November 24, 2014

Sweet Talk

David Poppe | 10/1/1995
To Dominicis, a vice president of Flo-Sun Inc., Florida's second-largest sugar cane grower, the U.S. system is good trade policy. The government makes loans available to farmers and limits sugar imports to keep prices high because, he says, at least 75% of the 114 million tons of sugar grown worldwide is subject to price supports or direct subsidies. That creates an oversupply of sugar, driving world market prices below the cost of producing the crop. Without a sugar program, Dominicis argues, the U.S. would be flooded with other nations' excess sugar, and farmers would go out of business.

"It is a trade issue, not a subsidy issue," says Dominicis. "We're not asking for welfare; we're not asking for a subsidy. We don't need a handout." All farmers want, he says, is for Americans to understand the ubiquity of sugar subsidies worldwide and the risk that U.S. sugar farming will disappear without price supports.

To conservative Republican Miller, the government's intervention to prop up sugar prices amounts to agricultural welfare. In the world market, raw sugar sells for 11 cents/lb. In the U.S., it fetches 23 or 24 cents/lb.

Miller knows many countries do subsidize sugar farmers, but notes Australia manages to export sugar without any subsidies at all. Although Americans don't pay for this program in their taxes, it adds $1.4 billion to consumers' annual grocery bills, according to the General Accounting Office.

"This is an obscene big government program that makes zero economic sense," says Miller, co-sponsor of legislation that would end the U.S. sugar program. Congress will debate it as part of the 1995 Farm Bill. "There is no economist anywhere who can justify this program. This is the kind of economic model that was a failure in Eastern Europe."

This is not a new debate; sugar is always a hot topic when the farm bill comes up for renewal every five years. But this year, the usual array of sugar program opponents - candy companies, environmentalists, consumer advocates and free-market policy groups - are salivating over the prospects of the conservative Congress taking a bite out of Big Sugar.

It's an emotional issue, with both sides circulating lengthy position papers and questioning the claims of their opponents. And yet, for all the rhetoric, the fundamental question of this debate never gets addressed.

What are the economics of sugar? Surprisingly, considering sugar farming is virtually government-controlled, few people seem to know for certain. So while Rep. Miller swears Big Sugar would survive just fine, Dominicis says much of the industry might collapse without price controls.

The U.S. sugar program works like this: The Department of Agriculture (USDA) lends money to sugar cane growers at a rate of 18 cents/lb. and gives them two options: when the harvest comes in, either they can repay the loan, with interest, or give the sugar to the government.

But the USDA is obligated to operate the sugar program at no cost to taxpayers, meaning it can't take the sugar. So it keeps prices higher than 18 cents/lb.

The way the USDA does this is by limiting imports. Last year, just 1.3 million metric tons of the nine million metric tons of sugar consumed in the U.S. was imported. Miller's bill would not end import restrictions, but would do away with the USDA's loan and price-support programs.

Clearly, the USDA controls the domestic market for sugar. Yet no auditors pore over sugar farmers' books to make sure prices are set at reasonable levels. Farmers, in fact, resist disclosing information about their costs even as they clamor for price supports. "We're a private business," explains Dominicis.

As a result, data on farmers' costs to produce sugar is sketchy, at best.

The last major USDA study was based on the 1992 crop. It estimated the cost to produce

raw sugar ready for refining at 18.8 cents/lb. in Florida. The USDA also found that from 1981 to 1992, Florida farmers' costs had decreased by 4.5 cents/lb., or about 19%, while the number of acres devoted to sugar farming in the Everglades increased from 334,000 to 426,000. Today, the figure approaches 500,000 acres, an indication that sugar farming is extremely lucrative.

Several experts say sugar is even less expensive to produce than the USDA figures. They say the USDA overstated the cost of producing sugar in 1992 and argue that farming costs are falling rapidly. Many sugar cane farmers now harvest the crop mechanically, and large, efficient farms continue to swallow up smaller farms. Just 17 farms now produce 58% of all the sugar cane grown in the U.S.

Yet sugar farmers, like baseball team owners, decry the pitiful economics of their business while refusing to open their books. Florida's largest grower, U.S. Sugar, which farms 165,000 acres in the Everglades Agricultural Area south of Lake Okeechobee, claims it lost money last year on its 700,000-metric-ton sugar crop.

