ASSISTANT DIRECTOR

BEFORE THE

SENATE COMMITTEE ON AGRICULTURE,

NUTRITION & FORESTRY

ON CONSUMERS AND THE

FEDERAL SUGAR PROGRAM

ASSISTANT DIRECTOR

CONSUMER FEDERATION OF AMERICA

BEFORE THE SENATE COMMITTEE ON AGRICULTURE,

NUTRITION & FORESTRY

ON CONSUMERS AND THE FEDERAL SUGAR PROGRAM

CFA is a nonprofit association of more than 260 pro-consumer organizations, most of them national, state and local advocacy organizations and consumer-owned nonprofit cooperatives, such as credit unions and housing co-ops. CFA was founded in 1968 to advance the consumer interest through advocacy and education.

The Consumer Federation of America has long opposed the federal sugar program as costly to consumers. It appreciates the committee holding this hearing in the wake of a new General Accounting Office report on the sugar program and the recent government purchase designed to shore up sagging sugar prices.

The sugar program has its roots in the 1930s, when federal farm programs were seen as a temporary means to get family farmers through hard times. It has long since outlived its usefulness. Yet, when Congress recently pushed many other farm subsidies in a free-market direction, the sugar program was barely touched.

The program relies on a system of price supports and import restrictions to keep prices paid to U.S. producers well above the world market.⁽¹⁾ Unfortunately, much or all of this increased farm income is passed on to consumers as an added cost by those who buy sugar from producers--that is, food processors and retailers.

Consumers pay this hidden subsidy each time they buy a food product containing sugar at the grocery store. It amounts to a regressive, hidden food tax. And it hits poor Americans the hardest, since they spend a disproportionately large percentage of their income on food.⁽²⁾

In a report issued just last month, the General Accounting Office took an exhaustive look at the sugar program. It concluded that the cost of the program to sugarcane refiners, food manufacturers and consumers was about $1.5 billion in 1996 and about $1.9 billion in 1998.⁽³⁾ The June report followed a 1993 GAO report that put the cost of the sugar program to sugar users at $1.4 billion.⁽⁴⁾

What if there were no sugar program? In its most recent report, GAO estimated that, for table sugar alone, consumers would have saved about $600 million in 1996 and about $800 million in 1998, assuming all savings from ending the program were passed on by processors and retailers. If savings from all sugar-containing foods were passed on, GAO estimated consumers would have saved the full $1.5 billion in sugar program costs in 1996 and $1.9 billion in 1998.

Supporters of the sugar program dispute these findings. They suggest there is little or no consumer cost associated with the sugar program and, further, that food processors and retailers would simply pocket any savings from eliminating the program. Most economic studies that have investigated the issue, however, confirm the existence of the so-called consumer "pass through." They conclude that food prices are strongly influenced by changes in input costs, including commodity prices.⁽⁶⁾

Common sense also suggests that declines in commodity prices will eventually be reflected in retail prices. Since the major U.S. food companies are highly competitive, any company that fails to reflect reduced input costs in its prices eventually will lose sales to manufacturers of similar products."⁽⁷⁾

Finally, a review of raw and retail sugar prices in the early 1990s strongly suggests the existence of the pass through. From 1990 to 1994, a 5.3 percent drop in raw sugar prices was closely matched with 4.8 percent decline in the retail price of sugar. ⁽⁸⁾

Recent developments in the sugar market provide additional evidence that reductions in raw sugar prices are passed on to consumers. From July 1999 to February 2000, a glut of sugar caused the U.S. raw sugar price fall more than 20 percent.⁽⁹⁾

How did retail prices respond? According to Bureau of Labor Statistics data, retail prices of refined sugar hit a four-year low of 41.4 cents per pound in April of this year,⁽¹⁰⁾ suggesting a modest benefit to consumers from the decline in raw sugar prices. Consumers saw approximately a four percent decline in retail table sugar prices from April 1999 to April 2000.

Why didn't the retail price decline match the raw price decline? Industry representatives note that virtually all other costs to food manufacturers and grocers increased over the period. In particular, they cite soaring energy prices and increased hiring costs from a tight labor market as balancing out declines in raw sugar prices.⁽¹¹⁾

Certainly, CFA would prefer to see a more significant retail price drop in response to the free fall in raw sugar prices. We will be watching these numbers closely over the next few months and will not hesitate to speak out if it appears food processors and retailers have taken advantage of the 1999-2000 drop in raw sugar prices.

