Views of the International Sugar Organization

Presented by
David Willers
Chairman of the Council

and

Lindsay Jolly
Senior Economist

International Sugar Organization

Sugar: prices collapse again

Many sugar exporters are having a tough time. World market prices have collapsed on renewed fears of a return to a major market surplus later this year. The situation echoes that of 1998 when the world was awash with sugar prices collapsed to levels not seen for 13 years. Prices recovered in 2000 but the key driver was weather related shortfalls in production rather than any underlying market response to the price fall. The January 2002 slump in prices was chiefly driven by expectations for a significant rise in export volumes from the world's dominant exporter - Brazil, against a background of only modest growth in world demand and continuing historically high global stock levels.

To better understand the reasons and impacts for the sugar price malaise its instructive to consider the evolution of prices and key developments in the world sugar market over the past decade or more.

Golden era for sugar prices 1988-1997

There was a golden era for sugar prices between 1988 and 1997 with prices at a comfortably high level (12-13 US cents/lb) and showing a degree of stability unseen in the previous two decades. Analysts attributed this era to the dominance of developing counties, meaning world imports were much more price-sensitive than previously.

But then prices crashed in 1998 to levels not seen for more than a decade. With hindsight, prices were simply too high to not draw a response from producers, and export producers in particular. Especially in the Americas and the Pacific Rim, production capacities have been expanded over recent years without regard to demand. Between 1994/95 and 2000/01 world sugar production grew by 16 percent, whereas consumption increased by only 11 percent, 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 percent in the second half of the 1990s, representing 8.7 million tonnes of new production. The region's consumption grew at around 12 percent 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 competitive 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. More over, its 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 percent 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 percent).

The price crash of 1998 (to levels not seen for 13 years) was generally unexpected, but 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 as 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. More so, 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 build-up of stocks.

Price recovery in 2000

The New York No 11 spot price averaged 6.61 cents/lb in 1999, down from 8.92 cents/lb in 1998. Prices recovered in 2000 as early expectations for the 2000/01 (October/September) year was that for the first time in years global production would be below consumption. Market participants looked forward to a long-awaited draw down in stocks and the ISA price rose to a peak monthly average of 10.75 US cents/lb in October. In the event however, despite a fall in global sugar production (mostly weather driven), a small statistical surplus arose (0.38 Mt) and prices weaken steadily weakened during 2001 to average only 6.79 cents/lb in October 2001.

Initial expectations for the 2001/02 year suggested that the tide may have truly turned with production failing to meet the anticipated global consumption level [the ISO forecasts world production at 132.9 million tonnes and consumption at 133.9 million tonnes, giving a statistical deficit of 1 million tonnes]. Indeed the prospect of a statistical deficit helped to support prices during late 2001 and by December the average price had risen again to 7.83 US cents/lb.

2002/03 expectations buffeted prices in January 2002

However, the supportive market fundamentals at the global level (an expected market deficit) were overshadowed early in 2002 by market expectations for a huge cane crop in Brazil in the upcoming 2002/03 season, which saw prices collapse to as low as 6.5 US cents/lb. Currently ISA prices struggle at around 6.75 US cents/lb, but are widely expected to test the lows of 1999 once new crop Brazilian sugar becomes available to the market in peak volumes during the second half of this year. Brazil's exports are the residual of the domestic ethanol/sugar balance and even though ethanol production is anticipated to increase by up to 1.5 billion litres to 13.0 bin litres in 2002/03, there is still sufficient cane available so as to allow a 1 million tonne increase in exports. Even though there remain many imponderables such as the volume of Russian buying, the timing and quantity of Chinese buying, exchange rate movements and further developments in the world economy, the consensus view amongst commentators is for world market prices in the second half of 2002 to revisit the low levels of 1999. This outlook not only reflects the potential for greater Brazilian exports, but also reflects only modest growth in consumption, and expectations for little run-down in surplus stocks which remain near a historical high.

