The World Sugar Market

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The world sugar market

The world sugar market Sergey Gudoshnikov, Lindsay Jolly and Donald Spence Published in association with the International Sugar Organization

Cambridge England

Published by Woodhead Publishing Limited, Abington Hall, Abington Cambridge CB1 6AH, England www.woodhead-publishing.com Published in North America by CRC Press LLC, 2000 Corporate Blvd, NW Boca Raton, FL 33431, USA First published 2004, Woodhead Publishing Ltd and CRC Press LLC © 2004, Woodhead Publishing Ltd The authors have asserted their moral rights. The authors’ names have been listed alphabetically. This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. Reasonable efforts have been made to publish reliable data and information, but the authors and the publishers cannot assume responsibility for the validity of all materials. Neither the authors nor the publishers, nor anyone else associated with this publication, shall be liable for any loss, damage or liability directly or indirectly caused or alleged to be caused by this book. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming and recording, or by any information storage or retrieval system, without permission in writing from the publishers. The consent of Woodhead Publishing and CRC Press does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obtained in writing from Woodhead Publishing or CRC Press for such copying. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging in Publication Data A catalog record for this book is available from the Library of Congress. Woodhead Publishing ISBN 1 85573 472 9 CRC Press ISBN 0-8493-3208-7 CRC Press order number: WP3208 The publisher’s policy is to use permanent paper from mills that operate a sustainable forestry policy, and which have been manufactured from pulp which is processed using acidfree and elementary chlorine-free practices. Furthermore, the publisher ensures that the text paper and cover board used have met acceptable environmental accreditation standards. Typeset by SNP Best-set Typesetter Ltd., Hong Kong Printed by TJ International, Padstow, Cornwall, England

Contents

Foreword ix Preface

xi

About the authors List of figures

xiv

List of tables

xvii

xiii

PART I OVERVIEW

1

History and cultivation

2

The world sugar economy today

3

World sugar prices

3

Donald Spence History 3 Cultivation 17

22

Sergey Gudoshnikov Demand 22 Price dynamics 27 Supply 28 Political environment 32 Conclusions 34 References 35

Lindsay Jolly Long term trend Volatility 41

36

37

v

Contents

Booms and busts 49 Prices and the stocks to consumption ratio 51 Investigating sugar price seasonality: 1980–2000 53 Conclusions 59 References 60

4

Futures markets

5

Alternative sweeteners

61

Donald Spence History 61 Current contracts 63 Options 68 Uses of the futures markets 69 Forecasting techniques 73 Regulation 74

Donald Spence Natural sweeteners 78 Manufactured sweeteners Outlook 87

76

81

PART II DEMAND

6

Consumption

7

Import demand

91

Lindsay Jolly An historical perspective 91 Regional consumption drivers 97 Drivers of alternative sweeteners 103 Conclusions and outlook 107

109

Lindsay Jolly Key features 110 Regional dynamics 111 Dynamics of pivotal players 115 Drivers for the future 125 Conclusions 128 PART III SUPPLY

8 vi

Sugar production Sergey Gudoshnikov Low supply response to world prices 133 Weather: a key short term production driver

133

136

Contents

Long term trends in sugar production Cost of production of sugar 144 Conclusions and outlook 148 References 149

9

140

Exports

151

Sergey Gudoshnikov Concentration of exports and special role of Brazil 151 White, raw and crystal sugar 155 How important is the world market for exporters? 159 Preferential exports 162 Conclusions 169 References 169 PART IV THE FUTURE

10

Government policy

11

Sugar crops for biofuels and other emerging drivers

173

Lindsay Jolly The Uruguay Round experience relating to sugar 176 Multilateral reform under the WTO Doha Round 181 Unilateral reform pressures 187 Regional trade agreements 212 Conclusions 225 References 226

228

Lindsay Jolly Gene technologies to drive cost competitiveness 228 Environment policy 229 Sugar crops for biofuels 230 Commercial viability 233 Fuel ethanol programmes: state of play 246 Implications for sugar 255 Conclusions 259

12

Prospects in major exporters and importers

261

Sergey Gudoshnikov Australia 261 Brazil 263 China 266 Cuba 268 European Union 269 vii

Contents

India 271 Indonesia 274 Japan 276 Russia 278 Thailand 282 USA 284 References 286

13

World market perspectives

288

Sergey Gudoshnikov and Lindsay Jolly Low world prices: the main characteristic of the current market 288 Developing a market view to 2010 289 Overall view of the market to 2010 and beyond 296 Annex: what others are saying 297

Appendix I: current issues in sugar and health

305

Sergey Gudoshnikov The 1998 WHO/FAO report: ‘Carbohydrates in Human Nutrition’ 306 The 2003 WHO/FAO report: ‘Diet, Nutrition and the Prevention of Chronic Diseases’ 309 References 310

Appendix II: international sugar agreements Sergey Gudoshnikov The 1992 International Sugar Agreement References 314 Index

viii

315

313

311

Foreword

The World Sugar Market is the continuation of a trusting, fruitful and successful cooperation between Woodhead Publishing and the International Sugar Organization (ISO) as a copublisher. The last jointly produced book on the international sugar trade, published in 1996, became a veritable textbook, achieving extremely positive feedback, and a remarkable sales record. Over the last years the world sugar economy has experienced dramatic and drastic change in terms of industry restructuring, market differentiation and trade flows, mainly induced by rapidly progressing privatization, globalization and direct foreign investment, in a very competitive environment. At the same time sugar still remains a highly political commodity. What has not changed, however, is the ISO’s unwavering commitment to remain a centre of excellence and a competent service provider of comprehensive information to our member countries in particular and to the global sugar community in general. In 2001 the ISO adopted a new strategic direction, with the objective of maintaining and strengthening its role as the only worldwide intergovernmental organization dedicated to improving the conditions of the world sugar market. This new approach focuses on balanced, objective, first class economic research, market analysis and statistics, centring on the key drivers impacting on the world sugar market: demand, supply, government policy and new emerging drivers, e.g. biofuels, cogeneration, environment and gene technology. The new book clearly mirrors, in its structure and content, this new strategic concept. Those key drivers will continue to manifest significant change ix

Foreword

in the world sugar market; therefore without a clear understanding it will be impossible to develop strategies to cope successfully with the future challenges. Together with the annual ISO Sugar Yearbook, our regular publications and studies, as well as our international workshops, seminars and forums, this book, by analysing and explaining the complexities of the world sugar market, will contribute markedly to a deeper understanding for all parties interested and involved in sugar matters such as beet and cane growers, millers, refiners, traders, consumers, government representatives, politicians, students and the media. Dr Peter Baron Executive Director International Sugar Organization January 2004

x

Preface

Since the first book on sugar in the publisher’s series (The International Sugar Trade by A C Hannah and Donald Spence) was released in 1996, the world sugar market has undergone fundamental change. Indeed, over the past decade the key economic and policy drivers have created a new regional distribution of sugar production that has impacted the price-finding process as well as changed the type of sugar on offer to the world market. The key drivers have led to world export growth concentrated in countries with the lowest costs of production. Brazil has become the dominant supplier whilst Cuba’s production has collapsed to the preWorld War I level. On the import side, Russia has taken first position in the league of the world’s leading raw sugar importers whilst several regional instability in import demand has emerged as several countries have begun to liberalize their sugar and sweeteners sectors. Furthermore, the world market has been blighted by a structural surplus that has seen stocks rise to historic highs and the world price fall to a level below the production costs of some of the most competitive exporters. In this book the focus is on identifying, describing and assessing the key drivers and their future potential to impact the world sugar market. While trying to avoid overlapping, each chapter is constructed to be a self-contained essay on the subject matter, so the book can serve equally as a reference on specific topics as well as an overview of the world sugar and sweeteners economy. The book is thus aimed at a wide audience, from the specialist looking for more background information to newcomers wishing to gain a general impression about the current state of play and future of the world sugar market, as well as students and the general public in search of an introxi

Preface

duction to the fascinating world of sugar economics and politics. The book is published in association with the International Sugar Organization, whose statistics and studies are used extensively throughout. Part I provides an overview of the market, covering the history of sugar production and consumption and the cultivation of beet and cane, as well as a discussion of the current state of the market for sugar and alternative sweeteners. Part II deals with identifying, describing and assessing the key market drivers – both economic and political – for sugar demand. Part III presents a similar analysis for sugar supply. Finally, Part IV is dedicated to the future of the sugar market, assessing the potential for and consequences of changes to government policies, as well as identifying emerging drivers. The appendices are dedicated to comments on sugar and health, and international sugar agreements. The authors would like to acknowledge with gratitude the contribution and patience of Neil Wenborn, consulting editor of Woodhead Publishing Limited. Sergey Gudoshnikov Lindsay Jolly Donald Spence

xii

About the authors

Sergey Gudoshnikov is a senior economist with the International Sugar Organization, London, United Kingdom. Twenty-five years of his professional career have been dedicated to the world sugar market. From 1978 to 1988 he worked as a sugar trader and deputy director of the Sugar Department of V/O Prodintorg, Moscow. In 1988 he joined the Secretariat of the International Sugar Organization, London as an economist. He has published many articles on different aspects of the world sugar economy with a particular emphasis on the sugar markets of Eastern Europe and the former Soviet Union. Lindsay Jolly is a senior economist with the International Sugar Organization, London, United Kingdom. His main areas of specialization are economic and policy analysis of the world sweeteners, molasses and biofuels markets. He has a wide experience in economic research into commodity markets, having previously been employed at the Australian Bureau of Agricultural and Resource Economics in Canberra, Australia (1982–90 and 1992–95), and the Food and Agriculture Organization of the United Nations in Rome, Italy (1990–92). He has published articles on a wide range of issues related to the world sweeteners market and fuel ethanol from sugar crops. Donald Spence has been associated with the sugar market since the reinstatement of futures trading in 1957. As one of the original floor traders he played a part in establishing the market and helping it evolve into the truly international arena that it is today. In 1980 he joined E D & F Man where he was chiefly engaged in research. He now writes extensively on commodities, futures and options and related topics. xiii

Figures

2.1 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 xiv

Changes in world sugar consumption: 1985–2002. Structure of world sugar consumption: 1990–2002. Structure of world sugar imports: 1990–2002. Distribution of world imports between raw and white sugar: 1992–2002. World market sugar prices: 1991–2003. World sugar production: 1991–2002. Nominal annual raw and white sugar prices. Nominal and deflated raw sugar prices. Monthly world sugar prices, nominal and deflated (2002 = 100). The value of the SDR against the US dollar. Nominal raw sugar prices expressed in US dollars and SDRs. Nominal unadjusted raw/white price differential (annual averages). Nominal raw sugar prices. Real raw sugar prices. Monthly world sugar prices. Monthly ISA price. Raw sugar prices as against other commodities. Cycles in real raw sugar prices. Real raw sugar prices and the stocks to consumption ratio. Stocks to consumption ratio and the real raw sugar prices, 1952/53 to 2001/02. Box plot ISA prices: 1980–2000. Box plot ISA prices: 1982–2000.

23 23 23 25 27 29 37 38 39 39 40 41 42 42 44 48 48 50 52 53 54 55

List of figures

3.17 4.1 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14 6.15 6.16 6.17 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14 7.15

Seasonal factors: X-11. White sugar premium basis London daily price (1986–96). World sugar consumption. Sugar consumption and population: world. Per capita consumption of sugar by region. Annual average growth in per capita income: 2000–2012. World sugar consumption: 1955–2002. Global sugar consumption: decade average annual growth. World sugar consumption by region. Growth in world sugar consumption by region 1990–2002. Sugar consumption and population: Asia. Sugar consumption: Europe. Sugar consumption and population: Europe. Sugar consumption and population: Africa. Sugar consumption and population: South America. Sugar consumption and population: Central America. Sugar consumption and population: North America. Regional sweetener shares: 2000. Per capita sugar consumption and income growth in Asia. World sugar imports. World sugar imports as a proportion of world sugar consumption. Major sugar importers. World sugar imports by region. Share of developing countries in world sugar imports. Raw vs white sugar imports. Pivotal raw sugar importers: Europe. Pivotal raw sugar importers: North America. Pivotal raw sugar importers: Far East. Russia’s sugar imports. United States: projected total imports. United States: projected imports from Mexico. The raw/white differential. Indonesia’s sugar imports. Imports into China.

58 71 92 92 94 95 96 96 97 97 98 99 99 100 101 101 102 104 106 110 110 111 112 113 115 116 116 117 117 119 120 123 125 126 xv

List of figures

8.1

World sugar production and consumption: 1986–2002. 8.2 Changes in world sugar production and ISA prices. 8.3 Sugar production in China. 8.4 Sugar production in Brazil. 8.5 Sugar production in Australia. 8.6 Sugar production in the EU 15. 8.7 World sugar production by regions. 8.8 Growth in sugar production in Europe: 1985–2001. 9.1 Brazil’s sugar exports: 1990–2002. 9.2 Brazil – relative profitability of ethanol production (anhydrous ethanol) for domestic market as against sugar exports: May 1999–October 2003. 9.3 Product structure of world sugar exports (average for 1999–2001). 9.4 Brazil and Thailand: annual changes in raw sugar exports. 10.1 OECD producer support estimates. 10.2 US and world raw sugar prices. 10.3 US and world white sugar prices. 10.4 Second tier duties for US sugar imports. 10.5 White sugar base tariff and safeguard duties 1999/2000. 10.6 Regional trade agreements and sugar. 11.1 Sugar vs oil quotations. 11.2 Alcohol vs sugar. 11.3 Brazil: value of cane for different uses. 11.4 Ethanol costs by component: molasses feedstock. 11.5 US Gulf unleaded regular gasoline waterborne barges. 11.6 Spot crude and product prices. 11.7 Biofuels in Europe: 2001. 11.8 US ethanol production capacity. 11.9 US: monthly fuel ethanol production. 11.10 Brazil’s sugar production and exports.

xvi

134 135 137 138 138 139 141 143 152

153 156 159 175 191 191 194 199 215 232 234 235 237 241 242 246 248 249 255

Tables

Table 1.1 Table 1.2 Table 1.3 Table 1.4 Table 1.5 Table 1.6 Table 1.7 Table 1.8 Table 2.1 Table 2.2

Table 2.3 Table 2.4 Table 2.5

Table 2.6

Table 3.1

Approximate growth of cane production in the Caribbean area and Brazil (tonnes) Cane sugar production in 1800 (tonnes) Beet sugar production 1840–80 (000 tonnes) Total world sugar production from 1800 (000 tonnes, raw value) World per capita consumption from 1900 (kg, raw value) Growth of per capita sugar consumption World’s highest consumers in 2002 (kg per capita per annum) World’s lowest consumers in 2002 (kg per capita per annum) Imports by selected destinations: 1992–2002 (million tonnes, raw value) Changing structure of import demand: world’s largest importers, 1992 and 2002 (000 tonnes, raw value) Sugar production in selected countries (000 tonnes, raw value) World’s largest sugar exporters Changing structure of export supply: world’s largest exporters of raw and white sugar, 1992 and 2002 (000 tonnes, raw value) Summary of special arrangements and their market share in 1991 and 2001 (million tonnes, raw sugar) Basic statistics: sugar (2002) prices by decade

5 6 7 10 12 13 14 14 24

26 30 31

31

33 43 xvii

List of tables

Table 3.2 Table Table Table Table Table Table Table Table

3.3 3.4 3.5 5.1 6.1 6.2 7.1 7.2

Table 8.1 Table 8.2 Table 8.3

Table 9.1 Table 9.2 Table 9.3 Table 9.4 Table 9.5 Table 9.6 Table 10.1 Table 10.2

Table 10.3

Table 10.4 Table 10.5

xviii

Average level of real prices during observed cycles Summary statistics ISA: 1980–2000 Summary statistics ISA: 1982–2000 X-11 method seasonal index, 1982–2000 HFS production (000 tonnes, dry basis) World population projections Global sweeteners consumption New refining capacities (000 tonnes) Top 15 importers of white sugar, 2000–02 average (million tonnes, raw value) Sugar production and consumption in different economic groups (million MTRV) Cane and beet sugar production (average, million MTRV) Average cost of production by selected category of producers (US cents/lb, ex mill factory basis) Top five exporters of sugar (average for 1999–2002) Comparative quality-parameters of raw and white sugars Cane-sugar producers: raw and white sugar exports (000 MTRV, average for 1999–2001) Net exports to the free market as share of sugar production (%, average for 1998–2002) Preferential sugar quotas for ACP and India (000 tonnes) US raw sugar imports under the TRQ for fiscal 2002 (000 tonnes, raw value) Commitments under the Uruguay Round Agreement on Agriculture (%) Tariff commitments for the 10 largest sugar exporters of the GATT signatories (1992–94 period) Tariff commitments for the 10 largest sugar importers of the GATT signatories (1992–94 period) Commitments on minimum access (tonnes, raw value) Export subsidy commitments for sugar (000 tonnes)

50 56 57 58 80 93 104 124 124 144 145

148 152 157 158 161 163 167 177

178

178 179 180

List of tables

Table 10.6 Table 10.7 Table 10.8 Table 10.9 Table 10.10 Table Table Table Table Table Table

10.11 10.12 10.13 11.1 11.2 12.1

Table 12.2 Table 12.3

Table 12.4

Table 12.5

Table 12.6

Table 12.7

Table 12.8

Table 12.9

Table 12.10

Table 12.11

EU safeguard duties for imported raw sugar (for refining) EU safeguard duties for imported white sugar The EU current import regime Agreed EBA export quotas (tonnes, white value) Sugar production quotas for the EU candidate countries (000 tonnes, white value) Major trade pacts Major free trade agreements and sugar Sugar in the FTAA: 2000/01–2002/03 average Ethanol production cost estimates Ethanol production costs in Germany Australia: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Brazil: production of cane, sugar and ethanol Brazil: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) China: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Cuba: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) EU: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) India: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Indonesia: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Japan: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Russia: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Sugar import regulations in Russia

198 198 200 203 206 214 216 223 238 240

262 264

266

266

269

271

272

274

278

279 281 xix

List of tables

Table 12.12

Table 12.13

Table 13.1 Table 13.2 Table 13.3

xx

Thailand: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) USA: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) World stock projections: 2000–2008 World sugar projections (in raw sugar equivalent) FAPRI baseline projections: 2002–2013

284

285 298 300 302

P A R T

I

Overview

C H A P T E R

1

History and cultivation

History PRODUCTION

The evolution of sugar into the nutritious and plentiful plant of today took a long time. It is now widely assumed that the natural home of sugar cane is the Polynesian islands of the South Pacific where it is believed to have existed as long ago as 2000 BC. It was well known in India a thousand years later and in Persia around 500 BC. One of Alexander the Great’s generals came across it in Persia and called it ‘the reed which makes honey without bees’. From around 100 BC it was introduced into China and other Far Eastern countries and by AD 100 the art of sugar making was well advanced throughout those areas. Hitherto, the only source of sweetness was from honey; for instance, bees are often found amongst the hieroglyphics that surround Egyptian tombs, signifying that the person, when alive, kept them. Later, the armies of the prophet Mohammed also found sugar in Persia whilst waging a holy war designed to convert the whole world to Islam in about AD 630. It was quickly introduced to all the surrounding countries within the prophet’s sphere of influence and spread to the north coast of Africa, eventually reaching the western end of the Mediterranean. At this time it was known as the Persian reed and the production of sugar from it was very primitive. It involved a blindfold and tethered mule or ox walking in a circle, driving a vertical grinding mill to crush the cane. The juice was then evaporated, by boiling, to leave a mixture of crystals and syrup. It did not keep very long 3

The world sugar market

and could not be stored. This method is still used in parts of India and elsewhere. Almost five hundred years later, in 1100, the first samples of the Persian reed reached Britain, brought back by the returning Crusaders. However, it was not until the early fourteenth century that it started arriving in sufficient quantities to be widely available. The first regular trade in sugar to Britain began in 1319 when some Venetian traders started regular shipments. Shipments were erratic and it was also very expensive and therefore out of the reach of all but the richest. One of the earliest mentions of sugar in Britain was in 1226, when the Mayor of Winchester held a banquet for King Henry III. The Mayor was charged to provide ‘three pounds of Alexandrian sugar, if so much is to be found’.1 By about 1500, sugar cane had become widely known, extensively cultivated and actively traded south of the 35th parallel. Often grown as a garden plant, it was also used as a medicine. The Dutch East India Company began shipments from Java and nearby countries to Europe from about 1615. Sugar cane was first introduced to the New World by Christopher Columbus, who took some Canary Islands plants on his second voyage in 1493. It quickly flourished all over the Caribbean, which was known as the Spanish Main at that time. Following Britain’s acquisition of many Caribbean islands in the middle of the seventeenth century, the industry continued to grow and sugar soon became an important export to Britain and elsewhere. There was a large demand for it since, up to then, the quality of sugar in Europe was very bad; most of it came from Morocco and it was frequently unusable. This severely restricted consumption growth and led to widespread complaints to the government. Approximate growth of cane production in the Caribbean area and Brazil is shown in Table 1.1. By 1700, things had greatly improved; both Britain and France were actively encouraging the planting of new stronger variations and strains of cane from both the Mediterranean and the Far East. The cultivation of sugar cane is very labour intensive but first efforts to get a viable workforce of foreigners to work in the Caribbean were not a success. These foreign workers were mostly prisoners of war captured at the Battle of Sedgecombe Moor in England who were sent out as ‘indentured servants’ (slaves) to work in the fields. However, the climate proved their undoing and, in any 1 Hugill A, Sugar and All That: A History of Tate and Lyle, Century, London, 1978. 4

History and cultivation Table 1.1 Approximate growth of cane production in the Caribbean area and Brazil (tonnes) 1750

1770

1790

Cuba

NK

NK

17,000

Jamaica

25,000

40,000

61,000

St Dominique (Haiti)

30,000

60,000

80,000

Leeward Islands

20,000

20,000

20,000

Windward Islands

NK

21,000

30,000

Brazil

20,000

20,000

21,000

Suriname

8,000

6,000

9,500

British Guiana

NK

3,500

NK

Notes: Totals are approximate and have been rounded. NK = not known. Sources: Noel Deerr, ISO.

case, they proved very undisciplined and unreliable and many absconded. Indentured servants were time-serving white slaves, many of whom had volunteered in addition to the prisoners of war, indentured to work for a fixed term, often four years. At the end of that period they were free to start a new life and many became very successful. The grandchildren of some of these workers had become the first sugar millionaires by the mid-eighteenth century. Spanish and Portuguese workers sent out by France also absconded and set up shops. The answer to the labour shortage came from another source, from West Africa. These slaves were shipped to the West Indies in their thousands in the most appalling conditions, although, to be fair, many of the sailors were also indentured and their conditions were only marginally better. On arrival, the slaves were worked literally to death. A flourishing three-way trade developed with shipments of textiles, brass pots and iron ore from England and France being shipped to West Africa and bartered for slaves and gold dust which were taken to the West Indies, from where sugar and rum were shipped to Europe. The success of this trade essentially altered the pattern of production around the Mediterranean. Apart from Egypt and parts of Spain, sugar production had disappeared completely by the end of the eighteenth century. Between 1690 and 1790, some 12 million tonnes of sugar cane were shipped to Europe from the western hemisphere but by the 5

The world sugar market Table 1.2 Cane sugar production in 1800 (tonnes) Java Mauritius Cuba

6,000 3,000 29,000

Jamaica

71,000

Leeward Islands

17,000

Windward Islands

24,000

Mexico

16,000

Brazil

21,000

Peru

7,500

Suriname

7,500

end of the eighteenth century, the Napoleonic wars again altered the situation considerably. The superiority of the Royal Navy successfully blockaded all European ports, effectively preventing any goods from reaching them. By now, the consumption of sugar was widespread and the cost had fallen to such an extent that it was within the grasp of virtually everyone. The wars, however, quickly reversed that trend and the shortages prompted a public outcry. Cane sugar production in 1800 is shown in Table 1.2. Shortages led to the arrival of sugarbeet. About 50 years earlier in 1748, a German scientist, Andreas Sigismund Marggraf, became the first person to discover the presence of sugar in the red and white beet plants. Not being a businessman, Marggraf failed to recognize the commercial implications of his discovery and it was left to Franz Carl Achard to follow it up. By 1799 Achard’s experiments had advanced sufficiently to persuade King Frederick William III to build, at his own expense, a beet factory in Silesia, which opened in 1801. Europe’s first commercial sugarbeet factory had been built two years earlier in Bohemia in Austria-Hungary. This failed for lack of business acumen. However, by this time, several others had started up and were actively engaged in production. It had also spread to other countries, notably France, where, by 1811, thanks to official action and encouragement, a thriving industry had been established. Napoleon decreed that French farmers grow sugarbeet and by 1813 there were over 300 factories in operation, providing some 7.7 million lb of sugar. However, the Treaty of Paris in 1814 reopened French ports to colonial sugar, causing the temporary collapse of the industry throughout most of Europe. Nevertheless, it revived from about 1830 and by 1850 there 6

History and cultivation Table 1.3 Beet sugar production 1840–80 (000 tonnes) 1840

1850

Austria-Hungary

1860

1870

1880

4

17

77

213

533

France

30

76

101

282

331

Germany

14

53

127

263

594

Russia

NK

13

26

125

304

Note: NK = not known. Sources: Noel Deerr, ISO.

were thriving industries in France, Germany, Russia and AustriaHungary; see Table 1.3. In Britain, however, attitudes were somewhat different. Powerful vested interests both at home and abroad were extremely hostile to any advancement in beet technology as they saw it as a threat to the extremely lucrative livelihood they were enjoying. Despite this hostility, two Quakers opened a beet factory in Essex in 1830 and a second one started up six years later. Being fervent anti-slavers and taking advantage of the growing anti-slavery movement, these pioneers labelled their product: ‘Home-grown sugar – not made by slaves’. However, they could not compete with colonial suppliers, who saw to it that such a venture was doomed to fail, and fail it did. Apart from one brief attempt in 1870, no further developments occurred until 1912 when beet cultivation was perceived to be a sensible precaution in the light of a deteriorating European situation. Britain’s first commercial beet factory opened in Norfolk in that year. However, in 1914, Britain still depended upon continental suppliers for three-quarters of its total sugar consumption. Sugar production was one of the oldest industries of the old Russian Empire, emerging at the beginning of the nineteenth century. By the time of Napoleon’s invasion in 1812, there were four beet plants in the country. By the middle of the century, the main centre of activity shifted to Ukraine, where over three-quarters of the beet crop was then grown. This continued until the revolution in 1917. A smaller centre developed in the black-soil region further north. Yields were lower than in the rest of Europe and fluctuated widely despite the fact that extraction rates were similar. But they increased 25% in the period immediately preceding World War I. 7

The world sugar market

The agrarian revolution of 1917–20 completely devastated the industry, destroying the large estates on which it was based. Before World War I production exceeded 2 million tonnes, but by 1921–22 it had fallen to a mere 57,000 tonnes and did not recover to pre-war levels until the 1930s. In the 1920s and 1930s the industry expanded to the eastern region of the USSR, as far as the climate allowed. Sugarbeet cultivation under irrigation was also introduced in the warm but dry regions of Central Asia and Transcaucasia. During this time, Ukraine’s share of the market fell from its peak of 84% in 1921 to less than 70% by 1935. At the end of the eighteenth century, with Florida, Louisiana and Texas under Spanish rule, there was no sugar production in the USA. After a hesitant start in the early 1800s, a disastrous fall in the price of sugar and a substantial rise in the price of cotton caused farmers to switch to the latter. However, it soon revived and, by 1853, production passed the 200,000 tonne mark. At the start of the Civil War, production had reached 240,000 tonnes, but by the end of it, in 1864, had fallen to only 5,000, largely due to the desertion and impressing into the army of the slaves needed to cultivate the cane. This was quickly followed by the emancipation of slaves in the southern states, so recovery was very slow. Output in 1880 was still less than half the level of 1854. As was the case in Europe, the US beet industry suffered a slow start and it did not become permanently established until 1890, when the Alameda Sugar Company of California was formed. Throughout the nineteenth century, the development of cane sugar industries in Africa and Oceania, as well as in the western hemisphere, was a continuous process, evolving steadily, adapting to technical innovations and combating the competition from beet. In the western hemisphere, the development of Cuba at this time was one of rapid economic progress, and sugar production grew from 29,000 tonnes in 1800 to over 700,000 tonnes in 1868. Possessing the first steam engine in a cane sugar factory, 25 mills were steam driven by 1808. Technology in Cuba at this time was way ahead of that in Europe. Slavery was not finally abolished in Cuba until 1886 which gave the country a competitive advantage over other producers for most of the nineteenth century. If it had not been for the endless rebellion and riots by the slave population and the general antagonism towards the Spanish colonial regime, progress might easily have been considerably greater. The emancipation of slaves throughout the region presented further challenges to producers in the nineteenth century. One of these was the 8

History and cultivation

inequality of duties and quotas on sugar from countries not controlled by Britain. In Africa, cane production continued to flourish in Egypt throughout the nineteenth century. It was introduced into Natal in 1847 when the first seeds arrived from Mauritius. After a slow start, production reached 12,000 tonnes by 1880. Meanwhile in Mauritius, development gathered momentum from 1825 when duty disadvantages had been eliminated. Production quickly reached 33,000 tonnes and averaged 115,000 tonnes per year by the end of the century. Despite its geographical proximity to the Polynesian islands of the South Pacific, sugar cane is not indigenous to Australia and it was not until 1822 that sugar was first produced in New South Wales. By 1859, production had started in Queensland and total Australian production had reached 16,000 tonnes by 1880. Important changes also occurred in Asia during the nineteenth century with Java and the Philippines playing major parts in world trade. China also remained an important producer but attempts in other countries, such as Malaya and Ceylon (now Sri Lanka), only resulted in small quantities for domestic consumption. India did not start to produce sugar until 1923 but quickly made up for lost time, expanding rapidly to reach the 1 million tonne level in only 12 years. Production was not affected by World War II and reached 3 million tonnes by 1963 and 20 million in 2000. Nevertheless, the nineteenth century was a period of great change and technological advance for the sugar industry and by about 1880, the basic technical development was complete. World production in 1800 totalled 245,000 tonnes and by 1880 it had reached 3,832,000 tonnes; see Table 1.4. This figure does not include non-centrifugal sugar which 30 years earlier was the only type produced. The centrifuge was the last of the inventions connected with the industry and today’s suspended type was first used in Hawaii in 1867. Non-centrifugal sugar denotes that produced by primitive methods, very little of which, if any, reaches the international trade. In 1800, cane was the only sugar produced but 80 years later, beet had gained just under half the total of world production. In 1885, beet overtook cane production and reached over 50% of the total by 1915, falling to about a quarter in 1919 and thereafter recovering to around 40% from 1930 to 1960. Today the ratio is approximately 30% beet and 70% cane. Up to the outbreak of World War I, the expansion of the sugar industry continued at an increasing pace. World output rose to 9

The world sugar market Table 1.4 Total world sugar production from 1800 (000 tonnes, raw value) Year

Total

% cane

Year

Total

% cane

1800

245

100

1960

49,011

60

1830

572

100

1970

72,896

60

1860

1,725

80

1980

84,539

61

1870

2,723

63

1990

110,894

63

1880

3,832

52

1995

117,883

69

1890

5,716

39

1996

125,014

71

1900

8,385

34

1997

125,037

71

1910

12,705

48

1998

126,893

71

1920

12,382

73

1999

135,005

72

1930

24,615

63

2000

130,007

73

1940

27,075

60

2001

130,562

75

1950

29,160

63

2002

142,204

72

Sources: Noel Deerr, ISO.

more than 16 million tonnes, 7.7 million of which was European beet. European beet output was significantly boosted by the system of sugar bounties that prevailed from around 1850 until their abolition in 1903. Bounties were in operation in Germany, France, Austria-Hungary, Russia, Belgium and the Netherlands and, although different in each country, had the same final effect – the large-scale dumping of sugar and a ruinous decline in prices, from 25s 6d per hundredweight in 1872 to 7s 3d in 1902. By the end of World War I, world production had fallen to just over 12 million tonnes but, due to greatly improved prices, had recovered to reach almost 25 million tonnes by 1930. Cane producing countries were well prepared to take advantage of this situation; their improved cultivation techniques and new higher yielding varieties were chiefly responsible for the increase in output. By the mid-1920s, however, this increased production began to exceed consumption, and prices started to fall. This fall continued through the Depression of the 1930s and resulted in a fall in production until 1935 when both output and prices recovered significantly. World production reached a peak of 27 million tonnes in 1939 but by 1945/46 it had fallen back to 18.2 million, only 1.5 million tonnes above the previous peak of 16.7 million tonnes in 1913/14. 10

History and cultivation

It was during the inter-war period that various preferential arrangements and international agreements were formed. These were designed to improve the value of sugar during times of low prices but that, coupled with increasing competition from cane producers, caused many beet producers to resort to protectionist measures in the form of import duties and subsidies. The implications of these preferential arrangements and international agreements are discussed in Chapter 9. Since World War II, the industry has continued to expand. From 18.2 million tonnes in 1945/46, world production reached 55 million tonnes 15 years later, 100 million in 1981/82 and over 140 million in 2001/2002.

CONSUMPTION

The growth of sugar consumption throughout its history is subject to great inequalities and a dearth of reliable statistics. Indeed, it was not until 1950 that consumption statistics became even remotely accurate. Prior to that, the only guide was from production figures which, since there was never any surplus, were also the assumed consumption figures. When, in about AD 1000, sugar was coming into common use, it was only just becoming known in Europe and remained a luxury confined to the very rich for another 500 years. After about AD 1500 quantities increased considerably and consumption grew accordingly. In the first decade of the eighteenth century, annual per capita consumption in the UK was estimated to have been around 2 kg, and to have reached 8 kg by 1800 and 39 kg by 1900. In that year, it was estimated at 32 kg in the USA. However, when measured in terms of production versus population, world consumption in 1900 was just 5 kg per capita; see Table 1.5. Using this method, it reached around 12 kg by 1930 before falling in the Great Depression. Following the severe decline in production during World War II, that figure was not exceeded until 1951, reaching 17.5 kg by 1962. World figures, though, are misleading and hide great geographical disparities. European consumption, for instance, grew from 19 kg per capita in the 1930s to 34.5 kg by 1962. During the 1970s and 1980s, however, further growth in consumption was seriously restricted by various health scares and a 11

The world sugar market Table 1.5 World per capita sugar consumption from 1900 (kg, raw value) 1900

5.1

1910

7.0

1920

7.3

1930

12.3

1940

11.9

1950

11.9

1960

16.1

1970

19.9

1980

20.2

1990

20.6

2000

20.8

2002

21.6

Source: ISO.

vociferous anti-sugar lobby that claimed that it caused cancer and heart disease. The health issues surrounding sugar are discussed in Appendix I, but in fact there is no conclusive proof that it is harmful. Indeed, there is now a strong school of thought that considers it to be positively beneficial in moderation. Nevertheless, partly as a result of these attacks, per capita consumption is now little changed from 30 years ago. European consumption reached 43 kg per capita in 1987, but totalled only 36.3 kg per capita in 2001, while world consumption has remained fairly steady, at around 20 kg per capita for the past 20 years. The potential for further growth in consumption is enormous, particularly in Asia and Africa, where in some countries it is less than 3 kg per head per year. Even in 1999, China’s consumption was only 6.8 kg per head per year; it is not unreasonable, bearing the international average in mind, for that figure to more than double which would make an enormous impact on the statistical picture. However, at present, the Chinese get their energy needs from rice. Table 1.6 shows growth figures for sugar consumption; Tables 1.7 and 1.8 list highest and lowest sugar consumers in 2001.

TRADE

Sugar was traded in the east ever since it came into common use, around AD 1000. As production spread westwards to Persia and the eastern Mediterranean, the trade slowly developed in those areas. 12

History and cultivation Table 1.6 Growth of per capita sugar consumption Pre-World War II

1962

1993

1999

2001

USSR/FSU

11.2

37.9

34.0

37.8

40.2

UK

48.4

54.2

37.5

40.1

36.0

France

28.1

41.2

37.5

40.1

36.0

Germany

26.9

32.2

37.5

40.1

36.0

Netherlands

30.9

46.3

37.5

40.1

36.0

Belgium/Luxembourg

29.3

36.7

37.5

40.1

36.0

Spain

12.4

19.6

37.5

40.1

36.0

Portugal

10.0

18.2

37.5

40.1

36.0

Denmark

55.3

56.8

37.5

40.1

36.0

Greece

11.1

14.1

37.5

40.1

36.0

Austria

26.5

43.1

51.7

40.1

36.0

Sweden

49.3

45.7

44.4

40.1

36.0

Switzerland

41.0

48.1

45.4

45.3

49.9

Poland

11.8

32.8

43.9

45.7

45.0

Hungary

11.2

30.2

37.1

40.2

31.8

Canada

44.3

45.6

40.0

38.6

40.0

USA

47.0

47.9

31.7

33.7

31.6

Argentina

32.2

39.2

35.8

40.0

41.0

Brazil

17.1

37.3

50.0

57.8

57.7

Chile

25.8

36.2

44.1

48.4

44.3

Peru

12.0

25.3

30.1

35.5

37.4

5.4

34.3

34.8

42.9

36.9 6.9

Venezuela China

1.0

2.8

6.4

6.8

14.3

22.3

26.4

6.8

6.9

India

3.2

6.4

14.6

14.1

17.1

Indonesia

4.6

5.9

14.3

13.3

15.9

Hong Kong

Iran Japan Pakistan Singapore

6.4

18.9

25.8

28.5

30.4

12.3

16.9

21.5

20.1

18.4

3.1

3.5

22.6

26.3

24.2

35.9

47.6

73.2

87.7

69.4 31.0

Thailand

4.3

4.2

23.3

27.9

Africa

5.1

10.8

13.2

14.0

14.4

Australia

53.1

54.0

50.9

53.1

55.2

New Zealand

50.2

51.7

53.6

52.8

55.6

13

The world sugar market Table 1.7 World’s highest consumers in 2002 (kg per capita per annum) 1 Netherlands Antilles

113.6

2 Swaziland

111.7

3 Singapore

88.2

4 St Kitts & Nevis

75.0

5 Fiji

64.1

6 Israel

61.1

7 Costa Rica

61.0

8 Cuba

61.0

9 Brazil

59.7

10 Malta

59.0

11 Australia

56.2

12 Trinidad

55.7

Source: ISO.

Table 1.8 World’s lowest consumers in 2002 (kg per capita per annum) 1 Rwanda

1.2

2 Central African Republic

1.3

3 Zaire

1.3

4 Myanmar

2.0

5 Afghanistan

2.0

6 Eritrea

2.4

7 North Korea

2.6

8 Bangladesh

2.7

9 Liberia

3.1

10 Burundi

3.2

11 Benin

3.8

Source: ISO.

From the eleventh to the thirteenth centuries, Egypt was the major source of sugar for Europe, via the ports of Genoa and Venice. Even after the decline of Egypt as a supplier and the emergence of Tripoli, Sicily and Cyprus, these European ports continued to prosper. In the fifteenth century, thriving refining industries also developed there to supply the very rich of Central and Northern Europe. By the sixteenth century, Turkish warmongering eroded the importance of these producing areas and output dropped as a result 14

History and cultivation

of the fighting. Lands further west were quick to fill the gap and Madeira, the Canary Islands and the Iberian peninsula became important producers. Logistical problems prevented Venice from continuing as the refining centre of Europe as it became quicker and more practical to ship the sugar from Lisbon northwards to Antwerp. North-west Europe and Britain were becoming increasingly important consumers by this time, and Antwerp quickly became the chief sugar trading and processing centre of Europe. However, Antwerp’s dominance was short-lived for, in 1576, the town was sacked and from then until about 1660 Amsterdam became the leading city. During the first half of the seventeenth century, supplies from both Java and the New World competed with those nearer to home and all were shipped to Amsterdam, which had a virtual monopoly of the trade from 1660. After 1660, when Britain passed its Navigation Acts, the sugar trade became more protectionist. The situation changed completely; trade with the British and French colonies became restricted to their mother countries. Sugar production in the colonies was expanding rapidly and refining industries in both Britain and France were quickly established. These were soon protected by tariff legislation. Amsterdam remained the chief port for distribution to the rest of Europe for most of the eighteenth century but Hamburg, at that time a free city, offered strong competition and eventually overtook it as the chief supplier to Central and North-eastern Europe. During the nineteenth century, restrictions were greatly reduced and the trade became more of a free-for-all as sugar could be carried in almost any ship to almost any port. During this time, different countries became significant exporters and the trade expanded. Exports from Cuba and the Dominican Republic greatly increased and the Philippines, Mauritius and Hawaii also emerged as significant exporters. Towards the end of the nineteenth century, Europe became an exporter of beet sugar, which led to even fiercer competition for the European markets and, to a lesser extent, the North American ones also. The adoption of a free trade policy by Britain opened up the market to cheap foreign supplies of sugar which, thanks to the bounty system prevailing in Europe, caused a steady decline in prices. This also had an adverse effect on conditions in the British sugar colonies and undermined the competitiveness of cane producers. 15

The world sugar market

At the end of the nineteenth century, however, trade as measured by total exports only amounted to around 6 million tonnes. After 1900, it expanded steadily; indeed, between 1900 and 2001, the volume grew to over 40 million tonnes. During this time, production grew from 10 million to 136 million tonnes, so the share of the market held by exports declined from around 60% to around 28% today. Progress, however, was not smooth; from 1900 to 1914, exports gradually increased. During World War I, they remained constant while production declined and it was not until about 1925 that a recovery started. Exports’ share of world production fell from 70% to 62% between 1920 and 1930. Then came the Great Depression, again heralding a sharp decline in activity. After 1936, recovery started and by 1940, exports were averaging 11.9 million tonnes, only marginally higher than 15 years earlier, although the share fell to 47%. World War II saw a further decline in trade as exports fell to 7.1 million tonnes in 1942, the lowest since 1909. The 1941–45 average of exports was 8.6 million tonnes, 37% of production. Post-war recovery and expansion of trade was rapid and exports quickly passed 10 million tonnes in 1947, reaching 14 million in 1951, 28 million in 1977 and around 40 million today. In 1960 the US and UK were the world’s largest sugar importers, but by 1970 the situation had changed significantly. Hitherto, Cuba had been a major exporter to the US but, following the communist revolution there, a comprehensive trade embargo was swiftly put in place. Cuba thereafter shipped its sugar to the Soviet Union from where it was re-exported as white sugar because, at that time, Soviet production was enough to meet domestic needs and the imports provided a surplus of around 1.5 million tonnes a year. During the 1970s, the pattern changed again; Soviet production began to decline and exports ceased. Western European production grew significantly and the first EU exports appeared. By 1980, Western Europe had become the world’s largest exporter of white sugar. During the 1980s, trade in Asia and the Far East began to flourish and by 1990, the region had become a very important importing and exporting market. During the 1990s, Brazil emerged as a major exporter, competing fiercely in the Asian markets. Brazil is currently the biggest exporter, with 32.2% of the world market in 2001. Other leading exporters are the EU with 12.2%, Australia with 10.2%, Thailand with 9.7% and Cuba with 8.4%. 16

History and cultivation

By the late 1990s, however, record production levels and falling prices produced a recession in the sugar industry. An Asian financial crisis which began with the devaluation of the Thai baht and quickly spread to other Asian countries, also seriously affected Latin America and other leading sugar producers. Demand fell as the Asian expansion bubble burst. The 1997/98 El Niño had a devastating effect on the crops of Thailand, the Philippines and Fiji but India, Brazil and the EU all enjoyed record crops in 1998 and prices fell still further, to their lowest levels for over 10 years. The situation remained the same in 1999 and prices continued to fall until the second half of 2000 when bad weather affected the crops of Cuba, Brazil and Australia. Between March and October 2000, sugar prices doubled but the downward drift began again during the second half of 2001 as Brazil’s position in the market became more dominant. The devaluation of the Brazilian real in 1999 encouraged extra production and a maximization of exports as, even at the ruling low world prices, there was money to be made at the new exchange rates. The sugar market had a surplus of over 7 million tonnes in 2001/02 and another of around 5 million was expected for 2002/03. Global stocks, as a result, have risen alarmingly, and at the end of 2002 stood at nearly 50% of annual consumption compared with around 40% five years earlier.

Cultivation CANE

Sugar, in some form or other, occurs in all green plants, but commercial sugar, or sucrose, is stored most abundantly in cane and beet plants. Sugar cane is a grass of the genus Saccharum which grows in the tropics, roughly between latitudes 35°N and 35°S. In certain places it grows outside that belt, but it is usually found within the area where palm trees grow. It overlaps beet only in a few subtropical areas such as southern Spain and Portugal. Cane is a perennial plant which requires a hot and moist environment. A water-retaining soil is essential, as is strong sunlight with temperatures above 20°C. It grows from the ratoon (bud) that forms on stubble from the previous harvest and reaches around 5 metres in height. New plantings are not often necessary and occur only 17

The world sugar market

every six to ten years. The stalk is hard and yellow with a few red and green spots; at the top, the green leaves are stiff in the middle, while the lower ones drop rather in the manner of palms. Inside the stalk are tubular channels, through which water and minerals in the soil are drawn up to the green leaves where photosynthesis takes place. The sugar is then carried back down and stored in the thick stalk. Cane is the most efficient collector of solar energy in the plant kingdom. There is a multitude of commercially produced varieties of sugar cane, all derived from their wild origins. Under natural conditions its growth is both rapid and prolific and the higher the temperature, the higher the sugar component of the canes. Excessive ratooning – the production of successive crops from stubble without fresh planting – can affect yields, although it is very time and labour saving and results in a shorter growing period, due to the fact that the root system is already intact. High prices, labour surpluses and land shortages reduce the tendency for excessive ratooning. The abundance of land in Cuba encourages a high degree of ratooning and the consequent low yields go a long way towards explaining the parlous state of the crop in the 1990s. Commercially grown crops are now largely free of insect pests and diseases. Chemicals and pesticides are widely used and most varieties are strongly resistant to infection. The threat of any endemic disease to the plant has been greatly reduced in recent years. A cane is around 75% water, 14% sugar and 10% bagasse – the residual fibre which is used mainly as boiler fuel for the processing factory. Prolonged periods of dry weather are needed for harvesting. Mechanical methods are now widespread in most producing areas, apart from some countries, such as Mauritius, where the terrain makes this very difficult, if not impossible. In India, too, some areas where sugar is crushed to make gur or jaggery, a coarse brown sugar, are still primitively farmed. A pair of bullocks is yoked to a shaft and walked round and round in a circle. The shaft turns two drums, between which the cane is crushed. A young boy walks behind them making encouraging noises and occasionally hitting them to stop them falling asleep at their monotonous task. The glutinous green juice that is squeezed out of the cane is simmered on an open pan. The pan is heated by an oven dug into the ground and fuelled by the bagasse mixed with eucalyptus leaves. Even the water used to wash out the pan after each boiling is recycled – it is given to the cattle to drink. 18

History and cultivation

Sugar content declines rapidly after harvest, so swift removal to a mill is essential to enable the speedy extraction of the juice to take place. Processing mills are never far from the fields or plantations.

BEET

Beet is limited exclusively to temperate zones and is cultivated under a wide range of natural conditions. Temperature and rainfall are important factors in determining a crop’s yield, so the uncertain weather in temperate zones can produce some wide variations from year to year. Therefore, if a deficiency in one area is not compensated by a surplus in another, final outturns can be adversely affected. The beet is a biennial plant requiring two seasons to produce seed. However, where grown for sugar production, it is harvested after the first growth – generally about six to eight months after planting. Good beet soils need high water-retaining properties but must not be so retentive as to impede growth, cultivation and harvesting. They must also be deep enough to allow the roots to develop. A typical beet is about 76% water and 16% sugar. Sugarbeet is usually rotated one year in three or four with wheat and barley. It is more expensive to produce than cane but its advantage lies in its integration into the farming systems of the temperate zones. It also provides the farmer with a ready-made feed crop from the beet’s tops and leaves. European Union (EU) subsidies through the Common Agricultural Policy (CAP) ensure the continued prosperity of beet farmers. This has been the case for over 30 years. However, in 2003 and 2004, renewed efforts at reform have been attempted and some progress has been made, although strong resistance to them continues. Under the familiar compromises the European Union is famous for, the status quo will remain until 2006 when limited reforms are expected to start. Sugarbeet is normally sown during March or early April and harvested mid-September to mid-December. Processing can go on until the following February. Insecticides and chemical weedkillers efficiently control weeds, pests and insects that attack the crop. One disease of particular concern to sugarbeet is rhizomania; it is a soilborne disease that destroys the root and can reduce yields by as much as 50%. Research into this problem continues apace and it is 19

The world sugar market

hoped that a variety that is resistant to the virus responsible for rhizomania will be available by the turn of the century. Harvesting and topping are now completely mechanized; sugar content does not deteriorate as rapidly as cane after harvesting but some loss is experienced during storage. Beet processing factories these days are fewer and situated further from the fields than formerly. Beets are consequently stored in frost-protected clamps on the edges of the fields to await transportation to the processing factories. Conditions for cost effective harvesting usually deteriorate as autumn progresses and severe early frosts can also damage the crop. Farmers therefore aim to have the clamps formed by mid-December. These clamps are a familiar sight in the landscape of eastern England and northern France at that time of year. The only beet areas in the southern hemisphere are in Chile and Uruguay.

PROCESSING

The transformation of both cane and beet into raw sugar is essentially the same. In both cases processing needs to be done as quickly as possible to gain optimum yields and sugar content, which is why the cane factories tend to be situated close to the fields. Cane is shredded and beet is sliced and the juice is extracted. The bagasse and pulp are removed for fuel and animal feed. The juice is heated, lime is added and, after filtering, the juice is concentrated by evaporation. This thickened juice is boiled in steamheated pans under vacuum, producing a mix of crystals (raw sugar) and syrup (molasses). These are separated by spinning in centrifugal machines. Molasses is converted into rum and baker’s yeast as well as cattle food and industrial alcohol. The raw sugar, at this stage, is unfit for human consumption, unless specially treated and cleaned, but is ready for refining. Centrifugal and non-centrifugal sugars are terms now commonly used to distinguish between modern sugars and those produced by more primitive methods.

REFINING

Unlike processing, refining is usually carried out near areas of consumption rather than production. The raw sugar that reaches the refinery contains many impurities and is covered with a coating of molasses; the refining process is designed to remove these and 20

History and cultivation

produce a product that is over 99.95% pure sucrose. It contains no artificial colourings, preservatives or flavourings of any kind. Refined products obtained from cane and beet are identical. The first step in sugar refining is affination, the mingling of the raw sugar with a heavy syrup to form a softened mixture that is spun in a centrifuge while sprays of hot water wash off the syrup coating. Clarification is achieved by phosphatation or carbonation which produces a chalk precipitate which traps impurities. This chalky substance, containing the impurities, is removed by pressure filtration – through diatomaceous earth after phosphatation or through calcium carbonate after carbonation. This also helps in colour and polysaccharide removal. The liquor emerging is clear and sparkling but still an amber or yellow colour, so it is passed over a decolorizing agent such as resin to remove it and all soluble impurities and other extraneous matter. The liquor itself then becomes clear and colourless and is ready for crystallization. The liquor is then boiled under vacuum in large enclosed pans and, when it reaches the right thickness, crystallization is started by adding a controlled quantity of very small crystals to it. When these have grown to the required size they are separated in centrifugal machines and then dried in granulators. Four crystallizations are usually performed in series and the crystals from each stage yield about 50%. Sugars from the fourth operation, together with other low purity liquors, are sent through the system again or used to produce a range of other sugars and syrups where colour is not so important. Different sizes of crystals are produced by variations in boiling technique and duration and these are graded either granulated, finest granulated or caster sugar. Icing sugar is made by pulverizing crystals in a mill and cube sugar by compressing moistened crystals in moulds before drying. To icing sugar, which is also known as powdered or confectioner’s sugar, is added a small amount of corn starch or calcium phosphate to prevent caking.

21

C H A P T E R

2

The world sugar economy today

Before discussing the key drivers of the world sugar supply and demand and their impact on the future profile of the world sugar market it is worth having a glance at the world sugar economy today. So, in what shape has it arrived into the third millennium?

Demand Over the past three decades global consumption growth has demonstrated a stable increase at an average rate of around 2% per year. In 2002 consumption reached 136.8 million tonnes, raw value. Population growth remains the key driver of world sugar consumption, explaining about 85% of growth in sugar consumption at the global level (for more detailed discussion see Chapter 6). Figure 2.1 illustrates major changes in world sugar consumption since 1985. The trend of stagnating demand in the developed countries and growing consumption in the developing countries established since the mid-1970s has resulted in a steadily growing dominance of developing countries in the world sugar consumption (Fig. 2.2). Since the beginning of the 1990s their global consumption share has grown from 72% to 75%. The consumption trend was mirrored by sugar import dynamics (see Fig. 2.3). Developing countries’ share in world imports grew throughout the 1990s. This growth in imports was by no means relentless. At the beginning of the decade imports of the former Soviet Union (FSU) suffered a considerable setback reflecting the 22

6.00

140,000 135,000 130,000 125,000 120,000 115,000 110,000 105,000 100,000 95,000

4.00 2.00 0.00

% per year

-2.00

19 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 02

000 MTRV

The world sugar economy today

World consumption

Growth rate in %

Linear (growth rate in %)

Linear (world consumption)

Million tonnes, raw value

2.1 Changes in world sugar consumption: 1985–2002.

100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Consumption in developed market economies Consumption in developing countries including economies in transition

Million tonnes, raw value

2.2 Structure of world sugar consumption: 1990–2002.

35 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Developed economies Developing countries including economies in transition Linear (developing countries including economies in transition)

2.3 Structure of world sugar imports: 1990–2002. 23

The world sugar market

cost of transition from subsidized and government controlled purchases to market oriented imports. In the second half of the 1990s the developing countries’ import expansion was interrupted by the financial crisis in Asia. Nevertheless, in the long run, the bulk of the increases in world imports have come from the developing countries. Their import share has increased from 62% in 1990 to 75% in 2002. The 1990s proved to be a time of considerable change in the geographical and product structure of world sugar imports. The transformation in the geographical structure of world imports is illustrated in Table 2.1. By the end of the decade the above-mentioned slump in the FSU imports was over and the region’s purchases rose above the level of the first post-Soviet years. Deliveries of sugar from Ukraine, the main sugar supplier of Russia and other FSU countries during the Soviet era, were completely replaced by imports from the world market. Ukraine itself also became a net sugar importer. The FSU regained the leading place in the world importers’ league. South East Asia demonstrated a remarkable growth in imports in the first half of the 1990s but since 1996 the level of annual imports has stagnated at around 8 million tonnes. The most dynamic and consistent importing regions are North Africa and the Middle East (which are counted as a single region) and Sub-Saharan Africa. In 2002 the two regions imported 13.1 million tonnes, which accounts for nearly 30% of the world total imports. From 1992 to 2002 total Arab region imports grew at an

Table 2.1 Imports by selected destinations: 1992–2002 (million tonnes, raw value) 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

FSU

7.42

7.32

3.59

5.08

5.17

4.82

5.51

8.68

7.30

8.42

7.57

South East Asia

6.19

5.38

7.24

9.07

8.25

8.23

8.19

7.92

7.73

8.33

8.46

North Africa & Middle East

5.81

5.31

5.84

6.73

6.94

7.90

7.74

7.94

7.82

7.99

9.44

Sub-Saharan Africa

1.84

1.65

1.57

1.66

1.71

2.07

2.73

2.20

2.14

3.18

3.67

USA

2.05

1.83

1.60

1.64

2.87

2.95

2.06

1.59

1.37

1.26

1.37

Western Europe

2.23

2.28

2.40

2.81

2.73

2.49

2.23

2.28

2.31

2.28

2.75

24

Million tonnes, raw value

The world sugar economy today 25 20 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 White sugar imports Raw sugar imports

2.4 Distribution of world imports between raw and white sugar: 1992–2002.

average annual rate of more than 5%. During the same period the total imports of Equatorial and Southern Africa grew on average by nearly 9% a year. This is set against 3.8% world average annual growth rate over the same period. Finally, imports by Western Europe remained flat, showing only marginal year to year changes, while sugar deliveries from the world market to the US shrank from more than 2 million tonnes in the early 1990s to 1.3 million tonnes in 2001. Moving on to the world sugar trade’s product structure changes, we can note a growing dominance of raw sugar in the world turnover. The share of raw imports in the world total grew from about 50% at the beginning of the 1990s to nearly 60% in 2002. Characteristically, changes in the volume of white sugar trade have been less dynamic (Fig. 2.4). According to the market commentators, it is often more cost effective to transport raw sugar in bulk and refine it at destination, than to ship it in refined form in bags. Over the last 10 years refineries have been built all over the world including Algeria, Saudi Arabia, Dubai, Nigeria and Indonesia. Another feature of world imports, which emerged in the 1990s, was the dispersion of import demand. While in 1991 the world’s 10 largest importers absorbed 63% of the world imports, by 2002 the share of big players reduced to 41% of the total trade. Table 2.2 illustrates the changes in annual import volumes of both raw and white sugar by the five top participants in 19921 and 1 1992 is chosen as a basis year as it was the first year after the collapse of the Soviet Union. The disintegration of the Soviet internal sugar market and the COMECON system, which supported preferential imports from Cuba, was the most dramatic politically driven structural change in the world sugar economy 25

The world sugar market Table 2.2 Changing structure of import demand: world’s largest importers, 1992 and 2002 (000 tonnes, raw value) Raw sugar

White sugar

1992

2002

1992

2002

Russia

2,872

Russia

4,441

Russia

Nigeria

1,009

USA

1,994

EU

1,834

Iran

736

Indonesia

1,005

Japan

1,821

S Korea

1,516

Nigeria

697

Persian G

916

EU

1,705

Japan

1,507

Saudi Arabia

521

Algeria

907

S Korea

1,229

Malaysia

1,176

Jordan

472

Syria

882

World total

15,444

21,400

World total

14,055

Share in world total (%)

62

World total Share in world total (%)

49

Share in world total (%)

2,272

33

World total

17,574

Share in world total (%)

27

2002. The dispersion has affected both raw and white sugar buyers. The share of leading importers of raw sugar got reduced from 62 to 49%, while that of leading white sugar buyers fell from 33 to 27%. While examining the dispersion of import demand, it is worth keeping in mind that imports of white sugar are traditionally much less concentrated than those of raw sugar. Looking at the changes in geographical distribution of imports, the special role of Russia as the world’s leading import power is clear. Since the collapse of the Soviet Union, Russia has topped both raw and white sugar import league tables. The 1990s saw the rise of Russia as the dominant raw sugar importer, which by 2002 absorbed nearly a quarter of all raw sugar traded internationally. Meanwhile, in the white sugar sector Russia replaced imports of whites from the neighbouring Ukraine by imported raw sugar tolling and, as a result, since the mid-1990s Russia has practically disappeared from the white sugar market as an importer.

since the introduction of the US embargo on Cuba in the early 1960s. During the Soviet era all the inter-republic deliveries were considered as internal trade and were not included in the international trade statistics (in 1991 Ukraine alone exported nearly 2 million tonnes of sugar to other republics of the Soviet Union). This makes post-1991 statistics poorly compatible with data for earlier years. 26

The world sugar economy today

Price dynamics Throughout most of the 1990s there existed a popular theory that the increasing dominance of the developing countries together with greater liberalization of national sugar markets should bring more stability to the world sugar price. This belief rested on the assumption that the developing countries are more price sensitive and adjust the quantity they purchase to the pertinent price conditions. It was also expected that greater price stability would vastly improve the ability of producers to plan their investments to keep pace with demand growth, which, in turn, would feed back into even further increases in this stability. The market developments throughout the 1990s generally bore out this theory. Indeed, from 1988 to 1998 world market prices remained remarkably stable by sugar standards (sugar is considered the most volatile commodity traded internationally; for more details see Chapter 3). World market prices for raw sugar during this period rarely exceeded 14 cents/lb or fell below 8 cents/lb (see Fig. 2.5). The situation, however, changed dramatically towards the end of the decade. By late 1998 world market prices dived below 7 cents/lb, reflecting the increasingly bearish global fundamentals (considerable production gains in a number of key producing countries not supported by parallel growth in import demand and the consequent dramatic pile-up of stock). In April 1999 raw sugar prices were as low as 4.78 cents/lb, a level which had not been seen for more than 13 years – since January 1988. White sugar prices showed a similar fall.

22

US cents/lb

18 14 10 6

London daily price (white)

2003

2001

1999

1997

1995

1993

1991

2

ISA daily price (raw sugar)

2.5 World market sugar prices: 1991–2003. 27

The world sugar market

The new millennium brought some relief to exporters. Given the severe drought in Brazil coupled with the unfavourable weather conditions and plant diseases in Thailand and Australia, it seemed likely that the world sugar economy would swing into a deficit phase. In July 2000 raw sugar prices regained a 10 cents/lb level, kept rising in the second half of 2000 and by mid-October were just short of 12 cents/lb. This level, however, proved unsustainable, when the extent of Brazil’s productive recovery in 2001/02 became apparent. During the following two seasons world market values lost all the ground gained earlier. In summer 2002 raw sugar prices fell well below the 6 cents/lb level and only stopped a hair’s breadth away from 5 cents/lb. In the second half of 2002 prices improved slightly but throughout 2003 they stayed well below the level of the early to mid-1990s. Thus, the price dynamic at the dawn of the new millennium had failed to support early expectations of higher price stability and declining volatility (having said that, in absolute terms the current variations in world market prices are significantly lower than those of the 1970s and early 1980s).

Supply How can a new wave of price instability be explained? Probably not by looking at demand. Can the new shape of supply explain it? In contrast to consumption where we have had relatively stable growth over the last 50 years, production remains extremely volatile. As can be seen in Fig. 2.6, during the 1990s global output twice fell by 5 million tonnes or more from one year to the next (in 1993 and 2000), once grew by as much as 9.1 million tonnes (1999) and experienced a couple of plateaus (in 1997–98 and in 2001). Finally, in 2002 world sugar output grew by a stunning 11.6 million tonnes. Sugar is an agricultural product. In spite of all technological advances in field practices, unfavourable weather can still severely impact sugar production even in the most efficient industries. Yields may vary very substantially from year to year solely due to the differences in weather patterns and the incidence of disease. As a considerable share of the world production is designated for export, climate driven changes in production are reflected by world price dynamics. At the world level, however, local impacts of cataclysmic weather conditions are smoothed over because sugar production is so geographically spread out, and years when output drops simultaneously 28

The world sugar economy today 145,000

000 MTRV

135,000

125,000

115,000

105,000

95,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

2.6 World sugar production: 1991–2002.

in many producing countries are thankfully few and far between. The new remarkable feature of the world sugar economy, which has surfaced in the 1990s, is the sharp growth in the concentration of sugar production. At the beginning of the 1990s world sugar production was about 114 million tonnes, raw value (an average for 1991–93).2 With the onset of the new millennium it nearly reached 132 million tonnes (an average for 1991–2001). Thus, the global sugar output during 10 years only increased by 18 million tonnes. Notably, just two countries account for the bulk of the increase. Currently Brazil’s production averages nearly 20 million tonnes as against less than 10 million tonnes at the beginning of the 1990s (in 2003/04 it is estimated to go above 24 million tonnes). During the same period sugar production in India grew by more than 6 million tonnes from about 13 million tonnes to nearly 20 million tonnes. Other key producers failed to match such vigour in sugar production; in some cases sugar production even declined (see Table 2.3). As a result of the growing concentration of production, the share of the five largest sugar producers in the world total increased considerably from 46% in early 1990 to 53% in 1999–2001. 2 In order to reduce an influence of crops particularly impacted by extreme weather conditions we have used here a three year average rather than figures for individual years. 29

The world sugar market Table 2.3 Sugar production in selected countries (000 tonnes, raw value) 1991–93

1999–2001

Increase (000 t)

Increase (%)

Brazil

9,825.3

19,148.6

+9,323.3

+95

India

12,911.8

19,186.4

+6,274.5

+49

EU 15

16,826.6

17,361.6

+535.0

+3

6,775.6

8,032.6

+1,257.0

+19

USA China

7,966.7

7,767.9

-198.8

-2

Thailand

4,383.5

5,661.0

+1,277.6

+29

Mexico

4,040.1

5,153.1

+1,113.0

+28

Australia

4,015.5

4,899.6

+884.2

+22

Cuba

6,232.6

3,893.4

-2,339.3

-38

Pakistan

2,506.7

2,827.4

+320.7

+13

113,904.0

131,886.0

+17,982.0

+16

World

Contrary to popular belief, concentration in sugar production was not mirrored by concentration of exports. The share of top exporters in world trade totals has remained practically unchanged. At the beginning of the 1990s the bulk of the world sugar supply came from a handful of dominant exporters with Cuba leading the pack. Today the league of top exporters includes the same countries and their combined supply power (measured as a share in the world total exports) remains, generally speaking, untouched. What has changed is the leader. If 10 years ago Cuban exports accounted for about one quarter of the total world exports while Brazil was only the fourth largest exporter, responsible for 6% of sugar traded internationally, nowadays the South American giant stands as the undisputed export leader (in 2002 Brazil exported 13.4 million tonnes). Meanwhile, Cuba has been steadily dropping further and further down and is now just the fifth in the top exporters’ league. There are no dramatic changes in the relative importance of the other leading exporters (Table 2.4). The dominance of a few exporters and, hence, the dependence of the market on the supplies from a limited number of producers, explain the continuing vulnerability of world prices to crop developments in key regions throughout the 1990s. In answer to the growing demand for raw sugar, exporters have increased considerably the share of the latter in their export programmes. Gross exports of raw sugar have grown by 35% from about 16 million tonnes at the beginning of the 1990s to nearly 21 million 30

The world sugar economy today Table 2.4 World’s largest sugar exporters 1991–93 Exports (000 t)

Share in world total (%)

1999–2001 Exports (000 t)

Share in world total (%)

Cuba

6,674.7

23

Brazil

10,045.8

26

EU

5,065.6

17

EU

5,783.1

15

Thailand

3,025.9

10

Australia

3,865.9

10

Australia

2,810.8

10

Thailand

3,711.8

10

Brazil

1,842.1

6

Cuba

3,200.1

8

Subtotal

19,419.2

67

Subtotal

26,606.8

68

World total

29,194.3

World total

39,058.4

Table 2.5 Changing structure of export supply: world’s largest exporters of raw and white sugar, 1992 and 2002 (000 tonnes, raw value) Raw sugar

White sugar

1992

2002

1992

2002

Cuba

5,860

Brazil

7,674

EU

4,784

Brazil

5,714

Australia

2,878

Australia

3,783

China

1,808

EU

4,703

Thailand

2,422

Cuba

3,136

Brazil

1,592

Thailand

2,067

1,297

India

1,281

Brazil

681

Thailand

2,137

Thailand

Mauritius

633

Guatemala

1,097

Ukraine

22,660

World total

World total Share in world total (%)

15,444 77

World total Share in world total (%)

79

Share in world total (%)

970 15,661 67

Colombia World total Share in world total (%)

503 21,148 68

tonnes (an average for 1999–2001). Table 2.5 illustrates the major changes in geographical structure of white and raw sugar exports during the 1990s. Brazil replaced Cuba as by far the mightiest raw sugar exporter. Moreover, Brazil also significantly strengthened its position in the white sugar exporters’ league, becoming by the end of the twentieth century the largest supplier of white sugar to the world market. Another important change in the geographical supply structure is the already mentioned disappearance of Ukraine as a major white sugar exporter. The world’s largest beet sugar producer in the 1980s 31

The world sugar market

and still the world’s fifth largest white sugar exporter at the beginning of the 1990s eventually became a net importer of sugar.

