As Congress continues debate of the 2018 Farm Bill, the U.S. Department of Agriculture recently updated its backgrounder on sugar policy, which made this new observation about sugar prices around the world.
“The global sugar market is less integrated than other major agricultural commodity markets…due to diverse and complex domestic policies of most major sugar-producing and trading countries. As a result, wholesale and retail sugar prices around the globe are influenced by local agricultural and trade policies and vary greatly from market-to-market, rather than simply reflecting the world futures price.”
To put it less politely, foreign subsidies and other trade-distorting policies have created a grossly distorted price environment. Unfortunately, things are not improving.
Recent subsidies have helped create a glut of sugar, which is overhanging the market and driving prices lower and lower. And that’s necessitating more and more subsidies by foreign governments, sending prices even lower and creating a downward spiral.
India, the world’s second biggest sugar producer, offers a good case study of the yo-yo effect of the sugar market.
Global sugar prices were abnormally high several years ago, and countries like India used government policies to encourage farmers to plant more and more sugar to take advantage of the market. A study of Indian sugar policies at the time put subsidies at $1.7 billion a year.
Farmers responded and global shortages quickly turned to surpluses. In short order, India needed to dump oversupplies in order to protect farmers’ prices at home. So, the government mandated and subsidized exports to clear stocks.
But India wasn’t alone. Other countries were dumping surpluses, too, and the sugar market turned from bull to bear in the blink of an eye. Now, cheap imports became a threat to India’s farmers, so the government slapped high tariffs on sugar imports.
India didn’t need the imports. Its farmers were growing more and more sugar because the Indian government kept increasing price guarantees for farmers. The higher the guaranteed price, the more farmers grew, and before you knew it, India again had a domestic glut.
A recent article in the Wall Street Journal described the surplus size like this:
“Refiners are required to buy everything the cane farmers bring them at a government-set price. But because they only have to pay the farmers after they sell it, they are hoarding the sugar and waiting for a better price—or better [government] incentives. The result: piles and piles of sugar, in warehouses all over India….
“In late May, Indian refiners had a stockpile of 13 million tons of sugar—more than all the sugar consumed in the U.S. last year. India’s sugar output is expected to rise to 31.5 million tons in the 12 months that began on Oct. 1, exceeding the annual demand by 6.5 million tons, according to latest estimate by the Indian Sugar Mills Association, a New Delhi-based industry group.”
That same article blamed the Indian government’s price controls for creating the problem and explained that the government is again eyeing ways to dump the unneeded sugar on an already struggling world market. It’s also considering the creation of a government sugar stockpile.
In summary: India is trying to subsidize its way out of a mess created by Indian subsidies.
And so the yo-yo continues as prices respond to government actions rather than market signals.
This is the world in which U.S. sugar farmers must compete. And this is why maintaining a strong no-cost U.S. sugar policy is so important.
