Part Two

Economics Of Main Sub-Sectors
in Syrian Agriculture

CHAPTER 6
The Economics of Strategic Crops
by Michael Westlake^[53]

6.1 Introduction

This chapter covers six of the seven crops for which the Government continues to set producer prices, namely wheat, barley, lentils, chickpeas, cotton and sugar^[54]. The Syrian Government refers to these as ‘the strategic crops’. They account for over half the total value of national crop production and occupy about three-quarters of the 4.6 million hectares that are under cultivation in Syria. Wheat and cotton are by far the most important of the strategic crops in terms of farm-gate value, employment creation and the use of irrigation water. The analysis in this chapter focuses principally on these two crops and on sugar, for which Government intervention has been particularly intense. It also summarizes, for all six crops, the findings and implications of detailed analysis of their price and cost structures.

Syria is a net exporter of cotton, lentils and chickpeas, and a net importer of sugar. It became self-sufficient in wheat in the mid-1990s and has subsequently produced an export surplus, other than in 1999 and 2000 when production was severely affected by drought. Syria generated export surpluses of barley from 1993 to 1997, but output fell in 1998, 1999 and 2000. In 1999 and 2000, Syria was forced to import barley to supplement drought-affected national crops.

Government establishments are involved in the marketing of all six crops. In the case of cotton and sugar, farmers have no option but to deliver their marketable production to a Government establishment. In the case of wheat, the majority of production is still sold to such an establishment. Following partial liberalization of the domestic market, most of the national output of barley, lentils and chickpeas is currently consumed on farm or sold to private buyers.

Table 6.1 Key characteristics

Note: Information on areas planted and the main producing agro-ecological zones is based on 1998 data.

* Crop planted in the autumn, winter and spring, with main growth and irrigation requirement during the Summer.

** Agro-climatic zones run from 1, which has the highest rainfall, to 5.

6.2 Wheat

a) Production, consumption and external trade

Syria produces hard durum wheat and soft wheat during the winter season on both irrigated and rainfed land. Most rainfed wheat comprises hard varieties. Hard durum varieties reportedly comprise roughly 60 percent of total wheat production, and soft varieties 40 percent. Wheat is the main user of irrigation water in Syria. It accounts for roughly half of all irrigated land, 58 percent of the irrigated land planted to annual crops, and 70 percent of the irrigated land planted to the strategic crops. The national area of irrigated wheat roughly tripled between 1987/88 and 1997/98, rising over this period to 690 000 ha, principally as a result of a major expansion in the area of land supplied with water from dams. In 1998/99 and 1999/2000 there was a small decrease in the irrigated wheat area due to water shortages caused by drought. Unlike irrigated wheat, there has been no obvious trend in the area of rainfed wheat over the past 15 years. This has in most years been either slightly above or below one million hectares, depending on rainfall conditions.

Rainfed wheat yields tend to be highly unstable, with the national average varying from less than 0.5 tonne per ha in a drought year to over 1.7 tonnes per ha in a year of good rainfall. By comparison, irrigated yields are relatively stable, with the national average ranging from some 3.0 tonnes to 4.0 tonnes per ha. During the 1990s, total national wheat production ranged from a record of 4.18 million tonnes in 1994/95 to 2.68 million tonnes in the drought-affected 1999/2000 crop year. Production in 1999/2000 was the lowest since 1990/1991.

In addition to raising production capacity, the expansion in irrigated wheat area has had the following effects:

• it has increased mean national per-hectare wheat yields;

• it has increased the relative importance of wheat production in the north and east of the country;

• it has reduced the susceptibility of national wheat production to drought;

• it has changed the structure of national production costs and the mean national unit cost of production; and

• it has probably increased the proportion of Syria’s total wheat land that is planted in soft wheat, reducing the need to import soft wheat for blending.

In 1999/2000, the drought conditions and the resulting low output from rainfed land resulted in about 80 percent of total national production deriving from irrigated land.

Wheat is Syria’s major staple food commodity, consumed mostly in the form of bread. A major objective of the Government is to ensure that Syria is self-sufficient in wheat. Since 1994, the last year of net wheat imports, this objective has been achieved by a combination of an accumulation of national strategic stocks and the planting of enough land to wheat to ensure that national production is approximately sufficient to meet domestic needs, even in a moderate drought year. Syria exported wheat in each year from 1994 to 1999. Severe drought in 1998/1999 led to a sharp fall in national output, to the elimination of the national export surplus and, coupled with continued exports, to a reduction in national stocks. The exceptionally low drought-affected output of 1999/2000 led to a further draw down of national stocks.

b) Marketing and processing

Wheat is mainly marketed, stored and processed by state enterprises. The General Establishment for Cereal Processing and Trade (GECPT) is responsible for the public marketing of wheat and also of barley, lentils and chickpeas. The GECPT is an establishment of the Ministry of Supply and Internal Trade (MSIT), financed through the MSIT’s budget. Two state-owned companies under the GECPT undertake milling and baking - the General Company for Mills (GCM) and the General Company for Baking (GCB). Public wheat storage is undertaken by the General Company for Silos, Feed Mills and Seed Plants (GESILOS), an establishment of the MSIT. Most wheat storage capacity remains in the hands of GESILOS and other public enterprises. Private wheat milling was legalized in 1991, and resulted in the establishment of a substantial private milling sector. Private bakeries account for about two-thirds of the output of bread.

