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New Report Looks at Sugar Reform

The United States' sugar policy has a long history of supporting sugar producers, and the current system has its roots in the agricultural programs of the Great Depression. The policy has been widely criticized both at home and abroad for supporting a relatively small group of sugar producers at the expense of consumers, taxpayers, sugar-using industries, and the environment. A new Competitive Enterprise Institute report - "Is the U.S. Sugar Problem Solvable?" - explores the possibility of reform by considering other agricultural reforms at home and abroad.

The current U.S. sugar program relies on restricting sugar imports to keep domestic prices high, which especially hurts those developing countries that are low-cost producers of sugar. The artificially high price also provides incentives for domestic sugar producers to increase production into environmentally sensitive areas.

The cases examined are New Zealand's agricultural policy reform in the mid-1980s, changes to the United States peanut quota program through a buyout program, and the buyout program for tobacco quota holders in the United States.

The pressures for reform come from several sources. The desire to complete further regional and bilateral free trade agreements might require more sugar market opening "concessions" by the United States, especially if negotiations with low-cost sugar producers are to be completed. In addition, the timetable of the North American Free Trade Agreement will allow more Mexican sugar imports in the near future.

The ongoing negotiations among the members of the World Trade Organization to conclude the Doha Development Round revolve around agricultural policies. The United States and other industrial countries might have to provide better market access for developing countries to complete the Doha Round.

The debate over the upcoming 2007 farm bill will highlight the need for reform of several costly agricultural programs, and while the sugar program has escaped significant changes over the last few decades, this is not guaranteed in the future.

The examination of three reform experiences in other areas provides some insight into possible options for sugar reform:

• Agricultural reforms in New Zealand, which opted for a "shock reform" that left farmers little time to adjust to the new policies. While difficult for many farmers, the reforms did not lead to the collapse of the agricultural sector, as some had feared. In contrast, agricultural production has thrived over the past two decades.
• The buyout program for peanut quota holders enacted after the 2002 Farm Act. The changes abolished a two-tiered price system under which quota holders were guaranteed a minimum price of $610 per ton, while other producers received a minimum $132 and were restricted from selling in the domestic market. 
• The compensation of tobacco quota holders through a buyout program. This was enacted after tobacco reform abolished the existing tobacco quota and price support program.

These cases represent examples of the possible reform scenarios for sugar: the quick dismantling of the existing sugar program or a buyout option.

The conclusion that might be drawn is that, to be successful, reform needs to address several concerns, such as reducing the high costs for consumers and the sugar-using industries, as well as providing a long-term policy framework for sugar growers.

Reform efforts have been unsuccessful for decades because sugar producers could consistently muster enough political support for their political allies to block significant domestic changes. However, pressure for reform has not only arisen from criticism inside the United States but also from outside - for example, progress in liberalizing trade in other areas puts pressure on agriculture to follow suit; bilateral trade agreements with neighboring countries open up the U.S. markets, therefore increasing demand to provide poorer countries with better chances to participate in the world economy.