Regular readers would have noticed how repeatedly I have drawn attention to the role that serendipity seems to play in determining the timeliness and topicality of the subject matter that is covered in this series. When I had indicated several weeks ago that I would turn to a discussion of commodities, I had no expectation that spiralling crude oil prices would have provided such a perfect introduction to that discussion. This allowed me to spend the past five weeks on that topic while the level of interest was high because of almost out-of-control world events.

On the completion of that topic sugar was next in line for consideration, but once again little did I expect that the European Union (EU) would have let loose a bombshell proposal to 'reform' its sugar regime, which, because of its terms, has made headlines around the world and stirred considerable alarm in the region. The controversy this is generating again has again provided me with an excellent opportunity to impress upon readers the whole purpose of this series, which is to show that Guyana's location in the wider world is as important as any other set of conditions in shaping its future. While we are naturally pre-occupied with intense internal debates about whether the country can survive, let alone have a future, we should constantly locate these issues in the wider world. If we fail to do so, there is no prospect of a deeper understanding, which, as experience has shown, must precede effective and lasting solutions to any predicament or crisis.

As coincidence, luck, or serendipity would further have it, it was almost exactly two years ago to the day (from Sunday May 12, 2002 to June 23, 2002) that I carried seven successive weekly articles on sugar in the age of globalisation. These were presented under the caption: 'How sweet it is.' This time I have made a small addition to that caption.

As is the case with every topic within this series, readers need to start with a basic understanding, the ABC as it were, of the main configurations of the topic being addressed. I will therefore start this week with an identification of some of the key features of the global sugar market.

Sugar: world supply, demand, and prices

Starting with some basic supply, demand and price data, we observe for the crop year 2002-2003 that world output of sugar was 143 million metric tonnes. About three-quarters of this output normally comes from sugar cane (cultivated mainly in tropical climates), and the remainder from beet (cultivated mainly in temperate countries). The volume of sugar output has grown rapidly over the past six decades and more. Thus between 1940 and 1960, world output of sugar had doubled. And, between 1960 and 1990 it doubled again. Indeed, since 1990 output has increased by 40 percent. Of significance is the fact that because the absolute volume of output is so large, even modest percentage increases in sugar output add large absolute volumes to the amount of additional sugar needed to be produced. Thus every one per cent increase in output at the present level requires over 1.4 million additional metric tonnes of sugar output.

From this worldwide production, 47 million metric tonnes were exported in 2003, or about one-third of the total.

Sugar is produced in many countries, with the result that, unlike other commodities (such as oil which was considered earlier), production is not highly concentrated. Worldwide, the 5 leading producers account for about 45 per cent of global output of sugar and the top 5 exporters for about two-thirds of total exports. In the case of wheat and corn the top 5 countries account for 96 and 91 per cent respectively of production. Indeed, 19 sugar producers (of which 16 are developing countries) account for 85 per cent of global sugar production. The two leading exporters of sugar are Brazil (14.2 million metric tonnes in 2003) and the European Union with 6.1 million tonnes in the same year.

Global consumption of sugar per person is estimated at between 42-47 lbs. The range among countries is wide. In Africa and Asia it ranges between 30-34 lbs per person and in North America it is as high as 75 lbs. As we shall see later, sugar competes with many other sweeteners and this has been reflected in part in an increasing accumulation of sugar stocks. A decade ago sugar stocks were about 19 million metric tonnes worldwide. Today it is as much as 34 million metric tonnes, or about one-quarter of annual consumption.

The price of sugar on the world market has been on a downward trend. Last year it averaged about 7.5 US cents per lb, which was about the same as in 2002 (7.9 cents per lb). In fact for the five-year period 1999-2003, the world sugar price only averaged just fewer than 8 cents per lb, as compared to just fewer than 12 cents per lb in the previous 5-year period 1994-1998. While, as we shall see later, sugar prices have been quite volatile, the downward drift is unmistakeable.

Sugar market features

These data on supply, demand, and prices cannot be properly appreciated until one understands certain fundamental features of the world sugar market. First among these is that the sugar market is, by any standard, highly segmented, rigidly protected, heavily administered, and strongly penetrated with political and social factors, unlike any other global commodity.