Although the domestic wheat market experienced some liberalization during the 1990s, it still remains heavily controlled. Farmers may utilize wheat for their own consumption or sell it privately to buyers within their governorate. However, some 70 percent is still delivered to the GECPT, either directly or through a cooperative, with the remainder being consumed on farm, sold to a private mill or used for the local production of crushed wheat. Sale to private mills is technically illegal, but is tolerated for sales within governorates.

Only two main types of flour are produced in Syria, ‘standard’ and ‘high quality’. The quality of standard flour is specified by the government. In 2000, both standard and high quality normally comprised some 60 percent hard wheat and 40 percent soft wheat, reflecting the availability of these two types from domestic production. Such proportions are not ideal for bread flour, which should comprise around 60 percent soft wheat.

The GCM’s mills have a capacity of approximately 1.8 million tonnes per year. Since this is insufficient to meet the full national demand for flour, the GCM contracts private mills to produce for it on contract. In 2000, the GCM expected to mill some 1.72 million tonnes of wheat in its own mills and a further 385 000 tonnes in 13 contracted mills located in Aleppo, Homs and Hama.

All GCM flour, including that milled on contract, is used for the production of standard bread. All GCM bran is sold to the General Establishment for Feed (GEF), other than that derived from wheat milled on contract, which is sold to private feed millers or directly to farmers.

Other than for milling for the GCM on contract, the activities of the private mills are in effect restricted to the technically illegal milling of wheat acquired directly from farmers or from private traders.^[55] The private mills produce high quality flour only, since they would lose money if they attempted to compete in the heavily subsidized market for standard flour. This high-quality flour is used for speciality bread, pastries and pasta. The technically illegal nature of the activities of private mills means that the Government does not attempt to regulate the prices at which they buy wheat and sell flour and bran. Although greatly disadvantaged by having to operate in a relatively small market, the private mills have the advantage that virtually all the wheat that they use has invariably been harvested in the past year. This contrasts with the GCM which, because of the need to recycle public stocks on a first-in, first-out basis, is forced to use stocked, wheat which can be as much as three years old. Such wheat may need re-cleaning or drying, especially if it has been stored incorrectly.

In 2000, there was a high level of unutilized capacity within the private milling sector, with even the smaller mills mostly operating at below 50 percent of capacity. The larger privately owned mills were heavily dependent on milling on contract for the GCM. Since the market for high-quality flour is small, those that failed to win contracts were reportedly able to operate at best at only a fraction of rated capacity. As a result, competition to obtain GCM contracts was reportedly fierce.

The five new mills that the GCM established in 1997/98 increased its annual capacity by over 600 000 tonnes. This was a major contributor to the present national over-capacity in wheat milling and to the plight of the private milling sector. In this situation of over-capacity, it is clearly important that, as the national demand for wheat flour expands, the additional wheat that is required be processed in the currently under-employed private mills rather than in further costly additions to public milling capacity. This would both prevent national resources from being wasted on the duplication of capacity and would contribute to the development of a flourishing private milling sector in readiness for the eventual privatization of all wheat milling.

Bakeries making standard bread obtain their wheat flour at subsidized prices exclusively from the GCM, which delivers its flour by truck directly to them. Bakeries making high-quality bread buy from the only available source: private mills.

By law, bread may be produced from standard flour or from high-quality flour, but not from a mixture of the two. The public bakeries only produce ‘standard bread’. Private bakeries are permitted to produce either standard bread or high quality bread, but not both. This restriction is to prevent standard, subsidized flour from being used in high-quality bread. Due to the restrictions on the private inter-governorate movement of flour, private bakeries that produce high-quality bread depend principally on wheat flour produced within their governorate. In 2000, both the private and public bakeries acquired their standard wheat flour from the GCM at the highly subsidized price of SP7 200 per tonne, which had not been changed since 1994.

At 2000 prices, private bakeries were able to make profits, but the GCB had much higher unit costs and had been losing money since 1995. The main reason for this difference was gross over-staffing within GCB bakeries. These employ almost four times as much labour per unit of output as do the private bakeries. As with other state companies, the annual losses of the GCB are covered by Government transfers.

The GCB sells flour directly to consumers from its bakeries, through GCB outlets, and through private food shops. The latter represent its most important outlet due to their proximity to consumers.

Both the private and public bakeries sell standard bread ex-bakery at the fixed official price of SP8 per kg. These prices were last changed in 1994, when they were raised from SP5 per kg.

c) Pricing and subsidization

The Government sets prices throughout the marketing chain for wheat, flour and bread. In addition to prices for transactions between public organizations and the private sector, the Government also sets prices for transactions between government organizations and for transactions within the private sector.

In 2000, the setting of agricultural producer prices was the responsibility of the Supreme Agricultural Council (SAC).^[56] All other wheat and flour prices in the domestic market were set by the MSIT, other than the prices at which bread was sold through retail outlets. These were set by each local authority at premiums above the official prices at which bakers sold from their bakeries or own outlets. In 2000, the controlled retail price for bread was some SP0.5 per kg more than the ex-bakery price of SP8.00 per kg. Within the main price chain from the farmer through to the ex-bakery sale of standard bread, all prices were pan-territorial. This practice tends to be less distorting to resource allocation in Syria than it would be in countries with less developed transport systems, and it has a much smaller impact on the efficiency of resource use than distortion of the relative producer prices of different agricultural commodities (see Section 6.5 below).

In addition to standard bread, the retail prices of high quality flour and bread are also controlled. Since the into and ex-mill prices of the private mills that produce high quality flour are not controlled, these retail prices are set periodically by local authorities, taking account of estimated costs of production and, especially, the local market price of high quality flour.

