Heed Brazil Sugar Subsidies

Published in the June 2013 Issue Published online: Jun 30, 2013 Patrick Chatenay

Sugarloaf MountainBrazil now is a global powerhouse in agriculture. It provides much of the sugar, soybeans, corn, orange juice, coffee, beef, poultry and ethanol needed around the world.

In the United States, as in Europe and elsewhere, many see Brazil as a free-market player that built an agricultural empire thanks mainly to favorable natural resources and shrewd private operators.

That assumption is not entirely correct, especially not for sugar. Though often touted as an example of a successful market-based industry, Brazil's sugar industry owes its growth and immense influence to years of strong government intervention, which continues to this day.

A complex web of Brazilian incentives supports an industry whose sugar and sugar-based ethanol distorts the world market and harms Brazil's competitors.

While Brazil's subsidies can be difficult to pinpoint because of their non-transparent nature, Brazilian sugar producers alone benefit from at least $2.5 billion a year in direct and indirect government programs.

These subsidies include direct payments to growers, debt forgiveness, ethanol usage mandates, lower tax rates for sugar producers and special interest rates on government loans. Because of unreported debt restructuring, true subsidization is likely to be much higher than $2.5 billion a year.

Brazil already controls 50 percent of global sugar exports and has amassed incredible influence over the world sugar market. Subsidization from Brazil and other countries has created what may well be the most distorted commodity market in the world. The world market price for sugar is a "dump" price and should not be used to measure what benefits or costs may accrue from free trade in sugar.

To maintain its revenue, the Brazilian sugar industry would need world sugar prices to rise by at least 15 percent. That gives an idea of the impact of government support.

So what does this mean for the U.S. Congress during the ongoing farm policy debate? Simple. Weakening U.S. policy would jeopardize your domestic industry and leave consumers more dependent on subsidized sugar from countries like Brazil. Beware that "dependent" means "vulnerable." During most of 2011, Brazil's government threatened to tax its sugar exports to support the domestic supply of ethanol.

In Europe, we learned this lesson the hard way. In 2006, the EU sugar program was overhauled and many of the ideas promoted by opponents of current U.S. sugar policy were implemented.

Thus, the EU became more dependent on foreign sugar suppliers, and when those supplies tightened, consumers were burned with higher sugar and food prices. In addition, more than 120,000 European sugar workers lost their jobs. At considerable cost to stakeholders and without any measurable benefit to the consumer, Europe put at risk the safety of its sugar supply.

America should exercise caution before outsourcing its sugar production to subsidized foreign producers.