Bitter Goodbye

Confectionery manufacturers say U.S. government subsidies boost domestic sugar prices unfairly, making moving offshore an appealing prospect for some.

James A. Hanlon recently lost his last customer for bulk candies to a competitor located in Mexico. At one time, his Santa Cruz, Calif.-based candy company, which counts among its catalog of confections both gummies and jelly beans, had a dozen customers it supplied bulk quantities to. Meanwhile, the chairman and president of Harmony Foods has watched as a parade of fellow U.S. candy manufacturers have moved production outside of the country or simply gone out of business during the last few years. Most recently, Kraft Foods Inc. announced earlier this year that it would close its Holland, Mich., Life Savers plant and transfer production to its facility in Mount Royal, Quebec, near Montreal, in 2003. In January 2001 Brach's Confections Inc. announced that it would phase out production at its massive confections plant in Chicago, ceasing operations there by the end of 2003. More than 1,000 Brach's workers are expected to lose their jobs. Reports have Brach's both outsourcing production to Argentina's Grupo Arcor and building a new confections plant in Mexico. Another Chicago area candy maker, Ferrara Pan Candy Co., opened its second Canadian plant late last year. The reason for both Hanlon's loss of business and the drain of candy manufacturing away from the United States? Some manufacturers, trade organizations and a wealth of recent news reports say it is the high price of domestic sugar-which can range anywhere from two to three or more times world sugar prices-that is sending manufacturers scurrying beyond the U.S.' borders. Adding to the pain is the fact that it is U.S. government subsidies to domestic sugar producers and tariffs against sugar imports that have artificially inflated the prices. Not so, claims an equally vocal group that is quick to deny that U.S. sugar prices are the cause for a U.S. candy-manufacturer exodus. They say lower labor costs and a multitude of other lower-cost opportunities are sending confections manufacturers elsewhere. Among those most vocal in pro-sugar-policy claims is the American Sugar Alliance, an Arlington, Va.-based organization that represents growers and processors of sugar beets, sugar cane and corn for sweeteners. Some big names have gotten into the act. in June 2001, Chicago's Mayor Richard M. Daley showed up at a major candy trade show and called on Congress to make changes to the U.S. sugar policy. His city, home to the William Wrigley Jr. Co. and Tootsie Roll Industries, among others, has watched numerous candy companies shut down or reduce their size and move out. Brach's is simply the latest confections maker to exit the candy capitol of the world. "Sugar is 70% of the problem," says Hanlon, who in 1996 served as chairman of the National Confectioners Association. His 30 years in the confections business include stints as president and CEO at Leaf North America and president and CEO of Peter Paul Cadbury USA from 1982 to 1985. At Harmony Foods he leads a company with $150 million in annual sales and a workforce of 200. "The only people profiting [from the U.S. sugar policy] are the sugar growers," Hanlon says. "Small [manufacturers] are getting hammered." Among organizations that have long battled for changes to the U.S. sugar program are the Grocery Manufacturers of America, the National Confectioners Association and the Coalition for Sugar Reform, a group of 18 organizations whose objective is market-oriented reform for the U.S. sugar program. "What we favor is the elimination of the [sugar] program, but we are willing to have a long-term phase-in," explains Larry Graham, president of the National Confectioners Association and chairman of the Coalition for Sugar Reform. "The program doesn't make any economic sense." The U.S. sugar program guarantees domestic sugar growers and processors a minimum price for sugar by offering loans at rates determined by law and offering processors the ability to forfeit sugar to the federal government if prices fall below a certain level. To avoid forfeitures, prices are kept artificially high by restricting the amount of sugar that can be imported without stiff tariffs attached. Graham says it is estimated that 20% to 25% of all sugar candy sold in the U.S. is now made outside the United States and imported into the country, while the percentage of non-chocolate candy made outside the U.S. increased 70% between 1995 and 2000. Opponents of the sugar program contest the policy on several fronts. It is protectionist, they say, and provides incentives for overproduction while failing to allow market conditions to influence price. Says the Grocery Manufacturers of America's David Stafford, director of federal affairs for the Washington, D.C.-based association of food, beverage and consumer product companies: "Our members represent major sugar users. We contend that the sugar program artificially inflates [prices], inflating our input costs. "Companies look to effectively and efficiently produce," he continues, yet "contend with a program that inflates the price of a major commodity." Sugar-program opponents wield some seemingly heavy artillery to back their contention that the program harms more than it helps. They most frequently cite a June 2000 report by the U.S. General Accounting Office. Among the report's findings:

