The Breaking Point

by James Dale Davidson

  By mid-century, before Castro took over Cuba, the US government was paying a sugar trade subsidy of two cents per pound above the world price to Cuban producers. This price premium was worth $500 million a year to Cuban producers, and 54.8 percent of Cuba’s sugar trade was with the United States.

  Then Came Castro

  Fidel Castro overturned the Cuban sugar market and, in the process, turned Senator Teller’s bad dream of a US sugar market dominated by Cubans into a different kind of nightmare. When Fidel Castro took over the Cuban sugar industry from Julio Lobo and the Fanjul Gomez-Mena family, enough of the Everglades had been drained so that 47,000 acres in Florida were planted in sugarcane. At this crucial juncture, with the preponderance of Cuban sugar still in the hands of US investors, Lobo declined a personal invitation from Che Guevara to become Minister of Sugar in Castro’s government. Subsequently, he fled to Spain and retired on his $200 million fortune, worth at least $1.5 billion in today’s dollars. But after having dominated Cuban sugar production since 1850, the Fanjuls were not ready to retire. They, too, fled Cuba with “a hefty financial portfolio,” some fine paintings, and a mastery of the occult art of freebooting in a corrupt economy—knowledge they would soon put to expert use in both the United States and the Dominican Republic.

  To understand what happened next, you have to appreciate the luminously corrupt way that business was conducted in pre-Castro Cuba. If influence peddling had been an Olympic sport, Cubans would have been gold medalists in those days. As the leading sugar planters in mid-century Cuba, the Fanjuls had honed their political skills in dealing with a corrupt government whose leaders were only too keen to enrich the few at the expense of the many, especially when they could rake off a piece of the action for their pains.

  Remember, Cuba’s penultimate dictator before Castro, the kleptocrat Fulgencio Batista, governed in conjunction with Mafia kingpins Meyer Lansky, Charles “Lucky” Luciano, and Santo Trafficante. Indeed, it was reported that Lansky offered then Cuban president Carlos Prío Socarrás a bribe of $250,000 in 1952 to vacate the presidency to facilitate Batista’s return to power. In the event, Socarrás was deposed by Batista in a military coup four months before a scheduled election. Socarrás had been alerted to the impending coup but boarded a plane and flew to exile rather than taking steps to counter it. You can only guess whether he took Meyer Lansky’s retirement bonus with him.

  The Mafia bosses preferred to do business with Batista even though, in some cases, he literally required daily payoffs. It was well known that Batista’s bagmen would call every night on Trafficante’s casinos, including the iconic Tropicana Club, to collect 10 percent of the day’s take.

  You probably don’t know the Fanjuls, unless you see them lording around Palm Beach, as I sometimes do. The New York Times describes the Fanjul brothers as “Florida’s Cuban-American reigning sugar barons who preside over Palm Beach’s yacht-owning society.”5 But even in the unlikely event that you keep a yacht in Palm Beach and you see Pepe Fanjul when you stop by the yacht club for a drink, that still wouldn’t give you much of perspective on America’s reigning sugar barons. The way they work is that Alfy contributes heavily to the Democrats and Pepe covers the bases by contributing heavily to Republicans.

  Close readers of the Starr Report got an intimate peek at these Sugar Daddies’ high-level connections at work. In the report, Monica Lewinsky stated that on President’s Day in 1996, she was with former president Bill Clinton when he spoke by phone with a Florida sugar grower who turned out to be Alfonso Fanjul.6 It was nothing unusual for Alfy Fanjul to bend the president’s ear about the sugar business. In this case, Fanjul, who was cochair of Clinton’s 1992 Florida campaign, called to persuade the president to oppose a proposed tax on sugar growers to pay for the cleanup of the Everglades. Fanjul reportedly said that he and other growers opposed such a tax because it would cost them millions.

  Years later, after he saw the Starr Report and learned that the president was multitasking during their conversation, Fanjul observed, “I heard no heavy breathing or nothing.”

