If you trade commodities or follow commodity prices, it is likely that you have seen two different quotes for sugar traded in the U.S. There’s no reason to get excited at first glance, after all there are three different types of wheat that trade in the U.S. Why should sugar be any different? Well, the mystery begins when you realize that there are three distinctly different types of wheat that warrant three separate prices. It is a much different scenario when you look at the two sugar markets.
The two sugar futures markets that are traded include world sugar #11 and U.S. sugar #16. You may be surprised to find out that the U.S. sugar price is substantially higher that the world sugar prices – sometimes twice as much. I would like to say that the U.S. produces the Rolls Royce of sugar, but all the sugar is virtually the same around the world. The discrepancy in prices is due to fat subsidies and a tariff program that supports U.S. sugar farmers.
Sugar has been grown in the U.S for a couple hundred years, but it turns out the climate in the U.S. isn’t well suited for growing sugar. This can make it more costly to produce in the U.S. than other countries like Brazil and India that have suitable climates. As you might imagine, the sugar lobbyists have been able to arrange a very sweet deal for sugar farmers in the U.S for many decades. The details are complicated, but the government essentially guarantees a lucrative price for sugar producers and limits the amount of sugar imports. This means that U.S. companies basically have to buy U.S. sugar at inflated prices.
It is no wonder that companies like Coca Cola turned to high fructose corn syrup over plain old sugar. Now here’s where it gets somewhat hilarious and somewhat painful. I wrote an article that outlines the huge amount of subsidies we give companies to produce ethanol. Corn is used to produce ethanol and this has obviously caused an increased demand in corn along with the increased demand for corn used in high fructose corn syrup. In essence, the taxpayer is supporting artificially high prices for sugar and now corn. To add insult to injury, taxpayers are also paying higher prices at the grocery store for the same commodities they subsidize.
You can see consumers are getting hit on both ends. Sugar is not a matter of national security. We do not need to produce sugar in the U.S. if we are not efficient in producing it. Why not buy it on the world market at half the price? The taxpayer would save and the consumer would save. If there would happen to be a world shortage of sugar, we would use less sugar and it would make us healthier. So now you understand the difference between the two sugar quotes you see for commodities. You don’t have to agree with the logic on why there are two different sugar markets, but at least you know what they are.