World sugar prices

As we saw last week the bulk of the sugar is sold to the protected European Union markets. Indeed the argument was advanced there that, without these markets, regional sugar producers could not survive as commercial entities. This is simply because the world price of sugar outside of protected markets does not cover the cost of regional sugar production. The lowest cost sugar producer in the Region is Belize, which averaged 16 cents per lb for the crop years 1995/96 to 1997/98. At the same time the world price for sugar, calculated from the International Sugar Association (ISA) daily price, averaged 11.38 US cents per lb for the four year period 1995-1998. Since then in 1999 the ISA daily price averaged 6.27 US cents per lb; in 2000, it was 8.18 US cents per lb; and in 2001, it was 8.58 US cents per pound. These data are particularly disheartening as they show clearly that in recent years there has been no price reversal, which some pundits had argued was to be expected. Further, between December 2001and February 2002 the ISA daily price declined by another 15 per cent.

Lest it is believed that this represents a short or temporary decline in prices, it should be noted that, first of all, the price has been below 9 cents per lb on average for over four years, that is, since 1998. Second, the projections done by such organisations as the World Bank, the USDA, and UNCTAD all indicate very small increases in the price of raw sugar, even after the WTO effects are factored in! Indeed, in April 1999 the World Bank projected prices of only 10.4 cents per lb for raw sugar in 2005, and 11.3 cents per lb by 2010. When converted to constant price equivalents based on 1990 prices, the real price of sugar was projected at 8.6 cents per lb in 2005 and 8.3 cents per lb in 2010.

Structural decline

These pessimistic forecasts have led the World Bank to raise the possibility that what we have been witnessing over the last 3-4 years may be another step downwards in commodity prices relative to those of manufactures. This, they argue, has been brought on by significant efficiency gains and improved technology, which has led to reduced costs of production in several important sugar producing countries. If indeed such a structured price shift is underway, then there is no prospect of a lasting recovery in sugar prices over the medium term. WTO liberalisation, if successfully pursued, could in fact hasten the process of price decline.

Effects of inflation and relative exchange rates

There are other more complicated aspects to the price issue, which goes beyond the scope of this series of articles. I shall however, hint at these in the remainder of this article. One complication is that sugar prices have been historically among the most volatile of all major agricultural commodities traded internationally. In this sense therefore, it may be understandable that a risk-taker could gamble that prices may rise above say, 15 cents per lb, based purely on the uncertainty in any forecast of the future. Such gambling, however, can have severe penalties, if substantial resources are committed to a gamble that goes against the odds of statistical forecasting.

Second, the World Bank estimate given above is in both nominal and real prices. The purpose of the latter is to remove the effect of inflation on the price of sugar. Consider an example, if all prices rise by say 10 per cent, then inflation is 10 per cent and the price of sugar taken separately rises by 10 per cent.

However, the earnings from one pound of sugar would not have an enhanced purchasing power as all goods cost more. This is a very important consideration, which the average lay person does not take into account when discussing the price of most things. Price is always relative to something, whether it is the value of money or other commodities. As economists say, the average person suffers from money illusion. He/she focuses on the nominal price, and not the purchasing power or the amount of goods and services which that price affords.

Finally, the price of sugar is given in US currency. Obviously this means that changes in the price of the US currency in relation to others affects the real worth or value behind the price per pound of sugar. In other words as the US currency appreciates or depreciates in value in relation to other currencies, this will impact on the significance to be attached to the price of sugar stated in US currency.

This brief exploration of the world price of sugar has established that for a number of years now this price has been far below the cost of producing sugar in the Region. Further, there is no prospect of a significant lasting increase in this price, for the reasons indicated above. The crucial matter for present survival is the preferential sales we make in Europe and the USA. Next week we look at these arrangements.