  Part of the Fanjuls business model is to maintain a low profile. Their private holding company Flo-Sun is out of the public eye. But if you are a consumer in the United States, or even elsewhere in the world, you will know one or more of the Fanjuls’ many subsidized sugar brands: Florida Crystals, CNH Sugar, Redpath Sugar, Tate & Lyle Sugars (the leading sugarcane refiner in the European Union), Lyle’s Golden Syrup, and the iconic Domino Sugar, which pioneered the individual serving of sugar in 1916.

  The “Domino Effect” has meant diminishing returns in many areas of the economy. We hear a lot of complaint and discussion these days about the 1 percent, who are said to be unfairly hogging prosperity. For my part, I don’t begrudge billionaires any money they can make fairly and honestly in the free market. But I do begrudge those who profit through unfair advantage and the misuse of power through crony capitalism. As the free market has been left behind, so have the fortunes of most Americans.

  American prosperity has been in a stall for half a century. A big part of the problem is the success of modern-day snake charmers, like the Fanjuls, who have again unleashed the “same old serpent that says you work and I eat, you toil and I will enjoy the fruits of it.” The fact that they have been able to profit by taking billions out of the pockets of the bottom 90 percent of the income distribution accounts for large efficiency losses and the destruction of tens of thousands of jobs that might have otherwise provided for middle-class livelihoods.

  The Fanjuls recognized, more readily than most, that crony capitalism, not the free market, rules the world. The Fanjuls left Havana to exercise their well-honed skills in crony capitalism in Florida and the Dominican Republic.7 They came at an opportune time to take advantage of the US embargo on Cuban sugar. And even though the United States was ill suited as a setting for rebuilding their sugar empire, they jumped at the opportunity provided by the federal government’s absent-minded Florida swamp-draining boondoggle.

  They set up shop in Florida, buying swampland and politicians for a pittance; then they got their swamplands drained at your expense. As if by magic, the Fanjuls benefited from the US Army Corps of Engineers’ projects to drain more of the Everglades for agricultural use—a tax-funded initiative that turned swampland into farmland and made large-scale sugar farming in Florida possible.

  Today, more than 420,000 Florida acres are planted in sugarcane, and according to CNN, the Fanjuls farm an estimated 180,000 of those acres in the Everglades.8 Thanks to US government intervention that compels you and other consumers to pay artificially high prices for sugar, the Fanjuls pocket tens of millions of dollars annually in artificial profits. Because they control about 43 percent of Florida’s sugarcane production, CNN reports, they collect at least $60 million a year in subsidies.9

  With their control over the US sugar market, the Fanjuls saw to it that the sugar subsidies were structured to keep the price of sugar high. For one thing, sugar loans are usually granted directly to the sugar processors like the Fanjuls instead of to farmers. So from the Fanjuls’ perspective, none of the free money is wasted on some poor wretch trying to scratch out a living from twenty acres of sugarcane in Loxahatchee. A consequence of directing the subsidies to the processors rather than directly to the farmers is that it reinforces cartel pricing. There is no chance of a farmer undercutting the cartel price when he could maximize his income by selling more at a lower price.

  And note this sweet twist.

  If the proceeds from the harvest yield more than the cost of the loan, the Fanjuls and other big shot sugar operators repay the loans and realize the profit in cash. Otherwise, they can repay the loans in sugar.

  Another not inconsiderable benefit of these politically favored nonrecourse loans is the fact that they come with highly subsidized interest rates. Domino and other sugar processors borrow money from the Treasury at rates that are sometimes lower than the government pays to finance its deficit. As the Wal
l Street Journal reported in 2013, over the previous nine years, the United States lent sugar processors $8.8 billion. The loans in 2012 were granted with 1.125 percent to 1.25 percent interest rates.10 By comparison, the average rate paid by the US government on interest-bearing debt in 2012 varied from 2.791 percent in January to 2.523 percent in December of that year. So the government borrowed billions at up to 2.5 times the interest rate it received on sweetheart loans to billionaires.11

  During that same period, the interest rates on student loans (graduate and undergraduate Stafford loans) ranged between 3.4 percent and 6.8 percent.12 Also note that unlike the nonrecourse loans to Domino, student loans are total recourse—they cannot even be discharged in bankruptcy. Student borrowers are indentured for life. Evidently, enriching the Fanjul family is not only more crucial than US fiscal solvency; it is up to six times more important than financing the educations of young Americans.