The prices of standard bread and flour have been subsidized for many years^[57]. They were last raised in, respectively, 1994 and 1997. The subsidy is born principally by the GCM which sells standard flour to the GCB at a heavily subsidized official price that is insufficient to cover even its wheat acquisition costs. In 1999, the GCM spent SP37.62 billion on wheat acquisition and SP0.4 million on processing. The value of its flour sales amounted to only SP11.33 million, leaving it with a loss of SP26.29 billion.

GCM losses are made good by regular transfers from the Government’s Price Stabilization Fund (PSF), which finances consumer subsidies on wheat, sugar and rice. The PSF has two sources of revenue: (a) surcharges earmarked specifically for it on a number of goods, such as TV sets, carpets and refrigerators, and (b) direct budgetary transfers. Typically, these revenue sources are insufficient to cover the full extent of public losses incurred in the marketing and processing of wheat, sugar and rice, with the result that the PSF is forced to borrow from the state-run Commercial Bank of Syria. These loans are, in turn, refinanced by the Central Bank.

There are also other subsidies and cross subsidies in the processing and marketing chain. The GESILOS margin for storage and the milling margin of the GCM are insufficient to cover their full costs, requiring annual transfers from the Treasury. In the case of the GESILOS, its storage fees in 2000 had not been increased since 1994, and reportedly covered only about 40 percent of the cost of all its operations.

The prices of high-quality flour and bread are not explicitly subsidized, with the result that they are over twice the price of standard flour and bread. In 2000, high quality flour was selling at SP15 000-18 000 per tonne into-bakery, compared with the into-bakery price of standard flour of SP7 200 per tonne.

A typical 1999 cost and price structure for wheat, wheat flour and standard bread in Syria is shown in Table 6.2. The structure, which refers to the import parity price of soft wheat, is one of four separate structures that were estimated for soft and hard wheat by the strategic crops study task force^[58]. The structure is for one of the country’s main wheat marketing chains that runs from a farm in Al Hassake Governorate through to the point at which standard bread is retailed. The official prices at which the commodity changes hands between the point at which farmers or traders sell to the GECPT at its Al Hassake silo in the producing area, through to the price at which a retailer sells to a consumer in Damascus are shown in the two columns headed ‘Official government prices’.

In 1999, there were no imports of wheat into Syria, despite the existence of a national wheat deficit. Had imports been permitted, they would have been likely to compete with domestically grown wheat at GES silos in major deficit consuming areas, such as Damascus. Had there been no import duties or other levies and no subsidies, prices from this point down to the point of retail sale and back to the farm-gate would have reflected the estimated into-Damascus GES silo price of wheat imports of SP6 968 per tonne, which is derived in the upper part of Table 6.2. These estimated ‘import parity’ prices for wheat, wheat flour and bread in Syria are shown, together with the estimated unit costs incurred at each stage of the processing and marketing chain, in the column of Table 6.2 that is headed ‘estimated costs and parity prices’.

Table 6.2 Estimated import parity price structure in 2000 for soft wheat, standard flour and standard bread (SP/tonne)

* Assumed main first joint marketing point at which imported soft wheat competes with soft wheat grown in Syrian surplus areas.

** Based on flour with 60 percent soft wheat and 40 percent hard wheat. The hard wheat unit cost is based on a separately estimated into-bakery import parity price of Syrian hard wheat (see Westlake, 2001).

It can be seen that, with no price control and in competition with imports, mills would have paid only an estimated SP7 073 per tonne for their soft wheat rather than the SP16 500 per tonne official price. Farmers would have received SP6 504 per tonne for deliveries to an Al Hassake silo rather than the official price of SP10 800 per tonne. However, because of the heavy subsidization of standard flour, consumers would have paid a higher retail price for standard bread -SP10.51 per kg versus the official retail price of SP8.50 per kg.

The extent of the effective subsidies to wheat farmers and bread consumers will be seen from Table 6.3, which contains estimates of the sizes of the per-tonne and total subsidies that they in effect received.^[59] It should be noted that these subsidies are notional in that they are based on the deviation of official prices from estimated free trade prices. They do not represent the cost of subsidization to the Government.

Table 6.3 Estimated subsidies to wheat producers and consumers of standard flour and bread, 1999

* For a 60:40 combination of hard and soft wheat based on estimates in Westlake (2001).

Source: Westlake (2001).

6.3 Cotton

a) Production, consumption and external trade

Syria is a medium-sized producer of cotton, accounting for about 1.8 percent of global output. Its cotton fibre is of medium staple length, the most common length produced worldwide. Some 98 percent of Syria’s cotton is grown on private farms. The majority of production is small scale and takes place on land owned by the farmer. In total, the national cotton industry reportedly employs about a half million people.

Cotton is a summer crop that requires irrigation. It is planted in April and harvested from September until the end of the year. The majority of farms use flood irrigation, but the Government is encouraging farmers to invest in more efficient drip irrigation.

Government policy has been to allocate increased areas of irrigated land to cotton. The area planted expanded substantially during the 1990s, from 156 000 ha in 1990 to a peak of 275 000 ha in 1998. This was principally the result of increased use of water from the Euphrates Dam and from dams commissioned in the early 1990s in Al Hassake.

The drought at the end of the 1990s and the associated shortage of irrigation water forced reductions in the area planted to cotton. The total area fell to 244 000 ha in 1999 and further to 236 000 ha in 2000.

