If you trade in commodities or track their prices, it’s likely that you have seen two different quotes for sugar trading on US futures markets. While three different types of wheat are traded in the United States, why should sugar be different? However, there is a difference between sugar and wheat because there are three different types justifying three separate price structures. The situation in sugar is different where the sweet product is homogeneous.
Global Sugar Markets vs. Local Sugar Markets
The global futures markets for sugar consist of World Sugar No. 11 and US Sugar No. 16. You might be surprised to find that the price of US sugar is significantly higher than global sugar prices – sometimes reaching double their prices.
While the price difference between the two contracts may lead to the belief that the United States produces the best sugar, the sweet product is actually the same worldwide. The price difference is due to financial support and tariff programs that support sugar farmers in the United States.
The productivity of sugar in the United States dates back hundreds of years, but the climate in the United States is not entirely suitable for growing this staple. Therefore, producing sugar in the United States costs more than in other countries like Brazil and India that have more suitable climates for production. As of November 2020, Brazil and India ranked first and second, respectively, in global sugar production, while the United States came in fifth.
US sugar interests have managed to arrange a profitable deal for the country’s sugar farmers. The details of financial support for sugar are a subject of intense debate as the government guarantees a profitable price for sugar producers while restricting sugar imports from other countries. U.S. companies are forced to buy American sugar at inflated prices.
The high price of US sugar may be responsible for changes in manufacturing. Companies like Coca-Cola use high-fructose corn syrup as a substitute for regular sugar. I have written an article reviewing the massive amount of support given to companies to produce ethanol.
Corn is the primary ingredient in ethanol, which increases the demand for corn in the United States. Corn is also the main component of high-fructose corn syrup. Therefore, U.S. refiners artificially support the prices of sugar and corn high. Financial support leads to increased prices for the corn and sugar products we buy in supermarkets, so refiners pay taxes twice.
Consumers are ultimately the losers when it comes to financial support for corn and sugar. The price of sugar is not a matter of national security. Commodity markets operate efficiently; agricultural crops grow in regions where the climate suits them best to produce crops at the lowest cost. However, this is not the case when it comes to sugar production in the United States. Global sugar costs less than US sugar. The two contracts are identical in terms of the commodity but not in terms of price.
Financial Support Exists in Other Commodities and Markets
The largest producer of unsubsidized sugar in the world is Brazil, and it is priced based on World Sugar No. 11. Thailand is also an unsubsidized producer of the sweet commodity. There are also other sugar futures contracts trading in futures markets around the world, such as “white” sugar or Sugar No. 5, which trades on ICEU.
Subsidized prices are not exclusive to the sugar market. In fact, many countries support the production of commodities as a matter of national security. These countries seek to ensure that even if the price of a commodity falls, their citizens will still have access to that essential commodity.
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The price of raw materials has fallen below the cost of production; the producer in a country with no support may decide to grow a more profitable crop on their land. Economic downturns leading to decreased production can result in shortages of a strategic commodity. With financial support, the producer receives a price that ensures an annual profit for providing a stable supply of the commodity for the benefit of the people and the government.
It can also be seen that there are advantages and disadvantages when it comes to the financially supported production of essential goods. While support is directed from the government to producers, it is ultimately funded through tax revenues. These arrangements are often a subject of controversy within the government and among candidates for public office.
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Source: https://www.thebalancemoney.com/markets-for-us-and-world-sugar-809301
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