Political environment Finally, what were the main developments in sugar politics during the 1990s? Overall, the decade was characterized by accelerated liberalization of several important national sugar markets and curtailment of preferential trade. In discussing the deregulation of domestic markets, one cannot omit the full liberalization of both sugar and ethanol markets in Brazil (currently the world’s leading sugar exporter) and the transition of the sugar sectors from centrally planned to free market oriented in Eastern Europe and the FSU (particularly in Russia, the world’s largest sugar importer). In recent years the sugar market of India (the world’s largest sugar consumer) has also undergone significant deregulation. It is important to note, however, that liberalization and deregulation of domestic markets do not necessarily guarantee easier access to these markets for imported sugar or, for that matter, a lower level of export support. The example of Russia in the late 1990s shows that liberalized national sugar markets could remain as protected as they had been under full government control. During the last two or three centuries one significant characteristic of the world sugar market has been the share of total trade accounted for by special arrangements, with quantities and prices fixed at government level. The collapse of the USSR and the COMECON system, which subsidized Cuban sugar exports, together with the modifications in the US sugar programme, have resulted in a further shrinkage of preferential trade, which fell from 10.3 million tonnes in 1991 down to just 3.2 million tonnes in 2001. As a result the share of preferentially traded sugar in the global turnover shrivelled from 35% at the beginning of the last decade to just 8% at the beginning of the current one (see Table 2.6). While on the subject of the political environment, the Uruguay Round negotiations on agriculture ought to be mentioned. The Round of the GATT/WTO multilateral trade negotiations was concluded on 15 December 1993 and the Final Act was signed in Marrakech in April 1994. The Round for the first time included negotiations on agriculture in general and sugar in particular. The principal Uruguay Round reforms relating to agriculture were the market 32

The world sugar economy today Table 2.6 Summary of special arrangements and their market share in 1991 and 2001 (million tonnes, raw sugar) 1991

2001

US TRQ imports

1,732

1,154

EU sugar imports under ACP, SPS and MFN arrangements

1,626

1,647

3,835 797 25 58

0 359 0 0

Cuba exports to the USSR China North Korea Central Europe The USSR sugar intra-trade

2,273

0

Total Share in world trade (%)

10,346 35

3,160 8

29,5351

40,897

World total exports

Note: 1 Including 2,273 million tonnes of the USSR sugar intra-trade.

access commitments, concessions on lower tariffication and domestic support for agriculture, and subsidized exports. Signatory countries agreed to import a minimum share of 3% of their domestic market in 1995, rising to 5% by late 2000. Apart from that they agreed to replace non-tariff barriers and variable import levies by a base rate tariff and to reduce tariffs progressively over the implementation period (until the end of 2000 for developed countries and the end of 2004 for developing countries) by an average of 36% across all commodities, with a minimum reduction for any individual commodity of 15%. According to the ISO’s calculations, in the case of sugar, the average reduction in the tariff rate for raw sugar adds up to 24% – the weighted average base level of 93% had to fall to 72% by the final year of implementation. For white sugar the agreed reduction in the weighted average tariff was 22%, the decline from base tariff level of 100% to 88%. Despite this seemingly considerable drop in tariffs the reductions in real life tariff level were on the whole quite small – ceiling bindings were generally set at rates much higher than the existing applied tariffs. This permitted some countries to actually raise tariffs over the implementation period, even though negotiated reductions in bound rates remained in effect. Perversely, the level of border protection actually rose as a result of the Uruguay Round. If truth be told, in the case of sugar the commitments made under the Uruguay Round did little to achieve the objectives of 33

The world sugar market

GATT/WTO – freeing up world trade through more open and less distorted national markets. Nevertheless, the Round did bring sugar into the mainstream of the WTO multilateral regulatory system. Frameworks were established for tariffication (a small but important step towards reducing protection) and the treatment of all forms of distortion, which fall into the categories of market access, domestic support and export subsidies. In practical terms, a modest agreed reduction in subsidized EU exports, a lowering of the Japanese tariff on sugar, and a modest increase in access to some countries’ markets might slightly reduce sugar surpluses, but not enough to cause a measurable impact on world prices.

Conclusions Thus the world sugar economy at the boundary of two millennia is characterized by the growing dominance of the developing countries in world sugar consumption and imports. Also notable is the rising importance of raw sugar in the global turnover. Contrary to the widespread expectations of the first half of the 1990s, the increasing prominence of developing countries together with the progressive liberalization of national sugar markets did not bring more stability to the world sugar price. In terms of the world market prices, sugar remains one of the most volatile commodities. In contrast to consumption, where relatively stable growth has taken place over the last 50 years, production remains extremely volatile. In spite of all technological advances in field practices, unfavourable weather can still severely impact sugar production even in the most efficient agricultural industries. The dependence of the market on supplies by a limited number of leading producers explains a continuingly high level of vulnerability of world prices to crop developments in key origins throughout the 1990s. The emerging dominance of Brazil as the key world supplier of both raw and white sugar became the most prominent market feature at the turn of the millennium. Although during the 1990s in most countries governments ceased to directly regulate the industry, partly or fully liberalized domestic markets driven by market forces rarely provide better access for imported sugar or lower the level of export support. Even though the Uruguay Round brought sugar into the mainstream of the GATT/WTO multilateral trade negotiations, the Round itself did not 34

The world sugar economy today

deliver any significant reform of protectionist or interventionist sugar policies.

References Bromfield F, The Current World Picture, Sugar Trading Manual, Woodhead Publishing, Cambridge, 2002. ISO, Sugar Yearbook, various issues. ISO, The 1994 GATT Uruguay Round Agreement on Agriculture and the World Sugar Market (MECAS(99)16), London, 1999. ISO, Key Drivers of the World Sugar Market (MECAS(02)08), London, 2002. Kingsman J, Structural Changes in Sugar Trade Flows, Proceedings of the 11th ISO Seminar, London, 2002.

35

C H A P T E R

3

World sugar prices

The world sugar market has historically been viewed as a volatile residual market, which tended to be oversupplied except when a coincidence of bad weather and low stocks led to a sharp increase in world prices. This long term volatility is readily evident in world prices, as can be seen in Fig. 3.1, for both raw and white sugar.1 UNCTAD’s volatility indices (calculated as the percentage deviation from an exponential trend line) shows sugar during the period 1998–2001 to display an index of 19.2, as against 6.6 for corn, 5.7 for soybeans, 5.4 for rice and 4.1 for beef. Crucially, recent world price developments, as described in this chapter, have done little to dispel this view of the market, despite a belief which emerged during the mid-1990s that significant evolution in the structure of the world sugar market – with many industries having undergone deregulation and therefore reacting to and also influencing the world price – meant that the world market had become less marginal and at the same time more stable. Indeed, a period of relative stability during 1987–98, when prices ranged between 8 and 15 cents/lb, and a time when there were not the price spikes or troughs which characterized the market during the preceding three decades, led many analysts at the time to consider if world market prices had moved up to a ‘new’ higher average level, exceeding 10 cents/lb. However, the price crash of 1998/99 proved that this was not the case, as will be discussed later in this chapter. Key factors resulting in the historically high level of instability 1 The raw sugar price is the International Sugar Agreement price, known as the ISA price, quoted fob & stowed, in bulk, Caribbean port. The white sugar price is the London Daily Price, fob European ports. 36

World sugar prices 40 35

US cents/lb

30 25 20 15 10

Raw

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

0

1951

5

White

3.1 Nominal annual raw and white sugar prices.

have included the marginality of the world market, the long production cycle characteristics of cane sugar, the immobility of resources once invested in sugar crop processing capacity, and intervention by governments in their sugar sectors, albeit the forces of globalization have led to reform of national sugar policies in some countries in recent years. All of these factors will be discussed fully in later chapters. The goal in this chapter is to better characterize the dynamics of world sugar prices by: investigating the long term trend; assessing volatility; considering apparent cycles of price booms and busts; investigating the extent to which price movements are correlated with the global sugar stocks level; and finally, considering if monthly sugar prices display any predictable seasonality. This suite of perspectives to world sugar prices should enable readers to better understand how the myriad of demand, supply and policy factors can impact the world market and, in turn, drive world sugar prices.

Long term trend Most raw sugar traded on the world market is priced via futures quoted on the New York Board of Trade – NY No. 11 contract. While some criticize this basis of pricing, it is currently the only widely 37

The world sugar market 120

US cents/lb

100 80 60 40

Raw

Deflated

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

0

1951

20

Expon. (deflated)

3.2 Nominal and deflated raw sugar prices.

traded raw sugar futures contract available to buyers and sellers and forms the basic reference price in the international marketplace to price physical sales contracts. As the NY No. 11 futures contract is a world-denominated contract, it reflects global supply and demand and the expectations and actions of producers, consumers, traders, speculators and other users (Hildebrand, 2002). The long term trend in raw sugar prices can only be considered when the distortionary effects of inflation have been removed from the annual world price series.2 The long term trend in annual real sugar prices is shown in Fig. 3.2, and in monthly prices in Fig. 3.3. There has been a gradual underlying fall in real prices at a rate of close to 2% each year over the past 50 years, as estimated by ‘fitting’ a trend line to the price data. This underlying trend is important because it illustrates the pressures facing export orientated producers to achieve constant gains in productivity to maintain revenue in real terms.

EXCHANGE RATES AND WORLD MARKET PRICES

An issue in understanding the longer term trends in world market prices is the fact that sugar traded on the world market is priced in 2 The deflator was the US consumer price index, although a deflator which also captures the impact of currency movements could be used, such as the G-5 Manufacturing Unit Value Index prepared by the World Bank. 38

100 90 80 70 60 50 40 30 20 10 0 19 8 19 0 8 19 1 8 19 2 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 03

US cents/lb

World sugar prices

ISA price

Deflated

3.3 Monthly world sugar prices, nominal and deflated (2002 = 100).

1.1 US$/SDR

1 0.9 0.8 0.7

02

99

20

19

96

93

19

90

19

87 19

19

84

81

19

78

19

75

19

72

19

69

19

66

19

19

19

63

0.6

3.4 The value of the SDR against the US dollar.

US dollars, but that the value of the US dollar as against other currencies is not constant. This fact is illustrated in Fig. 3.4 where the value of the US dollar is shown as against the Special Drawing Right currency3 unit (SDR) created by the International Monetary Fund. There was a major appreciation of the US dollar against the SDR in the mid-1980s, followed by a depreciation until the mid-1990s, and then another but more gradual appreciation from 1996 to 2002. Even so, over the course of the past 40 years the US dollar has generally depreciated against the SDR. The impact of the changing value of the US dollar on world sugar price can be tentatively evaluated by considering Fig. 3.5 in which an index of world prices expressed in US dollars as against 3 SDR is redefined as a ‘basket of currencies’. Today, that basket consists of the euro, Japanese yen, pound sterling, and US dollar. 39

The world sugar market

Index 2000 = 100

5 4 3 2 1

02

99

20

93

96

19

19

90

19

87

19

84

US dollars

19

81

19

78

19

75

19

72

19

69

19

66

19

19

19

63

0

SDRs

3.5 Nominal raw sugar prices expressed in US dollars and SDRs.

SDRs is presented. The US dollar price has tended to modestly understate the price when expressed in SDRs, reflecting the general appreciation of the US dollar relative to other currencies included in the SDR basket. Of interest is the generality that over the past three decades or so the value of the US dollar has generally moved in the opposite direction to commodity price cycles (expressed in US dollars): a strong dollar was often associated with weak dollar commodity prices, as was the case in recent years. Perhaps the strongest conclusion to be reached on the basis of this simple analysis is that the very low (US dollar) sugar prices witnessed during the mid-1980s and the relatively low prices experienced since 1998 can partly be explained because of the higher value of the US dollar at those times.

WHITE SUGAR PRICES

White sugar prices, also shown in Fig. 3.1, generally follow raw sugar prices and the raw/white differential tends to narrow when there is a relative shortage of raw sugar or a surplus of white sugar. Figure 3.6 shows the unadjusted raw/white price differential (this is not the refining margin, which must include an adjustment to reflect the fact that 100 tonnes of raw sugar makes 92 tonnes of refined sugar). Trends in the differential can be related to developments in the relative share of white and raw sugar trade on the world market, which is discussed in Chapters 7 and 9. 40

World sugar prices 7 6

US cents/lb

5 4 3 2 1

White

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

0

Linear (white)

3.6 Nominal unadjusted raw/white price differential (annual averages).

Volatility Volatility in commodity prices, including sugar, arises as a direct consequence of shocks in the underlying demand and supply conditions, and is affected also by policy measures implemented at the national level. Research by Deaton and Laroque (1992) characterized the nature of price shocks depending on prevailing market conditions. In tight markets, a sudden rise in consumption induces a sharp temporal rise in prices, but in a slack market, the impact of the shock induces the release of stocks that dampen prices for long periods. This gives rise to price cycles with sharp spikes followed by flat tails. Sugar analysts during the late 1980s until the late 1990s argued that the sugar market had become characterized by less volatility because of policy reform and deregulation, ensuring faster and broad based adjustments to production and demand shocks. The precipitous relative decline in the share of developed countries in world imports, from two-thirds in the 1970s to less than 40% since 1995, has also been identified as contributing to the increase in price stability. Analysis of price variability can be shown using box plots, as shown in Figs 3.7 and 3.8, for nominal and real raw sugar prices. Box plots provide a graphical representation of variability in terms of quartiles. A quartile is a statistic that divides the price data for 41

The world sugar market 35

US cents/lb

30 25 20 15 10 5 0 1951-60

1961-70

1971-80

1981-90

1991-00

1971-80

1981-90

1991-00

3.7 Nominal raw sugar prices.

120

US cents/lb

100 80 60 40 20 0 1951-60

1961-70

3.8 Real raw sugar prices.

each decade into four intervals, each containing 25% of the data. Lower, middle and upper quartiles are derived by sorting the annual price data from the lowest to the highest, and then identifying the values below which fall 25%, 50% and 75% of the data. The bottom and top edge of each box shows the position of the lower and upper quartile, and the height of the box indicates the ‘spread’ of 50% of the price data. In 1951–60, 50% of nominal annual prices fell between 3.3 US cents/lb and 4.05 cents/lb; during 1961–70, between 1.96 cents/lb and 3.56 cents/lb; during 1971–80, between 7.40 cents/lb and 18.15 cents/lb; during 1981–90, between 6.22 cents/lb and 11.96 cents/lb; and in 1991–2000, between 8.93 cents/lb and 11.81 cents/lb. What’s clear is that the variability of sugar prices peaked in the 1971–80 period. From Fig. 3.8, it is readily evident that real prices during the 1991–2000 period have not only been the most stable but the lowest over the past 50 years. Simple statistical analysis reinforces this view, as shown in Table 3.1. 42

World sugar prices Table 3.1 Basic statistics: sugar (2002) prices by decade Raw sugar Average

White sugar Std dev

Skewness

Kurtosis

Average

Std dev

Skewness

Kurtosis

1951–60

25.22

6.73

1.38

1.30

na

na

na

na

1961–70

19.07

12.59

1.89

3.22

na

na

na

na

1971–80

42.54

29.05

1.46

1.89

52.97

33.90

1.58

2.35

1981–90

15.19

7.46

1.64

3.77

20.16

8.57

1.58

3.16

1991–00

11.79

2.75

-0.51

-0.24

15.8

3.76

-0.4

-0.79

In this table world prices over each of the past five decades are analysed to characterize any changes in their average level and volatility. The most common measure of variability is standard deviation. Complementary descriptions of the price data include skewness and kurtosis. Skewness is a measure of symmetry. In a normal distribution, skewness is zero. Negative values indicate that observations are skewed leftwards (i.e. more downward spikes than upward spikes). A positive value shows that there were more upward spikes than negative ones. Of interest is the fact that for both raw and white sugar the most recent decade shows a negative skewness whereas the previous decades showed a positive skewness. That is, in the period 1991–2000 there were more instances of downward price movements than upward movements. Kurtosis measures whether the distribution is different from the normal distribution (kurtosis is 3 in this case). Price distributions with a ‘flat top’ at the mean have a low kurtosis value, instead of the high sharp peaks which are associated with a higher kurtosis value. Again, there appears to be a different distribution of prices in the most recent decade with both raw and white sugar prices showing a low kurtosis. This implies that large price movements were common for sugar in the previous decades relative to the 1991–2000 period.

‘GOLDEN ERA’ FOR SUGAR PRICES: 1988–97

The graphical and statistical analysis above, showing a return to much greater price stability during the most recent decade, reveals only part of the story, as now will be explained. For many of the world’s sugar exporting countries there was what can now be 43

The world sugar market

US cents/lb

50 40 30 20 10

19 8 19 0 8 19 1 8 19 2 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 03

0

ISA price

NY No.11

LDP white

3.9 Monthly world sugar prices.

viewed as a ‘golden era’ for sugar prices between 1988 and 1997 with prices at a comfortably high level (12–13 US cents/lb – see Fig. 3.9) and showing a degree of stability unseen in the previous two decades. There is no doubt that the market change that occurred during the 1980s leading to the post-1988 increase in stability was the precipitous relative decline in the share of developed economies in world imports, from two-thirds in the 1970s to 35% by 1995 (and maintained near this level since then). In the United States, which in 1974 imported 5.2 million tonnes (33% of the free market in that year), and Japan, which in 1974 imported 2.85 million tonnes (18% of the free market), more than 80% of sugar is used in the manufacturing of sugar-containing products. Typically, food and beverage manufacturers have a low price elasticity – i.e. are not very responsive to price movements – and continue to purchase in the short term even as prices rise markedly. Between 1974 and 1980, the developed countries, dominated by the USA, Japan and Canada, accounted for two-thirds of the world free market. The sheer volume of imports by this category of importer – with their policy of obtaining necessary supplies irrespective of prices – helped to drive prices up to the peaks that are now almost unbelievable. However, from 1980 developed country imports declined sharply as large high fructose corn syrups (HFCS) industries developed, encouraged by the price booms of 1974 and 1980, in the USA in particular and in Japan. At the same time, imports by developing countries rose, partly because of the rise in oil prices from 1973 (oil exporting/sugar importing countries were the major source of import growth between 1973 and 1980), and partly reflecting the very low sugar prices in the mid-1980s. The result was that 44

World sugar prices

by the late 1980s, two-thirds of world sugar imports were accounted for by high price elasticity developing countries. Their reaction to rising prices was to purchase less, bringing more stability to world sugar prices. Although the declining import market share of developed countries (and increasing share of developing countries, on the other hand) was perceived as the main factor behind the increased price stability commencing in 1988, two other contributory factors were identified. The first stems from the deregulation and movement towards freer trade that has been a feature of the world sugar economy in general, both developed and developing, which saw many countries free and deregulate their sugar markets to some extent (with the obvious exceptions of the United States, the European Union and Japan – see Chapter 10 on sugar policy reform). Indeed in many importing countries there is now a connection between the domestic price and the world price of sugar, usually through a tariff (albeit since the onset of lower average prices since 1998 applied tariffs have been increased in some countries). Similarly in many exporting countries, farmers also receive signals, however imperfect, from the world price. In this process, the world market was perceived to have been transformed from a residual dumped market to a ‘real’ market where the world price is generally more stable. The second subsidiary factor promoting more price stability during the 1990s, before the collapse in 1998, was the breakup of the former Soviet Union, which rapidly led to a reduction of Cuba’s special bilateral trade arrangement with Russia and Ukraine. There was an equivalent increase in the size of the world free market, making it less marginal. All imports of sugar in Russia are now at the world price plus tariff (tariff rate quota applied since the end of 2000, first set at 3.65 million tonnes) under which the right to import raw sugar is auctioned, but which still allows the country to vary imports according to world market price. For 2004, the two tier tariff rate quota scheme was abolished and a system of variable tariffs introduced instead.

PRICES CRASHED IN 1998

Prices crashed in 1998 to levels not seen for more than a decade. The extent and speed of the crash caught many analysts by surprise. With hindsight, prices were simply too high the previous decade to not draw a response from producers, and export orientated pro45

The world sugar market

ducers in particular. Especially in the Americas and the Pacific Rim, production capacities had been expanded over recent years without regard to demand. Between 1994/95 and 2000/01 world sugar production grew by 16%, whereas consumption increased by only 11%, leading to a substantial build-up in stocks. By August 2000, surplus stocks had risen to 18 million tonnes, an all time high. Production increases in Latin America were particularly strong – up 25% in the second half of the 1990s, representing 8.7 million tonnes of new production. The region’s consumption grew at around 12% over the same period. Asia was the only region where consumption grew at a more rapid pace than production. The strong rise in production led to aggressive competition for world market share. Whilst Cuba dominated the raws market during the early 1990s, by the turn of the decade it was Brazil with a clear and major dominance. Moreover, it is clear that the average price level during the 1990s of 11 US cents/lb drew the biggest response from Latin America, and Brazil in particular. In fact, Latin America’s exports increased by 51% during the 1994/95–2000/01 period to reach 17.6 million tonnes. Brazil’s exports alone grew by 6.8 million tonnes, raw value (or a rise of almost 90%). As noted, the price crash of 1998 (to levels not seen for 13 years) in hindsight occurred because the Asian financial crisis slowed consumption growth while Brazil continued to export record amounts, aided by the devaluation of the country’s currency. Prior to the 1998 crash, the impact of Brazil expanding to become the prevailing exporter of raw sugar was not felt immediately in the global market because higher Brazilian exports were counterbalanced by a dramatic decline in Cuba’s exports. In addition, the decrease in Russia’s domestic production in the middle part of the 1990s was filled almost exclusively by imports from Brazil. This Brazil–Russia nexus helped to keep the sugar market near balance and prices from collapsing, despite a steady build-up of stocks. Prices recovered in 2000 – in fact they doubled – but the key driver was weather related shortfalls in production (primarily the drought-affected crop in Brazil) rather than any underlying market response to the price fall. Indeed, driven by expectations for a long awaited drawdown in world stocks, prices doubled from a low set in February 2000, to a peak monthly average of 10.75 US cents/lb in October 2000. In the event, however, despite the weather driven fall in global sugar production, a small statistical surplus arose (0.38 million tonnes) and prices steadily weakened during 2001 to average only 6.79 cents/lb in October 2001, the start of the next crop cycle. 46

World sugar prices

Hopes for a stocks drawdown and higher prices were reignited late in 2001 because all the available evidence pointed to production failing to meet anticipated global consumption in the 2001/02 crop year. The ISO’s first forecast (released October 2001) was for world production to reach 132.4 million tonnes and consumption to be higher at 133.9 million tonnes, giving a statistical deficit of 1.5 million tonnes. Indeed the prospect of a statistical deficit and lower export availability helped to support prices during late 2000. By December the average ISA price had risen again to 7.83 US cents/lb. However, these broadly supportive market fundamentals at the global level were again overshadowed early in 2002 by market expectations for a huge cane crop in Brazil in their upcoming 2002/03 season. Prices again came under strong downward pressure. However, from mid-2002 to February 2003 prices rose steadily, despite the ongoing global surplus, to a level above the long term trend value (the ISA price reached 9.37 cents/lb, the highest daily quotation for 19 months since July 2001). Many analysts pointed to the role of investment funds and their general swing out of equity markets into futures markets as the key factor driving prices higher. However, during 2003, prices remained under downward pressure and by October the ISA daily price had fallen back to 5.96 cents/lb. Prices had recovered to 6.28 cents/lb by year’s end but bearish market fundamentals were expected to continue to pressure the market over the medium term (see the additional discussion in Chapter 13 on longer term market perspectives).

CONCLUSIONS: VOLATILITY AND AVERAGE PRICES

The lower average world sugar price since 1998 is of paramount importance to those exporters reliant to varying degrees on the world sugar market. As shown in Figure 3.10, monthly prices since 1998 have persistently remained below the 1989–97 average of 11.34 cents/lb, and have averaged around 7.8 cents/lb since that time, below the production costs of many exporters and generally perceived to reflect oversupply on the world market. Analysts generally believe that prices of this level are remunerative to one exporter only: Brazil, which has a strong comparative advantage in sugar production, as discussed further in Chapter 9. Volatility in monthly world market prices appears to have changed little with the coefficient of variation at 0.17 during 1989–97 and only slightly higher at 0.20 thereafter. The key issue then is the lower average 47

The world sugar market 18 16 14 US cents/lb

12 10 8 6 4 2 00 20 01 20 02 20 03

99

1989-97

20

98

19

97

19

96

19

95

ISA

19

94

19

93

19

92

19

91

19

90

19

19

19

89

0

1998-2003

3.10 Monthly ISA price.

160 140 120

Index

100 80 60 40 20

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

0

Sugar (1995 = 100) Edibles index (1995 = 100) Index of non-fuel primary commodities (1995 = 100)

3.11 Raw sugar prices as against other commodities.

level of prices since 1998 rather than any sense of heightened volatility. Of interest is the fact that many agricultural commodity prices fell during the late 1990s – see Fig. 3.11 – and prices were generally viewed as ‘depressed’ by the year 2002. Nearly all basic foodstuffs had declined steadily from peaks reached in the mid-1990s, 48

World sugar prices

in some instances to levels not seen for nearly two decades. For tropical products the decline in prices had been dramatic: coffee prices had fallen to their lowest levels for more than 30 years, and quotations for other beverage crops were also very low. Prices of raw materials had deteriorated significantly. Among these, prices of cotton were at the lowest level since the mid-1980s. The coincidence of low prices across many commodities provoked market and policy analysts to ask the question as to whether there were common explanations for the price falls. However, there are no significant exogenous shocks that analysts can point to, such as the oil price shocks of the 1970s, or the more recent Asian financial crisis, which impacted all commodity prices generally. At most it seems that agricultural commodity prices have been low by historical standards during the early part of the present decade but that this situation seemingly reflects the ‘fundamentals’ of each market. Further consideration of this issue is outside the scope of this book, but it is a reminder that at times the sugar market should not be considered isolated from developments in other agricultural commodities.

Booms and busts Cycles are a dominant feature of commodity prices,4 but there is little evidence of a consistent ‘shape’ to cycles. Sugar is no exception. Typically, price slumps last longer than price booms; the probability of an upturn in prices is independent of the time already spent in the slump, and generally, the probability of an end to a boom in prices is independent of the time already spent in the boom. In Fig. 3.12 six completed cycles are identified in sugar prices over the past five decades, each displaying a considerably different average price level. The current cycle does not appear complete, and indeed perhaps the structural change in the supply side of the market (discussed in Chapter 9) means the cycle of booms and busts in sugar prices is unlikely to be repeated. The price cycle is typically seen as reflecting the perennial nature of the sugar cane plant,5 which results in a delayed and muted supply response by farmers (and millers) to changes in sugar prices. Figure 3.12 shows that the cycle is most commonly around six 4 Cashin, McDermott and Scott, 1999. 5 Todd, 2002. 49

The world sugar market 120 6 years

6 years

11 years

6 years

9 years

6 years

?

100

US cents/lb

80 60 40 20

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

1951

0

3.12 Cycles in real raw sugar prices. Table 3.2 Average level of real prices during observed cycles Cycle

Average price (US cents/lb)

1951–57

27.50

1957–63

25.06

1963–74

29.60

1974–80

47.98

1980–89

19.72

1989–95

14.60

1995–2002

9.18

years6 – a broad correspondence with the sugar cane replanting cycle in the majority of the world’s leading sugar exporters. Producers with a six year ratoon cycle (see Chapter 1) therefore exhibit very little supply response to changes in world sugar prices, accepting the ‘average’ price over the course of the cycle. For producers with shorter crop cycles (many Asian countries and beet sugar producers), their supply response is more marked because there is the opportunity to adjust the area under sugar crops. See Table 3.2. 6 Cashin et al found the ISA sugar price to have a ‘boom’ duration of 46 months and a ‘slump’ duration of 38 months to 7 years. 50

World sugar prices

Quick adjustments to price signals are also thwarted by high switch costs involved in moving into alternative crops, especially since sugar crops are part of a complex and capital intensive infrastructure geared to transport sugar crops into mills. In addition, sugar processing is capital intensive and millers take a long term view of the market, and therefore during times of low prices will continue to make sugar. Variations in a producing country’s exchange rate against the US dollar can also mask world market price signals. Crucially, the relative unresponsiveness of global supply also reflects government domestic support and trade policies, which means that a significant proportion of world production is conducted at prices that bear little relation to world market prices and often where the link between cane prices and sugar prices is weak (discussed further in Chapter 8).

Prices and the stocks to consumption ratio Stock levels7 are generally perceived as an overall predictor of world sugar price, taking into account not only how the current season’s surplus or deficit could impact the price, but also how the production surplus or deficit accumulates over time. In essence, the impact of the current year’s stock level also depends on the level of consumption. If stocks are high relative to consumption then this would exert downward pressure on prices and vice versa. When the stocks to consumption ratio reached an historical high in 1999 (57%), world sugar prices fell to an average of 6.27 cents/lb, their lowest for 13 years. In Fig. 3.13, the stocks to consumption ratio and the real raw sugar price is shown for the period 1952/53–2001/02.8 A general 7 The ISO measures stocks at the end of the calendar year. However, there is a real question of when to measure stocks because of the seasonal nature of sugar production. At end-December beet sugar stocks would be high because the northern hemisphere campaign would have just finished. For this reason some analysts prefer to use stocks measured at end-August, as compiled by F. O. Licht. Furthermore it is not possible to measure stocks accurately because many countries do not report their stock levels; consequently errors in the stocks series can arise. 8 September/August years as compiled by F. O. Licht. Data sourced from F. O. Licht, 2002. 51

The world sugar market 0.6

Ratio

0.5

80 60

0.4 0.3

40

0.2

20

Raw prices 2002 (US cents/lb)

120 100

0.1 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Stocks to consumption ratio

Real sugar price

3.13 Real raw sugar prices and the stocks to consumption ratio.

inverse relationship is evident, with higher prices tending to be associated with low stocks to use ratios and vice versa. However, whilst providing a general indication, further analysis shows that in any one year the stocks to consumption ratio does not act as a precise predictor of world sugar price. In 2000, for example, world sugar prices rose to average 8.18 cents/lb despite the stocks to consumption ratio remaining much the same level as in 1999 when prices reached a 13 year low. The extent to which the stocks to consumption ratio is useful as a predictor of world sugar price is illustrated more clearly in Fig. 3.14, which shows a scatter plot of prices as against the ratio. If there were a perfectly predictable relationship between the stocks to consumption ratio and world prices then all of the points would lie on the diagonal line. Clearly this is not the case and world prices in some years can lie relatively far from the predicted level,9 suggesting other factors also impact sugar prices.10 Using log values allows the estimation of the relationship between the stocks to consumption ratio and real world prices. The slope coefficient of the diagonal line is -1.82, meaning that a 10% increase in the stocks to consumption ratio would be associated with an 18.2% decline in the real raw sugar price.

9 Fitted line derived using ordinary least squares. Estimated equation is y = 38.6 53.28 · X. R2 = 0.52. 10 The LMC price forecasting model for instance shows that in addition to the stocks to consumption ratio, world prices are also driven by interest rates and the world oil price. 52

Log of raw sugar price

World sugar prices 5 4 3 2 1 0 -2

-1.5

-1

-0.5

0

Log of stocks to consumption ratio

3.14 Stocks to consumption ratio and the real raw sugar prices, 1952/53 to 2001/02.

Investigating sugar price seasonality: 1980–2000 WHAT IS SEASONALITY?

Persistent patterns of price behaviour through time are common in agricultural commodity markets, and include seasonal patterns of change, year to year fluctuations, trends and cycles. However, the most common regularity observed in agricultural prices is a seasonal pattern of change: an oscillating pattern observed within one production season. Seasonality in prices can be caused by factors that impact production, such as climate and biological growth processes (time from planting to harvest, annual or perennial crops, ability to grow a product at multiple locations with different climates). Complicating matters is the possibility that the pattern will drift or change in amplitude from year to year.11

HOW LIKELY IS SEASONALITY IN THE WORLD SUGAR MARKET?

Viewing world sugar in terms of the different components identified by the theory of agricultural price analysis – trend, cycle, seasonal and irregular – might well be instructive in anticipating movements in world sugar prices during the course of a year. Seasonality in prices might arise because of clear seasonality in world production. The key question though is whether any significant and stable seasonal pattern could be manifested in world sugar prices when a myriad of economic and policy factors can impact the yearly trend/cycle component and when the high instability in prices 11 From Jaditz T, Seasonality: Economic Data and Model Estimation, Monthly Labor Review, December 1994, pp 17–22. 53

The world sugar market

implies a large unpredictable irregular component to prices. Moreover, the clear and significant evolution in the structure of the world sugar market since the early 1990s – with some industries having undergone deregulation and now reacting to and also influencing the world price – means that the world market is less marginal. Consequently, identifying significant and stable price seasonality from historical data will be difficult.

IDENTIFYING SEASONALITY

Exploratory data analysis

US cents/lb

The first simple check for detecting seasonality is to conduct a graphical analysis of the data using box plots. The absence of a marked seasonal pattern in world sugar prices is shown in the box plots. As we have seen, in a box plot, the maximum and minimum points are identified, and a box drawn between the lower and upper quartiles, to represent the middle 50% of the data. Thus, the box plot provides visual information about shifts in the body of the data across months, including changes in variation over months (as illustrated by box height). Perusing Figs 3.15 and 3.16, there does appear to be some movement between the monthly series, although not of great magnitude, and there is also evidence of variation changes between the monthly sub-series. The visual comparison of average values and dispersion can be formalized and tested statistically by conducting a so called t-test for differences in means. A basic statistical profile of the monthly subseries is provided in Tables 3.3 and 3.4. Under this procedure, the mean price level for each month was compared against the mean

45 40 35 30 25 20 15 10 5 0 Jan

Feb

Mar

Apr

May June

3.15 Box plot ISA prices: 1980–2000. 54

July

Aug

Sept

Oct

Nov

Dec

US cents/lb

World sugar prices 18 16 14 12 10 8 6 4 2 0 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

3.16 Box plot ISA prices: 1982–2000.

level of every other month, two by two. For 12 months, every twoway comparison amounts to 66 possibilities. The test results are not reported here but in 25 cases only was the probability of the means (grouped differences) being equal found to be below 80%. The bulk of the lower probabilities for the means being equal were for March, June and July as against the other monthly sub-series. An F-test for equality of variances was also conducted across the 66 two-monthly comparisons, and in all cases there was no statistical evidence to suggest that the variances are not equal. The exploratory data analysis provides ambiguous evidence, but at best, there may be a weak seasonal pattern in world sugar prices – small seasonal peaks in March, June and July, and small seasonal lows in January, February and September. These initial results can be more robustly tested by applying formal methods of identifying seasonality. X-11 US Census Method II The X-11 method for identifying and measuring seasonality was developed by the US Census Bureau. It assumes that a time series can be broken down into a trend cycle component, seasonal component, and irregular component, and the idea behind the X-11 method is to extract the various components with a series of symmetric moving-average filters. The Census II method provided the seasonal factors for the 1982–2000 period, as shown in Table 3.512; these are graphed in Fig. 3.17. 12 Multiplicative model, with the final trend cycle component derived as a nine term Henderson moving average – I/C ratio = 0.94. 55

56

5.30

0.52

Standard deviation

Coefficient of variation

28.07

3.61

Minimum

Variance

27.78

Maximum

24.17

3.07

Kurtosis

Range

8.25

1.63

Skewness

Mean

Mode

8.80

10.30

Median

Jan

0.51

5.29

27.94

20.39

3.70

24.09

0.94

1.28

8.56

10.32

8.56

Feb

0.44

4.58

20.96

17.98

3.83

21.81

0.17

0.90

10.62

10.35

9.85

Mar

Table 3.3 Summary statistics ISA: 1980–2000

0.42

4.27

18.31

17.83

3.42

21.25

0.22

0.80

11.15

10.20

9.58

Apr

0.54

5.62

31.63

28.12

2.82

30.94

5.59

2.12

11.83

10.50

9.24

May

0.53

5.64

31.83

28.02

2.78

30.80

5.16

2.01

10.39

10.60

10.39

Jun

0.49

5.21

27.19

24.52

3.18

27.7

2.98

1.43

9.68

10.62

10.31

Jul

0.55

5.77

33.27

27.64

4.13

31.77

6.13

2.23

9.34

10.44

9.83

Aug

0.62

6.26

39.13

30.57

4.17

34.74

8.49

2.76

9.54

10.16

9.54

Sep

0.69

7.35

53.96

35.87

4.68

40.55

10.27

3.15

10.29

10.58

9.82

Oct

0.65

6.77

45.85

33.44

4.37

37.81

9.69

3.04

10.12

10.49

9.93

Nov

0.67

7.02

49.23

35.20

3.59

38.79

9.65

3.01

10.52

10.51

9.74

Dec

The world sugar market

9.86

3.14

0.35

Variance

Standard deviation

Coefficient of variation

3.61

11.15

Range

Minimum

-1.03

-1.01

14.76

Kurtosis

0.22

Skewness

Maximum

0.37

8.24

Mode

0.35

3.15

9.91

10.95

3.70

14.65

8.56

8.94

9.01

8.51

8.32

Mean

Feb

Median

Jan

0.34

3.15

9.95

11.53

3.83

15.36

-0.93

0.21

10.62

9.26

9.14

Mar

Table 3.4 Summary statistics ISA: 1982–2000

0.33

3.05

9.31

11.82

3.42

15.24

-0.86

0.06

11.15

9.21

9.46

Apr

0.33

2.99

8.94

11.81

2.82

14.63

-0.74

-0.11

11.83

9.18

9.23

May

0.32

2.97

8.85

11.24

2.78

14.02

-0.88

-0.33

10.39

9.22

10.36

Jun

0.35

3.26

10.66

10.84

3.18

14.02

-1.11

-0.29

9.68

9.42

9.68

Jul

0.32

2.96

8.74

9.87

4.13

14.00

-1.24

-0.23

9.34

9.09

9.46

Aug

0.32

2.79

7.79

9.96

4.17

14.13

-1.12

-0.09

9.54

8.78

9.43

Sep

0.30

2.66

7.06

9.76

4.68

14.44

-0.96

-0.01

10.29

8.93

9.69

Oct

0.29

2.63

6.94

10.65

4.37

15.02

-0.50

0.25

10.12

8.98

8.66

Nov

0.30

2.68

7.17

9.82

3.59

13.41

-1.03

-0.19

10.52

8.89

9.00

Dec

World sugar prices

57

The world sugar market Table 3.5 X-11 method seasonal index, 1982–2000 January

102.2

July

100.7

February

96.9

August

102.3

March

92.1

September

97.1

April

94.1

October

103.4

May

94.6

November

108.2

June

99.2

December

109.1

115 110

Index

105 100 95 90 85 80 Jan Feb Mar Apr May Jun

Jul Aug Sep Oct Nov Dec

3.17 Seasonal factors: X-11.

The identified seasonal pattern loosely follows the a priori notion of seasonality driven by export availabilities – as can be seen in this graph – particularly a seasonal (modest) slump during March and April and again in October. Most importantly, however, the Census II procedure objectively tests whether the reported seasonal factors are statistically significant. Using an analysis of variance procedure, there is no evidence of stable seasonality at the 1% level. This finding provides objective proof: there is no significant or reliable seasonal pattern in monthly ISA prices. Even so, the weak seasonal variations identified do conform with a priori expectations of a modest slump in prices during the first quarter and again in the September/October period when export availabilities reach a world market peak. Clearly though, prices do not always follow this pattern every year, depending on the size of the stocks relative to demand, whether there is a general situation of production surplus or shortfall, and whether cash flow needs force poorly financed industries to immediately sell new season sugar, amongst other factors. In a more general sense, the lack of marked seasonality in prices sug58

World sugar prices

gests that markets are working efficiently in ‘evening out’ seasonal variations in import demand and export supply during the course of the year.

Conclusions World sugar prices are trending downwards over the longer term at a rate of around 2% every year, but there appears to have been a sharp structural decline since 1999 to an average level of 7.80 cents/lb, causing financial distress for many export orientated countries. The fall-off in 1999 followed a decade of relatively stable prices (relative to the large peaks and troughs of the previous two decades) at a much higher average level of 11.3 cents/lb. This period of higher and relatively stable prices was attributed to an increasing share of price sensitive developing countries in world imports, general liberalization and deregulation in the world sugar economy, as well as to a boost in world trade following the break-up of the Soviet Union in the early 1990s. Although sugar prices have reached depressed levels during the past few years, price volatility has not increased substantially. A steadily accumulating stocks to consumption ratio at the global level (symptomatic of oversupply on the world market) during most of the 1990s is one factor contributing to steadily declining prices since the mid-1990s (there is empirical evidence of a robust inverse relationship between an increasing stocks to consumption ratio and lower prices), but this is not a perfect relationship because there are a myriad of market related and policy related factors impacting world sugar price all at the same time, as will be revealed in the following chapters. For the future, the key issue is whether world market prices will recover from the low average level of recent years. From another perspective, the 7–11 year cycle in prices evident during past years appears to have passed (attributed by analysts to the general liberalization and deregulation in the world sugar market since the 1990s) and there is little prospect of a sustained upswing to higher prices based on the phenomenon of commodity price cycles. Finally, taking a shorter term perspective, there is no evidence of a pronounced seasonality in sugar prices during the course of the year, suggesting that markets are working efficiently in evening out seasonal variations in import demand and export supply. 59

The world sugar market

References Cashin P, McDermott CJ and Scott A, Booms and Slumps in World Commodity Prices, Reserve Bank of New Zealand Discussion Paper Series G99/8, 1999. Deaton and Laroque, On the Behavior of Commodity Prices, Review of Economic Studies, Vol. 59, 1992, pp 1–23. Hildebrand C, Independent Assessment of the Sugar Industry, Commonwealth of Australia, Canberra, 2002. F. O. Licht, F. O. Lichts World Sugar Statistics 2002, Agra Europe (London) Ltd, UK, 2002. Todd M, Implications of World Trade Liberalization for Sugar Producers in Asia, Paper presented to the 8th Annual Asia International Sugar Conference, Bali, Indonesia, 3–4 September 2002.

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C H A P T E R

4

Futures markets

History The first futures markets were opened in Chicago around the middle of the nineteenth century to trade the main agricultural products such as wheat and soybeans. The need arose from a desire on the part of farmers for an efficient and reliable method of hedging their production following some serious defaults on forward contracts by unscrupulous operators. The great advantage that futures held over the old-style forwards was the lack of any counterparty risk; the futures markets themselves acted as counterparty for both buyer and seller by guaranteeing the contract. Another advantage to users was the relatively cheaper outlay of only paying a small (usually around 10%, but negotiable) deposit followed by variation margins when and if the market moved against them. Quality guarantees were another feature introduced by the market operators which attracted trade, and very soon the concept of futures trading was embraced enthusiastically by all sections of the trade and quickly flourished. Futures trading in Europe, which was quick to follow the USA’s lead, has enjoyed a chequered career. As with derivatives today, it suffered for years from a marked lack of understanding by many users and supervisors, with the resulting spectacular failure of several companies. This, coupled with some aggressive sales techniques on the part of crooked brokerage houses that simply churned a client’s position until the entire sum invested had been swallowed up in commission, seriously hampered progress and it was not until the 1980s that futures trading became respectable and accepted as a serious investment vehicle. The boom in prices in 1994/95 gave it 61

The world sugar market

the impetus it needed to become recognized as an asset class in its own right. Throughout the 1990s futures went from strength to strength, expanding into all kinds of new markets including energy, currency and environmental contracts. The first sugar futures exchange was opened in Hamburg in 1880, followed by the London Terminal Market eight years later. The contract unit at that time was 400 tons of raw beet sugar fob Hamburg. When the market was reopened after World War I, the contract was changed to white sugar ex bonded warehouses London, and the contract size was reduced to 50 tons. However, by 1929, tariff charges had virtually stopped the import of refined sugar, so the basis had to revert to raw sugar and the old white sugar one was de-listed in 1931. All futures trading stopped again during World War II, and it was not until 2 January 1957 that the London sugar market reopened. Since then, with modifications and alterations, it has been trading to the present day. Meanwhile, the Coffee Exchange of New York commenced operations in 1882 and, following the cessation of trading in Europe during World War I, added a sugar contract in 1914, changing its name to the New York Coffee and Sugar Exchange two years later. It merged with the New York Cocoa Exchange in 1979 to become the New York Coffee, Sugar & Cocoa Exchange (CSCE). In December 1997, the CSCE merged with the New York Cotton Exchange to form the Board of Trade of the City of New York (NYBT). In 1982, the first US exchange-traded option on a futures contract was traded when the CSCE launched world sugar options. A white sugar contract was launched in Paris in 1988 and sugar futures are also traded in Tokyo and Rio de Janeiro. These three have been very quiet and inactive. Indeed, the Paris contract was de-listed in 2000. When futures trading was resumed in London in 1957, it was known as the No. 2 raw sugar contract and was a cif contract, quoted in sterling. In 1979–80 this was replaced by the No. 4 contract, denominated in US dollars. This lasted until 1984 when it was superseded by No. 6 and changed to an fob contract, but ceased trading in April 1993. In retrospect, the decision to change to a dollardenominated contract can be seen as the beginning of the demise of raw sugar trading in London. This decision effectively wiped out arbitrage trading (see p. 70) which was the exchange’s most lucrative income source and was followed by an inexorable decline in volume, from 155,875 lots in September 1989 to a low of 371 in January 1993. 62

Futures markets

Another decision, taken in 1991, put the No. 6 contract briefly onto the London Commodity Exchange’s Fast Automated Screen Trading (FAST) system. When this failed it reverted to open outcry, but confidence was not restored and the decline continued. After it ceased trading in 1993, brokers and traders still demanded a London raws contract, so, later the same year, the present No. 7 contract was born. This has only minor modifications from the No. 6 but was again placed on the FAST system. By this time, the traditional open outcry method of trading had completely disappeared from the London sugar market. The FAST system enables orders to be matched up on screen and trades are executed in the brokers’ offices. This has the advantage of being considerably cheaper than the former method and is becoming increasingly popular. It is considered by regulators to be quicker, safer and fairer than open outcry. A disadvantage of the system is the virtual disenfranchisement of the locals, who are effectively excluded from trading sugar in London since their modus operandi entails eyeball to eyeball contact, making the market less volatile and less liquid than hitherto. It is not surprising, therefore, that the decision has had the opposite effect to that intended and has driven much business away from London. Indeed, apart from the spot month, the contract is seldom traded. That, however, is not the case with the white sugar contract that was launched in 1987. Before that, during the 1970s, a differential contract was introduced but that was very short-lived as it failed to win the support of the refiners. The present contract (known as the No. 5 white sugar contract) has proved far more successful and enjoyed soaring volumes in 1994 with prices reaching a four and a half year peak in early January 1995. That contract now enjoys 65–75% of the market.

Current contracts THE LONDON DAILY PRICE

Every day a special committee, appointed by the market, establishes a London daily price (LDP) for raws and whites. These prices represent the value of prompt physical sugar as reported to the committee, with the general tone of the futures market taken into account. The LDP is a basis on which the fixing of physical contracts can be achieved and it is widely used by the trade; indeed, many physical deals are struck months and even years before delivery is 63

The world sugar market

due and are settled on the basis of the LDP on delivery. They are also widely used by governments and other bodies for other purposes, such as the fixing of subsidies by the EU. However, the introduction of Cuba as a permitted delivery country of origin caused problems with US operators, who are not allowed by law to deal in Cuban sugar. This also had serious implications for investors and, as a result, a great deal of business was switched onto the No. 11 contract, where Cuban sugar is not deliverable, to London’s detriment. Because sugar is so susceptible to supply problems, it attracts a large speculative interest. Speculator activity in sugar has always been very popular and this leads at times to violently fluctuating prices, subjecting the market to temporary distortions. For that reason, therefore, it is important to have a daily fixing price that overrides technical squeezes and speculator-induced distortions and can be used as a yardstick by physical traders. CONTRACT SPECIFICATIONS

The No. 7 premium raw sugar contract (so called because it traded at a variable premium to the New York No. 11 contract) was suspended in March 1996. There is, therefore, now only one sugar futures contract traded in London, the No. 5 white sugar contract. This was transferred to LIFFE’s new CONNECT electronic trading system in November 2000. The specifications of the contract are as follows: No. 5 white Contract size: Quotations: Minimum price fluctuation: Contract terms:

Delivery months: Trading hours:

50 metric tonnes US currency per tonne fobs, designated port 10 cents/tonne ($5) White beet or cane crystal or refined sugar of any origin from current crop* Minimum 99.8° polarization March, May, August, October and December 09.45–18.20 London time

Last trading day:

18.20 hours, 16 days prior to final market day of delivery month

Trading method:

CONNECT

*The following origins are tenderable: Argentina, Australia, Barbados, Belize, Brazil, Colombia, Costa Rica, Cuba, Dominican Republic, El Salvador, Ecuador, Fiji, French Antilles, Guatemala, Guyana, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Mozambique, Nicaragua, Peru, Philippines, Réunion, South Africa, Swaziland, Taiwan, Thailand, Trinidad, USA and Zimbabwe.

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Polarization provides an indication of the purity of the sugar. The origin of the term lies in the behaviour of a beam of polarized light when passing through a solution of sugar. A solution of sucrose will turn such a beam to the right, whereas a solution of invert sugar will turn it to the left. The extent of the movement is a measure of the strength of the solution.

OPTIONS

Options, which are explained in detail later in the chapter, are also available on the white sugar contract, specifications of which are as follows:

Option type: Contract size: Strike price increments: Minimum price fluctuations: Trading months: Trading hours: Expiry date:

American 50 metric tonnes $10/tonne 5 cents/tonne ($2.50) Same as futures 10.00–18.30 hours Close of first business day of the preceding month. Instructions to be given to Clearing House within one hour All options that expire in-the-money will automatically be exercised

THE NEW YORK MARKET

Four sugar contracts are traded on the CSCE, the No. 11, or world, contract, a new white sugar one, the No. 14 domestic and a white sugar contract. The last two are purely domestic contracts which are traded only intermittently and are highly illiquid. The No. 11 contract, on the other hand, is truly a world contract and the only viable international vehicle for hedging raw sugar. It calls for the delivery of sound raw centrifugal cane sugar of 96° average polarization, fobs in bulk in any one of 28 foreign countries as well as the USA itself. The No. 14 domestic contract requires delivery of US origin raw centrifugal cane sugar, cif duty paid, in bulk, at named Atlantic or Gulf ports while the white contract specifies delivery of refined cane or beet sugar. Specifications for the three oldest contracts are as follows: 65

The world sugar market No. 11

No. 14

White

112,000 lbs (50 long tons)

112,000 lbs (50 long tons)

50 metric tonnes

Cents/lb

Cents/lb

Dollars/tonne

0.01 cent ($11.20/contract)

0.01 cent ($11.20/contract)

20 cents/tonne ($10/contract)

Contract terms:

Raw centrifugal cane sugar based on 96° average polarization

Raw centrifugal cane sugar based on 96° average polarization

Refined or white beet or cane sugar based on minimum 99.8° polarization

Delivery months:

March, May, July and October

January, March, May, July, September and November

January, March, May, July and October

Contract size: Quotations: Minimum price fluctuation:

09.30–13.20

09.15–13.30

09.45–13.43

Last trading day:

Trading hours:

Last business day of month preceding delivery month

Eighth, or next business day of month preceding delivery month

Fifteenth, or next business day of month preceding delivery month

Trading method:

Open outcry

Open outcry

Open outcry

The following origins are deliverable against the No. 11 contract: Argentina, Australia, Barbados, Belize, Brazil, Colombia, Costa Rica, Dominican Republic, El Salvador, Ecuador, Fiji, French Antilles, Guatemala, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Nicaragua, Peru, Philippines, South Africa, Swaziland, Taiwan, Thailand, USA and Zimbabwe. As with all US futures markets, position limits apply. Deliverable growths against the No. 14 contract are: cane sugars of US origin, duty free or foreign origin duty paid, and delivered in bulk. To be deliverable against the world white sugar contract, parcels must be manufactured in the country of the delivery port (EU nations count as one country). However, this contract is now dormant and tradeless. The New York CSCE also sets a daily spot price; this is posted a few minutes before the market closes for the day and is set by the exchange which rings around its members beforehand. This can lead to some anomalies if an important member is unavailable but, like the LDP, the price is widely used for settling maturing physical contracts.

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The CSCE imposes position limits in all its contracts, with options forming a part of that position if held. The actual limits are variable and subject to change at short notice. At present the limits on the No. 11 contract are 6,000 lots of any one month and 9,000 lots in total. Straddles and arbitrage positions can usually be netted and there are exemptions for genuine hedging operations. At present, the CSCE, where the US futures contracts are traded, has no plans to convert to screen based trading, preferring to stick to the well tried open outcry method. In June 1996 the CSCE launched a new white sugar futures contract to cater for those active in trading refined sugar and needing a more efficient hedging mechanism than the No. 11 raw contract. It has never been satisfactory for refined operators to hedge on the raw sugar contract as the variability of price between the two gets more and more unpredictable as time goes on, making such a practice unacceptably risky. The contract calls for the delivery of 50 metric tonnes of white sugar processed from either cane or beet, allowing direct hedging of white sugar commitments by refined sugar processors, merchants and users throughout the world. Investment capital and speculative interest should be attracted to the contract and, if it is successful, there will be many arbitraging possibilities. The specifications of the contract are as follows:

Contract size: Quotations: Minimum price fluctuation: Contract terms:

Delivery months: Trading hours:

50 metric tonnes Dollars/tonne 20 cents/tonne ($10/contract) White refined or crystal beet or cane sugar, in new woven polypropylene bags of 50 kg net, based on a minimum 99.8° polarization with a maximum moisture content of 0.08% March, May, July, October and December 09.15–13.20 (New York time)

Last trading day:

Fifteenth of the month preceding the delivery month

Trading method:

Open outcry

Delivery points consist of 80 ports* worldwide which may be added to or deleted as circumstances dictate. The sugar must be manufactured in the country of the delivery port and there are solid restrictions on Cuban sugar, which is not deliverable under any circumstances. EU delivery ports may take sugar from any EU nation. * The deliverable ports are: Argentina – Buenos Aires; Australia – Sydney, Mackay, Melbourne, Fremantle, Brisbane, Bundaberg and Townsville; Belgium – Antwerp; Brazil – Recife, Maceio, Imbituba/Itajai, Santos, Paranagua and Rio de

67

The world sugar market Janeiro; Canada – Montreal and St John; China – Shanghai, Dalian and Huangpu; Colombia – Buenaventura; Costa Rica – Punta Morales; Dubai – Dubai; Egypt – Alexandria, Damietta and Port Said; El Salvador – Acajutla; Finland – Porkkala and Helsinki; France – Dunkirk, Rouen, Calais and Le Havre; Germany – Hamburg, Bremen and Rostock; Guatemala – Quetzal; India – Bombay, Kandla, New Mangalore, Tuticorin and Madras; Korea – Pusan, Inchon and Ulsan; Malaysia – Penang; Mexico – Vera Cruz/Tampico, Manzanillo and Mazatlan; Mozambique – Nacala, Beira and Maputo; Netherlands – Rotterdam, Flushing, Amsterdam, Delfzijl and Eemshaven; Nicaragua – Corinto; Pakistan – Karachi; Philippines – Manila, Iloilo and Ormoc; Poland – Gdansk/Gdynia; Portugal – Lisbon; Russia – Novorossiysk; Saudi Arabia – Jeddah; Singapore – Singapore; South Africa – Durban; Sweden – Malmo; Thailand – Bangkok, Kosichang and Laem Chabang; Turkey – Mersin; Ukraine – Odessa and Nikolayev; United Kingdom – Immingham; United States – Galveston, New Orleans, Savannah, Baltimore, New York and Crockett. Sugar from Malawi is deliverable at Nacala and Beira. From Swaziland at Maputo and from Zimbabwe at Maputo and Beira.

OTHER MARKETS

There are also sugar futures markets in Japan and Brazil with several other countries weighing up the possibilities. These markets are very quiet and largely domestically structured. Foreign investors are not encouraged as their activities might be harmful to the country’s exchange rate and/or balance of payments. As we have seen, the Paris market proved a failure, lasting only 12 years before being de-listed by the authorities due to lack of investor interest. The Tokyo market is very small, with trading taking place only during the four specified calls each day. Prices are quoted in the local currency and overseas traders are virtually excluded from taking delivery from the spot month as the necessary certificates are not available to them. For the same reason, investor interest is very small.

Options In 1982 the CSCE, with its launch of sugar options on the No. 11 contract, was the first US exchange to sanction these since 1936 when they were prohibited by law following a massive fraud perpetrated in the 1930s. Since then, volume has grown steadily and traded options were launched in London in 1985. Options are a very useful risk management tool for both the trade and speculators. In return for the payment of a premium (often but by no means always around 10% of the strike price), the right but not the obligation is granted to buy or sell on the market on a given day in the future. If the price on that day is not acceptable, 68

Futures markets

the trader simply abandons the option, losing only his premium. The main advantage is that one’s losses are known, while profits can be quite considerable if the price continues to move in the right direction. If the price is expected to rise, a call option is bought and if to fall, a put option is purchased. If by the exercise date the price has moved in the wrong direction or in the right direction but by less than the amount of the premium, the option is abandoned. Options are fully tradable and there is always a thriving market in the most popular months. Trading in sugar options has grown substantially in the last 15 to 20 years and is now a useful, popular and highly flexible hedging tool. Options are also very useful in ironing out violent price movements that speculative activity can sometimes generate. Sellers, or granters, of options are usually in the trade, as it is necessary to have the physical sugar to back up the sale. Without such back-up, a seller is said to be writing a naked option, as he is completely uncovered and is consequently liable to substantial losses, even unlimited losses in extreme cases. For double the premium, it is also possible to purchase a double option. This is both a put and a call to each for a movement in either direction. Another advantage of options is not having to pay variation margins. This is particularly helpful to fund managers who thereby gain extra gearing for further trading opportunities. There are many option strategies available to the trader and many books have been written on the subject.

Uses of the futures markets HEDGING

It tends to be forgotten, in today’s jungle of trading strategies, that the original purpose of setting up a futures market in a commodity was to provide a vehicle which would enable the trade to hedge its exposure to significant adverse price fluctuations by taking a contrary position on it. Hence producers could protect their forward sales by buying futures and consumers could protect their forward purchases by selling them, with speculators, as often as not, taking the inherent risk. Nowadays, risk has become an unacceptable operation on 69

The world sugar market

futures markets. So many futures transactions are now inter-linked with other, similar operations, all designed to beat some obscure index without losing money, that true hedging strategies have become extremely difficult, if not impossible. Since the greater part of such activity is now, in any case, largely concerned with protection from currency fluctuations, most hedging operations are now done on the currency markets.

ARBITRAGE

Arbitrage operations have been similarly affected. These operations entail buying sugar in one currency and selling in another, or on a different exchange. When the London market switched to a dollardenominated contract in 1979, arbitrage operations virtually died out for a number of years. Hitherto, arbitrage had been an extremely lucrative source of revenue for both the exchange and its members, but it was not until the launch of the No. 5 white sugar contract in 1983 that it was revived. Arbitrage trading between the No. 5 contract in London and No. 11 in New York is currently very active. These contracts, of course, also have to take account of the premium that white sugar enjoys; this premium can fluctuate violently in certain circumstances and there are also times of temporary shortages, etc., so these operations can be quite exciting. The whites premium ranged from almost $200/tonne in September 1989, to around $20/tonne in June 1993 (see Fig. 4.1).

AAs AND EOs

Against Actuals (AAs) and Execution Orders (EOs) are two specialist trading operations between producers and consumers involving large deals of 10,000 tonnes or more that would not otherwise be possible to hedge satisfactorily. AA deals are essentially a straightforward hedge; the difference is that both parties have agreed to the operation, from start to finish, for exactly the same reason that a smaller operator hedges his deals. Both sides take opposite action in physicals and futures; the producer selling futures to protect himself from a fall in the price and the consumer buying them against a rise in the price and to safeguard his sales up to the time the physical sugar becomes available to ensure continuity of supplies to his customers. Once the sugar does becomes available, the futures deals are liquidated at a price 70

Futures markets 200

US$/metric tonne

150

100

50

0

(50) 1986

1987

1988

1989

1990

1991

1992

1993 1994

1995 1996

4.1 White sugar premium basis London daily price (1986–96). (Source: ED&F Man (Sugar) Ltd.)

acceptable to both parties. The producer delivers the physical sugar in exchange for the same amount of futures. The price at which the futures side is traded is usually by agreement and does not necessarily bear much resemblance to the prices paid on the market on that particular day, since both prices have to be the same to make the operation work and to eliminate any risk from hedge lifting or any unforeseen and sudden price movements. A member of the exchange has to act as middleman to register the futures transaction on the terminal market. To distinguish the trades from the day to day business of the exchange the letters AA are placed against the deal and this explains any discrepancy in the price. EOs are a variation of AA deals but with a higher profile played by the exchange members. Essentially, an AA becomes an EO when both sides use different brokers or trade operators, who therefore have to go on to the open market to set up the futures side of the operation. In this case, the price of the physicals would be the average of the futures selling price for the producer and the average of the futures buying price for the consumer. After the rest of the deal, such as premium or discounts, quantities and shipment period, etc. have been agreed, a small financial adjustment might need to be made. 71

The world sugar market

The advantages to the physical operators of a scheme such as this is that they can fix the price of the actual sugar at any time they like during the period of the open futures position and in that way can benefit from any premium or discounts previously agreed. However, one drawback is that they would be liable for any margin call that may arise, but it is not difficult to turn it into a fixed sale. Physical operators do not have to pay commissions on the futures side of such deals, only the actuals. Brokers can, of course, do simultaneous transactions for both parties; any losses on the futures market would lead to adjustment to the physical invoice. It is a safe hedge.

SPECULATION

The speculator buys and sells futures purely for capital gain. Without this most maligned of participants, futures markets simply would not be able to function. It is the speculator who provides the risk and the liquidity that make the market work. These days, in order to spread that risk, speculators often use commodity funds to obtain added gearing for their operations. These funds constitute a large pool of money that is invested in a basket of commodities, spreading the risk across several markets. Because of this diversification the chances of success are that much greater. Trading strategies of commodity funds vary considerably, depending on the methods of the manager. The decision to enter a certain market is often determined by its trend; once the fundamentals signal a rise in price and the rise has started, the trend is established and in come the funds. The tremendous growth in commodity fund investment during the 1980s and 1990s has had a profound effect on sugar futures prices – often to the disadvantage of hedgers. These machine-like trades have no interest in the fundamental position of a market – simply its price movements and the level of its liquidity and volatility. Once a trend has been established funds will pile into a market, seriously distorting the price for a short time and often pushing prices too far, too fast. Even when a bull move is entirely justified, funds will push prices to a level that bears no relation to the true market situation, simply through the sheer weight of orders. In addition, such actions can often trigger off yet more buy signals, pushing prices even higher. Such self-fulfilling price actions seriously disrupt the activities of 72

Futures markets

genuine trade users of a market, and sugar is no exception. Much hedging activity is now done on the currency markets. The sugar market has always been very popular with speculators; such popularity could possibly be because it was one of the first London futures markets to be reopened after World War II. Originally, the rules for many commodity funds did not permit them to sell short on any market so it was only a bull market that got distorted. Nowadays, that is no longer the case and both bull and bear markets are affected. However, the individual speculator is not so constrained and has an equal opportunity of making (or losing) money whether the price moves up or down. A straight buy or sell trade is only one of a number of transactions available to a speculator: spreads,1 straddles2 and arbitrages are three others, but with today’s increasingly sophisticated derivative strategies the opportunities are manifold. One result of fund activity is the speed with which the market falls back once the buying dries up. Once that happens, because there are no fundamental reasons to substantiate the high price levels, they fall back very fast – often too fast to enable the fund managers to take any decent profits. These price distortions have become a fact of life and tend to make life very difficult for the genuine trade operator. Nevertheless, the phenomenon is not going to go away – indeed it is likely to grow further and, although financial markets attract the lion’s share of fund money, soft commodities such as sugar will continue to get a substantial slice of it.

Forecasting techniques All users of futures markets, particularly the speculators, want to be able to forecast future price movements in order to make a profit on transactions. There are two main methods of forecasting – fundamental and technical. The former analyses the supply and demand situation – crop prospects and weather conditions play an 1 A spread is a simultaneous deal in two different futures contracts such as raw and white sugar, buying one and selling the other, anticipating a change in the relationship between the two. 2 A straddle is a similar deal to a spread but in different trading positions, such as March and October, in the same futures contract where an alteration in the difference in the two is expected. 73

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important part in these calculations, as do stock levels, price elasticity and shipping conditions. It is a truism to say that if the fundamentals are right and properly assimilated, making a profit is a certainty. Unfortunately, there are so many imponderables, such as political events and sudden acts of God, that such is never the case. A speculator, therefore, tends to rely more heavily on technical analysis. Since it is calculated that around 85% of speculator trades are losing ones, such analysis is more straightforward, even if it isn’t any more accurate. Technical analysis is the science of trying to forecast future price trends from past ones. By plotting a graph of prices to date and identifying perceived support and resistance levels, one can build up a position of what might happen in both the short and long term future. The techniques of such trading methods are both many and complicated and it is not appropriate here to go into details of their finer points. Managed funds are also very fond of the technical analysis method and every commodity trading adviser (CTA) has his or her own pet scheme. CTAs stand or fall by their methods and failure is not tolerated for long. Although this speculator-induced volatility sometimes turns the serious business of trade into something of a gamble, the sugar trade has to live with it. Despite the problems facing hedgers and other genuine trade operators, futures markets will continue to try to function for their benefit. However, with speculators assuming the risk, the prospect of huge profits will continue to attract both them and system traders. Without them, one must remember, futures markets would virtually cease to exist.

