# Worksheet

## Sugar:Sweet deal for your tastebuds. For your wallet, not so much.

In this worksheet we take a look at US trade policy for sugar.  You need to read this background sheet and then answer the questions.  You will need some of the data from this background sheet to make some simple calculations to answer the questions.  I suggest you print this background sheet to make it easier to reference.

### Sugar Consumption

Americans certainly have a strong taste for sugar.  For example, consider the following data on consumption from 2007:

Consumption in 2007 Total US
(tons)
per person in US
(pounds per person per year)
per person in US
(ounces per person per day)
Refined Sugar (from both cane &  beets) 10,773,000 71.6 3.2
HFCS – High Fructose Corn Sweetner   8,789,000 58.4 2.5
Total of both major caloric sweetners 19,562,000 130.0 5.7
###### Source:  http://www.ers.usda.gov/Briefing/Sugar/ combined with data on population from http://census.gov

Yes, you read that table correctly.  On average, each and every one of us: you, me, your mother, your friend, the President, and everybody else you see consumes over 5 ounces of pure sugar each and everyday, all year long.  Doesn’t sound like much, but it’s actually well more than 500 calories, and in these numbers I’m counting only caloric sweetners.  I’m not counting the natural fructose you get from fruits or the lactose from milk.  This is all pure glucose, dextrose, sucrose, and processed fructose.

The point I’m trying to make with this data, though, is not to make you feel bad about your diet.  Rather, I just want to make the point that sugar is a vital good for Americans. Judging by the consumption data, it’s important to a lot of Americans.

### Sugar Supply

Now let’s look at production or supply, and a quote from the US Department of Agriculture

The U.S. sweetener market is the largest and most diverse in the world. The United States is the largest consumer of sweeteners, including high fructose corn syrup, and is one of the largest global sugar importers. The United States ranks among the top sugar producers, and is one of the few countries with significant production of both sugarbeets and sugarcane.

In fact, the idea of the US as a major producer as well as consumer of sugar is shown by this data from 2008 from the same sources:

Sources of US Sugar Supply 2008
(tons)
2008
% of  US Supply
Beet Sugar Farming in US 4,721,000 44%
Cane Sugar Farming in US 3,431,000 32%
Imports (cane sugar) 2,620,000 24%

The US grew and produced 76% of the sugar it consumed.  If we add in the fact that sugar represents only 55% of our sweetener needs and that high-fructose corn syrup, the other 45% of our sweetener needs is totally domestically produced, we realize that our imports are relatively low.  In fact, the 2,620,000 tons of imported cane sugar represents only approx. 13% of our total (sugar + HFCS) sweetener supply.

### Background on Sugar & Production

What we call ordinary table sugar, the stuff you spoon into your coffee or tea or use to bake cookies, is a substance called sucrose. It is available form a large number of plants.  The most commercially viable sources of sucrose (ordinary sugar) is from refining either sugar cane or sugar beets.  Sugar cane is a grass-like plant that grows best in tropical environments.  Sugar beets can be grown in more northern, colder climes such as North America and Europe. For hundreds of years, these were the two most economical, high volume sources of sugar.

However, in the mid-20th century, researchers developed a method to process corn syrup and increase the sugar content.  Ordinary corn syrup has less sweetness than table sugar, but after processing into high-fructose corn syrup (HFCS) it has the same sweetness as sugar.  This allows it to be used as very good substitute for ordinary sugar, particularly in beverages.

Overall, there are three possible technologies/sources of sweetener:  sugar from cane, sugar from beets, and HFCS.  It is not economical for the US to import either HFCS or sugar beets, so for purposes of this analysis, we can think of four sources of sugar for the US:

• sugar cane grown in the US
• sugar beets grown in the US
• corn grown in the US (HFCS)
• sugar cane grown elsewhere in the world and imported into the US

The markets for all four of these products are relatively competitive (the HFCS market less so, but we will assume it is).  It is reasonable to assume that increases in quantities supplied from any of these four sources can achieved without significant price increases.  In other words, the supply curves for each of these products is very elastic (horizontal supply).  If we decided to buy more of one particular type of sugar, such as imported cane, then farmers would simply increase production and devote more acreage to that product.  Competitive markets will keep the price at, or near, the actual cost of production (remember the theory of Perfect Competition?).  This also means that we don’t have to be farmers to know the approximate cost of producing these different products – we can just look at the market price.

