AGRICULTURE: by Patrick J. ByrneNews Weekly
Sugar industry reports: 'social science fiction' - Ted Kolsen
, March 8, 2003
Emeritus Professor Ted Kolsen, former head of the University of Queensland's Economics Department, recently presented a paper to "The Sugar Summit", organised by the Australian Cane Farmers Association. He was critical of some recent reports recommending deregulation of the industry. Pat Byrne reports.Three recent reports have examined the sugar industry, the Centre for International Economics (CIE) study for the Queensland Government, the Boston Consulting report for the Cane Growers Board and the Hilderbrand report for the Federal Government. All recommended substantial deregulating of the industry.
In a paper to the recent Sugar Summit on the industry's future, Professor Ted Kolsen was highly critical of the CIE report and how economic models are used. They often fail to account for the "unique technical and novelty characteristics" of the sugar industry.Competition
"Unfortunately, while the difficulties created by these unique factors are well known by those in the industry, simple versions of 'competition', with and between industries, continue to provide the basic [policy] template" when they are "insufficiently based on empirical study". He said, that the "consistent failure of such economic models" seems to pass "without notice".
Professor Kolsen said that the proposals to deregulate the industry are based on competition models that seem to assume that cane growers delivering to the sugar mill for processing, "could auction off the cane to the highest bid by the millers. This is nonsense".
As there is a technical requirement to harvest over a short period when the cane has its best sugar content, and for the mill to process the cane quickly before it deteriorates, this requires "cooperation, not competition, under an umbrella of regulation between millers and growers".
Some of the recent industry reports have downplayed the importance of single desk selling of sugar onto the domestic and international markets. However, as Professor Kolsen pointed out, international sugar markets are subject to quality stipulations, access to some markets are restricted by quotas and other constraints, and they are "oligopoly markets" where there are few contenders.
Therefore to use a model based on the assumption of a competitive export market is inappropriate.
He suggested that the authors of these reports should move past first year university text book economics to second year texts that at least study how oligopoly markets, like that for sugar, operate in the real world.
In the case of the Centre for International Economics (CIE) report to the Queensland Government, he describes the "spectacular gains" predicted from the suggested deregulation as something "industry participants will need some convincing". The economic model showed that if the Queensland Sugar Act's regulatory restrictions were removed "the industry's value added would increase by 600 percent, grower profit by 154 percent, and miller profit by 310 percent".False assumption
In part, these spectacular gains were based on the assumption that the industry would shift from 6,500 owner farmers to plantation farms worked by paid labour, as in Brazil.
Professor Kolsen pointed out that at Federation, Australia made the brave decision for private ownership of farms, not plantations. This decision involved sending home the South Sea island indentured labourers. He said that the assumption of the CIE report is that while the Kanaks have gone, "you sugar farmers can now sell your farm and become Kanaks instead".
In other words, these reports completely failed to take Australia's preference for private ownership and equity matters into consideration.
Professor Kolsen said that there is absolutely no evidence that restructuring the industry to put it into the hands of the biggest players, would be the most efficient solution to the industry.
Rather, "arrangements are required which allow the industry to replicate the efficiency which would result under [a plantation] ownership structure which reflects the necessity of close integration of growing and processing, but which must cope with an industry structure in which control of the sugar production process is in many different hands.
"Better cooperation rather than more competition is required, for which Government regulation is necessary".
He also took to task curious arguments used to support abolition of single desk selling. The CIE report said, "The single desk does not have perfect knowledge about the market" and that market factors are uncertain and "almost impossible to predict accurately".
Professor Kolsen noted, "It is apparently assumed that those who will sell under non-single desk arrangements will be better able to cope with these problems, without any oversight over the market as a whole.
"[Indeed] the opposite conclusions can be reached by assumptions, which are more realistic than those in the CIE Report.
"In other words, there's absolutely no case whatsoever for abolishing the single desk. The arguments are wrong, they are not based on research".
Professor Kolsen also debunked the myth that Brazil has a deregulated, highly efficient sugar industry that Australia should emulate. Brazil has used huge subsidies to develop an ethanol industry, where ethanol is made from sugar cane. "In Brazil, sugar has become a by-product of the ethanol industry. The idea that Brazil has totally deregulated its markets is absurd, because the most regulated part of its sugar cane industry is marketed for ethanol, which is now the main product and sugar is the by-product".
Professor Kolsen said that the recommendations about changes to some production and milling arrangements do need to be examined by the industry.
However, he believed that, overall, the recent industry reports had used economic models that considered neither the realities of how the Australian sugar industry works nor how the world markets operate. "This is not economics; it is social science fiction," he concluded.