Government Programs Wasting Your Money – Part IV: Sugar Loans

Thomas Warns*

As our four-part series for the month of February about wasteful government spending comes to a close, one more bittersweet government program must be confronted: the USDA’s loans to sugar manufacturers.

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The program’s roots can be traced to the Agriculture and Food Act of 1981. The program uses several mechanisms to try to increase the price of sugar in America, which will help the sugar producers and processors (the companies which turn raw beet and cane into sugar) stay profitable. The most controversial (and wasteful) part of the program is the loans to sugar processors.

The loans prop up the sugar industry. When sugar prices are high, the companies usually pay off the loans; when sugar prices are low, the sugar companies often default on the loans and instead exercise the option to pay the loans with sugar they have put down as collateral. The USDA adds few restrictions to loan eligibility, so companies are eligible for loans almost immediately after defaulting on previous ones. Adding insult to injury, the government will then leave money on the table by selling the sugar to ethanol producers at a discount of ten cents a pound (about 50% off based on current sugar prices) in order to make more of that wasteful fuel – it essentially bundles two wasteful subsidies together.

The sugar industry claims that the practices sustain an industry that employs 142,000 people. But what about the American taxpayers and consumers – how much are they paying for this sticky mess? The sugar processors defaulted on $171 million of loans in 2013, despite the fact that the USDA also purchased $106 million worth of sugar in order to help drive up sugar prices (removing supply tends to increase price – how come the USDA only seems to understand the basics of supply and demand curves in limited contexts?). The USDA will give away some sugar to prisons and nursing homes, and will try to sell the rest to ethanol producers, but because of the ten cent per pound price cut, they will still lose $80 million from the $171 million worth of loans that defaulted.

There is no way to sugarcoat these facts – the program is a total policy failure. What is even more disturbing is the fact that economic and political reasons seem to be aligning so that this will continue indefinitely. Sugar prices will remain low while countries such as Mexico continue to experience a boom in sugar production and send more exports to the U.S. – extra supply usually means lower prices. Domestic production is likely to only increase as well, since the loans basically insulate sugar processors and farmers from any of the repercussions of overproduction of sugar. Politically, attempts to change virtually anything in the Farm Bill are met with opposition. The last attempt at reform was defeated, and Congress simply extended the existing Farm Bill another year.

By now, the solution should be painfully obvious – the government needs to stop meddling in the free market. The government may feel it is noble to dole out these subsidies to big sugar companies because the jobs of 142,000 workers may hang in the balance, but they’re only wasting money and driving up costs for consumers and taxpayers. If the U.S. government stopped giving out loans to sugar processors and stopped buying excess sugar in order to support higher sugar prices, sugar companies would be forced to adjust their production to appropriate levels. Instead, they are incentivized to keep producing more and more sugar, because they are essentially insulated from any negative results – if sugar prices are too low, the government will essentially bail them out. Congressional inactivity will likely allow the size of the subsidies to increase each year, and even a heaping spoonful of sugar won’t help Americans feel any better about the bitter medicine being shoved down their throats. 

 

*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."