Candy Companies Flee U.S. Workers, Not U.S. Sugar Prices

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1 Sugar Issue Brief: Candy Companies Flee U.S. Workers, Not U.S. Sugar Prices February 2006 AMERICA S SUGAR PRODUCERS Meeting America s Needs

2 1 Candy Companies Flee U.S. Workers, Not U.S. Sugar Prices Over the past decade, many of America s major manufacturers have moved operations to other countries in favor of cheap labor, lax government regulations, negligible employee benefits, reduced energy costs, lower taxes, and basic cheaper operating costs. Food manufacturers are no different, and unfortunately, a few U.S. candy manufacturers have chosen to relocate. Yet these candy companies never acknowledge that basic overhead costs were the driving reason for their flight from U.S. cities. Instead, they rally around a single scapegoat: America s sugar policy, which is coincidently the only major U.S. commodity program to operate at no cost to U.S. taxpayers. In almost every case where a candy company has relocated underutilized or obsolete operations, sugar costs were cited as the primary reason, even though wholesale sugar prices dropped 20 percent from 1996 to 2004 the timeframe that most relocations took place. Many food manufacturers seeking to eliminate U.S. sugar policy have for decades lobbied Congress on the unfounded notion that U.S. sugar prices are forcing some companies to flee. But for decades, most members of Congress have seen these claims for what they are mistruths and veiled attempts to shift cost to taxpayers, which are already burdened with huge budget deficits. Votes taken by Congress over the past 10 years clearly show increasing and overwhelming support for the existing sugar program. Congress Doesn t Buy Candy Companies Spin Senate Sugar Votes Date Pro Sugar Against Feb July Aug July Dec House Sugar Votes Date Pro Sugar Against Feb July June Oct June The facts are undeniable. Candy companies are fleeing American wages, not American sugar prices, which are comparable to sugar prices around the world. And any savings that these companies may realize because of outsourcing are pocketed instead of being passed along to shoppers in America s grocery stores.

3 2 Why Candy Companies Flee When Brach s Confections announced that it would leave Chicago in favor of Mexico in 2001, the company was quick to blame sugar prices. Many national news outlets took the bait, criticizing America s sugar farmers and ignoring the fact that other manufacturers like Levi Strauss & Company and Black & Decker left the country around the same time. All of these manufacturers left for the same reasons, employee expenses and operation-related costs. Sugar had little if anything to do with Brach s decision. A 2003 study conducted on-site at candy manufacturing locations by a former career USDA sweetener analyst found that other costs far outweigh the price of sugar when determining where to locate operations. Wages in Chicago were 27 times higher than Mexican wages, the study found. Healthcare costs were 4 times higher in Chicago a divide that continues to widen. The average tax rate in Chicago was 42 percent, compared to a mere 9 percent in Mexico. Energy costs came in 5 times higher in Chicago, and land costs were twice as expensive. In addition to Brach s, advocates for eliminating the U.S. sugar policy are quick to point out that at least one candy brand, Life Savers, left Michigan for Canada a country often thought to have similar business costs as the United States. However, the same study referenced above showed savings in all categories of doing business in Canada. Union wages in Michigan were 20 percent higher than the non-union wages the company would pay in Canada. Healthcare costs were 6-1/2 times higher in Michigan. The tax burden in Michigan was 35 percent higher, and U.S. energy costs were 30 percent higher.

4 3 In addition, the study s author, Peter Buzzanell, discovered that there was another deciding factor for moving all of LifeSavers production to Canada. The company owned two production facilities for LifeSavers, one in Michigan and one in Canada. In Michigan, the production facility was only half utilized. By fully utilizing the Canadian facility, the company saw tremendous per unit cost savings. U.S. Sugar Prices Aren t High When opponents of sugar policy lobby Members of Congress, they usually tout low world sugar prices. What they fail to disclose is that there is no true world market for sugar. In fact, 80 percent of all the sugar produced in the world is never traded on an open market; it is consumed in the country where it s produced at much higher internal prices protected by tariffs. The world sugar market they refer to is little more than a price-volatile dump market where foreign surplus sugar is sold below the cost of production with the aid of government subsidies. Dump market sugar has been unreliable in the past, with prices fluctuating from 3 cents per pound to more than 60 cents per pound over the past 30 years. In fact, since December of 2005, this dump market price has spiked to a 25-year high, a testament to how unreliable the dump market really is. What s more, comparing U.S. sugar to dump market prices is like comparing apples to oranges. That s because the dump market price does not include refining costs, shipping costs, storage costs, docking fees, or labor. The only legitimate way to gauge U.S. sugar prices is to compare them to the prices that candy companies pay in other countries. Wholesale sugar prices in the United States are nearly identical to average wholesale sugar prices around the globe, according to LMC International, a commodity economic analysis firm from Oxford, England. In June 2005, LMC found that U.S. candy companies paid 23 cents per pound for sugar in 2004, compared to a 22-cent-per-pound weighted world average and a 25 cent-per-pound North American average. Simply put, U.S. candy companies can t realistically claim they are fleeing because of prices.

