Sugar companies get generous taxpayer bailouts

It's a sweet deal: Even after massive loan defaults, producers are entitled to a brand new crop of fresh government lending.

By MSN Money Partner Nov 19, 2013 5:12PM
Image: Sugar cubes (© Geostock / Photodisc Green/Getty Images)By Alexandra Wexler, The Wall Street Journal

There is no way to sugarcoat it: The U.S. government is being forced to support sugar companies even though taxpayers are already footing a $280 million bill stemming from loans the companies can't repay.

The loans are part of a U.S. Department of Agriculture program aimed at supporting sugar prices. When sugar prices are high, processors -- companies that turn raw beet and cane into sugar -- pay the agency back on time and the program costs the government nothing.


But a glut of sugar over the past year sent prices plummeting, sparking the biggest wave of loan defaults among sugar processors since 2000.


In total, processors defaulted on $171.5 million in 2013, even after the USDA spent $106.7 million buying sugar to boost prices.


The government was left to pick up the bill, but U.S. farm policy mandates that it makes fresh loans for the new season. Since Oct. 1, the USDA has extended $86.2 million of new loans as domestic sugar prices remain low due to booming U.S. production and high imports from Mexico.


Among the companies receiving the new financing are two sugar-beet processors that defaulted earlier this year, according to a Wall Street Journal analysis of USDA data. North Dakota-based Minn-Dak Farmers Cooperative has borrowed $18.1 million after failing to pay back $7.2 million due in August. Amalgamated Sugar Co., based in Idaho, took out $18.8 million in new loans after defaulting on $17 million at the end of September. Neither company returned calls seeking comment.


The USDA places few restrictions on its sugar loans, and companies that default can immediately borrow again with no penalty.


Market and industry experts say the U.S. sugar market will probably remain soft.


"We are likely to have the same conversation [about defaults] a year from now," said Frank Jenkins, president of Jenkins Sugar Group, a brokerage in Wilton, Conn., and one of the largest U.S. sugar traders. As a broker, Mr. Jenkins acts as the middleman between sugar processors and end users such as candy companies. Therefore, the loan defaults neither help nor harm him.


The USDA predicts U.S. sugar supplies, including domestic production and imports, will hit a record in 2014. Prices, which in past months have bounced back from 13-year lows, are dropping again.


On Monday, U.S. sugar futures ended at 20.85 cents a pound, down 6% in the last month.


Most of the loans aren't due until next July or later, and several factors could lift sugar prices by then. The risk of defaults is significantly lower if sugar prices consistently stay above 20.9 cents a pound, according to the USDA. A spokesperson for the agency said it is "too early to speculate" about the possibility of defaults next year.


Traders say prices could rise if a hurricane damages Louisiana's sugar-cane fields or if warm weather disrupts Midwestern beet processing.


Weather is "always the wild card," said Sterling Smith, a futures specialist at Citigroup. "We're going to be looking at [defaults] and a glut of product in the United States, likely until 2015, unless we have some sort of weather interruption."


This year's crop is shaping up to be big. For the crop year ending Sept. 30, 2014, U.S. production is expected to total 8.9 million tons, according to the USDA. That's down slightly from this year, when production was at its highest since 2000.


The market is projected to be oversupplied by about 490,000 tons in the crop year ending Sept. 30, the USDA predicts. In the crop year that just ended, the surplus is estimated to be about 450,000 tons.


The U.S. sugar industry has little reason to cut back its output. Under federal law dating back to the early 1980s, companies that process raw cane and beets into refined crystals can borrow unlimited sums from the USDA, as long as the loans are secured with sugar as collateral. The USDA is then required to do what it can to keep prices high enough to prevent defaults.


Processors that can't pay back loans give up the sugar posted as collateral. However, in most defaults, the forfeited sugar is worth less than the unpaid loan.


The USDA is sitting on 300,000 tons of sugar it received as collateral. Last week, the agency said it would solicit bids for its remaining sugar hoard from ethanol producers. Some bought sugar at a discount of more than 80% in a similar sale at the end of September. In the past the USDA gave forfeited sugar to nursing homes and prisons.