How sweet it is: The myth of sugar handouts

Last week's article indicated that in recent years the world price for raw sugar has been well below the average cost of producing sugar in the Region. The International Sugar Association's (ISA) daily price for raw sugar averaged just under 8 cents per lb for the years 1998-2001. For the first three months of 2002 the daily ISA price averaged 8.24 cents per lb. As it was indicated, these figures are well below the cost of sugar production in Belize, the Region's lowest cost producer. Costs there have ranged between 15 and 17 cents per lb and, in the next lowest cost producer (Guyana), it has ranged from 19-22 cents per lb. It was also indicated last week that forecasts by organisations like the World Bank, UNCTAD, and FAO show that the low world price for sugar is expected to continue over the medium term and that, at present, there is no significant prospect of a lasting increase in the price of sugar. The reasons for this conclusion were given in that article.

The purpose of these observations was to establish the extent to which the industry's continued survival in the Region is dependent on the continuation, in a substantial form, of the present special marketing arrangements with Europe and the USA. Today's article commences an examination of these marketing arrangements. After this is completed we shall return to a broader discussion of the future of the regional sugar industry in the age of globalisation.

The inversion of meaning

Most readers will be aware that the present suagr marketing arrangements are at threat in a post-WTO environment where the Cotonou Agreement and NAFTA have come into existence, and where also, the FTAA negotiations along with on-going negotiations with Europe under the Cotonou framework continue. In order to understand the external marketing dilemma that the Region now faces, it is necessary to appreciate its origin.

Contrary to popular belief, much of the origin of the special marketing arrangements for sugar in Europe lies outside the Region. First, in Britain's pressure on its then colonies to secure its domestic availability of food during World War II (1939-1945), and then subsequently through Europe's efforts in the 1970s to avoid a price squeeze, brought on by anticipated increases in commodity prices due to expected global shortages of raw materials and primary products. It is important for me to make this point right at the outset, as it has been uncritically promoted (even by our own regional media) that the present arrangements constitute a 'handout' from Europe to the Region, in response to the Region's special pleading. In fact, nothing could be further from the truth. What has eventuated since the arrangements were put in place was not what Europe had intended. What Europe hoped for, at best, from the sugar marketing arrangements was the mutual sharing of benefits by both sides. It was not a handout to the Region. Both sides were expected to benefit.

The CSA

The origin of the present marketing arrangements lies in the effort by Britain during World War II to secure its sugar supplies, through offering a guarantee to purchase all exportable sugar from the Region so that it would not be diverted elsewhere. When the war ended, Britain's fear was that raw sugar supplies to its refineries could be disrupted, on account of the opportunities elsewhere for the colonies to obtain higher prices, created by shortages and the sellers' market for the Region's sugar. Export quotas and guaranteed prices therefore continued, and the World War II agreement gave way to the Commonwealth Sugar Agreement (CSA), which was signed in 1951. Under the CSA, Britain undertook to import an irreducible amount of 1.7 million long tons of sugar per annum from Commonwealth producers, of which 745,000 tons were initially allocated to the West Indies. The price of this sugar was to be 'negotiated' annually.

The Sugar Protocol

The CSA was subsequently transformed into the present ACP-EU Sugar Protocol in 1975, after Britain joined the then European Economic Community (EEC). The Sugar Protocol was indeed an important condition for Britain's entry into the EEC. Significantly, the protocol was signed with all the former sugar exporting colonies of continental Europe. Subsequently, these countries became known as the African-Caribbean-Pacific (ACP) Group of Countries. The Sugar Protocol was also simultaneously a part of, and separate from, the more comprehensive Lome Convention, signed by the EEC and ACP countries, which was an aid, trade, and financial arrangement.

The transformation of the CSA into the Sugar Protocol was not a unilateral gesture of generosity by Britain and Europe to the ACP sugar producers - as it is widely described today. It represented, in large measure, the continued pursuit of Europe's self-interest, as the fear was then that there would be a high long term price for raw sugar, and indeed for all primary commodities.

