Big Sugar Is Set for a Sweet Bailout

[RBP]

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The U.S. Department of Agriculture is considering buying 400,000 tons of sugar—enough for 142 billion Hershey's Kisses—to stave off a wave of defaults by sugar processors that borrowed $862 million under a government price-support program.

The action aims to prop up tumbling U.S. sugar prices, which have fallen 18% since the USDA made the nine-month operations-financing loans beginning in October. The purchases could leave the price-support program with an $80 million loss, its biggest in 13 years, said Barbara Fecso, an economist at the USDA, in an interview.

The move would benefit companies that turn sugar beets and sugar cane into granulated sweetener, a business plied by American Crystal Sugar Co., Amalgamated Sugar Co. and U.S. Sugar Corp. The USDA wouldn't say how many companies have received loans, or identify them. U.S. Sugar said it doesn't have any USDA loans outstanding. American Crystal and Amalgamated didn't respond to requests for comment.

Higher prices would hit food companies including candy giants Mars Inc., Hershey Co. and Nestlé SA, and could ultimately boost retail food prices, at a time when many consumers are financially stretched.

"Clearly, the USDA has made up its mind that Big Sugar is going to trump the American consumer," said Pierson Bob Clair, president and chief executive at Brown & Haley, a confectioner in Tacoma, Wash., that makes Roca butter-crunch candy.

The USDA makes loans to sugar processors annually as part of a program that is rooted in the 1934 Sugar Act. The loans are secured with some 4.1 billion pounds, or 2.05 million tons, of sugar that companies expect to produce from the current harvest. That comes to almost a quarter of total U.S. output that the USDA forecasts for this year.

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If domestic sugar prices bounce back before a final decision is made, the USDA would back away from plans to intervene in the market, Ms. Fecso said. A final decision could come as early as April 1.

The domestic sugar industry has long relied on subsidies that critics say are disproportionate to its contribution to the U.S. economy. The sugar industry supports jobs for 142,000 people, according the American Sugar Alliance, an industry group.

The loan program was designed to operate at no cost to taxpayers. A June 2000 study by the Government Accountability Office, then called the General Accounting Office, estimated the program's cost to the U.S. economy at $700 million in 1996 and $900 million in 1998.

The National Confectioners Association, which represents about 350 candy companies, including Mars, Hershey and Nestlé, estimates that the U.S. Sugar Program has cost consumers about $14 billion since the Farm Bill's passage in 2008.

Phillip Hayes, spokesman for the American Sugar Alliance, said the secretary of agriculture "is going to administer sugar policy the way Congress designed. Congress specifically designed sugar policy to run at the lowest possible cost to American taxpayers."

A bumper crop of sugar beets in the upper Midwest and a big sugar cane harvest has sent U.S. prices tumbling. The futures contract for U.S. raw sugar on Tuesday finished at 21.03 cents a pound, compared with about 25.50 cents a pound when the USDA loans were disbursed.

World raw-sugar prices ended flat on the day at 18.82 cents a pound. U.S. prices tend to be higher than world prices because the U.S. restricts sugar imports as part of the price-support program.

Any defaults on loans this year would be the first test of a provision in the 2008 Farm Bill that requires the USDA to sell forfeited sugar to ethanol producers. Most ethanol in the U.S. is distilled from corn.

To entice ethanol producers to buy sugar to mix in with corn, the USDA expects it will have to take a 10-cent loss on every pound of sugar it sells, bringing the total to $80 million if 400,000 tons are purchased, Ms. Fecso said.

Ms. Fecso said the USDA is hoping to avert a repeat of 2000, the last time the agency bought sugar on the open market. The USDA bought 132,000 tons of sugar to raise prices, but the effort was generally considered unsuccessful because borrowers ended up handing over 1 million tons of sugar to the agency instead of repaying the loans.

The loan program incurred losses of $295 million that year.

"If the USDA has to intervene…we're going to be unfairly leaving consumers and businesses on the hook to foot the bill and that is unacceptable," said Sen. Jeanne Shaheen (D., N.H.), co-sponsor of a bill that would give the USDA more flexibility in handling the sugar program.

[RBP]

I'll admit I am pretty clueless on farm subsidies in general, why we even have them, and what they cost. I need to do some reading I guess.

Maybe our resident bankers can explain why the government is providing loans to private agribusiness to begin with. :-k

[RBP]

By Robert J. Samuelson,January 06, 2013

Symbolic of the debate we’re not having about government’s size and role — the essence of the deficit problem — is the future of farm subsidies. Running $10 billion to $15 billion annually, they don’t do much good. For starters, they haven’t saved small farms. Since the 1930s, when subsidies began, the number of farms is down 70 percent. Nor do farmers need subsidies to stay profitable. Farmers’ income for 2011 and 2012 ($135 billion and $133 billion, respectively) were the highest and second-highest ever and would have been without subsidies.

