TRADE: by Colin TeeseNews Weekly
Sugar industry study backs failed policies, not new solutions
, July 27, 2002
Clive Hildebrand's report on the sugar industry commissioned by the Coalition's Minister for Agriculture falls far short of what is needed, mostly because it remains totally faithful to the current economic and trade orthodoxies so comprehensively embraced by the National Party.
Independent or otherwise, it is about as helpful to the industry as a sustained drought.
Moreover, it is full of gratuitous and, in the final analysis, unhelpful advice.
The executive summary says it all. We are told that with the international price of sugar within the range of A$225-260 a tonne many farmers will be placed ... 'under severe pressure'. Well why hedge the issue, why not come out and say it: most North Queensland family farms, including many of substantial size, can't survive at those sugar prices without government help.Solution?
And what is the Hildebrand solution? Intensified efforts by the government to knock down the protectionist policies of the US, the EU and Japan. Fine as far as it goes, but the most likely position is that these 'protectionist policies' will remain in place whether or not Australia redoubles its efforts to have them changed.
How do we know this? Because the EU speaking on behalf of member countries maintaining these policies tell us so - and keep on telling us.
As for the US, the President has - in the context of the discussion of the most recent subsidy Bill - told the world that the farm industries are strategic, and will remain so. In other words they will never be allowed to succumb to the pressure of cheaper imports.
For much the same reasons, the EU and Japan are similarly committed to keeping their own agricultural protection.
And, incidentally, even if the protectionist policies of others were changed, that would not, in a competitive world, necessarily produce price improvements for our sugar growers. Is not, after all, the purpose of competition to drive down prices rather than hold them up? And remember, rarely are price concessions extracted from farmers reflected in consumer prices. Mostly they find their way into the pockets of large middleman buyers.
Farmers - large and small - can't escape the commercial reality that, in the absence of government help, they remain at the mercy of coordinated buyer pressure?
And the key to all this is the 'production/demand equation'. Hildebrand barely addresses this issue.
It is true his report has presented us with pie charts demonstrating the quantities of sugar produced and sold by country of origin. He has, however, not taken the trouble to aggregate these figure, and so we must construct our own picture of overall world production.
Those taking the trouble to do so are able to conclude (courtesy of Rabobank) that world production is currently around 131 million tones.
Hildebrand has also presented us with figures - prepared by Queensland Sugar Limited - which purport to define the world sugar market. They aggregate to 81.6 million tones.
However, they define not total world raw sugar consumption, but instead …'volumes of raw sugar consumed by customers of Australian and other exporters for purposes of processing into refined sugar. As such they are not strictly compatible with Rabobank's figures for raw sugar production.Marketing
QSL'S figures, which may be fine for the industry's marketing purposes, understate world consumption of raw sugar, perhaps substantially: since they take no account of the activities of raw sugar users who don't export refined sugar.
Which is perhaps just as well because if world demand for sugar was, in fact, in line with the QSL's figure for consumption, the supply/demand imbalance would be 60%. In that event we could be certain that the world raw sugar price would be even lower than it currently is.
On the figures available to him, this writer is unable to calculate exactly how much surplus production is overhanging the world market. It is, however, possible to say with certainty, that there must be overhang. Because, if that were not so, then market forces would operate to keep prices higher. Oversupply always pushes prices down.
Unfortunately, for Hildebrand, it is not subsidy practices, as such, that depress world sugar prices, but over production; though it is true that production subsidies, particularly in the case of the EU (and possibly Brazil) encourage overproduction and thereby create surpluses of raw sugar.
That this is true can easily be determined from an examination of the last International Sugar Agreement which provided for upper limits on individual country production for export. Under that agreement, though production and demand imbalances for sugar were not entirely eliminated, they were more successfully contained than is now the case.
As a consequence, greater price stability was maintained. QSL's own figure 3 on page 4 of the Report supports this view. It demonstrates that, since the collapse of the last International Sugar Agreement in 1983, world sugar prices have been permanently depressed.
None of this Hildebrand seems to have taken into account in his assessment of the state of the industry. Instead, he has chosen to load most of the blame for the industry's problems onto the protectionist attitudes of certain other producers and exporters. The remainder, he attributes to the surge in production by Brazil.
Hildebrand implies, though he does not actually say so, that Brazil's low cost production '... has reshaped the pattern of free market purchasing ...'. Is he trying to tell us, as gently as he can, that Australia cannot match in price competition a more 'efficient' producer?
Sugar consumption is growing steadily, Hildebrand insists, but fails to mention not nearly so fast as production.Efficiency
If Australia can't keep up with the competition from the most efficient (Brazil) producer, then can our industry have a future without a permanent government funded or consumer subsidy? If Hildebrand's analysis holds up, certainly not.
But is Brazil as 'efficient'('low cost' is a better term) as is claimed for it? This writer is in no position to know, but he must be allowed his suspicions. Hildebrand points to low labour costs, but these have always prevailed in Brazil, and cannot possibly explain why exports have taken off since 1994. Hildebrand also points to the fact that costs of production vary widely (no surprise) from as low as 5 cents US per pound.
What seems most likely is that the revenues from the sale of sugar for ethanol production provides concealed support for Brazilian sugar exports. In fact, nothing else explains how its export performance can have exploded in the last eight years.
There is another point. This huge surge in Brazilian exports has, in fact, displaced as much European sugar from world markets, as it has Australian, and for that we may be grateful. That may also account for the fact that the EU is now moving to change the basis
of its support system away from direct production subsidy.
That won't help Australia much, though, if, as seems likely, that its place is taken by Brazil: especially would that be so if we can't pin the label of 'subsidiser' on Brazil.
Hildebrand does not seem to have developed any solutions - maybe that wasn't his job. But he does seem to offer some gratuitous observations.
In stock exchange terms, he tells us, the industry is not very important, however much it means for North Queensland. Also, individual farmers appear to hold unrealistic and unrealisable expectations of what can and should be done for them.
Well, what can and should be done for the industry?
If the Brazilians are not subsidising their exports, and if we fall below them in production costs, then our sugar industry will collapse if it does not receive permanent support from the government and/or domestic sugar consumers.
Now some in the Coalition, including in the National Party, to be consistent, would have to concede that if the industry can't survive without protection it should go under. That has actually happened already with some industries.
Whether or not the government can allow the industry to collapse is a political decision which presumably would have to take account of the implications for North Queensland (and for Northern New South Wales) without a sugar industry. Without assistance there would be no domestic industry either.
If Brazil is not subsidising, and given that our sugar tariff is zero, how could we keep out Brazilian imports?
If, however Brazil is subsidising, we may
be able to keep out it subsidised imports, providing we were prepared to reactivate our right to put tariffs subsidised imports.
That would not be enough on its own; we would have to find some sort of domestic support for the industry, either in the form of government subsidy, or by charging higher prices for domestic sugar.
In addition, it is probably necessary that our industry be helped into ethanol production as well, for the same competitive reasons as Brazil.Survival
Now all of this is necessary and desirable if the industry is to survive. But it will not be enough. This kind of income support is likely to be self-defeating and intolerably expensive unless simultaneously controls are placed on Australian sugar production.
Presumably farmers will not like to have their capacity to produce limited in any way. And it is unfair, when their competitors in export markets are not similarly limited.
True enough. But there is no alternative outside the creation of a new international sugar agreement, which places export limitations on all exporters.
That, it must be said, is hardly a realistic possibility in the present world economic climate; but, longer term, it may be no less unrealistic than Hildebrand's exhortation that we redouble our efforts in the WTO to have protectionist policies reversed.
- Colin Teese was Deputy Secretary of the Department of Trade