  • The estimated cost of the U.S. sugar program to domestic sweetener users was about $1.5 billion in 1996 and about $1.9 billion in 1998.
  • Domestic sugar beet and sugarcane producers were the primary beneficiaries, receiving benefits of about $800 million in 1996 and $1 billion in 1998.
  • Net losses to the U.S. economy were approximately $700 million in 1996 and about $900 million in 1998. But supporters of the domestic sugar program are equally vociferous-and clearly more successful-in defending their position. Farmers need U.S. assistance to fight subsidized crops from other parts of the world, says Joseph Terrell, a spokesperson for the American Sugar Alliance. Besides, the organization claims, it is simply not true that manufacturers are moving to Canada and Mexico to get around high sugar prices in the United States. "It's not the sugar," said Jack Roney, staff economist for the American Sugar Alliance, speaking at the U.S. Department of Agriculture's annual outlook forum earlier this year. "Factors such as wages, taxes, energy costs, and the cost of labor and environmental protections dwarf the cost of sugar." Not to mention the exchange rate. The alliance points to a cost-analysis study completed by Peter Buzzanell & Associates Inc., Reston, Va., for the organization that indicates myriad factors other than sugar costs impact manufacturers' decisions to move outside the U.S. In fact, the study indicates that sugar prices in Mexico actually exceeded those in the U.S. during the period of time under scrutiny. In "U.S. Confectionery Companies: The Move to Canada and Jamaica-Encouraged By What Cost Variables?" Buzzanell points out that a number of factors make operating costs in Canada, particularly Quebec, more attractive than those in the U.S., which could have influenced Kraft's decision to relocate Life Savers production there. For example, his report states:
  • Quebec has extremely low electricity use rates owing to the availability of hydro-power.
  • Health-care payments by companies in Canada, reflecting the national health-care system, are estimated at only about one-quarter as high as in Michigan.
  • Factory worker wages in Quebec are $7.10 per hour compared with $15.30 per hour for workers in Holland, Mich. In addition, Buzzanell's estimate of the average price for refined sugar in fiscal year 2001 shows Quebec's sugar prices just slightly below those in the Midwest, 20.7 cents a pound vs. 22.1 cents a pound in Chicago, while Mexico's were well above either, at 25.3 cents per pound. On the other hand, Quebec was substantially lower than the U.S. in March 2002 (18 cents vs. 27.5 cents). All costs are in U.S. dollars. Interestingly, for all the attention domestic sugar prices garnered following Kraft's announced decision to move production to its Canada plant, the company now says sugar prices were not a driving force behind the move. "Sugar [prices] were a reason, but not the primary reason," says Cathy Pernu, Kraft spokesperson. She says Kraft's Holland plant was underutilized after the Federal Trade Commission mandated the company divest a breath mint that had also been made at the plant. The Mount Royal plant in Quebec offered both lower production costs and could accommodate the increased production, Pernu says. "We really couldn't do the reverse [move Mount Royal production to Holland]," she says. As to U.S. sugar prices? "Companies [in the U.S.] like Kraft pay at least twice what they pay on the world market," Pernu notes, adding that Kraft prefers the trade associations address the U.S. sugar program specifically. Manufacturers appear to have little reason to expect changes in their favor in the domestic sugar policy any time soon. President George W. Bush in May signed into law the Farm Security and Rural Investment Act of 2002 (H.R. 2646), which continues the price support system for sugar. The bill extends 10 years but must be renewed after six. The Coalition for Sugar Reform's Graham predicts that the sugar program "probably will implode on itself one day." Hanlon sees little hope for relief from high-priced sugar, which he calls "the most grievous" of the U.S. support programs. It's the solely domestic manufacturer that gets hurt the most, he says, which usually translates into the smaller producer. While he acknowledges that the larger manufacturers face the same price constraints, "the big guys have plenty of offshore capability." "We are going to see an acceleration of damage to medium and small producers. The problem is getting worse," he says. "It's going to change the landscape of the sugar user industry." ********** U.S. Confectionery Industry 2000
    Total shipments of confectionery products 6.65 billion pounds
    Chocolate confectionery 3.29 billion pounds
    Non-chocolate confectionery 2.74 billion pounds
    Chewing gum and other 621 million pounds
    Total value of confectionery products $15 billion
    Top ingredients consumed by volume:
    Sugar 2.92 billion pounds
    Corn syrup 1.74 million pounds
    Source: U.S. Census Bureau
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