October 19th 2002

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Articles from this issue:

COVER STORY: Bush changes US strategic doctrine

NATIONAL AFFAIRS: ALP Conference: triumph of 'spin' over substance

CANBERRA OBSERVED: PM's loopy housing scheme evades rebuke

SOUTH AUSTRALIA: Social 'reforms': Rann's devious politics

STRAWS IN THE WIND: Yes - it is about oil, and arms, and ... doublethink

SUGAR: Behind the sugar crisis

OBITUARY: Ted Serong: a great Australian

FINANCE: A $50 billion war chest for the ALP?

LETTERS: Superannuation and the ALP (letter)

LETTERS: Democrats (letter)

LETTERS: Life matters (letter)

WATER: Wimmera-Mallee major water conservation project underway

CHINA: China will remain the major challenge to America

COMMENT: Share collapse: we've seen it all before

BUSINESS: Just how 'ethical' can business be?

COMMENT: Dysfunctional Victoria

BOOKS: Wilful murder: the Sinking of the Lusitania, by Diana Preston

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Behind the sugar crisis

by Colin Teese

News Weekly, October 19, 2002
At meetings of cane farmers down the coast in the sugar seats, there is strong and growing opposition to the industry package being promoted by the Federal and Queensland governments. The issues behind the continuing crisis are examined by Colin Teese.

Reports in last week's newspapers that the Australian government has joined with Brazil to complain about European Union (EU) sugar subsidy practices are truly astounding. It's impossible to imagine that the complaint is - at least on Australia's part - anything other than an attempt to divert attention away from the government's own shortcomings in dealing with the problems of our sugar industry.

And make no mistake, the international sugar producing community will recognize this ploy for what it is: an exercise in both naivety and cynicism.


As to outcome, the most the parties bringing the complaint can hope for is that their representations are not dismissed as utterly frivolous.

The reasons why are obvious as soon as one considers the facts.

It is, of course, immediately conceded that the EU is in the business of seriously subsidising its sugar production. What will be difficult - if not impossible - to prove, is that EU subsidies are at present the important component in exerting downward pressure on world sugar prices.

The facts don't support any such assumption. And certainly not when our partner to the complaint is by far the world's biggest sugar exporter, and in today's market, is doing most to depress the world price.

It is a sad fact for Australia that the harm done to our sugar industry by the EU (then the European Community, EC) was caused in the late seventies and early eighties of the last century. That was the time when the EC increased its exports of sugar from zero to about four million tonnes in a couple of years.

It is also true that the harm then done to our industry could have been worse, but for the existence of the International Sugar Agreement, and a favourable decision this writer secured in the General Agreement on Tariffs and Trade, which forced the EC to curtail its exports.

At a rather technical level, there has been the suggestion that the present EU subsidy arrangements do not conform with World Trade Organisation rules. Our negotiators will argue, according to reports, that EU non-subsidised sugar is cross-subsidised by the subsidised product.

This is, of course, true. Unfortunately for us this point will have no weight in the WTO. Back in 1994, we agreed, in the round of trade negotiations establishing the WTO, that Australia would not contest the results of the outcomes on agriculture which covered EU subsidies.

For reasons which were never made clear at the time, we agreed to have our hands tied. We may soon come to regret that concession.

As to the matter of Brazilian sugar subsidies, that country maintains there are none. We should not expect the EU to take that statement at face value. After all, the EU is the world expert on sugar subsidies. As such it will understand and exploit the fact the kind of gain in market share now in Brazilian hands could hardly have been achieved without subsidy.

Direct assistance to Brazilian farmers might not be easily proved. However, no doubt the EU will argue that the ethanol program - which provides, by government direction, a well paid outlet for much Brazilian sugar - helps Brazilian sugar exporters to compete on price.

Could we, and Brazil, possibly disagree? After all, is not the basis of our complaint against them precisely the same: that subsidies to one category of product benefit all the others?

It seems that Australia's negotiators can look forward to a challenging, if not rewarding negotiation.

What we cannot expect is that any of the outcomes likely to be delivered in the WTO can possibly do anything for the plight of our sugar industry - long or short term. At most it could become a smokescreen for the government to hide behind back home.