In the US, sugar cane is only grown in four states: Florida, Louisiana, Texas, and Hawaii.  Of these, Florida is the largest producer. Sugar beets are grown in many different states with particular concentrations of production in California, Minnesota, and North Dakota. Many other states also produce sugar beets, including Michigan.  However, there aren’t very many sugar farmers in the US.  The total US production of sugar is grown by less than 6,000 farms.  Fewer than 1,000 farms grow cane and less than 5,000 farms grow beets.  For purposes of this analysis, you can assume that there are 6,000 total sugar farmers in the US and of these, 5,000 are sugar beet farmers.

At the refining stage of the business. There is a difference between cane and beet sugar.  Cane sugar refining is a monoplistic competition industry. It is competitive with nearly 200 different cane refining firms in the US.  This means that on average, a single cane refinery is a smaller business serving the needs of 4-5  farms.  Beet refining is different.  Sugar beet refining is clearly an oligopoly.  There are a total of only 8 firms in the entire US that engage in sugar beet refining.  These 8 firms employ 7,718 employees.

### Market Prices

Now let’s consider pricing, again using data from the same sources.  I will use the prices for refined product, not raw.  Refined product has been processed into either syrup or powder and is ready for immediate use in food or beverage preparation. Note that these prices are the wholesale industrial prices.  The price you would pay at retail, at a grocery store for example, are typically twice these prices.

Average market price in 2008 Price
(cents per pound)
US refined sugar from beets 32
US HFCS 29
World market for sugar from cane 16

Notice that the US price for refined sugar is twice the world price.  Why is this? It appears uneconomic. Why does the US only buy 24% of it’s sugar from  international sources if the price is 1/2 of what the domestic price is?  Couldn’t some buyers do much better by sourcing their sugar from international sources rather than domestic?  To answer that question, we need to examine US trade policy toward sugar.

### US Sugar Tariffs and Quotas

Again, I will quote from the US Department of Agriculture regarding US trade policy:

The United States imports sugar under a system of tariff-rate quotas (TRQ). A TRQ is a two-tiered tariff for which the tariff rate charged depends on the volume of imports. A low-tier (in-quota) tariff is charged on imports within the quota volume. A high-tier (over-quota) tariff is charged on imports in excess of the quota volume. Almost all raw cane sugar, refined sugars and sugar syrups, and sugar-containing products are imported under TRQs for those products.

What a TRQ system means is that there is no theoretical limit on the total quantity of sugar that can be imported from any particular country. However, in practice, the tariff that is charged on imports of sugar from any particular country depends on how much has already been imported.  In practice, each country is assigned a quota.  Import amounts under the quota are charged a moderate tariff of 1.66 cents per pound.  But any amounts over the quota are charged a high tariff of 17 cents per pound.  In textbook terms, amounts under the quota are charged a revenue tariff.  Amounts over the quota are charged such a high protective tariff that nobody in fact is willing to import quantities over the quota. Each year the US Dept of Agriculture establishes a total maximum quota for all imported sugar (except from NAFTA countries).  Each sugar exporting nation in the world then has fixed share of that annual total quota.  This becomes that nations quota.

For example, Guatemala, a small county in Central America, exports sugar to the US.  Each year, 4.8% of the US overall import quota is allowed to come from Guatemala.  In the year 2008, the first 50,546 tons shipped from Guatemala to the US were charged a tariff of \$0.0166 per pound, or 1.66 cents per pound.  All sugar shipped from Guatemala in excess of this quota was charged a tariff of \$0.17 per pound.

The effect of this tariff-rate quota system is to effectively limit the amounts of imports.  It is simply uneconomical to buy sugar from international sources at the world price and pay the higher tariff rate.  Result: sugar is imported up to the quota amount and pays the 1.66 cents per pound tariff.  Using our table above, this means an importer pays the the world price of 16 cents per pound plus the 1.66 cents tariff and ends up with sugar imported into the US that costs the importer 17.66 cents per pound – an attractive price well below the cost of buying domestic sugar.  But such cost-effective purchases are limited by the quotas.  Any sugar purchased at the world price that was in excess of the quota would cost 16 cents world price plus 17.cents tariff for a total cost of 33 cents per pound.  Since it is cheaper to buy US produced sugar from beets at 32 cents than it is to pay 33 cents, the over-quota sugar is never actually imported.