Regulation Back in 1975, US market regulation was considerably tightened by the formation of the Commodity Futures Trading Commission (CFTC). This organization took over the duties of regulation from the US Department of Agriculture following the launching of new financial futures contracts. One of its chief functions was (and is) to ensure that futures trading meets its underlying purpose, i.e. to ensure there is a genuine trade driven need for a new market. All new markets have to be approved by the CFTC and that includes approval of their rules. It also monitors traders’ positions and 74

Futures markets

imposes position limits on them to prevent any market manipulation. In addition, the CFTC imposes minimum training and capital adequacy standards on brokers and demands the total segregation of clients’ funds from those of the company. All this was widely resented by many US market operators and London benefited from a consequent influx of business. However, it wasn’t long before stricter regulation came to London. Following the Gower report and the Financial Services Act of 1986, the Securities & Investments Board (SIB) was formed to set up self-regulatory organizations (SROs) for all financial services. Under the SIB, the futures industry originally came under the auspices of the Association of Futures Brokers and Dealers (AFBD) but was later merged with the Securities Association to form the Securities and Futures Association (SFA). This oversaw all the regulatory aspects of the industry until 2000, when all the UK regulatory bodies were incorporated into the newly formed Financial Services Association (FSA). The new body’s rulebook is very complex and detailed but this is not the appropriate place to discuss it in depth. However, amongst the more important requirements for members is the segregation of clients’ funds, as mentioned above. After many instances of investors losing large sums of money to unscrupulous traders, public opinion demanded adequate protection from such people, so now anyone wishing to work in the industry must show himself to be a ‘fit and proper’ person to do so. Unfortunately, there are at present no guidelines as to what exactly constitutes a fit and proper person – authorization by the FSA appears quite arbitrary. Much of the FSA’s work is unobtrusive – a word here, a suggestion there – and, as far as the sugar market is concerned, seems to work very well. Regulation in today’s business climate is essential; the financial rewards for cutting corners and circumventing rules can be immense. Unregulated markets, as well as unsupervised staff, lead to unsociable behaviour. If the confidence of investors and speculators is to be retained, the markets must be seen to be doing everything possible to ensure that they are honestly and openly supervised.

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C H A P T E R

5

Alternative sweeteners

Sugar will always be the dominant sweetener in the minds of consumers; indeed, to date, there is no single noncaloric sweetener that even comes close to it. The main reason for this is the matter of taste; artificial sweeteners still tend to leave a bitter aftertaste and scientists, although regularly improving their products over the years, have failed to match the distinctive taste of sugar. However, it now has to compete with both starch based glucose and fructose as well as high intensity sweeteners. Starch based sweeteners have readily been a substitute for sugar in liquid applications wherever it is cheaper to do so. This is particularly applicable to soft drinks. Over the past decade or so, they have steadily improved their market share at the expense of sugar on a global basis. There have been times during the period when world prices for sugar have fallen to a level where the trend has been temporarily reversed but, overall, the improvement has been relatively steady. Intensive sweeteners are mainly synthetic and are many times sweeter but with little or no caloric value. Because of this, they are widely used in diet drinks and other slimming preparations. As they are so much sweeter than sugar, only infinitesimal amounts are required in the preparations and this has cost implications. Total alternative sweetener use is now around 17%, leaving sugar with just 83%, so it can be seen that it is becoming increasingly important to the industry. Despite considerable opposition from vested interests, the antisugar lobby has succeeded to an extent in convincing certain sectors of the population that they might just live a little longer if they ate less sugar. In the health conscious age in which we live, this theory 76

Alternative sweeteners

gained credence and led to a sharply increased use of artificial sweeteners. This was after they were given the all clear from the health authorities following a cancer scare in the 1980s. Imports of sugar into the USA and Japan fell dramatically following the price booms of 1974 and 1980, which led to the rapid increase in high fructose corn syrups (HFCS) use in the market. In addition, saccharin use in low calorie soft drinks escalated and quickly gained consumer acceptance. The efficaciousness of artificial sweeteners is still subject to debate but, nevertheless, their use in diet soft drinks continues to grow and has been extended to nondiet drinks. Consumers in general, in their search for anything that could prolong their life, are becoming increasingly diet conscious and take particular care of their calorie intake. This has led manufacturers of colas and other soft drinks to increase the use of non-caloric sweeteners to such an extent that the printing of warnings on labels could become widespread. It is already the case in several countries. The intake of high levels of saccharin continues to worry the UK government’s Food Advisory Committee because of possible links to cancer, despite the lack of any proof. Manufacturers of foods and soft drinks are consequently extremely unwilling to spell out precise information on their labels, leaving parents confused as to what they can safely give their young children. In addition, foods advertised as being low in sugar are often high in saccharin. This applies to many foods, medicines and pharmaceuticals including iced lollies, tinned soups and toothpaste as well as fizzy drinks. Alternative sweeteners fall into two categories – natural and manufactured. Natural non-sugar, or caloric, sweeteners are dominated by high fructose syrup (HFS) usually, but not always, made from maize (corn) and known as HFCS. Manufactured, or intense (noncaloric) sweeteners are led by saccharin and aspartame. Price is often an important factor in deciding the use of alternative sweeteners. Provided they are fully substitutable, such as is the case with HFCS, they can become interchangeable. But intensive sweeteners often need bulking agents such as poly-ols and so are not so readily substitutable. Poly-ols are sugar alcohols and have a sweetness level similar to that of sugar. They are increasingly used as bulking agents in conjunction with intense sweeteners when applied to the manufacture of low calorie products.

77

The world sugar market

Natural sweeteners HFS/ISOGLUCOSE

HFS, or isoglucose as it is known in Europe, can be produced from any feedstock that contains a sufficient amount of starch. The most prominent source is maize (corn) but other smaller ingredients include potatoes, wheat, maple and yams. HFS is only available in liquid form, so its applications are limited but it is very suitable for soft drinks. It also creates problems in storage and transport, both of which have to be kept to a minimum as it does not keep for long. Nor can it be shipped over large distances, so international trade is confined to cross-border transactions and production geared chiefly to domestic use. HFS comes in two strengths, HFS 42 and HFS 55. The figures indicate the percentage strength of fructose in each. HFS 42 consists of 42% fructose, 50% dextrose and 8% higher saccharides while HFS 55 is 55% fructose, 40% dextrose and 5% higher saccharides. The lower percentage is used in the production of jams, ice cream, pastries and tinned fruit, etc., while the higher one is used chiefly by the soft drink bottling industry. The average bushel of US wet-milled maize contains 31.5 lb of recoverable starch (dry weight) which in turn produces about 33.33 lb of corn sweetener. This apparent anomaly is due to the chemical gain in converting starch into sweetener. The process of making sweeteners from starch was known in the nineteenth century but it was not until the surge in sugar prices in the early 1970s that HFS production made an economic impact. The high price of sugar at that time enabled the production of HFS to benefit from advances in technology and to reach industrial quantities. Production trebled as a result of high world sugar prices and it continued to be economically viable when they fell again in 1975/76. HFS 42 was first commercially produced in 1972 but HFS 55 was not perfected until 1977. It was still an expensive process to manufacture sweeteners from starch at this time, so it was confined to developed countries. Production costs are sensitive to many variables and it is therefore difficult to predict with any accuracy the future rate of growth. Most estimates are made by private consultancies and are not readily available. The main variable is the cost of the starch, which in turn depends on the price of the feedstock. In addition, availability can fluctuate according to the export demand of, say, US corn or 78

Alternative sweeteners

Japanese yams. For HFS, the raw material is a traded commodity with a variable price. To reach a net starch cost, it is necessary to deduct the proceeds from the sale of the by-products from the cost of the corn. Set-up costs for the production of HFS are very high. F. O. Licht, a leading sugar and sweetener research company, estimates that each bushel (25.4 kg) of newly built daily grinding capacity can require investment of anything up to $10,000, while expansion of existing plant can cost up to $2,000 per bushel. During the 1980 surge in sugar prices, HFS production flourished. The equally dramatic decline in prices which followed, however, incurred some losses from 1982/83. Availability and price of sugar, while important, are not the only determinants in the production of HFS; sufficient supplies of starch, government support and a well developed food and consumption infrastructure are also important prerequisites. The first plants were built in the US and Japan, which taken together currently account for around 85% of global output. There is little doubt that the specious health scares associated with sugar have greatly aided the expansion of HFS production. In both the US and Japan, favourable pricing policies and attractive tax structures have been very helpful and output continues to expand in both countries. Most of the growth in HFS usage has been in the US where government support for sugar prices has helped create the required conditions for development of large-scale HFCS production. Starch sweeteners gained a 55% share of the total caloric sweetener market in the US in 2000. In Japan, they have gained a 24% share of the combined sugar/HFCS market. In the US, which accounts for 75% of world production, HFCS output for the year ending September 2002 reached 8.7 million tonnes dry basis, up from 8.5 million in the previous year. Japanese production on the other hand has remained static at just under 800,000 tonnes for the past 10 years or so. See Table 5.1. In the EU, however, the situation is rather different. Although conditions were ripe for a flourishing HFCS industry, the desire to protect the sugar lobby proved too strong to allow it free rein. The authorities consequently instituted a restrictive production system that seriously curtailed output. Elsewhere, the greatest potential for growth is in the Far East. Taiwan and South Korea have both benefited from considerable government help in establishing plants, and in China both Coca-Cola and Pepsi-Cola have invested heavily in new plants. In Hungary and Egypt production is increasing, but it remains static in the EU where 79

The world sugar market Table 5.1 HFS production (000 tonnes, dry basis) 2002/03

2001/02

2001/01

1999/00

1994/95

1990/91

Benelux

67

72

78

81

81

80

Spain

79

83

81

83

83

83 292

EU

283

301

293

303

302

Hungary

136

135

130

130

104

40

All Europe

882

914

798

666

457

358

Argentina

240

260

280

235

205

154

Canada

270

280

265

260

255

250

Mexico

110

220

250

250

0

0

8,450

8,431

8,489

8,527

6,986

5,872

China

150

110

95

95

50

30

Japan

758

761

741

755

806

783

S Korea

310

295

265

240

200

276

Taiwan

180

175

170

155

145

110

All Asia

1,536

1,451

1,374

1,335

1,286

1,260

11,645

11,664

11,549

11,361

9,294

7,956

USA

World Total Source: F. O. Licht.

the quota structure restricts its growth. Owing to its poor storage qualities, production of HFS is closely allied to consumption growth. Its use is greatest in countries that have high domestic sugar prices. For the immediate future, competition between HFS and sugar is likely to remain confined to a relatively small number of countries. This is because they both remain imperfect substitutes in some applications. For instance, in the confectionery and bakery industries sugar will remain the preferred sweetener because of its unique bulking, texture and browning characteristics. Demand will, of course, always be a driving issue and supply constraints and high domestic sugar prices will also be a factor. Prospects for continued growth in HFS consumption, despite the recent rise in production, remain bright, since 75% of HFS distribution involves the soft drinks industry where average world annual consumption is 32 eight ounce servings per capita. In the emerging countries of Africa, Asia and Eastern Europe, the current average is only around eight such servings, so, given continued world population growth, it can be seen that future possibilities are very encouraging. However, prospects for these countries will be limited because of the necessary investments in infrastructure that are needed to enable it to grow. 80

Alternative sweeteners

World consumption rose from 700,000 tonnes in 1975 to 11.9 million in 2001/02, having slowed down somewhat since 1999 as world sugar prices fell. However, it is still expected to reach 13.5 million by 2005. North America’s share of this total is expected to reach 9.5 million tonnes, an increase of over 2 million since 1995. In the EU, consumption is around 3% of the total but is not expected to alter much in the near future while Asian offtake is forecast to grow slowly at less than 1% a year. Global consumption growth is currently around 2.5% a year and around 25% of the entire artificial sweetener market is satisfied by HFS. TREHALOSE

In 2002, two new natural products reached the market. Cargill, a leading US agribusiness, introduced trehalose, a naturally occurring sweetener made from cornstarch. It claims to have all the functional benefits of table sugar and half the sweetness. It is digested and absorbed at a slower and more sustained rate than other sugars. Trehalose could create a whole range of new products and at the same time provide added health benefits. It occurs naturally in honey, lobster and yeast and could make an impact on the nutritional bars and sports drinks industries. SUCRALOSE

The other new product is sucralose, which is marketed by Tate & Lyle. It received approval from EU health chiefs in July 2003 but still has to be accepted by EU governments. It is already authorized in over 40 countries outside the EU, including the US where it is marketed as Splenda. It is the first diet sweetener to be made from sugar mixed with starch and is some 600 times as sweet as sugar. It is made by modifying elements of the sugar molecule that make sugar fattening and has been chemically altered to pass straight through the body without being digested so is of benefit to both slimmers and diabetics.

Manufactured sweeteners The use of manufactured, or high intensity, sweeteners (HIS) is increasing steadily in a wide range of end uses including soft drinks, 81

The world sugar market

diet foods and medicines. Throughout the 1990s, HIS use grew two to three times faster than that of sugar largely as a result of the continual increase in demand for diet foods and beverages. Also known as non-caloric sweeteners, usage in 2002 accounted for 9% of global sweetener consumption based on sucrose equivalents, that is about 14 million tonnes of sucrose. They are typically used to lower the caloric value of foods and beverages. As with natural non-sugar sweeteners, their success is largely down to the growing health awareness trend that the more affluent consumers support. The most widely used ones are 200 to 300 times sweeter than sugar and the three most common are saccharin, aspartame and acesulfame K (aceK). Their use is controlled by governmental food and drug regulations, so not all HIS are used in the same applications in all countries. In some countries, notably the US, approval has taken several years but the three commonest HIS have now been approved for use in most leading consuming countries. Consumption prospects of these sweeteners are expanding as the range of foods and beverages which use them increases. The practice of blending them with sugar, to improve the taste and as a cost cutting measure in non-diet products, is also increasing. Soft drinks and ice cream toppings are the chief uses for non-caloric sweeteners, while others include powdered gelatine desserts, tinned fruit and soups, confectionery and chewing gum. Their use as a table-top powdered sweetener (direct sugar substitute) is confined to aspartame. These sweeteners are also, of course, widely used by diabetics. As technology advances, usage will continue to expand and is expected to reach 10% of total sweetener demand by 2010. Use of HIS produces considerable cost savings as substituting aspartame for sugar can save up to 50%, while a blend of cyclamates and saccharin can bring savings of as much as 95% to a soft drinks manufacturer. Unfortunately, these savings are not noticeable at the retail end of the market. SACCHARIN

Saccharin is about 500 times as sweet as sucrose and was developed in 1897. It is the cheapest source of sweetness available. It is a coal tar product and is not metabolized, so it has no calories. It does, however, have a very bitter aftertaste which can only be removed by blending with other sweeteners. When blended with aspartame, for instance, the aftertastes cancel each other out. 82

Alternative sweeteners

In 1977, saccharin was banned in the US as research indicated it might be carcinogenic but Congress imposed a moratorium on the ban, subject to its carrying a warning label. Later research showed that humans were unaffected and the need for a warning label was withdrawn in 2000. Notwithstanding the medical implications, saccharin, as well as being the oldest artificial sweetener, is now the most widely used. It currently dominates the global use of high intensity sweeteners with an estimated market share of around 70% in 2001. It can be manufactured relatively easily and at low cost. The world’s largest manufacturer of saccharin is China, where domestic consumption is also highest. High domestic sugar prices in 1998–2000 caused a surge in saccharin production as it became cheaper. A significant quantity is also exported to other Asian countries. In 2000, the Chinese authorities introduced measures to curb saccharin usage by cutting production by 16,000 tonnes and limiting domestic usage to only 3,000 tonnes. Increased imports of sugar under WTO and an improved 2001/02 crop lowered domestic prices but efforts to curb saccharin demand met with mixed success. The authorities closed nine of China’s fourteen saccharin factories and limited output at the other five, reducing capacity from 49,000 tonnes to around 19,000. In 2000/01, China produced 17,000 tonnes, of which 4,000 were sold on the domestic market, significantly more than government set targets. While accurate figures are not available, it is thought that clandestine, illegal production is widespread and actual consumption could be considerably higher still. Saccharin can be manufactured relatively easily and, in sucrose equivalent terms, at very low cost. Demand for sucrose drives that for saccharin which is the preferred sweetening agent for many traditional foodstuffs. ASPARTAME

Aspartame is about 200 times as sweet as sucrose and is the next largest intense sweetener. Discovered in 1965, it is composed of two amino acids, phenylalanine and aspartic acid. Like all other proteins, it provides four calories per gram but, because it is so sweet, only very small amounts are needed to reach the equivalent of sugar. Aspartame gradually loses its sweetness over time and needs to be protected from high heat in baking. In its encapsulated form it remains protected until the final stages of baking when the sweetener is released. 83

The world sugar market

In the US, aspartame is 10 times more expensive than saccharin. Nevertheless, after its introduction in 1981, it made rapid inroads, reaching around 20% of the market by 1999. The US accounts for almost 75% of global aspartame consumption despite a perceived slowing of demand. The US patent for it ran out in December 1992, since when it has become a completely free market, expanding rapidly, particularly in the EU.

ACESULFAME-K

Discovered in 1970, ace-K, as it is known, is 200 times sweeter than sucrose and, like saccharin, is calorie free. It also has a bitter aftertaste that can only be removed by mixing with other sweeteners. It has shown rapid growth in recent years but its use remains small compared with aspartame and saccharin. In 1995, its use was around 150,000 tonnes a year but by 1999 it had doubled to 300,000 tonnes. It is used chiefly in Europe and North America where it is blended with aspartame in soft drinks. It was approved for use in the US in 1998. Ace-K is produced by Nutrinova, a German company, and is marketed under the trade name Sunett. It is very stable and shows no deterioration in food applications where other non-caloric sweeteners cannot be applied. Its main applications are in beverages, chewing gums and confectionery.

CYCLAMATES

Cyclamates are 30 times sweeter than sucrose and therefore the least sweet of all non-caloric sweeteners. Before they were banned they were frequently blended 50/50 with saccharin in soft drinks. Discovered in 1937, they came into widespread use after World War II. However, they were banned in 1970 following claims that they were carcinogenic. In June 1985 that was found to be untrue but nonetheless they remain banned in the US. Cyclamates are rarely used on their own because of their taste limitations. Their use is greatest in Asia where they are blended with saccharin. However, consumption in Europe and America showed little growth in the 1990s as their usage never properly recovered from being banned in the US and because of continued worries about possible harmful effects on health. 84

Alternative sweeteners OTHERS

Of the newer sweeteners, sucralose and alitame have had difficulties in capturing a slice of the HIS market but regulatory approval for both has been obtained in many countries, including the US. Sucralose is made from sugar and is manufactured in Canada by Tate & Lyle. It is 600 times sweeter than sucrose and is a table-top sweetener competing with aspartame and sugar. Alitame is 2,000 times sweeter and is composed of two amino acids, alanine and aspartic acid. It has very few calories. Other HIS include stevioside and glycyrrhizin which are both derived from plant extracts, the former from a South American plant and the latter from liquorice. So far they have made only very limited inroads in the market. Aspartame-acesulfame salt, a combination of the two sweeteners discussed above, received limited approval in 2002. It claims, among other things, to keep chewing gum tasting sweet for longer periods. In 2003, a leading US chocolate manufacturer entered the sugar free chocolate market using the sugar substitute lactitol. Lactitol is derived from lactose and is resistant to high temperatures. The product has been endorsed by the American Diabetes Association. Of the newest HIS, neotame seems poised to have the greatest impact. It is made directly from aspartame but is 40 times sweeter (8,000 times sweeter than sugar). It is relatively inexpensive to produce, and regulatory approval from the US Food and Drug Administration was granted in July 2002. To give an illustration of the potential cost savings to food manufacturers, 1 kg of neotame could replace 10 tonnes of sugar. However, new intense sweeteners face tough regulatory hurdles and financial restraints that cast considerable doubts on their profitability.

PROSPECTS

The underlying contributory factors to further growth in HIS usage are economic development, population growth and income growth, although regulatory constraints tend to slow things down. In addition, the financial costs of developing new non-caloric sweeteners also affect future growth. Asia, Africa and Eastern Europe are the areas of greatest potential for dynamic growth. In all three, the soft drinks sector, in particular, is still at an early stage of development. In Western Europe, the US and Japan, on the other hand, economic 85

The world sugar market

factors play a greater part and, with world sugar prices at historically low levels, the blending of sugar with HIS to improve taste and as a cost saving measure, is showing signs of increasing. The blending of different HIS has the double benefit of improving taste and increasing sweetening potency. Nevertheless, HIS have consistently been able to undercut sugar prices, even at the lows of 2002, in both Europe and the US. In the latter, saccharin prices are about 2% those of sugar while cyclamates and aspartame are around 12 and 45% respectively. Following permission for the free use of HIS in any blend of nutritive and non-caloric sweeteners from the British government back in 1994, the substitution of intense sweeteners for sugar in soft drinks is now very well established in the UK. As a result of this policy, many carbonated soft drinks are now sold as non-diet products despite the fact that they contain very few calories. It is estimated that nearly half the sweeteners used in the UK beverage sector are now HIS, while diet products only account for around 20% of the market. Other EU member states are following the UK’s lead, albeit slowly. The incorporation of intense sweeteners in non-diet beverages is steadily increasing. In the US, HFCS is the preferred artificial sweetener and has captured the bulk of the carbonated soft drinks market from sugar. Intense sweeteners, therefore, compete with HFCS rather than sugar. The practice is also evident in other parts of the world, notably Eastern Europe and the former republics of the Soviet Union, but it is often done illegally as many countries prohibit the use of HIS in this way. The economic advantages of substituting HIS for sugar are so great that it is spreading to other food manufacturers wherever it is technically possible and permitted by the authorities to do so. Once an inexpensive bulking agent to take the place of sugar has been found, the potential opportunities for expansion will be endless. Around 88% of the world market has been captured by starch based sweeteners, mostly HFCS, and around 13% by HIS. Their use grew between two and three times faster than sugar in the 10 years to 2001. Consumers and manufacturers will use non-caloric sweeteners for only two reasons – health and price – but only if taste is not sacrificed. In advanced markets, blends of sugar and HIS will continue to be preferred to cheap saccharin. It is estimated that HIS usage will continue to grow at the same rate as during the past two 86

Alternative sweeteners

decades, chiefly due to the growing demand from more populous countries such as China and India. Global non-caloric sweetener demand is forecast to reach 16 million tonnes sucrose equivalent by 2010. However, that would still represent only 10% of expected total global sweetener demand. The longer term growth rate of non-caloric sweeteners is expected to be higher than that of caloric ones, which in turn grow at roughly the same rate as the world population.

Outlook Economic development, together with population and income growth, are the main factors driving demand for sugar (and, indeed, all other commodities). The same can be said for alternative sweeteners, although price and health considerations also play an important part. As long as many countries continue to support high domestic sugar prices, the future is bright for all forms of alternative sweetener. High intensity sweeteners consistently undercut sugar prices while starch sweeteners also thrive as manufacturers search for price-reducing ideas. High domestic sugar prices have played a major role in the expansion of alternative sweeteners up to now and that expansion looks set to continue for both starch based and high intensity sweeteners. Regulatory constraints and high development costs tend to slow progress of the latter but, with 70% of HFCS offtake attributable to the US, the field is set fair for further growth, even allowing for any increase in the cost of the starch. World demand for alternative sweeteners is expected to reach 13.5 million tonnes by 2005. Demand from the emerging countries of Africa, Asia and Eastern Europe is currently only around a quarter that of average consumption levels so they present the best potential for dynamic growth. However, in order to achieve this, considerable new investment is needed and this can be expensive, especially for HIS. High intensity sweeteners account for around 62% of the alternative market, aided by the current fad for diet beverages. The World Health Organization (WHO) continues to publish unsubstantiated and damaging reports on the effects of sugar in diet and repeats the mantra of the 1990s that so called free sugar, that is sugar added to food and drink, should not exceed 10% of any diet. This sort of thing can only help increase the use of alternative sweeteners. 87

The world sugar market

By 2001, around 8% of the entire sweetener market had been captured by starch based sweeteners and a further 13% by HIS. Throughout the 1990s, their use grew two to three times as fast as sugar. In the future, the competitive threat to sugar from alternative sweeteners is likely to increase significantly as the practice of blending sugar and HIS in non-diet products as a cost cutting measure continues. Add to this its use in diet foods and beverages and the fact that new products coming onto the market are gaining ground and will further enforce the economic gains for sugar substitution, and future growth in both developed and developing countries seems solidly underpinned.

88

P A R T

II

Demand

C H A P T E R

6

Consumption

As highlighted in Chapter 2, consumption growth is the fundamental driver of the world sugar economy. Figure 6.1 shows that world sugar consumption has grown steadily over the long term. Since the mid-1980s, global consumption has risen by around 2.0% annually and reached 136.8 million tonnes raw value in 2002. The key underlying driver is population growth, having risen by 1.7% annually over the same period and explaining about 85% of growth in sugar consumption at the global level (see Fig. 6.2). The bulk of the remaining increase in sugar consumption can be attributed to gains in per-person income levels, especially so in the lower to middle income countries, since it is these countries which are estimated to have the highest income elasticities of demand. Box 6.1 provides a brief account of the key economic and demographic drivers of sugar consumption and draws attention to the fact that all population growth is occurring in developing countries – the highest growth rates are projected for the Middle East and Sub-Saharan Africa – and this will largely underpin future growth in global sugar consumption.

An historical perspective As is already evident, the level of world consumption is one of the most important determinants of the world sugar market and, as will be shown in Chapter 7, also of world sugar trade. Of significance is 91

The world sugar market

140 130 120 110 100 90

05 20

03

01

20

99

20

97

19

95

19

93

19

91 19

19

89 19

19

19

87

80 85

Million tonnes, raw value

150

6.1 World sugar consumption. 140 130

Index

120 110 100 90

19

8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 02

80 Sugar

Population

6.2 Sugar consumption and population: world.

Box 6.1 Major drivers for consumption The major drivers of sugar consumption in any single country are population growth and changes in per capita consumption levels, which are determined by the level of income and its rate of growth, the price of sugar and its substitutes and, in some instances, by cultural habits. POPULATION GROWTH At the world level, 85% of the growth in consumption is explained by population growth. At a country level, population size and its growth rate are key factors. Logically, if there is no change in per-person consumption levels of sugar, then growth in population translates directly into increasing sugar consumption for that country. However, there are 92

Consumption

sometimes changes in several of the factors impacting per-person demand for sugar associated with changes in population size and demographics. For instance, changes in the age, gender balance and location (urban/rural) of the nation’s population could impact the average amount or form of sugar consumed. Population growth has been fastest in Asia, Africa and Latin America. World population growth is projected to increase at only 1.2% annually between 2001 and 2010, as against 1.5% during the previous decade (according to the US Bureau of the Census). Significant declines are projected for Africa (down from 2.1% to 1.5%) and in Asia (down from 1.8% to 1.4%). Almost all population growth is occurring in developing countries and growth in developed countries is less than 0.4% per year with the slowest rates in Japan and the European Union. Highest growth rates are projected for the Middle East and Sub-Saharan Africa at around 2% per year. See Table 6.1. PER CAPITA CONSUMPTION There is a wide variation among countries and regions, and also in the rate at which per capita consumption of sugar is growing. Generally speaking, consumption levels are lowest in the low income developing countries (frequently importers of sugar). In Africa, south of the Sahara, and in parts of Asia, consumption levels in 2000 were less than half the world average of 20 kg, and less than one-third of the developed countries’ average of 35 kg per person. There are exceptions to these low consumption levels in developing countries – in particular the sugar exporting countries of Latin America tend to have conTable 6.1 World population projections Region/country

1991–2000

2001–05

2006–11

World

1.5

1.2

1.1

Developed countries United States Japan EU 15

0.6 1.0 0.2 0.3

0.5 0.9 0.1 0.2

0.4 0.8 0.0 0.1

Developing countries

1.6

1.3

1.2

Asia

1.5

1.3

1.1

Central America

1.7

1.5

1.4

South America

1.7

1.5

1.3

Middle East

2.2

1.9

2.0

Africa

2.1

1.7

1.5

Source: US Department of Commerce, Bureau of the Census, compiled in October 2001.

continued

93

The world sugar market

sumption levels of 40 kg per capita or more, reflecting ample domestic availability. Income Both the level of income and its rate of growth are important in explaining patterns in sugar consumption. Generally, higher levels of per capita sugar consumption are associated with higher income levels (but other factors can weaken this axiom considerably). Also, as incomes rise, so too does sugar consumption (economists refer to this as the income elasticity of demand). In many developing countries, per capita consumption of sugar has been growing over recent years as the younger generation develops a taste for fast foods, soft drinks and confectionery (that is, changing dietary habits) (see Fig. 6.3). However, in high income countries, there is little further growth in sugar consumption due to rising incomes – there is a physical limit to how much sugar can be consumed, irrespective of income. Concerns for health and diet and the availability of alternative sweeteners have even resulted in a negative relationship between income growth and sugar consumption in several developed economies, notably Japan. In China, reported increases in income have not led to any substantial rise in per capita consumption of sugar, with much less expensive saccharin being the preferred sweetener in the country’s soft drink sector. World Bank projections show growth in real world per capita income of 1.74% per year between 2000 and 2012 (see Fig. 6.4). Greatest growth is projected in developing countries and transition economies (3.98 and 3.29% respectively). Within developing countries, Asia has by far the most rapid projected growth in income levels, at 4.53% per year. 60 50

1985 1990 1995 2000 2001 2002

Kg/head

40 30 20 10 0 Europe N America C America S America

Asia

6.3 Per capita consumption of sugar by region.

94

Africa

Oceania

Consumption Africa Middle East South America Caribbean and Central America Latin America Asia Developing countries Transition economies Developed economies World 0.0

1.0

2.0

3.0

4.0

5.0

Per cent

6.4 Annual average growth in per capita income: 2000–2012.

Price Generally, consumers are sensitive to a change in the price of a food commodity. However, for sugar, because it is often a major source of food energy, consumption is insensitive to changes in domestic sugar price, especially in low income countries. Furthermore, government intervention in many countries has fixed or influenced consumer prices, also helping to explain differences in the level of per-person consumption as between countries. The form of sugar consumption is also important in determining the responsiveness of consumers to prices. In developed countries, the bulk of sugar is consumed (over two-thirds) indirectly – in beverages and manufactured food products, so the link between retail prices and consumption is fairly weak. The OECD estimates that the cost of sugar in some high sugar content products is often less than 5% of the retail price, therefore changes in sugar prices are barely perceptible to consumers. Price and availability of alternative sweeteners Availability of alternative sweeteners, both caloric and non-caloric intensive sweeteners, can also influence sugar consumption levels in some countries. Production and consumption of high fructose corn syrup has been concentrated in those countries with cheap supplies of starch and a high price of sugar – the United States and Japan being the obvious examples. The case of China shows how consumption of saccharin can displace sugar in value added products. Domestic availability Sugar consumption can also be closely related to domestic availability. Exporting countries often have a high per capita consumption level as compared to net importing countries even if per capita income levels are low.

95

00

97

20

94

19

91

19

88

19

85

19

82

19

79

19

76

19

73

19

70

19

67

19

64

19

61

19

19

19

19

58

160 140 120 100 80 60 40 20 0 55

Million tonnes, raw value

The world sugar market

6.5 World sugar consumption: 1955–2002.

5

Per cent

4 3 2 1 0 1951–60

1961–70

1971–80

1981–90 1991–2000

6.6 Global sugar consumption: decade average annual growth.

that since the 1950s there has been a steady decline in the rate of annual consumption growth – see Figs 6.5 and 6.6. During the 1955–60 period annual growth averaged 4.95%, with strong growth in consumption evident in developed countries after the ending of post-World War II rationing, and little competition from alternative sweeteners. In the decade to 1970 some developed markets had already begun to reach saturation, and there were changes in dietary habits and the first signs of concern over sugar consumption and human health. At the same time many developing countries were expanding their sugar consumption (as population and incomes were rising), and annual average growth of 4% was achieved. In the following decade (1971–80), major inroads were made by alternative sweeteners in several developing countries after the price boom of 1974 (but particularly in the United States and Japan) and annual growth fell to 2.2%. Over the most recent decade, 1991–2000, annual growth has averaged 1.8%, although the break-up of the former Soviet Union (FSU), which saw the end of consumer subsidies in these countries, dampened growth considerably in the first half of the decade. 96

Consumption

Regional consumption drivers A key driver impacting the future dimensions of the world sugar trade is the rate of growth in consumption and where that growth originates. For that reason, it is instructive to consider consumption trends and prospects on a regional basis. Asia has become the world’s largest sugar consuming region, after consuming less than Europe in 1985. Indeed, during the 1990s, Asia was the dynamo of world sugar consumption, reaching 49.3 million tonnes, or 36% of the world total in 2000, up from 33% a decade earlier (see Figs 6.7 and 6.8). Consumption has continued growing and reached 53.5 million tonnes in 2002. Of this broad ‘Asia’ category, the Far East dominates, and growth there drives regional

Million tonnes, raw value

60 1985

50

1990

40

1995

30

2000 2001

20

2002

10 0 Europe

N America C America S America

Asia

Africa

Oceania

6.7 World sugar consumption by region.

Oceania Africa Asia South America Central America North America Europe -5

0

5

10

15

20

million tonnes, raw value

6.8 Growth in world sugar consumption by region: 1990–2002. 97

Sugar

02

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

90

19

89

19

88

19

19

19

19

87

180 170 160 150 140 130 120 110 100 90 80 86

Index

The world sugar market

Population

6.9 Sugar consumption and population: Asia.

consumption. Strong population growth in the region is obviously a key factor explaining Asia’s ‘power-house’ role, but as can be seen from Fig. 6.9, sugar consumption has been growing at a faster rate than that implied by population growth alone. Correspondingly, per capita sugar consumption has increased from 10.9 kg in 1985 to 14.4 kg per person in 2002, chiefly driven by strong economic growth over the past 15 years. The strength of the relationship between per capita sugar consumption and income levels is illustrated in Box 6.2. Looking forwards, developing countries in Asia will be the key to future growth in global consumption in light of the projected population and income growth rates, as presented in Box 6.1. Whilst Asia has been very much the power-house of world consumption growth since the late 1980s, sugar consumption in Europe fell in the early 1990s by around 3.5 million tonnes to average 29.7 million tonnes between 1993 and 2002. Even so, the region remains the second largest sugar consuming region, accounting for 23% of global consumption. As can be seen from Fig. 6.10, much of Europe’s fall in sugar consumption was due to the breakup of the centrally planned economies of the former Soviet Union and Eastern Europe, and the problems that continue to affect some of these countries in moving to freer market driven economies. Under the Soviet system, sugar consumption was heavily subsidized and per-person consumption was very high by world standards at 50 kg. In Russia, consumption reached a low in 1995 of 4.9 million tonnes, but has since recovered and by 2002 was 6.5 million tonnes. As will be discussed later, Russia has emerged as the major player in the world import market since the demise of the FSU. There is a statistical quirk in that the Central Asian Republics of the FSU 98

Consumption 25 Million tonnes

20 15 10 5

8 19 8 89 19 90 19 91 19 9 19 2 93 19 9 19 4 95 19 9 19 6 97 19 98 19 9 20 9 00 20 0 20 1 02

87

19

19

19

86

0

Western Europe

Central Europe & FSU

6.10 Sugar consumption: Europe.

120

Index

110

100

90

80 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sugar

Population

6.11 Sugar consumption and population: Europe.

(Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) since 1992 have been included in the Asian regional total, so the fall-off in Europe’s consumption is overstated by 1.3 million tonnes (i.e. the consumption of these five republics which was included under the Soviet Union total prior to 1992). In Western Europe, consumption has stagnated at around 17 million tonnes per annum during the past decade. On a per capita basis, consumption has fallen slightly over this period. Here (as in most other developed countries), the sugar market is considered almost saturated as population is growing only slowly and consumption is barely responsive to growth in incomes (see Fig. 6.11). 99

The world sugar market

Concern about the alleged negative health effects of sugar also appears to have negatively impacted demand, and there has been some substitution by alternative sweeteners to sugar in these markets. Concerning Africa, in 2002 consumption of 12.4 million tonnes represented 9.1% of world consumption. Since 1990 sugar consumption has been growing at around 2.4% per year, exceeding annual global growth of 2%. As can be seen from Fig. 6.12, population growth has been the key driver of consumption growth in aggregate, but it is also evident that population is growing more quickly than sugar consumption, so consequently per capita consumption fell during the decade commencing 1985 (from 14.7 kg to 13.6 kg), before recovering again during the late 1990s, and by 2002 had reached 14.8 kg. Annual population growth in Africa is projected to be around 1.7% over the coming decade, supporting increasing sugar consumption over the longer term, even though for many countries in Africa, per capita levels are likely to remain amongst the lowest in the world. Sugar consumption in Central and South America reached 25.07 million tonnes in 2002, and as can be seen from Figs 6.13 and 6.14, consumption grew strongly during the 1990s. Brazil is the region’s dominant consumer at 10.5 million tonnes (42% of the region’s total). Growth in sugar consumption in Central America appears to be strongly linked to population growth, whilst in South America con160 150 140

Index

130 120 110 100 90

19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02

80

Sugar

6.12 Sugar consumption and population: Africa. 100

Population

Consumption 160 150 140

Index

130 120 110 100 90

02

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94

Sugar

19

93

19

92

19

91

19

90

19

89

19

88

19

87

19

19

19

86

80

Population

6.13 Sugar consumption and population: South America.

160 150 140

Index

130 120 110 100 90

19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02

80

Sugar

Population

6.14 Sugar consumption and population: Central America.

sumption has been growing faster than population growth over the past five years. Per capita consumption is approaching saturation levels, however, and is unlikely to grow much further. In North America, consumption of sugar in the United States dominates that of Canada (9.1 million tonnes as against 1.3 million 101

The world sugar market 160 150 140

Index

130 120 110 100 90

02

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94

Sugar

19

93

19

92

19

91

19

90

19

89

19

88

19

87

19

19

19

86

80

Population

6.15 Sugar consumption and population: North America.

tonnes). The region’s consumption has grown over the past decade, reflecting population growth (see Fig. 6.15) and despite the fact that in the United States high fructose corn syrup, other corn based sweeteners, and non-caloric intensive sweeteners have pushed sugar’s market share to less than 50%. Importantly though, the bulk of the displacement of sugar by HFCS had taken place before 1985 (see later discussion on alternative sweeteners). Per capita consumption has stagnated at around 33 kg in the United States. Dietary preferences and health concerns could push per capita sugar levels lower over coming years, but even so, increasing purchasing power by low income groups, together with population growth, should ensure slow but steady growth in sugar consumption. The US Department of Agriculture (USDA), in its baseline projections released February 2003, projected total domestic deliveries to increase slightly faster than the rate of population growth in the baseline, rising from about 10 million short tons, raw value (STRV) in FY 2004 to 11.2 million STRV in FY 2013. That represents annual average growth of only 1.1%. A recent dynamic in the US sweeteners market was the onset of declining or at best stagnant consumption of sugar and sweeteners. After experiencing strong and steady growth during the 1990s (after 102

Consumption

the US beverages sector completed its conversion to corn sweeteners), US consumption of sugar stagnated after 2000/01. Sugar deliveries for domestic food and beverage use for 2001/02 were estimated at 9.894 million STRV, down from 9.998 of the previous year. Deliveries are estimated to have declined further in 2002/03 to 9.769 million STRV, and the USDA estimates 9.45 million STRV for 2003/04. Furthermore, per capita consumption of all sweeteners tracked by the USDA reached an estimated high of 68.7 kg in 1999, whereas the 2001 estimate was 66.7 (a fall of almost 3%). Both sugar and high fructose corn syrup consumption fell. The USDA has observed that there have been no satisfactory explanations for the decline in sugar and overall sweetener consumption. The decline coincided with a fall in US economic activity, suggesting that aggregate disposable income and sweetener consumption could be related. Another factor could be a change in dietary habits, whilst analysts also point to the possibility that sugars contained in imported products have increased sufficiently to negatively affect domestic deliveries. In short, more sugar enters the United States than explicitly allowed for under the tariff rate quota scheme.

Drivers of alternative sweeteners As we have seen in Chapter 5, sugar is part of a broader sweetener market and competes with high fructose syrup (HFS) and high intensity/intense sweeteners (HIS). In the year 2000 (the latest year for which consistent data are available for all sweetener categories) the total sweeteners market expressed in terms of white sugar equivalent is estimated to have reached 143.7 million tonnes. The breakdown by major category of sweetener shown in Table 6.2 reveals an important sweeteners market dynamic: sugar has been losing market share to both HFS and HIS. Whilst annual growth in sugar has averaged 2.0%, rates for HFS and HIS have been far higher at 4.1 and 4.5% respectively (at least until 2000, after which HFS use in the dominant US industry has faltered). Key factors driving this loss of market share for sugar have included: the successful penetration of HFS into the US beverage market; strong growth in demand for low calorie and lite food and beverages in developed countries; and the use of saccharin as a prime sweetener for beverages in Asia, particularly China. 103

The world sugar market Table 6.2 Global sweeteners consumption Sweetener

Unit

1985

1990

1995

2000

Average annual growth

Sugar (white value)

Mt

91.5

101.5

108.9

117.9

1.7 %

HFS

Mt

6.2

7.6

9.7

11.4

4.1%

High intensity sweeteners

Mt

7.2

8.5

11.5

13.8

4.4%

Total Shares

Mt

104.9

117.6

130.1

143.1

2.1%

Sugar

%

87.2

86.3

83.7

82.3

–

HFCS

%

5.9

6.5

7.5

7.9

–

HIS

%

6.9

7.2

8.8

9.8

–

Per cent

100 90 80 70 60 50 40 30 20 10 0 Europe

North America

C/S America Sugar

Asia

HFS

Africa

Oceania

HIS

6.16 Regional sweetener shares: 2000.

REGIONAL VARIATIONS

As can be seen in Fig. 6.16, there were significant regional differences in the shares held by each major sweetener in the year 2000. Sugar dominates in all regions except for the United States, where the bulk of the world’s HFS is produced and consumed, and also where the HIS sector is strongly embedded, leaving only 44% of the sweeteners market for sugar. In Europe, sugar remains the dominant sweetener (90%), in part because the competitive threat from HFS (isoglucose) was stifled by quotas. In Asia, sugar accounts for around 85% of the market, and HIS have taken 15%, chiefly 104

Consumption

reflecting a high use of saccharin in China. In Central and South America, Africa and Oceania, sugar is clearly the dominant sweetener. Since 1985, the sweetener market in total has been growing by around 2% a year. At the same time, however, high intensity sweeteners and high fructose syrup (HFS) have grown between two and three times as fast as sugar. As a result, the share of high intensity sweeteners in the overall sweetener market has grown from 7.2% in 1990 to 9.8% in 2000, while that for HFS increased from 6.5% to 7.9%. Over the longer term it is possible that the share of sugar in

Box 6.2 Per capita sugar consumption and income growth in Asia Income growth has been a key driver of per capita consumption growth in Asia, but to differing degrees (see Fig. 6.17). To illustrate this contention per capita sugar consumption is measured against deflated per capita GDP in four countries: Republic of Korea, China, India and Malaysia. REPUBLIC OF KOREA Korea generally follows the expected pattern: per capita sugar consumption has increased at much the same rate as per capita real GDP, at least until 1998, when the region’s financial crisis struck. Real income has recovered, but per capita sugar consumption has not, averaging 21 kg as against 24 kg before the financial crisis. CHINA China’s per capita sugar consumption remains low at around 6.9 kg/person and has shown little growth over the past one and a half decades, despite strong growth in per capita income. Part of the reason is consumption of intense sweeteners (primarily saccharin), which if included in the sweeteners total raises per-person consumption to 10 kg annually. However, even taking a broader sweeteners consumption definition, growth has been modest, perhaps rising by only 1 kg/head since the mid-1980s. Analysts also point to generally very low income elasticities of demand for most of the main sugar-containing products (apart from soft drinks) as another explanation for sugar not reacting to the boom in consumer spending during the 1990s. continued

105

The world sugar market Korea: Per capita sugar and income growth

China: Per capita sugar and income growth 300

250

250 index

index

200 150 100 50

200 150 100 50

Sugar Deflated GDP

0

0

85 87 89 91 93 95 97 99 19 19 19 19 19 19 19 19

85 87 89 91 93 95 97 99 19 19 19 19 19 19 19 19

Malaysia: Per capita sugar and income growth

index

index

India: Per capita sugar and income growth 180 160 140 120 100 80 60 40 20 0

Sugar Deflated GDP

Sugar Deflated GDP

200 180 160 140 120 100 80 60 40 20 0

85 87 89 91 93 95 97 99 19 19 19 19 19 19 19 19

Sugar Deflated GDP

85 87 89 91 93 95 97 99 19 19 19 19 19 19 19 19

6.17 Per capita sugar consumption and income growth in Asia.

INDIA Per capita sugar consumption appears to have moved closely with growth in per capita inflation adjusted GDP. Since 1985, per capita sugar consumption has risen from 11.9 kg to 16.5 kg. India also produces two other traditional cane derived sweeteners, khandsari and gur, boosting sweetener consumption to 25 kg/person. Growth in total sweeteners consumption is slower than sugar alone, indicating that India’s sugar consumption has been increasing at the expense of the traditional sweeteners. MALAYSIA Per capita sugar consumption responded to strong income growth during the mid-1990s but has since levelled at around 48.5 kg.

the global sweeteners market will continue to be eroded while HFS and high intensity sweeteners make gains. The major competitive threat to sugar arises through the blending of caloric sweeteners and HIS in non-diet products, a practice which is likely to be adopted on an increasing scale. This particular factor working in favour of increased HIS use will be com106

Consumption

pounded by the factors contributing to general growth in demand for sweeteners (economic development, population and income growth) which will underpin future growth in HIS in Asia. Another factor also working towards a greater share of HIS in world sweeteners consumption is the release of new sweeteners such as neotame (8,000 times sweeter than sugar) which will further enforce the economic gains for sugar substitution. Consequently, there is every prospect that the share of intense sweeteners in the global sweeteners market will continue to increase, possibly breaching annual growth of 4.5% over the coming decade. A crucial factor working against HIS over the medium term is the expectation that China’s government will effectively reduce the use of saccharin, thereby boosting sugar consumption in that country. Such is the scale of China’s sugar and saccharin sectors that a switch away from saccharin towards sugar would be sufficient to impact the global sugar consumption and HIS growth rates (possibly reducing world consumption of HIS in absolute terms).

Conclusions and outlook At the global level population growth is the key driver of growth in sugar consumption. Even so, the geographical distribution of sugar consumption is crucial, and Asia stands out as a major driving force sustaining the global increase in sugar consumption. Looking forwards, with mature markets such as the United States, the EU and Japan showing little or no growth in sugar consumption, the key driver of future consumption growth in sugar will continue to originate in developing countries – Asia particularly. The two drivers determining the pace of sugar consumption in developing countries are population growth and per capita income levels. Importantly the projected rate of population growth is slower than during this past decade – for developing countries down from 1.6 to 1.2%. Even so, consumption prospects will also more generally reflect future increases in economic growth in developing countries, as manifested in food and beverage consumption patterns. On balance, the underlying economic drivers suggest an outlook of substantial increases in consumption in developing countries over the coming decade. Sugar is part of a broader global sweeteners market and competes with high fructose syrup and intense sweeteners. Sugar has 107

The world sugar market

lost market share to these alternatives over the past decade, but again the geographical distribution of consumption is a key driver influencing growth prospects. Over the longer term the share of sugar in the expanding global sweeteners market is likely to continue to be slowly eroded, particularly through the blending of sugar and intense sweeteners in non-diet products. Extrapolating forward to the long term growth trend, global sugar consumption would reach 145 million tonnes in 2005 and 160 million tonnes in 2010. Whilst these global trends are important, in terms of driving developments in the world sugar market and trade, regional growth patterns are critical. Asia (Far East and Middle East) is likely to continue as the major region for growth, especially with the highest projected population growth rates and continuing economic growth, and with changing tastes and preferences which boost consumption of sugar-containing foods and beverages.

108

C H A P T E R

7

Import demand

Whilst consumption growth drives expansion of the world sugar economy, the extent to which consumption growth has been manifested in terms of an increasing volume of world imports has historically been relatively weak. This fact is a direct consequence of the self-sufficiency goals that many governments in both developed and developing countries have pursued in sugar, offering tariff protection (as well as non-tariff barriers) and sugar policy supportive to their domestic industries (discussed further in Chapter 10). Therefore, despite steady growth in world sugar consumption (and production), sugar trade during the late 1980s and early 1990s was stagnant, remaining in a fairly narrow range of 27–32 million tonnes. However, trade has trended upwards since 1992, and imports reached a peak of 43.95 million tonnes in 2002 (Fig. 7.1). More importantly, the growth in world imports has been more rapid than growth in global sugar consumption, and consequently the ratio of imports to world consumption has been following an upward trend since 1990 – see Fig. 7.2. To understand the factors driving this upward trend in world trade since the early 1990s, and to ascertain the prospects for further growth, the key features of the world sugar trade are important, as are the recent dynamics of imports on a regional basis. But in short, trade has expanded in the 1990s because of two key factors: the demise of the former Soviet Union (FSU) and strong consumption growth in Asia. Furthermore, expanding trade in sugar is also likely to reflect deregulation along with general trade liberalization during the 1990s.

109

The world sugar market

Million tonnes, raw value

50 40 30 20 10

90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02

89

19

88

19

87

19

86

19

19

19

85

0

7.1 World sugar imports.

0.34 0.32

Ratio

0.30 0.28 0.26 0.24 0.22

01

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

19

90

19

89

19

88

19

87

19

86

19

19

85

0.20

7.2 World sugar imports as a proportion of world sugar consumption.

Key features A feature of the bulk trade is that sugar can be shipped in raw or white (refined) forms. Raws are traded for further refinement, but whites move directly into the end user market. The majority of sugar is consumed in the form of white sugar, so a major driver determining whether a country imports raw or white sugar is its refining capacity relative to domestic sugar production and consumption. Countries import raw sugar because during the course of the year there is refining capacity in excess of that required to process their domestic raw sugar production. However, many countries, especially those with small domestic sugar growing industries, do not have sufficient refining capacity and import white sugar to fully meet 110

02

01

Japan

20

00

20

99

United States

20

98

19

97

19

96

19

95

Indonesia

19

94

19

93

19

92

Russia

19

91

19

19

90

7 6 5 4 3 2 1 0 19

Million tonnes, raw value

Import demand

EU

7.3 Major sugar importers.

domestic consumption needs. For some countries, if refining capacity is situated in the sugar growing regions, away from ports, then this would also encourage imports of mainly white sugar in times of shortage. Other factors are also relevant. So-called ‘toll refiners’ (countries with spare refining capacity near to ports) import raw sugar for re-export as white sugar, the volumes driven by the level of the white sugar premium (discussed later). Furthermore, government tariff policy can also encourage imports of raws or whites depending on the relative level of tariffs. Most of the world’s raw sugar imports are by a relatively small number of large importers. In the 2000–02 period, 64% of total imports were into the European Union, Russia, the United States, Japan, South Korea, Canada and Malaysia. During that period, global raw sugar imports averaged 21.4 million tonnes (Fig. 7.3). Import demand for white sugar is more diversified. Indonesia, and several African and Middle East countries, are the major importers of white sugar. Global imports of white sugar averaged 15.7 million tonnes during the 2000–02 period. The major players in world raw and white sugar trade are investigated further below, but this is best conducted after considering the regional dynamics of imports over the past decade or more.

Regional dynamics The dynamics of import demand at the global level are heavily driven by the geographical spread of import demand and the ‘loca111

The world sugar market 18 Million tonnes, raw value

16 14 12 10 8 6 4 2 0 Europe

N America C America S America 1985

1990

1995

2000

Asia 2001

Africa

Oceania

2002

7.4 World sugar imports by region.

tion’ of import growth. As can be seen in Fig. 7.4, Asia is by far the dominant importing region and growth there in the past decade has been substantial (despite marked increases in the region’s production level – see Chapter 12). In 2002 imports by Asia (capturing the Far East and the Arabian Peninsula and Persian Gulf) reached 16.4 million tonnes (or 37% of the world total). The Asian financial crises, whilst centred in the countries of the Far East, adversely impacted the broadly defined Asian import demand total in 1998 (via impacts on disposable incomes rather than impacts on the price of sugar in local currency) and imports fell by 4.4% (0.7 million tonnes), having previously grown by 6.4% annually over the prior seven years. Even so, not all of the fall in imports in 1998 can be attributed to the financial crises because imports in 1997 were boosted by weather reduced production in several countries of the region in the same years. The next largest importing continent is Europe at 10.97 million tonnes in 2002. Imports are dominated by the Russian Federation at 5.4 million tonnes during 2000–02, and the bulk of growth in Europe has been centred in Russia, mirroring the decline in domestic beet sugar production since 1992. At the same time, however, as well as being a large exporter of white sugar, the European Union imports 1.3 million tonnes white sugar equivalent (wse) under its preferential scheme with African, Caribbean and Pacific (ACP) countries. Africa is the third largest importing region (importing 7.2 million tonnes in 2002) and import growth has been steady there over the past decade. Generally in North Africa, countries that have increased 112

Import demand

sugar imports over recent years tend to be those with small domestic sugar industries, but where domestic demand has been increasing along with rising incomes. In Sub-Sahara Africa, domestic supply typically falls short of demand (apart from South Africa and its immediate neighbours) and consumption levels there have sometimes been constrained by the availability of foreign exchange to fund sugar imports. Because Asia is so dominant in global imports, but also reflecting an increase in imports by Africa, the share of developing countries in world trade (see Fig. 7.5) has increased significantly since 1985 – rising from 45% in 1985 to average around 60% in 2001 and 2002 (a peak of 68% was reached in 1994). The increasing share was due not only to absolute growth in the volume of imports by developing countries, but also to a concurrent decline in imports by two historically important developed countries – the United States and Japan. Intake by these two importers has fallen by around 0.6 million tonnes over the same period, due to their national sugar policies which have supported domestic production. The weakening in the share held by developing countries since 1998 chiefly reflects the surge in imports by Russia, whilst imports by the United States fell further. The rising share of developing countries has typically been seen as a crucial factor in terms of world price behaviour, in that as a group, imports by developing countries are generally 25

0.7 0.6

20

15

0.4 0.3

10

Ratio

Million tonnes, raw value

0.5

0.2 5 0.1 0

0 1985 1987 1989 1991 1993 1995 1997 1999 2001 Developed

Developing

Developing share

Linear (developing share)

7.5 Share of developing countries in world sugar imports. 113

The world sugar market

viewed as more sensitive to world price movements than industrialized countries. PREFERENTIAL TRADING ARRANGEMENTS

With the demise of the COMECON arrangements in 1992, preferential trade now consists mainly of imports by the European Union under its Sugar Protocol with ACP countries (under which 1,294,700 tonnes wse of cane sugar from certain ACP states are imported levy free) supplemented by Special Preferential Sugar (SPS) arrangements to cover the maximum supply needs of the four member states with raw cane sugar refining industries; and imports by the United States under its tariff rate quota (around 2.1 million tonnes in the mid1990s but now 1.1 million tonnes, the WTO minimum). Since 1997 (with the accession of Finland) the European Union also has a commitment to import around 79,000 tonnes from Cuba and Brazil under Most Favoured Nation (MFN) arrangements. The demise of the Soviet Union effectively brought an end to the largest preferential trade, that of Cuba to COMECON countries (5 million tonnes, raw value in 1991). Crucially, the preferential trading arrangements mainly relate to raw sugar trade, so in effect represent 16% of world raw sugar imports. Preferential trading arrangements are discussed more fully in terms of world exports in Chapter 9. RAW VS WHITES: DYNAMICS

An important trend in the world sugar market over the past half decade has been a progressive expansion in the world trade of raw sugar. Another key driver to that market dynamic has been investment in stand-alone refineries (both for domestic consumption and for re-export – so-called ‘toll refiners’), in the Middle East. The growing importance of stand-alone refineries and toll refiners is discussed below when considering the dynamics of key market players in the raws market. Prior to the mid-1990s it was white sugar that was expanding at the expense of raw sugar (see Fig. 7.6), reflecting the increasing share of developing countries in imports, many of which do not have domestic refining industries, and higher demand for white sugar imports into Eastern Europe as a result of declining beet production, together with the cessation of the preferential trade in raw sugar from Cuba to the FSU. In 2002 white sugar trade stood at 17.6 million tonnes, raw value, and raw sugar trade at 21.4 million tonnes, raw value. 114

Import demand

Million tonnes, raw value

25 20 15 10 5

White

02

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

90

19

89

19

88

19

87

19

86

19

19

19

85

0

Raw

7.6 Raw vs white sugar imports.

Since the mid-1990s there has been increasing production and export availability of direct plantation whites (DPW), which is lower in quality than the standard white (45 ICUMSA) sugar typically exported from the European Union. DPW sugar is of much higher colour and has a lower purity as measured by polarization. Particularly, it is Brazilian ‘cristal’ sugar that has blurred the line between raws and whites. That is because DPW can therefore be considered as very high polarization (VHP) raw sugar in many markets (although in several countries such as Japan, a maximum polarization limit of 97.99° for raw sugar limits imports of DPW as VHP raw sugar because prohibitively higher white sugar tariffs would then apply). The extent to which DPW goes to a whites or raws use depends on market prices. Part of the explanation is that in a growing number of developing countries liberalization and privatization have resulted in a renewed focus on price/quality relationships whereby the lowest acceptable end use quality is often preferred and so DPWs have increased market penetration into Sub-Saharan Africa and North Africa to the detriment of 45 ICUMSA white sugars.

Dynamics of pivotal players Developments in pivotal importing countries, in terms of the economic, policy and random (weather related production shocks) factors impacting upon their annual import needs, can be a key driver of world price movements in the short term. 115

The world sugar market PIVOTAL PLAYERS IN RAW SUGAR IMPORTS

There are seven countries, each importing over 1 million tonnes annually, that together have accounted for between 62 and 68% of world gross trade in raw sugar over each of the past five years. They are spread between three major geographical trading spheres: the Far East, including Japan, Republic of Korea and Malaysia (and more recently Indonesia); Europe (Russia, the European Union); and North America (see Figs 7.7, 7.8 and 7.9).

Million tonnes, raw value

7 6 5 4 3 2 1

Russia

20

02

00 20

98 19

96 19

94 19

92 19

19

90

0

EU

7.7 Pivotal raw sugar importers: Europe.

Million tonnes, raw value

3.5 3 2.5 2 1.5 1 0.5

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01

0

United States

7.8 Pivotal raw sugar importers: North America. 116

Canada

2 1.5 1 0.5

Malaysia

02

01

20

00

20

99

20

98

19

97

Rep Korea

19

96

19

95

19

94

19

93

Japan

19

92

19

19

19

19

91

0 90

Million tonnes, raw value

Import demand

Indonesia

8 6 4

White

Raw

2002

2001

2000

1999

1998

1997

1996

1995

1994

0

1993

2 1992

Million tonnes, raw value

7.9 Pivotal raw sugar importers: Far East.

Total

7.10 Russia’s sugar imports.

Russia Russia has emerged as the world’s single largest player on the import side, importing mainly raw sugar. As can be seen in Fig. 7.10, Russia’s raw sugar imports have risen markedly since the mid-1990s, rising from 1.1 million tonnes in 1994 to a peak of 6.5 million tonnes in 1999, before easing to 4.4 million tonnes in 2002. At this level, Russia is a key price driver for the world market. Changes to Russia’s sugar policy have been instrumental to both the volume of imports and the raw/whites mix over the past decade. First in 1993, the subsidy on raw sugar imports was eliminated, resulting in a tripling of white sugar imports because the white premium at that time did not allow for profitable toll refining of raws. The government then imposed an import tax of 25% on whites in 1994 and along with other policy settings (relating to controlling the flow of white sugar from Ukraine), imports of raw sugar quickly replaced whites after 1996. The financial crisis of 1998 saw the abrupt imposition of prohibitive temporary import duties of 75% on raws and 45% on whites. 117

The world sugar market

In 1999 a new policy was implemented which saw import duties relatively low in the period from December to July but higher during the harvest period from August to November. The next policy change was to implement a tariff rate quota (TRQ) system at the end of 2000 under which the right to import 3.65 million tonnes of raw sugar was auctioned. As it happened, 1.5 million tonnes of nonTRQ sugar were imported in 2001 because the out-of-TRQ tariff rate was not set sufficiently high so as to deter such imports. The 2002 TRQ was also set at 3.65 million tonnes, but with higher non-quota tariff rates, including the extra seasonal duty applied during 1 July to 31 December. The 2003 TRQ was set even higher at 3.95 million tonnes, and with continuing seasonally higher tariff levels for nonquota sugar. Finally, at the end of 2003, the government decided to abolish the two tier tariff rate quota scheme and introduced a system of variable tariffs, as discussed in detail in Chapter 12, when discussing prospects for major world importers. Looking ahead, the shape of Russia’s future sugar policy will depend to a large extent on the terms of its accession to the WTO. At the same time, a government target is to reach 50% self-sufficiency by 2010. In the meantime Russia can be expected to import at least 3 million tonnes of raw sugar each year. United States Imports of sugar by the United States are conducted under its tariff rate quota scheme which forms part of its broader sugar policy. Importantly, as shown in Fig. 7.3, imports of raw sugar under its TRQ have steadily declined to the WTO minimum level of 1.1 million tonnes (1.256 million short tons, raw value (STRV), of which at least 24,251 STRV must be refined sugar). This is because of surging domestic production, which having reached a level of more than 8 million tonnes in 1999, became incompatible with the sugar programme, and the country’s NAFTA and WTO commitments. Indeed the US government ended up holding significant volumes of forfeited sugar stocks (over 1 million tonnes in October 2000) because excess supplies had pushed market prices beneath the loan rate. Another factor pushing the TRQ to the WTO minimum has been increasing access to the US market by Mexico under the terms of the North American Free Trade Agreement (NAFTA). Under NAFTA, Mexico’s level of access to the US sugar market has already risen significantly, up from 25,000 tonnes in 1999/2000, to 105,788 tonnes 118

Import demand 3,000

2,500

000 STRV

2,000

1,500

1,000

500

20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

0

Baseline ’02

Baseline ’03

7.11 United States: projected total imports.

in 2000/01 and higher still to 137,788 tonnes, raw value for the 2001/02 fiscal year. Even so, US–Mexican sweetener trade is mired in dispute because of disagreement over the interpretation of NAFTA’s sugar provisions for the period before 2008, after which the sugar and sweetener economies of the two countries are meant to be fully integrated.1 In short, Mexico claims the right to export its entire exportable surplus (estimated at over 500,000 tonnes prior to 2003) but instead the so-called USDA formula restricts Mexico’s access to more modest dimensions. The USDA baseline projections (released February 2003) show US imports (total sugar imports less imports for re-export programmes) to average 1.496 million STRV a year. Concerning imports into the United States from Mexico under NAFTA, sugar available for export to the United States is projected to average 253,000 STRV a year during FY 2004–13. Significantly, the USDA has pared back projected imports to a peak of 1.764 million short tons in FY 2006, before weakening slightly to 1.756 for the remainder of the projection period. This is in stark contrast to the much more aggressive forecast for imports to rise steadily to 2.85 million short tons in FY 2012 as projected in the 2002 basecase (Fig. 7.11). The difference 1 See MECAS(01)20 for a full explanation. 119

The world sugar market 1,600 1,400 1,200

000 STRV

1,000 800 600 400 200

06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

05

20

04

20

03

20

20

20

20

01 02

0

Baseline ’02

Baseline ’03

7.12 United States: projected imports from Mexico.

centres on expectations for Mexico’s imports, initially within the NAFTA low tier and high tier framework, but then unfettered imports after 2008. In the 2002 baseline, imports from Mexico under NAFTA were projected to be as much as 733,000 short tons in 2003, steadily rising to nearly 1.4 million short tons by FY 2012. However, by the time of preparing the 2003 baseline, a complete reassessment was evident. Mexico’s exports for FY 2003 were put at only 21,000 short tons, rising to a peak of only 264,000 short tons in FY 2009 before stabilizing at a level of around 255,000 short tons (Fig. 7.12). The key reason for the marked lowering of the imports projection in the 2003 basecase is a complete reassessment of the situation and outlook for sugar and corn sweeteners in Mexico. In particular the 2003 baseline assumes that Mexico’s tax on soft drinks containing HFCS will continue over the entire projection period, whereas this factor was not an issue when preparing the 2002 projections. Indeed, the soft drinks tax boosted sugar consumption in Mexico in 2002, and according to the USDA, effectively removed the surplus which had been characteristic of Mexico’s sugar industry over recent years, and for which the Mexican government and industry had been negotiating to dispose of on the US market (either 120

Import demand

through Tier II access or through a NAFTA low tier quota which is not determined by the USDA formula – as discussed further in Chapter 10). European Union As foreshadowed above, imports of raw sugar into the European Union are conducted under the terms of the ACP–EU Sugar Protocol (under which 1,294,700 tonnes wse of cane sugar, from certain ACP states, are imported levy free), supplemented by Special Preferential Sugar (SPS) arrangements to cover the supply needs of the four EU member states with raw cane sugar refining industries, and the MFN commitments to Cuba and Brazil (and others). Whilst the Sugar Protocol was extended under the Cotonou Agreement of 2000, the level of SPS sugar is set to diminish over the coming years. This is a direct result of the EU’s unilateral ‘Everything but Arms’ (EBA) initiative, adopted March 2001, under which new duty free access to the EU sugar market has been granted to least developed countries (LDCs). SPS sugar is now to be considered as part of the quota set-up under the EBA agreement (determined as the best figures for LDC sugar exports during the 1990s plus 15% – 74,185 tonnes (white sugar equivalent) in 2001/02, which will then grow by 15% each year, reaching 197,800 tonnes in 2008/09). In effect, rising imports of EBA sugar would be mirrored by a reduction in SPS sugar from ACP countries (see Chapter 10 for a more detailed discussion). The longer term future for raw sugar imports into the European Union depends on the extent to which EU sugar policy is reformed – a subject discussed in Chapter 10 – and the extent to which LDC sugar producers realize capacity to increase sugar production for export to the high priced EU market under the EBA initiative (discussed in Chapter 10). Other players Canada has been a steady importer of raw sugar (between 0.9 and 1.2 million tonnes annually) to meet domestic needs, and import volumes are unlikely to change significantly as the country exhibits the characteristics of a mature market. In the Far East, Japan is a large importer (1.57 million tonnes, raw value in 2000–02) but again, unless significant policy reform takes place import volumes are not likely to alter significantly, and are likely to continue to trend downwards. Of most interest in the region are the rising import volumes 121

The world sugar market

by other key players in South East Asia: the Republic of Korea, Malaysia and Indonesia and, as discussed later, China’s potential to become a regular importer in coming years. Malaysia’s domestic sugar production is small and static, at around 105,000–110,000 tonnes, raw value, and represents less than 10% of consumption. Imports are therefore trending upwards (reaching 1.24 million tonnes in 2002) in line with overall consumption growth. As discussed below, Malaysia is also an important toll refiner, which adds to its overall import volumes for raw sugar. Malaysia’s imports may not keep expanding, however, as a glucose and HFCS facility is soon to commence production there. The Republic of Korea has no domestic sugar industry and therefore its import volumes have also trended upwards in line with domestic sugar consumption, reaching 1.5 million tonnes raw value in the mid-1990s. Like Malaysia, the Republic of Korea is a toll refiner of raws for re-export as white sugar. Indonesia’s imports of raw (and white) sugar increased markedly during the second half of the 1990s, following liberalization of its sugar sector (largely driven by Indonesia’s IMF agreement), including the breakup of BULOG which used to trade in key food commodities, including sugar. At that time import controls became much freer and subject to only modest tariffs which proved insufficient against the low world market prices of 1999 to prevent large-scale imports. Imports of sugar rose markedly to 2.2 million tonnes in 1998, but have since eased to 1.3 million tonnes in 2001 before recovering to 1.6 million tonnes in 2002 (although the country first imported large volumes of sugar in the late 1980s). Future import levels are critically dependent on the extent to which Indonesia’s domestic sugar industry can be revitalized, depending to a significant extent on higher tariff assistance to the sector. (See Fig. 7.14 below for Indonesia’s imports.)