Once upon a time, subsidies could be cast as an antidote for above-average instability. Farmers faced floods, droughts, insects and wild price swings. Subsidies smoothed their incomes. Other sectors were more stable. This is no longer true. Technological upheaval and foreign competition have convulsed countless industries and their workers: autos, steel, entertainment, newspapers and many more. Farmers aren’t unique.

Government support for agricultural research and food safety can be justified. But direct subsidies to farmers can’t. If subsidies ended tomorrow, wheat would still be grown in Kansas. Subsidies qualify as “low hanging fruit” in cutting federal spending. What’s instructive is that no one is doing it.

Over the years, Congress has played a shell game. When one subsidy appears unwarranted, it’s erased and replaced with another. Thus, we’ve had set-asides, price supports, direct payments, counter-cyclical payments and more. The shell game continues. The Senate Agriculture Committee eliminated “direct payments” and diverted most savings into a new subsidy (“agriculture risk coverage”) and expanded crop insurance.

Crop insurance sounds sensible; it cushioned the effect of last year’s drought. But as economist Bruce Babcock of Iowa State University shows, it’s mainly another arcane way to funnel money to farmers. It protects not only against natural disasters but also against normal price fluctuations that could be hedged in futures markets. Premiums are heavily subsidized, as are the expenses of insurance companies. With subsidized premiums, farmers buy lavish protection. Even before the drought, federal spending on crop insurance went from $1.5 billion in 2002 to $7.4 billion in 2011, Babcock reports.

In Congress, ending subsidies is unthinkable. The Senate’s legislation would trim existing levels. Still, the combined cost of direct subsidies and crop insurance under the new legislation would average $14 billion annually from 2013 to 2022, estimates the Congressional Budget Office.

Hardly anyone asks basic questions. Would we create these programs today? Why subsidize farming if it would do fine without subsidies? Indeed, meat and vegetable production is largely unsubsidized; subsidies apply mainly to grains.

Politics fosters inertia. People feel entitled. Farmers like their payments. Subsidies raise agricultural land values and, for absentee landlords, the rents that can be charged. Farm groups protect these benefits with lobbyists and campaign contributions. Congressional farm committees’ power rests on their control of subsidies.

Farm subsidies are a metaphor for our larger predicament. We no longer have the luxury — as we did for decades — of carrying marginal, ineffectual or wasteful programs. We can no longer afford subsidies for those who don’t need them or, at least, don’t need so many of them (including affluent Social Security and Medicare recipients). If we can’t eliminate the least valuable spending, then we will be condemned to perpetually large deficits, huge tax increases or indiscriminate cuts in many federal programs, the good as well as the bad.

Despite a deficit obsession, Americans still seem ill-informed about the magnitude of the gaps. A recent CBO report is illuminating. Even with a full economic recovery, current policies imply annual deficits over the next decade averaging 5 percent of the economy (gross domestic product); by 2022, federal debt to GDP would hit 90 percent (the 2007 figure: 36 percent). Balancing the budget in 2020 would require $1 trillion of spending cuts or tax increases. The recent “fiscal cliff” agreement hardly alters these forecasts because it closes only about 8 percent of the next decade’s projected deficits, estimates the Committee for a Responsible Federal Budget.

Government needs reappraisal. Programs shouldn’t be immortal in the face of changing economic and social conditions. What’s no longer justified should be discarded. Unfortunately, President Obama has evaded and discouraged this discipline. Republicans emphasize spending control but are often hypocritical on specifics.

Politics favors the status quo; economics calls for change. Farm subsidies are but one example. As the CBO observes: “Very few policy changes, taken individually, can shrink the deficit [sharply]. . . . Significant deficit reduction is likely to require a combination of policies, many of which may stand in stark contrast to policies now in place.” Still, agriculture would be a good starting point. In 2013, Congress will continue debating a farm bill. It would be refreshing, if surprising, to see subsidies phased out because — whatever their historical justification — they’re no longer needed.

[DemonGeminiX]

http://www.youtube.com/watch?v=54GJA83JFI4

[FBD]

Maybe our resident bankers can explain why the government is providing loans to private agribusiness to begin with. :-k

because if they didnt then they would have less ability to manipulate things. which is basically the answer for any questions of this nature. the government does this shit so it can have more say in what goes on, plain and simple.

fucking "price stability" more important than people eating, more important than a farmer doing what farmers do. how stupid is it to buy up a shitload of sugar so the price stays high? (like how stupid is it to pay farmers not to farm...or pay them to destroy harvest...or dump milk out in the street...)