April 6th 2002

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Articles from this issue:

COVER STORY: Stem cell research: the way forward

The facts behind the 'people overboard' affair

Opinion: The banks' power over small business

STRAWS: Selective amnesia / Slow boat to China / Tower of Babel

TRADE: Sugar price collapse threatens future of canegrowers

MEDIA: Debating points

New Zealand faces winter of discontent

Manufacturing: an endangered species (letter)

Afghan specialities (letter)

The great water debate: facts and myths

COMMENT: Healthy disinterest no bad thing

UNITED STATES: Behind Washington's self-serving free trade rhetoric

Switzerland, Taiwan seek UN membership

HISTORY: Demons and Democrats: the story of the Labor Split

Books: JOHN GORTON: He Did It His Way, by Ian Hancock

MEDIA: Stem cells: what debate?

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Sugar price collapse threatens future of canegrowers

by Colin Teese

News Weekly, April 6, 2002

Nobody should be in any doubt about the difficulties facing the Australian sugar industry. In the last year or so, prices have steadily fallen until they languish at or below survival levels for most Australian cane growers (remember, no grower produces sugar).

Twenty years ago, this writer was involved in the negotiations that led to the collapse of the International Sugar Agreement. Up to that time, the ISA had been the instrument through which producers and consumers met regularly and collectively endorsed measures which limited the amounts of sugar reaching world markets to quantities roughly equating with world demand.

The agreement wasn't perfect, but it did provide cane growers with a measure of protection against the ruinous impact of downward price pressures arising from uncontrolled increases in production.

It is interesting to relate the impact on sugar prices of shifts in production below or above world demand. Twenty years ago, for example, world sugar demand was around 100 million tonnes. In one year when production yielded no more than 98 million tonnes, prices of sugar escalated to 40 cents a pound; two years hence, when production reached 102 million tonnes, prices fell to 8 cents.

That's how sensitive sugar prices are to shifts of production around levels of demand.

Now the reasons why the last agreement collapsed are complicated. It could justifiably be said (and it certainly was maintained at the time) that Australia was responsible for the collapse of the agreement in 1983. Technically, it was correct that the Australian sugar industry did not want an agreement - at least the kind which was emerging at the time. Agreement as to export quotas at that time depended upon Cuba being permitted to omit its exports to the Soviet Union from its quota entitlement. The Australian sugar industry at that time was, quite justifiably, unwilling for the Australian Government to commit itself to such an agreement.

That was the technical reason for the collapse of the agreement. But the real reason was what was then called the European Community (now called the European Union). In a brief period before the 1983 negotiations, its exports had grown from nothing to a point where it was the largest sugar exporter in the world. The strain of trying to accommodate that additional volume of exports from a new exporter was more than the agreement could tolerate.

And, of course, it goes without saying, that the emergence of the EC as the world's largest sugar exporter resulted entirely from its irresponsible subsidy policies applying to both production and export. As is well known, those policies continue unabated, into the present, and remain a serious and fundamental disruptive force on the international market for sugar.

While the EU remains a destructive force, it has been joined by another - Brazil - which complicates matters still further. Between them, these two exporters dominate the world sugar market.

Brazil is currently the more important threat. The EU has obtained and maintains an undeserved share of world markets through subsidy practices. But it is not significantly increasing its share of world markets. Brazil is. Its 2001-2 crop was 18.2 million tonnes - up 12%. This year it is expected to reach 20 million. Much of the increase will find its way into export markets.

By comparison, Australia produced 4.6 million tones of sugar in 2001; this year it is expected to top 5 million tonnes.

The fact that Brazil is increasing its production - and possibly its exports - at the same rate as Australia, though from a much higher base (20 million tonnes as against 5 million tonnes) is bad news for Australia - and for the other smaller sugar producers and exporters.

There are other factors working against Australia. Brazil's exports are expected to increase dramatically (most likely faster than the rise in world consumption), but still most of its output of cane is consumed domestically. Not all of it in the production of cane sugar, but in other by-products with what appear to be massive government subsidies.

