A TRADE VIEW OF THE FUTURE OF SUGAR IN THE REGION


Prepared by Mr Geoff Mitchell, Tate & Lyle Bundaberg Ltd Australia for the Sugar and Beverages Group, Commodities and Trade Division.

Mr Chairman, Delegates

Before addressing my topic today, I must firstly seek your indulgence in a matter of definition. I have been asked to give a "trade" view but I make no claim to be a trader in the usual sense of the word.

This has been particularly so since I once heard a "trader" defined as someone who would sell you out in just one heartbeat. I am sure that was quite unfair but anyway, in other respects at least, I am not qualified to present a trade house view.

Rather my experience has been in the operational management of cane growing, milling, refining and distilling enterprises. This has been extended to include some direct knowledge of the global sweetener business as a result of being part of the Tate & Lyle Group. I have also been fortunate to have held Board positions in Australia with responsibilities in the areas of sugar industry marketing, regulation and organisation.

Thus by definition I guess I could be described as a sugar businessman and the "Trade View" I have is from that business perspective.

What then is the future for the business of sugar in this Asia Pacific region?

Business and trade is about creating productive wealth and the potential for growth must feature largely in that. From that perspective then I can turn the question around into the statement that even global sugar's future is, in fact, this Asia Pacific region.

Clearly that observation derives from demographics. Asia has the people and the population growth. It also, in general, is building from a low per capita sugar consumption base as its economies develop. Together these factors add up to demand potential in the region - and a demand potential that is unique in a global sense.

This would seem to be an attractive scenario for those in the sugar business in Asia Pacific. At the very least it is a scenario which should be conducive to investment, development and expansion.

And indeed there is recent evidence of this. The two large regional producer/exporters Australia and Thailand have shown remarkable growth. Both have been increasing production and exports at rates of the order of five percent per annum.

But this situation is not characteristic of other sugar producing countries in Asia Pacific. For the most part production is either static or declining. We can observe this in the semi circle around the Pacific from Hawaii through Japan, China, Taiwan Province of China, Philippines, Malaysia, New Guinea and ultimately to this conference venue of Fiji. Even in that cradle of the cane sugar industry, Indonesia, production has been under pressure although it should increase with new investment outside Java.

There is a conundrum here. The expanders, Thailand and Australia, are also the industries most exposed to low world market prices. The other regional producers are static despite receiving income from a complex mix of domestic and international support mechanisms.

This is also the business conundrum in seeking to form a view of the future of sugar in this region .

Is there a factor "X" in sugar which can make it distinctively a different business?

By any trade definition sugar, raw or white, is clearly a commodity. But it is a commodity which has quite dramatically different values in different markets.

In the international free market which functions as a residual market a tonne of sugar commands about US$ 300. It has a similar value in Australia.

But in the USA and throughout much of Asia Pacific it has a value around US$ 500. In Europe the price is incongruously higher again at US$ 700 and in Japan up yet another order of magnitude to US$ 1000.

The factor "X" in the sugar business is agricultural politics. Further there are arguments which I will canvas later, why the commodity sugar is the most susceptible to government intervention and has the greatest immunity to reform.

Given that sugar remains the most political of all agricultural commodities, intervention factors outside supply, demand and cost can dictate a future which defies normal business analysis. However I will try to develop a trade view by considering these factors in turn and as they inter-relate.

Firstly, supply. Statistical data and low market prices in recent years have demonstrated that overall there has been adequate supply. This is due to increased production from Brazil, Thailand and Australia more than offsetting reduced output from Cuba. Production on the subcontinent India has also been high and increasing.

Secondly, demand - measured as consumption. In the past 30 years world consumption of sugar has doubled to reach about 120 million tonnes. Annual growth rates during the past two decades have slowed a little to the order of 1.5 to 2.0 percent. When compounded this still amounts to a lot of sugar - equivalent to Australia's total exports every two years.

But actual trade in sugar has not grown to anywhere near the same extent. Since 1980 the volume traded annually has remained relatively static at about 30 million tonnes.

Thus we have yet another business conundrum - growth in demand, low world prices and yet most of that new demand satisfied by domestic production.

However there is some evidence of the impact of real market forces. What has changed is that

  • there is now a concentration of exports in the hands of the efficient exporters
  • "free" market trade has increased from about 40% to 90% of exports

The question is will this be the end of the matter? Will increased demand continue to be met by more expensive domestic production while efficient exporters compete for a static world trade volume?

