3. Sugar, tropical beverage crops and fruits

Sugar

Introduction

The sugar projections were carried out with the help of a multi-region, non-spatial equilibrium model. The model assumes the continuation of current sugar policies and does not hypothesize as to the direction of future policy changes or include an analysis of the potential impact of the Everything-But-Arms (EBA) proposal in the European Union (EU). The principal changes in sugar trade policy of recent years continue to be those commitments made in the Uruguay Round Agreements in regard to the reduction of domestic support and export subsidies, as well as minimum market access for imports and tariff reduction. These changes are accounted for by the model, with no further changes in these commitments envisioned by 2010. Furthermore, as trade policies are typically based on the type of sugar traded (refined and/or raw sugar), the model accounts for the relationship between refined and raw sugar prices and the traded quantities of the differing types of sugar.

Production, consumption and stocks are expressed in raw sugar equivalent, with cane and beet sugar combined in one supply response relationship as necessary to the specific country or region. Demand is expressed by the combination of the direct and indirect uses of sugar, and stock demand equations through combined public and private stocks building. Domestic prices for refined and raw sugar are incorporated (with other variables) in the supply, demand and stocks equations. Ad valorem tariffs link border prices (world prices) to domestic prices. Finally, the model is closed through the usual market clearing condition that the sum of all net trade across all countries and regions, expressed in terms of refined and/or raw sugar, equals zero.

Production

Global sugar production is projected to reach 165 million tonnes by 2010. The projected growth rate of two percent is in line with consumption growth projections and similar to the growth of the 1990s. The baseline period reflects the chronic surplus overhanging the world sugar market for most of past decade, several seasons of record output in major sugar producing nations, and 14-year lows in world sugar prices. The projected world output would be affected by record production due to better than anticipated yields and efficiency gains in developing countries, particularly Brazil and India.

Developing countries are projected to account for virtually all of the global increase in sugar production, thus raising the share of world production from 67 percent in 1998-00 to 72 percent by the year 2010. Regionally, while Latin America and the Caribbean would continue to play the leading role in raising output, production in Asia is projected to grow 2.5 percent per year, slightly lower than Latin America but higher than the anticipated global average growth rate. Latin America and the Caribbean would account for slightly more than 14 million tonnes of the 30 million tonne increase projected for developing countries, with Asia at 13.5 million tonnes and Africa at 2.4 million tonnes of the projected increase by 2010. India and Brazil would account for 18 and 17 percent of total global production between 1998 - 2000 and 2010, respectively.

By contrast, developed countries are projected to have marginal growth in sugar production, less than one percent over the period. Production growth is projected to slow slightly in Australia, to 1.4 percent, with steady to slightly increasing growth in South Africa. Output in North America is anticipated to decline as scheduled NAFTA access to the United States sugar market increases over the projections period, given current assumptions of declining NAFTA tariffs that will be eliminated toward the end of the projections period (US fiscal year 2008). Little change in sugar output is anticipated for Western Europe while output in the Commonwealth of Independent States (CIS) in Europe is projected to increase at a higher rate than that of the combined production for other countries in transition.

Consumption

World sugar consumption is projected at slightly above 160 million tonnes, an expansion of nearly 32 million tonnes, between 1998-00 and 2010. The implied annual growth rate of two percent, while slightly more than the growth rate achieved over the past decade, partially reflects assumptions of rising incomes and anticipated shifts in patterns of food consumption throughout the world by 2010 and beyond. Most of the projected growth in global sugar consumption is anticipated in the developing countries, with only marginal increases foreseen in the developed nations. Increasing per capita income levels, particularly in those developing countries with higher population growth rates, as well as shifting food consumption patterns, would support sugar consumption growth to 2010. Rising incomes would be the key driver of sugar consumption growth, particularly as the global population growth rate is anticipated to slow over the next decade.

Developing countries would account for nearly 32 million of the projected 33 million tonne increase in consumption, raising the share of global sugar consumption in those countries to 71 percent by 2010, from nearly 64 percent in the baseline period. Among the developing regions, particularly strong annual growth of 3.4 percent is projected for Asia, followed by Africa (2.9 percent per year), Latin America and the Caribbean (2.3 percent), and Oceania (1.6 percent per year). For the developing nations, the highest growth in sugar consumption is projected for Thailand (5.9 percent per year), followed by India (3.6 percent per year), Pakistan and the Philippines (3.5 percent per year).

Although consumption is expected to marginally increase for the developed countries, the share of global consumption would decline from 36 percent to 29 percent. Growth rates are projected to continue to decline in Japan to 2010, slightly more than the downward trend of the 1990s. The fastest growth in total consumption in the developed regions would be in Australia (3.2 percent per year) while the slowest growth rate is projected for the economies in transition. Among economies in transition, growth of one percent is projected for the CIS in Europe (the Russian Federation and Ukraine).

International trade and prices

Opportunities, though limited, arising from sugar policy changes to increase market access in recent years, as well as the continued deregulation and privatization of sugar industries throughout the world, may have provided a new impetus to international trade in sugar. Brazil, generally considered to be one of the most competitive sugar producing nations, emerged as the globally dominant sugar exporter in the 1990s. Record output, increasingly higher yields and more efficient production toward the latter part of the 1990s resulted in substantial volumes of sugar exported into the world market and downward price pressures. Brazil is expected to maintain its position as the leading player in the world sugar market over the 1998 - 2000 to 2010 projection period. It should also show the most substantial increase in net trade among the main exporters, up by 8.2 million tonnes to slightly more than 18 million tonnes in 2010. Net trade from Mexico is projected to increase by nearly 1.1 million tonnes over the same period, primarily due to increasing NAFTA access to the US market. India would emerge as a net exporting nation, with exports projected at more than 600 000 tonnes in 2010. Australia, South Africa and Thailand would also increase net export trade, although at a slower rate for Thailand than in recent years, largely due to strong projected domestic consumption growth, nearly 1.4 million tonnes more by 2005. A similar increase is projected for Australia. Net imports by the United States are projected to increase by 1.5 million tonnes over the projection decade, due to increased market access by Mexico under the NAFTA agreement and potential declines in domestic production.

The bulk of market opportunities for exporters, however, are expected to arise in markets where domestic production cannot keep pace with demand. Regionally, it is projected that net imports into Asia would increase by 7.2 percent a year, with substantial growth in imports projected for China, Pakistan and the Philippines. Net imports by Indonesia are projected to nearly 2.4 million tonnes by 2010, despite domestic policies to increase sugar production in that country. Among the transition economies in Europe, growth in net exports is projected for Poland, while declining imports are anticipated for the CIS in Europe due to the expected increase in domestic production in these countries.

Although most often tending toward a structural surplus, the world sugar market has historically had recurring supply and demand imbalances, which are reflected in extremely volatile prices in free markets. For most of the past four decades, world production of sugar has been in excess of consumption, pressuring prices downward and resulting in stock building. Periods of deficit production, such as the poorer than anticipated crops due to weather shocks in Brazil and the EU in recent years, resulted in periods of market volatility in which prices rose sharply, followed by equally sharp declines. Since such events and indeed collapses in demand cannot be foreseen in commodity models, price movements in such models tend to be smooth and gradual. The projections in world free market price for raw sugar (nearly 15 US cents per pound) show a significant increase in real terms from the average price level of 8.2 US cents per pound for raw sugar in the base period. Furthermore, the raw to refined price differential (also referred to as "the refining margin") could increases from 1.8 US cents per pound in the base period to 6.3 US cents per pound by 2010.

However, these price projections from 1998 - 2000 to 2010 appear to be overly optimistic. As price developments over the past few seasons demonstrate, with the ISA daily price plunging by more than 35 percent - to a 14-year low of 4.78 US cents per pound by the end of April 1999 for raw sugar - price volatility seems set to remain a notable feature of the world sugar market. Price levels for calendar year 2002 are anticipated to average less than 6 US cents per pound, well below the cost of production in most exporting nations.

Issues and uncertainties

Volatility of prices in the free market has been a long-standing feature of international trade in sugar. The 1980s, for instance, opened with a world sugar price spike, with raw prices soaring to 47 US cents per pound versus a long-term average of about 10 cents per pound. Typically, such price volatility was followed by long periods of relatively depressed prices with occasional declines, to levels below the costs of production in major low-cost exporting countries (average world raw sugar production costs are estimated by LMC to be 16 US cents per pound). World prices remained fairly stable throughout most of the 1990s, declining rapidly toward the end of the decade, as record output, particularly in Brazil, drove greater volumes into export channels and hence, the free sugar market. Increased domestic production in the United States has also resulted in less sugar imported under the preferential tariff rate quota in recent years, with more directed toward the free export market. While it has been long expected that the development and diffusion of alternative sweeteners would help reduce the magnitude of price volatility, this has not been the case to date.

The increasing importance of developing countries in global sugar consumption, with their greater sensitivity of demand to price, has been cited as a possible contributor to the reduced variability of prices for most of the 1990s. However, Brazil’s emergence as the most dominant and competitive exporter in recent years, the economic crises of the late 1990s, and record output in other major producing nations have resulted in a renewed cycle of depressed prices.

Generally, price elasticities of demand for sugar are closely aligned with higher income elasticities. Coupled with the chronic surplus supply and high stocks, reversal of the most recent slump in the free market price may well hinge as much on recovery in the economies affected as on the interaction of short-term supply and demand factors. Further rationalization of global sugar industries may result due to sustained low free market prices, with potentially damaging consequences for investment planning in sugar production and downstream industries.

Another important developmental issue for the future concerns the extent and impact of policy changes in the world sugar economy. In an earlier study of the Impact of the Uruguay Round Agreements on Agriculture (URAA) (FAO 1995), it was concluded that the URAA would induce increases in world sugar production, consumption and trade, but that the overall effects would be relatively small. Essentially, the scope for further reductions in market supports implemented through sugar policies remains substantial. Without exploring such hypotheses as further liberalization, some analysis is in order of the consequences of recent policy changes on the part of the world sugar trade that is the subject of preferential arrangements, in particular, the African, Caribbean and Pacific States (ACP). Already in the decade preceding the conclusion of the URAA, the total volume of preferential trade in sugar had declined from about 8 million tonnes to less than 3 million tonnes. Thus, reductions on tariff rates for both raw and white sugar, as agreed in the URAA, would generally have the effect of further reducing the value of preferences on a smaller volume of trade than in earlier years. However, other aspects of the URAA, for example the commitments to reduce the volume of subsidized exports should be of help to preferential suppliers, through impacts on prices in third markets. The projections suggest that in the case of ACP sugar producing/exporting countries, the URAA would raise their export earnings by about 1.2 percent in the short-term. However, this would be almost entirely a trade volume effect as it is projected that the changes in the prices of their preferential and non-preferential sales would be offsetting. In general, for these countries the scenarios explored suggest that their export revenues would benefit more from widespread trade liberalization, which would help to support free market prices, than from, for example, further liberalization limited only to preference-giving countries, which would also have a negative effect on the preferential price.

Conclusions

The world sugar market remains in a period of chronic surplus, as record output in major producing countries surpassed growth in global consumption in recent years. Trade and stocks increased 23 and 26 percent respectively, resulting in global stock building, increased export volumes and sustained downward price pressure. Further discussion of prices over the last decade reveals that world sugar prices declined 17 percent between the first five years of the last decade (1990 - 1995) and the last five (1996 - 2001), hitting 14-year lows in early 2000. Exports from Brazil increased nearly 65 percent between the two periods, largely driven by the 62 percent devaluation in the Brazilian real since 1999 and record output and deregulation of the fuel alcohol sector, which encouraged increased export volumes.

Sugar policy reforms have largely been directed at the supply side where instruments have been introduced to reduce inefficiencies and enhance competitiveness of producing countries. Among smaller producers, rationalization of the industry, diversification and exit strategies were explored for the macro-economic impact. As for international trade policies, the only significant development occurred in developing countries where market access increased by 150 000 tonnes and accounted for 90 percent of the increase in concession reached under the first five years of the Uruguay Round.

Recent policy developments have seen virtually unchanged sugar policy in the United States, as codified by the passage of the Farm Security and Investment Act of 2002. Essentially, the US Sugar Program created an incentive for sugar producers in the United States to expand domestic production, which has in turn resulted in import levels at or near the WTO minimum access agreement. This has resulted in some amount of increased global output requiring an export destination in the free market. Moves for further liberalization of the sugar regimes in both the United States and the EU may be stalled given the overall unchanged US sugar policy.

The more significant development has been the EBA initiative, which was introduced by the European Commission to enhance market access by Least Developed Countries (LDCs). However, increased market access for those sugar producing nations that are LDCs will be granted at the expense of the existing ACP quota-holders. Essentially, there is no net gain in market access to the EU, but a redistribution of the SPS quota which ranges from 200 000 to 300 000 tonnes each year. Under the EBA, which came into effect for sugar in 2001, a volume of 74 000 tonnes of sugar (raw equivalent) has been removed from the overall SPS quota and redistributed to LDCs. This base quantity will increase by 15 percent each year until 2006 when quotas will be removed altogether.

Implementation of commitments under the URAA had little or no impact on world sugar markets for most of the 1990s. Efforts to address sugar policy reform have not advancedsignificantly in either the EU or the United States. Furthermore, recent trends indicate increased use of differential import tariffs and domestic policies to protect national sugar producing industries from lower world sugar prices.

Table 2.23. Sugar: actual and projected production