A tale of high costs: producing at a cost four times the 'commercial' price
Guyana and the wider world
By Dr Clive Thomas
Stabroek News
August 22, 2004
Last week's article examined factors related to labour, land and factory efficiencies, which have contributed to the decline of the regional sugar industry over the past few decades. This week I shall conclude this discussion and then address the cost of producing sugar in the region. This cost has a direct bearing on our intended goal, which is to evaluate the impact of the crisis facing the regional sugar industry as posed by the threats to 1) the European Union (EU) sugar regime and 2) the persistent low price of sugar in the world market. Any threat to the EU sugar regime is directly translated into a threat to the Sugar Protocol between the EU and the African-Caribbean-Pacific (ACP) group of countries, under which, as we saw, Caricom sells more than three-quarters of its sugar exports.
Management, financing and the decline of sugar
While we have so far addressed labour, land and factory issues, the poor quality of management and lack of financing have also played major roles in the disintegration of the regional sugar industry. Several reports, industry commissions and other analyses have confirmed this, highlighting the negative contributions of poor management and poor information and data management systems. The incentive and regulatory framework through which the industry operates has been particularly weak, especially in key areas such as land administration, land use, labour productivity and labour payments. The linkage between reaping and processing has been adversely affected by delays in reaping the sugarcane on schedule, delivering it to the mills on schedule, and having it milled on schedule. This has increased what is termed in industry circles as the 'kill-to-mill time,' which in turn has adversely affected the quality of the cane at the time of processing and has thereby contributed significantly to the increase in the amount of sugar cane required to produce a given amount of sugar.
In countries where a significant portion of the sugar cane is cultivated by small farmers for processing at central factories owned by other interests, the incentive and regulatory system has inhibited the growth and efficiency of peasant cane farming. Disputes and conflicts over the price paid for farmers' cane are the norm, hampering the smooth linkage of field and factory operations.
In a similar vein financing for the industry has been hard to come by as profit levels have dramatically declined. Throughout the industry, there is evidence over the years of reduced maintenance, reduced investments in research and development (R&D), and reduced funds available for new plant and modernisation of the industry. Public subsidies of one kind or another have been found necessary in several instances, just to keep the industry afloat - let alone rehabilitate, modernise and expand operations. Furthermore, funds have been available only through debt financing guaranteed or provided by the government or obtained by pledges against future sales and prime assets under control of the industry. Equity capital has been impossible to come by, and reliance on debt financing has consequently added a significant cost to the operations of the industry. As this has occurred, those industries that are operated under management contracts have had the added burden of carrying the cost of these contracts in which payments are sometimes made in a manner unrelated to the financial profitability of the industry. Indeed, despite the stake some management companies have in the industry worldwide (eg Booker-Tate), they distinguish themselves by holding little or no equity in the regional industries where they have had management contracts.
Reduced throughput and increased cost
The substantial decline in regional sugar output has obviously affected the average cost of producing sugar in the six remaining sugar-producing territories in the region. In recent years the weighted average cost of producing sugar in Caricom has been over 29 US cents per lb. This figure is more than four times the Contract No. 11 annual average price of sugar on the world market for the years 1999-2003.
The range in the cost of production is enormous - from about 16 US cents per lb in Belize, the region's lowest cost producer of sugar, to 55 US cents per lb in Trinidad and Tobago. In Guyana the cost of producing sugar has been in recent times about 21 US cents per lb. In Jamaica the cost has been twice that of Belize (about 32 US cents per lb) and it is even higher in Barbados (39 US cents per lb) and St Kitts and Nevis (45 US cents per lb). Several of these costs are so high that they exceed the protected price of sugar obtained under the EU-ACP Sugar Protocol.
To smooth these figures, in the event readers may feel that there are wide annual fluctuations in the cost of production, I have calculated the average cost of producing sugar in each country for five crop years (1995/96) to (2000/01). The information gathered has revealed that Belize was still the lowest and Trinidad and Tobago the highest cost producer of sugar. The range was from 16 US cents per lb in Belize (the same as given earlier) to 48 US cents per lb in Trinidad and Tobago (about 7 US cents lower). Guyana's average cost of production was still 21 US cents per lb. Jamaica's average cost of production was also virtually the same (31 US cents per lb), as was Barbados' (38 US cents per lb). In St Kitts and Nevis the cost was lower by 3 cents as it averaged 42 US cents per lb.
A breakdown of costs shows that in Guyana field costs account for about 62 per cent of total costs (13 US cents per lb), factory costs about 14 per cent (3 US cents per lb) and the remaining or 'other' costs about 24 per cent (5 US cents per lb). Belize's decisive advantage comes from having by far the lowest field costs for producing sugar (8 US cents per lb), as Guyana is competitive with that country in factory and 'other' costs.
Despite substantial cost differences and the decisive advantage of Belize, none of the territories can at present be classed as a low-cost producer or exhibit confidence that it can be made competitive, selling at prevailing world prices. In order to continue production, export sales will have to concentrate on existing preferential markets, regional markets, and the domestic market.
Herein, however, lies the dilemma the industry faces, as its main preferential market is under direct threat from several quarters. We shall examine this situation next week.