That might seem impossible, considering sugar requires little pesticide or fertilizer, nor human harvesters. Plus, raw sugar sells in the U.S. for about 23 cents/lb., well over the USDA's estimated production cost.

"Either they (U.S. Sugar) aren't telling the truth or they are the dumbest people who ever lived," says Joe Lockhart, spokesman for the Coalition to End Welfare for Big Sugar, a lobbying group backed by environmentalists, candy companies and consumer advocates. "How can you lose money growing sugar in Florida? If the program was costing them money, why would they be fighting so hard to keep it?"

U.S. Sugar did not respond to repeated requests for interviews.

But looking at Flo-Sun, it's hard to accept that sugar farming is a marginal business. The owning Fanjul family has done nothing but expand for 35 years since Alfonso Fanjul, Sr., fled with his wife and children to Florida from Cuba, where the family had dominated sugar farming.

Flo-Sun started in 1960 with 4,000 acres and an old sugar mill. Today, it farms 190,000 acres in Florida and 240,000 acres in the Dominican Republic.

While Flo-Sun's Dominicis won't discuss how much it costs to produce sugar, he agrees 18 cents/lb. is a reasonable estimate.

Last year, Flo-Sun produced about 630,000 metric tons of sugar in Florida (one metric ton = 2,204 lbs.). If the cost to produce a pound of raw sugar is 18 cents, and the U.S. market price is 23 cents, then Flo-Sun's 1994 revenues from Florida sugar farming would be $319.4 million, with a pre-tax profit of $69.4 million.

Further, Flo-Sun in 1994 imported another 40,000 metric tons of sugar it grew in the Dominican Republic to the U.S. market as part of the USDA's limited import program. Flo-Sun concedes Dominican growing costs are lower than Florida's, but won't say how much lower. But if it costs 16 cents/lb. to produce raw Dominican sugar for sale in the U.S. at 23 cents/lb., then Flo-Sun's profit would be $6.2 million on revenues of $20.3 million.

Put those figures together and it appears Flo-Sun, with a 7.4% share of the U.S. sugar market, generated at least $75 million in pre-tax profits on sales of $340 million last year. Profit margin: 22%.

(Flo-Sun also refines sugar, grows rice and operates a $200 million electrical cogeneration plant in the Everglades. It owns the Casa de Campos resort and 60,000 head of cattle in the Dominican Republic and produces an additional 330,000 metric tons of sugar there for sale outside the U.S.)

These estimates suggest sugar farming is extremely lucrative. But what if it costs less than 18 cents/lb. to grow sugar? Don Westfall, a vice president of the agricultural economics consulting firm Able, Daft, Earley & Ward in Alexandria, Va., asserts the USDA estimates are inflated because they include expenses that aren't in a normal business plan, including allowances for profits.

"The problem with USDA production cost numbers is they don't really reflect the way a business person would calculate costs," Westfall says.

Westfall notes that the USDA estimate includes allowances for return on assets and return on labor - also known as profits. So every penny sugar farmers earn in excess of 18 cents/lb. represents a windfall, he argues.

Westfall is biased: he currently works for two groups who oppose the federal sugar program, the Sweetener Users Association, whose members include Coca-Cola, Hershey, M&M/Mars and Nabisco, and the U.S. Cane Sugar Refiners Association. This latter group came forward in August to endorse significant change of the sugar program, saying it often causes the price of raw sugar to rise to the same level as refined sugar, leaving them without profits.

There is other evidence, however, suggesting the cost of producing sugar may be less than 18 cents/lb. and declining. A British firm whose research is often used by the sugar industry, Landell Mills Commodities Studies Ltd., reported earlier this year that the worldwide cost of growing sugar cane has dropped by 20% since the mid-1980s. Landell Mills also told the USDA's Agricultural Outlook Forum in February that the world sugar price at the time of 15 cents/lb. is about the same as farmers' break-even level.

Landell Mills also reported U.S. sugar cane growers rank 25th among 92 sugar-growing countries in cost-efficiency. If one puts the pieces together - a world production cost of 15 cents/lb. and falling, plus efficient U.S. farmers - Landell Mills' research suggests U.S. sugar farmers are making much more than a 22% profit margin on their crop.

