The impact of US sugar prices on the financial performance of US sugar-using firms

Abstract

The effect of the United States (US) sugar program on sugar-using firm profitability from 2000 to 2017 is examined using firm financial data and the relative US-to-world sugar price ratio. Return on assets and market-to-book ratio proxy for firm financial performance. The regression results provide statistical evidence that as the US sugar price increases relative to the world sugar price, sugar-using firm financial performance improves. This is likely a result of sugar-using firms passing higher sugar costs on to consumers. An ex post analysis indicates that the statistical tests have adequate power. Findings provide guidelines for future analyses investigating the relationship between the US sugar program and sugar-using firm financial performance.

Factors Affecting Sugar-Containing-Product Prices

“…The goal of this paper is to determine factors influencing SCP prices with a particular interest on understanding the role of input sugar prices. Trejo-Pech et al (2020) was the first known research to examine the relationship between US sugar prices and sugar-using firm performance as measured by firms' ROAs and MTB ratios. It was found that as the ratio of US wholesale refined beet sugar price to the world refined sugar (US-to-world) price increased, firms' ROAs increased.…”

“…Trejo-Pech et al (2020, page 14) concluded their research with a possible explanation of, "US sugar-using firms must pass on higher costs to consumers when relative prices increase or do not pass on discounts to consumers when relative sugar prices decrease." We examine this outstanding question using a unique data set of SCP prices as a dependent variable, rather than using firm profits (ROA and MTB ratios) as a dependent variable like Trejo-Pech et al (2020), and by including sugar prices as an independent variable. Thus, this research will directly estimate whether higher US sugar prices are passed on to consumers while controlling for other relevant possible determinants of food prices.…”

“…While somewhat counter-intuitive, Trejo-Pech et al (2020) found that as US sugar prices increase relative to world sugar prices, US sugar-using firm financial performance improves. This may suggest relative (US to world) price increases are passed onto consumers.…”

“…Previous research has analyzed many aspects of the US sugar market such as sugar-sweetened beverage taxes (e.g., Cawley et al, 2021;Lee et al, 2019;Allcott, Lockwood, and Taubinsky, 2019), the impact of NAFTA (e.g., Kennedy and Schmitz, 2009;Knutson, Westhoff, and Sherwell, 2010;Schmitz and Lewis, 2015), the effect of Mexican sugar dumping and countervailing actions on the US sugar market (e.g., Schmitz, 2018;Lewis and Schmitz, 2015;Zahniser et al, 2016), US genetically modified (GM) sugar beets (e.g., Lewis et al, 2016a;Kennedy, Schmitz, and DeLong, 2019;Carter and Schaefer, 2019), consumer preferences for sugar (e.g., Lewis, Grebitus, and Nayga, 2016a;Lewis, Grebitus, and Nayga, 2016b;Lewis, Grebitus, and Nayga, 2016c;Lewis and Grebitus, 2016), and how US sugar prices impact sugar-using firm profitability (e.g., Triantis, 2016;Trejo-Pech et al, 2020). Cawley et al (2021) provide a review of the literature concerning the impact of sugar-sweetened beverage taxes.…”

“…The hypothesis of whether US sugar prices affect SCP prices is also tested. While research shows that, counterintuitively, sugar-using firms are more profitable when US sugar prices increase relative to world sugar prices (Trejo-Pech et al, 2020), no known research has investigated whether US sugar prices are statistically significant in determining SCP prices. Given sugar prices represent a small fraction of SCP prices (Triantis, 2016;ASA, 2021), it is possible US sugar prices are not associated with SCP prices.…”