Sugar Bailout to Inflate Food Prices

Posted by - Friday, March 15th, 2013

The U.S. sugar industry is in need of government help.

Under the 1934 Sugar Act, the government is required to provide sugar processors with loans each year. This year, those loans amounted to $862 million.

But plummeting sugar prices, due in part to a large harvest of both sugar beets and sugar cane, have put these companies at risk of defaulting on their loans.

So the U.S. Department of Agriculture is stepping in with a plan to buy 400,000 tons of sugar, an effort to boost prices.

Sugar prices have fallen 18% since October, when the loans went into effect. The drop from August was even greater.

Domestic Sugar FuturesSource: Wall Street Journal

And it's affected major processors like American Crystal Sugar Co. (PINK: ASCS), Amalgamated Sugar Co., and U.S. Sugar Corp. The USDA wouldn't specify whether these companies had received loans, the Wall Street Journal reports.

But by raising the price of sugar, this bailout would also likely raise food prices on the consumer level. Americans would find the move hitting their wallets.

There's no guarantee the bailout will go through just yet. Sugar prices may come back, and nothing will be decided before April 1.

But the nation has already experienced what this sort of a situation might mean. In 2000, the USDA purchased 132,000 tons of sugar, as the Wall Street Journal reports, and the loan program still lost $295 million.

This time, however, the 2008 Farm Bill will see to it that the sugar is sold to ethanol producers to simultaneously reduce the impact on corn.

But even with this provision, consumers won't be protected from the bailout.

From the Wall Street Journal:

“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.

Many argue that the sugar industry should not receive these subsidies, let alone a bailout. It provides 142,000 jobs, but compared to what it takes, this isn't significant.

But one thing is certain: if the USDA does decide to purchase sugar to boost prices, there's no doubt consumers across the U.S. will see the effects in their grocery bills.

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