TOLL REFINERS

A feature of the world sugar trade is toll refining, whereby raw sugar (over and above that needed to fulfil domestic consumption needs) is imported for refining and then re-exported as white sugar. The level of tolling is driven by the level of the white sugar premium, that is the price advantage of white sugar over raw sugar adjusted for freight and the polarization (purity) of sugar. Therefore, the level of tolling can vary considerably from year to year. The average 122

Import demand 8 7 US cents/lb

6 5 4 3 2

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

1991

1

Differential in c/lb

7.13 The raw/white differential.

premium is difficult to calculate because raw sugar has a wide range of polarization depending on the origin and the production process. Therefore a cruder but more easily calculated indicator is used, namely the raw/white differential, as shown in Fig. 7.13 and which was discussed in Chapter 3. Clear volatility is present in the differential between raw and white sugar. Toll refiners are sometimes considered the safety valve of the world sugar market as they help to re-balance the raw/whites mix should supplies in one category become too tight, although they act with a considerable time lag, and the quantities involved are substantially smaller than the principal market players. Traditional toll refiners are located in the United States, Republic of Korea, Malaysia and China. New refineries in Saudi Arabia (Jeddah) and Dubai (UAE) which commenced in 1997/98, are transforming large areas of the Middle East sugar market by refining raws to fulfil demand both in their own countries and in nearby countries. Dubai hosts one of the largest toll refining operations in the world at 0.75 million tonnes refined sugar per year. Importantly, the advent of these large refineries has resulted in a significant shift in the composition of sugar imports by the Arabian Peninsula and the Persian Gulf away from whites into raws. New refinery projects in Algeria and Syria are adding to an already significant refining capacity in Saudi Arabia and Dubai. Furthermore, additional projects are being announced for Saudi Arabia and Yemen, further boosting raw sugar demand and perhaps ultimately challenging the strong position of EU white sugars in North Africa and the Middle East, especially since some of the sugar produced at the new refining capacity will be for re-export. (See Table 7.1.) 123

The world sugar market Table 7.1 New refining capacities (000 tonnes) Country

Current capacity

Planned additional capacity

Saudi Arabia

800

+245

UAE

600

–

Nigeria

750

+250

Algeria

–

+650

Syria

–

+1000

Yemen

–

+240

Table 7.2 Top 15 importers of white sugar, 2000–02 average (million tonnes, raw value) Country

Country

Algeria

0.886

Israel

Nigeria

0.856

Egypt

0.462 0.450

Indonesia

0.802

Russian Federation

0.439

Persian Gulf

0.802

Uzbekistan

0.383

Syria

0.757

Pakistan

0.382

Iraq

0.543

EU

0.295

Yemen

0.479

Iran

0.222

Sri Lanka

0.468

Total

8.226

The major tollers in the Far East are South Korea and Malaysia. China is another important player in the global tolling business. There are 25–30 factories in southern provinces which can refine imported raws. In the past, China has tolled large quantities of sugar; for instance in the mid-1990s it is estimated to have tolled 750,000 tonnes annually.

PIVOTAL PLAYERS IN WHITE SUGAR IMPORTS

As already noted, imports of white sugar are much more diffused than for raw sugar. Furthermore, volumes traded are suffering from the increased availability of VHP raws/DPWs. Only a handful of countries had average imports during 1998–2000 of greater than 0.5 million tonnes annually: Algeria, Nigeria, Indonesia, Persian Gulf, Syria and Iraq, as shown in Table 7.2. More broadly, the top 15 124

3 2

White

Raw

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

1991

1 1990

Million tonnes, raw value

Import demand

Total

7.14 Indonesia’s sugar imports.

importers accounted for 42% of world imports of white sugar over the 2000–02 period. In such a widely dispersed market structure, it is difficult to pinpoint countries which play a pivotal role in price formation on the demand side (more easily done on the supply side in terms of the EU, Brazil and toll refiners). The top five importers are Algeria, Nigeria, Indonesia, Persian Gulf and Syria. Indonesia was identified as having become a significant importer of raw sugar during the 1990s, but as shown in Fig. 7.14, the first consequence of industry deregulation and a declining domestic sugar production during the mid- to late 1990s was a surge in white sugar imports, acting as the principal replacement for the greatly diminished role of Russia in white sugar imports after 1996. Consumption of sugar fell in Indonesia in 1998 and has since not fully recovered, but production fell further, and so import demand initially rose. At their peak in 1998 white sugar imports reached 1.6 million tonnes. As already commented above, future import levels (both raw and white) are critically dependent on the extent to which Indonesia’s domestic sugar industry can be revitalized, depending to a significant extent on higher tariff assistance to the sector.

Drivers for the future Looking to the future, global consumption growth is likely to lead to higher trade in sugar over the longer term. Deregulation during the 1990s, which has left fewer and fewer countries with overt government participation in their domestic sugar industries, has contributed to a greater dispersion of import demand (i.e. government’s retreat from the sugar industry has led to increased 125

The world sugar market

participation of the private trade), and could lead to a stronger link between consumption growth and imports. Mounting pressures for sugar policy reform and further trade liberalization (discussed in Chapter 10) could also act to increase world sugar trade if that reform were to lead to less emphasis on self-sufficiency goals in many countries and improved market access following the removal of non-tariff barriers.

CHINA: A PIVOTAL PLAYER FOR THE FUTURE?

96 19 97 19 98 19 99 20 00 20 01 20 02

94

93

92

91

95

19

19

19

19

19

19

90

3.5 3 2.5 2 1.5 1 0.5 0 19

Million tonnes, raw value

China is a potential future driver for greater world trade in sugar. During the 1990s China’s levels of imports and exports were extremely volatile (see Fig. 7.15). The variability of the country’s trade pattern reflected large changes in the country’s level of domestic production against the much less volatile level of sugar consumption. Weather conditions have played their role in the instability of production over time, but it is also partly because sugar prices were freed when China first moved towards a market economy in the early 1990s, but sugar factories still had to pay government-set floor prices for cane and beet. Notwithstanding the variability of trade flows, with WTO membership China agreed to implement a tariff rate quota for 1.764 million tonnes in 2002, increasing by 5% each year until 2004. The tariff rate quota was not filled in 2002 and in 2003 only 0.6 million tonnes were imported against the TRQ volume of 1.852 million tonnes. This was because the country experienced a near record sugar crop, and bearish domestic fundamentals pushed domestic prices below global price benchmarks making

Raw

7.15 Imports into China. 126

White

Import demand

imports unprofitable for much of the year. Indeed imports during the 2000–02 period averaged only 1 million tonnes. In essence, the WTO door is open, but access to the domestic market remains controlled by government. In the longer term China’s import requirements will be driven by domestic requirements, assuming the government is successful in its stated aim of achieving a profitable sugar sector (assuming there are continued moves to rationalize unprofitable mills and place an increasing number of mills under private management), with imports accounting for around 20% of demand. China will meet her TRQ commitments subject to there being a commercial reason for her to do so (i.e. the domestic supply/demand balance). Crucial to the demand outlook, the sugar sector in China is complicated by an extraordinarily heavy intake of saccharin. Production of saccharin boomed over the 1995–99 period, rising from 10,000 to 24,000 tonnes. The saccharin industry was originally founded by the government in a drive to increase export income. In 1998, around 55% of production was exported, leaving 13,000 tonnes available for domestic use. During 2001 sales of saccharin totalled 22,862 tonnes of which, according to official figures, approximately 6,000 tonnes was consumed domestically. On a comparative basis, saccharin is deemed to have 400 times the sweetening power of sugar. This volume of saccharin would have displaced around 1.4 million tonnes of domestic sugar consumption, depending on assumptions regarding its sweetening potency (up to 400 times as sweet as sugar). When considered in the light of China’s annual sugar consumption – around 8 million tonnes wse – the magnitude of the competition between sugar and saccharin is readily visible. China’s government back in 1999 issued new regulations in an attempt to circumvent further inroads by saccharin. A licensing system was introduced to manage saccharin production. Production quotas issued in May 1999 limited output to 24,000 tonnes of which only 8,000 tonnes was allowed for domestic use, and the remaining 16,000 tonnes was to be exported. Despite this three-pronged strategy (production cuts, increased exports and consumption limits), by late 2000 it emerged that only four small saccharin factories had been closed, removing around 3,000 tonnes of production capacity. There was also little evidence of lower saccharin consumption and few food manufacturers appeared to be adhering to the new labelling rules. During 2001 targets were outlined to reduce domestic consumption from 13,000 tonnes to just 3,000 tonnes and reduce 127

The world sugar market

production down to 19,550 tonnes. However, unofficial production above the planned targets resulted in total sales of 22,862 tonnes, of which around 6,000 tonnes was consumed domestically. In March 2003 the Chinese government established the State Sweetener Production Investigation Group to enforce the government’s objectives. Production of saccharin is reportedly limited to five factories and targets for lower production now seem attainable, helping to boost sugar demand over the medium term.

Conclusions World sugar trade is expanding, although historically the persistence of many countries in pursuing self-sufficiency goals meant that imports before the early 1990s were declining as a proportion of world sugar consumption. The prime key driver for expanding trade over the past decade is Russia’s emergence as a major player on the import side during the early 1990s. Furthermore, it would appear many net importing countries have not been able to improve their level of self-sufficiency, having to import more to satisfy growing demand. Asia is the dominant importing region (Far East supplied mainly by Australia and Thailand) and rising imports in that region have been driven by strong consumption growth, together with the establishment of new toll refining capacity in the Persian Gulf. Furthermore, broader trade liberalization and deregulation, particularly privatization within national sugar industries (only a handful of countries now have overt government participation in the operation of their domestic sugar industries) may have also acted to support growth in trade during the 1990s. Deregulation more broadly has left import demand more dispersed and possibly more sensitive to world price movements. There are seven countries, each importing annually over 1 million tonnes, raw value, that together account for over 65% of world trade in raw sugar. These major players consequently act as key drivers of global raw sugar imports and include: Russia and the European Union in Europe, the United States and Canada, and in the Far East the traditional importers – Japan, Republic of Korea and Malaysia – but now also Indonesia, which emerged as an importer during the late 1990s. Future prospects in the European Union and the United States are heavily determined by sugar policy developments. 128

Import demand

Imports of white sugar are much more diffused than global raw sugar imports – the top 15 importers accounted for around 42% of world white sugar trade during 2000–02. Identifying key players with a pervasive influence on the world market is therefore troublesome, but Indonesia has heavily impacted the market in recent years. In the longer term, global consumption growth is likely to increase sugar trade. Furthermore, mounting pressures for sugar policy reform and further trade liberalization (discussed in Chapter 10) could also act to increase world sugar trade if that reform were to lead to less emphasis on self-sufficiency goals in many countries and improved market access following the removal of non-tariff barriers. China is a case in point, and with its recent entry into the WTO will see significant and regular imports of sugar.

129

P A R T

III

Supply

C H A P T E R

8

Sugar production

Having established the strong likelihood of continuing demand growth in the coming decade, it is important to identify how this growth can be met, from where that additional supply is likely to originate and what might be the nature of the supply’s response to the growth in demand. It should be stressed that most of the time the world sugar market is haunted by short term worries over how to dispose of the accumulated surplus and long term worries over the growing demand not being met. Importantly, world sugar production remains extremely volatile, in contrast to a remarkable stability of growth in global sugar consumption. Global output may fall by as much as 5.5 million tonnes from the year before (1993), may remain practically unchanged from one year to another (1996–98), or may grow by as much as 11.6 million tonnes in just one year (2002).

Low supply response to world prices Let us look first at the short term worries concerning the imminent threat of global surplus and the consequent fall in world sugar prices and poor export earnings of industries (currently exporting countries are responsible for about 75% of world sugar production). From time to time production capacities can impose limits on consumption growth (in the recent past global use of sugar exceeded output in 1986–89, 1994 and 2001 – see Fig. 8.1). In the longer run, production tends upwards to meet rising consumption. It also tends 133

The world sugar market 150,000

000 MTRV

140,000 130,000 120,000 110,000 100,000

World production

02 20

00 20

98 19

96 19

94 19

92 19

90 19

88 19

19

86

90,000

World consumption

8.1 World sugar production and consumption: 1986–2002.

to outrun consumption growth, pushing the global balance into surplus for several years at a time. Why does sugar so often violate general economic laws of supply and demand, and why does the world supply keep overshooting consumption levels and increasing even in times when world prices are low? At the national level sugar production remains cyclical. Generally, the cause of the cyclicity is that capital, once invested, cannot be easily withdrawn. Even though sugar is often described as an agricultural product, it is not a traditional ready to consume farmgate product but a processed food. Currently, sugar crop processing is believed to be the most capital intensive of all soft commodity processing sectors, frequently involving investment of more than US$100 million in one processing unit. In the context of supply response, high capital intensity has two major implications. First, sugar cane and beet processing mills have strong bonds with growers and seek long term supply commitments. Second, the milling sector takes a long term view of the market prospects and tries to stay active through times of low price by cutting costs and delaying expenditure. The lion’s share of the world sugar output is produced from perennial cane, which, once planted, is productive for several years. This means that cane sugar producers, who currently account for 73% of global sugar supply and about 85% of the world net exports, are not likely to be capable of making a sizeable adjustment in the course of one or two years. Sugarbeet is an annual crop so response periods, in theory, should be swifter than they are for cane, but the 134

Sugar production

capital intensity of the sector makes quick responses unlikely. Another factor explaining the low supply response of beet producers to world prices is a low world market dependency of beet producers. Later on in Chapter 9 we will discuss in more detail the relative world market dependence of individual producers. For now let us note that all beet sugar producers belong to the group of low dependency, where net exports to the free market account for less than a third of their production level. The world market dependency of sugar industries may be further diluted by protectionist policies. In many countries domestic industries remain insulated from the world market. The nature and extent of these policies are examined in more detail in Chapter 10, but the important fact is that domestic support policies and trade policy settings mean that domestic sugar prices can bear limited or no relation to world market prices. Simple graphical analysis of annual changes in world production against the level of world price (see Fig. 8.2) provides evidence of little same-year response in world production to periods of low prices. There is no statistically significant correlation between the changes in world production and world prices. When production does decline, it typically is for one year only, suggesting adverse weather plays the key role rather than some underlying economic response to previous years’ low prices. Even if a cursory glance at the historical data supports the main arguments given above – that world production is not very responsive to periods of low or falling prices – there are more rigorous 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

14 9,000 12

10

3,000

8

0 -3,000

6

-6,000

4

Changes in production

US cents/lb

000 MTRV

6,000

ISA price

8.2 Changes in world sugar production and ISA prices. 135

The world sugar market

statistical methods of testing the hypothesis that sugar supply response to changes in world sugar prices is muted and delayed. Specifically, economists with an empirical bias can turn to econometric modelling for estimates of the short run and longer run price elasticity of supply. Although estimates of supply elasticities vary amongst sugar models, because of different data sets and structural formulations, there is clear evidence to support the key conclusions of the above theoretical and graphic analysis: The price responsiveness of production to world price is generally very small in the short run (a 1% change in world price leads to a production response of between 0 and 0.05%). Sugar production in predominantly beet growing areas is more responsive than sugar production in predominantly cane growing areas. It takes two to three years for most producers – even those at the lower end of the cost scale – to respond to a change in world sugar price. This is evident because estimates of the long term supply elasticities are high (0.01–0.2%).

Weather: a key short term production driver Overlying the fundamental insensitivity of world production to prices signals is a key short term production dynamic: weather. Despite all technological advances in field practices, unfavourable weather can still severely impact sugar production, even in the most efficient industries. Yields may vary very substantially from year to year solely because of the differences in weather patterns or incidence of disease. In the short term, weather remains a key driver of sugar production. Sometimes, when they impact several main producing countries or regions, climatic conditions alone may steer the entire world sugar market. At a national level, natural instability in the sugar production systems can be easily identified and illustrated by some examples from recent history. In December 1999 four days of -4°C temperature caused widespread frost damage to the crops in three of the most prominent cane growing provinces of China. As a result, in 1999/2000 sugar production dropped by 2.3 million tonnes – nearly 136

Sugar production

000 MTRV

12,000

9,000

4 03 20

/0 02 20

/0

3

2 20

01

/0

1 20

00

/0

0 19

99

/0

9 /9 98 19

19

97

/9

8

6,000

Crop year: May/April

8.3 Sugar production in China.

25% compared to the previous year. With a return of normal weather, production fully recovered in the following year and set a new record in 2002/03 (see Fig. 8.3).1 In Brazil a prolonged drought at the end of 1999 and the beginning of 2000, combined with the severe financial hardships suffered by the agricultural sector, damaged and delayed the cane harvest in 2000/01, resulting in a nearly 20% drop in sugar output (see Fig. 8.4). As in China’s case, a return to normal weather improved Brazil’s sugar output considerably. In 2002/03 it reached a new record: in excess of 23 million tonnes, and in 2003/04 it is forecast to go above 25 million tonnes. In some unfortunate cases weather can affect several crops consecutively. In Australia poor weather, notably cyclones with high winds and heavy rains, washed away young crops, knocked down mature cane and flooded the fields, causing considerable harvest delays throughout the end of the 1990s starting in 1998. As a result, the country’s sugar production dropped by 745,000 tonnes (or 13%) in 1998/99 and further by 1.148 million tonnes (or 21%) in 2000/01. Output recovered the following year, but a severe drought in the 1 As weather conditions influence the crop during a particular season, Figs 8.3–8.6 illustrate developments during national crop years rather than calendar years (source: F. O. Licht, as published in First Estimate of World Production 2003/04, October 2003. 137

The world sugar market

000 MTRV

25,000

20,000

20 03 /0 4

20 02 /0 3

20 01 /0 2

20 00 /0 1

19 99 /0 0

19 98 /9 9

19 97 /9 8

15,000

Crop year: May/April

8.4 Sugar production in Brazil.

000 MTRV

6,000

5,000

20 03 /0 4*

20 02 /0 3

20 01 /0 2

20 00 /0 1

19 99 /0 0

19 98 /9 9

19 97 /9 8

4,000

Crop year: May/April * ISO forecast

8.5 Sugar production in Australia.

first months of 2003 significantly cut the projected crop for 2003/04 (see Fig. 8.5). Obviously, favourable weather can boost sugar production. For instance, at the end of 1998 the EU beet growers, in an attempt to reduce surplus stocks of sugar, decided to decrease the beet sowing area in the coming season by 2%. Excellent weather during summer 138

Sugar production 20,000

000 MTRV

19,000

18,000

17,000

16,000

4

3

/0 03 20

20

02

/0

2 20

01

/0

1 20

00

/0

0 19

99

/0

9 /9 98 19

19

97

/9

8

15,000

Crop year: July/June

8.6 Sugar production in the EU-15.

and autumn 1999, however, not only compensated for the decrease in sowing area but also led to a new production record (19,175 million tonnes, raw value, compared to 17,561 million tonnes in 1998/99 – see Fig. 8.6). At the world level, the effects of national cycles and weather conditions are not felt so much because sugar production is spread out around the globe, and years when output drops simultaneously in many producing countries are few and far between. As a rule, shortfall in one region is partially or fully balanced out by gains in another. If, however, weather hits a number of main growing regions simultaneously, the world market prices may suffer. This happened in 1999/2000 when production dropped considerably in Brazil (4,070 million tonnes down), China (2,263 million tonnes down) and Pakistan (1,125 million tonnes down), as well as in a number of other producers including Australia, Argentina, Poland, Turkey and Ukraine where output decreased by 300,000–400,000 tonnes. Prices (the ISA monthly average) grew quite dramatically from 5.14 cents/lb in March 2000 to 10.75 cents/lb in October 2000, reflecting the tighter supply situation. In some instances, weather may hit a particular sector of the regional or world market (such as the white sugar market). For example, the strength of the white sugar premium in the second half of 2001 and the first months of 2002 reflected lower availability of good quality white sugar resulting from poorer crops of the leading 139

The world sugar market

European exporters (EU-15, Poland and Turkey) – the 2001 campaign was made difficult by weather.

Long term trends in sugar production Despite a considerable year to year volatility dictated by high weather dependence of sugar crops, in the long run world sugar production tends to grow so as to match growing consumption. So, the ultimate limiting factor should be production capacity. This, however, will not be the case in the coming few years. Summing up the best individual country annual production levels since the mid-1990s gives a staggering figure: in excess of 156 million tonnes, raw value. The world production in 2002 was 142.2 million tonnes. In the hypothetical scenario of favourable weather conditions all over the globe, world sugar output may rise by nearly 15 million tonnes without any increase in sowing area or industrial capacity. In other words, given a reasonable tempo of consumption growth, the existing productive capacity should cover our needs until the second half of the current decade. Of course, the world sugar industry will not stand still. A number of key exporters are planning further increases in their export programmes, while many importers are proclaiming greater selfsufficiency in sugar a political goal. So – assuming that the future investment in new sugar production capacity stays demand driven and, therefore, continues growing – where will the required additional supply come from? Historically sugar has been one of the most autarkic soft commodities. Sugar is produced in more than 120 countries and territories out of the total of about 190. Today, out of the countries with significant agricultural capability, only Estonia, New Zealand, Norway, Korea and most of the Arab Peninsula countries produce no sugar. The global share of non-producers in world consumption is only 5%. Having said that, fewer than 50 countries are actually able to cover their demand by domestic production, and about 70 producing countries have to import sugar in order to meet internal demand. As the following regional review shows, there is a marked difference between regional and country level supply responses to demand growth over the past decade. They depend on the scale, structure and competitiveness of their industry, as well as 140

Sugar production 50,000

000 MTRV

40,000

30,000

20,000

10,000

0 Europe

N America C America S America

1986-89

1990-93

1994-97

Asia

Africa

Oceania

1998-2001

8.7 World sugar production by regions.

on the existence of supportive policies aimed at domestic sugar sectors. Regional production dynamics since 1985 are shown in Fig. 8.7. In order to iron out statistical bleeps associated with years of exceptional weather conditions, the graph shows production averages over four year periods. As illustrated by Fig. 8.7, since the mid-1980s sugar production has consistently grown on just two continents: Asia and South America. In Asia alone sugar production grew by more than 20 million tonnes between 1986 and 2000 to reach 42.3 million tonnes. India, currently the second largest producer in the world, is responsible for more than half of the increase. Asia’s sugar sector has a significant potential for further expansion. Whilst an increase in area under sugar crops might not be possible in some countries, crop and sugar yields can be improved considerably. Currently, in the list of sugar producers, no Asian country’s yields are high by international standards. Most Asian producer countries fall into the low or middle sugar yield category. Importantly, Asia’s sugar consumption has grown even faster than supply, so despite a considerable expansion of production, Asia remains a net importing continent. South America has become the world’s leading export oriented sugar producer. Between 1986 and 1999 South America’s sugar output increased dramatically from 13.0 million tonnes to more than 27.2 million tonnes. Brazil, the world’s leading sugar producer, plays a very special role here. It is behind about 80% of the continent’s 141

The world sugar market

total production increase. The potential of South America’s producers in general, and Brazil in particular, seems not to be fully exhausted; further increase in sugar output can be envisaged. In North America, production expansion matched the growth in demand – domestic production increased from 5.8 million tonnes in 1986 to 8.2 million tonnes in 2000 while consumption grew from 8.1 million tonnes to 10.3 million tonnes. Moreover, production has been growing faster than consumption. This has resulted in an increased level of self-sufficiency in sugar and lower sugar imports. The future of the sugar sector in the US and Canada depends on the level of border protection and production support provided by the governments (discussed further in Chapter 10). Oceania’s production is dominated by Australia, another example of an export oriented sugar producer. From 1986 to 2001 the continent’s sugar consumption increased by less than 0.5 million tonnes, while sugar production jumped from 3.9 million tonnes to 6.2–6.3 million tonnes in 1996 and 1997. (Since then, due to bad weather, sugar output has fallen to a level below 5 million tonnes.) Sugar producers in this region are the most vulnerable to changes in world market values, because most of the sugar produced there is exported. At the end of the 1990s and first years of the new century bad weather prevented the sector from properly fulfilling its potential, on the one hand, and severely dented the sector’s resources, on the other. The future of the industry will depend on whether Australia manages to remain globally competitive, especially relative to Brazil. Since 1986 Africa’s production has increased (from 7.6 million tonnes in the mid-1980s to 9.1 million tonnes in 2001), but more slowly than sugar consumption (11.8 million tonnes in 2001 compared to 8.4 million tonnes in 1986). The sugar import dependence of the continent is growing. In the two remaining continents sugar production decreased during the period under consideration. Central America lost the third position in the continents’ league that it occupied 15 years ago (mainly due to a sharp reduction in Cuba’s sugar production in the first half of the 1990s). Since then the region’s total has been remarkably stable, despite occasional swings in individual nations’ figures. Since 1995 the combined output of 14 producing countries has been fluctuating inside a narrow 12.8–13.7 million-tonne range. This points to a consolidation of new supply structures in the region: Mexico is emerging as the leading producer, and the gradual rise in Guatemala’s sugar pro142

Sugar production

duction is compensating for Cuba’s severe losses since the collapse of the Soviet preferential market for Cuban sugar. Finally, in Europe production has decreased considerably since 1986. Much of the fall in sugar production was due to the break-up of the centrally planned economies in Eastern Europe. Production in the EU 15, Turkey and Switzerland has grown modestly (see Fig. 8.8). From history, we may expect most of the required additional supply to come from Asia and South America. One interesting aspect of the production growth problem is the relative likelihood of its happening in importing versus exporting countries in the future. Undoubtedly, domestic production in importing countries, or their self-sufficiency in sugar, is, along with population growth and availability of alternative sweeteners, a major force in determining the extent to which sugar consumption in deficit areas manifests itself as import demand. There have been numerous intentions to expand sugar production in importing countries. However, an analysis of recent developments and trends in sugar production in importing countries shows that the level of self-sufficiency keeps decreasing worldwide. Table 8.1 illustrates that importers’ production has decreased considerably in both absolute and relative (share of domestic consumption) terms since the beginning of the 1990s. Therefore, in contrast to some widely held beliefs, the global sugar market seems to behave like a free market: the import dependency of sugar importing countries with generally high production costs tends to increase, despite all the distortions caused by government policies.

Eastern Europe

Other Western Europe

EU 15

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

000 tonnes, raw value

8.8 Growth in sugar production in Europe: 1985–2001. 143

The world sugar market Table 8.1 Sugar production and consumption in different economic groups (million MTRV) Total for importers 1992

2001

Changes

Developed importers 1992

2001

Changes

Production

38.2

35.4

-2.8

9.5

10.6

+1.1

Consumption

57.0

65.8

+8.8

17.9

20.8

+2.9

Self-sufficiency (as a/b in %)

67

54

53

51

-2

-13

Developing importers 1992

2001

Changes

Importing economies in transition 1992

2001

Changes

Production

21.7

20.7

-1.0

6.9

5.2

-1.7

Consumption

26.9

34.4

+7.5

12.3

10.9

-1.4

Self-sufficiency (as a/b in %)

81

60

56

39

-21

-17

The only importers who have so far managed to withstand the pressure of massive imports from the world market are countries with high and upper medium income. Only developed importers, such as the US or Japan, are able to afford the long term economic cost of sugar industry expansion despite low competitiveness of domestic producers by international standards. The high level of border protection, a powerful deterrent against cheap imports, leads to high domestic prices, an unaffordable luxury for lower income countries. Taking into account the current structure of the world sugar economy and recent trends in sugar production described above, we can assume that the additional demand will be met by growing supply, mainly from efficient low cost cane sugar producers and exporters, while the share of beet sugar in the global output is expected to continue decreasing.

Cost of production of sugar From the discussion above it becomes apparent that the importance of production cost determines the results of many sugar equations. Sugar is a unique agricultural commodity: an identical product can 144

Sugar production Table 8.2 Cane and beet sugar production (average, million MTRV) 1960s

1970s

1980s

1990s

1999/00

2000/01

2001/02

World sugar production

61.6

81.9

101.8

118.4

131.8

131.4

137.4

Beet sugar production

26.8

32.6

37.9

37.4

35.4

36.0

33.2

Cane sugar production

34.8

49.3

63.9

81.0

96.4

95.4

104.2

Cane sugar as % of world total

56.5

60.2

62.8

68.4

73.1

72.6

74.2

Source: ISO estimates.

be produced from two different crops. As described earlier, since the beginning of the nineteenth century the world sugar economy has been divided between cane and beet with competition between cheap ‘colonial’ cane sugar and expensive, but domestically produced, beet sugar. It is commonly recognized that the basic economics of the production of beet sugar are less competitive than those of cane sugar,2 and the lower cost sugar has been able to displace the higher cost alternative from some markets. Table 8.2 shows that, starting from the 1960s, cane sugar has been displacing beet sugar slowly but steadily. Looking at the developments in sugar crop yields in recent years, it may be concluded that, despite considerable political distortions from national sugar regimes and protectionist policies, the world sugar economy, generally speaking, was developing in accordance with economic theory. An ISO study dedicated to this subject showed that both production and exports were increasingly concentrated in the countries where sugar industries were more efficient. There is an identifiable trend of efficient producers’ (mainly cane sugar manufacturers’) increasing dominance in world sugar trade. In the last decade the growing import demand for sugar was covered by enlarged export availability from low cost producers. The continuing liberalization of the world sugar market can only speed up the process. 2 At the national level the picture may be different. Due to the federal government measures providing more support to the beet sector, in 1992 in the US beet sugar cost of production was 12% lower than that of cane sugar (van der Poel, Schiweck and Schwartz, 1998). 145

The world sugar market

Indeed, during the last decade cane harvested areas increased from 12.4 million hectares to 14.0 million hectares while beet areas decreased from 8.5 to 6.9 million hectares. (Admittedly, much of the fall can be attributed to structural changes of sugar economies in the former Soviet Union and Eastern Europe.) Western Europe’s sugar sector, responsible for 60% of world beet sugar production, is believed to be one of the most supported in the world. Sugarbeet has become one of the most profitable crops for EU farmers, reflecting falling returns from other food crops, particularly cereals, which have been subject to faster or more extensive supportive policy reforms than sugar. The continuing liberalization of the world agricultural markets (such as might occur under the current WTO Round) may aid cane sugar in usurping a greater share of market growth. However, some studies argue that the net effect in some of the main beet growing regions is likely to be the continued preeminence of sugarbeet in terms of the gross margins earned per hectare (Fry, 1998). Thus, beet sugar production in the EU may fail to decrease in several important areas, as long as liberalization is broad rather than specific. International comparison of cost of production in different countries is probably the greyest area in sugar economics. British consultancy LMC International, the internationally recognized authority on sugar cost of production issues, regularly updates variable costs for a wide range of producers worldwide, but most of the figures are not in the public domain. Variable costs (costs which vary with the rate of output such as labour, raw materials or energy) rather than overall costs of production (including the fixed costs or costs which do not vary with output such as depreciation and interest on the capital invested) are considered to be more relevant in analysis of supply response; cost of production estimates form the basis for comparing competitiveness in production across regions and countries. Improvements in field or factory productivity result in lower costs of production. Varying levels of productivity explain a significant portion of the differences in cost structures across countries. The key field productivity measure is cane or beet yield per hectare. This is determined by soil fertility, varieties, pest and disease management, agricultural inputs, irrigation, and harvesting methods. Sugar yields per hectare corral three important drivers: the aforementioned crop yields, sucrose content (of an individual beet or cane plant) and sucrose recovery rates (the proportion of usable sugar recovered from the plant relative to its total sucrose content). Other key measures of factory performance are factory size (average 146

Sugar production

daily crushing capacity) and capacity utilization. Again sugar industries differ considerably in these two aspects of factory performance. For instance, contrast 3,000 tonnes cane per day average mill capacity in India with 15,000 tonnes cane per day in Thailand. For beet, contrast 3,000 tonnes beet per day in Poland with up to 14,000 tonnes beet per day in the European Union. Those sugar industries with costs that are significantly below the world average – centre/south Brazil for instance – all do well when it comes to the key performance parameters described earlier. Those nearer the world average – South Africa and Thailand – tend not to excel in one or more important area (e.g. factory capacity utilization or sugar yields), whilst those with above average production costs – for instance China and Pakistan – tend to perform relatively poorly in several areas (field performance, mill size and mill utilization). Added to these technical performance issues are substantial differences between countries in the cost of land, capital (interest rates and capital replacement costs), labour and energy. Also, there exist substantial differences between producing countries when it comes to the costs of meeting the required environmental, labour and social standards set by local governments. These compliance costs can sometimes be a significant part of the overall cost structure. Table 8.3 shows the average cost of producing cane and beet sugar for selected global producer categories (as estimated recently by LMC International). Cost of production estimates for major producer categories (raw, white, cane and beet sugar) are presented in the table. According to LMC analysis (as reported by the USDA), the lowest cost producers of raw cane sugar are Brazil (centre/south), Colombia, Guatemala, Zambia and Zimbabwe at around 7.4–8.2 US cents/lb. Low cost beet sugar producers are Belgium, Chile, the Netherlands, Turkey, the United Kingdom and the United States, with unit costs of around 19.7–21.74 cents/lb. A comparison of the lowest beet costs to the lowest cane costs (raws converted into white sugar equivalent) shows that there is a competitive advantage for cane of 10–11.5 US cents/lb. Ranking of industries in the cost of production ‘league’ also greatly depends on the exchange rate of the local currency. The US dollar has gained strength relative to many currencies, and this alone is lowering most industries’ recorded expenditures, when they are expressed in US dollar terms. Some countries, such as Brazil, Thailand and South Africa, saw the value of their currency move dramatically, giving them an extra competitive boost on the 147

The world sugar market Table 8.3 Average cost of production by selected category of producers (US cents/lb, ex mill factory basis) 1995/96

1996/97

1997/98

1998/99

Cane raw sugar Low cost producers1

8.10

8.18

7.78

7.58

10.60

10.72

10.52

9.73

Low cost producers1

11.75

11.84

11.41

11.19

Major exporters2

14.23

14.48

14.61

13.53

Low cost producers3

23.16

23.09

21.21

22.67

Major exporters4

26.87

25.90

23.56

24.75

Raw sugar prices (ISA DP)

12.25

11.11

9.94

6.63

White sugar prices (LDP)

15.94

14.48

12.30

9.81

Major exporters2 Cane sugar, white value equivalent

White beet sugar

World market spot prices

Notes: 1 Average for Australia, centre/south Brazil, Guatemala, Zambia, Zimbabwe. 2 Average for Australia, Brazil, Colombia, Cuba, Guatemala, South Africa and Thailand. 3 Average for Belgium, Canada, Chile, France, Turkey, UK and US. 4 Average for Belgium, France, Germany and Turkey. DP = daily price. LDP = London daily price. Source: S Haley, US and World Sugar and HFCS Production Costs 1994/95–1998/99, Sugar and Sweetener Situation & Outlook, ERS/USDA, September 2001.

international scene. In the case of Brazil, the currency devaluation together with a modern and efficient production sector (and low production costs) make the country a very strong competitive exporter on the world market. However, low cost producers have relatively open economies, and the benefits brought by their exchange rate fluctuations can be only temporary. The end of 2003 and the early months of 2004 showed some significant devaluation of local currencies against the US dollar in such key world producers as Brazil, the EU and South Africa.

Conclusions and outlook Summing up our comments on production, weather shocks are a key short term driver of production, and the main factor underlying the high volatility of global production relative to consumption. To 148

Sugar production

this extent weather impacts trade – it becomes a key short term determinant of world market prices. Crucially, world production changes little from year to year in response to world market price movements, acting to prolong periods of low prices on the world market. Low price elasticity of production can be attributed to a number of reasons. First, it can be explained by the ratoon nature of the cane crop. Second, both cane and beet sugar processing is capital intensive and sugar crop processors take a long term view of the market; therefore, during times of low prices the industry continues to make sugar. The relative unresponsiveness of global supply also reflects the generally low world market dependence of most producers. Moreover, due to government support policies (often pursuing self-sufficiency goals) a significant proportion of world production is conducted at prices that bear little relation to world market prices. Variations in a producing country’s exchange rate against the US dollar can also act to mask world market price signals. In contrast to some popular beliefs, the global sugar market seems to behave like a free market. There is an identifiable trend of increasing dominance of efficient cane sugar producers in world sugar trade. The import dependency of sugar importing countries with generally high costs of production tends to increase, despite all the distortions generated by government policies. Therefore, bearing in mind the current structure of the world sugar economy and recent trends in sugar production described above, we can assume that the additional demand will be met mainly by growing supply from efficient low cost cane sugar producers and exporters, while the share of beet sugar as well as cane sugar from high cost manufacturers in the global output is expected to continue decreasing.

References Fry J, Comparison between Beet and Cane, Proceedings of the 7 th ISO Seminar, London, 1998. Fry J, The Competitiveness of Domestic Sugar versus Imports, Proceedings of the Conference ‘Arab Region and Africa in the World Sugar Context ’, Aswan, Egypt, 2003. Haley S, US and World Sugar and HFCS Production Costs 1994/95–1998/99, Sugar and Sweetener Situation & Outlook, ERS/USDA, September 2001. ISO, Sugar Yearbook, various issues. 149

The world sugar market ISO, Developments in Sugar Crop Yields in the 1990s (MECAS(99)19), London, 1999. ISO, Key Drivers of the World Sugar Market (MECAS(02)08), London, 2002. ISO, Taking Stocks of Econometric Models of the World Sugar Market (MECAS(03)07), London, 2003. ISO, Self-Sufficiency in Sugar: Trends and Prospects (MECAS(03)08), London, 2003. F. O. Licht, First Estimate of World Sugar Production 2003/04, F. O. Licht International Sugar and Sweetener Report, No. 30, October 2003. Nyberg J, Consumption Growth: Prospect and Limits for Sugar and Caloric Sweeteners, Proceedings of the 11th ISO Seminar, London, 2002. Van der Poel P W, Schiweck H and Schwartz T, Sugar Technology: Beet and Cane Sugar Manufacture, Verlag Dr A Bartens KG, Berlin, 1998.

150

C H A P T E R

9

Exports

In this chapter we focus on long term trends in sugar exports and key drivers behind recent structural changes which will define the dynamics of export supply in the coming years.

Concentration of exports and special role of Brazil Historically, the export side of the world sugar market has been dominated by a handful of producing countries. This is in stark contrast to the widely dispersed nature of production. As already discussed in Chapter 2 and illustrated by Table 9.1, the five or so leading exporters alone are responsible for about 70% of world sugar turnover. In the previous chapter we suggested that the additional demand ought to be met by the rising output of efficient low cost cane sugar producers and exporters, while the share of beet sugar, as well as cane sugar from high cost manufacturers in the global output, is expected to continue shrinking. From an export perspective, this will mean that low cost exporting countries are best placed to take advantage of the demand growth. Brazil features not only as by far the largest world sugar exporter, but also as the most rapidly expanding source of both white and raw sugar since the mid-1990s. This expansion deserves closer attention. Brazil’s export growth has been exceptional and, excluding the weather reduced crop of 2000/01, Brazil’s sugar exports have dominated the world sugar market. Sugar exports increased more than eightfold between 1990 and 2002 (see Fig. 9.1) with the country’s 151

The world sugar market Table 9.1 Top five exporters of sugar (average for 1999–2002) Total exports

White sugar exports

000 mtrv

Brazil EU

% of world total

Raw sugar exports

000 mtrv

% of world total

000 mtrv

% of world total

10,881

25.7

EU

5,513

30.3

Brazil

6,417

29.1

5,514

13.7

Brazil

4,150

22.8

Australia

3,747

17.0

Australia

3,873

9.6

Thailand

Thailand

3,835

9.5

India

Cuba

3,172

7.9

Persian G

World

39,069

World

1,634

9.0

Cuba

3,196

14.5

1,2321

6.8

Thailand

2,222

10.1

6932

4.1

Guatemala

1,098

5.0

17,000

World

22,069

02

01

20

00

20

99

20

98

19

97

19

96

Raw

19

95

19

94

19

93

19

92

19

91

19

19

90

14 12 10 8 6 4 2 0 19

Million tonnes, raw value

Notes: 1 2001 and 2002 only; prior to 2000/01 India was in a deficit phase of its sugar cycle – see Chapter 12. 2 Re-exports and tolling.

White

9.1 Brazil’s sugar exports: 1990–2002.

share of the world market rising from 6 to 31% over the same period. Brazil has been able to develop both raw and white sugar exports at a speed never recorded in the history of the world sugar market. Brazil’s phenomenal export growth reflects the low production costs in the country. This is brought about largely by a unique feature of the cane processing industry – sugar production represents only one, and not necessarily the biggest, outlet for cane processors. More than half of the cane goes towards ethanol production (for more detailed discussion see Chapter 11). Because the ethanol market is now (since 1999) relatively free of government control,1 the price of ethanol should, theoretically, induce the millers 1 It has to be noted, however, that it is the government that sets an ethanol-topetrol blending ratio for automobile fuel. With the current level of ethanol demand and sugar/ethanol yields each percentage point change in the mandated blend ratio (since 2000 the blend ratio has varied from 20 to 26%) roughly 152

Exports RS/kg of total reducing sugars

0.1 0.05 0 -0.05 -0.1 1999

2000

2001

2002

2003

9.2 Brazil – relative profitability of ethanol production (anhydrous ethanol) for domestic market as against sugar exports: May 1999–October 2003.

to put just enough sugar cane into ethanol production to satisfy domestic demand (predominantly dependent on the government regulated ethanol–petroleum blending ratio). In the short term, the volume of produced cane is fixed (unless growers choose not to harvest). The world sugar market becomes the outlet for the surplus sugar cane, produced on top of what is needed to satisfy the Brazilian ethanol and sugar markets. Within that framework, however, there is a considerable swing capacity arising from the ability of production facilities to adjust relative output of ethanol and sugar. The low production cost has been further strengthened by the devaluation of the nation’s currency since 1999. The relative profitability of sugar exports, as against domestic ethanol, over the past few seasons is shown in Fig. 9.2. From March 2001 to January 2003 export sugar was more profitable, except for just three months in the first half of 2002, when the export sugar value of cane was lower than the ethanol value (reflecting the decline in world market prices rather than any improvement in alcohol prices). The situation changed during the first few months of 2003, when low ethanol stocks and fears of an ethanol deficit lifted ethanol prices sharply, resulting in a significantly higher profitability of ethanol production relative to sugar export. Since mid2003 values of cane used for sugar production for export and for ethanol production have been in equilibrium, making millers’ returns equates to a demand increase or decrease of 300 million litres of ethanol or 0.5 million tonnes of sugar. The government alters the blending ratio in response to changes in the availability of cane; the key aim is to have sufficient alcohol available at reasonable prices to meet domestic demand. The government also controls pump prices for ethanol. 153

The world sugar market

from the three markets (domestic sugar, domestic alcohol and export sugar) generally alike. In the longer term, projections of Brazil’s ethanol demand are a key determinant of the country’s sugar export levels. Key factors driving the future of ethanol demand are: the terminal decline in demand for hydrous ethanol fuel (due to the falling numbers of alcohol powered cars on the road), the rising demand for anhydrous ethanol intended for ethanol–petroleum blending and an overall rise in fuel consumption per vehicle. The ethanol/sugar equation has recently been further complicated by the launch of a new type of car powered by either ethanol or petrol. In an attempt to assess the impact of the ethanol sector’s development on the Brazilian sugar surplus, sugar analysts regularly revisit projections of how these three trends should combine over the next decade or so and what should determine the future path of ethanol consumption. If cane output continues to rise and ethanol demand does not grow, then the sugar surplus increases. There are any number of projections which, based on different analyses and assumptions regarding the three key trends, show different outcomes for sugar exports from Brazil. In a moderate scenario, the demand for fuel alcohol, presently around 13 billion litres annually, remains flat until 2006; then the increasing demand for anhydrous ethanol begins to dominate the market, and overall market growth is restored. The greater the rise in total ethanol demand, the more cane will be set aside for ethanol production (at the expense of sugar). If, however, cane production also continues to rise, Brazil will remain in a position to increase sugar exports, even with a strong local demand for ethanol. Most commentators believe that sugar cane remains an attractive crop, compared to alternatives, and also point to the fact that in São Paulo State sugar cane is grown on only a tiny fraction of the available arable land. These feelings have recently been voiced by the industry itself. In June 2003, in an interview with Reuters, Eduardo Pereira de Carvalho, president of the powerful São Paulo Cane Agroindustry Union (UNICA), forecast Brazil’s cane production to grow by 50 million tonnes in the next two years. It remains to be seen how this additional cane will be split between sugar and ethanol. Even if just half of the increase is directed into sugar production, Brazil’s share in world exports may grow by no less than 2.5–3 million tonnes from the 2002 level of more than 13 million tonnes. There is a widespread belief that the dominance of Brazil in the world sugar market has ushered in a new era of lower world prices, 154

Exports

reflecting low production costs. During 1999, Brazil supplied 12 million tonnes of sugar onto the world market, forcing prices down to below 5 cents/lb. This is probably what first earned the country its reputation as the world market price setter. This reputation was further ingrained when the equally dramatic drop in exports in 2000 (mainly due to drought) brought a strong recovery in world market prices in mid-2000. Current estimates for an average cost of production in the all-important centre/south region vary from 5 to 7 cents/lb. Importantly, estimated production cost in Brazil is markedly lower than in most competing exporters, even cost efficient ones, such as Australia, Thailand or South Africa. One has to accept that Brazil’s exports are the overspill of the domestic ethanol/sugar balance. Looking ahead, let us turn to the longer term outlook for fuel ethanol in that country, and also to the relative returns from ethanol production, as against domestic and world market sugar. Each of these represents a source of much uncertainty in both the short and the longer term. This issue’s sting is that, as global import volumes grow over the longer term, most sugar industries will need to raise efficiency along their entire supply chain in order to compete with Brazil in securing new markets. These pressures will be felt not only by exporting nations. For the importing countries striving for self-sufficiency, competitive pressures will be just as real, should border protection levels begin to fall. The rapid rise of Brazil as a major player in both the raw and white sugar markets has been the most significant development in world exports. There are ramifications for all other exporters, for the structure of world trade and for world prices. Brazil is currently the only major exporter realistically able to expand production beyond routine gains arising from advances in agricultural and processing technology. However, the growing reliance on Brazil as an oligopolistic supplier leaves the world market much more vulnerable to the effects of weather or policy driven variations in the size of the Brazilian cane crop and sugar output.

White, raw and crystal sugar Traditionally the world sugar market is divided into two main segments: white and raw sugar markets. White sugar is a product which can be consumed directly, while raw sugar normally requires 155

The world sugar market

17% 26%

17% 40%

Standard quality white sugar exports Lower quality white sugar exports Standard quality raw sugar exports VHP raw sugar exports

9.3 Product structure of world sugar exports (average for 1999–2001).

additional purification. At present, more than half of the sugar traded internationally is delivered in the form of raw sugar (see Fig. 9.3). In reality, the contemporary sugar market offers a diverse range of sugar qualities that correspond to different buyers’ requirements and different processors’ abilities. The emergence of Brazil as a major sugar supplier has also had an important impact on the product structure of the world market. Currently, the distinction between raws and whites is rather blurred due to the appearance on the world market of Brazilian crystal, or plantation white, sugar, which can be described equally accurately as low quality white sugar or high quality raw sugar. Millers have the choice to produce a low quality crystal sugar and export it in bulk as very high polarization (VHP) raw sugar. They choose to do so when the premium that bagged crystal sugar (sold as white sugar) receives over bulk raw sugar is not sufficient to cover the extra costs incurred in exporting sugar in bags rather than in bulk. Crystal sugar as high quality raw sugar or low quality white sugar is now widely accepted by the processing industry as well as the trade. In fact, the high polarization of these sugars has become so valued that the structure of the raw sugar market has changed. Brazil’s competitors have had to upgrade their raw sugar to satisfy 156

Exports

customers who have become used to VHP sugar from Brazil. The share of lower quality cane sugar in the world trade is growing steadily as more and more end users accept plantation or direct whites. Lower quality sugar has been displacing refined sugar in some markets since the mid-1990s. Direct white sugar is now widely accepted in Africa, in most of the Far East and the Indian subcontinent, and in the Middle East. The supply is led by Brazil, but there is a growing availability of low quality whites from some Asian and Latin American producers. Comparative quality parameters of different sugar types for selected exporters of raw and white sugar are given in Table 9.2. The ability to respond quickly to the market signal, when production and export programmes shift from white to raw sugar and vice versa, has become an additional competitive advantage for some exporters. Generally, beet sugar producers can supply only white sugar. In the cane sugar camp, a few exporters deliver only or mostly white sugar, while the majority specialize in raw sugar,

Table 9.2 Comparative quality parameters of raw and white sugars Polarization (°)

Water content (%)

Ash

Colour (ICUMSA units) 1,800

Australian Brand 11

98.90

n/a

0.26

Brazilian Crystal

99.70

0.05

0.05

150

Brazilian VHP1

99.48

n/a

0.12

880

Brazilian raw1

98.49

n/a

0.26

2,600

Colombia’s raws1

98.46

n/a

0.34

2,324

Cuban raws1

98.04

n/a

0.40

4,238

El Salvador’s raws1

98.71

n/a

0.21

2,478

2

EU No. 2

99.70

0.06

0.03

45

Guatemala’s raws1

99.00

n/a

0.21

1,991

South African VHP

99.38

0.17

0.11

1,655

Swaziland raw

98.79

0.24

0.25

2,035

Thailand’s high pol1

98.99

n/a

0.17

2,381

Thailand’s standard1

98.51

n/a

0.20

3,692

Notes: 1 Parameters are measured on selected shipment cargoes and averaged over 1996–99 – not production specification. 2 Internationally recognized as white sugar of standard quality. Sources: T McNeil, Sugar Quality, Sugar Trading Manual, 2nd edition, Woodhead Publishing, Cambridge, 2002; PW van der Poel, H Schiweck and T Schwartz, Sugar Technology: Beet and Cane Sugar Manufacture, Verlag Dr A Bartens KG, Berlin, 1998.

157

The world sugar market Table 9.3 Cane sugar producers: raw and white sugar exports (000 MTRV, average for 1999–2001) Raw sugar

White sugar

Share of raws in total in %

3,747

119

96.9

106

0

100.0

138

0

100.0

3,195

4

99.9

Mostly raw sugar exporters Australia Belize Costa Rica Cuba

Raw sugar

Share of raws in total in %

Mostly white sugar exporters

Dominican R

168

0

100.0

El Salvador

251

15

94.4

Guatemala

Mexico

67

246

27.2

India

7

474

1.5

Pakistan

0

312

0.0

Sudan

0

67

0.0

54.9

Flexible exporters

1,098

142

88.5

Guyana

264

0

100.0

Brazil

Jamaica

168

0

100.0

Colombia

Mauritius

526

20

96.3

Thailand

Nicaragua

168

25

87.0

Philippines

111

0

100.0

South Africa

White sugar

1,007

160

86.3

Swaziland

299

4

98.7

Zimbabwe

153

62

71.2

Argentina

79

65

6,417

3,629

63.9

618

329

65.3

2,222

1,490

59.9

and only a handful enter the market with both white and raw sugar (see Table 9.3). Of particular interest is the ability of the countries listed as most flexible exporters to modify their export programmes from year to year and sometimes even during one season. Thus, in 1999 Brazil increased raw sugar exports to 7.8 million tonnes from 4.8 million tonnes in the previous year and nearly halved them to 4.3 million tonnes in the following year, but came back to a 7 million tonne level in 2001. In the recent past Thailand has demonstrated similar flexibility although the absolute level of year to year variations is obviously significantly smaller (see Fig. 9.4). What trends in the product structure of the world sugar market are we to expect in the long term? We can assume that it will be driven by changes in demand. The construction of refineries in key importing regions, such as the Middle East and North Africa (discussed earlier in Chapters 2 and 7), and stable demand for raw sugar, which allows for optimum utilization of existing processing capacities in the FSU countries, are likely to preserve the dominance of 158

Exports 4

1998 1999

2000

2001 2002

Million tonnes

3 2 1 0 -1 -2 -3 -4 Brazil

Thailand

9.4 Brazil and Thailand: annual changes in raw sugar exports.

raw sugar in the world market. Possible changes in the sugar regime of the EU, the world’s second largest raw sugar importer, may bring a significant decrease in raw sugar exports to the region, but this is likely to be counterbalanced by a parallel reduction of European white sugar exports.

How important is the world market for exporters? The extent of world market dependence and the degree to which exporters are able to exploit higher domestic prices (resulting from tariff policies capable of raising the import parity price substantially) can be important in determining exporters’ responsiveness to changes in world market prices for raw and white sugar. Although net exporters are currently responsible for about 80% of world sugar production, their domestic markets (in aggregate) absorb more than two-thirds of their annual output, while an additional 3% of production goes to preferential exports. Globally, this leaves just about one-quarter of net exporters’ output to be channelled into the world free market. Obviously, the situation varies greatly from country to country. The world market dependence of an individual exporter (expressed as net-exports-onto the-freemarket share of sugar production) can be as low as 6% (India), or as high as 79% (Australia). Net exporters are conventionally divided into three groups: Low dependency: net exports to the free market account for less than 40% of domestic production level. 159

The world sugar market

Medium dependency: net exports to the free market account for between 40 and 65% of domestic production level. High dependency: net exports to the free market exceed 65% of domestic production level. In the case of net exporters with a low world sugar market dependency, export levels are quite unresponsive to changes in world prices. The small number of net exporters in the medium and high dependency categories can be expected to react much more readily to both the average level and the annual change in world market prices. The classification of all significant net exporters according to these three categories is shown in Table 9.4. Brazil is put into the group of medium dependence exporters on the basis of 1998–2002 data, but clearly in the peak year of 1999, the coefficient would have risen beyond the 65% bracket. It is interesting to note that, if Brazil’s sugar exports were compared to the overall processing capacity of the industry (i.e. including that for ethanol production) the world’s leading sugar exporter would be reclassified as a low dependence exporter. The numbers show that about 75% of world sugar output is accounted for by countries where the sugar sector is relatively unexposed to world market prices (low dependence exporters and net importers). If Brazil was added to this category, this share would rise to 88%. Another aspect explaining the generally low dependence of the sugar industry on the world market is the level of domestic prices. The recent ISO study ‘Domestic Prices for Sugar: International Comparison’ shows that domestic price at retail level in a wide variety of countries, including exporters of both white and raw sugar, beet and cane sugar producers, developing and developed economies, is significantly higher than world market prices. Since 1996, world sugar prices on average have not exceeded 40% of world weighted average domestic retail prices. In other words, sugar sold at domestic prices brings returns significantly higher than those from exports to the free market. High profitability of domestic sales provides invaluable help to most exporters. The level of cross-subsidizing, however, varies greatly from country to country depending on the level of an exporter’s exposure to the world market.

160

Exports Table 9.4 Net exports to the free market as share of sugar production (%, average for 1998–2002) Low dependence exporters Vietnam Ecuador Côte d’Ivoire Bolivia India Latvia Czech Republic Mexico Argentina Paraguay Sudan Slovak Republic Pakistan Papua New Guinea Hungary Poland Mozambique Myanmar Turkey Lithuania Zimbabwe Panama Fiji EU Moldova Zambia South Africa Dominican Rep Costa Rica Colombia Medium dependence exporters Belize Nicaragua Swaziland Congo, Rep of El Salvador Brazil Guatemala High dependence exporters Thailand Cuba Australia

3 4 4 5 6 7 9 9 10 10 13 13 13 14 14 15 19 19 21 25 26 28 29 30 30 36 36 37 37 40 42 43 43 47 49 52 54 65 68 79

161

The world sugar market

Preferential exports Preferential exports, where agreed quantities of sugar are supplied to importers under long term agreement at fixed prices well above the average level of world market prices, have long been a characteristic of the world market. As noted in Chapter 2, the volume of sugar traded under preferential arrangements has declined markedly and in 2002 represented only 8% of world exports. Nevertheless, special arrangement trade is still a significant although shrinking segment of the world market. What is the importance of preferential trade? The special arrangement exports provide an additional insulation from the volatility of the world market to those producers who enjoy access to the lucrative (from the point of view of world market prices) markets of the EU and the USA. Nearly every cane exporter in the world currently receives preferential prices for part if not for all of his sugar exports.

EU PREFERENTIAL SUGAR TRADE SCHEMES

Although the European Union remains one of the world’s leading sugar producers (in 2002 the EU was the third largest sugar manufacturer after Brazil and India), it is also a major importer of sugar. Practically all the EU imports come under special preferential arrangements. The EU sugar regime allows for duty free or reduced duty imports of both raw and white sugar from third countries. The cane refining industry in Western Europe dates back to well before the modern EU sugar regime was established. Thus, a couple of hundred thousand tonnes of raw cane sugar per annum traditionally came from the French Départements Outre Mer (DOM) – Réunion, Guadeloupe and Martinique. However, the biggest refining sector is in the UK and, when the latter joined the European Community in 1973, the EEC sugar map changed considerably. The ACP sugar protocol The largest volume is delivered to the EU under the so-called ACP Sugar Protocol. At the time of accession of the UK to the European Community in 1973 the UK imported about 2 million tonnes of raw sugar a year under the British Commonwealth Sugar Agreement. As part of the UK’s accession arrangements, a preferential import 162

Exports

programme was agreed with the traditional developing suppliers, known as the African, Caribbean and Pacific (ACP) countries. The ACP Sugar Protocol effectively translated a United Kingdom commitment to the Commonwealth into an EU (at that time EEC) commitment to the ACP. The preferential access was reduced from about 2 million tonnes imported by the UK refineries under the old agreement to 1.3 million tonnes of raw sugar (in white sugar equivalent). A large part of the reduction in guaranteed access was accounted for by Australia, which historically had supplied about 400,000 tonnes of raw sugar to the UK. During the course of negotiations, it was conceded that Australia, as an independent, highly developed country, could not expect the same treatment as developing countries. The Sugar Protocol was embodied in the Lomé Convention of 1975. The Sugar Protocol and a parallel agreement with India allow for the import of 1.3 million tonnes of raw sugar, white value, a year. This tonnage is not subject to import duties and is paid for at a guaranteed price at the level of the EU support price for raw sugar (€52.37/100 kg). In 2000 the Cotonou Agreement replaced the Lomé Convention but sugar arrangements remained practically unchanged. In contrast to the Cotonou Agreement, the Sugar Protocol has formally an open-ended duration. The existing ACP quotas are given in Table 9.5. It has to be noted that the number of ACP sugar suppliers is significantly lower than the total number of ACP countries. ACP member states who are not party to the Sugar Protocol may apply to join it, provided the existing members and the European Commission give their consent. In 1995 Zambia acceded, on the basis of a zero quota but full benefits from possible reallocations of the quotas. Most Favoured Nation (MFN) arrangements When Portugal and Finland, two more countries with refining capacities, joined the EU, the preferential import scheme was further Table 9.5 Preferential sugar quotas for ACP and India (000 tonnes) Barbados

50.3

Côte d’Ivoire

Belize

40.3

Jamaica

Congo

10.2

Madagascar

Fiji

165.3

Malawi

Guyana

159.4

Mauritius

India

10.0

St Kitts-Nevis

10.2 118.7

Swaziland

117.8

Tanzania

10.2

10.8

Trinidad & T

43.8

20.8

Zimbabwe

30.2

491.0 15.6

Total

1,304.7

163

The world sugar market

modified. While the Portuguese accession was prior to the conclusion of the Uruguay Round and the sugar imports question was an internal EU matter, Finland entered independently into the GATT commitments. Finland’s guarantees relating to supply arrangements with third countries became part of the EU’s import commitments known as imports under MFN. The MFN exports reach about 80,000 tonnes of raw sugar a year – about two-thirds are delivered by Cuba and one-third by Brazil. An import duty of €98/tonne is charged. No guaranteed price is established for the MFN sugar. The level of prices is negotiated between EU refineries and MFN suppliers and is believed to be close to the EU support price for raw sugar (€52.37/100 kg) minus the refining aid (€2.69/100 kg). An import duty of €98/tonne is charged on the MFN imports. Special preferential sugar Further quantities are also imported to the EU under the Special Preferential Sugar scheme (SPS). In 1995 under the EU new sugar import regime the maximum supposed needs (MSN) concept was introduced. The EU established maximum supposed needs for the four countries with raw sugar refining industries (UK, France, Portugal and Finland). Alongside production quotas the MSN are subject to reduction in order to meet the WTO commitments. Currently MSN are fixed at about 1.765 million tonnes, white sugar value. The SPS is a difference between the MSN and sugar imports from DOM, under the ACP/India quotas, the MFN sugar and, more recently, the EBA sugar deliveries (see below). No import duty is charged on the SPS. The price paid for SPS is €49.68/100 kg (the EU support price for raw sugar minus the refining aid). Once fixed by the European Commission the SPS is then distributed among the ACP countries. Everything but Arms (EBA) initiative In March 2001 the European Union extended its existing Generalized System of Preferences (GSP) to give duty free access to all exports except arms and armaments from least developed countries (LDCs)2 with the exception of three sensitive products: bananas, 2 Twenty LDCs produce sugar (the remaining 28 LDCs import their entire sugar needs) but only eight are significant sugar exporters: Ethiopia, Madagascar, Malawi, Mozambique, Myanmar (Burma), Sudan, Tanzania and Zambia. 164

Exports

rice and sugar. For them free access is being phased and the implementation of the duty reductions has been delayed until 2002 (bananas) and 2006 (rice and sugar). In the case of sugar, until 2009 when duty free access is finally allowed, annual duty free quotas are being allocated. The annual quota will increase from 74,000 tonnes in 2001/02 to 197,000 tonnes by 2008/09. In the short to medium run (i.e. during the first stage of implementation during 2001/02–2005/06) the only impact of the EBA sugar on the world market appears to be a redistribution of exports to the EU market between LDCs and ACP countries. Until 2006 the EBA sugar exports are restricted to raw cane sugar only and are regulated by quotas. The EBA sugar will gradually displace the SPS and as a result by 2006/07 more than half of preferential sugar exports by ACP countries (225,000 tonnes in 2002/03) will be replaced by EBA exports. A slight increase in sugar production (say, about 125,000 tonnes) in non-ACP LDCs can be expected while a similar quantity of displaced ACP sugar may appear in the world market. Taking into account the marginal volumes in question by world standards, no serious impact on the world sugar market and level of world prices can be anticipated. In the longer run, the impact of unlimited access to the EU market granted for the LDCs starting from 2009 will depend on the so far unpredictable shape of future EU sugar policy (discussed in more detail in Chapter 10). It can be assumed that the threat of an influx of imported sugar starting from 2009 will most probably force the EU to reduce quota production, support prices and exports. Even the most conservative scenario suggests that even while keeping the necessary quantities of domestically produced sugar to fully satisfy internal demand, the net exporting LDCs will be able to deliver annually to the EU between 0.9 and 1.3 million tonnes once duty and quota free access to the European market is finally granted. Sugar from LDCs could easily surpass the maximum supposed needs, and solutions for balancing the sugar trade in the EU have to be found, especially when considering the commitments the EU has made under the WTO Agreements on Agriculture. The probability of a reduction in both sugar production quotas and support price is high. The almost definite consequence could be a severe reduction if not cessation of EU exports. The resulting market vacuum is expected to be filled by the most efficient white sugar producers like Brazil. Raw sugar exporters (in particular, low cost raw sugar producers and exporters such as Australia, Guatemala, Zambia and Zimbabwe) could partly share the benefits of the withdrawal of 165

The world sugar market

European sugar from the world market, as higher deliveries of white sugar may at least temporarily reduce the Latin American giant’s availability of raw sugar. On the debit side, a reduction in EU internal prices would trigger a drop in the preferential prices currently paid by the EU for imported raw sugar. The most probable ramification for the majority of the ACP countries and LDCs will be downward adjustments of production and exports to both European and world markets. Again the beneficiaries will be efficient low cost cane sugar producers and exporters, who will take over the vacant market shares of the ACP suppliers and LDCs.

Economic partnership agreements (EPA) Within the European Commission there is a new approach on sugar and other commodities in forthcoming negotiations for region specific economic partnership agreements (EPAs) with ACP countries and regions. There is presently no official mandate, but Commission documents make clear the objectives of such EPAs. The Commission believes that the Community should grant duty free access to its market to all products originating in the ACP countries (effectively granting the terms of the EBA initiative to non-LDC ACP countries). Consequently, there are plans to provide quota free access for the beneficiaries as of 2008, but at the same time institutional prices in the EU could fall substantially, threatening the viability of some higher cost ACP cane producers.