### Other Effects of the Sugar Tariff-Rate Quota System

The US sugar tariff-rate quota system has benefitted sugar beet farmers and corn farmers in the US by making the sweetener products they produce (sugar from beets and HFCS) price competitive in the US with imported sugar cane products. It has done this by raising the price of all sweeteners in the US (particularly imported cane) and by reducing the amount of competition. Tota import competition is strictly limited and both sugar beet refining and HFCS are highly oligopolistic industries.  There have been other effects, though, also. This particular system, the TRG system, meets the technical letter-of-the-law of US GATT and WTO treaty obligations, but it clearly does not promote free trade.  Consumers are clearly worse off.

Another, slightly hidden effect is on the industries and firms that buy sweeteners: candy makers, cookie bakers, and other confectioners. For these firms, sugar is a cost of doing business. The TRQ system raises their costs.  These firms face competition from both US firms but also Canadian and Mexican firms.  Since neither Canada nor Mexico have such quotas and high tariffs on sugar imports, firms producing candy in Canada/Mexico can buy cheaper sugar there, make the candy, and then ship the product to the US and charge a lower price (candy is exempt from tariffs under NAFTA).  The US International Trade Administration has estimated that for every sugar-producing job saved in the US by the sugar TRQ system, 3 jobs have left the US to Canada or Mexico in the industries that produce sugar-containing products.

1. Suppose the US were to change to a trade system of allowing unlimited imports of sugar but taxing them at only 1cent per pound. Who in the following list would benefit from this change?  Question 1 options (the order of these options may be different in learning mgt system):
1. US sugar beet refinery employees
2. US sugar beet farmers
3. US sugar beet refiners
4. US employees of firms who produce candy
5. Workers in poor countries that grow sugar cane in Central America and the Carribean
6. US consumer who eat or drink sweetened products
7. US government tax collections
2. Suppose the US were to change to a trade system of allowing unlimited imports of sugar but taxing them at only 1cent per pound. Who in the following list would immediately be harmed? Question 2 options (the order of these options may be different in learning mgt system):
1. US sugar beet refinery employees
2. US sugar beet farmers
3. US sugar beet refiners
4. US employees of firms who produce candy
5. Workers in poor countries that grow sugar cane in Central America and the Carribbean
6. US consumer who eat or drink sweetened products
7. US government tax collections
3. How much more are Americans paying per pound for domestic produced sugar vs. imported sugar from cane (ignore tariffs)?
4. How much more are Americans paying per pound for HFCS vs. using imported sugar from cane (ignore tariffs)?
5. Using your answers to questions 3 and 4 with the consumption per person per year numbers, how much extra \$ per year is the average American paying for usingdomestic sugar and HFCS instead of imported cane sugar?
6. If we assume that there are 306 million Americans, then using your answer from question 5, what is the potential total savings to the Americans if we were to shift to unlimited free trade on sugar? (hint: if your answer from the previous question is in your calculator, clear it and re-enter the rounded number you answered)
7. If we assume that each sugar beet farm has 3 employees (including the farmer), and assuming that an elimination of the TRQ system would jeopardize all employment in both sugar beet farming and sugar beet refining, then how many workers in total (farm + refiner) are being protected?
8. Using your answers from questions 6 and 7, how much money are American consumers paying in higher prices to protect each of the jobs in sugar beet farming and refining?
9. Given the potential savings possible to each American consumer from abandoning the sugar TRQ system, and given the opportunity cost of time, do you think it is rational and a good use of time and money for the average American consumer to write their representatives in Congress and to spend time being politically active to push for repeal of sugar tariffs and quizzes. Yes or No?
10. Given what they have at stake, do you think it is rational and a good use of time/money for sugar beet farmers, sugar beet refinery employees, and sugar beet refinery firms to join trade associations and to lobby Congress for a continued sugar TRQ system? Yes or No?