Yields per hectare rose from 1 625 kg in 1970 to a record of 4 180 kg in 1997. The main causes of this more than doubling of yield were:

• the development and adoption of new, environmentally adapted varieties, which have both higher yields and are also less susceptible to fungal attack in cold weather, allowing earlier planting;

• a producer price structure that further encouraged early planting and harvesting through the payment of price premiums for early seed cotton delivery;

• improved irrigation techniques and the adoption of row planting, which gives a 20 percent higher yield than broadcasting; and

• improved agricultural extension.

Despite the increase in yields witnessed over the past three decades, Syria remains a high cost producer of seed cotton. In the late 1990s, the unit costs of production of most small-scale farmers were well in excess of the farm-gate export parity price.

There are very large differences in yield between governorates and between farms within governorates, with per-hectare yields on farms reportedly ranging from 2 500 to 6 000 kg per hectare. These yield differences reflect differences in the physical and chemical properties of the soil, the amount of fertilizer applied, the type of irrigation employed, the method of planting, and the timing of planting.

About 30 percent of the fibre produced in Syria is utilized by domestic spinners, with the remainder being exported. After oil, cotton is Syria’s most important export commodity. Virtually all cotton seed is used domestically, for seed for planting and for the production of cotton-seed oil and cake.

b) Marketing and processing

Syria’s entire cotton crop is harvested by hand. By law, the state Cotton Marketing Organization (CMO) is the sole permitted buyer and ginner of seed cotton. It is also the only exporter of cotton fibre^[60]. In 2000, the CMO had 15 saw ginneries, located in Aleppo (7), Homs (4), Dair Ezzor (1), Al Hassake (1), Hama (1) and Idleb (1). Ginning commences in late September and is completed by July or August, depending on the size of the national crop. Ginned cotton fibre and cotton seed are used by both publicly and privately owned mills. The public textile and oil mills are the responsibility of the Ministry of Industry.

Syrian cotton fibre covers the full spectrum of qualities required by the domestic textile industry, obviating the need to import natural cotton. In 2000, there was no production of synthetic fibre in Syria. Imports of such fibre bore an import duty of only 1.0 percent and were used by a number of domestic spinning mills. Imports of synthetic yarn were subject to a 15 percent import duty. In 2000, five public textile mills imported such yarn for combining with Syrian cotton yarn in the manufacture of cloth.

Prior to Investment Law No.10 of 1991, all spinning mills in Syria were publicly owned. In 2000, public-sector companies still accounted for most domestic spinning and weaving. Some of these companies specialized in spinning, but there were also a number of fully integrated mills that spun, wove, dyed and printed. There were also three private spinning mills that accounted for about 10 percent of all cotton utilized domestically. Two of these mills spun cotton only, and one a mix of cotton and synthetics. There were also some large private weaving mills, in addition to the many small-scale private workshops that existed prior to 1991. These used yarn purchased from both the private and state-owned spinning mills.

The manufacture of garments and other finished textile goods is principally in the hands of a large number of private companies, the larger of which produce finished goods from their own-manufactured textiles.

c) Pricing policy and its impact

Annually, the government sets a base producer price for Grade 1 seed cotton that is applicable nationwide.^[61] This is designed to cover a typical small-scale farmer’s costs of production while, at the same time, isolating farmers from instability in world cotton prices. In the late 1990s, the cost-based producer price was well above export parity.

There is an average lag of about six months between the time that the CMO pays farmers for their seed cotton deliveries and the time that it receives payment for its sales of cotton fibre and seed. During this period, it has to finance its working stocks and other costs through loans. In 1998/1999, this resulted in it bearing an interest charge of SP1.72 billion. This was substantially greater than all its other costs, and was equivalent to 0.2 percent of GDP. This very high financing cost could be reduced by shortening the ginning period through the construction of additional ginneries. However, although this would reduce the CMO’s costs of stocking seed cotton, it would increase the national unit ginning cost since the increased capital and other fixed costs associated with the operation of the ginneries would be spread over a similar crop. Whether national ginning costs would indeed be reduced through an increase in ginning capacity is an important empirical question that can only be resolved through the detailed projection of future ginning and financing costs with and without additional ginneries.

The CMO exports its cotton fibre at world market prices through agents based in importing countries. These exports fetch a cif price that is typically some US$0.07-0.08 below the COTLOOK ‘A’ index. The CMO incurs a substantial loss on its exports because of the high cost-plus prices that it pays to farmers and its high seasonal financing costs. In 1998/1999, the CMO paid cotton farmers SP9.88 billion more than if it had paid them the export value of their cotton net of its domestic processing and marketing costs (Table 6.4).

Table 6.4 Estimated subsidies to seed cotton producers and taxation on domestic consumers of cotton fibre, 1998/99

* After adjustment to reflect the quality of deliveries.

Source: Westlake (2001).

Unlike buyers in export markets, the domestic textile industry is required to buy cotton fibre from the CMO at cost-plus prices. Consequently, the industry pays well in excess of the world price equivalent for its supplies. In 1998/1999, it paid an estimated 51 percent more ex-ginnery for the cotton fibre that it purchased from the CMO than the CMO would have received ex-ginnery had it sold the fibre for export. This amounted to a notional tax on the domestic textile industry of SP2.30 billion. The CMO’s high domestic selling price was protected by an import duty on cotton fibre of 30 percent, and a set of import duties on yarn, cloth and garments that ranged from 15 to 75 percent.