PREFERENTIAL SUGAR EXPORTS TO THE US

The tariff rate quota The tariff rate quota (TRQ) is the main instrument of protection for the US sugar industry. It is used to limit the supply of imported sugar to the domestic market. Sugar imported outside the quota is subject to a much higher (prohibitive) second or high tier duty, set as a WTO bound level of 15.36 cents/lb (US$338.62/tonne). The TRQ is allocated on a country by country basis for 40 countries. As illustrated by Table 9.6, the top three quota holding countries are allowed to ship 25% of allocated volume each fiscal quarter to ensure an orderly supply to the US refining market. The top four quota holding countries are the Dominican Republic, Brazil, Philippines 166

Exports Table 9.6 US raw sugar imports under the TRQ for fiscal 2002 (000 tonnes, raw value) Argentina

45.3

Gabon

Australia

87.4

Guatemala

50.5

PNG

7.3

Barbados

7.4

Guyana

12.6

Paraguay

7.3

Belize Bolivia Brazil Colombia Congo Costa Rica Côte d’Ivoire Dom Republic

11.6 8.4 152.7 25.3 7.3 15.8 7.3 185.3

Haiti Honduras India Jamaica Madagascar

7.3

7.3 10.5

Panama

Peru Philippines

8.4

South Africa

11.6

St Kitts-Nevis

7.3

30.5

43.2 142.2 24.2 7.3

Swaziland

16.8

Malawi

10.5

Taiwan

12.6

Mauritius

12.6

Thailand

14.7

Mexico

7.3

Ecuador

11.6

Mozambique

13.7

El Salvador

27.4

Nicaragua

30.5

Trinidad & T

7.4

Uruguay

7.3

Zimbabwe TOTAL

12.6 1,117.2

and Australia, accounting for 51% or 568,000 tonnes of the total TRQ minimum access imports. North American Free Trade Agreement The North American Free Trade Agreement (NAFTA), between Canada, the United States and Mexico, became effective on 1 January 1994 and has an objective to phase out most of the trade barriers within the continent by 2008 after a 15 year transition period. Trade in sweeteners between Mexico and the United States is directly addressed by specific NAFTA provisions that provide for increasing duty free access during the transition period to the US sugar market for Mexican ‘net surplus’ sugar production and a common market for sugar after 2008. The original NAFTA document (1991) contained provisions related to trade in sugar that were opposed by many US sugar producers. This opposition stemmed from the fear that the NAFTA provisions would allow for increased HFCS exports to Mexico, which would in turn displace sugar consumption and create a surplus that could be exported to the United States. Therefore, to secure US Congressional support for NAFTA, the United States prepared a side letter agreement in November 1993 that altered the sugar provisions of the original NAFTA text. However, since the implementation of 167

The world sugar market

NAFTA, there has been a dispute between Mexico and the United States centred on the interpretation of the content and the validity of the side letter. The original provisions of NAFTA subjected Mexican sugar exports to the US to several conditions, but still would have allowed significant access to the US market should the country have attained net production surplus for two consecutive marketing years (originally defined as sugar production less domestic sugar consumption). The side letter changed key NAFTA provisions however. In particular, under the side agreement projected Mexican sugar production has to exceed Mexico’s projected consumption of both sugar and HFCS for Mexico to be considered a net surplus producer (also known as the USDA formula). That provision by itself lowered Mexico’s likelihood of qualifying for duty free access. Furthermore, the side letter provided for an annual limit on duty free access of 250,000 tonnes (275,750 short tons, raw value) annually from 2001 to 2007, eliminating the possibility of unlimited duty free access should Mexico become a net surplus producer for two consecutive years, as would have been the case under the original provisions.3 Central American Free Trade Agreement In December 2003 the United States and four Central American countries (El Salvador, Guatemala, Honduras and Nicaragua) reached a deal for a Central American Free Trade Agreement (CAFTA). CAFTA will increase the duty free import quotas for the Central American countries by 85,000 tonnes in the first year of the agreement, up from the current 110,000 tonnes. Then their quota will grow by 2% per year over 15 years to reach a total of 236,000 tonnes.

3 Mexico’s government has consistently disputed the validity of the side letter, and since 2000 has argued that Mexico is entitled to export its total net surplus production to the United States on a duty free basis (commencing October 2000). For instance, in August 2001, Mexico publicly stated it was seeking a 550,000 tonne sugar quota to the United States. In the event, the US interpretation prevailed and Mexico was awarded a NAFTA sugar quota of 137,788 tonnes, raw value – nearly five times lower – set according to the net surplus rule, or the USDA formula contained in the disputed side letter. At the same time, Mexico’s share of the WTO tariff quota was put at 7,258 tonnes, raw value. 168

Exports

Conclusions Summing up our comments on exports, flows of sugar traded internationally are dominated by a handful of major exporters with Brazil playing a special role. The Latin American giant is currently responsible for more than one-quarter of the global sugar turnover, and some further consolidation of its role as the world’s leading sugar supplier is envisaged. The growing reliance on a limited number of exporters leaves the world market dependent on weather or policy driven changes in the exportable surplus of a few oligopolistic suppliers. On the other hand, there is very little historic evidence suggesting that in the long run exporters can fail to meet ever growing demand for sugar from sugar non-sufficient countries. Some changes can be expected in the product structure of the world sugar market. On the one hand, the construction of refineries in key importing regions, such as the Middle East and North Africa, and stable demand for raw sugar from Russia and its neighbouring countries are likely to preserve the dominance of raw sugar (in particular, of higher quality) in the world market. On the other hand, the complete disappearance of the white sugar sector is highly unlikely, as for the foreseeable future exporters will have to satisfy import demand from a long list of countries without a domestic industry and, hence, refining capacities. In contrast to the raw sugar sector, a further growth in world trade of low grade whites can be anticipated. The foreseen changes in the product structure will further limit the export niche of beet producing countries, for whom it is nearly impossible to supply either high quality raw sugar for further refining or low quality whites for direct consumption.

References Bromfield F, The Current World Picture, Sugar Trading Manual, Woodhead Publishing, Cambridge, 2002. du Genestoux P, Trends, Challenges and Outlook for World Cane and Sugar Production and the Markets, Zuckerindustrie, No. 8, 1999. Hannah AC, Shifting the Goalpost on Cost of Production, International Sugar Journal, No.1211, 1999. ISO, Sugar Yearbook, various issues. ISO, Key Drivers of the World Sugar Market (MECAS(02)08), London, 2002. ISO, Everything but Arms Initiative (EBA): Implications for the World Sugar Market (MECAS(02)18), London, 2002. 169

The world sugar market ISO, The 2002 US Farm Law: Implications for the World Sugar Market (MECAS(03)06), London, 2003 ISO, Domestic Prices for Sugar: International Comparison (MECAS(03)20), London, 2003. Schmitz TG, Seale JL and Buzzanell PJ, Brazil’s Domination of the World Sugar Market, Sugar and Related Sweetener Markets: International Perspectives, CABI Publishing, New York, 2002.

170

P A R T

IV

The future

C H A P T E R

10

Government policy

Historically sugar can be seen as one of the most regulated agro-industries in the world. Border protection and other support measures are widespread and take the form of trade measures (import tariffs and export subsidies) and inter-related domestic support measures such as production quotas, fixed producer prices and regulated consumer prices. The importance of various policy measures varies across countries. There are also other measures and regulations that act to support sugar including measures restricting the use of other sweeteners, general protection of state-owned industries, and single trading desks. Critically though, since the early 1990s some countries have taken unilateral steps to liberalize their domestic sugar markets, and deregulation has seen countries privatize their sugar industries (leaving fewer and fewer countries with overt government participation in their domestic sugar industries), driven primarily by efficiency goals in the state-owned sector together with a lack of both public and private capital to fund capital expenditure. Some countries have lowered their sugar import tariffs, sometimes driven by IMF, Asian Development Bank and World Bank loan conditionalities. Key instances of market liberalization and privatization (either complete or in process) over recent years include Mexico (partially reversed with government appropriation of debt-laden mills in 2001), Brazil (subsidies and price setting removed for first sugar and then alcohol in the late 1990s), Russia, Ukraine, several Eastern European and Central European countries, as well as several countries in Africa. India in 2002 announced a widespread liberalization programme, although implementation has not been as smooth or as fast as was first envisaged by government. As argued in Chapters 173

The world sugar market

7 and 9, deregulation has impacted the world market, leading to an increasing concentration of exports and a dispersion of import demand. Even so, the general level of government assistance to the world sugar economy remains high – in part because the results of the Uruguay Round for reductions in trade distortions (particularly tariff barriers) in the world sugar market were modest, although the reductions in export subsidies were a clear achievement, as was the creation of a more systematic framework for future trade negotiations. The primary focus for further sugar policy reform and liberalization remains in the OECD countries, as several countries within this group continue to offer the highest levels of support to their sugar industries, i.e. the European Union, the United States and Japan (see Box 10.1), whilst at the same time being major players in the world sugar market, as clearly established in Chapters 7 and 9.

Box 10.1 Government assistance in the world sugar economy Assistance to the sugar industry is widespread and the evidence to support this is readily available. There are two main sets of evidence: the largely trade measure based information available through the WTO and the broader measure of assistance (producers’ subsidy equivalent) available for OECD countries. WTO data shows that tariffs are widespread, and in some cases very high, and provides evidence that assistance to sugar is probably mostly provided by tariffs (as against other forms of assistance). There appears to be only one case of a sugar producing country without tariffs (Australia) and only a few cases of sugar importing countries without tariffs (Hong Kong, New Zealand and Singapore). Other studies exist to show the level of tariff support in sugar. A 1997 study (Burfisher, 2001) showed the average tariff for sugar in developed countries to be 59% and for developing countries 14%. Another study (Gibson et al, 2001) showed world average tariffs for sugar in terms of bound levels in the final year of the Uruguay Round AOA implementation period were 70% for sugarbeet, and 62% for sugar cane. ISO research on the AOA and sugar (MECAS (99)16) showed there to be a wide dispersion in commitments relating to tariff reductions, but that on a trade weighted basis, the average tariff for raw sugar would fall from 93% to 72% and for white sugar from 109% to 88%. Furthermore, there was little consistency in the extent of tariff commitments amongst the 10 largest exporters (GATT members), in part 174

Government policy

reflecting considerable differences in the nature of each country’s sugar policy. Other trade policy assistance measures relevant to sugar include tariff rate quotas (12 countries have between them 32 TRQs for sugar) and export subsidies (six countries have notified the WTO as to their use of sugar export subsidies and of these the EU accounted for over 80% of the total expenditure during the 1995–98 period). Inter-related with the TRQ system are country specific trade preferences in that most of the rights to within-quota imports are limited to certain preferred exporting countries. There are two key preferential trading schemes for sugar: imports by the European Union from ACP countries amounting to 1.3 million tonnes of sugar for an ‘indefinite period’ at guaranteed prices, and that of the United States where the sugar TRQ (subject to a GATT minimum tonnage of 1.1 million tonnes) is allocated to 40 countries, of which only two are not developing countries. A broader view of assistance (which takes in more than trade policy measures) is available for OECD countries, which determines the producer subsidy equivalent (PSE) yardstick. For all OECD countries that grow sugarbeet or cane, the PSE level fell within the range of 42–76% during 2000–02. Only three countries, Australia, Hungary and the Czech Republic, had substantially lower results (respectively 12%, 18% and 27%) – see Fig. 10.1.

Australia Hungary

2000–02

Czech Republic

1986–88

Slovak Republic Japan Turkey All OECD EU Poland Mexico United States Switzerland 0

20

40

60

80

Per cent

10.1 OECD producer support estimates. Continued

175

The world sugar market

The PSE methodology has limitations, however. Most of the attention focuses on the use of world prices in the calculation (for some sugar industries the credibility of world prices is an issue), but there are also several assistance measures which are not included in the calculation. The exclusion of tax concessions (such as those for ethanol production) and a key input subsidy (for irrigation water) are likely to be important for PSE estimates for sugar. Note: This material draws heavily on research conducted by the OECD, Directorate for Food, Agriculture and Fisheries, Committee for Agriculture, Working Party on Agricultural Policies and Markets.

Looking to the future, if an increasing number of countries implement reform and deregulation programmes, whether through unilateral, multilateral or regional initiatives, then over the course of the longer term, major shifts in the world sugar economy are likely (most critically in the centres of world production, especially since many sugarbeet producing countries would face major competitiveness problems against low cost cane producers). A key driver over the longer term therefore is sweetener policy reform – how far and how fast? Obviously, unilateral reform pressures will be compounded by regional and multilateral trade policy reform. Multilateral pressures from the WTO negotiations on agriculture under the Doha Round are geared towards gradually reducing general distortions in agricultural trade, including sugar, whilst in regional trade agreements the goal over the longer term is to eliminate trade distorting support measures amongst member nations. Multilateral, regional and unilateral pressures for reform are discussed in this chapter, but first, it is instructive to consider in more detail the impact of the Uruguay Round Agreement on Agriculture (AOA) on the world sugar economy.

The Uruguay Round experience relating to sugar Table 10.1 shows the Uruguay Round commitments in terms of the percentage reductions in support and subsidies over the implementation period in the three core areas of market access, domestic support and export competition. Least developed countries (LDCs) were not required to reduce subsidies or tariffs. Improvements in market access were to be achieved through tariffication and reductions in tariff levels. But the reductions in 176

Government policy Table 10.1 Commitments under the Uruguay Round Agreement on Agriculture (%)

Market access (tariffs) Average reduction Minimum per commodity Domestic support Reduction in aggregate support Export subsidies Reduction in outlays Reduction in volumes

Developed countries 6 years

Developing countries 10 years

-36

-24

-15

-10

-20

-13

-36

-24

-21

-14

actual tariff levels achieved during the implementation have generally been small – sugar no exception. The reasons included unrepresentatively high base periods, ‘dirty’ tariffication,1 and the ability of tariff cuts to be measured as simple averages, thereby allowing sensitive commodities such as sugar to attract smaller tariff cuts. Furthermore, ceiling bindings were set at rates much higher than actual applied tariffs, affording countries the opportunity to raise tariffs over the implementation period even though negotiated reductions in bound rates were in effect. In Tables 10.2 and 10.3 the significant differences in final bound tariff rates and tariff ceilings for the globe’s largest sugar exporters and importers are provided. For sugar there have been few gains in improved market access through minimum access arrangements using tariff quotas – see Table 10.4. Few countries made commitments on access and for those that did, such as the European Union and the United States, the levels of tariff for beyond tariff quota imports have been prohibitive, effectively enabling tariff quotas to become another tool for managing trade to achieve domestic sugar policy goals. Although 1 ‘Dirty tariffication’ is an expression which captures the fact that some countries chose to overestimate the levels of support provided by non-tariff barriers in the tariffication process in order to increase their base rates of duty (i.e. resulting in unrepresentatively high base tariff levels) thereby providing scope to impose a relatively high level of tariff support during the implementation period, typically for sensitive products. ‘Water’ in the tariff can be defined as the difference between the GATT bound tariff rate and the tariff rates actually applied, for any commodity. Water in the tariffs means that relatively large reductions in some bound tariffs might have little actual impact on market access. 177

The world sugar market Table 10.2 Tariff commitments for the 10 largest sugar exporters of the GATT signatories (1992–94 period) Country

White sugar

European Union1

Base

Final

Base

Final

173

138

110.7

88.5

–

40

–

Cuba 1

Raw sugar

40

Australia

26

13

32.5

16.3

Brazil

55

35

55

35

Thailand

104

94

104

94

Guatemala

178

160

178

160

Colombia

130

117

130

Mauritius

–

122

Turkey

150

135

United States2

106

90

117 –

122

150

135

136.1

115.7

Notes: 1 An ad valorem equivalent based on the 1995 average world price. 2 Beyond tariff quota rate.

Table 10.3 Tariff commitments for the 10 largest sugar importers of the GATT signatories (1992–94 period) Country

White sugar Base 1

Raw sugar

Final

Base

Final

United States

106

90

136.1

115.7

European

173

138

110.7

88.5

325

276

306.8

260.7

18

23.7

18

Union2 Japan Rep of Korea Canada Malaysia

23.7 8.0 17

India Nigeria

7.0 15

–

150

–

150

7.1 17

6.0 15

–

150

–

150

Egypt

30

20

30

20

Sri Lanka

66

50

66

50

Notes: 1 Beyond tariff quota rate. 2 An ad valorem equivalent based on the 1995 average world price.

178

Government policy Table 10.4 Commitments on minimum access (tonnes, raw value) Initial quota

Final quota

Within-quota tariff

Quota increase

Barbados

1,454

2,423

122%

969

Colombia

33,860

57,325

80%

23,465

Costa Rica

4,617

7,699

El Salvador

3,887

6,479

1

1,418,209

1,418,209

Finland

85,463

85,463

8,620

14,367

45%

5,747

556

556

60%

0

EU-15

Guatemala Hungary

55% - 45%

3,082

40%

2,592

0%

0

0.57

0

Iceland

11,816

11,816

Malaysia

17,400

29,600

110,000

183,800

50%

73,800

274

274

168%

0

29

48

60%

19

38,430

64,050

50%

25,620

Mexico Morocco Nicaragua Philippines2 Slovak Rep South Africa Thailand Tunisia USA3 Venezuela Total

75

75

46,667

62,037

0% 5% + 220.46

0 12,200

50% max 20% of bound rate

0 15,370

13,105

13,760

65%

655

100,000

100,000

15%

0

1,139,195

1,139,195

132,013

132,013

3,165,670

3,329,189

$13.80/T raws $36.60/T whites

0

40%

0 163,519

Notes: 1 EU-15: ACP, 1,294,700 (whites); India 10,000 (whites). 2 Philippines: the minimum access volume (MAV) for tariff no. 1701, which includes both raw and white sugar. 3 United States: 1,117 million tonnes raws; 22,000 refined and speciality sugars.

greater gains in market access have been achieved for some other commodities, broadly speaking the Uruguay Round did not generate any major concessions on market access by the major developed consumer countries. Reductions in export subsidies have been perceived by some analysts as one of the major gains to arise from the Uruguay Round. This is particularly so for grains and dairy products. But for sugar, export subsidy commitments were minimal (see Table 10.5), with only 10 reduction commitments, and it is only in the final year of the implementation period for developed countries that the European Union has faced binding constraints on its level of subsidized sugar exports, resulting in modest cuts to its production quotas. 179

The world sugar market Table 10.5 Export subsidy commitments for sugar1 (000 tonnes) Country Brazil Colombia

Base period

1995

2000

2004

Reduction

%

1,740

1,716

1,600

1,500

240

14 14

260

256

240

224

36

1,612

1,556

1,273

1,273

340

21

166

166

32

32

134

81

Mexico

1,530

1,500

1,367

1,260

270

18

Poland

172

132

104

104

68

40

Romania

176

170

159

151

25

14

5

5

4

4

1

20

889

858

702

702

187

21

6,550

6,359

5,481

5,250

1,300

20

EU-152 Hungary

Slovak Republic South Africa3 Total

Notes: 1 There were related commitments concerning the US$ value of export subsidies. 2 Does not include exports of sugar of ACP and Indian origin on which the EU did not make reduction commitments. The average level over the 1986–90 base period was 1.6 million tonnes. 3 South Africa phased out its system of subsidies subsequent to the Uruguay Round and no longer offers subsidies to sugar exports.

Few countries have lowered domestic support to sugar through GATT negotiated reductions in the Aggregate Measure of Support (AMS). Because cuts were agreed for agriculture as a whole, there was the opportunity to avoid reducing support to sensitive commodities such as sugar, particularly if the AMS in the base period was high. The AOA also allowed many exemptions from cuts to domestic supports – the ‘green-box’ measures, and the ‘blue-box’ measures. In essence, the commitments made by GATT signatories under the Uruguay Round of multilateral trade negotiations had limited success in achieving the objectives of the WTO, which centre on freeing world trade in commodities through more open and less distorted national markets. Even so, one positive and critical development was that the Round brought sugar (and agriculture) into the mainstream of the GATT/WTO multilateral trading system.

RECENT TRADE REFORM

Recent steps to remove sugar trade barriers have included: EU abolition of storage subsidies in 2001 and the mid-term review of EU CAP policy which signals reform of the EU sugar regime. 180

Government policy

The cut in EU production quotas for the 2002/03 year of 0.86 million tonnes in order to meet commitments made under the Uruguay Round Agreement on Agriculture. The introduction of China’s tariff rate quota when entry to the WTO was granted in November 2001 (but in reality the quota is not being filled and China’s sugar policy and import behaviour have hardly altered). However, there have also been moves to increase support to sugar and in some instances this has begun to reverse (under pressure from local sugar industries) the reforms implemented during the 1990s. These include: Increased price support to sugar producers in the 2002 US Farm Bill. Tougher import regimes in Russia and Indonesia (higher tariff rates and differentiating between raw and white sugar). Appropriation of debt-laden sugar mills by Mexico’s government. Transport and infrastructure subsidies for India’s sugar exporters. Import barriers raised in India, Indonesia and South Africa. An industry assistance package granted to the Australian sugar industry in September 2002, which represents short term structural adjustment support designed to restructure the industry to be capable of surviving in the world market; since subsumed into the A$ 444.4 million Sugar Industry Reform Program 2004.

Multilateral reform under the WTO Doha Round The WTO’s fourth Ministerial Conference held in Doha, Qatar, successfully launched a new round of multilateral trade negotiations on 14 November 2001. The agreed Doha text on agriculture was one of seven subject areas for which a new ‘work programme’ was to be launched, with the overall conduct of the negotiations to be supervised by a new Trade Negotiations Committee (TNC) subsequently established on 1 February 2002. 181

The world sugar market

The key passage in the text of the Doha Ministerial Declaration on Agriculture is probably this: Building on the work carried out to date and without prejudging the outcome of the negotiations we commit ourselves to comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view of phasing out, all forms of export subsidies; and substantial reduction in trade-distorting domestic support. The text also incorporates explicit recognition that special and differential treatment (S&DT) will be an integral part of all elements of the negotiations. The text also confirms that non-trade concerns will be taken into account in the negotiations. The TNC agreed that agriculture negotiations should be conducted in special sessions of the Committee on Agriculture, effectively maintaining the processes already established since negotiations on agriculture began early in 2000. Those negotiations were mandated under Article 20 of the Uruguay Round Agreement on Agriculture, in which WTO members agreed to initiate negotiations for continuing the agriculture trade reform process one year before the end of the Uruguay Round implementation period (i.e. by the end of 1999). By the time of the November 2001 Doha Ministerial Conference, 121 governments had submitted a large number of negotiating proposals (45+) and under phase 2 of the mandated negotiations were beginning to consider key areas of these proposals in more detail. Effectively under the Doha Declaration, these negotiations on agriculture continue, but now with a series of deadlines. Importantly, agriculture is now part of the ‘single undertaking’ in which nearly all linked negotiations are to end by 1 January 2005.

STATUS OF THE DOHA ROUND NEGOTIATIONS ON AGRICULTURE

WTO negotiators failed to meet the deadline for agreeing agriculture negotiating modalities, set for end-March 2003 (as set out in the programme of work agreed on 26 March 2002), and again at the Cancun Ministerial Meeting of September 2003. The modalities set out the scope of the negotiations, the methodology to be followed during the actual process, and the end results expected. Failure to reach consensus by the original deadline had been predicted by observers when the first draft of the possible modalities, issued by the chair to the special session, Stuart Harbinson, on 12 February, 182

Government policy

was rejected by cautious reformers like the European Union and Japan as too ambitious, and by more aggressive reformers like the Cairns Group and the United States as not ambitious enough. In essence, WTO negotiations on agriculture had been under way for over three years by the time of the modalities deadline, but for much of this time participants had remained close to their ‘maximal’ positions and had shown little appetite for concession and flexibility. The collapse of the Cancun Meeting was clearly a setback to the Doha Round and it was the result of confusion over the ongoing deep divisions among WTO members, not only over agriculture reforms but also relating to whether and how to launch negotiations on the so-called Singapore issues including investment, competition, transparency in government procurement and trade facilitation. Post Cancun, at the conclusion of the 15–16 December 2003 General Council Session of the WTO, chairperson Carlos Pérez del Castillo announced that members were willing to restart work in the Trade Negotiations Committee and the negotiating bodies under it, but that there was still no major breakthrough in the Doha Round negotiations. The outcome of this meeting was widely perceived as focused on procedure rather than substance and it was felt that it did not bring the Round back on track, although arguably the meeting may have made considerable progress in that direction. The chair remarked that he did not see at the meeting any closing of the gap between expressions of flexibility and commitment and their translation into negotiating positions. Forecasting the outcome of the Doha Round is impossible. Many observers believe that the Round will now be more protracted and faces stagnation in the short term. Furthermore, there is an emerging belief that governments will direct extra attention to regional and bilateral trade agreements (RTAs), which could divert political attention from the WTO talks, and could eventually threaten the multilateral trading system (the issue of RTAs is discussed later in this chapter). The United States, a key player in the multilateral trade negotiations, is pursuing a series of RTAs and has stated its intention to proceed further down this route towards achieving its trade goals. THE MAJOR PLAYERS AND SUGAR POLICY REFORM EXPECTATIONS

Views on the need or otherwise for further sugar trade liberalization cover the full range of players in the interventionist and noninterventionist camps. For non-interventionists the Uruguay Round Agreement on Agriculture did not lead to sufficient fundamental 183

The world sugar market

reform of sugar policy under the three pillars of market access, domestic support and export subsidies. Therefore pro-reformers (particularly the Cairns Group of governments and members of the Global Sugar Alliance – an alliance of sugar industries from 11 developing and 2 developed countries2) continue to seek significant advances towards increased access, elimination of trade distorting domestic support and an end to export subsidies. Liberalization in the non-interventionist camp is seen as the key method to raise world market prices for sugar, and often the United States, the European Union and Japan are pinpointed as causing most of the distortions to the world sugar market. However, those against rapid and extensive reform of sugar policy do not see trade liberalization as the panacea to sugar’s ‘commodity’ problems, pointing more broadly to market fundamentals such as an increasing concentration in the global export market and the dominance of Brazil, which is likely to ‘sit’ on world prices until global demand rises sufficiently to absorb supplies. Some also point to the fact that the world sugar market remains a ‘dumped’ market where marginally costed output distorts average price levels downwards, thereby providing the continuing justification for insulating their own producers from the world market. The other key stakeholders in the sugar policy reform debate are the beneficiaries of the preferential sugar trade arrangements. It is clear that any erosion of preferential trade will be threatening to ACP countries. All ACP sugar supplying states are either developing, or least developed. Many are island states or land-locked countries, all with comparatively fragile and vulnerable economies unable to absorb precipitous change without serious disruption to their socio-economic stability. This is particularly so because their economies are narrowly based and are difficult to diversify. Put simply, they have fewer adjustment options and argue that they cannot be expected to absorb change in the same timescale or of the same magnitude as the developed countries.

HOW MIGHT SUGAR TRADE REFORM AND LIBERALIZATION DRIVE THE WORLD SUGAR MARKET?

Trade reform is seen by many of the globe’s lower cost cane sugar producers, and certainly those in the Global Alliance, as promoting 2 Australia, Brazil, Canada, Chile, Colombia, El Salvador, Guatemala, Honduras, India, Nicaragua, Panama, Thailand and South Africa. 184

Government policy

a wider and deeper market for traded sugar, less prone to the volatility which has been characteristic of the world market over many years. There may be unrealistic expectations concerning the likely increases in world sugar prices with policy reform. A recent IMF study shows that elimination of government support for refined sugar, rice and wheat in industrialized countries could boost world prices of these goods by between 2 and 8% (IMF, 2002). This is in stark contrast to the claims made by some other studies. For instance the Australian Bureau of Agricultural and Resource Economics projected a world market price rise of between 5 and 41% depending on the extent of liberalization (ABARE, 1999). The Centre for International Economics based in Australia asserts that full liberalization would boost world sugar price by 63% as against the situation of full protection (CIE, 2002). The UN Food and Agriculture Organization (FAO) estimated that complete global liberalization would lead to a rise of 30% in world market price (Wohlgenant, 1999), while a USDA study showed a more modest figure of a 16% price rise under full policy reform (Diao, 2001). An understanding of the full implications of sugar policy reform and liberalization for the world sugar market will remain elusive until significant additional research and analysis is undertaken. The existing quantitative studies, supplemented by economic theory, provide a range of views about uncertain outcomes. Several key issues can be identified. A major issue of common interest in the current negotiations is the likely impacts of sugar policy reform on the stability and level of world sugar (and ethanol) prices. Views generally coalesce around two polar opinions: those advocating reform argue that distortions to world prices are decreasing and would be further lessened by sugar market reform and liberalization, ultimately resulting in higher and more stable world prices (along with significant gains in sugar trade volumes). Those resisting reform argue the opposite – that reform will only make minor improvements to the ‘credibility’ of world sugar prices – and so justify the continuation of trade policy and domestic support measures to ensure their national industry remains de-coupled from a corrupted world market. The nature of the global supply response with global policy reform and liberalization will also be a powerful determinant of future world price stability. Will the sugar market’s supply response become quicker and of a more significant magnitude? Sugar policy reform might be expected to lead to price-induced cutbacks in production in relatively higher cost countries, but this is not an easy 185

The world sugar market

certainty because substantial reduction in production capacity will inevitably face political and socio-economic resistance, especially in those countries where sugar has a strategic importance in a nation’s export earnings. If support is lowered to beet producers, concentrated in Europe and often produced at high cost, then the bulk of future growth in world production and exports will be from lower cost cane producers. However, the cane cycle means that farmers and millers are slow to cut back production at times of low prices, and switching costs will remain high. Consequently it is expected that the sugar economy will continue to be characterized by relatively steep declines in prices at times of global surplus. Perhaps the most important consideration in formulating expectations about the implications of sugar policy reform is the potential for Brazil to increase production capacity substantially. Issues surrounding Brazil’s competitiveness and its current and future role in world sugar price determination require further analysis. Importantly, results from econometric models indicating major increases in world prices (and trade) arising from global liberalization need to be treated with caution until these models are respecified and reestimated to fully capture the world market impacts of the presentday dynamics of the massive Brazilian cane/sugar/ethanol complex. More generally, there is likely to be an increasing concentration in world export supply, increasing the potential for greater price shocks should weather problems affect one large producer.

EXPECTATIONS FOR SUGAR

Because the sugar world remains characterized by tariff peaks, tariff escalation, high levels of domestic support in some instances, and by an array of transparent and opaque support measures, often in the name of ‘self-sufficiency’, perhaps then there is significant potential for sugar policy reform arising from the Doha Round of multilateral trade negotiations. There is probably general agreement that sugar will be under much more pressure this time than during the Uruguay Round. Obviously, without full knowledge of the agreed modalities it is too early to be certain about what those changes might be, but there is sure to be further progress made on improving market access, and lowering domestic support and export subsidies. At least there are likely to be modalities agreed similar to the Uruguay Round: a 36% cut to all tariff lines, expanding market access by 20%, a 20% reduction in the AMS level and a 21% cut in the 186

Government policy

volume of export subsidies, for instance. However, there remains the strong likelihood that more demanding modalities will be ultimately agreed. For instance, should a Swiss formula for tariff reductions be agreed as well as steeper cuts to domestic support and export subsidies, then the implications for presently highly assisted sugar industries would be significant. A recent FAO study shows that modest reform under a modalities scenario that was much the same as that agreed under the Uruguay Round would lead to only minor implications for the world sugar market. However, market impacts would be marked were the modalities to include: tariff reductions according to the Swiss 25 formula3; an expansion in tariff rate quotas of 50%; a zero in-quota tariff rate; an 80% cut in the AMS level; and elimination of export subsidies. The study4 showed the average bound tariff rate for 30 countries accounting for 75% of world sugar imports would fall to a level of 15%. There would be significant impacts on the location of production and trade with production in high cost producing countries shrinking whilst low cost cane sugar production in Latin America would expand.

Unilateral reform pressures The Uruguay Round commitments did have implications for sugar policy in the United States and the European Union: the United States was constrained to a minimum import volume under its tariff rate quota; and the European Union agreed to constraints on both the value and volume of subsidized sugar exports. Even so, the reforms did not alter the fact that both these countries continue to provide relatively high levels of domestic support with high internal sugar prices. So arguably the key to more profound sugar trade liberalization remains whether the United States and the European Union will liberalize their current policies. In that context then, a key question is whether internal pressures for fundamental sugar policy reform in those two countries will ultimately move the world closer towards free trade in sugar, albeit the extent and pace of 3 Tf = (25 * T0)/(25 + T0) where Tf and T0 are final and initial tariffs. 4 The Geneva Roundtable on Trade-related Issues. Paper No. 4: Implications for specific commodity markets of possible modalities from commitments in the areas of domestic support, market access and export competition, FAO. 187

The world sugar market

reform may also be influenced by external pressures arising from WTO agriculture negotiations and RTAs.

UNITED STATES: PRESSURE FROM NAFTA AND A COMMON US–MEXICO SWEETENER MARKET

Significant pressures for US sugar policy reform come from NAFTA. This is because after fiscal year 2007, Mexico’s sugar exports will no longer be limited by calculations of net surplus production (the USDA formula) and Mexico’s sugar prices will be at parity with US sugar prices. Assuming continuation of the key parameters of present US sugar policy then the parity price is set by the US loan rate (itself supported by commodity credit corporation (CCC) stock acquisitions). However, the prognosis is complicated by possible changes to US sugar policy, either because of possible WTO commitments the United States may make on agriculture, or because of possible changes to US sugar policy because of RTAs. Summary of US sugar policy The US sugar programme, as passed in the Farm Security and Investment Act 2002, continues for six years through to 2007/08 to use two primary tools to support domestic prices and to control total sugar supply: the price support regime (loan rate); and the tariff rate quota import system. Domestic support is achieved by: A loan rate of 18 cents/lb for cane raw sugar and 22.9 cents/lb for beet white sugar, underwritten by the government. Restricting supplies to drive up market prices: the import quota and/or marketing allotments can be adjusted to maintain a domestic market price higher than the loan rate to avoid forfeitures (particularly during July, August and September, when support loans become due); and the Secretary of Agriculture, to the maximum extent possible, is to run the programme to avoid forfeitures (i.e. to operate the programme at no cost to the US government). The sugar loan programme The 2002 Farm Act reauthorized the US Department of Agriculture (USDA) to make loans available to processors of domestically grown 188

Government policy

sugar cane at the rate of 18 cents per pound and to processors of domestically grown sugar beets at 22.9 cents per pound for refined sugar. As before, loans are made for a maximum term of nine months and must be liquidated along with interest charges by the end of the fiscal year. Processors are required to provide payments to producers in proportion to the amount of the loan value accounted for by the sugarbeets and sugar cane the producers deliver. USDA retains the authority to establish minimum producer payment amounts. Sugar loans are non-recourse, meaning that when the loan matures, the USDA must accept sugar pledged as collateral as payment in full in lieu of cash repayment of the loan, at the discretion of the processor. Marketing allotments: new tool Marketing allotments are another tool for the USDA to manage the sugar programme when domestic supplies are large and when the TRQs for raw and white sugar are at the minimum commitments under the WTO and NAFTA. Flexible marketing allotments are likely to provide more effective price support throughout the marketing year. When allotments are on, processors who have expanded marketing in excess of the rate of growth in domestic sugar demand will have to postpone the sale of some sugar, and either store it at their own expense or sell it for uses other than domestic food use. The cost of storing excess production is thus shifted from the government to the industry. (However, the 2002 Farm Act requires that the CCC establish a sugar storage facility loan programme to assist processors who want to construct or upgrade storage and handling facilities.) Allotments are automatically in effect unless suspended (triggered off). The Farm Law allows the Secretary of Agriculture to suspend allotments when two conditions are met. First, estimated imports of ‘sugars, syrups or molasses for human consumption or to be used for the extraction of sugar for human consumption, whether under a tariff-rate quota or in excess or outside of a tariffrate quota’ have to exceed 1,532,000 short tons, raw value (STRV) (that figure is the sum of the minimum WTO commitment of 1.256 million STRV and up to 276,000 short tons (raw or refined) from Mexico under NAFTA). The second condition is that the Secretary of Agriculture has to determine that the imports would lead to a reduction in what is known as the ‘overall allotment quantity’ or OAQ (Earley, 2002). The OAQ is defined as estimated sugar consumption plus reasonable 189

The world sugar market

ending stocks, minus beginning stocks and the 1,532,000 tons of imports.5 The forecasts of both domestic use and beginning stocks are taken directly from the USDA’s monthly WASDE report,6 and the import proxy is given at 1.532 STRV, so reasonable ending stocks is the only ‘subjective’ variable in the equation which the USDA can adjust to keep prices above forfeiture levels. The tariff rate quota As discussed in Chapter 9, the tariff rate quota is the main instrument of protection for the US sugar industry. Tariff rate quotas are used to limit the supply of sugar to the domestic market, with the objective being to prevent domestic sugar prices from falling below the loan rate. The TRQ is a two tiered tariff for which the tariff rate charged depends on the volume of imports. A lower (in-quota) tariff is charged on imports within the quota volume, and a higher (overquota) tariff is charged on imports in excess of the quota volume). The TRQ is established annually by the Secretary of Agriculture and, subject to WTO and NAFTA commitments on market access, is announced at a level to ensure that domestic prices remain above loan rates plus interest – a goal generally achieved during the past two decades, as shown in Fig. 10.2 and 10.3 (FY 2000 being the obvious exception). The WTO commitment on market access provides for US tariff rate quota sugar imports of at least 1.139 million tonnes, raw value a year, including 22,000 tonnes of refined sugar. Many factors influence the import quota volume, including USDA forecasts of sugar supply and demand, sweetener market data, non-quota imports and the NAFTA provisions (Nyberg, 2002). Refined and speciality sugar import quotas are also in place, but the primary form of import restriction remains the TRQ for raw sugar. Sugar imported outside the quota is subject to a much higher (prohibitive) second or high tier duty, set at a WTO bound level of 15.36 cents/lb (US$338.62/tonne). The United States Department of Agriculture announced the raw sugar TRQ for FY 2003 on 30 July 2002, establishing the quota for imports of raw cane sugar into the US at 1,117,195 tonnes, raw value 5 The Secretary can also set the OAQ at some other figure if s/he thinks it is necessary to avoid forfeitures of sugar to the government. 6 The World Agricultural Supply and Demand Estimates (WASDE) report prepared by the Interagency Commodity Estimates Committee. 190

Government policy 30

US cents/lb

25 20 15 10 5

US raw sugar, duty fee paid, NY

01 20 02 20 03

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

19

19

90

0

Loan rate

World price, NY

10.2 US and world raw sugar prices.

35

US cents/lb

30 25 20 15 10 5

03

02

20

20

01

20

00

20

99

19

98

19

97

19

96

19

95

94

19

93

19

92

19

19

91

19

19

90

0

World price (white – LDP) US wholesale refined beet sugar Loan rate refined beet sugar

10.3 US and world white sugar prices.

(1,231,497 STRV). This amount represented the level to which the US is committed under the Uruguay Round Agreement. The US trade representative then announced the country by country tonnage allocations for 40 countries. The top three quota holding countries are allowed to ship 25% of allocated volume each fiscal quarter to ensure an orderly supply to the US refining market. The top four quota holding countries are the Dominican Republic, Brazil, the Philippines and Australia, accounting for 51% or 568,000 tonnes of the total TRQ minimum access imports. 191

The world sugar market

Pressures on US sugar policy: increased market access through WTO negotiations on agriculture Any outcome to the Doha Round of multilateral trade negotiations (due for completion by 1 January 2005) which commits the US to raising market access and lowering over-quota tariff rates would also threaten the sugar programme. Crucially, the new Farm Law also explicitly allows for the loan rate to be reduced at the Secretary’s discretion should foreign producers reduce export subsidies and support levels below current WTO commitments. The possibility of substantial change to the US sugar programme as a consequence of increased WTO market access was investigated by Haley, 2001 (for sugar policy as it stood under the 1996 Fair Act). Large forfeitures would accrue to the US government, because the high floor price prevents offsetting reductions in either NAFTA imports from Mexico, or in US domestic production. Put simply, to prevent forfeiture, the loan rate would have to be reduced. The USDA study found that a loan rate of 14 cents/lb (a fall of 4 cents) would be required to prevent forfeitures arising from a 50% increase in the US’s WTO minimum access commitment. It is important that such a marked decline in the loan rate would be associated with a reduction in US production and milling/refining capacity. Furthermore, lowering the US floor price would narrow the margin between the US and world sugar prices, which has at least two implications. First, high tier imports from Mexico would be lower than otherwise, because the price at which such exports become profitable for Mexico would be higher than the US price. Second, the narrowed US–world price margin may mean that exports are no longer viable for some higher cost WTO tariff rate quota holders. A larger proportion of US supplies would consequently be sourced from lower cost productions such as Brazil, Australia and possibly Mexico. Crucially, if the ambitious US WTO proposal7 (as released July 2002) were to be implemented then it would eventually destroy the US sugar programme. From a sugar perspective the key elements of the US proposal are: Reduce all tariffs over the course of five years to no more than 25% using the Swiss formula (see p. 187). Increase all TRQ quantities by 20% over five years. 7 http://www.ustr.gov/releases/2002/07/02-77.pdf 192

Government policy

Eliminate the special agricultural safeguard. Cap non-exempt domestic support at 5% of the value of agricultural sales. Eliminate export subsidies. Set a date for complete elimination of all tariffs and quotas. As already explained, the US imposes an MFN over-quota duty of 15.36 cents per pound on raw sugar under its tariff rate import quota – the primary means of restricting the level of imports. Assuming a procedure where specific tariffs such as this are converted to an ad valorem basis using a 1996–98 base period (referenced in the US WTO proposal), then the applicable MFN duty was 133% in that period, and applying the Swiss formula would reduce that tariff to 21% in 2010. Should world sugar prices be as high as 10 cents/lb, then the tariff would amount to 6.6 cents/lb.

NAFTA and Mexico’s exportable surplus: implications for US sugar policy As discussed in Chapter 9, the North American Free Trade Agreement (NAFTA) became effective on 1 January 1994 and it binds Canada, the United States and Mexico to the phasing out of most of the trade barriers within the group over a 15 year transition period ending in 2008. Trade in sweeteners between Mexico and the United States is directly addressed by specific NAFTA provisions that provide for increasing duty free access during the 15 year transition period (starting January 1994) to the US sugar market for Mexican ‘net surplus’ sugar production (generally known as the NAFTA tariff rate quota). Upon completion of the transition period, the US and Mexican sugar markets will be merged into a common market. The United States and Mexico have been embroiled in a sweeteners dispute concerning NAFTA’s sweetener provisions in which Mexico does not accept the USDA formula for setting the limits to Mexico’s access to the US market. The dispute has also seen Mexico first apply countervailing duties to imports of US HFCS in 1997, but then changing to a tariff rate quota regime in 2001 when both WTO and NAFTA panels found against the countervailing duties. Despite the ongoing sweeteners dispute, Mexico over coming years can access the US market by paying the high tier tariff for out193

The world sugar market

US cents/lb, raw value

20 16 12 8 4

05

06 20 07 20 08

20

04

20

03

20

02

WTO tariff

20

01

20

00

20

98

99

20

19

97

19

96

19

19

19

95

0

NAFTA high tier tariff

10.4 Second tier duties for US sugar imports.

of-quota sugar. The economic incentive to do so is growing over time because the high tier tariff is declining each year and therefore the threshold price at which it becomes profitable for Mexico to undertake high tier exports is declining. The US second tier or above-quota tariff is 15.36 cents/lb, raw value, having been reduced 15% under the Uruguay Round AOA. However, for Mexico, the second tier had fallen to 7.56 cents/lb in 2003, and will fall to zero in 2008 (see Fig 10.4). (Just as crucially, Mexico’s NAFTA status exempts it from safeguard statutes that apply to most other countries.) As the second tier tariff rate declines each year, the world price needed to avoid them is lowered. Second tier imports from Mexico first occurred in the second quarter of 1999. A world price of less than 5 cents/lb (fob) and US domestic price in excess of 22.5 cents/lb (cif, duty paid) allowed for second tier imports. The USDA estimates that high tariff imports from Mexico in 1998/99 reached 67,000 short tons, but fell to 6,000 short tons in 1999/2000 and to only 3,000 short tons in 2001/02. More significant tonnages of high tier sugar entered during FY 2002, mostly from Mexico at 42,226 STRV, whilst for FY 2003 the USDA forecasts only 10,000 STRV to reflect expected entries close to the US–Mexico border (Haley and Suarez, 2003). Although Mexico during 2003 had little surplus sugar to ship under the Tier II window (the result of a disappointing harvest and the surge in domestic offtake from the soft drinks sector in response to Mexico’s government in January 2002 implementing a 20% tax on beverages that contain HFCS), the absence of any agreement 194

Government policy

between the US and Mexico over sweeteners trade means that the US sugar programme could come under significant pressure in the future: maybe by 2005, perhaps the earliest date Mexico could return to surplus production.8 To the extent suspension of the tax on beverages containing HFCS together with improvements in productivity would create a surplus, the Tier II incentives will ensure much of that surplus is shipped to the United States. Crucially, the current Farm Law caps Mexico’s NAFTA TRQ at almost 276,000 short tons (part of the 1.532 million STRV import proxy used to calculate the overall allotment quantity), so should Mexico begin to ship volumes in excess of this under the NAFTA Tier II window, then the whole price support programme for US sugar would be undermined, leading to costly forfeitures and mountainous stocks for the CCC (as envisioned in the USDA’s 2002 baseline for sugar). Furthermore, because marketing allotments would be triggered off, the USDA would then have to resort to the payment in kind provisions of the 2002 Farm Law and also to reducing the quantity of sugar that comes in under the TRQ by buying certificates of quota eligibility in exchange for an equivalent amount of sugar held by the CCC (as was done in May 2002) in an effort to prevent massive forfeitures to the CCC. Even so, it is unlikely that the present sugar programme settings could accommodate Mexican access above 276,000 short tons for any substantial length of time. The NAFTA ‘one market’: unfettered access? As already illustrated by the possibility of NAFTA high tier imports entering the US market, the injection of free trade dynamics into the otherwise carefully managed US domestic system holds the potential to undo the support programme. A truly free common market for sweeteners between the United States and Mexico could possibly cause chaos for both markets. NAFTA mandated free trade in sugar and corn sweeteners would be likely to see US HFCS displace Mexico’s use of sugar in the soft drinks sector, with the resulting surplus shipped to the United States. The key question then is, would raising the import proxy threshold in the OAQ calculation (consequently leaving a smaller market for US processors), and/or lowering the loan rates be sufficient to save the policy from eventual demise? Perhaps then, there are sufficient incentives on both 8 Mexico’s sugar export potential over the longer term is a critical issue, but is not pursued further in this chapter. 195

The world sugar market

sides to achieve a new negotiated, flexible level of exportable supply from Mexico that can be shipped into the United States in the years immediately following the 2008 common market deadline. However, considerable uncertainty remains around the final parameters of any such agreement. US sugar policy and other regional trade agreements Whilst questions remain over to what extent US sugar policy could accommodate broader Mexican access, other foreign countries are likely to seek increased access to the US market over the coming years, heightening the potential for free market dynamics to undermine the support policy. The US recently completed a free trade area (FTA) with Chile (December 2002), and a Central American Free Trade Area (CAFTA – December 2003), including El Salvador, Guatemala, Honduras and Nicaragua, and is also eagerly pursuing a broad free trade area of the Americas (completion goal of 2005). Concerning sugar in CAFTA, the Central American countries will see their sugar quota increased by 85,000 tonnes immediately after the agreement is signed, up from the current 110,000 tonnes (as against the US global total raw sugar tariff rate quota of 1.117 million tonnes). Their quota would then grow by 2% per year over 15 years to reach a total of 236,000 tonnes. However, US import tariffs for sugar above-quota would remain in effect even after the 15 year period ends. Central American sugar producers had pressed for the elimination of the tariffs but the US sugar lobby was successful in keeping them in force. Press reports said that the deal includes two provisions: the US would be able to stop imports in order to protect the domestic industry but would have to make cash payments to the Central Americans, while the latter will not be allowed to import sugar at world prices to cover their domestic needs, in order to export the domestically produced sugar to the US. Although Central American sugar currently accounts for only 1% of the total US market, and would rise to only 1.4% at the end of the 15 year period, the US sugar and sweetener groups strongly opposed including sugar in CAFTA or any bilateral or regional free trade agreement. US sugar groups fear that if the CAFTA sugar agreement is used as a ‘template’ for negotiating other agreements, the domestic sugar industry would collapse, because in their view, imports would flood the market and prices would fall below production costs. From a sugar perspective, the effort to unite the economies of 196

Government policy

the western hemisphere into a single free trade area – the FTAA – is very significant (see later discussion). Although sugar was excluded in the free trade agreement with Australia (early 2004), other slated free trade areas with the Southern African Customs Union and possibly Thailand would also ‘threaten’ US sugar policy if sugar is not excluded or given special treatment in the transition period to achieving free trade between the RTA members. The strong opposition of the US sugar industry to the inclusion of sugar in RTAs is discussed further, p. 212. Conclusion: US sugar policy US sugar policy appears unsustainable in the longer term and is likely to face pressures for change during the second half of the current decade. In particular, likely over-quota imports from Mexico, together with higher loan rates (as against the 1996 Farm Law) are likely to continue to result in excess sugar production and loan forfeitures to the US government, particularly since marketing allotments would be suspended once imports exceed the 1.532 million STRV threshold. US sugar policy will also face pressures to allow greater market access from regional trade agreements such as the FTAA, especially should the WTO Doha Round lead to an agreement to further reform world agricultural markets and trade. EUROPEAN UNION: PRESSURES FOR REFORM ARE GROWING

In the European Union, even though the new sugar policy starting in July 2001 left the 30 year old regime of production quotas, fixed prices and export refunds largely untouched for another five years, there were several elements of reform. These include a permanent cut in the annual production quota of 115,000 tonnes, abolition of the storage costs equalization scheme and a commitment to further review the sugar sector in 2003: a commitment which has seen the Commission table a paper in September 2003 setting out three possible options for reforming the regime. The political debate over the future shape of EU sugar policy is gathering momentum. EU sugar policy: summary In June 2001 the EU sugar regime was renewed until June 2006. Key elements of the long running regime are9: 9 Based on Price, 1996. 197

The world sugar market

A common market intervention price for white sugar of €631.9/tonne, for raw sugar €523.7/tonne, together with fixed prices for sugarbeet. Protection from the world market via import duties (bound in the WTO) and additional (safeguard) duties (see Box 10.2) which vary with world market prices. In practice this system excludes all non-preferential sugar imports from the world market.

Box 10.2 EU safeguard duties The formula used to calculate additional duties is complicated and is set out in the Uruguay Round Agreement on Agriculture. Application of the safeguard provisions results in the additional duties shown in Tables 10.6 and 10.7. There are two key variables: the ‘trigger price’ notified by the EU to the WTO and the ‘representative’ cif import price. The relative importance of this supplementary duty to the base duty is illustrated for white sugar in Fig. 10.5. Table 10.6 EU safeguard duties for imported raw sugar (for refining) Reference Difference ST1 ST2 ST3 ST4 STT price % €/100 kg €/100 kg €/100 kg €/100 kg €/100 kg €/100 kg 50

88.0

3.76

4.18

4.39

4.91

17.24

100

76.1

3.76

4.18

4.39

0.4

12.74

150

64.1

3.76

4.18

1.20

0.00

200

52.2

3.76

2.54

0.00

250

40.2

3.76

0.04

9.14 6.30 3.80

Notes: Trigger price is €41.8/100 kg. ST = Supplementary tax; STT = supplementary tax total.

Table 10.7 EU safeguard duties for imported white sugar Reference Difference ST1 ST2 ST3 ST4 STT price % €/100 kg €/100 kg €/100 kg €/100 kg €/100 kg €/100 kg 100

81.2

4.78

5.33

5.57

2.95

150

71.8

4.78

5.33

4.37

0.00

200

62.3

4.78

5.33

0.87

10.98

250

52.9

4.78

3.43

0.00

8.21

Note: Trigger price is €53.1/100 kg.

198

18.63 14.48

Government policy 70

Tariff: euro/100 kg

60 50 40 30 20 10 0 10

14

18

22

26

30

34

38

42

46

50

Cif import price: euro/100 kg Base tariff

Safeguard duty

10.5 White sugar base tariff and safeguard duties 1999/2000.

A system of export refunds on sugar and sugar containing products to facilitate the exporting of sugar surplus to internal requirements to third countries. A system of production quotas (divided into A quota and B quota) which limits price support to a maximum quantity of sugar production, and which is also used to administer the self-financing of the sugar policy. (The costs of the export subsidies are passed back to beet growers through a variable levy on B quota sugar production. Production in excess of quota (C sugar) is exported with no support.) A raw sugar import policy to support sugar production in the French overseas departments, and which provides for reduced duty and duty free imports (specified volumes) from ACP countries to meet the supply needs of EU cane sugar refiners. Since 2002, a tariff rate quota on imports of sugar from least developed countries under the Everything but Arms trade initiative. Key facets of the EU sugar import regime are shown in Table 10.8. Pressures for reform: internal policy review Crucially, EU sugar policy is already under pressure from the EU’s international commitments under the Uruguay Round. There is a 199

The world sugar market Table 10.8 The EU current import regime Guaranteed prices

Import duties

Import quotas (tonnes,1 2002/03)

n/a n/a

€339.00/tonne2 €419.00/tonne2

n/a n/a

€523.70/tonne cif Europe

0

1,3043

MFN

not established4

€98.00/tonne

DOM production

€523.70/tonne ex-factory

0

208

EBA

€496.80/tonne cif Europe

0

85

SPS

€496.80/tonne cif Europe

0

214

€631.90/tonne cif Europe

0

1,3042

not established4

0

–

Free market Raw sugar White sugar Preferential arrangements Raw sugar ACP/India Sugar Protocol

White sugar ACP/India Sugar Protocol Balkan FTA

82

Notes: 1 All in white value. 2 This is the base tariff to which are added additional safeguard duties. 3 The ACP/India Sugar Protocol establishes a global quota (1.304 million tonnes) without specific quantities allocated for white and raw sugar. However the MSN limit raw sugar supply (for refining) to 1.176 million tonnes, leaving 128,000 tonnes for whites and direct raw sugar. 4 Prices are not guaranteed but the level of prevailing prices is expected to be close to the EU support prices – €496.80/tonne for raw sugar (cif Europe – MFN) and €646.50/tonne for white sugar (francoborder – Balkan FTA).

commitment to restrict the cost of export refunds to €499.1 million and the volume of subsidized exports to 1.274 million tonnes, which means the European Commission must review production quotas annually. Until 2000/01, the EC did not have to adjust A and B quotas as the cost and volume of exports were less than the allowed WTO limits. For the 2000/01 marketing year, a temporary quota cut of 498,000 tonnes was implemented and from 2001/02 a permanent quota cut of 115,000 tonnes was agreed to take effect from 1 July 2001. For the 2002/03 marketing year, a cut of 862,000 tonnes was implemented. Quota cuts are shared between sugar and various sugar products such as inulin, isoglucose and syrups, and have been divided among member states according to their current quota levels. Sugar has been excluded from broader reform of the Common Agricultural Policy (first the Agenda 2000 reforms and much more 200

Government policy

recently the reforms agreed between member states in June 2003). However, at the time sugar policy was renewed in 2001, the European Commission was charged with putting forward proposals for a new policy to come into force from 1 July 2006, and in terms of possibilities is considering a full range of policy reform options reaching from the status quo to a gradual reduction in quotas and prices, to full liberalization (see Box 10.3).

Box 10.3 EU: options for future reform of sugar policy As part of the analysis of sugar policy reform options underway in the European Union, the Commission in 2002 launched a tender for a ‘Study to access the impacts of options for the future reform of the sugar common market organisation’ (EU, Agriculture DG-A2, July 2001). The tender covers a wide range of six illustrative reforms for the five year period 2006/07 to 2011/12. The starting point or reference scenario is a continuation of the current policy including the preferential import arrangements (ACP and LDC). The options are: 1 Gradual reduction in production quotas to ensure phasing out of subsidized exports of EU produced sugar. 2 Gradual reduction in support prices, to ensure the same objective as 1. 3 Agenda 2000-like – a one-off cut in support prices with partial compensation in the form of a new direct payment. 4 A combination of reductions in both production quotas and support prices with partial compensation. This option as well as 1 and 2 to allow for some flexibility in quota transfers and allocation to growers. 5 Gradual elimination of production quotas combined with partial compensation, with a view to integrating sugarbeet into the general policy arrangements for arable crops. 6 Full liberalization of the sugar regime. The impact assessment was to take into account a range of policy issues affecting the four main groups of stakeholders (EU sugarbeet and cane growers, EU beet and cane processing and refining industry, EU industrial and final consumers, third countries including applicant and developing countries) as well as the impact on the EU budget.

201

The world sugar market

Based on these studies and its own analysis, the Commission in late 2003 released a communication in which it outlined three families of options for the future of the EU sugar regime, including: the maintenance of the status quo; a reduction in internal prices coupled with the eventual phasing out of production quotas; and complete liberalization of the EU sugar market. A possible fourth option focusing on fixed annual quotas for production and imports which had been included in earlier Commission drafts was only briefly mentioned within the framework of the status quo scenario; this was an option seemingly favoured by the European sugar manufacturers and growers. Forecasting the final form of EU sugar policy post 2006 remains difficult because the highly political debate about the three families of policy options has yet to run its full course. The dilemma of how to reform policy will not be easily solved, and there will be real difficulties in finding a reform option acceptable to all member states. Even so, the 30 year old regime will be forced to change, implying at least a strong possibility of quota reduction and a lowering of intervention prices, also suggesting lower export volumes. This would amount to a radical reform of the EU sugar policy, making sugarbeet a far less attractive crop for EU farmers, and would also have implications for cane sugar tolling and white sugar exports. Analysing the consequences of reform options for the key players within and outside the EU would be the subject of another study. The Everything but Arms initiative: implications for EU sugar policy and market A factor creating a significant challenge for EU sugar policy later this decade is the EBA initiative, adopted early March 2001 (see also Chapter 9). This programme extends duty free and quota free access to all products originating in LDCs except arms and ammunition. Only the three most sensitive products – bananas, rice and sugar – were not immediately liberalized. For sugar, liberalization would be phased in between 1 July 2006 and 1 July 2009 by gradually reducing the full EU tariff to zero. In the meantime, LDC sugar can enter the EU within the limits of a tariff quota, set as the best figures for LDC sugar exports during the 1990s plus 15% – 74,185 tonnes (white sugar equivalent) in 2001/02, which will then grow by 15% each year to reach 197,800 tonnes in 2008/09. Imports of sugar under the ACP–EU Sugar Protocol are excluded from this calculation. Safeguard 202

Government policy Table 10.9 Agreed EBA export quotas (tonnes, white value) Country Burkina Faso

2001/02

2002/03

2003/04

7,073

7,237

7,671

Ethiopia

14,298

14,689

15,248

Malawi

10,402

10,661

10,959 10,116

Mozambique

8,331

8,384

Nepal

0

8,970

8,667

Sudan

16,257

17,037

16,979

9,065

9,317

9,940

Tanzania Zambia Total

8,758

9,017

9,538

74,185

85,313

98,110

measures also apply to ensure there are no ‘serious disturbances’ to the EU sugar market. Actual quotas for each LDC country supplying sugar to the EU under the EBA initiative, as determined by the Framework Agreement on EBA sugar (devised in October 2001 by the EBA Sugar Working Group and the LDC Commercial Group on EBA sugar), are given in Table 10.9. The real impact for EU sugar policy arising from the EBA programme begins in 2006 when the first duty reduction is implemented. Starting that year, EU production quotas may have to be lowered to accommodate the increased access of third country sugar from LDCs (and possibly beet areas for C sugar production could be diverted to alcohol production). The real fear for EU sugar producers is that after 2009, a carousel trade could be established, whereby LDCs would export their entire production to the lucrative EU market and import from the world market to meet their own requirements. A key issue will therefore be the extent to which LDCs can expand the productive capacity of their sugar sectors in response to the considerable incentives generated by the EBA initiative. At the same time, EBA beneficiaries are aware of the impending EU sugar policy reform and are considering the possible implications of that reform for their level of EU market access and prices post 2009. In the short to medium term (up until 2006), no impact of the EBA initiative on the EU sugar market is expected, because EBA sugar exports are restricted to raw cane sugar only and are regulated by quotas. EBA sugar will gradually displace Special Preferential Sugar with no impact on the EU sugar balance. In the longer 203

The world sugar market

run, the impact of an unlimited access to the EU market granted to LDCs from 2009 will depend on the future shape of the EU sugar regime, which in turn will influence the volume of sugar entering under the EBA. If EU prices remain significantly higher than those of the world market, the export orientated sugar producers in the LDCs will be attracted to the lucrative EU market. Sugar from LDCs could then surpass the ‘maximum supposed needs’, and solutions for balancing the sugar market in the EU would have to be found. According to Commission estimates, longer term, LDCs’ sugar exports could reach from 0.9 to 2.7 million tonnes, depending on the scenario. The EU would face a difficult task finding ways to accommodate this additional sugar. All other things held equal, possible options include a combination of quota cuts and price cuts. More simply, the EBA is a strong factor making reform of the EU sugar policy imperative. ACP producers and EU sugar policy reform Reform of EU policy holds critical implications for ACP producers presently benefiting from preferential access to the EU market. ACP countries viewed the outcome of the Uruguay Round AOA for sugar favourably because the changes to EU sugar policy did not fundamentally impact the provisions regarding preferential trade. The successor to the Lomé Convention was signed in Cotonou, Benin on 23 June 2000, and provided for the continuation of nonreciprocal ACP trade preferences in the EU market for a transition period of eight years. After that time, however, new arrangements are to be negotiated in line with WTO rules. The Sugar Protocol will also be examined during the transition period. Critically, the Ministers at the Doha Meeting agreed to grant a waiver to allow the ACP–EU Cotonou Agreement to go ahead. For ACP sugar producers the Cotonou Agreement offered the assurance of the continuation of the Sugar Protocol during the eight year transition period, and confirmed the special legal status of Special Preferential Sugar. However, the EBA treaty stands to undermine the benefits of the Cotonou Agreement because ACP sugar producers who are not one of the 48 LDCs face the severe contraction of SPS sugar as the interim LDC EBA quota is increased. The real pressure on EU–ACP preferential trade will emerge some time between 2006 and 2009, as this is the time of the phased introduction of full liberalization for LDC sugar. Furthermore any change to the EU’s sugar policy resulting in a lowering of returns to ACP coun204

Government policy

tries under the Sugar Protocol (primarily cuts to support prices) is a real concern for these producers (capturing both relatively high and lower cost sugar producers). Further pressure for reform arises from proposed Economic Partnership Agreements The 27th of September 2002 marked the start of negotiations of the Economic Partnership Agreements (EPAs) between the European Commission and ACP countries. The basic principles of and the time frame for EPA negotiations were set out in the Cotonou Agreement, which was concluded between the EU and 77 ACP countries in June 2000, and governs development, political and trade aspects of EU–ACP relations. EPAs are scheduled to come into force by January 2008 at the latest and are defined by the Cotonou Agreement as the major instrument of economic and trade cooperation. The negotiating mandate establishes a comprehensive framework to trade and development and adopts an integrated approach addressing not only trade liberalization but also supply side constraints and competitiveness, trade related areas, and trade development measures in order to develop regional and domestic frameworks conducive to economic growth and social development. A two phased negotiating format was adopted. The first phase addressed cross-cutting issues of common interest to all ACP states. Groups of issues have been considered including the development dimension of EPAs, market access, agriculture and fisheries, services, legal issues, and trade related areas. The second phase of negotiations is now underway with both West Africa (The Economic Community of Western African States – ECOWAS) starting on 6 October 2003 and Central Africa (The Central African Economic and Monetary Community – CEMAC) on 4 October 2003. The EU hopes that a more comprehensive approach to EU–ACP trade cooperation under the EPAs will ensure that ACP countries overcome their dependence on a few commodities and a few markets, by addressing supply side constraints and by fostering product and market diversification. Negotiations of EPAs have been postponed and a longer period for the negotiation has been provided to allow the ACP countries to prepare themselves adequately for the new trading arrangements. The future shape of relationships between the European Union and ACP countries will probably add additional pressures driving reform of EU sugar policy. The Commission advocates that as part 205

The world sugar market

of the EPAs the Community should grant duty free access to its market to all products originating in the ACP countries (effectively granting the terms of the EBA initiative to non-LDC ACP countries), leading to even greater volumes of sugar imported into the European Union. EU enlargement The enlargement of the European Union to 25 countries on 1 May 2004 (the 10 new countries are: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia) means that overall EU production quotas will obviously increase. After accession, these countries will also face the annual adjustment to production quotas to meet existing WTO commitments. The agreed quotas and current production levels are provided in Table 10.10. The production quotas of newcomers were set so as to preserve the EU market status quo. Brazil, Australia and Thailand challenge EU sugar policy On 27 September 2002, Australia and Brazil formally lodged a WTO challenge against EU sugar subsidies. Both countries entered the first

Table 10.10 Sugar production quotas for the EU candidate countries (000 tonnes, white value) Agreed quotas

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta

0

0

455

492

0

0

405

340

67

55

103

129

0

0

1,675

1,932

Slovakia

207

170

Slovenia

53

55

2,965

3,173

Poland

Total

206

Estimated production in 2002/03

Government policy

stage of the WTO’s dispute settlement procedure by issuing a joint request for consultations with the EU on the issue. Australia’s request, according to a press release by Australia’s Trade Minister (and as stated in its formal request for consultations), identifies the following measures: EU export subsidies on sugar and products incorporating sugar in excess of its WTO export subsidy obligations; and discriminatory subsidies to EU refiners, in respect of its WTO National Treatment Obligations. Thailand announced its intention to also challenge EU policy in April 2003. Officials from Brazil, Australia and other world exporters met with their EU counterparts for two days in late November 2002 at the WTO to try to reach a settlement before going to an arbitration panel. Australia and Brazil claimed that the EU sugar regime is the main reason why some of the world’s highest cost producers are the world’s largest exporters of white sugar. Officials of the EU maintained that the EU sugar regime could not be blamed for fluctuations in world sugar market prices, and that the challenge would affect mostly the preferential treatment that developing and least developed countries have under the ACP/EU Sugar Protocol and the Everything but Arms initiative. The challenge to the EU’s sugar regime obviously caused alarm in ACP countries. There is a strong fear by ACP countries that this action could disrupt the EU sugar regime and therefore seriously undermine the value of preferential ACP access to the EU market. Consequently ACP governments have wanted to remain closely involved in the process in order to ensure that their interests are fully protected. In mid-July 2003 the three countries requested the establishment of a WTO panel at the 21 July Dispute Settlement Body meeting in Geneva. A WTO panel normally takes 9–12 months to report, but then the findings could be appealed. Commentators remain divided as to the likely success of the challenge and as to whether ultimately it strengthens or hinders pressure for reform of the EU sugar policy, especially in the environment of the Doha agriculture negotiations. However, should the challenge be successful, the consequences for EU sugar policy would be profound. Conclusion: EU sugar policy reform In short, there are mounting pressures for reform and the question is how much longer the current policy can survive without significant change. Consequently, a political debate on how the EU should 207

The world sugar market

change its sugar regulations is gathering momentum. The debate not only reflects all of the above pressures, but will also be driven in part by expectations regarding the Doha development agenda. It is clear though that the EU’s policy on export refunds will come under pressure in the WTO negotiations. Even assuming a phase-out of refunds at the same pace as agreed under the Uruguay Round (-36% in terms of cost and -21% in terms of volume over the six year transition period), then this would be difficult to achieve unless prices or production quotas are cut.