As far as doing anything for the industry back here in Australia, what can the government point to? Not much, except a touching faith in the report on the state of the industry prepared on its behalf by Clive Hilderbrand, and some, as yet not fully developed proposals based upon that document.

Unfortunately - for both the government and the sugar industry - the report is seriously flawed.

Much of the evidence on that state of the market for sugar gathered by Hilderbrand is hardly to the point: neither is it clearly assembled. Despite all of this, there is enough there to draw the obvious conclusions. The trouble is: Hilderbrand does not draw them.

Almost all of his report is concerned with the author's own analysis of what is wrong with the production side of the sugar industry - both at the growing and milling levels.

He is, in short, afflicted by the 'efficiency' syndrome. If only the growers and millers could be persuaded to become more 'efficient' (by getting bigger and reaping the benefits of economies of scale) then they would be able to compete with world sugar prices.

Now, this superficial analysis, with its off-the-shelf solution, fitting comfortably into the straitjacket of current economic orthodoxy, may be just what Agriculture Minister Truss wanted to hear; but it is, alas, hopelessly misguided. No amount of 'efficiency' can solve problems which arise from the circumstances of a corrupted world market.

Armed with this tainted advice, the government, understandably, crafts solutions for problems that do not exist, and leaves unresolved others that must be dealt with.

The figures are all there in Hilderbrand's report for those who want to find them. What's missing is the will to look.

Real solutions

Without denying the need to constantly be looking for ways to produce both cane and raw sugar more cheaply, it is obvious that the real problems lie elsewhere. On page four of his report, Hilderbrand reproduces the industry's record of monthly average raw sugar prices from 1970 to 2000. These figures clearly demonstrate that until the early 1980s, while sugar prices fluctuated enormously, the trend line was pointing modestly upwards.

The reasons for the wide fluctuations are because in certain periods supply exceeded demand and at others, demand was chasing supply. Since the early 1980s, there has been no such movement. The product has been in permanent oversupply as a result of unrestrained and subsidised exports flooding the market.

The really interesting point in the figures is that they show a huge drop in price after 1981 (from about 42 cents per pound to below 10 cents two years later). It has remained at the lower level ever since.

Hilderbrand's comment on all of this? It reflects oversupply of the world market (well really?), but also the increasing dominance of Brazilian exports. [How the latter is relevant is not made clear: surely if the world market is oversupplied (no matter by whom) then prices will remain depressed?]

What Hilderbrand has missed in his comment is that up to 1983, export extravagances were contained by the quotas imposed under the International Sugar Agreement. By limiting sugar exports more or less in line with demand, the ISA effectively discouraged increases in the production of subsidised sugar; what was the point of producing it if export was prohibited?

Since the collapse of the ISA, no such restraints have existed.

A new ISA, even if it were possible, would hardly fix the problem now. As far as overproduction of subsidised sugar is concerned, the Brazilian horse has bolted. Any new agreement could not be negotiated unless Brazil (and the EU to name two) would agree to cut exports. There is no chance of that.

And as for the claims that the EU is set to reform its farm subsidy program, that prospect has been halted by France and a number of other EU countries.

If we are to look to international co-operation for solutions to the overproduction of sugar, we are forced to rely upon the uncertain mercies of the World Trade Organisation and its capacity to generate an agreement to curtail (or better still eliminate) subsidies. We should not hold our breath for that.

And, in any case, assuming it were possible, it is years away. The problem facing the Australian sugar industry is survival now, at subsidised world price levels it can never match.

It is that very problem the Government and Hilderbrand have failed totally to address.

The issue comes down to a simple decision: do we want the Australian sugar industry to survive? Some of course do not. They would argue that, subsidised or not, if we can't make it cheaper than we can buy it, then we should allow our consumers the benefit of the lower prices of others.

Precisely that attitude was adopted with manufacturing industry - and Australia is now in a position of having almost the smallest manufacturing sector of all the OECD countries.

The trouble with that approach is that if we ignore subsidies, there is nothing - whether it be farm produce or manufactures - which can't be obtained cheaper from elsewhere.

The sugar industry, in its present plight, is caught up in the consequences of a wider, and totally unrealistic policy push about the ideology of free trade and unfettered competition, rather than the need for any or all of our industries to survive.

  • Colin Teese was Deputy Secretary of the Department of Trade

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