If there is any doubt about the validity of this assertion, one has only to recall the commodity boom of the 1970s, and the peaking of sugar prices at 64 cents per lb in 1974. Indeed, when the Sugar Protocol Agreement was signed, it was based on a price of only 147 British pounds per ton, when, the world price at that time was more than 22 times higher! As it was pointed out in an earlier article on this topic, in the mid-1950s the Region was the world's second largest sugar exporter and, despite declines in output after that, it remained among the top ten exporters right up to the mid-1990s. This perspective also helps to explain why the commitment that was made by both the EU and the ACP sugar exporters to establish the Sugar Protocol was as an 'indefinite agreement', binding sovereign governments.

Thus Article 1 of the Protocol states that: "The Community undertakes for an indefinite period to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw or whole which originate in the ACP state and which these States undertake to deliver to all." The Protocol goes on to state that "these quantities may not be reduced without the consent of the individual states concerned" (Article 3(2). As we noted earlier, the arrangements under the Sugar Protocol currently account for 85 per cent of the sugar exports from the Region.

The presentation above makes clear that the protocol was a commercial arrangement in which both sides expected to gain. The ACP producers took a lower price than that existing at the time in exchange for security and stability of sales over the long-term. Europe provided this security because it expected that the protocol price would, over the long-run, be lower than the world price, where it was expected that shortages would take its toll.

The arrangements were never intended to be a zero plus game where the winner takes all and the loser loses all. If it had happened that sugar prices remained permanently high (as many pundits were predicting at the time) would we have been saying today that the Region was providing Europe with 'handouts'?

Summing up

Last week we assessed CARICOM's sugar marketing arrangements with the European Union (EU) as a "three card con." As argued, the Sugar Protocol arrangement has brought benefits both to the African-Caribbean-Pacific (ACP) group of sugar exporting countries and the EU. The benefits to CARICOM sugar producers over the past decade and a half of the Protocol was nearly one and a half billion US dollars. During this period, with the Protocol in place, the EU moved from being the world's largest importer of sugar to the world's largest exporter of that commodity. It is unfair with such an outcome to represent the Protocol as a handout from Europe to the ACP countries and CARICOM.

Recent articles have also made the point that, for several reasons, not least of which is Europe's commitment to continued subsidising of its farming sector, the price paid for ACP sugar, although linked to the EU's Common Agricultural Policy will not decline precipitously. If anything, the recent dramatic against-the-tide resurgence of US agricultural subsidies will help to shore up EU's tendencies toward agricultural protectionism. It is reasonable to conclude that the EU will never lower barriers to agricultural trade, at a time when the US is in a mode to progressively raise theirs.

As we saw, however, the Special Protocol Sugar (SPS) is another matter. It was predicted in the earlier articles, that this will go. And, crunch time will come when free trade promises made to the group of 48 Least Developed Countries (LDC's) kick in (2008). As we noted, the EU's generosity to the LDC's is at the expense of commitments it had previously given to the ACP. How sad indeed, but this is in keeping with the double dealing that has characterised special trade arrangements for sugar worldwide.

The USA: from sugar to sweeteners

This week we turn to a brief review of preferential sales to the US market. This accounts for about eight per cent of the Region's export sales and is therefore substantially smaller than the two segments of the EU market, namely, the Sugar Protocol Sugar (71 per cent) and the Special Preferential Sugar (SPS - 14 per cent).

Unlike the EU, the US' sugar market is best described in terms of a 'sweetener market', where other forms of sweeteners compete lustily with sugar, both imported and produced at home.

The main rival to sugar is High Fructose Corn Syrup (HFCS). This is a sweetener made from corn and is used widely in the production of soft drinks, other beverages, confectionery, and foods in the US. Taken together, the US sweetener market is not only the world's most diverse, but the largest. The US is also among the top four sugar producers worldwide, producing over eight million tons of both beet and cane sugar. Indeed it is the world's second largest beet sugar producer (4.5 million tonnes) after the EU (18 million tonnes). Unlike the EU however, the US does not export sugar. It imports about 1.4 million tonnes, which ranks it at number six among the world's largest sugar importers.

Other US sugar import programmes

While our concern is with the arrangements under which the US imports raw cane sugar, it should be mentioned briefly that it has three other sugar programmes. One of these is the USDA's 'Sugar-Containing Products Re-Export Programme.' This permits US manufacturers of products using sugar to buy sugar at the world price to use in products for export back onto the world market. The second is the 'Refined Sugar Re-Export Programme.' This permits US refineries to import raw sugar at world prices for refining in the US and ultimate export. The Programme permits swaps between US and world sugar, as long as the world priced sugar is ultimately exported.

The third programme is the 'Sugar for the Production of Polyhydric Alcohols Programme.' This permits US manufacturers of polyhydric alcohols to have access to world priced sugar for this purpose, unless it is to be used as a substitute for sugar in human food consumption.

The US Tariff-Rate Quota System (TRQ)

Raw sugar is administered through the US Traiff Rate Quota (TRQ) system. The TRQ system allows for a specific quantity of raw sugar to be imported duty free or at a nominal tariff rate with any additional quantity imported at a higher rate.

The higher second tier duty that protects the market is subject to the North America Free Trade Agreement with Mexico and Canada (NAFTA) and WTO trade agreements. The Food, Agriculture, Conservation and Trade Act of 1990 establishes a minimum floor on the quota of 1,256 million short tons. However, the quota allocations under the TRQ system are not fixed as it depends on the US domestic supply and demand balance and its stock to use ratio. The arrangements are triggered when its stock to use ratio reaches 15.5 per cent. The import quota is set by determining the quantity of total supply on the domestic market that will trade at prices sufficient to avoid forfeitures of sugar under loan to the Commodity Credit Corporation (CCC). The price support loan programme has been the instrument in establishing the effective market support levels prevailing in the US sugar market.

Effect of the WTO

The WTO's Agreement on Agriculture (AOA), which this series considered at some length before the present discussion of sugar, has done very little to change the operation or effect of the US sugar programme already in existence. This is much like what happened also with the EU-ACP Sugar Protocol. Thus, in relation to her export competition commitments, the US not having had export subsidies is not directly affected by this provision to reduce the volume and budgetary commitments on its subsidised exports. For its commitment in regard to market access, the current import access of 1,256 million short tons under the TRQ counts and is any case above the required five per cent of domestic consumption. And, the US' 15 per cent tariff line reduction is calculated from the 1986-88 base period. For raw sugar this base period duty was established at 18.08 cents per pound. This duty is high enough to keep out imports even at world prices of between 5-8 cents per pound. Finally the Domestic Measure of Support (DMS) does not directly apply to sugar.

Next week we shall look at the CARICOM's quota allocation to the US market and assess the likely survival of the TRQ system.

US sugar policy
Although CARICOM exports only eight per cent of its sugar to the US market, US sugar policy is an important eye- opener to the byzantine programmes that rich countries have designed in order to subsidise their agriculture at the expense of the poor agricultural exporting countries. It is subsidies which confer much of the advantage they enjoy in global production and trade in agricultural commodities. This happens even though the rich countries lead the charge for free trade and the removal of government direction over economic activity!

For the financial year 2002, beet sugar production in the US is projected at 4.0 million short tons. Cane sugar output for the same period is also projected at 4 million short tons.

The total output of 8 million short tons makes the US a major player in global sugar production. It is also the second largest importer of sugar. But all this is possible largely because of specially designed government programmes that support US sugar.

At the heart of US sugar policy are two main programmes, the tariff-rate quota (TRQ) system referred to last week, and the price support sugar loan programme.

The principles behind these are not hard to follow, despite their apparent complexity. An effort will be made in today’s article to explain these two programmes so as to provide an insight into why the US is a major player in global sugar.

