(Chuck Muth) – On January 16, Bloomberg.com reported that “India, the world’s biggest sugar producer after Brazil, will subsidize shipments of raw sweetener to ease a domestic glut and help mills clear arrears of about $422 million to farmers before elections scheduled by May.”
In other words: This was not a “free market” decision, but purely political.
“The government will give incentives to export 4 million metric tons over two years;” a decision that will “widen a global glut” and sent raw sugar prices tumbling to “the lowest since June 2010.”
One expert predicted that India’s exporters will need “a substantial amount as subsidy for exports to take place because world prices have dropped quite a bit in the last two months.”
“The market is saying it’s already oversupplied,” added Tom McNeill, a director at Green Pool Commodity Specialists Pty. “It doesn’t need further supplies.”
“Global inventories will rise to a record as consumption trails production in the marketing period ending in 2014 for most countries, the U.S. Department of Agriculture forecast in November. Stockpiles in India jumped to 8.85 million tons on Oct. 1, the highest in five years, according to the Indian Sugar Mills Association.”
The problem is that local Indian governments set a higher-than-market price that Indian mills must pay to Indian farmers.
But that price is higher than what Indian refiners can pay to the Indian mills to make refining raw Indian sugar is profitable. So the government is going to give subsidies to the Indian mills so they can pay the Indian farmers the government-set price.
But then the cost of refined Indian sugar will be higher than what Indian refiners can get on the world market, so Bloomberg.com reports that Indian refiners “will also be given the subsidy.”
It’s a price-inflating vicious circle of one subsidy building on another and then another. And this is the distorted so-called “free market” that some expect U.S. sugar farmers to compete in without any protection whatsoever from their own government.
Unless Congress is willing to risk total reliance on unreliable emerging-world governments for its sugar supply, the only sensible policy is to continue the current U.S. sugar program to help U.S. farmers compete in a government-subsidized global market.
Or push for a new zero-for-zero subsidy policy in which all sugar-producing countries get completely out of the sugar subsidy business so everyone, not just American farmers, are competing without crutches.