Yarn and cloth manufactured in Syria from high-priced Syria cotton could not be exported profitably, but the high labour intensity of garment manufacture and the low wage rates in Syria meant that clothing made from Syrian cotton could still be exported at a profit, even when made from cloth produced from Syrian cotton. However, such exports were less profitable than if Syrian cotton were priced to the domestic industry at export parity.

The low wages in Syria coupled with the high cost of Syrian cotton to the domestic garments industry led to private textile companies making garments on contract for overseas firms using imports of cloth that these firms supply. This clearly involved substantial additional trading costs that would not be incurred if Syrian cotton were used, and meant that the net profits made by the Syrian garments industry were accordingly reduced. It also meant that a greater proportion of Syrian cotton was exported as fibre with no additional value added.

In summary, the end result of the pricing policy for cotton fibre was that the manufacture of garments and textile goods in Syria was less profitable than it could have been. This both hampered the growth of the domestic textile industry and reduced the proportion of Syrian cotton fibre to which value was added prior to export.

Textile and garment manufacture are well suited to countries, such as Syria, which are in the early stages of industrialization and have surplus labour and accordingly low wage rates. They have been the springboard for rapid economic development in a large number of countries. They were the corner stone of the industrial revolution in Western Europe and more recently underpinned the rapid growth achieved by countries in South-East Asia. By not pricing its cotton at export parity, Syria artificially discouraged the rapid growth of national textile and garment manufacture and lost a major opportunity for rapid development. Rather than seeking to keep the majority of the population working in rural areas on the production of crops in which Syria did not have a comparative advantage, it would have been preferable for the government to have given greater emphasis to policies that encouraged employment creation in labour intensive manufacturing.

The prices of all textile goods sold within the domestic market are controlled by the MSIT. Whenever a company develops a new product, such as a shirt with a new design, a MSIT committee sets the retail selling price based on the ex-factory unit cost of production plus a 17 percent margin. This latter margin is designed to cover all costs between ex-factory and retail sale including an element of profit for the manufacturing company.

While some form of price control is necessary in situations where companies have significant monopoly power, it is important to recognize that price control tends to inhibit competition within a free market. This is for a number of reasons. First, it is very difficult for an organization, such as the MSIT, to allocate overhead and financing costs between product lines, especially when there are many such lines as is the case with the larger garment companies. This makes it very difficult to set the prices of individual products rationally. Second, it is important for efficient market development that firms price at the level which the market will bear and that in some circumstances they temporarily make high profits. This encourages firms to enter under-supplied markets and eliminates shortages. Third, official prices tend to act as benchmarks for implicit price collusion between companies that might otherwise engage in strong price competition. In addition to these drawbacks, price control carries high public costs in terms of the resources that must be devoted to the setting of prices and to their enforcement. For these reasons, it is important that the MSIT monitor systematically the state of competition within domestic markets for garments and textile goods and that price control be eliminated for sub-sectors as soon as there are sufficient suppliers to ensure competitive price formation.

6.4 Sugar

a) Production, consumption and trade

Sugar beet is produced on some 2.3 percent of Syria’s irrigated land. There are a few large beet-producing farms, but most production is small scale. In 2000, the sugar industry provided employment for about 25 000 workers. Planting is spread over three seasons with the aim of maximizing the amount of beet that can be processed by factories in the vicinity of farmers. However, farmers prefer to plant in the autumn because this avoids the crop being tender and susceptible to damage during the January-February frost period.

The area planted to beet increased in the first half of the 1990s, peaking at 34 000 ha in 1994, and then declined to an average of about 27 000 ha in the years from 1996 to 2000. There was no obvious trend in yield per hectare during the 1990s. In 2000, yields were reduced substantially by the impact of drought on the availability of irrigation water.

National production is sufficient to satisfy approximately one sixth of the national demand for sugar. The balance is met through the importation of both refined and raw sugar. The latter is refined at factories at Homs and Al Ghab.

Compared with the prices at which sugar is available on world markets, Syria is a very high producer cost. In 1999, Syrian farmers were receiving producer prices that were some three times import parity.

b) Marketing and processing

The Ministry of Industry’s General Organization for Sugar (GOS) is the sole buyer and processor of sugar beet^[62]. The GOS also operates an oil and soap plant, and has three yeast factories. It reportedly seeks to break even on its sugar processing and make profits from its other operations.

The GOS operates a total of six factories that were established between 1948 and 1975, each run by a separate subsidiary company. Sugar farmers are responsible for delivering their beet to a factory within their governorate. However, since beet production and factory capacity are not well matched spatially, the GOS transfers substantial quantities of beet between factories, in line with allocation plans drawn up by an eleven-person Sugar Committee, chaired by the Director General of the GOS. This committee meets at least once per week during the harvest season. The GOS uses its own 32-ton lorries to transport beet between factories. In 2000, it expected to spend some SP380 million on such transport, raising the effective mean unit into-factory cost of beet by some 17 percent. In addition to this increase in the cost of beet, the movement of beet between factories has the further disadvantage of leading to a loss of sucrose content.

In 2000, all refined sugar produced by the GOS at its factories was sold at cost-plus prices to the General Establishment for Consumption (GEC), which on-sold to consumers through its outlets. From 1963 until 2000, all members of the population received a ration of subsidized sugar. From the mid 1990s, the GEC only marketed sugar supplied under the ration programme (see below), selling by means of ration cards through its own outlets. Sugar required for industrial use, speciality sugars (such as cube sugar), and other sugar for retail sale were imported and sold by the private sector.

