Sugar & Sin
Why sugar might be the next commodity to be devalued by social perception.
Will sugar soon become a sin stock?
The term sin stock refers to businesses that provide goods and services which are perceived to be harmful, and that offer no real value to society. Sin stocks typically include producers of tobacco, firearms, gambling machines, alcohol, and more recently, marijuana.
Past research has clearly demonstrated that social attitudes towards sin stocks do indeed have an impact on the equity values of firms who produce these type of goods, however, these social attitudes are not always universal.
In nations where sin stocks are widely considered sinful, the average sin firm’s value is about 8% lower than that of the average non-sin firm, while in nations where the majority of people do not consider that same company sinful, there will be little to no difference (Fauver & McDonald, 2014).
For example, the equity value of firearms firms in the USA tends to be normative, since the majority perception of firearms in the USA has historically been mostly positive. In many European nations, however, firms that produce firearms tend to experience the 8% lower value based on what their valuation should be.
One key indicator that a company stock might be migrating into the sin category is when governments start to tax it in order to curtail consumption.
Over the past five years, more than forty nations, as well as a number of major American cities, have started to tax soft drinks, and this is because supporters of such levies argue that the tax revenue compensates for the costs imposed on society by higher rates of disease.
Supporters also contend that taxes on soft drinks will help to reduce consumption within the most vulnerable populations, being the poor that cannot afford proper healthcare.
The wave of global soft drink taxes comes in the wake of guidelines issued by the World Health Organization (WHO) in 2014, in which they recommend that adults reduce their consumption of table sugar to less than 60 grams per day. This is of course to prevent the illnesses that may be caused by excess sugar intake, which include obesity, cancer, heart disease, and tooth decay.
A single 35cl/12oz can of a soft drink on average contains around 50 grams of sugar, which is 83% of the total daily consumption that the WHO recommends.
The WHO has therefore called for world governments to impose a tax on these sugary drinks as part of a broader action that is aimed at reducing the overall consumption of sugar. Just as taxing tobacco has helped to reduce tobacco use, the idea is that taxing soft drinks will also help reduce the consumption of sugar.
Aside from just one soft drink being near the total recommended daily amount, another reason that the WHO believes sugary drinks are the best target for tax is because they have a high price elasticity of demand.
In other words, the demand for soft drinks is sensitive to changes in price, and that is truer amongst poorer consumers. Therefore, the tax should have a positive health effect on those that will consume less, and the impact is expected to be seen mostly in populations that cannot afford proper healthcare.
Consumer data clearly shows that taxes on soft drinks tend to have regressive effects, for instance, households in America that earn less than $10,000 a year typically consume soft drinks twice as much as those that earn $100,000 or more. The gap between desired and actual consumption is, therefore, wider for poorer people than it is for wealthier ones.
However, some economists argue that if the tax is too low, there will be no change in behavior, but if it is too high, then shoppers will simply arbitrage the rules by traveling to buy sugary beverages where there is no tax. This could, however, be resolved easily if the federal government implemented a national tax since few consumers are likely to travel internationally for soft drinks.
Of the top ten companies that are producers of sugar, none of them are American firms, therefore it would seem unlikely that lobbying efforts from that industry would hold up a national tax on soft drinks in the USA. What may stand in the way however are the soft drink producers themselves, since two of the worlds largest producers, Coca Cola, and PepsiCo, are based in America. Furthermore, neither of these companies will want to be considered a sin stock, however public perception may already be shifting in that direction.
Some research has focused on nutritional education rather than tax and has found that poorer households would likely consume half as much sugary beverage if they simply had expert nutritional knowledge, while the reduction of soft drink consumption amongst wealthier people would likely be less than 30%. In this scenario, education would have a much greater effect on reducing the consumption of soft drinks and would greatly promote the designation of soft drink producers as sin stocks. The cost of organizing and implementing education, however, might make this approach infeasible.
What may prevent a national soft drink tax from happening anytime soon in the U.S. is that the existing Republican government is unlikely to apply a tax in order to change consumption patterns. However, a change of leadership in 2020 could very well open the door for the government to enact policy based on a new national attitude regarding sugary beverages.
While it seems unlikely right now, it is clear that implementing some type of national tax on soft drinks is probably the best course of action for reducing the rate of death and disease caused by excessive sugar consumption.