What to do about sugar supply and sugar prices? That is a question Nick Pyle, Independent Bakers Association’s president, deals with on a constant basis.

“We have seen sugar prices in the United States almost double as a result of the abilities of those that have the sugar to set the prices,” Pyle says. “A lot of people are scrambling to get their hands on sugar.”

What can bakers do about sugar prices? Not much. The U.S. sugar program ensures that bakers pay as much as double the prices of sugar that other countries around the world pay. This leaves many bakers scratching their heads looking for solutions to rising prices and slimming margins.

Unfortunately, solutions are elusive. The obvious answer, to stop using sugar, is unrealistic in the baking industry. Sugar is a functional ingredient that enhances bakery foods’ tastes, textures and browning abilities.

The not so obvious answer is to use a sugar substitute. Sugar alternatives are a practical solution in some formulas, but they still are an incomplete answer, especially considering the negative press surrounding high fructose corn syrup and some high-intensity sweeteners.

The logical answer: Modify U.S. sugar policy. What years ago seemed unthinkable is slowly becoming a probable solution to alleviate escalating sugar prices and the disparity between what U.S. bakers pay for sugar, and what the rest of world pays for sugar.

Policy details
“Frankly, I am not aware of another commodity where the gap between suppliers’ and customers’ policy preferences has historically been any wider,” says Randy Green, Sweetener Users Association’s president.

Green’s statement sums up the contentious environment between the parties participating in the growing, processing and purchasing of sugar in the United States. The differences of opinions recently were highlighted on May 10 in testimony before the Committee on Agriculture, Nutrition and Forestry of the U.S. Senate. The committee heard testimony from various participants in the sugar industry about the positives and negatives of U.S sugar policy.

Those giving testimony included:
• J.B. Penn, undersecretary for Farm and Foreign Agricultural Services for the U.S. Department of Agriculture (USDA). Penn spoke on behalf of USDA, which has administered U.S. sugar policy for the last four years.

• John Roney, American Sugar Alliance’s (ASA) director of economics and policy analysis. ASA is a national coalition of growers, processors and refiners of sugarbeets and sugarcane.

• Margaret Blamberg, American Cane Sugar Refiners’ Association’s (ACSRA) executive director. ACSRA represents all but one of the cane refiners in the United States.

• Robert Peiser, Imperial Sugar Co.’s president and chief executive officer. Imperial Sugar operates two major cane refineries in the United States.

• Joe Goehring, The Hershey Corp.’s director of commodity operations. Goehring testified on behalf of the Sweetener Users Association, whose members include companies that use nutritive sweeteners.

• Mrinal Roy of the Mauritius Sugar Syndicate and Mauritius Chamber of Agriculture. Roy testified on behalf of foreign exporters, including Mauritius, a small island in the Indian Ocean east of Madagascar.

During the Committee Hearing, each panel member discussed various aspects of U.S. sugar policy. Baking Management examines this testimony and details its potential impacts on high-volume bakeries.

U.S. sugar policy
The U.S. sugar program is unique compared to other commodity programs. Whereas other commodities operate in a market-oriented structure, “the sugar policy today consists of several interrelated programs that require USDA, rather than the marketplace, to balance available supply with domestic demand,” Penn stated in his testimony.

Depending on whom you ask, this program is either severely flawed or perfectly executed. ASA is a strong proponent of this policy, claiming that it does not cost taxpayers anything, gives U.S. consumers affordable and stable sugar prices compared to world standards, and gives American sugar farmers the tools they need to survive.

On the other hand, Goehring says, “For the past quarter of a century, sugar policy has not been sufficiently responsive to market signals and changes in the world economy. This has resulted in unintended consequences such as supply shortages, loan forfeitures, slow growth of domestic sugar consumption, inhibition of international trade and the relocation of U.S. manufacturing jobs overseas.”

One of the main tenants of U.S. sugar policy is a price support loan program for processors of sugarcane and beets. This program ensures sugar processors receive at least the support price for their sugar, whether they sell it or forfeit the sugar to USDA’s Commodity Credit Corp.

USDA sets the price of sugar “by controlling the supply relative to the demand,” Penn says. It accomplishes this through two tools: marketing allotments and tariff-rate quotas (TRQs).

Allotment quantity
Every year, USDA gazes into its crystal ball and establishes an overall allotment quantity designed to balance domestic supply, required imports and market requirements. This task, Penn states, “has become increasingly difficult within the past year and is not expected to get any easier. Direct federal management of the nation’s sugar supply has always been a difficult proposition at best.”

The domestic supply of sugar is controlled by marketing allotments, which allows USDA to control sales of domestically produced sugar to achieve the minimum price established by the price support loan program.

“The use of marketing allotments as a policy tool creates market distortions and is virtually impossible for USDA to manage such a program effectively and efficiently,” Goehring says.

Peiser agrees, stating that this program forces Imperial Sugar to “jump through many hoops that would not exist in a market free of such supply controls.”

To control foreign supply of sugar, tariffs and TRQs are used. The World Trade Organization requires a minimum TRQ for raw cane sugar of 1.23 million short tons raw value (STRV), and 24,521 STRV for refined sugar. The U.S. Trade Representative allocates TRQs to select sugar supplying countries.

For developing countries such as Mauritius, TRQs provide a consistent source of revenues. “For the past 24 years, the U.S. sugar program has provided much needed access to the U.S. sugar market for 40 traditional suppliers, most of whom are developing countries, at stable and remunerative prices,” Roy stated in his testimony. “The export revenues generated by these exports to the U.S. market have contributed to the economic development of these countries through trade, not aid.”

Goehring’s testimony called into question USDA’s effectiveness to accurately forecast market fundamentals as “the pace of change in the world increases and our multilateral and bilateral commitments expand.”

Baking perspective
For bakers, U.S. sugar policy means that they pay more for the value of sugar than the rest of the world, which puts the baking industry in firm opposition. The baking industry’s opposition to U.S. sugar policy grew more resolute in the wake of an active hurricane season that wreaked havoc on sugar prices and supply.

The affects of hurricanes Katrina, Wilma and Rita moved the U.S. sugar program into the spotlight, and similar to everything else about this debate, both sides draw vastly different conclusions about the impacts of the hurricanes in relation to U.S. sugar policy.

“It was the worst year the industry’s ever had, and it could have been a perfect storm for market chaos,” Blamberg stated in her testimony. “But, chaos never came because of our country’s sugar program and because of our country’s sugar refineries. In years of healthy crops, refineries supplement domestic supplies with imported raws. When hurricanes or droughts strike, more foreign raws can be tapped.”

However, opponents of U.S sugar policy state that these foreign supplies cannot be tapped quick enough to mitigate market realities. Hurricanes Katrina and Rita significantly impacted domestic sugar supply, creating short-term shortages that impacted many bakeries. As a result, USDA allowed additional sugar beyond the established allotment levels to enter into the United States. However, many in the industry feel the process was labored and did not reflect market realities.

“Even at its best, government usually cannot react as quickly as the marketplace demands, especially in turbulent times when all buyers and sellers are scrambling to match up available supplies with pressing demands,” Goehring says. “In that kind of environment, it is problematic to have a policy which says it is illegal to sell sugar until the government decides otherwise.”

Free trade agreements
The debate between sugar users, and sugar growers and processors is as heated as ever. But is it moot? An increasing number of free trade agreements, both enacted and pending, threaten to make the U.S. sugar policy obsolete.

“As the United States continues to seek expanded opportunities for our farmers and ranchers in the international markets through free trade agreements,” Penn states, “trading partners in turn request increased access to the U.S. sugar market, especially as long as our domestic price substantially exceeds the world price.”

On Jan. 1, 2008, all restrictions from the North American Free Trade Agreement will be lifted, eliminating customs duties on sugar traded between Mexico and the United States. In addition, free trade agreements and pending agreements between the United States and Central American countries, the Dominican Republic, Peru, Colombia and Thailand, seriously threaten to compromise current U.S. sugar policy.

Removing importing limitations from these countries most likely will increase sugar imports above 1.53 million short tons, which automatically suspends marketing allotments, causing considerable forfeitures and substantial program costs, Penn says.

The battle begins
Recent hearings are only the beginning of a long battle that will play out until Congress approves the next Farm Bill. Although market situations and realities, as well as testimony from Penn, appear to signal significant changes in the policy, Pyle says that the sugar industry should never be counted out.

“Politically, the sugar industry is very active in Washington,” Pyle says. “I’ve always said that if you look at what the sugar industry gives members of Congress collectively and through their individual Political Action Committees, it would make Jack Abramoff look like a piker.”

This influence almost ensures that the debate between the two sides will only get more heated and contentious. However, many in the industry, including Pyle, Green and Penn, are calling for both parties to get together and hammer out a deal that’s a win-win for everyone.

“We’re not advocating getting rid of the sugar policy, but we think it needs to change to be a little more up-to-date with the real world,” Green says. “We would like to work together, and we’ve expressed hope that we can sit down with producers, processors and refiners and see if there is some common ground.”

Unfortunately, common ground is going to be difficult to come by as evidenced by the war of words both sides are engaged in. “We’re struggling with coming up with a win-win solution that doesn’t collapse the market, helps sugar grows transition, and gets us to a more market-oriented program,” Pyle says.