All domestically produced sugar was used for the ration programme, supplemented by imports. The sugar imports needed to fulfil the total requirement of the programme were undertaken by the GOS, which used the state General Foreign Trade Organization for Chemicals and Foodstuffs (GFTOCF) to arrange importation.

c) Price policy and its impact

The GOS pays farmers an into-factory price per tonne specified for beet with a sucrose content of 16 percent, adjusted by a fixed Syrian Pound premium or discount for every percentage point that the beet’s sucrose content is, respectively, above or below 16 percent. The schedule of price adjustments in operation in 2000 embodied larger premiums and discounts than in prior years. However, these were still insufficient to encourage farmers to seek to maximize the per-hectare weight of sucrose that they produced rather than simply the per-hectare weight of beet. This resulted in farmers continuing to over-apply nitrogen fertilizer, leading to a national percentage of sucrose in beet of only 12 percent, which compared with the 15.5 percent achieved in the 1980s.

An optimal sucrose premium and discount schedule would take account of the percentage of sucrose in the beet, and also of two factors which characterize sugar processing. First, an amount of sucrose remains in the beet pulp after processing. The value of this is largely lost. Second, the processing cost per unit of sucrose extracted is negatively related to the beet’s sucrose content. Both these factors require a producer price schedule that contains premiums and discounts that raise and lower the price by a percentage that is greater than the proportionate difference in the sucrose content.

Sugar prices within the domestic market, including all prices at which sugar is bought and sold within the private sector, are set by the MSIT. Under the ration programme, all members of the population, including infants and children, were entitled in 2000 to one kilogram of sugar per month at a price of SP7. This compared with a ruling open market price for imported sugar of SP18-20 per kg and an into-factory price to farmers for their beet that was equivalent to SP28 per kg of sugar extracted.

The acquisition of sugar beet from farmers at some three times the import parity price, and the sale of a combination of domestically produced and imported sugar at prices below import parity led to large public losses. Since the GOS sold to the GEC at cost-plus prices, all the losses were borne initially by the GEC, and subsequently made good through transfers from the Treasury. In 1999, the GEC lost an estimated SP350 million on its throughput of domestically produced sugar, and SP110 million on the sugar that it imported.

The estimated size of the notional subsidies to producers of beet and to consumers of sugar that resulted from the distortion of official domestic prices from world prices is derived for 1999 in Table 6.5. It will be seen that beet producers received a subsidy of SP1.31 billion and sugar consumers SP1.63 billion.

Between 1995 and 2000, the decision by the GOS on whether to import refined or raw sugar was based on whether or not the difference between raw and refined prices on the London market exceeded the domestic refining costs of approximately SP2 000 per tonne or US$41 per tonne. Between 1998 and 2000, the price difference was below US$41 per tonne and consequently only refined sugar was imported.

In early 2000, the GOS started refining for a fee raw sugar that had been imported by the private sector for eventual sale in the domestic market or for re-export. Such importing and refining was attractive for private traders because raw sugar imports bore an import duty of approximately 7 percent compared with the duty of approximately 15 percent levied on refined sugar.

Table 6.5 Estimated subsidies to sugar beet producers and consumers of refined sugar, 1999

* After taking account of quality discounts.

⁺ Assumed that domestically produced refined would sell at the wholesale level at a 10 percent discount below the price of imported refined due to its lower quality.

Source: Westlake (2001).

While it was rational for the government to seek to utilize under-employed public refining capacity, it would have been preferable to do this with the minimum of price distortion, by equalizing the duties on raw and refined sugar imports and charging importers the marginal cost of refining their sugar. One would not then have had the situation where the Government had decided that it was not efficient to import and process raw sugar even though its policies were encouraging the private sector to do so.

6.5 Producer price distortion and the efficiency of resource use

The strategic crops task force undertook detailed analysis of Syrian price structures for wheat, barley, cotton, sugar, lentils and chickpeas. This analysis was undertaken in similar detail to that shown for wheat in Table 6.2.^[63]

The Syrian Government influences the prices of raw and processed strategic agricultural commodities in a set of ways:

(i) through direct price intervention by state establishments which buy and sell commodities at prices set by the Government;

(ii) through the setting of prices at which private sector firms and individuals are required to trade;

(iii) through the imposition of indirect taxes and levies on trade in agricultural commodities; and

(iv) through other policies that affect domestic supply and demand.

Virtually all Government policies affect the domestic supply and demand for agricultural commodities in one way or another. This applies to policies relating to non-agricultural sectors, such as the industrial, health and education sectors, and also to fiscal and monetary policies not targeted directly at the agricultural sector. To keep the analysis to manageable proportions, it is limited to interventions (a) to (c), which impact directly on the commodity chains for the strategic commodities. To examine the extent to which these interventions were affecting producer prices, the impact of their withdrawal has been projected. Thus, for all five commodities, simulations estimated the first-round impact of eliminating:

• Government price setting;

• all indirect taxation of the commodity, including export and import taxes; and

• restrictive control of foreign trade.

This, inter alia, would lead to domestic prices being determined through competition between domestically and foreign produced commodities. In the case of lentils, chickpeas and cotton, such competition would take place in export markets outside Syria’s borders. In the case of sugar and barley, the competition would be within the domestic market at the point where imports first compete with the domestically produced commodity. The case of wheat is more complex. Syria switched from being a net importer of wheat to a net exporter in the mid 1990s. In 1999 and 2000, due to drought, it produced insufficient wheat to meet domestic demand, but did not need to import due to the presence of state-held strategic stocks. Since Syria produces a higher ratio of hard to soft wheat than is ideal for bread-making and since hard wheat is worth more per tonne than soft wheat on international markets, the nation would export hard wheat at times of overall wheat surplus and import soft wheat at times of deficit. The initial impact of withdrawing interventions would thus depend on whether the country is in a surplus or deficit situation. The strategic crops task force developed a set of estimates for wheat that corresponded to different assumptions regarding wheat trade flows. In this chapter, the example is taken where soft wheat prices are determined by competition with imports within the domestic market.

