The Trouble with Sugar

Given the fuss about high food prices and the role of biofuels in driving them up, Asian nations contemplating food policies should look at the situation with sugar, whose price is driven by a bewildering excess of regulations by both rich and poor countries across the globe.

After a spike to US14¢ a pound early this year, the world price has now dropped back to around 10.5¢, the same as a year ago and half the 21¢ peak in 2006. But on a longer time scale, sugar’s price record has been more dismal than any other food crop. Its nominal peak was back in 1974 when it hit 53¢, the equivalent of US$2 today. This is almost entirely attributable to subsidies and controls.

Given the rising cost of fertilizer and cane processing, sugar is again now so cheap internationally that at this price not even the world’s most efficient producer, Brazil, can make money. Break-even costs in Brazil are now 11¢ and rising.

Sugar may not have the cultural identity of rice, but it is still important for most Asian countries both from an economic and nutrition standpoint, and a key ingredient in processed foods and beverages. India, the Philippines and Indonesia are particularly large per capita consumers. China’s sugar use is growing, albeit from relatively low levels – on a per capita basis less than half that of India -- and its deficit will rise. Thailand is a major exporter – two thirds of its crop -- Malaysia and Indonesia significant importers and the Philippines, once a major exporter, now exports only small amounts.

The price collapse for a crop that is more widely used for biofuel than any other is particularly striking at a time when biofuels are being blamed for food shortages. To add to the apparent paradox of sugar going down while rice remains sky-high, most sugar is produced from cane grown in tropical countries and in some places is interchangeable with rice. Sugar cane’s low prices cannot even be said to result from productivity improvement, which has lagged that of the major grain crops.

So what’s up?

The answer in the short term is largely provided by India, which went from a threatened shortage in 2006 when exports were banned, to a bumper crop that has added to a world surplus. Indian production is expected to be 28 million tonnes this season, almost on a par with Brazil at the top of the world production league. But because India only trades its marginal production – at most 10 percent -- the size of its surplus has a particularly big impact on world sugar trade.

Brazil exports almost half of its 32 million-tonne output and converts much of the rest into ethanol. With the ethanol price rising with in tandem with crude oil, ethanol producers look to be reaping a bonanza. Indeed it was expectation that demand for sugar for ethanol would soar that drove it to 14¢ earlier in the year. That has yet to happen. Meanwhile world stocks are estimated to have risen to 75 million tonnes or 47 percent of annual consumption.

In the world of sugar, nothing is simple. This unpretentious substance is the subject of more subsidies, trade barriers, complicated pricing policies and sheer irrationality than any other crop. Biofuels may be all the rage in Europe and North America but Brazil’s ethanol faces prohibitive tariffs in the US to protect expensive corn-based ethanol. The net result: high prices for corn and (as the knock-on effect) other grains and a decline in the sugar price. Europe meanwhile is subsidizing sugar-beet based ethanol as a diversion from its promised reform of its high-cost, protected and highly discriminatory (in favour of a few small ex-colonies) sugar regime.

Though all are net importers, the US, the European Union and Japan all pay their farmers at least double the average international price for sugar. The US also subsidizes corn syrup sweeteners, which further reduces its sugar import needs.

Developing countries also intervene in various ways. China protects sugar through tariffs but has been slowly liberalizing. Thailand’s mechanism keeps domestic prices down but allows growers and millers to make the best of international markets. India, although mostly a net exporter, has all kinds of mechanisms including price guarantees, which vary between states, to protect producers, and subsidize some consumers.

The farmers as ever respond to price signals for crops that can be sold at market prices – which explains why the 2006 price rise, partly caused by Indian shortfalls which necessitated imports, induced a huge rebound in Indian output. But if prices are to stay at today’s international level, Indian production can be expected to fall sharply, perhaps again making the country an importer.

If world markets were freer and unsubsidized, Indian farmers would have more stable price incentives to produce much more than the nation needs on a regular basis. But while it remains the most distorted of all farm product prices, extreme volatility will continue with damaging knock-on effects on other foods and undercutting the justification for bio-fuels.

Asian governments would do well to focus on what is happening in sugar because it demonstrates once again the consequences of developed-country subsidies and protectionism just at the time when these countries are using tight supplies and high prices of other crops to justify subsidies that are so ruinous to others.

Even the current critical food shortages in parts of Ethiopia, due mostly to conflict, misgovernment and declining foreign food aid, are being wheeled out to justify rich-country farm subsidies. The hypocrisy is stunning but can be countered with just one word: sugar.