The ISO's role is to identify key market drivers and facilitate dialogue.

With the rewriting of the International Sugar Agreement in 1992 and with our new strategic direction adopted late last year (see appendix I), it's not our ambition to find the winning recipe to low prices through any interventionist means. Our objectives instead are to ensure that high quality ISO research together with providing forums for discussion and dialogue, will allow member governments and the private sector to understand the key drivers of the world sugar and sweeteners markets (economic 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. Furthermore, achievement of ISO goals will ensure members have available to them the best information possible about the market and future prospects so as to enable those involved in the world sugar market to draw the "right" conclusions with a view to rebalancing the market as quickly as possible.

Further ISO views about the function and objectives of modern International Commodity Organizations are provided in Appendix II. In a nut-shell though, in a world of privatisation, globalisation and liberalisation, International Commodity Agreements with economic provisions are considered to be anachronistic instruments unable to contribute to a sustainable and positive development of the world commodities economy. For sugar: any review of the achievements of past international sugar agreements with economic clauses is sobering, as are the experiences with other commodity agreements such as tin, cocoa, rubber and coffee. Today, successful international commodity organizations could be described as service providing organizations to their member countries. Furthermore it is difficult to imagine present and future International Commodity Agreements not integrating the private sector more and more in their deliberations.

Multilateral reform of trade-distorting sugar policy the answer?

The issue of trade liberalisation has held the attention of the ISO and its members for some years. Because the Uruguay Round Agreement on Agriculture did not lead to fundamental reform of sugar under the three pillars of market access, domestic support and export subsidies, pro-reformers continue to see liberalisation as a key method to raise world market prices for sugar.

Indeed, this belief is firmly held by a relatively new group known as The Global Alliance for Sugar Trade Reform and Liberalisation, formed just prior to the Seattle Ministerial Meeting of 1999. It's not an intergovernmental grouping, but an alliance of sugar producing and exporting institutions from 12 developing countries and 2 developed countries^[12]. The Alliance is conducting an international campaign to demand as an outcome from the Doha round of trade negotiations an agriculture agreement which includes meaningful reform of sugar trade policies. Their objective for the future is a world in which there is a significantly larger and less distorted world trade at prices well above present levels reflecting production costs of the most efficient producers. This objective can in their view only be achieved through the following actions:

• substantially increase market access by dismantling tariff and non-tariff barriers;

• introduce rules governing tariff-rate quota administration to ensure that real access is provided for all quota import volumes;

• eliminate all export subsidies;

• eliminate all trade distorting domestic support; and

• achieve an agreement that applies negotiated disciplines on a commodity-by-commodity basis to eliminate trade-distorting domestic support.

Key in the sights of the Alliance are the protective sugar policies of the United States, European Union and Japan. At the same time, the Alliance explicitly recognises the needs of those developing countries presently reliant on the preferential trading arrangements with the EU (Sugar Protocol arrangement of the Cotonou Agreement) and the United States (under the tariff rate quota).

Obviously the arguments favoured by pro-reformers such as the Alliance are not readily accepted by opponents to policy reform, and certainly ISO membership encompasses the full range of players in the interventionist and non-interventionist camps. Nor do all members of the ISO see trade liberalisation 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 - its massive increase in crystal sugar output since the mid-1990s has significantly disturbed the market balance and will "sit" on world prices until global demand rises sufficiently to absorb supplies. Brazil however, sees the world differently and points to the subsidised exports from the EU as a key factor distorting the world market.

Also several countries continue to point to the fact that the world sugar market remains a marginal "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.

A Stocks Retention Scheme?

A stocks retention scheme has also surfaced as a possible response to low sugar prices. The idea first arose after the 1998 collapse in prices, and seemed sponsored by the private sector in Brazil. The scheme was mooted to involve key exporters retaining certain quantities from the export market, but discussions were not conclusive. The ISO has already publicly stated its scepticism over the likely success of any such scheme.

Can renewable energy improve the financial viability of sugar?