5 4 Where s the Passthrough? Another common claim made by opponents of U.S. sugar policy is that high-priced sugar punishes grocery shoppers. Their reasoning is that if sugar were From 1990 to 2005: Farmer Prices for Sugar Fall, cheaper, then candy companies Consumer Prices for Sugar & Products Steady or Higher* would pass savings along to the consumer. Consumer Prices Rise While such an economic theory sounds good, the real-world application tells a much different story. History clearly shows that when food manufacturers pay farmers less for commodities, grocery shoppers don t see the savings. Sugar is a prime example. From , the price companies paid sugar farmers fell. Over that same Raw Cane Sugar time, sugar prices at the grocery store remained flat, while the cost of candy, cereal, cakes, and other sugar-sensitive products skyrocketed. America Needs a Strong Sugar Policy The main reason America s sugar farmers are enjoying increased support in the halls of Congress is because this country s sugar policy is clearly working. It costs taxpayers nothing because sugar farmers don t receive subsidy checks, it ensures consumers pay some of the lowest prices in the world, and it supports 146,000 jobs in rural communities from coast to coast. Truth be told, candy companies depend on America s sugar policy, too. -8.5% Farmer Prices Fall Wholesale Refined Sugar These companies enjoy domestically grown sugar that can be delivered quickly and cheaply. They don t have to wait for shipments from often unreliable foreign suppliers. They don t even have to build and maintain expensive sugar storage facilities, because sugar producers bear the burden of storing and delivering the product. Best of all, they are guaranteed to receive the highest-quality, safest product in the world thanks to America s state-of-the-art technology and inspection programs. During World War II, sugar was among the first agricultural commodities to be rationed. A strong domestic sugar industry was vital to America then. And with Congress help, America will enjoy a strong domestic sugar industry well into the future. -1.4% 1.8% Retail Refined Sugar 28.4% 32.2% 40.1% Cereal Candy Ice Cream 47.0% Cookies, Cakes 50.0% Other Bakery Products *Change in prices from 1990 to December Raw cane: duty-fee paid, New York. Wholesale refined beet sugar: Midwest markets. Retail prices: Bureau of Labor Statistics consumer price indices. Data source: USDA. 13b

6 5 References North America s Confectionery Industries: Structure, Trade, and Costs and Trends in Sugar Demand, Peter Buzzanell & Associates, Inc., Reston, Virginia, March Retail and Wholesale Prices of Sugar around the World in 2004, LMC International Ltd, Oxford, England, June Sugar and Sweetener Situation and Outlook Report, U.S. Department of Agriculture Economic Research Service, Various Issues. Referenced Congressional Votes: Senate Votes 02/07/96 104th Congress, 2nd Session, Roll Call No /23/96 104th Congress, 2nd Session, Roll Call No /04/99 106th Congress, 1st Session, Roll Call No /20/00 106th Congress, 2nd Session, Roll Call No /12/01 107th Congress, 1st Session, Roll Call No. 364 House Votes 02/28/96 104th Congress, 2nd Session, Roll Call No /24/97 105th Congress, 1st Session, Roll Call No /24/98 105th Congress, 2nd Session, Roll Call No /04/01 107th Congress, 1st Session, Roll Call No /08/05 109th Congress, 1st Session, Roll Call No. 234 American Sugar Alliance 2111 Wilson Boulevard, Suite 600 Arlington, VA Tel: Fax: