country wants to use domestic sugar only.

  13. bashamc20

    It is perplexing to analyze profit margins and the like made by farmers as listed in the table because the difference between those of the 1980s and those of the present are vastly similar. The raw sugar price in the U.S. has gone down slightly alongside a very minute positive change in the price of the good wholesale. The profit margin for these farmers has therefore increased gradually over the past three decades, rising roughly $2 (from $4.90 to $6.76). This seems nothing out of the ordinary until one notices the drastic change in profit margins for the grocery stores which sell sugar. Assuming those stores bought wholesale U.S. sugar, their average profit margin would have been $6.53 in the 1980s; contrarily, in 2013 that same margin is $37.10. This represents a change in profit margins greater than 550%! This is baffling. Beyond profit margins that have changed for the stores but not the farmers, it is astonishing to see the spike in the price of sugar since the 1980s. Perhaps this is a matter of elasticity of demand. Sugar is used to cook a variety of goods and is instrumental in the American kitchen. The demand for sugar is likely inelastic and therefore changes in price would lead to smaller corresponding changes in quantity demanded. Essentially, people will still demand sugar in large numbers even if it costs a little more.

  14. gianakosa20

    The large gap between wholesale pricing and retail pricing is not specific to just the sugar industry. When I worked in a local clothing store, I could see the wholesale prices that our buyer had paid each month. Typically, the wholesale price would be at least 60% less than what we sold it for in the store. I attributed this extreme mark-up decision to the fact that we were operating as a tiny, local retail store with many expenses. But large grocery stores obviously can't use the same reasoning.

    Grocery stores see the dependency that Americans have on sugar. It is used in practically everything we consume -- from fountain drinks, to granola bars, to the packets we put in our coffee. More than ever, we need sugar. I attribute the price jump in sugar (between wholesale and retail) since the 1980s to the increase in demand for junk/sugary foods in the United States.

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