Tariff-Rate Quota (TRQ)
As we noted last week, the tariff-rate Quota (TRQ) is a two-level import tariff in which the tariff-rate changes with the volume of imports. Within the stated quota volume a lower tariff is charged on imports of sugar. Outside, or over the quota as it is sometimes termed, a higher tariff is charged. The quota for the lower tariff is set annually by the US Department of Agriculture (USDA).

The volume fixed for raw sugar (which is what CARICOM exports) during the 2002 financial year is about 1.3 million metric tonnes. This quota is allocated to 40 countries. The quotas are based on these countries’ trade during the period 1975-81, when it is assumed that sugar trade was "relatively" free from restrictions. The quota allotted to CARICOM countries averages about 53,000 tonnes.

There are two additional points worth nothing about the TRQ. One is that under the terms of the WTO Agreement on Agriculture (AOA), the US agreed to import a minimum quantity of 1,256 million short tons of raw sugar equivalent each marketing year (October to September) The TRQ is accepted as fulfilling this obligation. Second, as a member of the North American Free Trade Association (NAFTA) with Mexico and Canada established in 1994, an additional allocation of sugar imports is made available to Mexico in order to fulfill US obligations under NAFTA.

The latter has however, not worked smoothly and has in fact become a source of enormous contention as Mexican sugar producers and US high fructose corn syrup (HFCS) producers battle to secure their positions in each other’s market.

As a result, a separate arrangement called a "side letter" between Mexico and the USA has been substituted for the original NAFTA provisions. In effect the "side letter" establishes a transition period before Mexico is allowed full free trade entry of its sugar into the U.S. If, and when this occurs, the entire TRQ system will be threatened. At present, the transition period is planned to end at the end of financial year 2007, but given disputes so far this outcome is not yet certain.

The price support sugar loan programme
The second main programme of US sugar policy is the provision of subsidies directly to sugar processors and indirectly to sugar producers.

How is this done? Subsidies are now administered under the recent US Farm Security and Rural Investment Act of 2002, termed the 2002 Farm Act. Under this Act loans are provided through the US Department of Agriculture (USDA) to the processors of domestically grown cane and beet. The loan rate for refined cane sugar is 18 cents per lb and for refined beet sugar it is 22.9 cents per lb. The difference in the two rates reflects the difference in the costs of producing these two types of sugar in the US. Processors can obtain loans for sugar "in-process", that is sugar not yet fully refined, at 80 percent of the full loan rate.

The loans provided by the USDA are for a period of 9 months. The stipulation is that these must be repaid along with all interest charges by the end of the fiscal year in which the loan was made. As indicated above the loans are made to the processors, but these in turn must pay the cane and beet producers an amount proportional to their contribution to the value of loan received. Outside of agreed arrangements between processor and producer, however, the USDA can set minimum producer payments, if required.

The loans provided are termed "nonrecourse loans". Put simply, this means that when the loan matures the USDA must accept the sugar, which is pledged as security or collateral for the loan, in lieu of full repayment in cash, if the processor so desires. Further, the processor has no obligation to inform the USDA beforehand of an intention to forfeit the sugar in lieu of repayment. In other words, the processor (borrower) is free to repay the loan or give the USDA sugar for the value of the loan.

This arrangement in effect therefore, sets the floor for sugar prices in the US domestic market, as no rational processor would repay the loan if the price of sugar in the US domestic market is below the loan rate. In this situation forfeiture of the sugar would guarantee a better price for the sugar. Further, after the sugar is forfeited, the supply of sugar on the US domestic market is reduced, thereby helping to support the market price for sugar.

Under the 2002 Farm Act, the USDA is required, "to the maximum extent possible", to operate the sugar loan programme at no cost to the Federal Government.

This can only be done if there is no forfeiture of sugar. If this is considered carefully, it will be seen that this only possible if the market price for sugar is above the loan rate value.

