Sugar Producer

22 Sugar Producer APRIL 2015 Recently, a professor at an acclaimed business school in the Midwest gave a lecture on the evils of U.S. sugar policy when it comes to free-market economics. One student in that class forwarded the lecture to the American Sugar Alliance and asked for our take. While the lecture was a misguided assault on sugar policy, it is refreshing to see that some of the country's best young business minds are still interested in getting multiple opinions and both sides of the story. Below is a portion of my reply. Thank you for sharing the detailed power point from the lecture you attended. We may never change the minds of dogmatic professors or zealous sugar buyers and their lobbyists, but I would highlight two themes of rebuttal—one philosophical, the other practical. Philosophical I sometimes introduce myself as "a recover- ing free trade economist." Economists are trained to be free trade and schooled in the David Riccardo/Adam Smith theory of comparative advantage—goods should be produced by the countries that can produce them at the lowest cost. But after years of operating in the real world, I realize what Riccardo and Smith were missing: the pervasive role of government policies that distort apparent measures of comparative advantage. To wit: Does a "low-cost" country whose government imposes little or no restraints, and costs, on producers to protect the environ- ment, workers and consumers really have a comparative advantage over a developed coun- try whose producers are highly capitalized and technologically efficient, but also face high government-imposed social-standard costs? Obviously, American sugar producers fall into the latter category. We are rightfully proud that we manage to rank among the world's lowest-cost sugar producers, while complying with arguably the world's highest social standards and costs. This reality of our efficiency contradicts another economic theory: If we are protected by import quotas and tariffs, we must therefore be inefficient and non-competitive. A Lesson in Real-World Economics FROM THE ASA By Jack Roney Practical Theorists who calculate a deadweight cost to society from U.S. sugar policy are using the wrong price series for their calculations. In- variably, the theorists compare U.S. producer prices with what we rightly call the world "dump market" price. In reality, this so-called "world" market is relatively thinly traded (20-25 percent of global production), extremely volatile, and does not re- flect the actual cost of producing sugar. As Chart 1 illustrates, the world average cost of producing sugar has averaged 50 percent more than the world dump market price over the past 25 years. So how can there be a world sugar industry if prices don't reflect the cost of producing the product over time? Chart 1 Chart 2 Sources: World Price: USDA, #11 raw contract, Caribbean ports, monthly average prices, 1970-2015. Cost of Production: "Sugar Production Cost, Global Benchmarking Report," LMC International, Oxford, England, July 2014. Data Sources: International Sugar Organization, USDA. Monthly average prices through August 2014. * Brazil, China, European Union, India, Mexico, Russia, United States – represent approximately half of world sugar consumption.

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