In the absence of Government price setting and control, prices at each level of marketing vary spatially, giving a very large number of different price structures between the farm gate and the point of final sale and export. Estimates were made for structures that approximate the most common likely case, namely that where the commodity moves from the main producing area - in most cases Al Hassake Governorate - to the main deficit urban area, Damascus. It is assumed that foreign trade is through Syria’s main Mediterranean ports, Latakia and Tartous. It should be noted that, for an export crop, producer prices would be higher the closer the location of the producing farm to the main consumption centres and/or the point of export. For an import-substituting crop producer prices would be higher, the closer the producing farm to the main consumption centres and, in particular, if the farm in question is close to a main consumption centre, that is distant from the point of import.

For all commodities other than sugar, it was assumed that the stages of the marketing chain would remain the same as at present. For sugar, the assumption is that a wholesaling sector would emerge if the Government were to withdraw from sugar distribution. Prices in foreign markets were converted into Syria Pounds at the rate of SP50 to one US dollar. Domestic costs were estimated at mid-2000 prices. In the case of world prices, the mean of monthly prices between January 1997 and June 2000 was employed for each commodity. Adjustments were included in the analysis to take account of the difference in the quality of Syrian output and that imported or traded on world markets.^[64]

Table 6.6 compares the estimated intervention-free, parity producer prices with the official producer prices that were in place between 1996 and 2000.

Table 6.6 Comparison of official and parity producer prices

* Actual mean producer price after the adjustment of the official base price to take account of quality premiums and discounts paid to farmers.

It will be seen that the producer price for sugar beet in the late 1990s was some three times import parity, making beet much more protected than any other crop. Soft wheat producer prices were 66 percent higher than import parity. Cotton producer prices were above export parity by an estimated 31 percent, following a monotonic decline in annual international prices for cotton fibre from 1995 to 1999.

For barley, official prices were roughly equal to import parity. This was compatible with the private importation of barley that had been taking place for two years to make good the drought-affected domestic crop. However, the official producer prices were well above export parity.^[65] Thus, if international barley prices were to remain at their level at the end of the 1990s, and should national production experience a post-drought recovery to a level above domestic demand, the GECPT (which is a buyer of last resort at the official barley price) would buy the greater part of the crop and would be forced either to export a part of its purchases at a loss or to accumulate stocks.

In the case of lentils and chickpeas, official prices were below estimated export parity. This finding was consistent with the observed dominance of the private sector in both the export and domestic markets for these crops.

This analysis showed that, to the extent that farmers can switch between crops in response to relative profitability, government price intervention had been artificially encouraging wheat, cotton and sugar beet production at the expense of barley, lentil and chickpea production.

6.6 Prices, costs and the profitability of production

As a basis for the annual review of the official producer prices to be recommended to the government for each strategic crop, the MAAR makes estimates of the average cost of production of each. The cost and yield data employed in this exercise are the only readily available up-to-date information that is available on unit costs of production. The data have severe limitations for analysis since they provide no information on cost variability between farms within Syria and no direct information on the variability of costs and profitability from one year to another.

Since yield variation is the main determinant of inter-year changes in unit production costs, some insight into the variability of average national costs between years can be obtained by simulating current unit costs at different yields. Such an analysis is summarized in Table 6.7. Using the official MAAR cost data employed in the annual review of strategic crop prices, this table simulates how costs and profitability would vary with variations in yield, and at the ruling official and parity prices. The official cost data have been adjusted to exclude land rental and to take account of the fact that financing costs for annual crops do not span a full year. The exclusion of land rental means that the cost and profit data in effect refer to a typical farmer working his own land. This is the most common form of arrangement.

Two sets of per-hectare yields give six separate scenarios:

• the 1997, 1998 and 1999 official yields employed in MAAR price reviews; and

• the highest, lowest and mean annual national yields observed between 1989 and 1999.

Table 6.7 Profitability of producing strategic crops in 1999

* Calculated using price and yield data from the official 1999 total cost of production less land rental and interest adjustment

Combined with the official prices and with recent parity prices, these give the 12 estimates of the profitability of each crop shown in Table 6.7. The data in the table show that the official yields used in the 1997-1999 annual producer price reviews were above the estimated mean national yield from 1989-1999. This is despite the fact that the official yields were reduced in 1999 in the knowledge that actual yields were being adversely affected by the prevailing drought conditions. The only exception was for lentils in 1999, for which the official yield was reduced to below the mean 1989-1999 national yield. In the case of irrigated soft wheat, the 1999 official yield of 3 560 kg/ha was 20 percent above the record national yield of 2 960 kg/ha. It should be noted that for cotton, the official yields were only marginally above the 1989-1999 mean and were probably close to the trend in national mean yield, given the strong yield growth that had taken place for cotton. However, for all the other crops, for which there had been no strong growth trends, the official yields were above the mean national levels that could have been expected in a year of median growing conditions.

From Table 6.7, it will be seen that, until the reductions in official yield in 1999, the official estimates of profitability were positive for all the strategic crops. The reduced 1999 official yields for rainfed crops were reportedly based on the projected yield of those farms that had not experienced complete crop failure. At these reduced yields, farmers’ income at the official prices would not have been sufficient to cover production costs.

