Sugar! I don’t raise sugar! This is the Cornbelt and I raise corn. Why should I be concerned about sugar? Don’t talk to me; go to the kids and the candy bar makers.

If that reflects your thoughts, you might want to brush up on how the corn market will be impacted by US sugar policy. There is a closer connection that most farmers realize.

Sugar is part of the Farm Bill, and it is a major crop in sugar cane production areas along the Gulf Coast and in the sugar beet production areas in Minnesota’s Red River Valley. Sugar is the commodity that provides pricing guidelines for High Fructose Corn Syrup (HFCS), a commodity that is produced by our trading partners throughout the Caribbean, and a commodity that can easily replace corn a feedstock for ethanol. Suddenly there is reason to become familiar with sugar politics, and the Congressional Research Service (CRS) has recently issued a report to Members of Congress to help familiarize them with sugar politics.

Sugarcane and sugar beet farmers and the refineries have a market loan program that provides a floor price for sugar and restrictions on how much can be imported. As a result sugar users perennially seek elimination of the program to obtain sugar at a lesser price. The USDA is required to manage the sugar supply so that the program has no cost to the tax payer, and it does that by managing import volumes to achieve a supply/demand balance. At issue in the Farm Bill debate are several issues:
1. Raising support prices. While producers want this, sugar users don’t since US sugar is usually 2 to 4 times as expensive as the world price. But loan rates have not been raised for 15-20 years, and the House version of the Farm Bill raises loan rates by 3%.
2. Managing the domestic supply. USDA allows imported sugar and marketing allotments on sugar refiners to keep the price just above the loan rate. But beginning next January, Mexican sugar will enter the US unrestricted as a result of Mexico having to accept unrestricted amounts of US HFCS.
3. Balancing costs. Because of the expected sugar imports from Mexico and other free trade countries, the USDA expects the sugar program will cost $1.4 billion over the next 10 years, and since the increased supply will likely reduce the market price for sugar, producers and producers will likely forfeit the commodity to repay their marketing loans and the USDA will likely own stockpiles of sugar.

The final issue is the increasing call to convert surplus sugar into ethanol, and that has become louder with the increased targets in the Renewable Fuels Standard. Disregarding the market prices for corn and sugar, it is a cheaper process to use sugar than corn to make ethanol, since there is no need to convert cornstarch to sugar. Brazil has been doing that for years. However, due to market prices for US sugar, sugar-based ethanol is estimated at twice as expensive as corn-based ethanol, and three times as expensive as Brazilian sugar-based ethanol.

In the House version of the 2007 Farm Bill is a requirement for the USDA to sell surplus sugar to the ethanol industry to maintain the sugar program at “no cost.” The CRS report expects a considerable subsidy would be needed for sugar-based ethanol to be economical. Currently operating corn ethanol plants would need to convert their processes, and due to transportation issues, the sugar ethanol plants would probably be limited to sugar beet and sugar cane regions. The Congressional Budget Office anticipates large forfeitures in the sugar loan program, which would increase its cost along with the ethanol production subsidies.

Since the CRS report focuses solely on sugar, it does not address the direct impact on corn. However, Cornbelt economists have indicated that corn prices would soften if ethanol plants in the Upper Midwest began using sugar. Such a softening of the corn market may or may not reach as low as the loan rate, triggering the LDP program; but that would be an additional cost to USDA that does not exist in current market conditions.

Summary:
Proposals to renovate the US sugar program, as a result of trade negotiations and ethanol demand, could have a significant impact on the monopoly corn enjoys for ethanol production. Congress is addressing the controversial sugar program which has had an economic relationship with corn through the contribution corn makes to the sweetener industry. However, with sugar surpluses anticipated by USDA and policy makers, sugar may also find its way into ethanol refineries and that has the potential to soften corn prices.