10/23/2013

Cheaper Sugar Sends Candy Makers Abroad

According to the Wall Street Journal, the U.S dropped sugar prices by 50% in the last two years but it is not enough for some domestic companies to continue productions of its sugary sweets at home. The beloved Jelly Belly Candy co. is a case in point. Jelly Bell only sells 20% of its sugary sweetness abroad but the company is expanding its foreign production in Thailand, the fourth largest sugar producer, in order to gain access to cheaper sugar. In addition to expanding foreign productions, the company had to increase the price of its candy over the last 10 years in order to account for the higher sugar prices in the U.S.

The U.S currently has a price floor on sugar and limits imports. The article states that “sugar users say the protections inflate wholesale prices, hurt profit margins and sap the competitiveness of U.S candy makers in the global market.” On the global scale, average sugar prices are nearly half the average price of U.S sugar. Defenders of the price policy say, “without the current U.S policy, 90% of the 142,000 sugar-growing and processing jobs in the U.S would be in danger…” With more companies choosing to expand their productions abroad, what will be the implications for the domestic sugar industry? And how will the U.S react?

5 comments:

JRich said...

My sweet-tooth finds this article very fascinating. Governmental economic policy has and will be a very debated topic. Such things as price floors, price ceilings and subsidies have profound impact on the direct market and secondary markets. It may be very beneficial for sugar producers to have the price floor, but detrimental for all of the secondary market sugar consumers like Jelly Belly, Hershey's and numerous others. Ultimately I think that it would be very interesting to see the world economy in a truly free market. I wonder if it would be better or worse?

Dave Tufte said...

Emma182: 100/100
JRich: 50/50

Before I start a rant that's sure to annoy some of you, let me say that agricultural policy is a travesty in just about all developed countries, and is often worse than it is in the U.S. Farmers everywhere have an outsized influence on the political process.

And, compared to other industry segments, sugar isn't doing anything out of the ordinary. But, they may be doing it on a grander scale.

I'm kind of surprised at the 2:1 ratio of actual price to world price. It's usually around 5:1. Economists can measure, and find worrisome, the market distortions caused by changes in sales tax and income tax rates of a percent or less. But, 2:1 implies a 100% tax, and 5:1 implies a 400% tax on sugar. These are huge differences.

But, the sugar industry gets away with this because ... it's just sugar. It helps that the product is consumed in amounts that cost a few pennies: who's going to notice a few pennies too many?

The article is right: most of the 142K jobs in the sugar industry are threatened by a relaxation of the price floor system. That's because most of them shouldn't be jobs that are in the U.S. at all.

The theory of pricing something like sugar, produced by one of our industries and sold to the rest of us, is no different than the transfer pricing story of divisions within a firm. In the absence of some ability to sell sugar at a high mark-up outside the country, it should be sold at close to marginal cost inside the country. It isn't.


Ryan Brockway said...
This comment has been removed by the author.
Ryan Brockway said...

I don't really understand the reason for the US to subsidize the agricultural industry. Does this happen simply due to lobbyists in Washington or is it due to domestic supply issues? I know that sometimes the government will subsidize rare earth mining because it will offer a domestic source for those materials. This happens because policy makers do not want us relying on foreign suppliers if a war ever starts. Anyway, I feel like the US is wasting its comparative advantages producing things like sugar that can obviously be done much more "efficiently" elsewhere.

Dave Tufte said...

Ryan Brockway: 50/50

Well, Ryan, let me be blunt and cynical. You don't understand this because the sugar growers have political power and you don't. The cause isn't really about economics at all ... just the effect.

America is not alone in this. Just about everywhere, agricultural interests have political power that far outweighs their proportion of the economy. I'm not sure what the reason is; nostalgia? prejudice that favors land owners?

FWIW: The rare earth metal (and rare earth — they're two different things) issue isn't a very solid counterexample. We didn't produce very much of them because the processes pollute quite a lot and were shut down (my understanding is that it is mostly a volume rather than a hazard issue with the pollution). Then the xenophobes found out that China was the only country producing them, and they turned this into a security issue. Again, my understanding is that this isn't an extraction industry that would have been very hard to restart in the event of a war. I'm not an expert on this, but I do have one level of separation from an expert if anyone needs to know more.