September 6th 2003

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Articles from this issue:

COVER STORY: How to help democracy in Hong Kong

Australian Senate backs Hong Kong democrats against China

CANBERRA OBSERVED: Government stumbles over Manildra, Tuckey fiascos

STRAWS IN THE WIND: J'accuse / Shape of things to come

WATER: Murray River farmers face man-made 'permanent drought'

NATIONAL PARTY: Why John Anderson should stay

LETTERS: Sugar price

LETTERS: Rail the key to rural infrastructure

LETTERS: Amrozi death sentence

Ethanol, sugar and free trade

EDUCATION HISTORY: Social justice in education - self-interest disguised as altruism

FAMILY: Quick facts on marriage

BOOKS: GULAG : A HISTORY, by Anne Applebaum

BOOKS: The Maverick and his Machine: Thomas Watson Sr and the Making of IBM

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Ethanol, sugar and free trade

by Colin Teese

News Weekly, September 6, 2003
Somehow the Government doesn't seem to know quite how to get it right on ethanol. And ideologues and the media aren't helping.

At one level the media is concentrating on whether or not the Prime Minister has misled parliament over his relationship with the largest Australian manufacturer of ethanol. Of course that is a consideration, but it is not the only one. At another level the media seems determined to denigrate any kind of ethanol policy on the grounds that it opens the door to protectionism and is a backhanded means of helping the sugar industry. These issues will be taken up later in this article.

The Australian Financial Review seems obsessed with the idea that sugar's only hope is to restructure into larger farms - despite the fact that the evidence points in the other direction. The sugar industry - the AFR asserted boldly in an editorial last month - is going out backwards because it cannot compete with Brazil.

The journal simply is not on top of the facts. It was left to far north National Party backbencher, De-Anne Kelly, to correct the Review, and point out that the Queensland sugar industry is a significantly lower cost producer than Brazil.

The reason it cannot compete with Brazil - as well informed commentators know - is because the Brazilian government's ethanol program soaks up enough of the sugar crop at good prices to allow Brazil to go into export at prices below cost. The result is to drive down the world price of export sugar.

Mrs Kelly might have added that both sugar and ethanol production in Brazil are protected against imports with hefty tariffs. In addition, the industry enjoys substantial hidden subsidies. All of this surely does not support the view that Brazilian production is highly competitive.

It is important to understand precisely what Brazil does. Much of the cane crop finds its way into ethanol production at far better prices than producers can get for cane devoted to sugar production. In effect, the ethanol programme subsidises that nation's export price for sugar. No wonder Queensland producers are demanding that our government act.

It is time the AFR accepted these realities.

Even if getting bigger could help the sugar industry - and it can't - our producers still could not compete while ever Brazil uses its ethanol programme to subsidise sugar exports. If we aren't prepared to accept that, then logically, we should allow our industry to die, and import all our needs at world prices. No doubt that is the preferred view of some of the ideologues on the AFR, but if it is the journal's official position, then it should say so.

Of course - as this writer has pointed out on previous occasions - that view is dangerously irresponsible. If we are determined, uncritically, to accept the dumped output of the rest of the world, then cheap imports could cover almost everything we need. The question then arises, how would we pay for them?

There was a time when both the major parties came close to adopting such a policy on imports. Indeed, many in both parties are still attracted to the idea: to his credit, the present Prime Minister is not among them. Nevertheless, he hasn't managed to get the right policy on ethanol.

Perhaps it is time to look at what Brazil has done. It has mandated that petrol at the pump contain 25% ethanol. And protection ensures that the ethanol must be produced in Brazil. Further, the system allows that cane sold for ethanol attracts a higher price than if sold for sugar. And because much more cane is sold for ethanol, farmers are less concerned about the price received for cane sold for sugar production. Is it any wonder they can undercut us in world markets?

Bolder approach needed

Compare this with what our Government has done. It has permitted - not mandated - the addition of 10% ethanol to our petrol. In some ways the trouble of making this rather timid step forward in policy seems hardly worth the effort, unless it is the first step in a plan to take larger and bolder steps in the future. Let us hope so. The trouble is, such is the plight of the Queensland sugar industry, that it may not have time on its side.

It needs the larger and bolder steps right now. Not necessarily to mandate - as Brazil has done - a 25% ethanol content in petrol; but 10% would be a not unreasonable beginning. Really, if there is no mandated amount, then the government should butt out and leave the market to decide whether or not it is desirable to include ethanol - in whatever proportion - in petrol. It wouldn't be what other countries - including the US - have done, but it would certainly suit the oil companies.

There is now, by the way, a new element which justifies some kind of government intervention: an environmental benefit appears to flow from the inclusion of ethanol in petrol; apparently, it burns cleaner than petrol. It is certain that this consideration has had absolutely no influence on Brazil. Its decision to add ethanol to petrol was taken long before the environmental consideration came into play, and it would have been taken anyway.

Its purpose was to underwrite the expansion of Brazil's sugar cane production and to benefit its farmers - and, incidentally, at the same time, take some of the pressure off oil imports.

The most controversial aspect of our present government's policy - which is, unfortunately, entwined with the matter of Mr Howard's relationship with Australia's only ethanol manufacturer, Mr Honan, is his decision to disallow a shipment of Brazilian ethanol to be imported into Australia.

It has been decided that excise tax will attach to imported ethanol, but not to the domestically produced alternative. The application of this tax is obviously enough to make the imported product uncompetitive, given that a proposed shipment from Brazil has been cancelled.

Protect market

In the opinion of this writer, Mr Howard's decision - regardless of whether or not Mr Honan played any part in it - was a step in the right direction. Not to protect the domestic product would have undermined the possibility of an ethanol industry for Australia. Moreover, it is a welcome and timely reversal of the prevailing and previously unqualified commitment to free trade.

It is also most definitely in the public interest, whether or not - for the moment - Mr Honan is the most important beneficiary. And it is absolutely vital to the sugar industry. Without domestic ethanol production the long-term future of the sugar industry must be in doubt.

Not that the industry can now afford to lay back in the traces. Mr Honan, as we all know, produces his ethanol from grain, which, up to date, is a cheaper option than sugar cane. Work is currently being done in the hope of closing that price gap, and much of the sugar industry's capacity to rely on ethanol depends upon how successful that research is.

Finally, there is an interesting, and, hopefully, sobering sidelight to all of this. Mr Honan is well known for his long association with the wheat industry.

Whatever may be his personal position on free trade, spokespersons for the wheat industry have been unremitting in their defence of the virtues of free trade and of the evils of industry protection - particularly as it relates to manufacturing industry.

Let us hope that the wheat industry acknowledges that it has been granted a hefty subsidy from Australian taxpayers and consumers and that we hear no more of the industry's supposed commitment to free trade.

  • Colin Teese was Deputy Secretary of the Department of Trade

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