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December 13,1974
John Adams once said that sugar was
"an essential ingredient in American
independence," because of the
colonists' opposition to the sugar
acts imposed by the British govern
ment. Adams would have felt right
at home today, in view of the revo
lutionary sentiments expressed by
bakers, housewives and other con
sumers faced with a five-fold rise in
sugar prices within a single year.
However, those troubles may be
declining, since the recent specula
tive bubble now shows signs of
bursting. Spot raw sugar prices
peaked at 641/2 cents a pound in
late November, compared with 11
cents a year ago and 20 cents last
spring. But within two weeks of the
peak, a 25-percent decline occurred
as the market price fell by the twocent daily limit day after day. This
soon led to a drop in the wholesale
price of grocery sugar— a drop
which may soon show up at neigh
borhood supermarkets. The easing
development came about as stratos
pheric prices attracted larger sup
plies into the market. For example,
the Philippines and Poland report
edly lifted earlier restrictions on
exports, and even Fidel Castro ex
pressed interest in selling sugar to
the U.S., at a suitable price.
Legislative distortions
The 1974 price upsurge reflected the
uncertainties caused by the U.S.
attempt to deregulate an industry
which had been highly regulated
for decades in practically all coun
tries of the world. By rigid controls
over supply, the U.S. government
1
under the Sugar Act of 1937 had
tried to protect domestic producers
and consumers from volatile fluctua
tions in world sugar prices, albeit
by maintaining domestic prices
somewhat above world market
levels. This legislation represented
a typical price-stabilization effort of
the depression era. But the U.S.
sugar program was not at all unique;
industrial countries generally have
produced most (if not all) of their
consumption requirements under
protected conditions.
About 35 percent of the world's
sugar is produced in Europe (includ
ing the Soviet Union), and produc
tion shares amount to 28 percent
for Latin America and 25 percent for
Asia and Africa, but the U.S. ac
counts for less than 8 percent of the
total. From World War II to the
Cuban crisis, domestic sources and
foreign countries each supplied
roughly half of this country's total
requirements, with Cuba and the
Philippines accounting for the vast
bulk of our imports. After the sus
pension of Cuban trade, the U.S.
increased domestic production until
it reached 60 percent of the total,
and it spread its foreign business
among a vastly larger number of
suppliers— 31 at last count. U.S.
quotas totalled 11.7 million tons in
1973, domestic growers accounted
for 6.5 million tons, and foreign
countries for 5.2 million tons.
Geographical distortions
Chicago Professor D. Gale Johnson
argues that about two-fifths of the
world's sugar is produced in the
(continued on page 2)
Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.
wrong places because of production
being encouraged under high-cost
conditions. Until recently, more
than one-half of the sugar moving
in international trade did so at
fixed prices within a framework of
special preferential arrangements,
while prices in the unprotected
world market generally were low
and highly variable. ("World mar
ket" is a misnomer, because only
10 to 15 percent of total output
is normally sold in this highly
volatile unprotected market.) Lowcost producers, such as Brazil and
Mexico, have had little opportunity
in the past to expand their produc
tion beyond the amounts required
for domestic consumption and sales
to preferential markets. Not sur
prisingly, substantial differences
have arisen between the prices re
ceived by farmers in different coun
tries, with Brazilian and Mexican
farmers in 1970 receiving only about
one-third as much as their American
and European counterparts.
The U.S. sugar program thus has
been criticized for decades for
creating serious market distortions.
Under the act, there were no clear
guidelines for establishing quotas
for domestic and foreign producers.
Quotas generally were assigned on
the basis of political rather than eco
nomic criteria, with all that that
implies in the way of lobbying pres
sures. Johnson estimates that the
sugar program in 1972 cost U.S. con
sumers and taxpayers more than
$600 million, with one-third of this
2
gross transfer going to foreign quota
holders and the rest to domestic
producers. (Direct Treasury subsi
dies to domestic growers amounted
to about $89 million in fiscal 1974.)
Market distortions
Still, the U.S. sugar program cannot
be blamed entirely for the 1974
debacle, since many other causal
factors have been at work, some
dating back a decade or more. First
of all, worldwide shortages resulted
from the European and Cuban crop
failures in the 1962-63 period. These
led to a dramatic price increase in
1963, but heavy planting over the
next several years then led to a glut,
with the world price dropping from
14 cents to 2 cents a pound. For the
remainder of the 1960's, crop sur
pluses continued, but the situation
turned around in the 1970's as pro
ductive capacity lagged behind everrising consumption. The domestic
industry failed to invest the capital
needed to expand production, partly
because of a falling profits trend
over the past several decades, which
reflected an 18-percent drop since
1950 in the relative price of sugar
compared with all consumer prices.
