Move over, OPEC, here rules the new world sugar cartel.
That's the meaning of the new international sugar agreement recently negotiated in Geneva by the United States and 71 other countries. If it had involved U.S. companies - not governments - the negotiators could have been jailed for violating the antitrust laws.
For the sugar agreement simply represents a legalized conspiracy to restrain trade. When sugar supplies are high, it allows sugar exporters to restrict sales as a way of increasing prices. It aims at increasing wholesale raw sugar prices about 60 per cent in the next six months (from about seven cents to 11 cents per pound) and more in succeeding years.
Because America imports about 40 per cent of its sugar supplies (4.7 million tons in 1976 out of total consumption of 10.9 million tons), logic suggests that the United States would have vehemently opposed the sugar agreement, and that chances for Senate retification are nil.
But things are rarely so simple. Until 1974, quotas protected U.S. sugar producers from cheap imports, and, consequently, domestic interests have pushed both the Administration and Congress to perpetuate that protection through high world prices. Moreover, there is pressure to support developing nations, which supply about 70 per cent of all sugar exports, and their demands for a "new economic order." Finally, a thin hope exists that a little inflation now - higher sugar prices - will avoid a stiffer dose later.
That hope rests on the agreement's major concession to consumers: Buffer stocks. Under the agreement, producing nations are supposed to accumulate extra reserves during glut periods. Then, when conditions change - when for example demand booms or a crop failure suddenly reduces supply - the reserves can be released, cushioning any price inrease.
Whether the strategy will work is anyone's guess. Even if it does, a good case can be made that the best way to resist inflation and aid developing countries is to disvow trade protectionism entirely. Let less efficient U.S. sugar producers fail (and turn, probably, to soybeans, wheat or rice) and foreign suppliers earn more by selling more - not by raising prices.
But that approach doesn't have a constituency. The average American sugar glutton - consuming 94 pounds in 1976 - has never heard of the sugar agreement, and both domestic and foreign producers desperately want protection.
It's not hard to see why. At seven cents a pound, world prices are now less than 25 per cent of the average in 1974, a boom year when short supplies and panic buying temporarily sent prices as high as 60 cents a pound.
The subsequent bust is nothing new to the sugar market. High prices stimulated more production, which, in turn, led to over-supply, lower prices, less revenues for producer could control prices. Cuba, the world's biggest exporter, accounts for only about 25 per cent of shipments, followed by Australia (9 per cent) and Brazil (7 per cent).
What is new, however, is the vulnerability of U.S. sugar producers, deprived of their quota protection for the past three years. When world prices plunged, they started screaming for help, and Congress - over the objections of the White House - responded this summer by mandating a price support program of 13.5 cents per pound. That is about two cents or three cents above prevailing U.S. levels. (With transportation and tariff expenses, prices in the United States already exceed world prices by that much.)
Although the Administration already favored some type of international sugar agreement. Raising the world price to 13.5 cents would relieve the Administration of job of propping up domestic prices.
This could be expensive. The government would have to buy - or make loans on - all domestic sugar that could not be sold at 13.5 cents. And the more cheap foreign sugar that comes into the country, the more domestic sugar the government has to buy. Consequently, the Agriculture Department soon is expected to announce temporary measures (higher tarriffs or quotas) to limit imports - and thus government purchases - until the sugar agreement begins to have an impact.
That shoudl be in early 1978. Beginning in January, stiff quotas go into effect, designed to reduce the amount of available worldwide exports from 16.8 million to 13.1 million tons. The quotas, only gradually increasing, would remain in place until the price reaches 15 cents. Only at 19 cents woud producing countries be committed to release buffer stocks.
But, if prices go that high, it's unclear whether the agreement's 2.5 million tons of stocks, would stop the surge. Actually, it's even unclear whether actual stocks would increase. Although the official buffer stocks must be certified, certified, producers could simply divert sugar from their normal working inventories, which, at 21 million tons, now far exceed needs.
The sugar agreement addresses a real problem. The wild price fluctuations that hurt developing countries. Nor would sugar prices remain at seven cents (which is probably below average production costs) forever. But it's not clear whether producers, long-term interests - as opposed to their immediate needs for higher export revenues - are served by the agreement.
Both the United States and the European Community are now protecting noncompetitive sugar producers, and, in the process, denying developing countries needed markets. Keeping world sugar prices high makes it easier to continue this protection by minimizing subsidy outlays. The high price of sugar also encourages the substitution of high-tructose corn syrup, which can be used interchangeably with sugar fo most industrial uses, such as candy and food. The substitutes account for about 70 per cent of all U.S. sugar consumption, and there is already reported to be one million to two million tons worth of fructos-producing capacity, about 10 per cent to 20 per cent of total sugar consumption.
None of this augurs well in the long run for producers. And, in the short run, the sugar agreement simply gives a small - but unwanted - extra twist to inflation.