Kellogg’s, Christmas Cookies, and America’s Idiotic Sugar Policy
There are significant economic, political, health, and environmental costs.
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Dear Capitolisters,
Recent events have me thinking, as one does, about U.S. sugar policy. First and most obviously, it’s the Christmas season, and my sugar intake—along with my waistline—has predictably increased. (I blame Santa.) Second, controversy erupted last week when U.S. food manufacturer (and major industrial consumer of sugar) Kellogg’s announced that—after its unionized workforce rejected the company’s latest labor contract offer—it would hire non-union workers in the meantime. This prompted a rather, ahem, unique statement from President Biden, saying he was “deeply troubled” by the move. Since both events implicate U.S. sugar policy, which significantly burdens not only American families, but also U.S. companies like Kellogg’s and their workers, there’s no better time to dig into the issue.
So go grab a(nother) frosted cookie, and let’s get down to it.
How the U.S. Sugar Program Works
As helpfully summarized in a 2018 paper by my Cato colleague Colin Grabow, U.S. government support for sugar—some form of which has been in place since 1789!—has four main pillars today:
Price support loans. The USDA offers government loans secured by domestic producers’ sugar as collateral, which borrowers can either repay with interest or default on if prices go below a fixed price. Because producers will simply forfeit their sugar collateral if the market price dips below this price, USDA must restrict domestic sugar supply to boost prices. Those supply restrictions are implemented through the second and third pillars, discussed next.
Marketing allotments. USDA annually determines an overall limit on how much sugar can be sold in the United States to avoid loan defaults and reserve 85 percent of the U.S. sugar market to domestic producers, as required by law. This quantity is divided among sugar cane and sugar beets, as well as among various states.
Sugar for ethanol (no, really). USDA also can buy domestic sugar to keep it off the consumer market (and thus keep prices high). The agency then sells this sugar to U.S. ethanol (of course) producers, often at a big loss (of course).
Import quotas. Finally, the United States imposes strict quotas, divided among 40 different sugar-producing countries, capping the amount of sugar that can be imported into the country duty-free. Any imports above those (very low) quantities are subject to a high tariff (approaching 100 percent) that effectively bars these goods from the market.
The only exception to this complex system of price, supply, and demand regulations—which you couldn’t make more economically ridiculous if you tried—was Mexico under NAFTA. However, the United States closed that “loophole” in 2015 with a good ol’ “trade remedy” investigation and subsequent U.S.-Mexico “suspension agreement” that restricts Mexican sugar imports and keeps U.S. prices high.
The Program’s High Economic Costs
As you can probably guess, this Rube-Goldbergian system has imposed all sorts of harms—intended and unintended—for the United States and abroad. Most obviously, tight government restrictions on domestic sugar supplies have ensured that U.S. consumers pay far more—sometimes three times as much—for sugar than the rest of the world does:
This price differential, which is today about two-fold, adds up. For example, Bryan Riley of the National Taxpayer Union Foundation did a back of the napkin calculation a few months ago and found that American consumers paid as much as $6.2 billion more for sugar during 2020-21 because we were forced to pay the U.S. price instead of the world market price. More sophisticated analyses have found much the same: As shown in the table below (from this 2017 AEI paper), for example, eliminating the sugar program would lower sugar prices and thus generate as much as $5.3 billion in annual benefits (in today’s dollars) for users:
Since sugar is a primary ingredient in all sorts of foods, these costs don’t just hurt you and me, they also harm domestic food manufacturers—such as candymakers, bakers, and (ahem) cereal producers—and their workers. The aforementioned AEI report, for example, concluded that the sugar program results in the annual loss of about 20,000 jobs in U.S. food processing industries, and Grabow details how many companies, including Kraft Foods, have just abandoned the country altogether instead of enduring a massive tax on one of their main ingredients. As one quoted executive explained, “It’s really not that much of a choice. … You move or you go out of business.”
Heckuva incentive system, huh?