Diversification has been a long-discussed issue in the world of sugar. The onset of low sugar prices in 1999 saw an urgent interest develop in value-adding by-products, particularly molasses and bagasse, but because at that time oil prices were booming, renewed enthusiasm was triggered for fuel ethanol schemes from sugar crops. Indeed a growing number of observers and analysts are pointing to fuel ethanol as a viable route to follow in helping to take supply pressure off the world sugar market (acting as a safety valve to low prices) and at the same time to provide a broader revenue base to the sugar sector. Enthusiasm for biofuels is growing as a policy response to climate change and to address energy security issues. The EU has two draft directives which if implemented would boost use of ethanol, generating new demand for ethanol from beets (as well as grains). In the United States, the prospective banning of the fuel additive MTBE is expected to markedly boost ethanol production (mostly from corn), and this would be compounded if the new Energy Bill does include the mooted renewable fuels standard. In key sugar producing countries, fledgling ethanol schemes are being investigated or are under implementation in Thailand, Australia, India, Mexico, Colombia, whilst the fuel ethanol scheme in Brazil is well known and harks back to the mid-1970s as a response to the first oil shock. A key issue though is the extent to which ethanol is commercially viable without supportive government policy.

Significant issues need investigation and resolution before the potential opportunities for sugar from ethanol can truly be understood. The ISO, amongst others, is presently investigating the issue.

Longer term demand growth key factor supporting prices

As a final comment, in deciding on appropriate responses to the present malaise in sugar prices, its important to consider that longer-term demand prospects are positive for sugar. Population and income growth (which historically explain the bulk of consumption growth, although alternative sweeteners are capturing a greater share of the market in some countries) point to average annual consumption growth of around 2 percent. Critically thought, the nature of the world supply response to that demand growth will be critical to the future price path for sugar. The required new sugar production will likely come from the lower cost sugar producers, but the dynamics of prices will be heavily influenced by how "supply response" (presently heavily influenced by supportive and insulating sugar policy in several key countries) alters with multilateral sugar policy reform. Will sugar market's supply response become quicker and of a more significant magnitude? If support to beet producers (concentrated in Europe and mostly produced at high cost) is lowered, then the bulk of future growth in world production and exports will be from lower-cost cane producers. Indeed, cane has steadily accounted for an increasing share of world and even over the past decade has increased from 63 percent to 73 percent. However, in cane in particular, the adjustment costs to switching crops remain high, due in part to the perennial nature of the crop. High switching costs could therefore continue to ensure the world sugar economy continues to suffer relatively steep declines in prices at times of surplus.

APPENDIX I

ISO's STRATEGIC DIRECTION

Vision, mission, goals

Our vision

The ISO is an intergovernmental organization whose vision is to be a centre of excellence as the 'first-best' provider of comprehensive information to the global sugar community.

Our mission

The ISO's mission flows directly from this vision. The mission is to provide, in a balanced and objective way, first-class economic research, market analysis and statistics centred on sugar and sweeteners.

Our goals [ISO's core business]

We will achieve our mission by fulfilling these goals:

to provide Members with high quality market analysis, economic research and statistics that satisfy their needs; and

to provide fora for furthering debate and deliberation of all matters impacting the global sugar community.

The direct benefit of these goals arises in helping member governments and the private sector to understand the key drivers of the world sugar and sweeteners markets (economic 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.

The ISO has already made a significant contribution to an improved understanding of emerging issues in the sugar and sweeteners market -through its MECAS work program, ISO Seminars and workshops - and will continue to do so.

Outcomes

Following from the ISO mission and goals, the ISO has four key outcomes:

• members benefit from improved transparency in 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; and

• developing countries and economies in transition have access to CFC financing for projects to help facilitate their strategies to improve competitiveness of their sugar industries.

APPENDIX II

NEW LOOK INTERNATIONAL COMMODITY ORGANIZATIONS

Economic provisions a lost cause

In a world of privatisation, globalisation and liberalisation, International Commodity Agreements with economic provisions are considered to be anachronistic instruments unable to contribute to a sustainable and positive development of the world commodities economy.