Brazil's sugar production for export may not be directly subsidised, but cane sugar production, through the ethanol program, certainly is. And it would be naïve to believe that the ethanol subsidy through its influence on cane production does not help Brazil export raw sugar at lower prices to the detriment of its competitors.

The question now to be addressed is what can be done about these problems?

Certain elements of the problems we cannot change. We cannot change world sugar demand, which is vitally linked to the demand for our cane. (Let us not forget that our producers grow cane; sugar is a product of that activity. Nor should we assume that world sugar consumption will continue to rise at previous rates. We can't do much about that either.)

Nor can we change the fact that, unlike our most worrisome competitors, most of Australian sugar is exported. Accordingly, we cannot marginally price our exports on the back of set prices in the home market. For that, we would need to apply border controls on sugar imports.

We know government ideology won't support that, and, so it would seem, neither will National Party politicians. And we now know that the industry itself - or at least the milling segment of it - won't support border controls on the basis of its need to export.

Nevertheless, as things stand, it can only be a matter of time before imported sugar reaches the Australian market. It has already happened with imported processed food products containing sugar. At the moment, these are roughly in balance with domestic sales, and are expected to grow faster than the domestic competition. Especially as the Government appears reluctant to use the measures it has at its disposal to discourage dumping.

At that moment will arrive judgment day for the industry, for the Government and for the National Party. There will be nowhere to hide. Perhaps then, for the first time, will there be recognition of the true circumstances of the predicament of Australia's sugar industry.

It won't be possible, for example, to take refuge in the virtues of free trade and to behave as if it is the lifeblood of our sugar industry. To be sure, export markets are important. Though significantly less than was asserted by a spokesman for the sugar millers, who recently insisted that 85% of our sugar was exported. That may be true only if one includes the amount of sugar exported in processed foods.

If so, then it must be offset by the value of imported food products containing sugar. Since currently imports and exports of these products are in balance, they cancel each other out - or should, for groups such as the millers who claim we must keep our markets open because we export.

Given the Government's - and the National Party's - well-exposed attitude on dumping, in the event of imported raw sugar entering Australia at low prices, the industry should not assume that protests about dumping will reach sympathetic ears. And even if the Government does act, there will be a tendency to apply the dumping provisions in a highly technical way and to shovel the full onus of proof fairly and squarely onto the shoulders of the local industry.

Of course, it will be said that the sugar millers, at least, are aware of the problems of price squeeze facing cane growers. And so they are. But their solution is for growers to become more efficient and thereby meet the challenge. Unfortunately, such advice misunderstands the point.

Of course our cane growers should constantly be aiming at greater efficiencies. But does it make sense for any efficiency gains to be dissipated in price-cutting rather than for increasing grower returns?

And, can there be a future in any sort of race to the bottom on price?

Almost certainly not, when the natural advantage of our most powerful competitors means that we can't hope to win such a battle, and may not even be able to survive it.

So what can be done?

The most obvious answer is perhaps to re-open negotiations on a new sugar agreement. But that proposition is unlikely to receive support from any quarter, local or overseas.

Another possibility is to try obtaining support for the idea of some kind of border controls which would allow higher prices to be achieved on the domestic markets. With that advantage, our growers may be able better to withstand the impact of price competition in export markets. Unfortunately, that, too, seems unlikely to win support from any influential quarter within Australia.

There is a long shot hope that the rules of the WTO might be invoked against the Brazilian subsidies. It is, however, unlikely that the Government has the stomach for such efforts.

Short of those possibilities, it is hard to see what might work. Certainly, any kind of relief for the industry will require a kind of full-scale industry, co-operation which, at the moment, seems impossible. Even the growers seem unwilling to work in any concerted way towards a common goal.

What does the future hold? Who knows? But if things are allowed to drift, it is hard to see how the industry based upon large numbers of small cane growers, can survive.

What could happen is that ruinous price competition could drive the small farmers out of business and falling prices for vacated land might create opportunities for large scale holdings to flourish.

Especially would this be so if these businesses were possessed of sufficient political clout to turn around the attitudes of industry leaders and politicians.

  • Colin Teese was Deputy Secretary of the Department of Trade

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