  Yet another sour taste associated with the Domino Effect is that when the cash prices on sugar fall to a point that would otherwise make the subsidized loans unprofitable, Domino and other sugar processors can repay their loans with sugar instead of cash. That is like allowing young people to repay their student loans by delivering their class notes and used textbooks to the Department of Education. I can easily imagine that the 53 percent of recent college grads who are jobless or underemployed would like to use Domino’s approach to satisfying their federal loans.

  The comparison is unrealistic, I grant.

  For one thing, unlike young people trying to use student loans to find their way in a bankrupt world, the Fanjuls need not account for how they use the proceeds of their federal loans in the first place. While the website of the Department of Education’s Office of Inspector General details a long list of persons indicted or jailed for misuse of student loans, there is no such thing as misusing sugar loans. They are truly sweetheart loans—just another packet of free money donated at your expense to the Sugar Daddies.

  The Fanjuls could not have been named “the first family of corporate welfare” in the United States by both CNN and the New York Times if they were not really proficient at picking your pocket.13 Believe me, they are. They have found so many ways to rig markets and live at your expense that it would take a platoon of forensic accountants months to decipher and quantify them all.

  When you compile a tally, don’t forget to take into account the millions they pocket gaming the sugar import quota system. Through a subsidiary, the Fanjuls grow sugar in, and export it from, the Dominican Republic as well. Whether they sell their sugar from the Everglades or from the Dominican, they are guaranteed a US price that is more than double anywhere else in the world. The New York Times explains: “The sugar exporters who are able to sell to the United States also benefit from those astronomical prices. The Dominican Republic is the largest quota holder.” And as reported by CNN, the Fanjuls are “the largest private exporter of Dominican sugar. . . . Through a subsidiary, Central Romana Limited, the brothers grow sugarcane and operate the world’s largest sugar mill there . . . Whether they sell sugar from their holdings in the Everglades or from their mill in the Caribbean, the Fanjuls are guaranteed a US price that is more than double anywhere else in the world.”14

  They rigged the markets so that American consumers and taxpayers had to lavishly subsidize them. The CNN/GAO estimate that rigged sugar markets put about $60 million a year into the Fanjuls’ bank accounts is really a gross underestimation. It counts only the portion of budgeted federal outlays that experts claim end up with the Fanjuls. The total costs are much higher than that. Economists put the dead weight loss to consumers from inflated sugar prices at $3.5 billion annually.15 And that doesn’t count the follow-on costs.

  In the process of growing their subsidized sugar, the Fanjuls imperiled a fragile Everglades ecosystem with biochemical discharge and agricultural runoff. As a result, populations of wading birds in the Everglades have declined by 90 percent since the Fanjuls arrived in Florida. Fertilizer runoff and excessive draining for agriculture have seriously imperiled water quality. The Everglades, the source of most drinking water in South Florida, has been found to contain excessive amounts of phosphorus and sulfate-mercury, a serious poison. Both are the result of discharge from sugar production. That is why Big Sugar fought lengthy court battles in the 1980s and ’90s in an attempt to block studies of water quality in the Everglades.

  This is not the place to recite the whole tangled tale of research and documentation of the ecological damage done. The Everglades Foundation’s “Polluter Pays Study,” which looked only at phosphorus pollution, not sulfate mercury pollution (which becomes methyl mercury poisoning), concluded that taxpayers were subsidizing “50 percent of Big Sugar’s pollution cleanup costs.”

  Notwithstanding Article II, Section 7 of the Florida Constitution, the “polluter pays” amendment, the sugar barons convinced politicians to make taxpayers absorb the lion’s share of the costs for cleaning up the mess they made. The State of Florida’s Everglades Forever Act of 1994 has already cost at least $1.8 billion—of which, according to CNN, the Fanjuls pay $4.5 million a year.16

  On the federal level, a 1997 analysis places the annual spending by the Army Corps of Engineers to regulate water flow in Central and South Florida at $63 million, of which the Corps estimates that $52 million subsidizes agriculture, mainly sugarcane farming in the Everglades. By implication, 43 percent of that, or another $22 million a year, subsidizes the Fanjuls.

