Illinois-based Mondelez International, the maker of Nabisco brand products, is moving production of the firm’s iconic Oreo brand cookies to a new facility in Mexico.
Half of the 1,200 employees in the current Chicago facility will lose their jobs. According to Nabisco, the decision not to proceed with a USD$130 million upgrade to the plant, which is the company’s largest U.S. bakery operation, was made because the three unions representing plant workers didn’t accept wage and benefit concessions.
Seven lines in the 60-year-old plant will be upgraded, with nine lines moving to Salinas, Mexico. The south-of-the-border operation will make Oreo cookies, as well as Ritz and Graham crackers.
According to Nabisco, the new lines can produce twice the output of the old equipment with half the floor space, therefore saving the company USD$46 million per year compared to the Chicago operation.
With savings like that, will the rest of the Illinois workforce be safe?
And is this move really about wages and benefits?
According to Bloomberg News, American industrial users of sugar, obviously a major input in the snack food industry, pay substantially more than world prices for this commodity. A 300 gram package of Oreos contains 121 grams of sugar. At over one-third of the overall package weight, the price of sugar is a major issue for cookie production.
So why do US producers pay so much more for this essential ingredient?
The reason is a US Department of Agriculture farm subsidy program for sugar producers, which allows them to repay government loans with cash or their harvests if prices fall below agreed levels. With a bumper crop of sugar beets and cane, that’s exactly what happened, which means the USDA will buy 400,000 tons of sugar to cover $862 million in loans to farmers.
So what will they do with all this product? By law, it will be sold to ethanol producers at 10 cents a pound less than the government paid, as an inducement for the biofuel industry to use the surplus sugar.
Essentially, American taxpayers pay twice: the artificial boost to sugar prices costs consumers an extra $3.5 billion a year, according to an Iowa State University study, and, combined with import restrictions on sugar, food manufacturers pay a price premium of about 8.88 cents per pound.
It’s a remarkable example of a subsidy piled on top of a subsidy. And how powerful are the farm subsidy lobbyists? How many GOP candidates rejected agriculture subsidies during the Iowa caucuses? Both Democrats and Republicans talk about the efficiencies of free markets, but in practice, it’s lobbyist-take-all inside the Beltway.
If there’s one good thing that will come out of this Oreo offshoring, it’s that it illustrates what happens when price support programs distort the price discovery mechanism of markets: unintended consequences that usually end badly, especially for manufacturers.
Donald Trump is apparently giving up Oreos in protest and I've decided to do the same. This will be my last Oreo ever, for sure. I promise…