The market is therefore exceedingly complex, since production, sales, consumption, and prices reflect the dynamic interlocking of both commercial and non-commercial elements. Second, sugar itself is a complex commodity on at least two main counts. One is that sugar is produced from both the sugar cane plant (tropical) and sugar beet (temperate). The other is that sugar is a sweetener and therefore competes with all other sweeteners, derived from both agricultural and industrial methods. Good examples are high-fructose corn syrup, produced from corn, and non-caloric sweeteners like saccharin and aspartame, which are industrially produced. As we shall see next week as we continue this discussion, competition from these alternative sources has grown dramatically in the period of globalisation.

When a market is not a true market: The world market for sugar

Need for caution

As we saw last week global output of sugar is huge, reaching as much as 143 million metric tonnes in 2003. In recent years about one-quarter to one-third of this amount has been exported. A significant share of these exports takes place under special trading arrangements such as that Caricom enjoys with the European Union (EU) and the United States. As a result the world free market for sugar is largely a "residual" or "remainder" market in relation to global production. This nature of the world market reflects the broad features of the global sugar industry itself, which as I described it last week are: "by any standard, highly segmented, rigidly protected, heavily administered, and strongly penetrated with political and social conditions unlike any other global commodity".

My purpose in making these observations is to encourage readers to be cautious when interpreting the reported price of sugar in the world market. As we saw over the past five years (1999-2003) that price has only averaged fewer than eight cents per lb. This value is one-third lower than that for the average of the five years, which preceded it (1994-1998). Indeed at some points in time during the past five years (e.g., during 2002) the price of sugar fell to as low as five cents per lb. This price is less than one-quarter the full cost of producing sugar in Guyana, and therefore raises many questions, which we shall be pursuing in the coming weeks. A key issue will be what store should be set on the world price. For today's article I continue to draw attention to certain important aspects of the world market for sugar, because this will have a bearing on how I evaluate the future of sugar not only in Guyana but the wider Caricom.

Residual and Volatile

Because the world's sugar market is a residual or remainder one, it is what analysts would describe as thin and highly volatile. That is, the market does not reflect fully the economic/commercial forces driving global supply nor the preferences and income shaping demand. This volatility is accentuated by the competitive nature of the sweetener market, of which the sugar market is one class among several other classes of sweeteners. As we noted last week there is even competition between sugars produced from beet and that from the sugar cane plant. And, because the former is produced in temperate climates and the latter in tropical and sub-tropical climates, the impact of weather on sugar output and costs, and therefore competitiveness is more demanding than other large-volume agricultural exports.

Among the other sweeteners sugar competes with, some are agricultural-based and others are not (for example, the non-caloric/non-nutritive or artificial sweeteners). The major competitor to sugar however is high fructose corn syrup (HFCS), which is produced from corn and is widely used in the production of soft drinks, other beverages, confectionary and foods, particularly in the USA, Canada, and to a lesser extent Europe. In Europe HFCS is referred to as isoglucose.

In the USA, HFCS output has grown from 6.6 million short tons dry weight in 1992 and is projected to reach 9.4 million short tons this year - an increase of about 40 percent. It is estimated that 20-35 percent of the growth in caloric or nutritive sweeteners is accounted for by HFCS. Partly as a result of the expansion in demand for sweeteners other than sugar, global demand for it has not been keeping pace with increases in world output, leading to the high level of sugar stocks that I identified last week.

All these situations conspire to put considerable downward pressure on sugar prices as well as to making that price highly volatile. As a commodity it is susceptible to many non-economic forces operating on its supply and demand. Furthermore, certain intrinsic features of the sugar industry itself seem to accentuate these effects. One of these is the large number of countries that produce it and therefore the highly varied economic, political, and social environments that impact on output. Another is the central role, which sugar plays in the food chain of countries and consequently the determination by governments not to put its availability and affordability at risk.

By-products and the sugar trading houses

The production of sugar yields an enormous volume of by-products. Consider for example that it takes as much as 10-14 lbs of the sugar cane plant to produce one ton of sugar, thereby yielding an enormous annual volume of biomass worldwide. Some of this is used for electricity (bagasse) but as we shall see later, there are many other uses. Other cane sugar by-products, such as molasses, are also high-volume products. Sales of these contribute to the total returns from sugar production and are an important consideration in the economics of the crop.

Because volumes are so large, transportation and storage costs are important factors as well in the economics of sugar production and sale. About 90 percent of sugar is transported by water, and because of the large volumes involved it follows that freight rates play an important role in fixing the price of sugar in the world market.