Where our tax money goes

Big Sugar Is Set for a Sweet Bailout

The Wall Street JournalBy Alexandra Wexler | The Wall Street Journal – Tue, Mar 12, 2013 7:48 PM EDT<p>               In this Wednesday, Feb. 13, 2013 photo, displayed are Peeps at the Just Born factory in Bethlehem, Pa. With the storied candy brand celebrating its 60th anniversary this year, a quirky new TV ad campaign talks about all the things people do with their Peeps. (AP Photo/Matt Rourke)

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.

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.

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