UNILATERAL REFORM IN OTHER KEY PLAYERS

Reform to sugar policy is already underway in several other important sugar producing and consuming countries. Reforms under implementation in China as a consequence of its WTO accession in December 2001 have already been highlighted in Chapter 7. During the 1990s China’s levels of imports and exports were extremely volatile. The variability of the country’s trade pattern reflected large changes in its level of domestic production against the much less volatile level of sugar consumption. Weather conditions have played their role in the instability of production over time, but it is also partly because sugar prices were freed when China first moved towards a market economy in the early 1990s, but sugar factories still had to pay government set floor prices for cane and beet. Notwithstanding the variability of trade flows, with WTO membership China agreed to implement a tariff rate quota for 1.764 million metric tonnes in 2002, increasing by 5% each year until 2004. The tariff rate quota was not filled in 2002 and was again unlikely to be filled in 2003 because the country is expecting a near record sugar crop. At the same time, bearish domestic fundamentals are pushing domestic prices below global price benchmarks making imports unprofitable. In essence, the WTO door is open, but access to the domestic market remains controlled by government. Longer term, China’s import requirements will be driven by domestic requirements, assuming the government is successful in its stated aim of achieving a profitable sugar sector (assuming there are continued moves to rationalize unprofitable mills and an increasing number of mills under private management), with imports accounting for around 20% of demand. China will meet her TRQ commitments subject to there being a commercial reason for her to do so (i.e. the domestic supply/demand balance). 208

Government policy

India is another large sugar producer and consumer undergoing liberalization with potential impacts for the world sugar market. India’s sugar sector is widely regarded as one of the most regulated in the world and political factors have often overridden economic considerations. Key facets of India’s sugar policy are given in Box 10.4. In early February 2002 the government announced that it would completely free the country’s sugar sector, once futures trading in the product had been established in November. Reflecting the long history of intervention, the deregulation proposals still left the government retaining control of the sugar supply through quarterly releases (to prevent a collapse in domestic prices) and selling sugar at subsidized rates through the public distribution system: both goals acting to temper the impact of liberalization.

Box 10.4 Primer on India’s sugar policy Sugar in India is highly regulated by the government. The central government controls imports through a tariff, and domestic supply through a levy system and a monthly release quota system, as well as administering a minimum cane price scheme. MARKET ACCESS Domestic sugar prices are supported by controlling imports, with the import duty set at a level of 60% since February 2000. Importers also pay a countervailing duty of Rs 850/tonne (US$17.5). Even after a decision in October 2003 to raise the duty to Rs 910/tonne, the effective import rate remains well below India’s WTO ceiling commitment of 150%. DOMESTIC SUGAR PRICE SUPPORT Domestic supply is controlled via the levy system and the monthly release system (as set out under the Essential Commodities Act 1995 and amended July 2003). All sugar that is sold in India is subject to these regulations. The levy system: the central government requires that a certain percentage of each mill’s sugar output is sold as ‘levy sugar’ to the public distribution system (PDS) for sale to the Continued

209

The world sugar market

public in fair price shops. The mill’s remaining sugar can be sold to the free market (but according to the monthly release mechanism). Recently the proportion of sugar that is required to be sold as levy sugar was reduced to 10% and there is now little difference between levy and free market sugar prices. The monthly release system: the central government sets monthly quotas based on estimated national monthly consumption requirements, historical demand patterns and estimated consumption growth. The monthly quota is then subdivided among mills and each mill is obliged to sell all of its quota in each month. The government therefore has considerable control over the average price that mills receive. This so-called dual pricing system has been subject to constant modification over recent years, particularly with respect to a declining share of levy sugar. Mills had to deliver 70% of their production to the PDS in the early 1970s, but this share had fallen to 40% by 1992/93 and to 30% by the start of 2000. The most recent reduction to 10% became effective in April 2002. CANE PRICING The central government fixes the statutory minimum price (SMP) for sugar cane every season (the price is set keeping in mind the interests of farmers, recovery rates and industry location). The SMP serves as a guideline for the state advised price (SAP) which is invariably 20–25% higher than the SMP, reflecting political reasons. The system of SAP and SMPs has made sugar cane one of the most profitable crops for farmers to grow. EXPORT COMPETITION With effect from 2001, exports were fully liberalized, with the removal of a quantitative ceiling on sugar exports (white sugar) and the removal of the need to register with the Agriculture and Processed Food Products Export Development Authority (so-called decanalization). The government began giving exporters help in 2002 by offering a transport subsidy to reimburse the internal transportation costs from mills to ports, equal to about US$15/tonne. This was supplemented in 2003 with an ocean freight subsidy, several state subsidies, and exemptions from level obligations on the volume of sugar exported.

210

Government policy

Crucially, however, in March 2003 the Indian government decided to extend the sugar control regime for another two and a half years in a bid to stabilize the supply and price outlook. In particular, the levy obligation of sugar mills was extended to 30 September 2005 (F. O. Licht, 2003). This decision was taken in the context of the collapse of domestic sugar prices, partly as a consequence of some mills circumventing the monthly release mechanism by seeking recourse to court orders to legally offload more stocks than would normally be allowed. The government’s response was to strengthen the release mechanism by bringing it directly under the Essential Commodities Act (amendment made on 2 June), as well as to defer decontrol until 2005. At the same time the government has moved to free sugar exports in an effort to reduce the country’s burdensome surplus. When in August 2000 India’s government announced procedures and laid out guidelines for the industry to begin large-scale exports, the market remained sceptical about the country’s export potential. In the past India had never exceeded 1 million tonnes of exports and, significantly, had the reputation of a ‘swing’ exporter – one or two years of surplus would be followed by a few seasons of deficit, when the country became a net importer. This time, the situation is different because the process of deregulation of India’s sugar industry has considerably dampened the notorious sugar cycle and for three consecutive seasons the country has exported more than 1 million tonnes to the world market. Crucially, though, in July 2002 the government agreed to reimburse exporters for the cost of surface transport of exportable sugar from factories to ports, and to provide an ocean freight subsidy of US$7 per tonne to encourage or minimize the loss on exports and hence liquidate the large carry-forward stock. Since June 2003 sugar meant for export is exempted from levy obligation, and is not included in free sale quotas. The government announced in August 2003 that it would offer additional subsidies to achieve a 2003–04 export target of at least 3 million tonnes. With the addition of incentives in September 2003 to include reimbursement for cargo handling and marketing expenses, the financial incentives for exporters are estimated at Rs 850/tonne (US$18.74/tonne). Longer term, the country’s overall competitiveness in export markets is likely to be undermined by high production costs (in part because cane prices to growers are still set by regional and state governments), with interest in exports unlikely at prices for white sugar lower than US$250–260/tonne (in the absence of incentives). 211

The world sugar market

The longer term potential of India’s increasingly deregulated sugar sector needs further analysis.

Regional trade agreements As noted earlier in this chapter, the stagnation of the WTO Doha Development Round of multilateral trade negotiations is likely to lead to a greater focus on regional and bilateral trade agreements (RTAs). Although sugar is often classified as a ‘sensitive’ commodity in RTAs – thereby having been awarded a much longer time period over which to achieve integration amongst the RTA members – several of the target dates are now hovering on the horizon rather than being a decade or more away. As already noted, under the North America Free Trade Agreement (NAFTA) integration between the sweetener sectors of the United States and Mexico in 2008 will hold implications for third countries presently holding US WTO quota, but this in part depends on any concessions on market access the US might make under the Doha negotiations. In MERCOSUR, Brazil is in favour of establishing a common sugar regime, but Argentina has resisted. Recently, however, a deadline of the year 2006 has been given for such a regime. Any links between MERCOSUR and the EU or NAFTA also could have far reaching implications for the sugar trade. Looking ahead though, efforts to unite the economies of the Americas in the form of the Free Trade Area of the Americas (FTAA), although likely to confront significant difficulties in integrating the sugar economies of the 34 members, potentially holds the most significant impacts for world sugar trade. Elsewhere, the Asian Free Trade Area could have a significant impact on regional trade flows, and within Africa, SACU and SADC will impact regional sugar trade and market dynamics.

BACKGROUND TO REGIONAL TRADE AGREEMENTS

There is controversy in international trade circles between those who see RTAs as compatible with global liberalization and those who see RTAs as fragmenting the international trading system and ultimately as a second best outcome compared to the multilateral world of the WTO. Crucially, however, the WTO has accepted proposed regional trade agreements if most of the trade between members will be 212

Government policy

subject to a general lowering of tariff barriers, and secondly, if external tariffs to non-members are not increased. Whatever the merits or otherwise of RTAs, such regional initiatives to reduce and harmonize tariffs and coordinate different policies across the many sectors of member countries within a trade bloc are inherently conflictual, reflecting domestic considerations and market driven pressures. Agriculture is often a sector in which there is dispute between pact members, and sugar is no exception. Indeed sugar, perhaps not surprisingly, is often a sensitive product in the context of RTAs. According to the WTO 172 RTAs were in force as of July 2000, and 68 RTAs were under negotiation. Some of those in negotiation would replace existing agreements. Some RTAs are expected to expand over the coming five years (e.g. the European Union and MERCOSUR). Most countries around the globe are members of RTAs, and the network of RTAs is complex because many countries are members of several agreements. Around 60% of the RTAs in force at the end of 2000 have been concluded among European countries, whilst RTAs amongst developing countries represent only 15% of the total. TYPES OF REGIONAL TRADE AGREEMENT

The composition of RTAs varies widely, ranging from simple bilateral RTAs composed of two parties, to plurilateral RTAs consisting of three or more members, to an RTA in which all parties are themselves distinct RTAs (EU–MERCOSUR, Closer Economic Relations (CER) and ASEAN). To make sense of the jargon surrounding RTAs, it is important to acknowledge the various forms that RTAs can take. Words like free trade area, customs unions, common markets – they all represent different forms of RTA, but really should not be used interchangeably because they each refer to a different level of economic integration. First, at the lower end of the integration scale are preferential trading agreements (PTAs), which lower trade barriers among members, but typically such preferences are limited to a portion of actual trade flows and are often non-reciprocal. The EU’s preferential sugar trade with ACP countries is a well known example of a PTA. Free trade areas are pacts where member states abolish tariff and non-tariff barriers on intra-regional trade, but where each member country determines its own tariff on extra-regional trade. Frequently, barriers to trade are reduced over time. NAFTA is a prominent example. The next level of integration is the customs 213

The world sugar market

union where there is free trade among members, together with the application of a common external tariff on imports from outside the union. MERCOSUR represents such an arrangement and the Andean Community is working towards the formation of a customs union. A common market shares the features of the customs union, but goes a stage further by promoting mobility of the factors of production (especially labour and capital) and harmonization of trading standards and of independent national policies. The European Union presently operates a common market.

KEY REGIONAL TRADE AGREEMENTS AND SUGAR

To conduct the analysis of RTAs seven key RTAs are reviewed and analysed. As can be seen in Table 10.11, the selected pacts are drawn from Europe, Latin America, North America, southern Africa and Asia. A simple measure of the potential importance of these RTAs to sugar is to consider their share in world production, consumption and trade in sugar, as shown in Fig. 10.6. It is evident that

Table 10.11 Major trade pacts Regional trade agreement

Member countries

North American Free Trade Agreement (NAFTA)

United States, Canada and Mexico.

Southern Common Market Agreement (MERCOSUR)

Argentina, Brazil, Paraguay, Uruguay (while Bolivia and Chile have signed free trade agreements with MERCOSUR (in 1996)).

Andean Community (CAN)

Bolivia, Colombia, Ecuador, Peru, Venezuela.

Central American Common Market (CACM)

Costa Rica, Guatemala, El Salvador, Honduras, Nicaragua.

Southern African Development Community (SADC)

Angola, Botswana, Democratic Republic of Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe.

ASEAN/AFTA

Brunei, Malaysia, Singapore, Vietnam/ Indonesia, Philippines, Thailand.

European Union (EU-15)*

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom.

*On 1 May 2004, ten Central and East European countries joined the European Union (EU-25).

214

Government policy Share of RTAs in world sugar production

Share of RTAs in world sugar consumption

44%

55%

13%

11% 10%

12% 7% 2%

3% 9% 1%

8% 4%

Share of RTAs in world sugar exports 32%

15%

2%

3%

16%

Share of RTAs in world sugar imports 77%

1% 26%

11% 7% 5% 3%

EU CACM

9%

5% 1%1% 7%

NAFTA

MERCOSUR

CAN

SADC

ASEAN AFTA

REST

10.6 Regional trade agreements and sugar.

together these seven trade pacts can claim a significant share of world production and trade over the 1999–2001 period: 41% of world production; 45% of world consumption; 24% of world imports; and 67% of world exports.

KEY FEATURES OF TRADE PACTS RELATED TO SUGAR

The key features of the seven RTAs as they relate to sugar are presented in Table 10.11, including: Whether special provisions apply for sugar (i.e. is sugar excluded from the general tariff reduction programme and other integration measures); Whether a common external tariff is applied for sugar; The extent to which the RTA is moving towards intraregional free trade in sugar; and

215

The world sugar market

If not, the degrees to which member countries are working towards a convergence in sugar policy. Of the seven RTAs only the European Union is a fully fledged common market: all other RTAs are a weaker form of integration – free trade areas. All of the selected RTAs have special provisions for sugar at present (some exempting sugar altogether). That is, sugar is not treated as all other goods are in terms of the steps to be taken to achieve the ultimate goals of the trade bloc, especially in terms of reductions in tariff barriers and eventual free trade in sugar. Importantly, all of the RTAs seemingly have the goal of a common external tariff (CET ), but the degree of implementation to date varies considerably. For instance, under NAFTA, the US has its tariff rate quota system on imports, while Canada and Mexico impose different tariff levels. The absence of a CET can result in unequal incentives leading to opportunities for member countries to import sugar from outside the RTA for re-exporting within the RTA. By contrast the EU levies a CET on all sugar imports, creating a level playing field for its members – see Table 10.12.

EFFECTIVENESS OF RTAS IN PROMOTING SUGAR TRADE

The fact that the majority of the selected RTAs are only slowly moving towards the goal of free trade in sugar between member countries can be further illustrated by considering the following facts.

Table 10.12 Major free trade agreements and sugar Regional trading agreement

Special provisions for sugar

Intra-regional free trade Goal

Current

Harmonized intra-regional policy1 Goal

Common external tariff Goal

Current

Current

NAFTA

Yes

Yes

No

Yes

No

Yes

Yes

MERCOSUR

Yes

Yes

No

No

No

Yes

No

CAN

Yes

Yes

Yes

No

No

Yes

Yes

CACM

Yes

Yes

Yes

Yes

No

Yes

No

SADC

Yes

Yes

No

Yes

No

Yes

No

ASEAN/AFTA

Yes

No

No

No

No

No

No

EU

Yes

Yes

Yes

Achieved

Yes

Achieved

Yes

Note: 1 i.e. is the same sugar trade policy adopted by member states?

216

Government policy

Under NAFTA, Mexico’s access to the US sugar market is limited by the ‘USDA formula’ until 2008, but Mexico rejects the side letter to the original NAFTA agreement which included this formula. In MERCOSUR Argentina still applies tariffs to sugar from within the bloc. Originally, sugar tariffs were to be phased out by 2001, but Argentina has maintained that it must protect domestic sugar production from imports from Brazil. Sugar trade within the CAN is tariff free (since 1992), although sugar has been classified as a ‘sensitive product’ and therefore, according to the ‘agricultural protection clause’, sugar imports could be subject to volume restrictions. The Andean Community’s common external tariff 10 does not apply to sugar and instead each member applies an MFN tariff rate (Colombia, Ecuador, Peru and Venezuela adopted a 20% ad valorem rate) to which is applied an additional rate of duty when the international ‘reference price’ for sugar drops below the minimum level (floor price) set by the Secretariat of the Cartagena Agreement. When the reference price exceeds the maximum level (the ceiling price), a proportional amount of the MFN rate may be refunded. The reference price is calculated every two weeks and is on the basis of prices at the London International Financial Futures Exchange (LIFFE) contract No. 5. In April 2002, for instance, Colombia’s total effective duty (basic and surcharge) on imported raw sugar amounted to 70%. In terms of sugar, the CACM determines that sugar traded within the region has a duty free status, but permits countries to temporarily suspend imports when they perceive national production to be affected. There is reportedly a gentleman’s agreement between sugar industries in the region not to intrude into each other’s markets. There is no common external tariff. In SADC, a Sugar Cooperation Agreement was concluded in 2002, and annexed to the SADC Protocol on Trade, under 10 The CET has four levels: 5% for raw materials and industrial inputs, 10 and 15% for intermediate goods and capital goods, and 20% for final goods. It came into effect in 1995 and was adopted by Colombia, Ecuador and Venezuela. Bolivia enjoys preferential treatment (land-locked country) and applies 5 and 10%. Peru did not sign the agreement. The General Secretariat has drawn up a new proposed CET, with lower levels and a smaller spread than at present. 217

The world sugar market

which the members share access to the Southern African Customs Union (SACU) market. Market access is non-reciprocal wherein non-SACU SADC countries can sell specified tonnages of their sugar into SACU, but not vice versa. The long term goal is full reciprocity with no tonnage restrictions. In the Asian Free Trade Agreement amongst ASEAN countries, sugar has been declared a sensitive product by several members, in particular, the Philippines and Indonesia. Sensitive products are afforded a longer transition period (by 2010) and a delay in tariff reduction, as against products within the inclusion list of the common effective preferential tariff (CEPT) scheme (which specified a tariff reduction schedule so as to ensure the maximum tariff rate of 5% would be met by January 2003). So, because the majority of RTAs have special provisions for sugar, or have exempted sugar altogether from the trade pact goals (the EU again being the exception), tariff and non-tariff barriers to sugar trade remain a feature of the majority of the selected RTAs. Indeed, some agreements have established an institutional framework for controlling sugar trade. For these reasons, there is presently limited harmonization of intra-regional sugar policy. In part the underlying justification for excluding sugar from the general time frame for trade liberalization within the RTA is due to the fact that there are, and will continue to be, considerable differences between the underlying cost competitiveness and the net sugar trade position of individual member countries, as well as between national sugar policies, with associated differences in sugar pricing on domestic markets. Crucially, though, a general lack of domestic policy convergence creates incentive structures that could ultimately threaten the RTA from a sugar perspective. In particular, perceived unfair competition arising from different domestic support regimes can spark disputes and conflict (discussed further below). The extent to which the net trade position of individual member countries can be an important factor influencing the cohesiveness of an RTA can be aptly illustrated by considering the following perspectives: In MERCOSUR Brazil is by far the dominant sugar industry, dwarfing the sugar industries of the other member states – underlying Argentina’s perception that Brazil provides unfair competition. 218

Government policy

In the Andean Community, the net surplus of Colombia has traditionally been absorbed by Venezuela, but problems arose in the mid-1990s when Venezuela began filling its shortfall by importing sugar from outside the agreement (also once reexporting some back to Colombia). In NAFTA, there is Canada which offers little price support, but the United States sugar policy supports domestic prices well above world market levels. Mexico’s sugar industry targets the higher priced US market for its sugar surplus. In the CACM, production and trade is dominated by Guatemala. In SADC, the surpluses of South Africa and Swaziland are a key focus, but members have an agreed access to each other’s markets under the SADC sugar protocol. In ASEAN/AFTA, Thailand is by far the dominant surplus producer, but intra-regional trade has been impacted by sugar tariffs remaining relatively high due to member governments placing sugar on the sensitive and highly sensitive exclusions list. In the European Union, success has been achieved by having a mechanism to ensure that any net surplus sugar is exported outside the RTA, and not ‘dumped’ on other member countries. Clearly, the ability of the EU sugar regime to dispose of its surplus sugar outside the EU (through its system of production quotas and export restitutions) has been a factor ensuring a cohesive and stable customs union from the sugar perspective. So, in short there would appear to be several factors limiting the effectiveness of regional trade agreements in relation to sugar: The application of special provisions and exemptions for sugar; The absence of an agreed or evenly applied CET for sugar; The lack of harmonized rules for intra-regional trade; and A general lack of internal policy convergence relating to sugar (and sweeteners) between member states in each of the trade blocs, often due to vast differences in the sugar economies of member countries. 219

The world sugar market FUTURE REGIONAL TRADE AGREEMENTS

Not only are many existing RTAs facing difficulties in achieving goals of free trade in sugar (with the scheduled dates for unfettered trade still lying towards the end of this decade or further ahead) but new and emerging RTAs are likely to experience similar problems. Given the significance of the Latin American region to world sugar, potential new RTAs in the region could hold significant implications for world sugar trade. For example, by 2005 the number of RTAs in Latin America is expected to increase although there may be some consolidation. For example, the Andean Community’s agreements with Argentina and Brazil are likely to be superseded by its agreement with MERCOSUR and at least some of Chile’s bilateral RTAs will have been superseded through its membership in MERCOSUR. All of the CACM members will have concluded separate agreements with Mexico to finalize the CACM–Mexico FTA. However, an alternative scenario may occur after the entry into force of the Free Trade Area of the Americas (FTAA), which would cover 34 countries – a key issue for the future is what impact the FTAA would have on the existing five plurilateral agreements.

FREE TRADE AREA OF THE AMERICAS (FTAA)

The eighth Ministerial Meeting of the Free Trade Agreement of the Americas ended on 20 November 2003 with the adoption of a declaration which avoided tough decisions and left many options unresolved. Negotiations between the United States and Brazil were tough, but overall, delegates failed to bridge their wide differences and chose to adopt a broad and vague declaration in order to prevent failure. The declaration adopts a two tiered approach, allowing each country the flexibility to decide its level of commitment according to its needs, objectives and specific capacities. The declaration does not set the level of commitment that will be adopted and much will depend on the level of each participant’s ambition; therefore the exact scope of the agreement will not be clear before the conclusion of the FTAA negotiations. The declaration is far short of the comprehensive agreement being sought by the United States. Brazil continued to be unwilling to enter into commitments on intellectual property rights, investment and services, whilst the United States continued unwilling to negotiate in the area of agriculture. 220

Government policy

The effort to unite the economies of the western hemisphere into a single free trade area began at the Summit of the Americas, held in December 1994. The heads of state of 34 countries in the region11 agreed to construct a Free Trade Area of the Americas (FTAA), in which barriers to trade and investment would be progressively eliminated, and to complete negotiations for the agreement by 2005. Four Ministerial Meetings took place during the preparatory phase of the FTAA process. On the basis of the San José Declaration, the FTAA negotiations were launched formally in April 1998 at the Second Summit of the Americas in Chile. The fifth Ministerial Meeting – the first since the negotiations were formally initiated – took place in November 1999, where Ministers instructed the ten negotiating groups12 to prepare a draft text of their respective chapters (including Agriculture), to be presented at the third Summit of the Americas meeting in April 2001 (held in Quebec City on 20–22 April 2001 and preceded by the sixth Ministerial Meeting convened in Buenos Aires, Argentina, on 7 April). At that meeting, the leaders of the 34 countries agreed again to conclude negotiations on a Free Trade Area of the Americas by 2005. Crucially, the first draft text of nine chapters of the FTAA, including a chapter on Agriculture, was published on 3 July 2001, fulfilling a commitment made at the April Summit of the Americas to make the trade negotiating process more transparent and accessible. There are stark differences in the sugar position of the 34 members of the FTAA, particularly the dominance of Brazil, the United States and Mexico in the proposed pact’s sugar consumption and production. Brazil’s dominance in exports is obvious and the United States and Canada are of key importance in terms of imports. Furthermore, the membership encompasses the small and typically higher cost industries of the Caribbean benefiting from preferential trade agreements (to the United States importantly), as well as 11 Namely Antigua & Barbuda, Argentina, Bahamas, Barbados, Belize, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Suriname, Trinidad & Tobago, United States, Uruguay, Venezuela. 12 Namely Market Access, Investment, Services, Government Procurement, Dispute Settlement, Agriculture, Intellectual Property Rights, Subsidies, Antidumping and Countervailing Duties, and Competition Policy. 221

The world sugar market

the large and most competitive low cost producers, particularly Brazil. The implications for sugar remain unclear, but certainly the negotiations will be extremely complicated reflecting the likely difficulties in harmonizing the sugar policies of the United States, Brazil and Mexico, as well as in maintaining the longstanding trade preferences afforded to the Central and South American developing countries as part of the US raw sugar tariff rate quota. Indeed 24 countries of the planned FTAA membership hold quota access to the United States, and in 2002/03 they accounted for 715,500 tonnes of the total 1.117 million tonne raw sugar tariff rate quota. There is every possibility that the FTAA will utilize special provisions for sugar, designed to manage trade between members, as is readily evident in many other RTAs (some of which have exempted sugar altogether). In part the underlying justification for excluding sugar from the general time frame for trade liberalization within the FTAA or any other RTA is due to the fact that there are considerable differences between the underlying cost competitiveness and the net sugar trade position of individual member countries, as well as between national sugar policies, with associated differences in sugar pricing on domestic markets. Crucially, existing RTAs within the proposed FTAA membership have readily used special provisions for sugar, as discussed above. The sugar trading arrangements of the key FTAA members are therefore already complex, and the extent to which the FTAA negotiations supplant these existing plurilateral and bilateral trade agreements remains a moot question. Crucially, the US sugar industry has repeatedly stated its lack of intention of negotiating on sugar in regional trade agreements. The US industry argues that the conditions of ‘reasonable adjustment periods for import-sensitive commodities’ and ‘safeguard mechanisms’ are not sufficiently adequate to ensure that the planned tariff reductions and moves towards free trade in commodities will not result in a flood of sugar from other surplus sugar producing members of the proposed pacts, thereby proving ruinous to the US sugar industry. At the same time, however, Brazil’s sugar industry and government have indicated their stance of no agreement to an FTAA if sugar is excluded. The United States sugar industry stands out amongst FTAA countries as a highly supported sector (as discussed previously) and even a modest diversion of the 15.2 million tonne export surplus of other FTAA members – see Table 10.13 – to the ‘finely balanced’ US market 222

Government policy Table 10.13 Sugar in the FTAA: 2000/01–2002/03 average Country

Production

Exports

US TRQ allocation

Mexico

5.128

0.246

0.007

Canada

0.094

0.005

–

Caribbean1

0.864

0.487

0.237

Central America

3.633

2.168

0.168

South America

25.917

12.376

0.313

FTAA total

35.636

15.282

0.727

Note: 1 Excluding Cuba.

could not be readily absorbed, creating significant pressures for lowering of the loan rate. Ultimately, should sugar exports from other FTAA members be able to enter the US unfettered, there could be pressure for rationalization of the US sugar industry. Whether sugar will be included in the FTAA free trade goals remains unclear, and certainly the negotiations will be extremely complicated.

THE EU AND RTAs

The EU sits at the centre of a web of RTAs13 and this is due to be extended by free trade agreements with South Africa (originally scheduled to come into force in January 2000), with Mexico, and longer term plans for liberalization with MERCOSUR and Chile, and with the EFTA. Furthermore, enlargement of the EU to 25 countries took effect on 1 May 2004. In terms of preferential trade agreements (PTAs), the EU has granted duty and quota free access for virtually all products exported by the ACP for many years under the successive Lomé Conventions; and for sugar, specifically under the Sugar Protocol and Special Preferential Sugar arrangements. The framework has been recently 13 The EU has notified the following customs union agreements under GATT Article XXIV: Andorra, Cyprus, Malta, Turkey; as well as free trade agreements with Bulgaria, Denmark, Estonia, former Yugoslav Republic of Macedonia, Hungary, Iceland, Latvia, Lithuania, Norway, Poland, Romania, Slovak Republic, Slovenia and Switzerland. There is also a free trade agreement with the Western Balkans (adopted September 2000). 223

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expanded to include the Everything but Arms initiative to cover all products originating in LDCs, including sugar (albeit sugar is subject to quotas until 2008). Economic Partnership Agreements (EPAs) with ACP countries are to be implemented before 2008, providing what the EU believes to be an innovative type of accord, which will combine trade and development issues in ways tailored to national and regional conditions in this group of developing countries.

RTAs AND SUGAR: BUILDING BLOCKS OR STUMBLING BLOCS?

In principle trade blocs run counter to the ethos of the WTO. Despite the fact that they contravene the most favoured nation principle of non-discrimination, RTAs are accepted by the WTO. There are three ways in which exceptions to MFN treatment can be granted. First, Article XXIV of the GATT permits customs unions and free trade areas, provided that restrictions are eliminated on substantially all the trade between the members, that the process is completed within a reasonable period of time (usually 10 years in the WTO) and provided that RTA members do not raise trade barriers against nonmembers. The second exemption is through special and differential treatment, under the 1979 Enabling Clause that permits preferential treatment of developing countries. The third way is under Article IX of the Uruguay Round Agreement which permits waivers from the normal rule for any agreed purpose. The Cotonou Agreement between the EU and ACP countries received a waiver under this Article. So effectively the justification for the WTO’s acceptance of RTAs is that they act as a step in the direction towards promoting greater multilateral trade, in that they at least promote intra-regional trade. However, the jury is still out on whether RTAs are presently leading to an improvement in sugar trade within the pact, and more so if RTAs contribute to liberalizing world trade in sugar generally. As shown in this chapter, sugar is not even part of some RTAs, and is heavily controlled in others – something likely to continue throughout the remainder of this decade. Even new RTAs are facing difficulties in encompassing sugar in their broad liberalization goals. Indeed, the US sugar industry argues sugar should be excluded from the FTAA or any other FTA, and instead points to the much broader multilateral negotiations over sugar and agriculture in the WTO Doha Round, as the only way in which fair trade liberalization can be achieved. 224

Government policy

Conclusions Assistance to the world sugar industry is widespread. Tariffs are common and are sometimes high relative to other agricultural commodities. Other trade policy tools include tariff rate quotas and export subsidies. There are also inter-related domestic support measures such as production quotas, fixed producer prices and regulated consumer prices, as well as constraints on the production of alternative sweeteners and general protection of state-owned industries. Assistance remains generally high to the world sugar sector because the results of the Uruguay Round Agreement on Agriculture for reductions in trade distortions were modest for sugar. Subsequent policy reform, liberalization and privatization have been country specific and unevenly spread through the world sugar economy. The primary focus for sugar policy reform and liberalization is likely to be in the OECD countries, as several countries within the economic grouping continue to offer the highest levels of support to their sugar industries – the United States, the European Union and Japan – and at the same time are major players in the world sugar market. A key driver for the world sugar market over the longer term therefore is sugar and sweetener policy reform, particularly the extent and pace of reform. Unilateral reform pressures are being compounded by regional and multilateral pressures. The WTO negotiations under the Doha Round are geared towards gradually reducing general distortions in agricultural trade, including sugar, whilst in regional trade agreements the goal over the longer term is to eliminate trade distorting support measures. In the United States the move towards a fully integrated sweeteners economy between Mexico and the United States holds significant implications for the US sugar programme. In the European Union, considerable pressure for further reduction in the volume of subsidized sugar exports will arise from the WTO Round, but the key driver for fundamental sugar policy reform is the EBA initiative, especially after 2006 when the phased full liberalization of LDC access commences. ACP producers presently benefiting from preferential access to the EU market face the contraction of SPS sugar running up to 2009 as the EBA sugar quota increases. Any change to the EU’s sugar policy resulting in a lowering of returns to ACP producers remains a real concern for these producers (capturing both relatively high and lower cost sugar producers). Finally, pressures for reform of sugar policy also arise through regional trade agreements. Although sugar has commonly 225

The world sugar market

been afforded a longer time period over which to achieve integration between pact members, target dates are drawing near. Furthermore, efforts to unite the economies of the Americas in the form of the Free Trade Area of the Americas potentially holds significant impacts for the world sugar trade, the extent of which requires further investigation. The implications of sugar policy reform and liberalization for the world sugar market are not transparent and need further research and analysis. Existing quantitative studies provide a range of views about uncertain outcomes. Even so, several key issues can be identified. The nature of global supply response with sugar policy reform and liberalization will be a powerful determinant of future world price stability. Reform might be expected to lead to the centre of world production moving to low cost cane sugar producers (with both higher cost beet and cane sugar producers under threat), but the low responsiveness of cane sugar production will not change, and prices will continue to be characterized by relatively steep declines at times of global surplus. Another key issue in formulating expectations about the implications of sugar policy reform is the nature of Brazil’s supply response. Issues surrounding the country’s future competitiveness and its future role in world sugar price determination need further investigation.

References Australian Bureau of Agricultural and Resource Economics (ABARE), Sugar: International Policies Affect Market Expansion, ABARE research report 99.14, 1999. Burfisher M ed, The Road Ahead: Agricultural Policy Reform in the WTO, USDA/ERS Agricultural Economic Report No. 802, Washington, May 2001. Centre for International Economics (CIE), Targets for OECD Sugar Market Liberalization, Canberra, 2002. Diao X et al, The Road Ahead: Agricultural Policy Reform in the WTO, ERS/USDA, Washington, 2001. Earley T, US Agricultural Policy: The Sugar Program and Prospects for Trade Liberalization, F. O. Licht International Sugar and Sweetener Report, Vol. 134, No. 30, December 2002. Gibson P, Wainio J, Whitley D and Bohman M, Profiles and Tariffs in Global Agricultural Markets, USDA/ERS Agricultural Economic Report No. 796, Washington, January 2001. Haley S, Assessing Economic Impacts of Liberalizing WTO Sugar Tariff Rates and Minimum Access Commitments by the United States, special article in Sugar and Sweetener Situation and Outlook, SSS-231, May 2001. 226

Government policy Haley S and Suarez N, USDA Increases Sugar Marketing Allotments, Sugar and Sweeteners Outlook, SSS-236, USDA/ERS, January 2003. IMF, World Economic Outlook: Trade and Finance, Chapter II, Washington, September 2002, pp. 81–91. F. O. Licht, Sugar Control Extended up to 2005, F. O. Licht International Sugar and Sweetener Report, Vol. 135, No. 8, March 2003. Nyberg J, United States Sugar Policy: Implications for Tariff Rate Quota, NAFTA and CBI Countries, paper presented to FAO/Mozambique, Third International Sugar Conference, Maputo, October 2002. Price J, European Union Sugar: The EU Sugar Policy, the Agrimonetary System, GATT and the WTO, ED & F Man Sugar Ltd, London, 1996. Wohlgenant M, Effects of Trade Liberalization on the World Sugar Market, FAO, Rome, 1999.

227

C H A P T E R

11

Sugar crops for biofuels and other emerging drivers

Looking to the longer term horizon several prospective developments have the potential to significantly impact the world sugar market. First, new production technologies, particularly gene technology, hold the promise of substantial further productivity gains which, whilst improving profitability for some industries, will also contribute to a continuation of the long term decline in inflation adjusted world sugar prices. Second, environmental policies offer both challenges (higher compliance costs to meet government regulations and standards) and opportunities, particularly sugar crops for biofuels to help meet urban air quality targets and greenhouse gas abatement targets implemented in terms of the Framework Convention on Climate Change and the Kyoto Agreement.

Gene technologies to drive cost competitiveness As trade policy and domestic support interventions are gradually removed over the longer term, then cost competitiveness between suppliers will become paramount. One key driver for huge improvements in crop yields and cost efficiencies is the potential for biotechnology (gene technologies) to produce superior varieties. Specifically, gene technology offers the opportunity to make specific and targeted improvements to sugar crops at lower cost and more rapidly than conventional breeding. Sugar cane with introduced genes conferring resistance to bacterial diseases, viral diseases, insect pests or herbicides, and genes 228

Sugar crops for biofuels and other emerging drivers

with the potential to improve sugar yield and quality, has progressed to controlled field testing in several countries (including Australia, Brazil, Cuba, South Africa and the United States). Work on these trials continues and is focused on better understanding how to control the expression of genes in sugar cane. Work is also underway on the development and application of molecular markers for sugar cane improvement. Map based cloning targeted at a rust resistance gene is underway (France). Molecular markers linked to genes associated with sucrose accumulation have been identified (USA). A major effort is underway to sequence genes expressed during sugar cane development (Brazil, with smaller programmes in Australia and South Africa).1 Sugarbeet is further ahead, with transgenic varieties developed in the United States and some European countries (tolerant to herbicides) ready to be distributed to growers as soon as processors are prepared to produce sugar from GM crops. In the longer term, those countries which best grasp the opportunities offered by gene technologies may derive a substantive competitive advantage in the world market, but not until the massive credibility problem with consumers and public opinion against genetically modified foods is overcome in industrialized countries. This resistance seems to ignore the fact that sugar produced from transgenic sugar cane does not contain DNA and that sugar produced from a GM plant cannot be distinguished from that produced from a non-GM plant. Part of the solution may be to point to the potential environmental benefits of transgenic cane and beet varieties, such as less use of herbicides and pesticides.

Environment policy Environmental issues are also likely to impact cost profiles and act as yet another driver of relative competitiveness. Sugar industries have at least four long term environmental impacts: air pollution, including impact on global warming; soil loss and degradation; water use and pollution; and biodiversity impacts in unique ecosystems. 1 Reported in R Birch, Biotechnology: Potential in World Sugar, paper presented to WSRO Conference ‘The Sugar Industry’s Debate: GM Technology’, Germany, May 2000. 229

The world sugar market

Considerable differences exist between regions and countries regarding government environmental legislation and the related compliance costs imposed on sugar industries to meet set environmental standards by investing in various pollution prevention and treatment measures. In some developed countries, environmental compliance costs are likely to be less than the benefits gained from government support measures to sugar production, an important issue in the European Union where sugarbeet factories have to meet some of the highest environmental standards in the world. For sugar industries in those countries in which governments are only beginning to address environmental issues the compliance costs would impact their cost structures and their competitiveness on the export market. However, to gauge the possible extent of those compliance costs is difficult as few indicative figures of such costs are in the public domain.

Sugar crops for biofuels Increasing global renewable energy requirements offer a significant opportunity for the world sugar economy to expand sugar crop production and introduce another revenue stream to enhance profitability. Should industries other than Brazil’s develop a switch capacity between ethanol and sugar production, then there would also be implications for sugar price stability. Both beet and cane are important sources of renewable transport fuels (see Box 11.1 which illustrates the renewable energy potential for sugar cane), the market for which is expected to grow

Box 11.1 Sugar cane as a renewable energy source The sugar cane plant is nature’s perfect storage device for solar energy, with one of the highest energy to volume ratios among energy crops. In spite of its renewable energy potential, the commercial value of sugar cane has for centuries been based on extraction of sucrose for use as a sweetener. Only more recently has it been widely recognized that the sugar cane plant offers bioenergy resources that are potentially more valuable than sugar. Energy based on the two main resource streams of the cane plant that are separated at the factory – sugar and fibre – can be tapped through cane ‘co-products’ that are physically 230

Sugar crops for biofuels and other emerging drivers

linked to cane or sugar production through raw materials and/or simultaneous processing. The fibre resource stream includes bagasse, the outer residue of the cane stalk that is sent to the boiler to provide energy to the factory. Fuel is also available from cane trash – plant tops and leaves that are left in the fields. Modern cogeneration systems can use bagasse and cane trash to provide a marketable surplus of heat and electricity. Advanced steam turbines can increase electricity production by a factor of 10 and combined cycle systems by a factor of 20 over the typical back pressure turbine units installed at sugar factories. The ready availability of bagasse and the need to dispose of any excess results in an extremely cost effective biomass resource, with fuel costs that are zero or even negative. Economic viability is highly sensitive to the amount of power exported per unit of capital investment and thus depends upon year round operation, with supplemental fuels during the off season, and a large generating capacity relative to the internal electric demands of the mill. In addition, process steam requirements need to be reduced per tonne of cane. The sugar resource stream includes fermentable sugars in cane juice or molasses that provide raw material for production of ethanol. Recent advances in hemi-cellulose conversion methods also potentially allow use of bagasse as an ethanol feedstock. Ethanol content of 20–25% can be blended with gasoline without engine modifications. Ethanol boosts the octane of gasoline, providing an alternative to lead, which is still used widely in the developing world despite its harmful health effects. Ethanol also finds valuable markets in the pharmaceutical, chemical and potable spirits industries. The organic wastewater stream from ethanol production – known as vinasse – provides further energy resources by conversion into clean-burning methane gas. Bioenergy from sugar cane thus offers an unusually versatile renewable energy resource, providing energy services in all major forms – electricity, heat (cogeneration), gas (methane) and liquid (ethanol). There are also many non-energy cane co-products ranging from particleboard to plastics to animal feeds that are somewhat lower in volume and near-term commercial value but nevertheless provide added value and economic flexibility in utilizing the cane resource. Product diversity reduces risks to sugar companies and associated stakeholders, which is especially valuable in the developing world where fluctuations in commodity prices and weather conditions can cause severe hardships.

231

The world sugar market

US$/barrel

30 25 20 15 10

US cents/lb

14 13 12 11 10 9 8 7 6 5 4

35

96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 n Jul an Jul an Jul an Jul an Jul an Jul an Jul an Jul J J J J J J J

Ja

Average 2 month Brent $/bl

ISA price

11.1 Sugar vs oil quotations.

markedly as both regulatory pressure addressing environmental issues (particularly urban pollution and climate change) and the economic value of non-fossil fuels increase. Even so, the magnitude of the fuel ethanol2 opportunity will be dependent to a varying extent on the future path of petroleum prices and a variety of policy interventions (i.e. related to sustainability, energy and taxation as well as agriculture and rural development policy). It is no accident that renewed interest in ethanol from the sugar world originated in late 1998 and early 1999 when price developments in the sugar and oil markets started to diverge. Sugar prices were suffering a downturn, but then oil and petroleum prices surged, leading some governments and industry analysts to believe bioethanol schemes had become much more economically viable than ever before (Fig. 11.1). Countries including Australia, Colombia, India, Thailand, Peru and Ecuador are considering the feasibility of, or are already beginning to implement, large-scale ethanol production from sugar cane and sugar by-products with the support of their national sugar industries and respective governments,3 while Mexico has proceeded as 2 Ethanol is a high octane oxygenated hydrocarbon produced from the fermentation of sugar or converted starch. Its chemical formula is C2H5OH, and it is commonly known as alcohol. Ethanol blended with gasoline at concentrations of 5 or 10% serves as an oxygenator, enhancer and extender. 3 Elsewhere in Asia, both Taiwan and Japan are looking to import ethanol for blending with gasoline, whilst China is moving towards producing fuel ethanol from corn. 232

Sugar crops for biofuels and other emerging drivers

far as to undertake pilot ethanol programmes to combat urban air pollution. For some sugar industries, Brazil serves as a plausible model for the future development of an integrated sugar and ethanol industry, but the extent to which this model can be replicated is uncertain, especially when Brazil’s success in technical advance and cost reductions partly reflects previous supportive policies over a long time period (mid-1970s to mid-1990s).

Commercial viability The terms ‘commercial viability’ and ‘commercial feasibility’ are normally used interchangeably and refer to there being sufficient expected profitability from ethanol production, which may be conditional on government support. We also need to be mindful of commercial viability related to the continued operation of existing capacity as opposed to commercial viability of planned investment in the creation or expansion of an industry. At the simplest level there are three key drivers of commercial viability. The first is the price of sugar – as it represents the opportunity cost of the sugar crop used to produce ethanol. The second is the price of crude oil – which drives the price of gasoline, providing a benchmark against which to gauge the competitiveness of ethanol. The other key determinant of commercial viability is the existing level of government support, expectations about its continuance, and possible new forms of future support.

CONDITION 1: OPPORTUNITY COST

The opportunity cost for ethanol production from sugar crops is the return otherwise achievable from sucrose production. In other words, determining the commercial feasibility of producing ethanol from sugar cane/beet involves a comparison of alternative revenue streams from sugar cane/beet with ethanol or raw/white sugar product forms. More specifically, in the case of sugar cane, the implied opportunity cost of ethanol production varies according to the feedstock used. The value of the embodied sucrose in C molasses is far less than a distillery using A and B molasses (as done in Brazil), whilst the cost of sugar cane juice as a fermentation feedstock would be 233

The world sugar market

the raw sugar values minus savings (in operating, energy, capital) relating to the operation of the ‘process end’ of the sugar factory. C molasses, typically a low value by-product of cane based sugar (its value often set by the livestock feed market), offers the lowest cost substrate (yielding 270 litres of ethanol per tonne at 50% fermentable). If distillers paid the true value of sugar contained in C molasses, then ethanol production costs would be higher. Taking sugar as a feedstock gives the upper limit to possible feedstock costs. Opportunity cost also varies with changes in sugar price. B molasses might be used for ethanol production when the export price of raw sugar is at the lower end of its range. Ethanol vs sugar The opportunity cost of ethanol production is not of theoretical relevance. Relative returns as between sucrose and fuel ethanol are a key factor driving the allocation of cane as between sugar and ethanol in Brazil, the world’s biggest sugar/ethanol industry. The trade-off between relative sugar and alcohol returns (ex mill) is illustrated in Fig. 11.2. The oblique line shows the point of breakeven between the two products. To the left of this line, the profitability of alcohol is greater, and to the right, the profitability of producing sugar is greater. The position of break-even of course depends on the yields of alcohol and sugar per tonne of cane crushed (average assumed to be 74.5 litres of alcohol and 0.14 tonnes of sugar).

0.60 Alcohol US$/litre

0.50 0.40 0.30 0.20 0.10 0.00 0

100

200 Sugar US$/tonne

11.2 Alcohol vs sugar. 234

300

400

Sugar crops for biofuels and other emerging drivers 0.4 RS/kg of total reducing sugars

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 1999

2000

2001 Export sugar

2002

2003

Anhydrous alcohol

11.3 Brazil: value of cane for different uses.

The relative profitability of export sugar as against domestic ethanol is shown in Fig. 11.3 for the past few seasons. During 2001/02, export sugar was more profitable but during much of 2002 the export sugar value of cane exceeded that of alcohol. A surge in domestic alcohol prices early in 2003 but declining returns from the export market (lower world market prices and a strengthening real against the US dollar) once again made ethanol more profitable. Millers are therefore constantly comparing returns from the three markets: domestic sugar, domestic alcohol and export sugar, inducing a significant swing capacity between alcohol and sugar production. In the United States, because of the sugar programme, the opportunity cost of using beet and cane for fuel ethanol is too high as against using sugar crops for their sucrose content. The same is true in the European Union, where sugarbeet used for bioethanol production (incidentally beet are the dominant feedstock for the production of ethanol for ethyl tertiary butyl ether (ETBE) in France) are typically dedicated crops grown in set aside land.

CONDITION 2: ETHANOL PRODUCTION COSTS VS GASOLINE PRICES

The issue of ethanol costs versus price of gasoline is critical and underlies the need for fiscal incentives to attract investment in 235

The world sugar market

biofuels’ productive capacity. For a given crude oil price, an ex refinery price for gasoline can be derived. From this can be estimated a maximum competitive price for ethanol, against which expected costs of production can be compared. In a nutshell, over the past decade or longer, despite technological progress in the biofuel/ ethanol production process that has lowered the unit costs of production, the economics spoke always in favour of conventional fossil fuels. Therefore, the profitability of biofuels production has depended heavily on the extent of subsidies or other fiscal incentives afforded them by governments, and the taxation levels imposed upon fossil fuels as against ethanol. Consequently, development of large biofuel sectors, including ethanol from sugar crops, has only occurred in countries where governments have advanced support in the form of favourable fiscal regimes and other forms of support. Ethanol production costs Let us consider more closely the key components of ethanol production costs, and how production costs vary with feedstock costs and with the scale of production. In general, though, estimating the cost of ethanol is complicated because of the large number of specific factors involved. At the most simple, the cost of producing ethanol varies with the cost of the feedstock used and the scale of production. In reality, ethanol production costs also vary considerably according to location, age and the type of technology. The key components of ex distillery cost for fuel ethanol include: feedstock costs, plant operating costs, capital cost recovery and profit. These four key cost components hold true for ethanol produced from sugar crops or from starch sources such as cereals. The relationship between the four key cost components and plant size is illustrated in Fig. 11.4 for ethanol from C molasses, given specific assumptions regarding the cost of C molasses, ethanol yields, project life, project financing and the required internal rate of return – 10% in this case. As shown in Fig. 11.4, operating and capital costs reduce markedly per litre of ethanol produced, as plant capacity increases. But feedstock costs remain constant in absolute terms, irrespective of capacity. This illustrates how important low feedstock costs are to achieving a competitive cost level for ethanol.

236

Sugar crops for biofuels and other emerging drivers 120 100

Index

80 60 40 20 0 10ML/year

30ML/year

100 ML/year

Plant size Profit

Operating

Capital

Feedstock

11.4 Ethanol costs by component: molasses feedstock (based on Enecon Pty Ltd, Ethanol Scoping Study Report, Johnston Shire Council, Queensland, Australia, 2001).

Feedstock costs For cane, feedstock costs vary according to whether using C molasses, B molasses or A molasses, or sugar syrup. Each has a different market price and a different opportunity cost. Crucially, ethanol yields from each feedstock differ significantly, and typical yields are given below: C molasses: 270 litres/tonne (purity – 55). B molasses: 350 litres/tonne (purity – 72). A molasses: 410 litres/tonne (purity – 83). Sugar syrup: 425 litres/tonne. Sugar: 620 litres/tonne. (The theoretical yield from the fermentation of sugar is 630 litres per tonne of sugar. Allowing for 95% efficiency in an industrial plant we suggest a figure of 620 litres.) C molasses is most often the cheapest feedstock because its value is normally set by its worth in livestock feed applications. But where there is insufficient availability of C molasses to meet expected fuel ethanol demand, the price will rise and consequently there may be sufficient incentive to use A and B molasses as a feedstock. Post-

237

The world sugar market Table 11.1 Ethanol production cost estimates United States

Variable costs @ US$0.25/litre from corn

Brazil

US$0.15–0.21/litre from sugar cane juice/ molasses

Australia

US$0.30/litre from C molasses

European Union

US$0.48/litre from sugarbeet US$0.60 if beet valued at EU quota value

All cost estimates higher if expressed in terms of gasoline equivalent. The energy density of a litre of fuel ethanol is 70% that of gasoline.

extraction cane juice containing around 13.5% fermentables is the other obvious feedstock. For beet, feedstock costs benefit from an important co-product – beet pellets – sold for livestock feed, effectively lowering the net feedstock costs (similarly for ethanol produced from cereals). Condensed molasses solubles (CMS) from cane molasses is a lower value product and is mainly used for dust suppression in animal feeds. Other costs Added to the unit costs of the feedstock are the unit costs of other major components including capital charges, cost of labour and process energy input costs. Capital charges vary project by project but in general terms investors will target a rate of return commensurate with their perception of risk to that particular fuel ethanol project. If there is a perception of high commodity risk, investors will factor in a higher risk premium and, perhaps too, a shorter payback period on their initial investment. Up-front capital expenditure and consequent capital charges per unit of output also are driven by the technology chosen for fermentation, distillation and waste disposal and by the mode of operation. Production cost estimates In Table 11.1, several production cost estimates for fuel ethanol as given in the recent literature are collated. The highlight is the strong competitiveness of Brazil against gasoline and crude oil. According to a leading Brazilian analyst,4 by late 2000 a new paradigm had 4 Dr Pilinio Mário Nastari, Brazil’s Market Dominance: A Reason to be Frightened?, paper presented to 9th ISO Seminar, ‘Hot Issues for Sugar’, London, November 2000. 238

Sugar crops for biofuels and other emerging drivers

arisen in the Brazilian industry, as ethanol was being produced at a cost that was competitive with the price of gasoline in the world market. Anhydrous ethanol can be produced in centre–south Brazil at US$28.40 per barrel (at exchange rate of R$1.96/US$) meaning that it can compete with gasoline in the world market, when the price of crude oil is between $22.70 and $23.70/barrel. Brazil’s currency has devalued significantly against the US dollar since that time (reaching a high of R$4.00/US$ mid-October 2002), clearly lowering the threshold world market price of crude oil against which Brazilian fuel ethanol is competitive. However, the scale of the Brazilian distillers is very important: these are large-scale units achieving significant economies of scale and throughput, utilizing state of the art technology and using bagasse as a major part of the fuel source for distillation. Costs could be significantly higher for smaller-scale distillers in other countries. Furthermore, in Brazil, over the course of two decades, new technologies have increased sugar and fermentation yields significantly.5 Increased field productivity, development of cane varieties, better soils and fertilizer practices and increases in the sugar content of cane (from 9.5% in 1977 to 14% in 1999) were all important factors. New technologies and control of industrial processes were developed with gains of up to 17% in fermentation yield (from 75% in 1977 to up to 92% today). In 1997 fermentation yield was 70–80% in distilleries, but now it is 85–92%. Better extraction of the juice from cane was also important. Together, these factors have increased ethanol productivity from 3–4 cubic metres/ hectare to 5–10 cubic metres/ha (expressed in absolute ethanol/ha). Not only has this impressive productivity gain been a key driver lowering production costs, it also has meant a smaller sugar cane area than would otherwise have been needed to meet ethanol demand. A study in Australia6 estimates total production costs for fuel ethanol at $A0.56/litre (US$0.30), assuming a C molasses feedstock valued at $A50/tonne. That level was found to be competitive with gasoline with an exchange rate of US$0.50, a crude oil price of 5 Amorim Henrique, Fermentec S/C LTDA, Brazil: The Process of Industry Consolidation, paper presented to F. O. Licht’s World Ethanol 2000, London, November 2000. 6 ABARE, Factors Impacting the Commercial Viability of Ethanol Production, report to client, Canberra, 2001. 239

The world sugar market Table 11.2 Ethanol production costs in Germany Plant size Raw material

500,000 hl Wheat €/hl

500,000 hl Beet

%

€/hl

%

2,000,000 hl Wheat

2,000,000 hl Beet

€/hl

€/hl

%

%

Plant buildings

1.28

2.1

1.28

1.9

0.82

1.5

0.82

1.4

Machinery Total investment

8.28 9.56

13.4 15.5

8.28 9.56

12.5 14.4

5.30 6.12

9.6 11.1

5.30 6.12

8.9 10.3

Labour

4.26

6.9

4.26

6.4

1.40

2.5

1.40

2.3

Insurance, fees and reparation

1.60

2.6

1.60

2.4

1.02

1.9

1.02

1.7

Feedstock (inc transport)

27.75

44.9

35.10

52.8

27.75

50.5

35.10

58.9

Energy and enzymes

18.68

30.2

15.93

24.0

18.68

34.0

15.93

26.7

Gross production cost

61.85

100.0

66.45

100.0

54.96

100.0

59.57

100.0

By-product

-6.80

-11.0

-7.20

-10.8

-6.80

-12.4

-7.20

-12.1

Net production cost

55.05

89.0

59.25

89.2

48.16

87.6

52.37

87.9

Source: O Henniges, Wirtschaftlichkeit und Potenzial der Bioethanolproduktion im internationalen Vergleich, Diplomarbeit, Institut für Landwirtschaftliche Betriebslehre, Universität Hohenheim, StuttgartHohenheim, August 2002, p 59.

US$32/barrel, and factoring in an excise exemption of $A0.38/litre. Costs would be significantly higher using A or B molasses. The European Commission in framing its draft legislation on targeted biofuels incorporation noted that at ‘current’ oil prices ($25/barrel), biofuels are not competitive. Biofuel production costs were put at €0.5/litre (equivalent to US$0.48 at April 2002 values). This costing is supported by an analysis of prospective ethanol production costs in Germany from both wheat and sugarbeet, putting production costs at between €0.48 and 0.60/litre (see Table 11.2). Maximum ethanol selling price driven by gasoline price A key question for any prospective ethanol producer is what is the relevant gasoline price benchmark against which to determine the competitiveness of ethanol. Put another way, commercial feasibility is heavily dependent on the prospective selling price for ethanol. And the maximum competitive price for ethanol will be set by the ex refinery price for gasoline or the cif cost of imported gasoline, depending on a country’s status as a net exporter or importer of oil and gasoline. Therefore it is crucial for investors in ethanol to understand the drivers of the prices of gasoline, including the relevant exchange rates and the potential volatility in world 240

03/01/2003

03/07/2002

03/01/2002

03/07/2001

03/01/2001

03/07/2000

03/01/2000

03/07/1999

03/01/1999

03/07/1998

03/01/1998

03/07/1997

03/01/1997

03/07/1996

03/01/1996

03/07/1995

35 30 25 20 15 10 5 0 03/01/1995

US cents/litre

Sugar crops for biofuels and other emerging drivers

11.5 US Gulf unleaded regular gasoline waterborne barges.

oil prices and derivates as illustrated by Gulf gasoline prices in Fig. 11.5. Put simply, if ethanol production costs are greater than the implied maximum competitive price (and don’t forget that the selling price of ethanol has to allow a suitable margin to yield a satisfactory return on the high capital cost of ethanol production), then commercial viability can only be achieved with government support for ethanol. The oil price: long term outlook is critical From a longer term perspective what is important to biofuel schemes is the expected price of oil. Of course, advocates of biofuels have consistently argued that energy fuels, particularly oil, are severely underpriced because a variety of externalities associated with fuel use are not fully taken into account in their pricing. Externalities most directly tied to fuel use are air, water and land pollution associated with discovering, extracting, processing and distribution of the fuel, including emissions of greenhouse gases (GHGs). But the market price of oil is unlikely to reflect such externalities in coming years, so the benchmark will remain. Forecasting future oil prices is fraught with difficulties, but a moderate view might be that using a classical supply–demand framework (which economists typically do), it is hard to escape the conclusion that the oil market has built-in mechanisms for returning the oil price to near its long run level of around $22 per barrel, although there still remains ample potential for under and overshooting when short term factors gain an upper hand (such as OPEC behaviour). Indeed, prices have remained well above the long term 241

The world sugar market 50 45

$/bl cif Rotterdam

40 35 30 25 20 15 10 5

l9 Ja 6 n 97 Ju l9 Ja 7 n 98 Ju l9 Ja 8 n 99 Ju l9 Ja 9 n 00 Ju l0 0 Ja n 01 Ju l0 Ja 1 n 02 Ju l0 2 Ja n 03 Ju l0 3

Ju

Ja

n

96

0

Regular unleaded

Unleaded premium

2 month Brent

11.6 Spot crude and product prices.

average since mid-1999 – as is evident in Fig. 11.6. A key mechanism is that at any price in excess of non-OPEC production costs (marginal costs of around $15–20 per barrel), there is an incentive for non-OPEC producers to increase exploration and production activity, which in turn pushes the price back down, although with a lag as new investment will take at least two years to impact production levels. (However, there are other analysts who believe nonOPEC reserves are very limited and expensive to exploit.) One respected agency, the US Department of Energy, forecasts that the average world oil price will gradually strengthen over the course of the next 17 years to reach US$25.50/barrel in 2020 (expressed in year 2001 dollars) from a 2001 level of US$22.48/barrel.7 Accepting that oil prices are likely to tend towards a long run level of around US$22–24/barrel (in year 2001 prices), then it is difficult to escape the conclusion that some biofuel schemes will require ongoing government support to remain competitive, unless there is a dramatic shift in the technology of ethanol production to lower costs (the focus here is on ethanol from lignocellulose, presently subject to substantial research and development efforts). 7 USDOE, Annual Energy Outlook 2002 with Projections to 2020, Report No. DOE/EIA-0383 (2003), 9 January 2003. 242

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Other cost issues The future for biofuel schemes is not solely about the relative costs of ethanol as against petroleum or the relative costs of CO2 abatement through biofuels use. There is the need to consider the infrastructure cost of new fuels; the measures needed for gradual displacement of conventional fuels; and even supply issues for ethanol when the resource base may be limited or have competing uses. There is also the need to factor in costs of waste product disposal (vinasse/dunder).

CONDITION 3: GOVERNMENT SUPPORT

The importance of long term government support to biofuels simply reflects the fact established above: that the costs of biofuels historically have exceeded the price of gasoline they replaced, or the price of other oxygenates. It might therefore be instructive to consider the nature of government support, not only to the two biggest players (Brazil and the United States), but also to the smaller-scale programmes in France and Spain. The extent of government support for fledgling schemes is than assessed with a view to better understanding their longer term future. Brazil Brazil’s massive ethanol industry is now operating more or less in a deregulated environment (apart from the mandatory inclusion of ethanol in gasoline). But deregulation and reform of the fuel alcohol sector only began in the late 1990s, whereas PROALCOOL was launched in 1975 with massive support by the government. Today, the reformed ethanol sector still benefits from a captive market for anhydrous alcohol but prices are freely determined by the market. Crucial also is the fact that ethanol still benefits from a favourable tax excise arrangement as against gasoline. Gasoline attracts a tax of R$0.5709/litre whereas anhydrous ethanol is taxed at 0.06/litre and hydrous at 0.0485/litre.8 This is against the pre-tax price level of R$0.75/litre for gasoline, R$0.66 for anhydrous ethanol and R$0.60 for hydrous ethanol. 8 Source: Luiz Carlos Correa Carvalho, The Brazilian Ethanol Experience, paper presented to Seminario Internacional de Alcohol Carburante, Cali, Colombia, 17–18 June 2003. 243

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United States In the United States the key production incentive is the 52 cents/gallon (13.7 cents/litre) tax break, scheduled to fall to 51 cents (13.4 cents) in 2005. Without it, production of ethanol would not be viable against its main competitor, gasoline. In addition, 15 states also offer production incentives. Mandated markets have also been a key factor supporting the ethanol sector. Key among these are the Clean Air Act of 2002, the reformulated gasoline programme and the winter oxygenated fuels programme. European Union Presently only 7 of the 15 member states have tax relief in place for fuel ethanol: Spain, Germany and Sweden offering 100%; Finland offering 51%; Italy offering 42%; and as of 1 January 2005, the UK with 44% tax relief on fuel ethanol. In France, a differentiated rate of excise duty is applied to biofuels (after the EU Council of Ministers in March 2002 approved a derogation under Article 8.4 of Directive 92/81/CEE). Until recently the excise duty used could not exceed €0.53/litre for bioethanol used in authorized mixtures. The limits were set to limit tax losses to the government’s budget. The French government recently lowered the exemption to €0.38/litre because they saw too great a gain to biofuels as a result of the high world crude oil prices. All EU member states are now able to exempt biofuels from the present tax on mineral oil products following the adoption, at the end of October 2003, of the directive restructuring the framework for the taxation of energy products and electricity. Fledgling schemes None of the fledgling schemes envisages fully applying the Brazilian model of mandated blending ratios of as high as 25%. Australia at most will blend 10% ethanol in gasoline, with the government hoping the tax exemption for ethanol, together with the incentives offered under the Greenhouse Gas Abatement Scheme, will be sufficient to attract the interest of petroleum companies to commence blending. India’s government has approved a 5% blend (but in a later phase will approve a 10% blend) and Thailand has a 10% blend with fiscal and other production incentives (see pp. 250–5). The longer term success of these government incentives in ensuring a commercially viable and sustainable ethanol sector remains to be seen. 244

Sugar crops for biofuels and other emerging drivers OTHER ISSUES IMPACTING COMMERCIAL VIABILITY

There are several other issues impacting commercial viability.

Market acceptance First, there is a need to ensure consumer acceptance of gasoline blended with ethanol. To reduce the risk of low consumer acceptance, effective quality control of blends would appear to be a key requirement. There may be a need for a concerted marketing campaign to ensure acceptance.

Optimization of co-products The commercial feasibility of ethanol production may be enhanced if investors also aim to optimize the co-products from production: particularly the use of bagasse from the cane feedstock to generate electricity for sale to the national electricity grid. Can such synergies be realized in all countries embarking on a fuel ethanol programme?

Optimal use of vinasse An important issue is how to extract energy optimally from the waste streams of the distillery. Income can be gained by transforming vinasse into biofertilizer and biogas. It can also be used as a boiler fuel and as a partial replacement for molasses in animal feeds. Perhaps then, optimal utilization of vinasse can also contribute to attaining commercial viability for ethanol production.

Availability of imported ethanol Finally, there is the issue of the availability and competitiveness of imported ethanol. Crucially, what is the government’s policy treatment of imported ethanol – applied tariff rates? Would imported ethanol qualify for the excise exemption applicable to domestically produced ethanol? Typically, fuel ethanol programmes have been launched very much based on domestic production capacity rather than imported ethanol. That was clearly illustrated in 2002 when the Australian government quickly moved to change the mode of support to the industry when a Brazilian cargo of ethanol was destined to be imported into the country. 245

The world sugar market 400 350

000 tonnes

300 250 200 150 100 50 0 Austria

France

Germany

Italy

Spain

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11.7 Biofuels in Europe: 2001.

Fuel ethanol programmes: state of play EUROPEAN UNION: DIRECTIVES TO BOOST BIOFUELS

The EU Commission (DG transport and energy) first proposed in November 2001 two draft directives on liquid biofuels, targeting increased use of crop based, non-polluting fuels. Specifically the Commission’s first draft directive mandated for an increasing proportion of all diesel and gasoline sold in member states to be biofuel, whilst the second directive allowed members to apply differentiated tax rates in favour of biofuels (would amend Directive 92/81 on excise duties for mineral oil), fully recognizing the fact that liquid biofuels are not competitive against gasoline and diesel on a cost basis. The target in the proposed directive was for biofuels to account for 2% of all fuels used in the EU transport sector by 2005, rising to 5.75% by 2010 – as shown in Fig. 11.7. This compared to an estimated use of non-polluting renewable biofuel – made from rapeseed, sugarbeet and grain – of 700,000 tonnes in 2001, or 0.3% of all fuels used in the EU transport sector. Six members contribute to the EU’s biofuel production, but France is the dominant producer (49%), followed by Germany (20%), Italy (14%), Spain (7%), Sweden (7%) and Austria (3%)9 – see Fig. 11.7. There are currently three fuel ethanol producers: France, Spain and Sweden. In 2002 France lost its leading position to Spain, which is rapidly expanding production. 9 Alcohol production from all origins was 216 million litres in the EU 15 in 2001. 246

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Biodiesel production is growing strongly in France, Germany, Italy, Spain and the United Kingdom. Member states would have the flexibility under the legislation to choose the best way to implement the guideline. In order to achieve the targets ethanol could either be used to produce ethyl tertiary butyl ether (ETBE) – a fuel oxygenate in direct competition with methyl tertiary butyl ether (MTBE) – or in gasoline blends of around 5%. Biodiesel (from rapeseed) would also be used in blends with conventional diesel (typically 10% but up to 30%). Clearly, were these two proposed directives to become law, production and use of biofuels would grow markedly. The Union Européenne des Producteurs d’Alcool (UEPA) projected that biofuels consumption in the EU 15 could reach between 8.4 billion litres and 14 billion litres by 2010,10 depending on views regarding the energy content of biofuels as against the gasoline they replace. However, in April 2003 the EU Council adopted legislation which did not include mandatory targets but instead ‘voluntary’ or indicative targets. Several member states, the EU oil industry and some environmental NGOs had difficulties with the mandatory approach. Cited reasons include: The extent of crude oil substitution is minor (target of only 5.75%); The cost of carbon dioxide (CO2) abatement through the use of biofuels is high compared to other alternatives (because of the required fiscal incentives); Set aside land (upon which energy crops will have to be grown under the EU CAP provisions) will not be sufficient for the targeted production volumes; and Significant differences exist between member states’ policy objectives, raw material availability and alternative energy sources. Not only are the targets indicative but member states also have the possibility of deviating from the national targets according to three main reasons: limited potential for biofuel production; the amount of resources allocated to production of biomass for energy uses other than in the transport sector; and the existence of national policies 10 UEPA, Bioethanol: The Long Term Outlook, paper presented to World Biofuels 2002, Seville, 23–24 April 2002. 247

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that allocate comparable resources to the production of other transport fuels based on renewable energy sources. Interestingly, the European Commission is to report on progress made in achieving the indicative targets before 2007, and based on the findings, the Commission may propose new legislation to adapt the targets or to set mandatory targets. The other key legislation is the Directive on Taxation of Energy Products, adopted in October 2003, which sets out minimum levels of taxation for all energy products. Under the directive, member states are allowed to exempt products that contain renewable substances for a period of no more than six years.