• the reasons in short are the lessons from the past: first, the overriding objective of price stability cannot be achieved; second, politically negotiated price ranges do not normally reflect market realities, tend to be too narrow to cope with the volatility of commodity prices, and send the wrong signals to producers and exporters; third, no effective sanctions are negotiable in the case of non-fulfilment of commitments; fourth, participation of all key players on the exporting and importing side, which would be a precondition for a proper functioning, cannot be achieved; and last but not least, fifth, as a consequence of privatisation, the gradual withdrawal of governments from the formulation and execution of commodity policies makes those intergovernmental agreements an unworkable option;

• both developing and developed countries found that there are more efficient mechanisms to support the economies of developing countries like for example:

  - export stabilisation schemes, aid-to-trade measures, diversification programmes, improved access to capital markets and to the international banking system.

So whether they rely on buffer stocks, export quotas, or any other control mechanism, the weakness of international agreements is that they only treat the symptoms of oversupply and often give the wrong signals to producers. Remunerative prices cannot be enjoyed without adapting production to demand.

For sugar: any review of the achievements of past international sugar agreements with economic clauses is sobering, as are the experiences with other commodity agreements such as tin, cocoa, natural rubber and coffee.

New Era for Commodity Organizations

Today, successful international commodity organizations could be described as service providing organizations to their member countries.

The objectives of the different modern international commodity organizations are rather similar and are aimed at:

• ensuring and promoting international cooperation in their respective commodity;

• providing a forum for intergovernmental consultations on ways and means to improve the respective commodity economy;

• improving market transparency by collecting, analysing and disseminating relevant statistical information and studies;

• encouraging and promoting demand/consumption for traditional and non-traditional uses where possible (diversification);

• monitoring research, environmental and health aspects of the respective commodity, disseminating the findings and encouraging their implementation.

Furthermore, an important distinctive function of modern commodity organizations is their role as designated ICB's for the CFC. After overcoming some teething problems and management weaknesses in the first years of operation the CFC has developed into a very useful instrument with a view of helping to finance commodity-specific projects with a multi-country focus. The objective to alleviate poverty by increasing productivity and efficiency as well as diversification is crucial for many developing countries depending on primary commodities

Private Sector must be included

Already over the past ten years a continuing trend became very clear: privatisation and globalisation are leading increasingly to a gradual or total withdrawal of governments to formulating or administering national commodity policies. This leaves a vacuum which can ideally be filled by the private sector, representing growers or planters, processors, traders, consumers and increasingly bankers. In the recently negotiated new International Cocoa Agreement, 2001, and the International Coffee Agreement, 2001, a greater participation of the private sector in the work of the organizations is contained in the objectives.

In the International Sugar Organization (International Sugar Agreement, 1992) this government/private sector participation has already been practiced for many years without being mentioned expressis verbis in the Agreement itself. At the time this Agreement was negotiated, last in 1992, such a formal participation of the private sector would not have met the approval of many negotiating countries.

It is difficult to imagine present and future International Commodity Agreements not integrating the private sector more and more in their deliberations. Notwithstanding this development, international commodity organizations will have to keep their status of intergovernmental bodies. It would not be in their interest to open up membership to national associations or even private companies. Otherwise they would lose a most precious value, namely their independence and they would be in danger of becoming subject to manifold conflicting pressures.

However, it is evident and necessary that governments include more representatives from the private sector in their delegations. Committees, working groups or expert circles consisting mainly of private sector representatives with a mandate to tackle specific problems or specific tasks can be meaningful and helpful.

There will also be an increasing number of governments mandating the private sector to represent the country in a respective international commodity organization in co-ordination with the government.

Consequently, the influence and the impact of the private sector on the work of the international commodity organizations will grow and will be stronger. This is a very positive development from which both members and the organizations benefit. It adds value and substance to their work.