The problem was aggravated by the
distortions which the price-control
program created in the sugar-beet
sector of the industry. In late 1971,
the Cost of Living Council decon
trolled all raw agricultural products,
such as raw cane sugar. But the
Council kept controls on refined
sugar, among other finished prod
ucts, and thus effectively froze the
price of raw beet sugar— since beet
farmers typically are not paid a fixed
price for their production, but rather
a price dependent on the proceeds
received by beet processors. Until
this inequity was corrected, the in
dustry was confronted with a twoprice system for sugar and substan
tial shortages of beet sugar. For
several years, sugarbeets could not
compete with other crops for acre
age; thus, in 1974, acreage was the
smallest since 1967 and beet-sugar
output fell 9 percent below the
1973 level. Meanwhile, cane-sugar
output failed to rise above the yearago level because of hurricane
damage in Louisiana and strikerelated crop shortages in Hawaii.
In the wake of '74
World sugar production in the
1974-75 crop year is estimated at
89.5 million tons, after being pro
jected earlier at 91.0 million tons.
Carryover sugar inventories, this
year as last, may amount to no more
than one-fifth of the total crop,
somewhat less than the 25-30 per
cent carryover that is considered
necessary to reduce recent price
pressures. Turbulent market condi
tions this year have been compli
cated, on the supply side, by the
actions of certain producers in
holding crops off the market in
anticipation of higher prices, and
also by the actions of some in
shifting t-heir supplies to the world
market now that they are no longer
guaranteed access to a protected
U.S. market under the Sugar Act.
On the demand side, purchases
have remained high in many coun
tries (especially in Western Europe)
which maintain low sugar prices
through consumer subsidies. More3
over, in this country, the initial
consumer reaction to rising prices
apparently was a rise in hoarding.
The situation should change in the
next year, as a worldwide recession
dampens demand and as high prices
act as a lever to increase produc
tion— and as speculative demand
disappears in the wake of these basic
market adjustments. Moreover, with
the Sugar Act going off the books
at the end of this month, the Ameri
can market should be increasingly
open to efficient world producers.
Yet the market must still contend
with a sugar tariff recently
reset by the President at 0.66 cents
per pound, and for that matter, with
on OPEC-style cartel arrangement
threatened by Mexico, Cuba and
other Caribbean producers.
In this period of transition, as the
U.S. moves out of the speculative
atmosphere of 1974 and in the
direction of a free market, the
record-high prices of sugar and
sugar-contained products should
depress consumption considerably.
By some estimates, cutbacks in sugar
usage by housewives, confectioners,
bakers and soft-drink makers could
mean a 20-percent reduction in pur
chases. Per capita consumption
could fall well below the recent
level of 100 pounds— but that
should still be enough for the aver
age sweet tooth, considering that
this amount is about ten times the
per capita consumption of John
Adams' time.
William Burke
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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Amount
Outstanding
11/27/74
Change
from
11/20/74
+
+
+
+
+
+
284
448
75
120
3
4
120
44
469
461
8
217
12
3
326
347
Change from
year ago
Dollar
Percent
Loans (gross, adjusted) and investments*
Loans (gross, adjusted)— total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)— total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits— total*
States and political subdivisions
Savings deposits
Other time depositst
Large negotiable CD's
84,145
66,855
1,422
24,135
19,971
9,770
4,643
12,647
80,840
23,188
439
55,839
5,678
18,017
28,860
15,600
Weekly Averages
of Daily Figures
Week ended
11/27/74
Week ended
11/20/74
Comparable
year-ago period
61
275
214
31 r
174
—143r
76
19
+ 57
+ 1,241
+ 646
+ 933
+
+ 665
-
—
—
+
+
+
+
+
—
+
+
+ 7,328
+ 8,565
+
97
+ 3,767
+ 1,801
+ 790
-1 ,3 9 7
+ 160
+ 8,378
+ 1,332
36
+ 6,893
- 116
+ 359
+ 6,479
+ 5,010
+ 9.54
+ 14.69
+ 7.32
+ 18.49
+ 9.91
+ 8.80
—
23.13
+ 1.28
+ 11.56
+ 6.09
— 7.58
+ 14.08
2.00
+ 2.03
+ 28.95
+ 47.31
Member Bank Reserve Position
Excess Reserves
Borrowings
Net free ( + ) / Net borrowed ( —)
-
Federal Funds— Seven Large Banks
Interbank Federal fund transactions
Net purchases ( + ) / Net sales ( —)
Transactions of U.S. security dealers
Net loans ( + ) / Net borrowings ( —)
521
21
♦Includes items not shown separately. ^Individuals, partnerships and corporations.
Information on this and other publications can be obtained by calling or writing the
Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco, California 94120. Phone (415) 397-1137.
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