Guyana's sugar will survive current problems
By Rajendra Rampersaud
Stabroek News
May 21, 2004
The current trends in the international environment definitely put sugar at the crossroads. Its success depends on the policies that must be put in place to ensure the sustainability and development of the industry. In the region, Guyana is blessed with the natural endowment factors for sugar production such as seasonal rainfall, sunshine, good soil quality, especially in East Berbice, low cost production method, and the promptness with which the cane could be delivered to the factories. The high value cane with a lower fibre but higher sucrose content and juice purity can only be produced in certain regions in Guyana. These natural endowments blended with the correct policies will make Guyana's sugar highly competitive with a quality crystal product. Once this is done neither the threat of liberalisation nor the death of preferences can stop Guyana's sugar as a premium product in any market.
The restructuring and modernisation of the sugar industry in Guyana to reduce the cost of production is a step in the right direction. Guysuco, in its ten year strategic plan, is targeting the lowering of unit cost of production from US 17 cents to US 9 cents per pound. This would make Guyana's sugar highly cost competitive with Brazil, being the lowest cost producer at US 8.6 cents per pound. It however, should be noted that Brazil only became a low cost producer after the Brazilian Real was devalued by 65% in 1998. Additionally, a US$4.5 billion loan from the Bank of Brazil to modernize the sugar industry had to be restructured and rescheduled. The sugar industry had easy access to credit from the Sugar and Alcohol Institute Export Fund that financed the alcohol fuel programme and former assistant US Secretary to the Treasury, Donald Larson, argued that several Brazilian firms remained burdened by this programme to provide easy credit access to sugar.
The present average recovery rates in Guyana's sugar factories is low at 78%, even below the Caribbean average which stands at 80%. But new investments, along with updated diffusion technology, will see the recovery rates rising to between 85 - 90% in Guyana (LMC International 1999). This will facilitate better yield and higher ton cane per ton sugar (TC/TS) in Guyana. The playing field in sugar is not level given the low investment in sugar since nationalisation in 1976.
The marketing prospect for Guyana's sugar is even more promising especially in the Caribbean, with most of the higher cost producers exiting the market. Raw sugar exports to the Caribbean now range between 55,000 to 60,000 tons but there is an even more lucrative prospect to capture the 160,000 ton Caricom market in refined sugar. Trinidad presently sells refined sugar at a cost of US$390 per ton. However, former Guysuco Chief Executive, Brian Webb (2002) argued it would cost Guysuco only US$240 per ton to produce refined sugar at the new Skeldon factory. He further contended that the container rate for shipping refined sugar to the Caribbean is US$110 from extra regional sources while Guysuco's container rate will be around US$25 to US$30. Presently raw sugar is resold at US$600 per ton and white sugar at US$750 per ton at the retail level in Caricom. There is also the prospect of exporting between 30,000 to 40,000 tons of packaged sugar. Guyana can also increase its market share in the USA especially among the large West Indian communities in the middle income bracket who have a preference for nostalgic products. Guyana has a competitive freight advantage over the Dominican Republic and the Philippines to the US and is presently the largest source of sugar exports to the United States. However, it would be better to await the outcome of the FTAA process before further analysis is done on this market.
Sugar from sugar cane is cost competitive when compared to both beet and corn syrup in the sweetener market. The average cost of producing cane sugar by major exporters in the 1998-1999 period was 10.39 cents per pound while that of refined cane sugar was 14.25 cent per pound. Refined sugar from beet cost an average 25.31 cents per pound - 78 per cent more than refined cane sugar. Corn syrup production cost 14 cents per pound due to easy access to cheap corn dumped at world market price. The Institute of Agricultural and Trade Policy (IATP) analysis in 2001 reveals the cost of producing corn in the US averages US$3.41 a bushel but is dumped at US$2.28 on the world market.
Transportation and storage are expensive for artificial sweeteners and send up the cost for users. Corn syrup can only be consumed close to its production centres, which gives cane sugar an advantage with its longer shelf life. Moreover larger investment is needed as start up capital for corn syrup production.
While it will be naive to think that the sugar market would be totally liberalized by the next trade round even under such assumption Guyana's sugar can hold its own. Borrell (1999) estimates that under such a scenario the world price for sugar will rise by 44%, which when calculated at the ridiculous 12-year world market average price of US$254 per ton would give a new world market price to US$366 per ton. This is a price on which Guyana's sugar can survive. In a fully liberalized environment both beet and corn syrup market share will be further eroded. A fully liberalized market will cost Brazilian consumers around $1 billion a year due to a rise in sugar prices (Borrell and Pearce 1999). Borrell further argued that the global gains from total liberalization of sugar will be as high as US$6.3 billion a year in an annual global market of US$56 billion at the wholesale level. Sugar is currently the major sweetener accounting for 92 per cent of world market sales with corn syrup making up the remainder. Despite the high level of protection sugar is still among the largest commodities traded in the international market.
There is the tendency to use the fictitious world market price of sugar as the benchmark to determine the future of sugar even though more than 90 per cent of the world's sugar is never traded on that arrangement.
Many times the real value extracted from sugar, especially its by-products such as rum, molasses and energy, are hardly factored in the overall process. And co-generation using bagasse is now becoming a special niche product in the world clean energy programme. Sugar production provides both backward and forward linkages for industries and the service sector in Guyana. The new sugar factory at Skeldon is expected to not only produce sugar but quality rum with a new and modern distillery, as well as generate 30 megawatts of electricity from bagasse.
Even though the prospects for sugar are brighter than some of the detractors would like us to believe, this does not leave any room for complacency. Less than a decade ago bananas faced a similar challenge but the Caricom region at the time failed to read the writing on the wall. Today, similar writing can be seen in bold block letters "IF BANANA COULD SPLIT THEN SUGAR COULD BE BITTER."It is sad to say that Caricom has consistently been caught on the back foot, unable to determine the pace of liberalisation, even though there is a threat to the preferential sugar arrangements. What is important to note is that Brazil, Australia and Thailand faced similar threats in the past which forced them to restructure and modernise their industries which now give them the leverage to jump-start the liberalization process.
I have seen enough evidence to determine that Guysuco's decision to restructure and reorganise the industry under its ten year plan is the best available option. Professor C. Y. Thomas stated, "Most studies indicate there is no other large scale crop that is more efficient than sugar as a net foreign exchange earner, and its - "Domestic Resource Coefficient (DRC) is superior to all available alternatives at this point in time in the region" (Stabroek News 5/2002).
Having provided a short review of the sugar policies and regimes in a select group of countries, it is only reasonable to conclude that sugar will be the most complicated of the products that will have to be discussed in the next trade round. However, the multilateral approach with the active participation of all interested parties is the only way toward finding a lasting solution on sugar. In this regard the WTO is the best forum for such a discussion. The WTO, even though part of the iron triangle, is far more democratic than its sister organisations and offers more of a rule based rather than power based solution to trade issues.
The National Trade Strat-egy for Guyana by Dr Craig Van Grasster made it explicitly clear "that benefits of the trading system depend more upon the ability of the negotiators to exercise their bargaining po-wer than the appeals that they make to 'generosity'." He further stated that "Benefits are only won through hard bargaining which in turn require that countries devote the institutional resources and political capital needed for real negotiations."
Let me conclude by stating once more that future negotiations on sugar will be bitter; tedious and long and drawn-out but I have little or no doubt that the final outcome will eventually be sweet.