The prospects of changing the farm program are slim. The U.S. Senate and House voted down bills this year that would have scaled back the sugar-loan program.


Congress is currently negotiating a farm bill in which agricultural policies are set for the next five years. The most recent versions of the legislation leave the sugar program unchanged.


"As long as there is a farm bill [this year], we will have sugar policy in its current form," said Jack Roney, director of economics and policy analysis for the American Sugar Alliance, a group representing growers.


More from The Wall Street Journal

19Comments
Nov 19, 2013 6:11PM
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when does it stop????  no more bailouts!!!!
Nov 19, 2013 6:32PM
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If the farmers aren't making any money on their sugar due to low prices, why hasn't the price come down in stores?
Nov 19, 2013 6:02PM
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i don't  know about other tax payers but i am sick of supporting farmers  with our tax dollars.
Nov 19, 2013 6:24PM
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The people that make these rules have the brains of a piss ant.Why import sugar when there is a glut.Seems like we hear more and more stupidity about

 our gov each day.

Nov 19, 2013 6:59PM
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STOP ALL THE DAMN SUBSIDIES!!

 

Let every business sector, every business, every person compete in a free market without government intervention with the winners getting the spoils and the losers going to bankruptcy court.

 

I am sick and tired (make that as mad as hell) in that I (as a  taxpayer) am expected to continually support everybody from ADC mothers who are incentivized to keep popping out kids to farm subsidies that keep farmers fat and happy and some local congressman in office.

 

 

Nov 19, 2013 6:13PM
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you can't run a successful business, then fail...someone will step in an run it successfully.
Nov 19, 2013 6:31PM
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How much economic sense does it make for a government to subsidize more production than it takes to clear the market?  Let me answer my own question. It makes no economic sense at all.


It must/might, therefore/possibly, make another kind of sense.  And that is a scary thought indeed.

Nov 19, 2013 7:05PM
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Tax payers pay twice, in taxes and in higher sugar prices.  What a super rip-off where we ending up giving to the rich another subsidy that the free market should handle, as most Republicans say it should.


The sugar companies are just another hanger on to Uncle Sam's tit. 

Nov 19, 2013 7:03PM
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Sugar been a give away program for the last 100 years, can import sugar for a fraction of what it cost to produce here.

Just another long term give away program.  Too many gift  programs of this type.  Uncle Sam just runs up food prices on many food products.  Everyone got their hand in the pot.  Poor and middle income feel the extra cost more than others.  We all have to eat about the same amount of food to stay alive.  


Nov 19, 2013 6:39PM
Nov 19, 2013 6:25PM
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How about we get a loan from the gov't and use what ever we have as collateral but at a much lower value than the loan, say a car. Borrow $10,000 buy a car for $5,000 then default and give them the car. Next year we do it all over again. And btw they can give the cars away as a gov't entitlement because  everyone should have a car. Sounds great right????
Nov 20, 2013 8:50AM
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Sugar, milk etc. It all needs to stop. Let the market dictate the price with no subsidies. The price will be what it will be.
Nov 19, 2013 6:52PM
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" The U.S. also came close to defaulting on its debt."  Pure BS!  The U.S.S.A. takes in many times more than it's debt payments each and every month.  The 'gubmnt' simply must rank order what gets paid after the debt is paid.  . 
Nov 19, 2013 7:01PM
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Sugar growers don't worry me and we shouldn't bail them out. At the same time, we can't just make blanket statements like "no more bailouts for farmers." The cost to taxpayers to support grains like corn, wheat, rye and other staples like potatoes is a pittance compared to what will happen if we depend on foreign countries for our food. We are already net importers of agricultural products and have been for about ten years.

 

Too many people in the U.S. think food grows on supermarket shelves and don't understand the enormous effort and the financial risk involved in putting abundant, high quality and cheap food in their refrigerators.

Nov 20, 2013 9:21AM
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Canada does not subsidies and sugar about $.07, yet we subsidies and they can not pay back at 5 times the price. Somebody is getting rich at our expense
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