The cost to consumers of the federal sugar program might not be so objectionable if most of what consumers paid in extra costs helped struggling family farmers stay on their land. Unfortunately, since benefits under the sugar program accrue on a per-pound basis, the bulk of the benefits go to those who least need it--that is, the largest, most financially secure growers and industrial processing companies.

According to the General Accounting Office's 1993 report, more than 40 percent of the benefits from the sugar program went to the top one percent of the growers in 1991. Benefits were particularly concentrated among cane sugar growers, 33 of whom reaped in excess of a million dollars a year each. But benefits were also concentrated among sugar beet growers. According to the GAO, the top 10 percent of beet sugar growers received 40 percent of all beet-grower benefits in 1991, or nearly $80,000 per year each.

These beneficiaries are not struggling family farmers. The money they receive could be used by consumers to buy additional food or clothing, help pay the mortgage and supplement savings.

The consumer cost of the sugar program is also increased by the way the Agriculture Department administers the program. Too often, it favors producers' interests over those of consumers or taxpayers.

In setting the annual Tariff Rate Quota for sugar, for example, USDA acts in an overly restrictive manner, creating a tighter-than-necessary supply and a higher-than necessary price.⁽¹²⁾ Last summer, the General Accounting Office concluded that $400 million of the sugar program's annual cost to consumers and other sugar users resulted from USDA's overly restrictive administration of the tariff rate quota.⁽¹³⁾

Recent plummeting sugar prices have led to more management problems with the sugar program. In the last year, the growing sugar glut triggered fears that, under one of the few pro-consumer reforms in the sugar program in recent years, growers would be forced to repay their government loans in cash if imports fell below 1.5 million tons for the year. Growers, of course, would prefer the option of simply forfeiting their crops to the government at taxpayer expense.

To solve this problem, the Agriculture Department first made it appear imports would top 1.5 million tons this year when, in fact, this was extremely unlikely.⁽¹⁴⁾ Key to USDA's calculations was 250,225 tons of "initially unallocated" imports that the Department said would be allocated "if needed, as the administration reviews market conditions and the operation of the sugar program."⁽¹⁵⁾

Unfortunately, this creative use of numbers only made things worse. With producer prices still slumping, the Agriculture Department early this year faced the prospect of taxpayer-paid forfeitures of loans to sugar producers. To avoid forfeitures, USDA announced plans to shore up sagging prices by purchasing approximately 150,000 tons of surplus sugar.⁽¹⁶⁾ The purchase cost taxpayers more than $54 million⁽¹⁷⁾ and there is no guarantee there won't be more purchases or forfeitures before the year's out. Knowledgeable observers expect the government to own at least 500,000 tons of sugar, either through additional purchases or forfeitures, by fall. Taxpayer costs for these purchases would be well over $100 million.

The USDA sugar purchase also sends the wrong signal to producers. It suggests that the federal government will continue to rescue them from the marketplace and encourages them to overproduce. Despite slumping prices, for example, acreage planted in both sugar cane and sugar beets is projected to set records this year.⁽¹⁸⁾ This will only lead to additional consumer and taxpayer costs for the sugar program down the road.

While CFA objects to the sugar program, it is also concerned about the continuing decline in the number of small family farms. Small farms add much to the economic and social fabric of the nation and should be preserved. Clearly, some small sugar beet farmers in the Upper Midwest and elsewhere are facing serious financial problems and deserve help. We simply feel price support programs are an inefficient way to assist them, because they concentrate benefits on the wealthiest producers.

Repeatedly in the last year, as economic conditions in rural America deteriorated, CFA raised the possibility of a means-tested program to save the remaining family farms. A recent Economic Research Service analysis hints at the same solution. It looked at four approaches to a "farm household safety net," most based on income or expenditure thresholds used in other federal assistance programs. The analysis found that these safety nets would cost about as much as current farm programs. But the distribution of benefits changed dramatically. Under the safety nets, a much larger percentage of benefits went to smaller farms or those with limited resources. ⁽¹⁹⁾

In lieu of the sugar program, Congress should consider a targeted assistance package for those small sugar producers needing help to survive. This would be more effective than the current sugar program--and it would concentrate assistance where it's needed the most, not on the largest, wealthiest producers. While such an aid package would entail government cost, at least taxpayers would know they were providing subsidies to farmers who need help, not wealthy Florida cane growers.