  Another $20 Billion in Domino Effect

  But this is small change compared to the outlays entailed in the larger Comprehensive Everglades Restoration Plan (CERP). It is this massive project—a joint undertaking between the Army Corps of Engineers and the SFWMD—that had my anonymous seatmate drooling. According to the Washington Independent, federal projections put the cost of CERP at just under $20 billion.17

  Think about it. You would be filthy rich, too, if you could rig a market as large as the sugar one, requiring everyone in the United States to pay you a multiple of the world free market price. From 1990 through 2009, US prices for raw sugar averaged almost exactly double the global average—21.56 cents per pound, compared to 10.85 cents per pound in the rest of the world.

  As I write, the current closing price for US Sugar No. 16 is 24.83 cents per pound—a hefty 43 percent premium to world prices but mercifully smaller than the usual markup (as reported by the Intercontinental Exchange, a center of global trading in soft commodities).

  The system is rigged to make the sugar market the personal fiefdom of the Fanjuls. This has not only cost you and other citizens untold billions, but the subsidies have also resulted in the loss of twenty thousand jobs in the confectionery industry each year due to the higher prices of sugar in the United States. So said the Department of Commerce in a 2006 report.18 This implies that crony capitalist domination of the sugar market has cost more than 100,000 Americans the opportunity to enjoy a middle class livelihood since the collapse of the subprime bubble in 2008.

  There a lot of thirtysomethings sleeping on their parents couches who might have jobs if not for the Domino Effect. This is exemplified by the fact that iconic US confection brands, such as Life Savers and Hershey Foods, closed production facilities in Chicago, Pennsylvania, Colorado, and California and moved to Canada, where the cost of sugar is half that in the United States.

  The Domino Effect on Your Diet

  That is one substitution effect. Another involves the substitution of high fructose corn syrup (HFCS), a cheap artificial sweetener that has been adopted in soft drinks, baked goods, sweetened fruit drinks, condiments, and almost everything else you can think of in the American diet. Americans eat more of this vile product than any other people on earth. You also pay your share of some $40 billion in subsidies doled out to corn farmers. And it is a big reason why the United States has the highest incidence of obesity and type 2 diabetes in the world.

  Dr. Joseph Mercola, who draws on the research of Dr. Rober
t Lustig, professor of endocrinology at the University of California, reports that HFCS consumption contributes far more to obesity and insulin resistance than simple table sugar—the kind the Fanjuls have made needlessly expensive. HFCS leads to the following:

  1. Insulin resistance

  2. Impaired glucose tolerance

  3. High insulin levels

  4. High triglycerides

  5. High blood pressure

  Studies show that consumption of high fructose corn syrup in the United States has skyrocketed since 1970.19 So have rates of obesity and type 2 diabetes. Demographic analysis at the University of Utah shows that the obesity epidemic in the United States intensified after the 1970s and that each cohort has successively higher rates of obesity at every stage of life. Note that one in ten Americans now has diabetes, which entails an average increase in medical spending by $7,402 per year compared to nondiabetics. Treatment of diabetics accounts for some 32 percent of all Medicare spending, or roughly $171.5 billion in 2012.

  It would take some elaborate forensic accounting to determine what large fraction of those tens of billions, soon to be hundreds of billions, of dollars a year should be attributed to the Domino Effect. But clearly, sweetheart deals to the Sugar Daddies cost you a lot of money.

  Notes

  1 Wallsten, Peter, and Tom Hamburger, “Sugar Protections Prove Easy to Swallow for Lawmakers across the Spectrum,” Washington Post, December 7, 2013.

  2 Kowalski, Chuck, “The Two Sugar Markets—US Sugar and World Sugar,” About.com Commodities, http://commodities.about.com/od/researchcommodities/a/The-Two-Sugar-Markets-Us-Sugar-And-World-Sugar.htm.