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Costly U.S. sugar tariffs drive candy makers north of border

Businesses invest in Canadian facilities to escape high price

By Ilena Peng, Bloomberg News
Published: June 15, 2024, 6:01am

Last fall, Hershey Co. repurchased a factory outside Ottawa that it closed more than a decade earlier. Blommer Chocolate Co., a U.S. rival, is expanding in Ontario while it shutters an 85-year-old Chicago plant. Oreo-maker Mondelez International Inc. says it has invested $250 million in Ontario manufacturing facilities just in the last few years.

Although Canada is far too cold to grow enough sugar for its candy industry, it has managed to attract hundreds of millions of dollars of investment in recent years to expand capacity. Some of that can be attributed to a rising population, but many in the industry say it’s the long-standing protectionist measures in place south of the border that are sweetening Canada’s appeal.

“High U.S. sugar prices over the long term is the driver of chocolate and candy production in Canada,” said Sébastien Pouliot, an agricultural economist and consultant based in Québec.

The U.S. sugar industry is heavily protected, and buyers such as confectioners and processed-food makers can only import certain amounts of raw and refined sugar before incurring hefty tariffs. The decades-old regulations are intended to protect U.S. farmer profits and prevent other countries from flooding the country with sugar. But critics say it also keeps U.S. sugar prices artificially high, burdening American sweets companies and refineries trying to operate at home.

In 2013, the difference between U.S. and global sugar prices was only a couple of pennies per pound. But production challenges at home and in neighboring Mexico have driven U.S. sugar futures to almost twice the global benchmark price. That makes it increasingly attractive for companies to make candy and cookies in Canada instead, then ship some of their production to U.S. consumers. Many of those finished goods can enter the U.S. and avoid quotas that dictate the more “tightly managed” trade in refined and raw sugar, said Alex Smith, a project leader at consulting firm Agralytica.

The Canadian industry’s growth “is a direct result of the price that’s well beyond any reasonable price in the U.S.,” said Rick Pasco, president of the Sweetener Users Association, which has pushed for reforms to the U.S. sugar program. “We’re paying twice as much for sugar. That’s a great stimulus for operations offshore — Canada being the closest.”

The volume of sugar contained in finished goods flowing from Canada to the U.S. last marketing year was the highest in close to two decades, Agralytica data show. Last year, $1.98 billion in chocolate and $615 million in other sugar confectioneries were shipped from Canada to the U.S. for consumption — both all-time highs — according to data from the U.S. Department of Agriculture. Although some of that increase can be attributed to higher chocolate prices due to cocoa’s rally, chocolate imports into the U.S. from Canada last year were still the second-highest ever in data going back about 35 years, surpassed only by the volumes recorded for 2022.

Each time the U.S. Farm Bill comes up for reauthorization (it’s due to happen this year), critics of the country’s sugar policies lobby for changes to the import quotas. They got new ammunition in October when the U.S. Government Accountability Office’s review of the program found that it costs American consumers more than it benefits producers, resulting in an estimated net economic loss of as much as $1.6 billion per year.

The agency also said in its report that the policies can incentivize companies to move abroad, including to Canada.

A cheaper sugar price is “the main difference” between having operations in Canada and the U.S., said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. “I don’t think there’s any secret sauce there.”