The data show the major variability in unit costs and profitability to which Syrian farmers are subjected as yields vary from year to year. As one would expect, this is especially marked on rainfed land. Thus, the setting of administered prices does not ensure reliable stable net incomes for farmers. Indeed, it is evident that the net incomes of farmers, even those farming irrigated land, are potentially highly unstable under the existing administered pricing regimes.

The estimated profits that would be made at parity prices show that, if farm incomes were not supported by government purchasing at official prices, farmers with the average costs assumed in the annual price review would make losses on all the strategic crops in a year of average yield, other than for lentils and chickpeas. In the case of irrigated wheat and sugar beet, losses would be made even in years when yields were equal to the highest previously achieved.

The above findings must be qualified in two ways. First, it must be emphasized that the data employed refer to estimated annual national mean yields and mean costs. The profits that are actually made by individual farmers depend on how their costs and yields compare with the average. Farmers in the more productive agro-climatic zones using low cost techniques may be able to make profits in circumstances where other farmers are incurring losses. Second, the impact of yield instability will vary between crops and types of farms depending on the amount of family labour that they employ. This is because family labour is costed in the official figures at a notional wage rate. In practice, small-scale farmers growing labour-intensive crops will bear the impact of low yields principally through a reduction in their effective earnings per unit of family labour.

6.7 The relative costs of price support and subsidization

Table 6.8 contains estimates of the net financial cost to the government of financial losses incurred by state organizations involved in the processing and marketing of wheat, cotton and sugar. The focus for each crop is on the organization that explicitly bears the cost of subsidization. For wheat, this is the GCM, for cotton the CMO, and for sugar the GEC. It should be further noted that, in the case of wheat, relatively small losses are made by other organizations involved in storage, transporting and baking.

Table 6.8 Government price intervention: costs and beneficiaries

Based on a GDP for 1999 of SP811.6 billion.
Source: Tables 6.3, 6.4, and 6.5.

Table 6.8 also contains estimates for wheat cotton and sugar of the subsidization of producers and consumers that stems from the deviation of official prices from those that it is estimated would have existed in the absence of Government price setting, indirect taxation and the restrictive control of foreign trade (see Section 6.5, above). Unlike the estimated losses incurred by the state enterprises, these are notional transfers only.

It will be seen that wheat and cotton farmers received an approximately similar total value of notional price support through the setting of official producer prices at levels that were substantially above import and export parity, respectively. However, the total financial losses of the GCM were some four times those of the CMO. This was for two main reasons. First, the GECPT includes in its selling price to the GCM not only its costs of acquisition, transport and intra-seasonal storage, but also the costs of financing the national strategic grain reserve and interest costs that result from late reimbursement of losses by the Treasury. Second, the CMO recovers a part of the cost of subsidizing seed cotton producers by selling cotton fibre to the domestic textile industry at prices that are above export parity. The GCM, conversely, sells standard flour at below import parity with the aim of reducing the retail price of bread.

Since, in 2000, official producer prices had not been changed since 1996, the relative size of the subsidy received by producers and by consumers of wheat and sugar during the five-year period had tended to change from year to year with changes in relative world prices. In 1999, farmers and consumers benefited from the subsidization of sugar by roughly equal amounts. In the case of wheat, some 85 percent of the total price subsidization went to farmers, with consumers buying standard wheat flour and bread at retail prices that were only marginally below import parity.

From Table 6.8 it will be seen that price subsidies to wheat, cotton and sugar beet farmers totalled SP20.47 billion, equivalent to 2.52 percent of GDP. Total consumer subsidies by contrast amounted to only 0.66 percent of GDP.

GCM losses amounted to a massive SP26.29 billion, equivalent to 3.24 percent of GDP, and total public losses for the three commodities to 4.49 percent of GDP. A further subsidy of 0.28 percent of GDP was in effect paid by the domestic textile industry to cotton producers.

6.8 Conclusions

National policies towards the main strategic crops have been successful in that Syria has achieved its key objectives of national self-sufficiency in wheat and rapid growth in the production of the country’s main agricultural export commodity, cotton. It has also prevented the development of large disparities in the incomes of rural and urban households. However, it has achieved these objectives at a high cost in terms of government budgetary resources, the efficiency of resource allocation within the agricultural sector, and the growth of the domestic textile industry.

Syrian agriculture has adjusted to domestic producer prices that, in the case of sugar, wheat, and to a lesser extent cotton, are well above the prices that would exist if there were no government price support or restrictive controls on international trade. In the absence of major and sustained increases in world prices, all sugar farmers, most wheat farmers and at least some cotton farmers would be unable to sustain production if the government were to withdraw its price support and the protection of the domestic industry from world market forces. Moreover, although barley is able to compete with imports in the absence of marked subsidization, it would be unlikely to be competitive in export markets.

Together, wheat, barley, cotton and sugar occupy most of Syria’s cultivated land, both irrigated and rainfed. Although some of this land could be switched to the production of crops for which the country has a comparative advantage, such as lentils, chickpeas and certain fruits and vegetables, there is little possibility of switching more than a fraction of the total in the short and medium term. Moreover, a major shift would make Syria reliant on grain imports, an outcome which is not acceptable to the Government.

Thus, in the absence of a large devaluation of the Syria Pound, there would seem little possibility of being able to phase out government intervention and expose all domestic agriculture to world market forces.