Sugar farmers dispute Landell Mills' work, saying the world market price is depressed by huge oversupplies of heavily subsidized European Union sugar and bears no relation to production costs.

Farmers prefer the work of Leo C. Polopolus, a professor of Food and Resource Economics at the University of Florida in Gainesville, who says "reliable estimates" of the cost to produce sugar throughout the world range from 19 cents to 22 cents/lb. "The main point here," he wrote in a May report that defends price supports, "is that most studies of the cost of the sugar program to U.S. consumers are based upon theory, assumptions and crude estimating procedures."

While Westfall believes the USDA exaggerates the cost to produce sugar in Florida, Polopolus suggests the USDA understates the cost. He says the USDA fails to include corporate overhead expense, which for larger farms can be significant, or the costs of compliance with regulatory and administrative rules. He says farmers won't discuss how high those costs might be.

Like Westfall, Polopolus isn't sure how profitable sugar farming is. He believes Florida's large, vertically integrated farms do quite well, while smaller farms that don't process their own sugar struggle.

While Polopolus argues that worldwide price supports skew growing costs and make it difficult to know how expensive sugar would be in a truly free world market, his argument can easily be turned upside-down: how does one support government price controls for an industry that can't, or won't, prove it needs them?

Westfall acknowledges that he's not prepared to guess what sugar production costs might actually be, either. "What that world average production cost is, is something of a mystery," he says.

Those numbers ought to be vitally important. Before Congress asks consumers to open their wallets, it should ask sugar farmers to open their books. By doing so, it could better determine whether this is an industry that needs, or deserves, protection.

Instead, however, the debate over sugar policy is fought with speculation, supposition and money.

According to the Center for Responsive Politics, a Washington, D.C., think tank, sugar cane, sugar beet and corn sweetener interests contributed $11.9 million to candidates for federal office from 1979 through 1994. The center calls the program a political sop.

Big Sugar paints a doomsday scenario, warning that cutting off its price supports could cost as many as 420,000 American jobs as the entire industry folds. But the USDA says sugar farmers employ only 46,000 people nationwide, including about 15,000 in Florida.

Candy companies and sugar refiners, meanwhile, claim that the current program actually costs jobs. Rep. Miller says half the sugar refiners in the U.S. have gone out of business since 1982 because raw sugar is nearly as expensive as refined sugar, slicing their profit margins too thinly. Greg McCormack, president of Bobs Candies in Albany, Ga., says U.S. sugar policy may force him out of the country.

Bobs, with 600 workers, makes more candy canes than anyone in the world. But McCormack, 40, the third generation to run this 76-year-old family business, says Bobs increasingly is an uneconomical proposition. The company has a small Jamaican plant that buys refined sugar from a Savannah, Ga., mill for about 15 to 17 cents/lb. Because the domestic sugar price is manipulated upward, however, McCormack's Albany operation pays 25 to 27 cents/lb. at the same mill.

McCormack says sugar makes up 60% of Bobs raw materials costs and 30% of its entire overhead, meaning Georgia is a bad place to make candy.

Environmentalists chime in that sugar farming has reduced the historical flow of fresh water from Lake Okeechobee into the Everglades by two-thirds. This has contributed to a reduction in the flow of fresh water into Florida Bay and spurred growth of huge algae blooms near the upper Keys in winter months. The National Audubon Society has organized dive boat captains, commercial fishermen, even Monroe County banks to warn that the once-clear Keys waters that lured tourists and supported fisherman are being ruined.

In September, as Big Sugar's prospects in Congress dimmed, growers proposed a compromise under which sugar imports would continue to be limited, but the USDA would no longer take the sugar crop as collateral on loans to farmers. This would end the government's legal obligation to keep prices at about 18 cents/lb., but it would remain a major industry creditor taking other collateral from farmers.

The compromise proposal suggests farmers have not been forthright about their costs. They now seem to feel there is room to reduce sugar prices without hurting efficient growers. On behalf of long-suffering consumers, Congress should find out just how much room.

Tags: Florida Small Business, Politics & Law, Business Florida

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