Legislation pending in Congress starts down the road to reforming the sugar program by phasing out sugar price supports by 2003. It is sponsored in the House by Representatives Dan Miller (R.-Fla.) and George Miller (D.-Calif.). and by Senators Charles Schumer (D.-N.Y.), Diane Feinstein (D.-Calif.), and others in the Senate.

This legislation deserves enactment. If this is not feasible, a preliminary step would to simply administer the sugar program as it was enacted in 1996, without an overly restrictive Tariff Rate Quota or costly federal surplus sugar purchases.

Import protections--the other cornerstone of the sugar program--also should be phased out or drastically reduced. Tariffs on most major agricultural commodities entering this country are minimal. The tariff on over-quota sugar is more than 100 percent. Restrictions on sugar imports limit our ability to open markets for other agricultural commodities.

Many small farmers in this country are hurting, in part from a drop off in exports. Opening up agricultural trade is a key to helping them. Without reform of the sugar program, this will be difficult.

The sugar program has been picking the pockets of American consumers for decades. Now it is incurring million of dollars in taxpayers costs as well. It also hamstrings efforts to boost agricultural exports. The time has come to begin phasing out this program.

1. In May, for example, U.S. raw sugar prices averaged 19.3 cents per pound while the world price averaged 7.3 cents per pound. U.S. Raw and World Raw Sugar Prices, by Month and Quarter, Economic Research Service, USDA.

2. For example, government consumer expenditure data show that the poorest fifth of families spends an average of 40 percent of income on food, while the average family spends only 13 percent.

3. Supporting Sugar Prices Has Increased Users' Costs While Benefitting Producers, U.S. General Accounting Office, GAO/RCED-00-126, June 2000.

4. Sugar Program: Changing Domestic and International Conditions Require Program Changes, U.S. General Accounting Office, GAO/RCED-93-84, April 1993. ⁽⁵⁾

5. Sugar Program: Changing Domestic and International Conditions Require Program Changes, U.S. General Accounting Office, GAO/RCED-93-84, April 1993.

6. See, for example: A Study of the Relationship Between Farm Level Prices and Retail Food Prices, Dale Heien, U.S. Council on Wage and Price Stability, September 1976; "The Effects of Changing Input Costs on Food Prices," R. McFall Lamm and Paul C. Westcott, American Journal of Agricultural Economics, May 1981; or "Why Do Food Prices Increases?" Michael Belongia, Journal of the Federal Reserve Bank of St. Louis, April 1983.

7. Specifically discussing sugar, the June GAO report noted that the market for table sugar is highly price-competitive: "With a homogeneous product such as sugar, each brand is almost perfectly substitutable for another. When substitutability between products is nearly perfect, it is more difficult for sellers to insulate their products from the price competition of rivals..."

8. The average price of a pound of raw sugar declined from $23.29 to $22.05, or $1.24, between 1990 and 1994, while the average price of a pound of refined sugar at the retail level dropped from $42.17 to $40.13, or $2.04, over the same period. U.S. Raw and Retail Sugar Prices, by Month and Quarter, Economic Research Service, USDA

9. U.S. Raw Sugar Price, by Month and Quarter, Economic Research Service, USDA

10. Average price data for refined sugar from the Bureau of Labor Statistics website, July 18, 2000

11. In the first half of 2000, energy costs increased more than 26 percent, according to the Labor Department, while labor costs are up more than four percent over the last year. In the last 12 months, the overall Consumer Price index was up 3.7 percent.

12. The goal of the TRQ is to restrict low-priced imports and keep domestic prices high. Imports above the quota are currently assessed a tariff of more than 15 cents per pound, making them prohibitively expensive.

13. Sugar Program--Changing the Method for Setting Import Quotas Could Reduce Costs to Users, GAO-RCED-99-209, U.S. General Accounting Office July 1999.

14. A more recent estimate of imports under the TRQ, from USDA's Sugar and Sweeteners Yearbook, is 1.2 million tons.

15. "USDA Announces Fiscal Year 2000 Raw Sugar Tariff-Rate Quota," USDA News Release, November 2, 1999

16. "USDA to Purchase U.S. Sugar, Reduce Cost to Government," USDA News Release, May 17, 2000

17. Notice of Sugar Purchase, Kanasas City Commodity Office, Farm Service Agency, USDA, June 6, 2000

18. Sugar and Sweeteners Yearbook, Economic Research Service, USDA, May 24, 2000.

19. "A Safety Net for Farm Households?" USDA Agricultural Outlook, January-February 2000.