UNITED STATES: PROPOSED RENEWABLE FUELS STANDARD AND MTBE PHASE-OUT

There are two drivers for rapid expansion of fuel ethanol offtake and production in the United States (Fig. 11.8). The first is the planned phase-out of MTBE – a petroleum derivative – first in California, but in total by 14 states starting in 2004, and ultimately by 19 states. This is because of health related and environmental concerns. MTBE has been added to meet an oxygenate requirement mandated by US federal law. Estimates of ethanol demand in California for methyl tertiary butyl ether (MTBE) replacement (likely to commence end-2003) vary from 2.5 to 3.6 billion litres, representing a four to sixfold increase in the state’s use of ethanol. However, there are several key drivers determining if these amounts will actually be needed: ethanol–gasoline blending economics, and the gasoline formulating practices adopted by the state’s gasoline refineries

Billion litres/year

20 15 10 5 0 2001

2002 Existing

11.8 US ethanol production capacity. 248

2003

2004

New entrants

2005

Sugar crops for biofuels and other emerging drivers

and marketers. Nationwide, some analysts estimate that efforts to phase out MTBE could double demand for ethanol within four years, creating an industry to match that of Brazil in scale. That’s big news in the context of the global ethanol market (F. O. Licht puts world fuel ethanol production at 20 billion litres in 2001). The US ethanol sector has instigated a rapid expansion over the past two years in anticipation of the MTBE phase-out and production has increased markedly as shown in Fig. 11.9. The US ethanol industry set an annual production record of 10.6 billion litres in 2003, an increase of more than 32% from 8.06 billion litres in 2002 and 91% from 5.56 billion litres achieved in 1999. The new markets in California, New York and Connecticut added last year (where the gasoline additive MTBE has been banned) helped boost demand, but will not be fully felt until 2004. Seven new ethanol plants opened in 2003, adding 300 million gallons of production capacity. This brings the number of plants to 72 with a total current production capacity of 11.7 billion litres. Fifteen plants are presently under construction and, when operating, will boost ethanol production to 14 billion litres, rivalling the present size of Brazil’s ethanol sector. The second driver for booming ethanol demand is a possible renewable fuels standard as part of a comprehensive US energy bill. On 5 June 2003 the US Senate passed a renewable fuels standard (RFS) as part of its comprehensive energy bill proposal. The House passed its version of the energy bill including an RFS in August 2003. A comprehensive bill was put before Congress late in 2003 (con-

1 0.9 0.8

Billion litres

0.7 0.6 0.5 0.4 0.3 0.2 1997

1998

1999

2000

2001

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2003

11.9 US: monthly fuel ethanol production. 249

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ference report to H.R. 6, the Energy Policy Act of 2003) including the following provisions: Renewable fuels standard (RFS) – doubles the minimum use of ethanol to 5 billion gallons per year by 2012. Volumetric Ethanol Excise Tax Credit (VEETC) – protects highway funding while preserving an important incentive for ethanol use. Promotes refiner flexibility, reduces fuel tax fraud and enhances opportunities for E-85. Modifies the Small Ethanol Producer Tax Credit to allow farmer owned facilities to fully utilize the credit, and updates the definition of a ‘small producer’ to up to 60 million gallons per year of production. RFS waiver provisions that protect consumers while not undermining the growing market for renewable fuels. However, the bill failed to gain passage by the end of the first session of the 108th Congress: it was passed by the US House of Representatives, but did not gain passage in the Senate. Advocates are hoping the bill receives the bipartisan support necessary for passage early in 2004. Corn refiners in the mid-west hope to meet all of the higher ethanol offtake (although other renewable transport fuels such as biodiesel and biogas would also benefit from the RFS). A report of the California Energy Commission released in 2002 showed that US ethanol production capacity is projected to nearly double to around 4.5 billion gallons (17.03 billion litres) per year by the end of 2005 – see Fig. 11.8. The increase by 2005 is attributable to expansions in capacity at existing plants (2.39 billion litres per year), plants already under construction (1.46 billion litres per year) and by new plants (4.54 billion litres per year).

FLEDGLING BIOFUEL SCHEMES

The extent of the biofuels opportunity for sugar crops is even greater with several policy initiatives supporting production in Asia, Oceania and Central America. However, because there are competing feedstocks for the production of fuel ethanol in several of these countries, the possible implications for sugar are not immediately transparent. 250

Sugar crops for biofuels and other emerging drivers

India: E-5 to be sold countrywide in first phase India’s transport sector is growing rapidly and presently accounts for over half of the country’s oil consumption whilst the country has to import a large part of its oil needs. Hastening interest in an ethanol programme was the country’s sugar glut (part of which the industry is now exporting to the world market) and burgeoning supplies of molasses. On 13 September 2002, India’s government mandated that nine states and four federally ruled areas would have to sell gasoline blended with 5% ethanol (E-5) by law from 1 January 2003. The government late in 2003 further announced that states would be obliged to increase the blend ratio to 10% ethanol. Estimated annual ethanol needs for a 5% blend are 0.37 billion litres. A 10% blend increases the need to 0.72 billion litres. This is against installed annual production capacity of 3.2 billion litres/year and annual consumption of 1.5 billion litres.11 By end-September 2003 the government reported that the country’s fuel ethanol production capacity had reached 0.55 billion litres, clearly sufficient to meet the 5% blending goal. The success of ethanol in India will depend to a significant degree on pricing. The sugar industry originally claimed that it could provide ethanol at 19 rupees per litre (US$0.38/litre), which is at a lower cost than the product it would substitute for – MTBE – which costs 24–26 rupees per litre (US$0.49–0.53/litre). The oil industry, however, is seeking parity between ethanol and the price of gasoline on an ex refinery or import basis. Pricing became a stumbling block in June 2003 when India’s Petroleum Ministry announced that it would appoint a Tariff Commission to fix an appropriate price for ethanol sourced from sugar mills. The move came after oil companies tendered for bids from sugar millers to supply ethanol for blending with gasoline. The mills asked around Rs 17.5–18/litre (US 39 cents/litre). However, the Petroleum Ministry judged the prices to be high on the basis that production costs should be no more than Rs 14/litre assuming molasses prices – average ex mill – of Rs 1,000/tonne. More significantly perhaps, there are still substantial differences in the profitability of potable alcohol as against fuel alcohol and in several states. Consequently, insufficient fuel alcohol is being produced to 11 Source: D N Tewari, The Indian Ethanol Experience, paper presented to Seminario Internacional de Alcohol Carburante, Cali, Colombia, 17–18 June 2003. 251

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meet demand. Other states have yet to set up sufficient production capacity. Generally, the implementation of the ethanol programme is not proceeding as smoothly as envisaged by the government. Oil companies are delaying ethanol purchases and some millers were temporarily forced to stop ethanol production because of mounting stocks. In mid-2003 the government announced a further three month delay in the extension of the 5% ethanol–gasoline blend countrywide – originally scheduled for July 2003. At the end of 2003, five states had still not begun sales of blend fuel. Thailand: eight ethanol projects approved but implementation is slow Thailand’s interest in establishing a large-scale bioethanol industry using feedstock such as cassava, sugar cane and rice, was manifested in September 2000, and reflects the nation’s rising import bill for oil (the country is 90% reliant on imports). The National Ethanol Development Committee has estimated that if 10% ethanol were blended with petrol or diesel, to replace MTBE, about 1.9 billion litres would be required each year. Supplementary reasons are that ethanol production could help lift prices of farm products. State incentive programmes for gasohol have been initiated. The Finance Ministry in 2001 announced it would waive the excise tax on gasohol as well as contributions to the State Oil Fund and Energy Conservation Fund. Furthermore, tax privileges would be granted to investors including duty exemptions on machinery imports and an eight year corporate tax holiday. The Industry Ministry calculates the gasoline/ethanol blend would be 0.7–1.0 baht/litre (US$0.01– 0.02/litre), cheaper than conventional gasoline. Late in 2001, eight private companies were granted licences by Thailand’s Ministry of Industry to build ethanol production plants with a capacity to produce 1.5 million litres of ethanol a day. Four plants would use molasses as a feedstock and the others would use cassava (tapioca). Five of the plants were expected to start production late in 2002 with a combined annual output of 114 million litres. However, progress in constructing the plants has faltered. By end-2003, only one distillery had advanced to construction stage and many had not submitted feasibility plans. The Thai government will now guarantee buying a certain amount of ethanol from producers to encourage more investment in the sugar cane 252

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based industry. The government has also moved to ensure that around 25 million tonnes of cane is used to produce alcohol during the 2003/04 campaign. Australia: a viable fuel ethanol industry sought by cane industry The sugar industry in Australia first identified development of a cane based fuel ethanol sector in the year 2000 at a time of significant financial hardship. The federal government early in 2000 moved to exempt ethanol from fuel excise of around $A0.38/litre (US$0.21). Moreover, it has set an objective that fuel ethanol and biodiesel produced in Australia from renewable sources will contribute at least 350 million litres of the total fuel supply by 2010 as against 40 million litres of mostly grain based ethanol produced presently. In September 2002, the fuel excise exemption was ended and instead an ethanol production subsidy at the same rate as for ethanol used in petrol was implemented for one year. Importantly the change in support policy raises the cost of importing ethanol, thereby strengthening the level of assistance to the local industry. In May 2003, the government acted to extend the excise exemption for ethanol to 30 June 2008; in April the government had moved to set a 10% limit on the blending of ethanol with petrol in conjunction with mandatory labelling of ethanol blends. Potential investors, however, argued that establishing new facilities would not be financially viable with the six year ethanol subsidy, and that they would also need to know the rate after 2008. In December 2003, the government announced that a 50% excise discount would apply, with ethanol carrying a top excise rate of 12.5 Australian cents/litre by 2012. Central America With environmental goals in mind, Colombia’s government issued Law 693 in September 2001 making mandatory the use of alcohol in gasoline in cities with populations greater than 0.5 million inhabitants, starting 2005. The Corporation for Development of Biotechnology and Clean Technologies (CORPODIB) – a government/ private entity – calculates that 900 million litres of ethanol would be required in the first year. Production of this volume would require additional planting of 150,000 hectares of sugar cane and construction of up to 12 production facilities. Ethanol would cost around 253

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US$0.9–1.15/gallon and the ethanol selling price would be around US$1.35–1.60/gallon, while ethanol would not pay the excise taxes applicable to gasoline (Law 788 of 2002). Colombia is not the only country looking to ethanol as a diversification opportunity. In Peru the sugar industry is gearing up to export ethanol to the United States. The industry has a capacity to produce 0.154 billion litres annually. Other initiatives are also developing and Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica are reportedly working together to implement laws that promote the use of fuel ethanol in the Central American region. Asia Several provinces in China are pursuing the ethanol option as a way to reduce grain surpluses and to reduce oil consumption and imports. In 2001 China’s government conducted trials in five cities in the country’s central and north-eastern regions – in Henan province and in Heilongjiang province – and a large-scale ethanol plant has been constructed in Jilin province which is expecting to use around 1 million tonnes of maize a year. Jilin province published an administrative edict in November 2003 promoting the use of ethanol gasoline for vehicles, and in Nanyang City in Henan province there have been ethanol–gasoline blend trials since March 2002. In Taiwan several Taiwanese based companies during 2002 indicated a strong interest in producing ethanol from US corn, while at the same time working to develop a domestic cellulose based ethanol industry using materials such as bagasse, rice straw and municipal solid waste. If ethanol were to replace MTBE in all of the gasoline sold in Taiwan at only 5% by volume, it would represent annual demand of 0.375 billion litres. Japan, under pressure to cut greenhouse gas, in 2003 moved to approve non-mandatory blending of 3% ethanol in gasoline in several parts of the country, already providing a potential import market of 0.5 billion litres, due to its inability to produce fuel ethanol locally. Japan is the world’s second largest consumer of gasoline after the United States, but has no extra agricultural produce to be used for fuel output. Japan’s ethanol market is estimated to reach nearly 6 billion litres a year, based on the assumption that Japan’s government would mandate an ethanol–gasoline blending ratio of 10% for the entire country. Even so, development of Japan’s import market (keenly anticipated by Brazil and other prospective 254

Sugar crops for biofuels and other emerging drivers

suppliers) is likely to be measured and will depend on the extent to which suppliers can assure the country of reliability of supply. Others In Canada, prospects for a large-scale ethanol industry (based on grain) are improving. The government in mid-2003 pledged financial support in the form of a three year C$100 million Ethanol Expansion Programme, helping to meet the nation’s Kyoto Protocol commitments. The government identified a target for a 10% ethanol/gasoline blend to achieve 35% market penetration by 2010. State governments are also beginning to mandate ethanol blended gasoline, for example in late December 2003 Manitoba introduced legislation mandating E-10 fuel to be used by most vehicles by 2005. Presently Canada produces around 0.238 billion litres of ethanol both for fuel ethanol and for industrial purposes.

Implications for sugar BRAZIL’S ETHANOL MARKET OUTLOOK CRITICAL TO SUGAR MARKET

Million tonnes, raw value

The rapid rise of Brazil as a key player in both the raws and whites markets (and even acting to blur the distinction between raws and whites) – see Fig. 11.10 – is an important development in the world export market with ramifications for all other exporters, the structure of world trade, and world prices. To analysts, Brazil sets the competitive benchmark and acts as the overriding price driver in the short term. A key dynamic driving Brazil’s market impact in the short

25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Production

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11.10 Brazil’s sugar production and exports. 255

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and longer terms is developments in the country’s large ethanol sector which absorbs more than half of the massive cane crop. Because the price of domestic ethanol moves to ensure millers use sufficient cane to meet domestic demand, the world sugar market can be seen as the outlet for that quantity of cane not needed to satisfy Brazil’s own ethanol and sugar markets. In the short term the government can change the ratio of ethanol blended into gasoline to influence the size of the excess sugar directed to the world market. A recent study12 shows that an increase in the blend ratio from 20 to 26% causes the world price for refined sugar to increase by US$3.04–7.58/tonne, whilst export tonnage falls by between 8 and 34%. The longer term dynamics of Brazil’s domestic and export demands are critical to the world sugar market outlook. A key factor driving domestic demand growth over the remainder of this decade is the recent launch of flexi-fuel vehicles (that can run either on gasoline, or ethanol, or a mixture of the two fuels). Two of the country’s biggest national car makers – General Motors and Volkswagen – were the first to manufacture flexi-fuel cars early in 2003, and Fiat offered its first flexi-fuel car in October that year. The other major manufacturer in Brazil, Ford, will launch its Fiesta 1.6 in 2004. Proponents of flexi-fuel cars hope that by 2006 all new vehicles produced in Brazil will be available in the flexi-fuel version. Should hydrous ethanol remain at less than 70% of the gasoline price then hydrous ethanol would be the fuel of choice, marking a fundamental change in the structure of ethanol demand. Consumption of hydrous ethanol fuel has declined dramatically over the past decade to only 5.8 billion litres in 2001, as against a peak of 10.88 billion litres in 1989, in line with scrappings of the nation’s ageing fleet of alcohol powered vehicles. At the same time anhydrous alcohol consumption almost quadrupled from 1.7 billion litres to 6.6 billion litres (reflecting the growth in the fleet of conventional vehicles using the gasoline–ethanol blend). The Brazilian industry is hopeful that over one million flexi-fuel cars will be added to the national fleet annually. Such a scenario would rapidly increase domestic demand from its present level of 12 billion litres, with growth in hydrous offtake soon exceeding 12 Troy G Schmitz, James L Seale, Jr and Peter J Buzzanell, Brazil’s Domination of the World Sugar Market, Morrison School of Agribusiness and Resource Management, Faculty Working Paper Series. http://www.east.asu.edu/msabr/research/workingpapers/msabr0207_brazilsugar.pdf. 256

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anhydrous consumption. The outlook is uncertain, but assuming 30% of future car sales are flexi-fuel vehicles, the domestic demand could swell to 16 billion litres by the end of this decade, of which 9 billion litres would be hydrous ethanol. Further enhancing the medium term prospects for a boost in sales of alcohol powered vehicles (and consequent higher hydrous alcohol offtake) is the deal struck at the Johannesburg Earth Summit for Brazil and Germany to develop a scheme where German companies subsidize Brazilians to buy alcohol powered cars. The reductions in carbon dioxide emissions achieved by this scheme would be ‘credited’ towards Germany’s targets under the Kyoto Protocol. The ultimate impact of this scheme on ethanol offtake is difficult to gauge until the scheme begins to be implemented. If similar deals to the Brazil–Germany one can be implemented under the clean development mechanism and flexible mechanisms provided for in the Kyoto Protocol then fuel ethanol schemes using sugar crops could assist countries achieve their Kyoto GHG reduction commitments and at the same time improve the underlying fundamentals of fuel ethanol schemes if CO2 emissions reductions are valued and traded. Forecasting export demand for Brazil’s ethanol is troublesome. The country’s exports are thought to have reached 700 million litres from the 2003/04 season, as against the 2002/2003 level of 620 million litres. Brazil’s industry was initially anticipating exports as great as 1 billion litres based on securing new markets in India, the United States and Japan. However, opening up these markets is proving more difficult than anticipated – as evidenced in the above discussion of the status of individual country programmes. To help promote globalization of ethanol, Brazil is actively promoting information on the economics and technology of ethanol production and trade. The potential for a true international commodity market to develop for ethanol remains a key question, with some analysts seeing Brazil as the natural supplier to Japan and the United States of America. At present Brazil is constrained to using the Caribbean Basin Initiative route into the United States. Under this Initiative, imports up to 7% of US ethanol use are exempt from tariffs (minimum of 227 million litres). This rule holds true even as US consumption expands. Should 13 billion litres be consumed by 2010, then imports via the Caribbean portal could reach 1 billion litres (explaining Brazil’s interest). Demand side prospects must, however, be matched against Brazil’s likely supply side dynamics. If cane production also 257

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continues to expand (reflecting the country’s low production costs – see Chapter 12), then Brazil can obviously still increase sugar exports even with a stronger local demand (and possible export demand) for ethanol. The relative attractiveness of sugar cane agriculture in the centre–south depends on the costs of production and returns from other crops. Indeed the industry is set to expand over the coming few years in the western part of São Paulo state with at least six new projects recently announced to commence by 2006–08 – see Chapter 12.

EU BIOFUELS

The specific impacts for sugar are not clear because it is not obvious how the national schemes will be set up (recall that each member state bears the responsibility to achieve targets, set up schemes and provide tax incentives). The potential for sugarbeet to become a significant feedstock for fuel ethanol is intrinsically bound up with EU sugar policy. Although the most important feedstock in France for the production of ethanol for ETBE at present is beet (50% of ethanol production) grown on set aside land without financial compensation, significantly greater beet areas are likely to be constrained by the high opportunity cost of beet for ethanol (because the value of beets for A and B quota sugar is much higher than their ethanol value). The key alternative feedstock is cereals, particularly wheat. Assuming EU average yields for beet and wheat, the ethanol yield per hectare from sugarbeet is as high as 7,000 litres, but for wheat is only 2,500 litres. Even so, ethanol from wheat has a valued byproduct (distillers’ dried grains and solubles) which offsets the cost of the starch source. For as long as EU sugar policy maintains a high sucrose value to beets, much of the targeted gain in biofuels production will come from cereal crops. Should reform of EU sugar policy take place post 2007,13 a consequent fall in the value of beets for the production of sugar will occur, improving the attractiveness of this feedstock to fuel ethanol producers (including sugarbeet millers with annexed distilleries). In this sense, the biofuels industry is likely to provide a new income stream for millers and beet 13 The EU Commission is reviewing EU sugar policy and the Everything but Arms initiative will provide increasing access to LDC sugar over the coming years, undermining EU price levels and forcing quota reductions to meet likely WTO constraints on subsidized exports. 258

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growers otherwise facing contracting income from beet for sugar. Another possible impact for sugar is through the possibility of the European Union becoming a market for Brazilian fuel ethanol, although this is by no means assured and is dependent on what import tariff would apply and whether or not the imported ethanol qualifies for the fuel tax exemption.

THE US RENEWABLE FUELS STANDARD

Although corn refiners in the mid-west of the United States hope to meet all of the higher ethanol offtake there is also the possibility of an ethanol trade developing with Brazil – thereby providing the link with the world sugar market. As explained above, the more Brazil can find export markets for ethanol, the lower the export availability of Brazilian sugar to the world market. In the short term, the economics of Brazil supplying the Californian market are unlikely to be viable unless the ethanol is first put through finishing plants in the Caribbean, after which it would be exempt from tariffs. Shipments of Brazilian ethanol to the United States starting March 2004 reflect low ethanol prices in Brazil but high gasoline prices in the United States – a temporary, likely unsustainable, trade. Alcohol (indigenously produced) can also enter the United States duty free from the Andean Trade Preferences Act and the Central American Free Trade Agreement (under negotiation), opening an opportunity supporting the development of cane based ethanol industries in Bolivia, Colombia, Ecuador, Peru and Venezuela (Andean pact) and Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua (CAFTA).

Conclusions Renewed enthusiasm for biofuels is about to unleash considerable demand for fuel ethanol. Ethanol output rivalling that of Brazil’s could materialize in both the European Union and the United States, on the basis of new legislation. Governments in Asia, Oceania and the Americas are mandating ethanol inclusion in gasoline, reflecting greenhouse gas abatement targets, air quality concerns and energy security goals. Even so, the commercial viability of fuel ethanol schemes will continue to rely on supportive government policy 259

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because costs (using starch or sugar crops) will remain above forecast oil and gasoline prices. Only a step-wise lowering of production costs, such as that arising from the successful commercialization of technology for the production of ethanol from cellulose (probably more than five years away) can change this basic fundamental of the fuel ethanol world. In the context of possible future sugar policy reform in both the EU and the US, which would lead to lower sugar prices, the ethanol option potentially provides an avenue for ensuring the continuing profitability of those industries. In the short term though, in the European Union the bulk of the ethanol is likely to come from cereals, particularly wheat. In the United States, corn refiners are hoping to reap the gains of the phase-out of MTBE and a renewable fuels standard, although there would be benefits to the world sugar market to the extent that Brazil is able to share in the gains in ethanol demand by developing an export trade with that country. In Asia, fledgling fuel ethanol schemes are advancing in India and Thailand. India’s scheme would first boost use of molasses for ethanol and would contribute to the erosion of India’s huge sugar surplus in the longer term if cane is instead used for ethanol production. Sugar cane would be one of several feedstocks for Thailand’s new ethanol industry but would help to maintain the profitability of the Thai sugar industry at times of low world sugar prices. Colombia’s ethanol programme could see lower volumes of sugar shipped to the export market. In conclusion, the ethanol option will increasingly provide an opportunity for sugar industries to expand their production base and to introduce another revenue stream; particularly so if governments place a high enough priority on environmental and energy security concerns and are prepared to provide ongoing fiscal incentives in order to establish a sustainable industry. Even so, from the perspective of the world market, until such time as other large-scale sugar crop-based fuel ethanol schemes develop, Brazil’s ethanol outlook perhaps remains the single most important alcohol related driver impacting world sugar trade and prices.

260

C H A P T E R

12

Prospects in major exporters and importers

So far we have discussed different elements of the world sugar economy, including policy issues and emerging drivers. Next we shall take a brief look at the prospects in major sugar exporting and importing countries. Significant parts of this chapter backtrack over material covered earlier. However, a discussion of the key players’ prospects permits us to take a panoramic view of sugar and sweetener economies, instead of concentrating on individual supply and demand segments. Another aim of this chapter is to show how diverse and individual national sugar economies are.

Australia Australia, the world’s second largest exporter of raw sugar after Brazil, has increased sugar production considerably over the past decade – from 3.2 million tonnes, raw value in 1991 to 5.9 million tonnes in 1997. Since then output has declined to about 5 million tonnes, because of a combination of floods, droughts and cane diseases, while the industry’s incomes have been further affected by low prices brought on by intense competition in the world export market. With a domestic demand of around 1 million tonnes, the Australian sugar industry is the most export oriented in the world and, hence, the most dependent on the global market. Table 12.1 shows that more than 80% of its produce is exported, mostly onto the free market. Australia also holds the fourth largest tariff 261

The world sugar market Table 12.1 Australia: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

5,617,695

2,038

4,288,207

4,286,169

976,355

1,748,103

1997

5,882,536

1,645

4,462,364

4,460,719

1,003,443

2,166,477

1998

5,084,841

3,687

4,691,495

4,687,808

1,002,561

1,560,949

1999

5,513,649

0

4,185,342

4,185,342

1,005,000

1,884,256

2000

4,416,870

4,831

3,867,003

3,862,172

1,048,908

1,390,046

2001

4,768,350

5,416

3,545,484

3,540,068

1,068,285

1,550,043

2002

5,613,528

5,754

3,893,564

3,887,810

1,100,423

2,175,338

rate export quota to the US – about 90,000 tonnes a year, which, however, equates to just 2.5% of the overall export availability. The country exports mainly raw sugar (97% of total exports in 2001). An important characteristic of the industry is its almost total deregulation. Significant liberalization in the industry began with the removal of the embargo on sugar imports and its replacement by a tariff in 1989. In 1996 the tariff on both raw and white sugar imports was abolished. On the international level, a single desk structure markets all the sugar produced in the state of Queensland, where about 95% of Australia’s sugar is produced. Queensland Sugar Limited is virtually the sole exporter of Australian raw sugar. In recent years, low production, brought about by adverse weather conditions and cane diseases and, by coincidence, low world market prices, dragged the industry and cane growers into financial difficulties. At the end of 2002, after urgent calls by the sugar sector, the federal government passed an A$150 million aid package. The suggested Sugar Industry Reform Programme earmarks up to A$120 million, in Commonwealth measures, to address the short and long term needs of the ailing sugar sector. According to the Programme, the government will also provide two year 50% interest rate subsidies on loans of up to A$50,000, taken for replanting purposes, and offer an exit grant of A$45,000. It is suggested the Programme should be funded by a levy of 3 cents per kilogram that is placed on domestic sugar sales for the next five years. Exports of refined sugar are exempt from this levy, and a rebate is available for sugar used in products manufactured specifically for export. However, there has not been agreement between federal and 262

Prospects in major exporters and importers

Queensland governments as to the components of legislative reform, and some major elements in the reform package are therefore on hold. In April 2004 the government unveiled a new A$444 million rescue package to the sugar industry. For decades, the Australian sugar industry was considered to be one of the most efficient in the world, one of the few able to remain competitive in a volatile world market with minimal state support. In recent years, a significant reduction in the competitive benchmark, caused by Brazil’s growing dominance on the world market, has thrown the Australian industry into disarray. Production is no longer going from strength to strength, and the usual Far Eastern customers have been turning to new southern hemisphere suppliers who deliver superior quality. An independent assessment of the sugar industry (Hildebrand inquiry, 2002), and subsequent state government and industry commissioned reports all point to the urgent need for fundamental reform aimed at increasing economic efficiency and longer term viability. In the long run, Australia’s future sugar production and the country’s place on the world sugar map depend on the success of the efforts to restructure the financially stressed industry. If the industry enacts various reforms to regain its competitiveness, it can expect consolidation of its output at a level exceeding 5 million tonnes, accompanied by improvements in cane yields and production efficiency throughout the entire processing chain. If, however, the current crisis is not alleviated by government help, a spate of farm failures and mill closures is likely.

Brazil Brazil has dominated much of the discussion throughout the book (not surprisingly, taking into account the dominance of Brazil among sugar exporters). Without any fear of exaggeration, one can say that the prospects of the gigantic sugar cane processing industry in Brazil will, to a great extent, shape the global sweetener market throughout the remainder of the decade. The enormous expansion of sugar crops in the state of São Paulo has led the evolution of sugar production in Brazil for the last decade and is set to continue doing so for at least another 10 years. A large number of new projects, mergers and acquisitions of deactivated mills, as well as the construction of new ones, have 263

The world sugar market

accelerated their pace in the western and northern regions of the state, and in the nearby states of Mato Grosso do Sul, Parana, Minas Gerais, Espirito Santo and Goias. The current ongoing mill investment projects have been announced to exceed US$1 billion for the next two years, and the industry is quite confident that Brazil’s cane production will grow by 50 million tonnes in the same two years. Compared to other crops, sugar cane is the second most profitable after soybeans in Brazil today. Importantly, cane is not competing with soybeans for land, since the two cultures have different growing areas. The main question is how the additional cane will be split between sugar and ethanol. If all the cane expected to be produced in the 2004/05 season (375–380 million tonnes) goes into sugar production, then Brazil will produce 47–48 million tonnes of sugar. This would leave more than 35 million tonnes, or nearly 80% of the world sugar turnover, for exports. In recent years the ethanol/sugar ratio of cane use has stabilized at a 50 : 50 level (see Table 12.2), with some marginal variations, depending on the size of the cane crop, on international prices for oil and sugar, and on the dynamics of the domestic value of cane for different uses. The recent introduction of flexi-fuel engines (see Chapter 11), which run equally on either pure ethanol, or petrol or any blend of petrol and ethanol, is likely

Table 12.2 Brazil: production of cane, sugar and ethanol Alcohol1

Sugar2

Sugar cane2

% of cane used for sugar production

1975/76

0.6

6.0

91.5

86

1979/80

3.4

7.0

93.9

54

1983/84

7.9

9.1

198.0

40

1987/88

11.5

8.0

224.5

29

1991/92

12.8

8.7

228.8

29

1995/96

12.7

12.2

251.4

38

1999/00

13.1

19.4

310.0

46

2000/01

10.6

16.2

258.0

47

2001/02

11.5

19.1

291.9

49

2002/03

12.6

22.4

321.0

51

Crop year

Notes: 1 Millions of cubic metres. 2 Million tonnes.

264

Prospects in major exporters and importers

to have a massive but somewhat unpredictable impact on Brazil’s cane processing industry and the world sugar market. As a result, in the near future a significant, but as yet unknown, proportion of the 1.2 million cars sold in Brazil will run on alcohol some of, most of or perhaps even all the time. This alone may substantially, even if not entirely, absorb expected increases in cane supply. As suggested in some quarters, the advent of international trade in ethanol, with Brazil as the major supplier, would also require more cane at the expense of sugar. Meanwhile, there is encouragement enough for Brazilian sugar cane processors to keep expanding. The profitability of sugar production has generated a clear multiplier effect in the local industry. The agro-business capital goods industry is strengthening its production investment in the country. Case New Holland in July 2003 announced the removal of its harvest machinery plant from Australia to a new home in Piracicaba, in São Paulo state. British AGCO, controller of Massey Ferguson, is substantially expanding the capacity of its plant in the southernmost state of Rio Grande do Sul. Part of one of its plants, currently based in the United Kingdom, will be transferred to this state. Furthermore, the National Treasury is on the verge of being forced to compensate sugar and ethanol producers, who argue that they suffered losses during the period of fixed prices between 1985 and 1989 for selling their product below the marginal cost of production. Various legal recommendations have already been made, suggesting that producers are on the winning side. Coupled with other incentive mechanisms given by the government, such as tax exemptions for ethanol production and loans for ethanolstock making, there is no doubt that the industry is facing very positive prospects in the immediate future. A number of not very predictable factors will enter Brazil’s sugar supply equation. These include world market prices for oil and sugar, as well as the level of government support to biofuels in both Brazil and all over the world (for more details see Chapter 11). What is clear is that Brazil’s cane producing and processing potential is far from exhausted, and there is little doubt that the Latin American giant may maintain its position as the leading sugar supplier on the world market even if the ambitious plans to rapidly increase the consumption of domestic ethanol (through the introduction of flexifuel cars and exports onto the emerging massive world market for ethanol) come to fruition. Table 12.3 shows sugar production, consumption and exports for Brazil in recent years. 265

The world sugar market Table 12.3 Brazil: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

14,717,500

0

5,309,048

5,309,048

8,490,000

3,374,169

1997

16,371,200

0

6,586,395

6,586,395

8,900,000

4,258,974

1998

19,168,100

52

8,675,148

8,675,096

9,150,000

5,601,978

1999

20,645,500

25

12,466,673

12,466,648

9,500,000

4,280,830

2000

16,464,200

0

6,502,375

6,502,375

9,725,000

4,517,655

2001

20,336,100

0

11,168,422

11,168,422

9,800,000

3,885,333

2002

23,567,315

5,023

13,388,246

13,383,223

10,519,936

3,549,489

Table 12.4 China: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

7,091,000

1,254,853

598,329

-656,524

8,250,000

1,467,465

1997

7,415,000

801,809

381,306

-420,503

8,250,000

1,052,968

1998

8,903,900

485,192

459,138

-26,054

8,300,000

1,682,922

1999

8,526,700

420,068

378,447

-41,621

8,300,000

1,951,243

2000

7,616,300

673,492

395,559

-277,933

8,500,000

1,345,476

2001

7,160,707

1,197,294

175,800

-1,021,494

8,900,000

627,677

2002

9,804,500

1,192,914

328,637

-864,277

9,975,000

1,321,454

China China is currently the world’s fourth largest producer and consumer of sugar. During the 1990s China’s levels of imports and exports were extremely volatile. China was often identified as one of the ‘swinging’ countries in the world sugar market. The inconsistency of the trade patterns reflected significant variations in the level of domestic production and instabilities in the sugar consumption growth (see Table 12.4). The country has a fast growing sugar industry that is currently undergoing serious structural changes. The industry has a big potential, but its future depends on the level of government support to domestic growers, on the one hand, and on the international competitiveness of the industry, on the other. China is one of the few countries in the world which produces both beet and cane sugar. 266

Prospects in major exporters and importers

Currently the cane/beet split in the total sugar production is about 85 : 15. This ratio varies greatly from year to year, depending on the climatic conditions in the main sugar crop growing areas. Nevertheless, there is an identifiable trend towards a gradual decrease in beet sugar production and its replacement by cane sugar. Most of the country’s sugar industry is concentrated in areas where climate favours cane, and labour costs are low. Consequently, with sufficient investment into the sector, China may become a lower cost sugar producer. The magnitude of the real potential of the industry was revealed in 2002/03 when production rocketed to a new record of 11.4 million tonnes, a 2.1 million tonne increase from the previous year. Meanwhile the potential for sugar consumption in China is also enormous. The country belongs to the group of nations with the world’s lowest per capita sugar consumption. If China’s per capita sugar consumption reached just 50% of the world average, the country would use nearly 13 million tonnes of sugar annually compared to the current level of 9.5 million tonnes. The single most important factor in explaining the existing low level of consumption and the sluggish pace of its growth is the widespread use of saccharin. In 1999, 29,000 tonnes of saccharin were produced; around 40% of this was exported, leaving 15,000 tonnes available for domestic use by the food industry. In terms of domestic consumption, this volume of saccharin displaced 3.0–4.5 million tonnes of sugar, depending on assumptions regarding its sweetening potency (200–300 times as sweet as sugar). Therefore, the success of the central government’s efforts to contain domestic production and consumption of saccharin is key to increasing sugar consumption. Controlling the saccharin industry is a notoriously difficult task. The government has been trying to limit production since 1999/2000. It took three years to finally curb saccharin use in the food industry. For 2002 the government had set a production target of 17,500 tonnes of which 3,500 tonnes were aimed for consumption by the domestic food industry. The actual figures were 21,400 and 3,900 tonnes, respectively, which corresponds to an increase in sugar demand of 2 to 3 million tonnes from 1999. In November 2001 China joined the WTO. As part of its negotiations with other WTO members, China agreed to implement a tariff rate quota (TRQ) of 1.764 million tonnes for 2002, increasing by 5% each year until 2004. The agreed import duty for the TRQ is 20% between 2001 and 2003, falling to 15% in 2004. This ought not to give rise to any illusions, since neither in 2002 nor in 2003 was 267

The world sugar market

the tariff quota transformed into physical purchases. Moreover, the long term policy of the government is to be largely self-sufficient and to cover only weather-induced production shortfalls through imports.

Cuba Production in Cuba, as in Australia, is export oriented, because about 80% of the annual produce is exported. The collapse of the Soviet Union and the end of the COMECON preferential arrangement brought Cuba into the uncharted free market territories. The country was the world’s leading sugar exporter throughout most of the twentieth century and had been thoroughly used to preferential exports at well above world market price. Before the revolution, Cuba exported annually around 5 million tonnes, mainly to the USA (in 1958 Cuba exported to the USA 3.2 million tonnes out of the total of 5.6 million tonnes). After the revolution, most of the island’s sugar was exported to the Soviet Union, China and Soviet satellites (for example, in 1988 Cuba exported to the free market 1.9 million tonnes out of the total of nearly 7 million tonnes). By 2001 Cuba’s preferential exports had shrunk to 65,000 tonnes delivered as the MFN sugar to the EU and 359,000 tonnes shipped to China under the long term government to government arrangements. The rest of the country’s exports (about 2.5 million tonnes) were at world market prices. The economic shock waves from the break-up of the USSR were felt soon after 1991. Application of fertilizer virtually ceased, and spare parts for field machinery, especially harvesters and mills, became scarce. Production fell from 7.2 million tonnes in 1992 to 3.4 million tonnes only in 1995. All frantic attempts by the government to reanimate the industry have so far failed. In the second half of the 1990s the island’s sugar harvest rarely exceeded 4 million tonnes, despite the official goal of pushing production back to the heyday level of 6–7 million tonnes (see Table 12.5). In 2002 the government finally decided to abandon its unrealistic targets and developed a more pragmatic approach to dealing with the chronically underperforming sector. In June 2002 the government launched a new sugar policy. The sugar ministry ordered the closure of 71 out of 156 existing mills. According to a ministry edict, in future Cuba will limit raw sugar production to a maximum of 4 million tonnes per year. The 268

Prospects in major exporters and importers Table 12.5 Cuba: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

4,528,629

0

3,830,144

3,830,144

670,019

395,412

1997

4,318,195

0

3,582,080

3,582,080

733,234

398,293

1998

3,291,345

0

2,568,580

2,568,580

712,515

408,543

1999

3,874,931

0

3,195,484

3,195,484

711,202

376,788

2000

4,057,391

0

3,423,565

3,423,565

705,057

305,557

2001

3,747,794

0

2,933,396

2,933,396

697,583

422,372

2002

3,521,672

97,589

3,136,550

3,038,961

698,119

206,964

government hopes to make the industry competitive by increasing plantation yields and mill efficiency. ‘We can produce 4 million tonnes of sugar using 38 per cent of the land currently dedicated to cane, if a hectare produces 54 tonnes which is milled at a 12 per cent yield,’ the document stated (Reuters, 5 June 2002). Cuba significantly reduced sugar planting in the 2003/2004 season. The first sugar harvest since restructuring of the sector began brought disappointing results. Because of severe shortages of parts, lubricants and fuel, coupled with mediocre weather conditions,1 the output collapsed to a level just in excess of 2 million tonnes, the poorest since 1913. The future for the Cuban sugar industry without massive foreign investment (hardly feasible bearing in mind the continuing US embargo) looks rather bleak. The end of the embargo and acceptance into NAFTA may change the situation quite quickly, but levels of 7–8 million tonnes achieved during the heyday of the Soviet era may never be attained again.

European Union As of 30 April 2004 sugar is produced in all 15 countries of the European Union. Except for small quantities (around 300,000 tonnes) of 1 Moderate rainfall further slowed cutting and milling in March and April 2003. Currently, Cuba’s harvest is extremely vulnerable to rainfall. According to the press, only 30% of the cane area has functioning drainage systems. Cutting, harvesting and other machinery is liable to get bogged down. 269

The world sugar market

cane sugar produced in French Départements Outre Mer (DOM) and southern Spain, all sugar produced in mainland Europe is from beet. France and Germany are the principal producers. Production is controlled through a set of national quotas. In 1990 the EU for the first time produced 17 million tonnes. Since then, sugar production has, on the whole, levelled off. In recent years EU sugar production has varied, depending on weather conditions, between 15.5 million tonnes (in 2001) and 18.7 million tonnes (in 1999), raw value, as shown in Table 12.6. The beet area has declined from more than 2 million hectares in the mid-1990s to an estimated 1.7 million in 2003/04. However, yields have continued to rise relentlessly, as some of the profits from sugar production have been diverted into improved beet varieties, better agronomic practices and greater factory efficiencies. In 2002/03, the highest yields were achieved in France (12.88 tonnes of sugar per hectare). In that same year, the EU average was as high as 9.96 tonnes of sugar per hectare. The stability of production levels can be ascribed to the favourable conditions maintained by the sugar regime of the CAP. Within the current regime, large-scale sugar production is highly profitable, and sugarbeet production gives the best returns of any large-scale crop. Similarly to the stability in sugar output, domestic consumption of sugar has shown little change in recent years, averaging 14.3 million tonnes since 1998. Flat consumption can be attributed to low population growth in Western Europe and to growing concerns about health and diet (for more details see Appendix I), rather than to substitution of sugar by HFCS, as in the case of the USA and Japan. Table 12.6 shows sugar production, consumption and trade for the EU in recent years. Although the European Union remains one of the world’s leading sugar producers (the EU is currently the third largest sugar manufacturer after Brazil and India), it is also a major importer of sugar. Practically all the EU imports come under special preferential arrangements (see Chapters 7, 9 and 11). Another distinctive feature of the EU sugar market is the remarkable stability of export availability and, in stark contrast to other top exporters, a low degree of dependence on both domestic production and world market prices. Despite all the weather driven fluctuations in beet output and volatile world market prices over the last 15 years, the annual volume of EU sugar exports has rarely deviated from a long term average of around 5.3 million tonnes; the 6 270

Prospects in major exporters and importers Table 12.6 EU: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

17,692,273

1,868,169

4,209,206

2,341,037

14,516,832

13,749,639

1997

18,582,544

1,883,142

5,151,941

3,268,799

14,551,868

14,511,516

1998

17,397,822

1,813,856

6,357,200

4,543,344

13,818,571

13,547,423

1999

18,730,758

1,941,088

5,086,460

3,145,372

15,006,631

14,126,178

2000

17,853,992

1,897,932

6,203,304

4,305,372

14,112,091

13,562,707

2001

15,500,157

1,844,169

6,059,598

4,215,429

13,588,256

11,259,179

2002

18,241,131

2,250,402

4,707,762

2,457,360

15,004,792

12,038,158

million tonne mark was only exceeded in 1998, 2000 and 2001, and only in 1996 did the exports drop below 4.5 million tonnes. The explanation of such remarkable resilience of exports to price signals is rather obvious: the high level of support to domestic producers, including export subsidies for B quota sugar. As discussed earlier in Chapter 10, the EU is under growing pressure, both internal and external, to reform its sugar policy. At the moment there is a high level of uncertainty surrounding the future EU sugar policy arising from the EU enlargement, the Doha development agenda and new EU free trade agreements with least developed countries and Balkan states and economic partnership agreements. Debates on the sugar regime beyond 2006 have just started. Given this, any attempt to predict the exact shape of the new regime, at this stage, would be futile. What can be foreseen now is the direction of reform rather than its speed and depth. It is likely that internal and external pressure will force the EU to reduce production quotas and support prices, and to improve market access for imports. The virtually inevitable consequence should be a severe reduction, if not an entire cessation, of EU exports.

India India today is the world’s leading sugar consumer. In 2002 the country consumed 17.9 million tonnes, raw value, which represents 13.1% of the global use of sugar. On top of being big as it is, India’s consumption is also currently undergoing rapid growth. In the 271

The world sugar market Table 12.7 India: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

16,892,192

0

1,009,862

1,009,862

15,254,240

6,023,169

1997

14,440,466

215,772

418,825

203,053

14,970,756

5,289,826

1998

14,280,964

670,352

85,774

-584,578

15,272,009

4,883,359

1999

17,405,982

1,003,249

21,717

-981,532

16,277,713

6,993,160

2000

20,246,997

206,727

201,660

-5,067

16,546,072

10,699,152

2001

19,906,213

48,268

1,219,904

1,171,636

17,274,252

12,159,477

2002

19,524,538

5,317

1,287,684

1,282,367

17,857,051

12,544,597

coming four to five crop years, sugar demand is expected to grow by 3.5–4%. The growth is attributed to continued population growth, increasing income and consumer preference for centrifugal sugar over traditional sweeteners. The country is also one of the world’s largest sugar producers. In 2002/03 India’s production exceeded 20 million tonnes. A unique feature of the Indian sweetener economy is the existence of two outlets for cane: it can be processed into white sugar by sugar mills or into traditional sweeteners, khandsary and gur, manufactured by a small-scale ‘cottage’ industry. During the 1990s the share of cane processed into traditional sweeteners varied from 37 to 62%. Sugar production, consumption and trade in India are illustrated by Table 12.7. The regular sugar industry, or the ‘organized’ sector, remains subject to considerable government control. There are fixed minimum cane prices,2 and the industry is compelled to sell a share of its produce (‘levy sugar’) at prices about 20% below the cost of production to be retailed through the government’s public distribution system (PDS) to consumers below the poverty line.3 The ‘unorganized’ traditional sweeteners sector, on the other hand, is practically free from government control. If all sugar cane 2 Each year the central government establishes a minimum support price (MSP) for cane, which state governments typically increase by 20 to 25% to make the so called state advised price (SAP). The SAP is mandatory and not linked to the level of domestic or world market sugar prices. The steady increase in cane prices in the past few years (for largely political reasons) has resulted in an abnormally high cost of production, averaging, as estimated, an equivalent of US$270–280/tonne. 3 Currently 10% of sugar production is to be delivered to the PDS system. 272

Prospects in major exporters and importers

harvested in the country were to be processed into white sugar, the country’s sugar output would double without any increases in areas or agricultural yields. The high level of government intervention has been distorting the normal functioning of supply/demand forces. When harvests yield bumper crops (as has happened for four consecutive seasons since 1999/2000), the market price for sugar cane falls but farmers may sell more of their cane to sugar mills at the regulated price. Sugar production keeps growing, despite low domestic sugar prices, to levels that are not remunerative for sugar producers. Currently, the industry is in deep difficulties after the phenomenal rise in mill sugar production from less than 14 million tonnes in 1997/98 to more than 20 million tonnes in 2002/03. To prevent a collapse of the sugar industry the government, at both federal and state levels, has dug into its coffers to help sugar millers overcome the financial crunch resulting from considerable payment arrears to cane growers and the rising cost of financing gigantic stocks accumulated by the industry. In November 2002 the central government agreed to set up a buffer stock of 2 million tonnes for a period of one year. The government also has implemented a number of export incentives that permit the variable costs of the industry by exports at least to be covered, despite a cost of production well above world market prices. The measures include inland freight subsidies, ocean freight subsidies and exemption of exporters from levy sugar obligations, from sales quota restrictions and from domestic excise taxes. State governments provide additional further top-ups to the central government incentives. Thus, the government of the main cane growing state of Maharashtra offers 1000 rupees per tonne of exported sugar (US$20/tonne). In 2002/03 for the third consecutive season India was a net exporter with annual exports well in excess of 1 million tonnes. In the longer run, the shape of the domestic market and, to a great extent, of large-scale exports, depends on the future national sugar policy. The industry has strongly advocated a total lift of control from the sugar sector, and this was promised by the government at the beginning of 2002. However, instead of abandoning the remaining straitjacket regulations, the government has strengthened them by amending the Essential Commodities Act 2003 so as to make the periodic quota release mechanism legally enforceable. In March 2003 the government decided to defer complete decontrol of the sugar market until October 2005 in order to give the industry some time to put its house in order. Although India has great 273

The world sugar market

potential for expanding production and even becoming a reliable and steady sugar exporter, the future of the industry with an internationally uncompetitive cost of production, due to government imposed interferences, remains rather bleak. Some market commentators believe that ethanol production from molasses and primary sugar cane juice represents a paradigm shift for the industry. The ethanol programme was launched in nine selected states at the beginning of 2003 but so far the programme faces severe teething troubles.

Indonesia Currently Indonesia is the world’s second largest sugar importer and the largest buyer of white sugar. In 2002 Indonesian white sugar imports surpassed the 1 million tonne level. In addition, the country imports between 400,000 and 500,000 tonnes of raw sugar annually. With more than 210 million people and relatively high per capita consumption (15.9 kg in 2001, compared to averages of 14.1 kg and 21.0 kg for Asia and the world, respectively), Indonesia has become an important destination on the world sugar map. Indonesia is also a sizeable cane sugar producer; as recently as the mid-1990s the country harvested nearly 2.5 million tonnes of sugar, which covered more than 80% of domestic needs. Table 12.8 shows sugar production, consumption and imports for Indonesia in recent years. The Indonesian industry comprises three distinct sectors: the Table 12.8 Indonesia: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

1996

2,100,477

1,205,795

7,606

-1,198,189

3,073,758

551,806

1997

2,189,400

1,976,959

0

-1,976,959

3,350,000

1,368,165

1998

1,492,734

2,199,269

0

-2,199,269

2,736,002

2,324,166

1999

1,490,300

1,905,486

15,133

-1,890,353

3,000,000

2,704,819

2000

1,685,000

1,558,532

74,174

-1,484,358

3,375,000

2,499,177

2001

1,850,000

1,306,722

734

-1,305,988

3,500,000

2,155,165

2002

2,150,000

1,569,128

779

-1,568,349

3,650,000

2,223,514

274

Ending stocks

Prospects in major exporters and importers

state-owned mills on Java, the state-owned mills on the Outer Islands and the private sector factories (five on the Outer Islands and two stand-alone refineries on Java). Fifty-nine state-owned mills are currently responsible for 61% of all sugar production. Although Java has the best soils and sugar productivity, the share of total sugar production supplied from the Outer Islands has increased in recent years. By far the greatest share of non-Javanese sugar is produced by the private sector operating the most technologically advanced large-scale sugar mills. Notably, small farmers supply about 70% of total cane received by the state-owned mills Traditionally (and not surprisingly, taking into account the social importance of the sugar industry), Indonesian authorities consider sugar as one of the nine basic food commodities, and domestic producers have enjoyed a generally high level of protection. For decades the sector, particularly the imports, remained strictly regulated by the government. Declining efficiency of underfunded stateowned mills resulted in a surge of sugar imports in the mid-1990s. Import volumes grew from less than 200,000 tonnes in 1994 to 1.2 million tonnes two years later and further to 1.98 million tonnes in 1997. The 1997 Asian financial crisis triggered radical changes. A series of deregulation measures – at first initiated by the government of its own accord, and later under the IMF reform packages – were introduced affecting both domestic production and imports. The most important was the removal of the monopoly of BULOG (Indonesia’s food logistic agency) on purchasing local sugar and undertaking any sugar imports. In 1998 the sugar trade was open to general importers, and the tariff on imported sugar was removed to soften the price increase to consumers that arose from the depreciation of the local currency. The first effect of deregulation was a considerable drop in sugar production (from 2.2 million tonnes in 1997 to 1.5 million tonnes in 1998 and 1999) combined with a severe over-importing of sugar in 1998 and 1999. Under pressure from domestic producers and after consultations with the IMF, the government introduced a 25% tariff on imported sugar. An introduction of even low, by international standards, import protection helped to halt the uncontrolled flood of cheap sugar imports, which reduced from 2.2 million tonnes in 1998 to just 1.3 million tonnes in 2001. In 2002 the government further toughened the import regime. Ad valorem duty was replaced by flat rate import duties of Rp550/kg for raw sugar and Rp700/kg for white sugar, which, bearing in mind the level of world market 275

The world sugar market

prices and exchange rates, represented a fairly significant increase in the level of border protection. Only sugar refineries were allowed to import raw sugar, while the government appointed public companies dealing with cane processing (PTPNs) as sole importers of white sugar. Moreover, in 2003 the Ministry of Agriculture introduced a rather unique, in international practice, measure of additional import control: a national standard on imported raw sugar with an aim to protect consumers from consuming raw sugar without additional purification. In the long run, the government plans to boost the productivity of the sugar sector and the cane growers in order to achieve selfsufficiency in sugar by 2007. Intended productivity boosting measures are to improve irrigation, introduce high quality seeds, provide increased credit subsidies to sugar farmers and maintain effective border control. Protection could be scrapped by 2007 when national sugar output is expected to rise, so the production cost can be kept down. It remains to be seen, however, whether cost of production in an ailing sugar sector in Indonesia can be reduced to a level that makes the industry internationally competitive. As discussed previously in Chapter 8, there have been numerous intentions to expand sugar production in importing countries. Proclaimed political goals, however, rather rarely have resulted in increased long term selfsufficiency, which keeps decreasing worldwide. In the case of Indonesia, some western sources (Evans, 2002) suggest that, even with government and foreign investment (resulting in increased efficiency of rationalized industry), import requirements remain of the order of 1 million tonnes a year.

Japan Japan is one of the few countries in the world which produces both beet and cane sugar. Sugarbeet is grown in the large northernmost island of Hokkaido, while cane is cultivated in Japan’s southernmost islands extending towards Okinawa. Sugar production is stable at about 850,000 tonnes per year, raw value (650–700,000 tonnes from cane, the rest from beet). As already discussed in Chapter 10, the government offers one of the world’s highest levels of support to domestic sugar producers. A large industry producing high fructose corn syrup (HFCS) from imported corn and domestic

276

Prospects in major exporters and importers

potato4 has evolved since 1977. Currently a mature HFCS industry producing around 800,000 tonnes, in sugar equivalent, a year is responsible for one quarter of the overall caloric sweeteners supply. Another particularity of the sugar market in Japan is the full saturation of consumption. The sugar/HFCS consumption ratio has shown very little change since the beginning of the 1990s. Moreover, both the HFCS and sugar sectors operate within a sweeteners regime that provides little incentive for expanding output. The existing regime includes a guaranteed minimum price for cane and beet, heavy subsidies to domestic sugar producers, government control over raw sugar import volume, prohibitive duties on white sugar imports, and surcharges on the HFCS producers acting as a kind of production quota system. This practically fixes the balance between sugar and HFCS. Government interventions impose high prices on consumers for both sugar and HFCS, which is thought to be a driving force behind the decrease in the overall use of caloric sweetener in Japan.5 In October 2000 new adjustments to the policy were introduced, in an attempt to lower consumer prices. The government doctrine is shifting away from market price stabilization towards support of domestic production, so as to minimize the impact of government policies on consumer prices for sugar. Thus, import duty on raw sugar was reduced to zero in 2000. The government also changed the procedure for calculating minimum beet and cane prices, in order to reduce the industry’s costs. These measures seem to be holding back a fall in sugar consumption. The Ministry of Forestry and Agriculture projects internal demand for centrifugal sugar to reach 2.25 million tonnes in 2002/03, as against 2.213 million tonnes in the previous season. With the existing policy of support for national growers and processors and with the highly saturated sweetener market, no structural increases in sugar imports, due to lower domestic sugar output or higher consumption, can be realistically expected in the near future. In the longer run, the position of Japan on the world sugar

4 The current regulations require 1/12 of starch used by HFCS producers to be acquired from local starch sources. 5 The recent USDA study ‘Sweetener Policies in Japan’ concludes, ‘because of high sweetener prices, consumers have less to spend on other items, and consumption of sweeteners is lower in Japan than it would be otherwise’. In 2001 Japanese per capita sugar consumption was 18.4 kg, as against the world average of 21 kg.

277

The world sugar market Table 12.9 Japan: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year 1996

Production

Imports

Exports

Net trade

Consumption

Ending stocks

881,849

1,707,785

6,349

-1,701,436

2,579,208

677,199

1997

782,723

1,756,876

11,733

-1,745,143

2,471,295

733,770

1998

869,880

1,604,044

7,810

-1,596,234

2,426,842

773,042

1999

913,204

1,562,926

4,790

-1,558,136

2,541,276

703,106

2000

842,171

1,607,284

3,165

-1,604,119

2,412,623

736,773

2001

822,777

1,571,556

2,130

-1,569,426

2,339,407

789,569

2002

901,348

1,510,887

2,256

-1,508,631

2,432,774

766,774

map will be defined by the speed and depth of sugar policy reform and liberalization (in the context of the WTO Doha Round negotiations on agriculture). According to a 1999 study by ABARE, if Japan cut its tariffs, surcharges and levies on sugar imports to zero over a five year period, domestic production would decline by 200,000 tonnes or 22%, but most of the domestic sugar production would remain because of other means of support by the government. Consumption would grow by 300,000 tonnes, or 13%, leading to a 500,000 tonne increase in sugar imports. The study assumed that HFCS production would be unaffected (meaning that no changes in the US agricultural support policy, which may affect prices of imported corn, were envisaged). More recent modelling at the economic research service of the USDA, using a multi-commodity partial equilibrium framework, has simulated what might happen if Japan were to eliminate all its border protection as well as all trade-distorting domestic support. After a few years of adjustment, sugar production is expected to fall by over 40% and imports to rise from 560 to 730,000 tonnes, depending on the reaction of corn imports and HFCS production to falling domestic, but rising global, sugar prices. Table 12.9 shows Japan’s sugar statistics for recent years.

Russia Russia today is the world’s leading sugar importer, purchasing annually from 4.5 to 5.5 million tonnes of sugar from the world market. 278

Prospects in major exporters and importers

State subsidies on beet sugar production and imported raw sugar tolling were finally abolished in 1993. The removal of state support from beet production, and sharp reductions in state subsidies to agriculture in general, resulted in large reductions in beet areas, yields and sugar production. The transition from a centrally planned to a market economy has also taken its toll on the processing sector. In 1990 Russia had 96 sugar factories. By 2002 the number of working factories had fallen to 84. Substantial growth in output is hardly possible without massive investments. At present the financial situation of the industry is not that bad. Currently about 80% of the factories belong to Russian sugar trading companies, who are wealthy enough to finance both regular maintenance and technological upgrades of the factories. Some in the industry believe that there is enough money in Russia itself, and no foreign investments are required. There is little doubt that domestic capital can provide financing, but clearly it would be unrealistic to expect the same source to supply the badly needed know-how, management and marketing. The Herculean task of a massive upgrade of the Russian sugar industry may, therefore, be unachievable without active participation of the world’s leading sugarbeet producers. Russia belongs to the group of low sugar yield producers – yields there are still four to five times lower than in Western Europe. Even if Russian sugar yields were only half of those achieved by the industries of Germany or France, with the same beet areas and slicing capacities as today Russia would more than double output and would produce 4 million tonnes of sugar. So far domestic sugar production covers only 20–25% of consumption (see Table 12.10). The rest is imported from the world

Table 12.10 Russia: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

1,851,202

3,275,300

236,108

-3,039,192

5,235,234

3,900,984

1997

1,337,230

2,984,951

38,792

-2,946,159

5,308,387

2,875,986

1998

1,369,503

3,732,478

36,675

-3,695,803

5,450,000

2,491,292

1999

1,651,224

6,446,540

149,157

-6,297,383

5,565,232

4,874,667

2000

1,705,275

5,288,303

168,822

-5,119,481

5,706,541

5,992,882

2001

1,756,527

6,003,595

201,667

-5,801,928

5,847,844

7,703,493

2002

1,756,796

4,958,935

358,509

-4,600,426

6,500,000

7,560,715

279

The world sugar market

market, mainly in the form of raw sugar. In the context of imports another rather unique characteristic of the Russian sugar market has to be mentioned: large-scale refining of imported raw sugar. The ratio of sugar produced from domestic beet to imported raw sugar testifies that, for the overwhelming majority of factories, beet sugar has become an auxiliary product or even by-product, while the lion’s share of output, profit and cash flow comes from raw sugar processing. In the longer run, the shape of the domestic market will depend on the future sugar regime. Large-scale imports are vital for Russia. The question is whether to import white or raw sugar. The industry’s interest in keeping factory capacities busy during the inter-crop period is rather obvious. Non-subsidized sugar factories processing beet for less than four months a year can only survive with additional money made on raw sugar tolling. Tolling provides for a continued utilization of the industrial capacities and labour force. The situation with white sugar imports, considered by Russians as the main danger, is quite clear. Starting from 1994 Russia has managed, slowly but steadily, to build up a high level of border protection against imported white sugar. Currently, white sugar imports are subject to a prohibitive US$340/tonne import duty. Raw sugar imports seem to be a much more complicated problem. At one stage raw cane sugar tolling was seen as a panacea. To facilitate raw sugar imports in July 1995 the government even reduced the import duty on raw sugar from 20 to 1%. However, imports of raws went out of control in 1997/98, when 4.3 million tonnes, well in excess of the estimated import demand, were imported. Domestic prices were pushed well below the cost of production of beet sugar, making domestic sugar uncompetitive. Since then Russia has tried a combination of different tariff mechanisms, like high seasonal duties and tariff rate quotas (TRQ) with a gradual increase in the level of the import duties on both, TRQ and non-TRQ. Finally, at the end of 2003 after a long political battle the government decided to abolish the two tier scheme and introduced a system of variable tariffs. The rate of tariff for raw sugar is linked to the monthly average of New York Board of Trade sugar futures based on the daily closing price, calculated and announced by the 15th of the following month. If the average price is US$99.21/tonne (4.5 cents/lb) or less, a maximum tariff of US$270.00/tonne will apply. If the world price is at US$198.43 (9 cents/lb) or higher, a minimum tariff of US$140.00/tonne is used. The remaining seven tariff rates fall within a range of equal intervals. White sugar imports 280

Prospects in major exporters and importers Table 12.11 Sugar import regulations in Russia 2004

2003

2002

2001

3.95

3.65

3.65

Quota is not divided by quarters or semesters

3.35

2.65

Tariff rate quota Raw sugar TRQ (mln t) of which, in the 1st semester

Abolished

in the 2nd semester

0.30

1.00

TRQ rate

€95/tonne

5% but no less than €15/ tonne

5% but no less than €9/ tonne

TRQ licence cost (annual average)

€102.60/ tonne

US$50.60/ tonne

US$58.18

From US$140/ tonne to US$270/ tonne US$340/ tonne

€200/tonne

40% but no less than €120/ tonne

30% but no less than €90/ tonne

€240/tonne

40% but no less than €140/ tonne

30% but no less than €120/ tonne

N/a

1.07–31.12 €230/tonne

1.07–1.10 50% but no less than €150/ tonne

Non-quota imports Import duty Raw sugar

White sugar

Seasonal duties Raw sugar

White sugar

Sugar imports (in mln mtrv)

N/a

1.07–31.12 €270/tonne

1.07–31.12 50% but no less than €180/ tonne

2003/04 4.800

2002/03 4.815

2001/02 5.271

1.10–31.12 €200/tonne

for both raws and whites IV quota (from 19 November) – 40% but no less than €120/tonne

2000/01 5.733

are subject to a fixed duty of US$340/tonne. At a glance, the level of border protection seems to suffer only marginal changes from the previous regime (see Table 12.11). The white sugar import duty has increased under the new regime to US$340/tonne (€282/tonne) from €270/tonne (seasonal duty on white sugar for the second half of 2003) 281

The world sugar market

– a level which has already proved prohibitive – and a further increase does not change the picture. In any case, it is clear that the cornerstone of Russia’s official sugar policy stays. The level of protection of domestic producers of beet sugar is high. The industry believes that the domestic market is more stable and predictable now. Moreover, a better protected sector is expected to attract more investments. There is little doubt that the shape of the future sugar regime will depend to a large extent on the terms of accession of Russia to the WTO. What is the Russian position there? Russia intends to keep the existing high level of border protection. It is clear that the current prohibitive level of import duties cannot be welcomed by the WTO; therefore, it remains to be seen how successful Russian negotiators will be in Geneva. Overall, the government target for the coming seven years is to reach 50% self-sufficiency in sugar. When the targeted level of self-sufficiency is achieved, Russia may gradually reduce the level of border protection. For how long will Russia be the leading importer? The likelihood of Russia’s disappearance from the top position in the league of world importers in the coming 10 years is very remote. Even with a sharp increase of domestic production and a rise in the level of self-sufficiency up to the targeted 50%, Russia will still need to import 3 to 4 million tonnes annually, which guarantees its presence on the world market as a leading importer of sugar.