In seeking an answer to that question, I have looked for evidence of change in the pattern of world trade

  • There is clear evidence of domestic market deregulation in many countries. Since 1980 some 25 nations of all economic persuasions and size, ranging from Singapore through the Russian Federation to Brazil have set out to systematically reduce or eliminate domestic sugar price support.
  • There is also a growth in customs unions such as NAFTA, MERCOSUR and ASEAN. This will eventually promote freer trade and competition; at least within the union of countries which otherwise have not yet deregulated their sugar regimes.
  • Further there is the important fact that the growth in sugar consumption is in manufactured food - often linked to global food companies. Such organisations are becoming increasingly interested in sourcing product at real world as opposed to domestic regulated prices.

Thus we have a clear pattern of "deregulation" of production support in various forms and a strengthening of global purchasing knowledge on the consumption side.

To form a trade or business view of whether these factors will overcome that factor "X" -agricultural politics - and lead to a liberalisation and growth of sugar trade I need to analyse the reason why sugar is so political.

In my view sugar is the most political of all agricultural commodities, not directly as a result of international politics in the sense that oil is political, but due to a concentration effect in local politics.

What happens in economic terms when someone builds a sugar mill is that all land holders within a short radius obtain - usually at no cost - one more option for use of that land. As the factory expands more and more of the local land is attracted to cane. The cane growers band together to negotiate with the mill. It is then a good negotiating tactic to accuse the mill of having monopoly power and demand of the local politician that there be regulation.

The local organisation of cane growers become a relatively large and effective lobby organisation in the small local area politics. It can influence (even direct) the local politician. Grower organisations then link at state and national level. The end effect is that a relatively small percentage of the population can have a disproportionate political power through high concentration in specific areas.

This pattern is evident in all sugar producing areas regardless of political persuasions. It derives from the fact that a mill and its cane supply are inextricably linked. The local concentration leads to national cane grower political power and the outcome is predictable - agricultural politics dictating international trade.

In the face of all this, does the pattern of change suggest a new future for the sugar trade in the Asia Pacific region?

I think it does. I suspect that while sugar politics will remain real everywhere, and even dominant in some countries, its influence will decline.

The fact is that it has already happened in many countries. Further, price support schemes are under real pressure even in those countries which can afford them e.g. EU, USA and Japan.

But the real factor which will open up trade will be the third factor in that supply/demand/cost trinity - cost.

Cost of production data is notoriously difficult to obtain and interpret. The Oxford based LMC International has undertaken a number of cost competitiveness studies and published trend data.

That data suggests that Australia, Thailand, Brazil, India and a group of Southern African units are the low cost sugar producers. All are continuing to improve their competitiveness vis vis the rest of the world - albeit at a slowing rate of improvement.

It is important to note here in the Asia Pacific context that it is not overall industry size alone that dictates cost competitiveness. LMC has identified some small southern African nations as low cost producers. I can independently confirm that from other data.

What seems to be most important in the long run is the business framework in which the individual sugar producing enterprise is allowed to operate. Apart from the obvious natural advantages / constraints of geography, cost competitiveness of a sugar business seems to be most determined by its independence from what could be described as imposed social constraints.

There is ample statistical evidence that the "Real" world sugar price, in common with other agricultural commodities, has been trending down throughout the twentieth century. People like me who are in the business hope that trend will reverse. However we also know only too well that those who don't pay attention to history lessons get to do all the practical classes.

Dr James Fry of LMC has stated that

"There is no doubt that the closeness of the production cost curve and the long run price trend is uncanny. At the least, it suggests that in the very long run, there IS feedback from production costs to world prices".

This is the key factor.

I think it will become the slow tide that the "King Canute" price support regulatory systems cannot hold back.

Therefore, in summary, it is my view that there will be real opportunities for growth in the sugar business and for trade in sugar in the Asia Pacific region, because of the obvious facts that:

  • consumption will grow,
  • supply will be available from efficient producers,

and the less obvious:

  • decline in relative political power of producers as economies grow and industrialise,
  • increasing domestic market deregulation,
  • manufacturing requirement and increasing interest in sourcing world priced sugar,

and, most importantly:

  • there is feedback from (efficient) producer costs to world prices.

However I am not going to predict when those opportunities will be realised. Experience has taught me that anything involving agricultural politics takes longer than a rational person would predict and is invariably preceded by a foul up. Nevertheless, as I said in my introduction, global sugar's future is, in fact, this Asia Pacific region.

In developing policy for the next round of Multilateral Negotiations, it will be important that there is due recognition of the evolutionary change occurring in the sugar trade pattern. The driving factor will not be regulatory price support mechanisms; rather it will be the cost competitiveness of efficient producers.