If that occurs, then the sugar can be sold to the market and the loan repaid (including all interest charges) and the processor is no worse off, and indeed would normally be better off.

Next week we will wrap up this discussion on sugar.

How sweet it is: Concluding the discussion on sugar

This week's article rounds off the discussion on CARICOM's sugar trade. This discussion started five weeks ago, as an illustration of the issues facing global efforts to bring agricultural trade under the regimen of the WTO. As explained the goal is to make agricultural trade, like trade in manufactures, minerals, and services, regulated by market forces. Our discussion has shown how difficult that would be to achieve.

Non-market considerations

Perhaps the most important point to come out of the discussion is the pervasive and extensive role of non-market factors in shaping global sugar trade. The real reason for this is the deep embeddedness of the social, cultural, and political factors, which generally shape agriculture and rural society in most countries. We see examples of this everywhere. Thus recently the Bush Republican administration in the USA, although ideologically fixated on rigid free-market doctrines, has raised agricultural subsidies to protect US farmers to unprecedented levels, despite global protests. The apparent motive for this was to secure/protect the rural vote for his party in the forthcoming Congressional elections.

The discussion has also shown how over the course of time, governmental intervention in sugar has secured the end result that the main purchasers of the Region's sugar, the European Union (EU) and the USA, are themselves among the world's leading producers and importers of sugar! As argued, none of this would have been possible without the deliberate combining of preferential arrangements for imports with subsidies for domestic producers. In the case of the EU this reached the extraordinary limit that at one point it became at one and the same time, the world's largest exporter and importer of sugar!

CARICOM benefits?

Our discussion has shown that CARICOM has benefited from these arrangements, along with the EU and the USA. For us the main benefit has come in the form of income transfers because the price of sugar in these markets has been substantially above that in the world free market. To the extent that our cost of sugar production remains very high this benefit is vital to the survival of the industry in the region.

Some economists have argued that the subsidised price for export sugar has been, over the long run, to our detriment. This is because it has encouraged sugar production in a period when Caribbean agriculture should have been diversifying. While, on the face of it this sounds plausible, it mis-reads two basic circumstances in which this occurred. One is that the income transfers that did occur, could well have gone the other way. Thus, if at the time (the mid-1970s) the Lome Convention was entered into, the anticipated rise in the price of sugar had occurred because of the expectation that long-term commodity shortages would emerge in the global economy, the end result would have been very different. As the series has stressed, that the Region was able to access significant economic rents from its sugar exports was not part of the original intention of the EU. The other circumstance is that none of the numerous cost studies of various alternative crops in the Region, have shown that any of these have come close to what sugar offers in terms of effective resource usage, employment, scale of operations, and the livelihoods it can sustain in terms of linkages, multiplier effects, and so on.

Economic rent

Some countries have treated this economic rent as a national entitlement. That is, as limited payback for their past colonial exploitation. As such, the economic rent is taxed, and government spending of it is aimed at providing benefits for the whole society and not just sugar interests. In Guyana the Sugar Levy was introduced ostensibly for this reason. Over the years, however, this has whittled away to zero, mainly in response to lobbying efforts by sugar industry interests, anxious to sustain the industry over a period in which it went into secular decline.

Readers should be aware that our country has never re-captured the sugar peak year of 1971 when it produced 383,000 tonnes of sugar. For that matter, during the first decade after Independence, in only one year (1977) was sugar output ever less than 300,000 tonnes. In stark contrast we have never achieved this level of output in any year during the past two decades.

CARICOM: exporting and importing sugar

One other observation the discussion made is that CARICOM has also become both a sugar exporting and importing region. The region imports at times as much as 30 per cent of its regional production. It can therefore be claimed that here too high cost sugar is exported to preferential markets while cheap sugar is imported for domestic purposes! Our sugar imports include both raw and refined sugar. At present import levels of refined sugar, the region could sustain one refinery. The questions are: where should this be located? And, how should it be financed?