The TTP's Sweetest Subsidies


Connecting a full one-third of the world's total trade economy together in the Trans-Pacific Partnership deal, one of the largest free-trade pacts in all of economic history, should prove a very sweet treat for affiliated nations on its own.  The reward of trillions of dollars flowing back and forth just doesn't provide enough satisfaction for select nations, however, including our good friends from the Land Down Under.  While Australia needs the passage of the TPP in order to get their own ho-hum economy back up and running, they also want to get a sweet guarantee out of the United States: a guaranteed percentage of sugar shipped to the US from partner states, ensuring that the US demand for everything from preservatives to soda remains fulfilled.  What makes sugar such a major sticking point for such a huge trade deal?

Problems and Solutions

The size and complexity of the TPP makes it profoundly difficult to boil down much of anything, but anyone can say without a doubt that American policymakers hope that it can serve as a mechanism for southeast Asian nations to engage in economic relations with the US rather than with China.  Agricultural commodities represent a very big part of the picture for several reasons, the most important of which being that China lacks foodstuffs in such a dire fashion that many have turned to the lucrative practice of smuggling meat across the border and into the willing hands of the black market.  What the Chinese don't lack for, however, is sugar.  Only Brazil and India produce more sugar per year than China, whose one hundred million annual tons account for approximately ten percent of the world's total sugar supply. The US sits in a very distant tenth place, capable of making sucrose out of corn but unable to grow actual sugar plants anywhere except for our sole possession in the Caribbean, Puerto Rico, which has been a hub of sugarcane production since Spanish colonization all the way back in 1493.  That means that plenty of nations want America's market for cane sugar, since corn syrup fails to make up the deficit and is less palatable to most consumers than sugar grown from cane.  With Australia producing one-tenth of one percent of the total quantity of corn that the United States harvests each year while exporting more sugar than all but two other nations, a sugar guarantee would give the Aussies the tools for their own export industry.  The United States, however, might not want to surrender so much sugar certainty.

Sweet Release

The US and Australia have a lot of ground to make up in negotiations in order to reach an agreement over the sugar deal and the broader TPP.  Australian Sugar Milling Council CEO Dominic Nolan (head of perhaps the most obscure council in all of Australian politics) believes that both parties are particularly far apart on the deal with time running out to formalize and finalize the TPP, noting how Australia is particularly "serious about sugar".  Australian politicians from the "sugar belt" of Queensland have aggressively pushed Tony Abbott, Australia's prime minister, to hold out on the TPP over the various asterisks slapped onto sugar exports.  On the opposite side of the deal, the American Sugar Alliance wants the exact opposite of the Australian guarantee in order to safeguard the favorable deals that US sugar consumers enjoy with their existing customers.  The ASA believes that Australia's current benchmark of 150,000 tons per year, about fifty percent more than the current US consumption of Australian sugar, is too steep a price to pay.  Australia, however, wants those 150,000 tons (about a third of their overall exports) to come into American ports and be used in American cheesecakes, hot fudge sundaes, and tiramisu.

A Dessert Desert

The TPP news comes at a critical juncture for sugar.  Like most other foodstuff commodities, sugar peaked in 2011 and has experienced a steady decline.  Brazil's record harvests provide most of the impetus for sugar having lost two-thirds of its value in the past four years.  Passage of the TPP with the sugar bill in tow would represent a major opportunity for the commodity, creating a fantastic new stretch of demand (artificial demand perhaps, but no less lucrative for its artiface) for sugar.  Both the United States and Australia badly need the TPP to pass: the deal opens up the Australian economy to new partnerships that are badly needed as the mining sector collapses, while the US needs fresh markets and wants to keep pressure on China.  Much as the TPP has created an interesting dynamic for cotton, so too does it have the capability to move sugar up the charts.

Tasty Takeaways:

  • With the dire need to reach agreement soon, both Australia and the US will conclude a sugar deal, even if it is not what either side wants out of the agreement.  That will push the prices of sugar up significantly.  Invest in sugar commodity futures as soon as possible, since the final deadline of November looms.  While an ETF or commodity stock can provide good value for sugar, it won't react to the surge in demand quite as favorably due to the influence of currencies and the market.
  • Sugar sits at seven-year lows.  Investors will have to look far and wide to find a better value investment than sugar with the TPP bump.  While sugar likely will not reach 2011 peak value, it will recoup a lot of years of losses.
  • The TPP bump won't affect the long-term decline of sugar.  Don't trade for futures further out than 8-12 months in order to capitalize on the deal's sugar provision, and certainly don't hang on to sugar with the expectation that the commodity will rebound.  This represents a short term opportunity for value, not steady growth within a portfolio.

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