Food stamps (EBT) or WIC vouchers? I've known not a few people who qualified for food stamps and their were no requirements as to what to purchase. People with WIC vouchers I know had to buy fruit juice and meat and other category items in specific amounts so I could see having cereal as a category but I don't see why oatmeal or granola would satisfy the requirement.
[WS:] You are absolutely right. Even cost is not a factor here. There are many "store brand" healthier alternative available at lower prices than name brands. For example, Safeway (where I shop for food most often) you can get a whole bunch of Safeway brand granola, oatmeal, bran etc. cereals that actually cost less than sugary "fruit loops" or similar brand name varieties.
I think a more serious problem here is marketing that target children - sugary items tend to be packaged in a way that is particularly attractive to children and "strategically placed" (e.g. lower shelves where children can see them or "gauntlets" leading to cash registers) - so the parents are barraged by screaming kids wanting a particular piece of attractively packaged junk. Some resist, other cave in.
As to Joanna's comment re. public subsidies for cereal manufacturers - it is true, but it is also a really small drop in the bucket of government subsidies. I think main beneficiaries that receive the lion's share of subsidies are auto manufactures, oil, construction and aerospace industries. It would actually be nice if more of it went to food manufacturers instead of weapon and wasteful gizmos producers.
Wojtek