Thailand As with Australia and Cuba, the Thai sugar industry is highly dependent on exports. In 2002 the country produced 6.4 million tonnes, raw value, while consumption did not exceed 2.0 million tonnes. Apart from a small (14,700 tonnes a year) US tariff rate quota, the country has no access to preferential trade. Thailand is amongst the low cost producers, but even so the cost of sugar production in the country is estimated to exceed by nearly 30% that in the world’s most efficient sugar producers, like Brazil or Guatemala. As a result, sugar production cost in Thailand may be considerably higher than world market price. In order to ensure a sufficient return to growers, since the mid-1980s domestic prices have been set sufficiently high for domestic returns plus export returns to adequately maintain the producer. Since then, Thailand has operated with three quotas: 282

Prospects in major exporters and importers

A The white sugar quota for the domestic market; B The raw sugar export quota for the Thai Cane and Sugar Corporation, for the purpose of establishing a reference export price; and C The quota for the residual of raws and whites to be exported by private millers in unrestricted quantity. In 2002 domestic sugar retailed at 13.25 bahts/kg, an equivalent of nearly 14 cents/lb, compared to the annual average of the LDP (whites) at 10.35 cents/lb. The revenue from the three quotas is combined and shared (after the cost is subtracted) 70 : 30 between growers and millers. Another distinguishing feature of Thailand’s sugar industry is its remarkable ability to respond quickly to world market signals and shift production and export programmes from white to raw sugar and vice versa. Thus, in 2000 Thailand increased white sugar exports to 1.9 million tonnes from 1.4 million tonnes in the previous year, then reduced them to just 1.1 million tonnes the year after, but came back to a 2 million tonne level in 2002. For decades Thailand and Australia dominated the Far Eastern sugar market, one of the most dynamic regions in the world in terms of import demand, also characterized by significant physical premiums explainable by the freight disadvantage of the region (to bring sugar from the western hemisphere would require a freight three to four times higher than in the case of Thailand’s origin). At the end of the 1990s the situation changed with the arrival of large quantities of Brazilian sugar following decreases in ocean freight rates. More recently a fragile equilibrium of the premium Far Eastern market has been further disturbed by an influx of sugar from India, a new supplying power in Asia. In the long run, Thailand’s future sugar production and the country’s place on the world sugar map depend on the sustainability of the existing revenue sharing system. On the one hand, the system ensures sufficient returns to growers and millers. Its success, however, is limited by the size of the domestic market, as lower revenues from ever growing exports are supposed to be counterbalanced by higher prices received for sugar sold domestically. Not unpredictably, in July 2003 the Thai Cabinet decided to limit sugar cane output with the guaranteed cane price as part of a bid to tackle problems in the sugar industry. Under the output restriction measure, cane production has been limited to 65 million tonnes annually, thus 283

The world sugar market Table 12.12 Thailand: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

6,154,135

0

4,628,193

4,628,193

1,706,446

374,960

1997

6,243,064

4

4,317,134

4,317,130

1,828,583

472,311

1998

4,143,332

17

2,443,777

2,443,760

1,833,974

337,909

1999

5,455,644

0

3,429,929

3,429,929

1,776,479

587,145

2000

6,157,138

0

4,341,374

4,341,374

1,815,990

586,919

2001

5,370,310

0

3,364,022

3,364,022

1,954,713

638,494

2002

6,437,797

5

4,203,826

4,203,821

1,978,090

894,380

guaranteeing a cane price of 580 bahts per tonne, which is believed to be a remunerative level for growers. The restrictions are planned to be implemented from 2003/04 until 2007/08. Cane produced over the 65 million tonne level will not receive the guaranteed price. Meanwhile, some market commentators suggest that in 2003/04 Thailand will produce an even larger crop of 75 to 80 million tonnes. To some extent a further growth in cane production comes as no surprise, taking into account the incentives generated by the government guarantee of a remunerative price paid to growers. Table 12.12 shows sugar production, consumption and exports for Thailand in recent years.

USA The US sweetener market is the largest and most diverse in the world. Presently, corn sweeteners comprise the major part of total consumption of caloric sweeteners in the country. In 2001 total US consumption of caloric sweeteners was 21.45 million short tons, of which corn sweeteners (including HFCS, glucose and dextrose) accounted for 56% and sugar for the remainder. The country is also one of the world’s largest sugar producers and importers. In terms of sugar production, the United States ranks among the top five producers and is one of the few countries with significant production of both sugarbeet and sugar cane. The United States has a long history of government support for domestic sugar production. Sugar production has been rising steadily 284

Prospects in major exporters and importers

since the early 1990s. Incentives for US farmers to plant sugarbeet and cane, provided by the US sugar programme, have made sugar crops the most lucrative crops per acre in the country. As a result, domestic sugar production increased from 6.8 million tonnes, raw value, in 1992 to a record 8.2 million tonnes in 1999. Since then, the drastic measures taken by the government to reduce an oversupply on the domestic market have resulted in a halt of production expansion. In August 2000 the USDA announced a payment in kind (PIK) programme designed to remove up to 300,000 short tons from the domestic market in the 2000/01 fiscal year and boost domestic prices. Under the PIK programme, the USDA paid beet growers in government-owned sugar to plough a portion of their fields. About 105,000 acres were submitted for destruction. A new PIK package was offered again in 2001/02. The programme was also extended to cane growers. This time beet and cane growers were offered the opportunity of ‘diverting’ production from part of their 2001 crop in exchange for sugar already in government stocks. The 2001 PIK programme reduced the harvested area by nearly 90,000 acres and domestic sugar output by about 200,000 short tons. In contrast to the growing production, domestic consumption of sugar has shown only a modest growth (see Table 12.13) as a result of severe competition from alternative sweeteners, particularly HFCS. Production growth, at a rate significantly higher than that of consumption growth, results in a fall in imports. Twenty years ago the United States imported nearly 5 million tonnes a year. Even at the beginning of the 1990s the US imported from 2 to 2.5 million tonnes of sugar a year. Since 1999/2000 the effective US import tariff quota

Table 12.13 USA: sugar production, imports, exports, consumption and stocks, 1996–2002 (tonnes, raw value) Calendar year

Production

Imports

Exports

Net trade

Consumption

Ending stocks

1996

6,593,493

2,869,709

266,260

-2,603,449

8,701,145

3,205,623

1997

6,731,400

2,953,039

135,916

-2,817,123

8,800,000

3,954,146

1998

7,159,033

2,056,442

151,620

-1,904,822

9,049,293

3,968,708

1999

8,243,400

1,588,804

135,755

-1,453,049

9,066,500

4,598,657

2000

8,080,428

1,373,705

70,275

-1,303,430

9,051,076

4,931,439

2001

7,774,000

1,257,935

104,109

-1,153,826

9,139,000

4,720,265

2002

6,804,770

1,373,892

96,827

-1,277,065

9,079,424

3,722,676

285

The world sugar market

has reached the WTO minimum, and in 2001 net imports were as low as 1.2 million tonnes. Significantly, virtually all sugar imports to the United States come under preferential trade. On the one hand, the tariff rate quota (TRQ) is the main instrument of protection for the US sugar industry. Tariff rate quotas are used to limit the supply of imported sugar to the domestic market, with the objective being to prevent domestic sugar prices from falling below the loan rate. On the other hand, the TRQ provides to a number of producers an access to the lucrative US sugar market with prices from two to three times higher than world market prices. The top four quota-holding countries are the Dominican Republic, Brazil, Philippines and Australia, accounting for 51% or 568,000 tonnes of the total TRQ minimum access imports. In May 2002 the USA enacted comprehensive new farm legislation. The new Farm Bill maintains the key provisions of the previous sugar programme, the cornerstones of which are the price support loan system and the tariff rate quota for imported sugar. US sugar policy appears unsustainable in the longer term and is likely to face pressures for change during the second half of the current decade. In particular, likely over-quota imports together with higher loan rates (as against the 1996 Farm Law) will probably continue to result in excess sugar production and loan forfeitures to the US government – particularly since marketing allotments are to be suspended once imports exceed the 1.532 million short ton threshold. US sugar policy will also face pressures from regional trade agreements, such as the already existing NAFTA and CAFTA, as well as the Free Trade Area of the Americas (FTAA), which is currently under negotiation, to allow greater market access, independently from the success of the WTO Doha Round on further reform of world agricultural markets and trade (for more details see Chapter 10).

References Duff A, EU Sugar Policy Mid-Term Review; Rabobank International Industry Note, Issue 085-2003, April 2003. Evans M, The Indonesian Sugar Industry, Proceedings of the 8th Annual Asia International Sugar Conference, Bali, Indonesia, 2002. Ferrier GD, The Indian Sugar Industry, Sugar and Related Sweetener Markets: International Perspectives, New York, 2002. 286

Prospects in major exporters and importers Gudoshnikov S, Russian Sugar Industry after 10 Years of Market Reform, International Sugar Journal, May 2003. Hagelberg GB, Cuba’s Sugar Industry: Restructuring or Requiescat? F. O. Licht International Sugar and Sweetener Report, Vol. 134, No. 31, October 2002. Hildebrand C, Independent Assessment of the Sugar Industry, Ministry of Agriculture, Fisheries and Forestry, Canberra, 2002. ISO, Sugar Yearbook, various issues. ISO, Key Drivers of the World Sugar Market (MECAS(02)08), London, 2002. ISO, China’s Accession to the WTO: What Does it Mean for Sugar? (MECAS(02)09), London, 2002. ISO, Everything but Arms Initiative (EBA): Implications for the World Sugar Market (MECAS(02)18), London, 2002. ISO, The 2002 US Farm Law: Implications for the World Sugar Market MECAS(03)06, London, 2003. Jain SL, Dimensions of India’s Sugar Economy, Proceedings of the 8th Annual Asia International Sugar Conference, Bali, Indonesia, 2002. Knight P, New Flex-Fuel Engines Transform Consumer Options, F. O. Licht International Sugar and Sweetener Report, Vol. 135, No. 21, July 2003. Natasomboon Nattapon, Sugar in Thailand, Proceedings of the 10th ISO Seminar, London, 2001. Sheales TC, Australia’s Sugar Industry: Operating in a Free-Market Environment, Sugar and Related Sweetener Markets: International Perspectives, New York, 2002. USDA, Sweetener Policies in Japan, Electronic Outlook Report, ERS No. SSS234-01, September 2002. USDA, GAIN Indonesia Sugar Annual Reports, 1998–2003. The Asian Triangle: Thailand, India and China, F. O. Licht International Sugar and Sweetener Report, Vol. 135, No. 15, May 2003. New Sugar System in Japan and Negotiating Proposal by Japan on WTO Agricultural Negotiations, presentation to the ISO Workshop ‘Sugar in the WTO’, New Delhi, India, 2001.

287

C H A P T E R

13

World market perspectives

In the preceding chapters the key economic and political drivers pushing and pulling the world sugar market in different directions have been identified and analysed. These drivers have created tumultuous developments in the world sugar economy that have seen the world raw sugar price remain below the 8 cents/lb level for most of the past five years. Our analysis raises interesting questions for the future of the world sugar market. Whilst in each of the relevant chapters we have attempted to point to the way each driver may impact the market over coming years, there is still the overarching and crucial question of how the main factors are acting together to determine the longer term outlook for the world sugar economy to 2010.

Low world prices: the main characteristic of the current market A quick look at world sugar production between 1994 and 2002 shows that it grew by a spectacular 32 million tonnes, at an average annual rate of more than 3%. Global demand during the same period also rose by a seemingly healthy 2.0–2.5% a year, but in absolute terms the increase has not been more than 24 million tonnes. The difference has resulted in a massive stock overhang. In 2002 alone, world sugar output was 5.4 million tonnes higher than consumption. Growth in stocks automatically followed. The situation in 2003 288

World market perspectives

was slightly better in terms of the size of the surplus but production again, as estimated, outstripped consumption, while the outlook for 2004 remains generally bearish with a high probability of further growth of global sugar stocks. These bearish fundamentals have been instrumental in determining world market price dynamics. The world raw sugar price (the ISA daily price) collapsed from 12.53 cents/lb in January 1996 to 6.28 cents/lb in December 2003. As a consequence, since 1998 the level of world prices generally has remained well below the cost of production for even the majority of efficient low cost producers.

Developing a market view to 2010 How long can the market stand being continuously devastated by a structural surplus? Economics teaches us that, in the long run, supply and demand must equal each other, and the market must rebalance to achieve equilibrium prices. If the demand function has a negative slope and the supply function a positive one, the two curves should intersect at some point. Above the equilibrium price, the consumers are willing to buy less than the producers are willing to sell. Below the equilibrium price, on the other hand, demand exceeds supply. Actual market prices therefore tend to approximate the equilibrium price under pure competitive market conditions. In theory, any imbalance rectifies itself over time, making low prices the best cure for low prices. The analysis given in the preceding chapters shows, however, that so far actual market prices permanently deviate from the true equilibrium price because the world sugar market does not come anywhere close to nearcompetitive market conditions. Will the normal rules of supply and demand begin to apply to the world sugar market over the longer term? In other words, can low world market prices eventually cure the structural surplus and price volatility? To make an overall assessment of the market to 2010, the future path of five main elements paramount to the longer term outlook are assessed below: world consumption growth and its geographical focus; whether production capacity can restrain consumption growth; expectations regarding the pace and extent of sugar policy reform; Brazil’s potential to expand sugar production and exports; and the outlook for fuel ethanol programmes. 289

The world sugar market WORLD CONSUMPTION GROWTH AND ITS GEOGRAPHICAL FOCUS

World consumption will continue to be the key driver of the world sugar economy to the year 2010. With mature markets such as the United States, the EU and Japan showing little or no growth in sugar consumption, the key driver of future consumption growth will continue to originate in developing countries – Asia and the Middle East particularly. The two drivers determining the pace of sugar consumption in developing countries are population growth and per capita income levels. Although population growth is projected to be slower to 2010 than during the previous decade, it should be more than compensated for by projected higher per capita income. Of course sugar is part of a broader global sweeteners market and competes with high fructose syrup and intense sweeteners. Even though there is every prospect that the share of sugar in the expanding global sweeteners market is likely to continue to be slowly eroded, particularly through the blending of sugar and intense sweeteners in non-diet products, this is unlikely to be sufficient to slow the rate of sugar consumption growth below its long term average of more than 2% a year. Similarly, high fructose corn syrup is unlikely to displace significant volumes of sugar during the remainder of this decade in any country – the United States will remain the globe’s dominant producer and sugar will only suffer should US sugar policy collapse and US sugar prices tumble. In China, should the fledgling HFCS industry become fully established, any impact on reducing sugar demand is potentially overwhelmed by the stated policy stance to reduce saccharin production. Reform of EU sugar policy could open an opportunity for much greater isoglucose output (presently subject to quota controls) but again, the opportunity is not likely to evolve prior to 2010, as set by the sugar policy reform agenda. Extrapolating the long term growth trend forward, global sugar consumption would reach 145 million tonnes in 2005 and 160 million tonnes in 2010.

CAN PRODUCTION CAPACITY RESTRAIN CONSUMPTION GROWTH?

Having argued that substantial growth in world sugar demand is likely, let us look at perspectives for global output. Can production capacity restrain consumption growth? There is very little reason to doubt that, in the long run, world production can keep up with the 290

World market perspectives

growth in world consumption. Of course, weather shocks can put the world sugar balance into a one or two season deficit phase. However, short term production shortfalls are not expected to cause a structural deficit. What are the arguments behind our confidence in the growth potential of the world sugar industry, despite the low world market price environment? Historically, world production does not change much in response to world market price movements from one year to the next. In the previous chapters we have identified a number of reasons for this: the ratoon nature of the cane crop, the capital intensity of the sugar processing industry and the generally low world market dependence of most producers. There are no grounds to expect these three fundamental drivers to change in the coming decade. In addition, technological advances and further efficiency gains in field and factory are anticipated, resulting in higher sugar yields and further growth of global output. Moreover, due to government support policies (often pursuing self-sufficiency goals), a significant proportion of world production is conducted at prices that bear little relation to world market prices.

EXPECTATIONS REGARDING THE PACE AND EXTENT OF SUGAR POLICY REFORM

A key driver for the world sugar market over the longer term is sugar and sweetener policy reform. But for the period to 2010, will the extent and price of reform be sufficient to impact the market? Whilst unilateral reform pressures are being compounded by regional and multilateral pressures, the pace and magnitude of sugar policy reform will arguably not be sufficiently substantive to impact the sugar market before the end of the decade unless policy makers implement much bolder steps towards policy reform than has been evident for some years. The WTO negotiations under the Doha Round are geared towards gradually reducing general distortions in agricultural trade, including sugar. Forecasting the outcome of the Doha Round is difficult. Many observers believe that the Round will now be more protracted than originally envisaged because of the failure to reach agreement at the WTO Ministerial Meeting in Cancun, Mexico, in September 2003. Even if the Doha Round is concluded by the originally planned deadline of 1 January 2005, the agreed outcome is unlikely to include modalities for marked 291

The world sugar market

reductions in tariff barriers, domestic support and export subsidies without relatively long transition periods. Such an outcome suggests that more significant reductions in domestic support and export subsidies and improvements in market access would not occur until early in the following decade. What about unilateral pressures for sugar reform? The primary focus for sugar policy reform and liberalization is likely to be in the countries which continue to offer a high level of support to their domestic sugar industry, headed by the United States and the European Union, but also including developing countries and countries in transition. United States sugar policy is not due for renewal until the expiry of the Farm Security and Investment Act 2002, which governs federal farm programmes for the following six years. Even so, the move towards a fully integrated sweeteners economy between Mexico and the United States potentially holds significant implications for the United States sugar programme, even though full integration is not scheduled until 2008. The possibility of NAFTA high tier imports entering the US market and the consequent injection of free trade dynamics into the otherwise carefully managed US domestic system holds some potential to undo the support programme before 2008 unless an agreement over sweeteners trade between the two countries can be established as an adjunct to the NAFTA provisions. After 2008, a truly free common market for sweeteners between the United States and Mexico could possibly cause chaos for both markets. NAFTA-mandated free trade in sugar and corn sweeteners would be likely to see US HFCS displace Mexico’s use of sugar in the soft drinks sector, with the resulting surplus shipped to the United States. Perhaps, then, there are sufficient incentives on both sides to achieve a negotiated, flexible level of exportable supply from Mexico that can be shipped into the United States in the years immediately following the 2008 common market deadline. Such an outcome again supports our contention that the US sugar market will remain relatively protected for much of the current decade, but only if sugar continues to be effectively excluded from other bilateral and regional trade deals being pursued by the US government. In the European Union, sugar so far has been excluded from broader reform of the Common Agricultural Policy. Member countries must, however, reach agreement on a reformed sugar policy to come into force from 1 July 2006. Forecasting the final form of EU sugar policy post 2006 remains difficult because the highly political 292

World market perspectives

debate about the three families of policy options (the maintenance of the status quo; a reduction in internal prices coupled with the eventual phasing out of production quotas; and complete liberalization of the EU sugar market) has yet to run its full course. There will be real difficulties in finding a reform option acceptable to all member states, and one which can cater for full liberalization of LDC access under the Everything but Arms initiative (EBA). There is every possibility that a transition period would be implemented where the initial cuts to production quotas and the intervention prices would not be severe. Consequently, during the first years of the new policy environment sugar production and exports would most likely not rapidly contract. More significant quota and price cuts later in the transition period (early next decade) would more severely impact industry revenue, and less competitive industries within the EU would face major adjustment pressures. This assessment of course assumes that the WTO challenge to EU sugar policy (currently under investigation under a WTO dispute panel) by Brazil, Australia and Thailand is unsuccessful in forcing more immediate and sharper reforms. What is the potential for significant reform of sugar policy through bilateral and plurilateral regional trade agreements? Sugar stands alone as the one commodity which has commonly been granted longer implementation periods, or has even been excluded altogether, from the trade reform goals of the pacts. For instance, there is every possibility that the complicated FTAA negotiations to harmonize the sugar policies of the United States, Brazil and Mexico, as well as to maintain the longstanding trade preferences afforded to the Central and South American developing countries as part of the US raw sugar tariff rate quota, will see a resort to special provisions for sugar – possibly yet again delaying significant reform until after 2010. Sugar remains a disputed issue within MERCOSUR and is unlikely in any case to impact Brazil’s massive potential to expand its production over the longer term. Within SADC and the AFTA, sugar trade will not be free until after 2010. Crucially, the recently concluded negotiations over the US–CAFTA have afforded only minimal increased access to Central American sugar producers. Because the extent of the US price premium (which is the underlying factor driving the desire of third countries to increase their access to the US sugar market) depends on the existence of quota restrictions, as market access is expanded through an increasing quota under bilateral trade deals, the US price will tend to move downwards towards the world price. 293

The world sugar market BRAZIL’S POTENTIAL TO EXPAND SUGAR PRODUCTION AND EXPORTS

In discussing longer term world perspectives no one can omit the special role of Brazil, the world’s leading producer of sugar cane, sugar and ethanol. Brazil is currently one of very few significant exporters that can sell sugar in the world free market at a profit. Brazil’s phenomenal export competitiveness reflects the low production costs in the country. This is brought about largely by a unique feature of the cane processing industry – sugar production represents only one, and not necessarily the biggest, outlet for cane processors. Reflecting the dominance of the Latin American giant in the world market, which is expected only to grow in the future, Brazil has been discussed in detail in nearly every chapter of this book. Without any fear of exaggeration, one can say that the prospects of the gigantic sugar cane processing industry will, to a great extent, shape the global sweetener market throughout the remainder of the decade. The long term future of Brazil’s cane processing industry will be influenced by a number of not very predictable factors including world market prices for oil and sugar, as well as the level of government support to biofuels all over the world and in Brazil itself. What is clear is that Brazil’s cane producing and processing potential is far from exhausted. There is little doubt that the country may single-handedly cover most of the additional import demand in the coming years, even if the ambitious plans to rapidly increase domestic ethanol consumption and exports onto the emerging potentially massive world market for ethanol are fulfilled.

ETHANOL PROGRAMMES – IMPACTING CANE SUPPLY FOR SUGAR BEFORE 2010?

Renewed enthusiasm for biofuels is likely to unleash considerable demand for fuel ethanol over the medium to longer terms. Ethanol demand and output rivalling those of Brazil are likely to materialize in both the European Union and the United States during the second half of the decade, on the basis of new legislation. Governments in Asia, Europe and the Americas are mandating ethanol inclusion in gasoline and offering fuel excise exemptions (amongst other incentives) to ensure commercial viability, in order to address greenhouse gas abatement targets, air quality concerns and energy security goals. Fuel ethanol consumption is therefore likely to rise considerably 294

World market perspectives

in the longer term, based on forecasts of transport fuel demand growth rates and on the basis of existing and proposed ethanol incorporation rates. Presently, Brazil and France are the only two major sugar production countries using sugar crops as fermentation substrate. In terms of the sugar market outlook to 2010, what is the likelihood that today’s fledgling fuel ethanol schemes will use sugar crops to the point where some countries switch cane away from sugar towards ethanol, thereby reducing export supply, as opposed to developing new land to produce sugar crops for ethanol production? The answer in part will depend on the relative costs of different substrates in each country (e.g. sugar crops as against starch crops). Until there is substantial reform of sugar policy in the European Union the bulk of the ethanol demand generated from the EU Directive on Renewable Transport Fuels is likely to come from cereals, particularly wheat, as EU sugar and agricultural policy would continue to limit energy beet to ‘set aside’ land. In the United States, corn refiners are hoping to reap the gains of the phase-out of MTBE and/or a prospective renewable fuels standard, although there would be benefits to the world sugar market to the extent that Brazil is able to share in the gains in ethanol demand by developing an ethanol export trade with that country. India’s fledgling ethanol scheme is first relying on molasses as the primary substrate but by 2005, assuming the country blends 10% ethanol in gasoline, there would be a need for cane to be used for ethanol production, hastening the erosion of India’s huge sugar surplus. Sugar cane would be one of several substrates for Thailand’s ethanol industry and there is the possibility that by mid-decade increasing volumes of cane allocated to ethanol could begin to slow the rate of sugar production growth unless new land is developed to grow cane for fuel ethanol. Japan in 2003 mandated a 3% ethanol/gasoline blend in several cities, and faced with minimal indigenous production capacity will need to develop supply contracts with major ethanol exporters, benefiting Brazil in the first instance. On balance, today’s fledgling fuel ethanol schemes using sugar crops as the main fermentation substrate are not likely to mature into large-scale schemes until later in the decade when blending rates in gasoline are raised. Consequently, from the perspective of the world market, Brazil’s ethanol sector will remain for much of this decade the single most important alcohol related driver impacting world sugar trade and prices, including the extent to which it can develop export markets for ethanol worldwide. Should 295

The world sugar market

import demand in countries such as Japan, China, the United States and Europe develop much more quickly than anticipated, then the potential for the fuel ethanol programmes and trade to relieve supply pressure on the world sugar market will be realized before the decade is over.

Overall view of the market to 2010 and beyond The outlook for the world sugar market remains subject to many uncertainties but the arguments and observations presented in this chapter point to little likelihood of the market attaining a sustainable balance and a consequent sustained revival in world sugar prices before the end of the decade. Whilst consumption will continue to grow at rates similar to the past decade, production capacity in the lower cost producing countries, Brazil in particular, remains such that consumption can be easily met and global stocks will not be significantly run down. Furthermore, although sugar policy reform will continue, it is not anticipated to begin to impact the world sugar market markedly until the verge of the new decade unless EU policy reform is more aggressive than anticipated and US sugar policy is unexpectedly undermined by the market access provisions of regional trade agreements. Consequently, much of the world’s consumption growth can continue to be met by production that does not respond directly to the world market price but instead to much higher domestic prices. The use of sugar crops to meet increasing fuel ethanol demand, whilst being a promising development, is not anticipated to help diminish the structural sugar surplus until late in the decade. In short, low prices will not cure low prices until much more of the world sugar economy is directly impacted and responds to change in the world sugar price. There would appear to be significant potential in the second decade of this new millennium for market rebalancing. Policy reform should advance to the point where higher cost uncompetitive production falters, subsidized exports disappear, and sugar import demand is boosted. Ethanol programmes by this time would also compete more aggressively for sugar crops, allowing sugar production to more closely match consumption growth. A long run equilibrium price that reflects the world market fundamentals and drivers would then be revealed: a price which in all likelihood would be better than today’s level. 296

World market perspectives

Annex: what others are saying Views about the long term outlook for the world sugar market can also be formed on the basis of projections generated from economic models of the world sugar market. As is revealed in this annex, projections released during 2003 for the medium to longer term differ significantly, with several projecting rising stocks and continuing low or lower prices, whilst others project consumption growth exceeding production growth and a consequent rise in world market prices.

AUSTRALIAN BUREAU OF AGRICULTURAL AND RESOURCE ECONOMICS

Source: Andrews N, Sugar Outlook to 2007–08, Outlook 2003 Speakers’ Papers, ABARE, Canberra, March 2003. Sugar consumption is expected to continue its long term trend of steady albeit slow growth. In developed countries demand for sugar is largely unresponsive to change in incomes. In developing countries there is a strong correlation between incomes and sugar consumption. Among the developing countries, it is the expanding economies of east Asia that are the primary growth markets for sugar. World stocks are projected to keep building to 2007–08 with production continuing to exceed consumption, reaching 148.6 and 148.1 million tonnes respectively in 2007/08 (see Table 13.1). The stocks to consumption ratio would peak at 50.8% in 2003–04 before falling to 48.6% in 2007/08, showing that the rate of stocks accumulation is projected to slow. The world indicator price (NY No. 11) is forecast to fall steadily from a high of 8.5 cents/lb in 2002/03 to 7.1 cents/lb in 2007/08.

FAO

Source: FAO, Medium-Term Projections for Agricultural Commodities: Committee on Commodity Problems, Rome, March 2003. Global sugar production is projected to grow at a rate of 2%, similar to the growth of the 1990s. This reflects a continuation of high supplies in the world sugar market that has characterized much of the past decade, including several seasons of record output in major sugar producing nations and 14 year lows in world sugar prices. 297

298

Mt

Mt

%

Consumption

Stocks

Stocks to consumption

USc/lb

– real

10.3

10.0

47.4

60.87

131.4

131.2

2000–01

7.7

7.6

47.8

63.2

133.9

138.2

2001–02

8.5

8.5

49.6

67.7

136.6

140.1

2002–03c

Notes: (a) September–August years; (b) in 2002–03 dollars; (c) forecast; (d) projection.

USc/lb

– nominal

Priceb

Mt

Productiona

Unit

Table 13.1 World stock projections: 2000–2008

7.8

8

50.8

70.1

137.9

140.3

2003–04d

7.4

7.7

50.5

70.6

140.0

140.6

2004–05d

7

7.5

49.8

71.1

142.7

143.1

2005–06d

6.6

7.3

49.2

71.6

145.4

145.8

2006–07d

6.3

7.1

48.6

72.0

148.1

148.6

2007–08d

The world sugar market

World market perspectives

Record production due to high yields and efficiency gains in developing countries, particularly Brazil and India, is particularly notable in regard to projected output to 2010. Developing countries are projected to account for most of the global increase in production, thus raising their share of world production from 67% in 1998–2000 to 72% by the year 2010. Developing countries are also expected to account for virtually all of the projected increase in global sugar consumption (over 30 million tonnes to 2010), with particularly strong growth projected in Asia. Sugar policies have remained virtually unchanged in certain major consuming countries in spite of the general trend towards policy reform. However, a more significant development which will impact on developing countries is the EU’s Everything but Arms initiative, which will redistribute existing market access more towards the least developed countries, albeit in this case only after 2007.

FAPRI (FOOD AND AGRICULTURAL POLICY RESEARCH INSTITUTE)

Source: FAPRI, Agricultural Outlook: World Sugar. Food and Agricultural Policy Research Institute, Iowa State University, University of Missouri-Columbia, January 2003, pp 218–37. FAPRI baseline projections to 2012/13 (from 2002/03) show strong consumption growth to 171.78 million tonnes and with consumption modestly exceeding production in each year of the projection period (see Table 13.3). Stocks therefore steadily decline from 31.09 to 26.11 million tonnes, and world prices steadily rise in nominal terms from $179/tonne to $232/tonne (fob Caribbean price).

GLOBAL SUGAR POLICY SIMULATION MODEL

Source: Koo W and Taylor, R, Outlook of the US and World Sugar Markets, 2002–2012, Agribusiness & Applied Economics Report No. 518, Centre for Agricultural Policy and Trade Studies, North Dakota University, Fargo, August 2003. The baseline projections show that the world sugar economy will improve over the next 10 years after the current oversupply is reduced. World demand for sugar is expected to grow faster than world supply, resulting in an increase in the price of Caribbean sugar of about 54% from 7.88 cents/lb in 2002 to 12.15 cents/lb in 2012. 299

300

1,000 t

US$/t

US$/t

Consumption

Closing stocks

Price, raw sugar (b)

Price, white sugar (c)

236.4

190.0

58,438

130,114

133,356

Average 97/98–01/02

252.3

219.3

60,795

131,643

131,164

00/01

235.3

167.2

63,160

135,852

138,217

01/02

238.1

165.3

67,704

138,600

143,144

02/03

242.5

172.0

67,490

141,265

138,052

03/04

260.1

191.8

66,403

144,099

144,112

04/05

249.1

183.0

65,963

146,890

149,749

05/06

238.1

174.2

67,066

150,220

150,423

06/07

231.5

169.8

67,797

152,770

151,701

07/08

Notes: (a) beginning crop marketing year; (b) raw sugar world price, New York No. 11 fob stowed Caribbean port (including Brazil), bulk spot price, Sep/Aug; (c) refined sugar price, London No. 5, fob Europe, spot, Sep/Aug.

1,000 t

1,000 t

Production

WORLD

Crop year (a)

Table 13.2 World sugar projections (in raw sugar equivalent)

The world sugar market

World market perspectives

Exports are predicted to increase for the EU, Australia, Mexico, South Africa, Thailand and Cuba, while exports are predicted to decrease from Brazil. Imports from all importing countries except the FSU and India are predicted to increase. China’s imports are predicted to increase by 56%, South Korea’s by 16.5% and Algeria’s by 25.2%. Total world trade is projected to decrease by 3.6% from 28.5 million tonnes in 2002 to 27.1 million tonnes in 2012 (a curious result given that world trade was already at 45 million tonnes in 2002). The projections were based on assumptions about general economic conditions, agricultural policies, population growth, weather conditions and technological changes, and were generated using the Global Sugar Policy and Simulation Model.

OECD1

Source: OECD Agricultural Outlook: 2003–2008, July 2003. Changes in the structure of the world sugar market point to little respite from low world prices over the medium term. The emergence of Brazil as a large exporter of raw and white sugar with considerable reserve capacity to expand exports is expected to be the key factor in determining sugar prices over the medium to longer terms. World sugar consumption is projected to increase to 155 million tonnes by 2008/09, growing by an average of 1.9% a year, slightly above world population growth, and remains the key driver of the world sugar economy (see Table 13.2). Sugar consumption is projected to grow fastest in Asia and South America. 1 OECD projections reflect country replies to the annual medium term questionnaire and input from experts within the secretariat and member countries. They are generated with the help of a world sugar model. They are conditional projections in that they are based on a number of specific assumptions about the future course of domestic and international macroeconomic conditions, demographic trends, weather and policy settings – assumes continuation of existing or announced agricultural and trade policies in OECD countries and those non-member countries important to the projections. Full compliance is assumed with commitments under multilateral and regional trade agreements such as the Uruguay Round Agreement on Agriculture and did include the new FSRI Act of 2002–07. The projections do not include EU enlargement, the Doha Development Round, or the mid-term review of the Agenda 2000 CAP reforms. 301

302

Mln t

Mln t

Mln t

Mln t

Mln t

Mln t

Mln t

US$/t

Production

Beginning stocks

Domestic supply

Consumption

Ending stocks

Domestic use

Net trade

Fob Caribbean price

Unit

179

31.26

171.22

31.09

140.12

171.22

32.97

138.25

02/03

194

31.40

172.34

30.35

141.98

172.34

31.09

141.24

03/04

189

31.12

174.50

29.87

144.63

174.50

30.35

144.14

04/05

Table 13.3 FAPRI baseline projections: 2002–2013

196

31.99

177.66

29.35

148.31

177.66

29.87

147.79

05/06

202

32.61

180.58

28.91

151.68

180.58

29.35

151.23

06/07

206

33.13

183.40

28.47

154.93

183.40

28.91

154.50

07/08

211

33.56

186.19

28.03

158.16

186.19

28.47

157.72

08/09

217

33.99

189.05

27.60

161.45

189.05

28.03

161.02

09/10

222

34.39

191.96

27.18

164.78

191.96

27.60

164.36

10/11

227

34.77

194.92

26.76

168.16

194.92

27.18

167.74

11/12

232

35.09

197.89

26.11

171.78

197.89

26.76

171.13

12/13

The world sugar market

World market perspectives

World production of sugar is projected to increase by around 1.5% per year, on average, over the entire projection period, and slightly slower than during the last decade, to reach 156 million tonnes in 2008. Stocks are expected to reach 70.5 million tonnes in 2008, an increase of almost 12% over the outlook period, but with the stocks to use ratio falling from 49% to 45%. Although sugar prices are projected to rise slightly by 2005/06, prices are again expected to come under pressure and fall to around 8 cents/lb raw as a result of increasing production and supply availability. Little change is expected in the country composition of the sugar trade over the medium term, other than an increasing dominance by Brazil of both raw and white markets.

WHY THE DIFFERENCES IN MODEL BASED PROJECTIONS?

A model represents the economic behaviour surrounding the production, consumption and trade of sugar and perhaps other sweeteners. Typically sugar production, consumption, and carry-over stock equations in major producing and consuming countries are estimated with time series data by using econometric techniques. The estimated equations are linked under a partial equilibrium condition in the world sugar industry. In the market clearing condition, the sum of each country’s excess demand equation for sugar, which is a function of the world price of sugar, is zero. This aggregate excess demand equation is solved for the equilibrium price of sugar. Significant differences between model based projections arise because of the features of the economic model, including the regional breakdown, the specification of the model equations, the estimated model parameters and the data used to estimate them (‘parameter values drive model results’), and the way in which policy has been represented in the model (gross approximations or detailed representation). Just as importantly, projections largely depend on factors external to the model: the assumed macroeconomic conditions and demographics, as well as assumptions about current/future agricultural policy for sugar and related markets over the projection period (typically no new policy initiatives are assumed).

HOW SHOULD PROJECTIONS BE INTERPRETED?

Projections of the world sugar market need to be interpreted with caution. It is important to recognize the uncertainty inherent in the 303

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projection process and they should be regarded as an indication of possible trends, conditional upon the assumptions regarding future macroeconomic conditions, as well as assumptions regarding the nature and impact of future agricultural policy change. Third, in any case, projections over a long period are, by their nature, highly uncertain as economies will evolve and policies will change in ways that cannot be foreseen.

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Appendix I: current issues in sugar and health

For more than three decades sugar has suffered attacks on health grounds coming from nutritionists and the medical profession. These attacks have been picked up by the press and absorbed by the general public to the extent that sugar consumption has suffered in many developed countries. Particularly damaging were Yudkin (Pure, White and Deadly, 1972) and the WHO report of 1990, which recommended limiting sugar to 10% of the calorie intake. However, not all the institutional enquiries into sugar have been negative. Thus, the Sugars Task Force established by the Federal Food and Drug Administration in the US concluded in 1986 that other than the contribution to dental caries there was no conclusive evidence that demonstrated a hazard to the general public when sugars were consumed at the levels that were current and in the manner practised at that time. In the UK a similar exercise by the government Committee on Medical Aspects (COMA) reached almost the same conclusions in 1989. The report confirmed the negative role of sugar in dental caries but largely exculpated sugars from being a direct cause of diabetes or coronary heart disease, and sugar calories were judged as no more implicated in obesity than calories from other foods. Finally, in 1997, a joint FAO/WHO expert group was set up to investigate the role of carbohydrates in human nutrition. Its report ‘Carbohydrates in Human Nutrition’, published in 1998, represented an authoritative, comprehensive exoneration of sugar in any adverse role in human health. The report fully recognized the important role played by sugar in human nutrition, providing energy and palatability, especially in developing countries, many of which suffer from malnutrition and undernourishment. 305

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The 1998 WHO/FAO report: ‘Carbohydrates in Human Nutrition’ The last three decades of intensive research into sugars, carbohydrates and dietary fibres have led to significant advances in the understanding of the metabolism and the physiological effects of these dietary components. The understanding of dietary behaviour in different food situations and among different populations and age groups has also increased dramatically during this time. To bring these new findings together and utilize them for nutrition improvement and maintaining health, FAO and WHO convened the joint expert consultation on Carbohydrates in Human Nutrition in Rome in April 1997. In preparation for this consultation extensive literature reviews on non-communicable diseases and all aspects of carbohydrate digestion, absorption, metabolism and behaviour were examined by a group of experts from 13 countries. These examinations included sucrose and the different sugars contained in the multiplicity of food in world diets. Briefly summarized below, the results were based on solid scientific grounds and dispelled the generally negative myths about the consequences of sugar consumption.

SUGAR, FATNESS AND OBESITY

The incidence of obesity is of great concern in developed countries (and is rising in developing countries). In the richer countries more than 25% of the population can be considered obese. Because obesity is a key factor in the etiology of several degenerative diseases, understanding the role of sugar as a food energy source is of great importance. Excess energy consumption in any form will promote fat accumulation. However, fats and oils have twice the energy content by weight of carbohydrate, and carbohydrate is the preferential source of energy for the body – carbohydrates are oxidized first leaving the more easily accumulated fat as the excess energy source. Indeed, findings generally show an inverse relationship between sugar intake and obesity and fat accumulation – those with higher sugar intake are less likely to be obese. In addition, there was no evidence that the sweetness of sugar increased the appetite. In fact, the opposite is generally true: the body tends to have a much better

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appetite reduction response to carbohydrates and sugar than it does to fat. Conclusion: The consultation found no evidence to implicate either sugar or starch in the promotion of obesity other than their contribution to total energy intake.

SUGAR AND DIABETES

Diabetes occurs when insulin release is impaired and cells do not receive the signal to absorb glucose from the blood. High sugar intake has been accused of causing or exacerbating diabetes. However, although glucose is the most glycemic food, sucrose is much lower on the glycemic index because it contains a molecule of fructose (very low on the glycemic index) as well as a molecule of glucose. Using the glycemic index has transformed dietary advice for many diabetics with the advice to consume low glycemic foods. Consequently, diabetics are allowed to consume sugar, generally up to 50 grams per day. The cause of non-insulin-dependent diabetes is insulin resistance at the cellular level. Sugar intake is not the cause of the development of this clinical state. In fact, the most important factor is obesity. Conclusion: Sucrose and other sugars have not been directly involved in the etiology of non-insulin-dependent diabetes and the key dietary advice has been to distribute intake of carbohydrates throughout the day, avoid obesity and strengthen low fat diets with a wide range of cereals, vegetables and fruit with a low glycemic index.

SUGAR AND CARDIOVASCULAR DISEASE

In early studies there was concern that glucose was being converted to fat. It is now understood that carbohydrate is the preferred energy source for the metabolism and is oxidized first. Carbohydrate is not readily converted to fat. The consultation reported that genetic factors are involved in the etiology of coronary heart disease. Dietary factors may influence these factors. Obesity is associated with an appreciable increase in risk, but as seen above, sugar is not responsible for obesity.

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Conclusion: There is no evidence that sucrose plays a causal role in the etiology of coronary heart disease. SUGAR INTAKE AND MICRONUTRIENT DEFICIENCY

Sugar, which in its pure form contains no micronutrients, had been accused of ‘watering down’ micronutrient intake. Studies of men in the US of different ages consuming sugar over a wide spectrum of rates (including high intake) showed that there was no risk of becoming mineral or vitamin deficient. Conclusion: The supposition that sugar automatically replaces foods rich in micronutrients, adversely altering micronutrient intake, is without foundation. SUGAR AND HYPERACTIVITY IN CHILDREN

The belief that sugar adversely affects human behaviour dates back almost 70 years. Recent comprehensive studies have, however, refuted the idea that sugar causes hyperactivity in children. Conclusion: There is no evidence to support the claim that refined sugar intake has any significant influence on either behaviour or cognitive performance in children. SUGAR AND DENTAL CARIES

The consultation confirmed that the incidence of dental caries is influenced by a number of factors. Foods containing sugar and starch can be broken down in the mouth and can produce acid which attacks the teeth. Foods with a high glycemic index have a more pronounced effect. However, the impact of carbohydrate on caries is dependent on the type of food, frequency of consumption, degree of oral hygiene practised, availability of fluoride, salivary function and genetic factors. Conclusion: Programmes to control and eliminate dental caries should focus on fluoridation and adequate oral hygiene, rather than sucrose intake alone. CONCLUSION

In summary the report concluded that eating sugar was not harmful in a balanced diet. Sugar has its legitimate place as an energy 308

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provider among other carbohydrates. It does not cause obesity, diabetes, cardiovascular disease, hypoglycemia, hyperactivity or cancer, or lead to micronutrient deficiency. On the contrary it is a low cost, tasty energy source, which makes a variety of foods more palatable. The positive contribution sugar makes to increasing the energy intake of poor people should be stressed. In an earlier report (‘Preparation and Use of Food-based Dietary Guidelines’, report of a joint FAO/WHO consultation, 1996), the FAO/WHO stated: ‘No specific limit for sugar consumption is proposed, since the putative relationship of sugar consumption to obesity is offset by the inverse relationship observed between sugar and fat intake.’

The 2003 WHO/FAO report: ‘Diet, Nutrition and the Prevention of Chronic Diseases’ Five years later, however, experts working in the same organizations contested the conclusions of the 1998 WHO/FAO report. In 2003 a new report of a joint FAO/WHO expert consultation, ‘Diet, Nutrition and the Prevention of Chronic Diseases’ was published by the WHO. The report details the thoughts of an international group of specialists as to the sort of diet that would appreciably reduce the burden of non-communicable diseases throughout the world. They recommended that populations should adopt a diet conforming to a particular nutritional profile as a means of addressing a number of important diseases, including cardiovascular diseases, cancer, diabetes, obesity, osteoporosis and dental diseases. So what exactly has the expert group proposed? The group asserted that the scientific evidence is persuasive to support the idea that all populations in the world would be far healthier if their diet conformed to a certain nutritional profile. On average, any population should consume a diet that is composed of 15–30% food energy from fat, 55–75% from carbohydrate, and 10–15% from protein. Detailed recommendations have also been made on the composition of the fat and carbohydrate allowance and on some other aspects of the ideal diet (e.g. recommended limits on salt, fibre and cholesterol). In particular, it has been suggested that ‘free’ sugars should be limited to 10% of energy input. Free sugar has been arbitrarily defined as all monosaccharides added to food by the manufacturer or consumer, plus sugars naturally present in honey and fruits. 309

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The report has met serious criticism from both the food industry and some nutritionists, as well as government and health officials of several countries. The main arguments were that the report failed to provide an up to date review of the scientific evidence in this area. Specialists also noted that the report treated the evidences in a selective and prejudiced manner resulting in severe contradictions in a number of respects to the findings of several other recent reports of similar standing, including one from the WHO and FAO published as recently as 1998. Under the pressure of several governments, in January 2004 the WHO executive board decided to send the draft resolution ‘Integrated prevention of noncommunicable diseases: WHO global strategy on diet, physical activity and health’ back to members for further comments. In February 2004 the FAO Committee on Agriculture also agreed that further studies at national and regional level would be required, while a majority of members suggested that the scientific basis for the expert report’s recommendation on population nutrient goals and, in particular, limits for sugar inputs was inadequate.

References Cottrell R, Déjà vu at WHO, International Sugar Journal, No. 1255, July 2003. FAO/WHO, Carbohydrates in Human Nutrition, report of a joint FAO/WHO expert consultation, FAO Food and Nutrition Paper No. 66, FAO, Rome, 1998. FAO/WHO, Diet, Nutrition and the Prevention of Chronic Diseases, report of a joint FAO/WHO expert consultation, WHO Technical Report Series 916, WHO, Geneva, 2003. ISO, Sugar and Health (MECAS(94)17), London, 1994. ISO, Current Issues in Sugar and Health (MECAS(98)10), London, 1998. WHO, Diet, Nutrition and the Prevention of Chronic Diseases, report of a WHO study group, Technical Report Series 797, WHO, Geneva, 1990. Yudkin J, Pure, White and Deadly, Davis-Poynter, London, 1972.

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Appendix II: international sugar agreements

Sugar’s history of international attempts to influence, if not control, the world market situation is probably the longest among commodities. The first working agreement was the Brussels Convention of 1902, signed by the Austro-Hungarian empire, Belgium, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom. The parties undertook to promote consumption and effectively abolish subsidies on the production and export of both beet and cane sugar. The Brussels Convention legally expired in 1920 but effectively ceased to operate with the outbreak of World War I. After numerous fruitless attempts to negotiate a new comprehensive international price stabilization agreement during the 1920s and beginning of the 1930s, an agreement was finally reached at the International Sugar Conference in London in 1937. It was signed by governments of both exporting and importing countries, including Australia, Belgium, Brazil, Cuba, Czechoslovakia, the Dominican Republic, Germany, Haiti, Hungary, India, the Netherlands, Peru, Portugal, South Africa, the UK, the USSR and the US. The agreement’s objective was to regulate production and marketing of sugar, taking into account the interests of both producers and consumers. The 1937 International Sugar Agreement (ISA) can be considered the first truly international and comprehensive economic agreement on sugar, which had the main features of coming ISAs of the second half of the twentieth century (i.e. export quotas for individual members, as well as special treatment of preferential trade). Another world war made the 1937 ISA inoperative but the formal structure of the International Sugar Council was kept in existence on a year to year basis in the hope that the agreement would again become effective after the war. 311

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After World War II the extreme volatility of world sugar prices, noted throughout this book, resulted in many multilateral intergovernmental attempts at sugar world market price stabilization. ISAs with economic clauses were negotiated in 1953, 1958, 1968 and 1977. The principal instrument used to stabilize the free market was adjustable export quotas, increased or suspended when free market prices rose towards the ceiling price and reduced, within limits, when prices fell. In the last ISA with economic clauses (1977), which ran from 1978 to 1984, defence of the price limits was strengthened by the creation of ‘special stocks’ of 2.5 million tonnes (more than 10% of world net exports to the free market at the end of the 1970s). Except for the 1953 ISA, it cannot be said that international agreements succeeded in their price objectives. None was able to deal with market responses to structural changes in the world sugar economy. The 1958 ISA failed to control the aftermath of the Cuban revolution and the US embargo, when initially the US sought imports from non-Cuban sources and drove up the world market price abruptly. The 1968 ISA was unable to contain the 1973–74 sugar price boom. Similarly, the 1977 ISA (seriously handicapped by the non-membership of the EEC, whose growing exports made ISA members’ attempts to control the situation through limits on their exports greatly inefficient) could not prevent the 1980 price boom, or the subsequent collapse of free market prices. After the 1977 ISA expired at the end of 1984 and negotiations in 1983 and 1984 failed to find an acceptable successor, there have been no further ISAs with economic clauses, and none is in prospect. Since 1985 the International Sugar Organization has existed by virtue of administrative agreements without economic clauses, with the objective of fostering international cooperation in sugar matters through providing information, statistics and analysis on world sweeteners markets and a forum for intergovernmental policy discussion. There are several reasons for economic agreements no longer being on the agenda. First and most importantly, since the early 1980s there have been fundamental changes in economic and political philosophy. The Keynesian ideas, on which ISAs were based, have become increasingly discredited and have been replaced by free market deregulatory ideas. In an era of privatization, globalization and liberalization, international commodity agreements with economic provisions are generally considered to be outdated instruments unable to contribute to a sustainable and positive devel312

International sugar agreements

opment of commodity dependent economies, particularly in developing countries. Moreover, as a consequence of privatization, most governments have gradually withdrawn from control over national sugar industries, making intergovernmental agreements an unworkable option. Political unpopularity of the concept is further reinforced by the poor records of economic ISAs, demonstrating a technical incapacity to achieve the overriding objective of price stability: politically negotiated price ranges did not reflect market realities and, even when achieved, were sending the wrong signals to producers and exporters.

The 1992 International Sugar Agreement The 1992 ISA did not include economic clauses designed to defend price ranges. The objectives of the longest lasting ISA in history are: To ensure enhanced international cooperation in connection with world sugar matters and related issues; To provide a forum for intergovernmental consultations on sugar and on ways to improve the world sugar economy; To facilitate trade by collecting and providing information on the world sugar market and other sweeteners; and To encourage increased demand for sugar, particularly for non-traditional uses. By 2004 the 1992 ISA has been extended four times and membership has expanded to 71 countries including: Argentina, Australia, Belarus, Belize, Brazil, Colombia, Costa Rica, Côte d’Ivoire, Cuba, Dominican Republic, Ecuador, EU 25 (Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom), Egypt, El Salvador, Ethiopia, Fiji, Guatemala, Guyana, Honduras, India, Iran, Jamaica, Kenya, Republic of Korea, Malawi, Mauritius, Mexico, Moldova, Nigeria, Pakistan, Panama, Philippines, Romania, Russian Federation, Serbia & Montenegro, South Africa, Sudan, Swaziland, Switzerland, Tanzania, Thailand, Trinidad & Tobago, Turkey, Ukraine, Vietnam, Zambia and Zimbabwe. The 313

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member countries of the International Sugar Organization represent (based on data for 2002) 83% of world sugar production, 65% of world consumption, 92% of world exports and 36% of world imports. Driven by the articles of the ISA, the ISO pursues four key outcomes: Members benefit from improved transparency in the world sugar trade. Members are fully informed about key drivers and emerging issues impacting the world sugar and sweeteners economy. Members are provided with effective fora for debate and dialogue regarding global sugar and sweetener issues. Developing countries and economies in transition have access to Common Fund for Commodities (CFC) financing for projects to help facilitate their strategies to improve the competitiveness of their sugar industries. In short, instead of defending price ranges, the ISO works to help member governments and the private sector of their sugar industries to understand the key drivers of the world sugar and sweeteners markets (economy and policy related), but just as importantly to help them prepare their national sugar industries for the climate of continuing change that shapes the world sugar and sweeteners economy. In other words, the ISO offers its members and world sugar community seismographic functions identifying new developments, trends and challenges in a wide range of sugar related issues from sugar fortification or environmental challenges facing the industry to alternative uses of sugar crops and by-products.

References Baron P and Hannah A C, International Sugar Agreements and Sugar in the 21st Century, F. O. Licht’s World Sugar and Sweeteners yearbook, 1999/2000. Viton A, The International Sugar Agreements: Promise and Reality, F. O. Licht, Germany, 1998.

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acesulfame-K (ace-K) 84 Achard, Franz Carl 6 ACP sugar 32, 112, 121, 162–3, 165, 184, 199, 204–5 Lome Agreement 163 Sugar Protocol 162–3 Against Actuals (AAs) 70–71 Alameda Sugar Company 8 alcohol see ethanol Alexander the Great 3 alternative sweeteners 76–88, 290 competitive threat to sugar 88, 103 natural sweeteners 78–81 HFS/isoglucose 78–81, 277–8, 284, 290 trehalose 81 sucralose 81 manufactured sweeteners 82–7 acesulfame-K 84 aspartame 83–4 cyclamates 84 saccharin 82–3, 127–8, 267 outlook 87 production costs 78 Andean Community (CAN) 214, 217, 219 arbitrage 70 Asian financial crisis 46, 112, 275 ASEAN/AFTA 214, 218, 219 aspartame 83–4 assistance see government policy Australia exports 159

fuel ethanol 239, 253 Hildebrand inquiry 263 production 9, 30, 137–8, 142, 174–5, 261–3 Sugar Industry Reform Programme 262 Australian Bureau of Agricultural and Resource Economics (ABARE), sugar outlook 297 bagasse 18 beet sugar areas 146 bounties 10 cultivation 19–20 emergence 6–7 processing 20 production trends 6–8, 10, 134–5, 136 production costs 147–8 yields 145 transgenic varieties 229 bilateral arrangements see preferential trade; regional trading agreements biofuels 230–55 implications for sugar 255–9 biotechnology 228–9 blend ratio, ethanol to gasoline 264 blending sugar and alternative sweeteners 86, 88, 106 border protection see government policy 315

Index Brazil ethanol market outlook 153–4, 255–8 fuel ethanol 243, 255–8 production costs 239–40 production 4, 30–1, 137, 141–2, 147, 263–5 sugar crop expansion 263–4 sugar vs ethanol 153–4, 234–5, 264 world’s dominant sugar exporter 30, 151–5, 263, 265, 294 British Commonwealth Sugar Agreement 162 Brussels Convention 311 BULOG 275 Canada 121 fuel ethanol 255 cane sugar areas 146 as a renewable energy source 230–1 cultivation 17–19 emergence 3–4 processing 20 production trends 4–6, 8–11, 134 yields 145 transgenic varieties 229 caster sugar 21 Central American Common Market (CACM) 214, 217 Central American Free Trade Agreement (CAFTA) 168–9, 286, 293 China consumption 95, 105, 127–8, 267 fuel ethanol 254 production 9, 136–7, 139 sugar policy reform 181, 208–9 saccharin use 95, 128, 267 Coffee, Sugar & Cocoa Exchange (CSCE) 62 Columbus, Christopher 4 COMECON 25, 32, 114, 268 Commodity Future Trading Commission (CFTC) 74–5 Common Fund for Commodities 314 commodity trading adviser (CTA) 74 Common Agriculture Policy (CAP) 19, 200, 270, 292

316

CONNECT 64 consumption, sugar Africa 100 and alternative sweeteners 76–88, 103–4 and population 92 and income 94, 105–6 and price 95 annual rate of growth 96 Asia 97–8 by region 97 Central and South America 100–1 China 105, 126–8, 267–8 Europe 98–9 fundamental driver 91 global trends 22–3, 91, 96, 288–90 history 11–12 India 271–2 Japan 277–8 major drivers 92–3, 107 North America 101–2 projection to 108, 201 per capita 11–13, 98, 105–6 regional drivers 97–106 Russia 24, 98, 279 United States (USA) 102, 285 USSR/FSU 22, 24, 96, 98–9 world 23, 92, 290 costs see production costs Cotonou Agreement 121, 163, 204 crystals 21 Cyclamates 84 Cuba exports 30–1, 268–9 industry restructuring 268–9 production 5–6, 8, 142–3, 268–9 currency movements see exchange rates deflated prices 38–9 demand, sugar see consumption; imports dental caries 308 developing countries share in imports 113 preferential trade 114, 162–9, 270 diabetes 307 direct white sugar 115, 157

Index Doha development agenda, Doha Round 181–2, 271 Doha text on agriculture 182 see also World Trade Organisation (WTO) domestic consumption measures see government policy domestic production measures see government policy domestic support see government policy domestic prices 160 dominant sweetener, sugar 76, 103 Eastern Europe consumption 98 Economic Partnership Agreements (EPA) 166, 205 econometric models 297–304 El Niño 17 environmental policy 229–30 East India Company 4 ethanol from sugar crops 230–2 commercial viability 233–46 opportunity cost 234–5 ethanol vs gasoline 235, 240–3 government support 243–5 see also fuel ethanol programmes ethanol production costs 236–40 ethanol to gasoline blend ratio, Brazil 152, 256 European Union Common Agricultural Policy 19, 270, 292 Cotonou Agreement 121, 163, 204 enlargement 206 exports 159, 270–1 fuel ethanol 244, 246–8, 258 imports Everything Buts Arms (EBA) 121, 164–5, 293 Sugar Protocol 114, 163 Special Preferential Sugar (SPS) 121, 164 options for future policy reform 201–2 policy challenge (WTO), Australia, Brazil and Thailand 207 production 17, 138–9, 143, 269–71

regional trade agreements 214, 219, 223 sugar policy (sugar regime) 179–81, 197–200, 292–3 safeguard duties 198 Everything But Arms (EBA) initiative 121, 164–5, 202–4, 293 Execution Orders (EOs) 70–1 exchange rates and sugar prices 38–40 exports, sugar Australia 16, 261–3 Brazil 16, 30–1, 151–5, 158–9, 263–6, 294 Cuba 16, 30–1, 268–9 competition 155, 158, 160 concentration, dominance 30, 151 EU 16, 31, 159, 269–71 India 272–3 global trends 12–17, 30–2, 151–2, 169 preferential 162–8 product structure 155–9 Thailand 16, 158–9 top 5 exporters 152 world’s largest exporters 31 export subsidy commitments 179–80 exporters and the world sugar market 159–61 Farm Security and Investment Act (Farm Bill 2002) 286, 292 Fast Automated Screen Trading (FAST) 63 Federal Drug Administration report 305 Food Advisory Committee 77 Food and Agriculture Organization (FAO), sugar outlook 297 Food and Agricultural Policy Research Institute (FAPRI), sugar outlook 299 flex fuel cars, Brazil 256 Frederick William III, King 6 Free Trade Area of Americas (FTAA) 286, 220–3, 293 fuel ethanol see ethanol from sugar crops fuel ethanol, impacts on sugar 255–9, 294–5

317

Index fuel ethanol programmes, state of play 246–55 Australia 253 Brazil 255–6 Canada 255 Central America 253–4 China 254 European Union 244, 246–8, 258 Japan 254 India 251–2 Thailand 252–3 Taiwan 254 United States 248–50, 258 futures markets contract specification 63–8 forecasting techniques 73–4 history 61–3 London market 63–5 New York market 65–8 regulations 74–5 gene technologies see biotechnology Global Sugar Alliance 184 Global Sugar Policy Simulation Model, sugar outlook 299–300 government intervention see government policy government policy Australia 262–3 Brazil 152, 243 China 208 European Union 197–203 export subsidies 179–80 history 173 India 209–11 Indonesia 275–6 minimum access 179 multilateral reform Uruguay Round 176–80 WTO Doha Round 181–2 overview 174–5 producer subsidy equivalents 175–6 recent reform 180–1 reform expectations Russia 280–2 tariffs 174, 177 Thailand 283–4 United States 188–91, 286

318

Gower report 75 Great Depression 10, 16 gur 18, 272 health, human, and sugar 305–10 see also World Health Organization (WHO) hedging 69–70 Henry III, King 4 HFS see high fructose corn syrup (HFCS) high intensity sweeteners see alternative sweeteners high fructose corn syrup (HFCS)/ isoglucose 77, 78–81, 270, 276–7, 285 Hildebrand inquiry 263 icing sugar 21 IMF 173, 275 Imports, sugar Africa 112–13 and consumption 109 and developing countries 113 and preferential trading arrangements 114 and refining capacity 110–11 Asia and Far East 112 Canada 121 changing structure 26 China 126–8, 267 dispersion 25 Europe 112 future drivers 125–6 geographical distribution 24–6 Indonesia 122, 125, 274–6 Japan 111, 113, 116, 121, 277–8 key features 110–11 Korea, Republic of 122 Malaysia 122 preferential see preferential trade pivotal players 115–27 raw 116–23 white 124–6 raws vs whites 114–15 regional dynamics 111–14 Russia 24, 26, 113, 116, 117–18, 280–2 to world consumption, ratio 110

Index toll refiners 25, 122–4 United States 118–21 India consumption 106 fuel ethanol 251 production 9, 147 production and consumption outlook 273–4 sugar policy and reform 181, 209–11 cane pricing 210 domestic sugar price support 209 export competition 210 fuel ethanol 251 market access 209 intensive sweeteners see alternative sweeteners International Sugar Agreements (ISAs) 1937 311 post World War II agreements (1953, 1958, 1968, 1977, 1984) 312 1992 313–14 ISA prices 48, 54, 55, 56–7 isoglucose see HFCS jaggery 18 Japan consumption 93, 278 fuel ethanol 254 HFCS 276–8 imports 111, 113, 116, 121, 277–8 production 276–8 Korea, Republic of 122, 123 khandsary 272 LMC International 146–8 Lomé Convention 163, 204 LIFFE contract specification 64 London Daily Price (LDP) 63 Malaysia 122, 123 Marggraf, Andreas Sigismund 6 MERCOSUR – Southern Common Market Agreement 214, 217, 218 Mexico and NAFTA 193–5 exportable surplus 194

high tier access to US market 194 tax on softdrinks containing HFCS 194–5 minimum access commitments 179 Mohammed 3 molasses 20 as ethanol feedstock 236–7 Napoleon Bonaparte 6 Napoleonic wars 6–7 North American Free Trade Agreement (NAFTA) 118–21, 167–8, 193–5, 214, 217, 219, 269, 286, 292–3 Navigation Acts 15 New York Board of Trade 62 contract specifications 66 New York No. 11 38, 65–6 non-centrifugal sugar 9, 20 non-sugar sweeteners see alternative sweeteners obesity 306 options 68–9 Organization for Economic Cooperation and Development (OECD), sugar outlook 301–2 outlook, sugar market, to 201, 296 outlook Australia 261 Brazil 263 China 266 Cuba 268 European Union 269 India 271 intensive sweeteners 87 Indonesia 274 Japan 276 Russia 278 Thailand 282 United States 284 payment in kind (PIK) programme 285 plantation white sugar 157 polarization 157 policies, policy instruments see government policy political environment see government policy

319

Index policy reform, sugar see trade reform and liberalization price volatility 41–3 prices and stocks 51–3 and exchange rates 38–40 and other commodities 47–8 basic statistics 43 booms and busts 49–51 crash of 1998 45–6 differential 40, 123 ethanol, fuel 243 golden era 43–5 high fructose corn syrup 79 long term trend 37–8 monthly world sugar prices 27, 39 nominal annual raw and white sugar prices 37 nominal and deflated raw sugar prices 38 projections 297–304 raw sugar 27–8 seasonality 53–9 exploratory analysis 54–5 X-11 US Census Method II 55–7 seasonal factors 58 volatility 41–3 factors explaining 37 white sugar 27–8, 40 world market 27–8 preferential trade 25, 33, 114, 162–9, 204–5, 270 PROALCOOL, Brazil 243 production quota see government policy production, sugar and ISA prices 135 Australia 9, 17, 137, 139, 261–3 autarky 140 Brazil 4, 17, 137, 139, 141, 263–6 by economic groups 144 capital intensity 134 China 136, 139, 266–8 Cuba 8, 17, 142, 268–9 cyclical character 134 EU 17, 138–9, 143, 269–71 global trends 3–11, 29, 139, 140–4, 148–9, 290–1 in selected countries 30

320

India 9, 17, 271–3 Russia 278–9 supply response to world prices 133–6 Thailand 282–4 United States (USA) 8, 142, 284–5 weather dependency 136–40 world 28–9, 134, 238 cane and beet 145 world market dependency 135, 159–61 production costs, international comparison 146–8 public distribution system (PDS), India 272 quotas see tariff rate quotas ratoon 17 raw sugar prices, world 37 trade 110–11 raw and white sugar, comparative quality parameters 157 regional trade agreements (RTAs) 212–24, 293–4 background 212–13 types 213–14 key RTAs and sugar 214–23 ASEAN/AFTA 214, 218, 219 Andean Community (CAN) 214, 217, 219 Central American Common Market (CACM) 214, 217 effectiveness promoting trade 216–20 European Union 214, 219, 223 Free Trade Area of the Americas (FTAA) 220–3 MERCOSUR (Southern Common Market Agreement) 214, 217, 218 North American Free Trade Agreement (NAFTA) 214, 217, 219 special provisions 215–16 Southern African Development Community (SADC) 214, 217 rhizomania 19

Index Russia consumption 24, 98, 279 imports 26, 111, 113, 116, 117–18, 278–82 production 7, 10, 279 policy 181, 280–2 tariff rate quota 118, 280–1 saccharin 82–3 and China 127–8, 267 saccharum 17 Securities & Futures Association 75 Securities & Investments Board 75 self-sufficiency in sugar 143–4, 149 Southern African Development Community (SADC) 214, 217 slaves, slavery 5, 7, 8 special and differential treatment see WTO special preferential sugar (SPS) 121, 164 speculation 72 spreads 163–4 stocks build-up, sugar 246, 288 stocks/consumption ratio 51–3 stocks and prices 51–3 straddles 73 subsidies see government policy sucralose 81 Sugar Industry Reform Programme (Australia) 262 supply, sugar global trends 28 supply response 133–6 see also exports; production Sugar Protocol 114, 163 supply elasticises 136 support measures see government policies sweeteners global consumption 104 regional shares 104 tariffs 174, 177, 187 tariff commitments 177–8 tariff rate quota (TRQ) 166, 175 China 267–8 Russia 118, 280–1

United States (USA) 118, 166–7, 286 toll refiners 122–4 trade, sugar history 12–17 raw and white trade volumes 25, 114–15, 155–7 see also exports; imports trade reform and liberalization views of major players 183–4 world sugar market impacts 184–7 see also government policy Trehalose 81 Thailand exports 155, 158, 283 fuel ethanol 252–3 policy 283–4 production 147, 282–4 USDA 102, 147, 283 UNICA 154 Ukraine 24, 31 United States baseline 119–20 consumption 102–3 fuel ethanol 248–50, 259 renewable fuels standard 248, 259 MTBE phase out 249 production 8, 142, 284–6 imports 188–9 sugar policy 188–91, 285–6, 292 and NAFTA 193–6 and other regional trade agreements 196–7 sugar loan programme 188–9 market allotments 189 tariff rate quota 190 pressures for reform 192 sugar prices 191 trade dispute, Mexico 119, 193 WTO commitments 118, 190 Uruguay Round and sugar 32–4, 176–9 very high polarization (VHP) raw sugar 115, 156, 157 volatility see price volatility vinasse 245

321

Index white sugar prices 37, 40 trade 110–11 white and raw sugar, comparative quality parameters 157 see also toll refiners World Health Organization (WHO) the 1990 joint WHO/FAO report 305 the 1998 joint WHO/FAO report 306–9 the 2003 joint WHO/FAO report 309–10 World War I 7–10, 16 World War II 9, 11, 16

322

WTO/GATT Cancun Ministerial meeting 183 Doha Round 181–3, 286, 291 Marrakech Agreement 32 modalities 186 multilateral trade negotiations 32, 34, 146, 164 negotiations on agriculture 182 special and differential treatment 182 Uruguay Round 32–3, 34, 176–9 WTO challenge EU sugar policy, Australia, Brazil and Thailand 207