EFTA Fair Trade Yearbook 1997

January 1998

Sugar

Considerable changes in world sugar markets

Astrid Engel and Tobias Reichert

The last few years have brought considerable changes in world sugar markets. The EU has lost its long standing position as the largest exporter of sugar; prices have stabilised at a low level; and some developing countries, as competitive suppliers of sugar on the world market, have been able to take advantage of this situation. These changes have been the result of the reduction of export subsidies forced on the EU by the GATT agricultural agreement. Two things, however, remain unaffected by this agreement: the protection of the sugar markets in industrialised countries and the appalling conditions of sugar workers in most developing countries.

The World Sugar Market

Sugar is produced in around 120 countries. Of the approximately 123 million tonnes produced in 1995, most came from the densely populated countries of Asia. India was the world's largest producer with more than 18 million tonnes, followed by the European Union with nearly 16 million tonnes, Brazil (nearly 13 million tonnes), China and Thailand with more than 6 million tonnes. Some 70 per cent of the total production is cane sugar, the rest being beet sugar. With the continuing increase in the production of cane sugar and stagnation of beet sugar production, there is a significant shift in favour of cane sugar. In the majority of countries, most sugar production is for domestic consumption. China and India, for example, hardly export any sugar. Nearly 30% of the world's sugar production is traded internationally. Since 1995, Brazil has been the largest exporter with a market share of 18%, thus having overtaken the European Union (15.6%), which occupied the number one position for many years. Other important exporters are Australia (13.2%), Thailand (11.2%), Cuba (7.5%), Ukraine (6%) and Guatemala (3%). These seven countries together account for almost three quarters of the sugar sold on the world market. The developing countries together have a world market share of 60%. Although the world market share of the exporting countries not mentioned above is low, for many of them sugar is an important source of foreign exchange.

Two features distinguish the world sugar market:

First, the national and international sugar markets are determined by massive government intervention. With high tariffs and other protectionist measures, most of the sugar producing countries protect their own markets from the world market in order to increase or even enable their own domestic sugar production. Domestic producers can therefore achieve prices above world market level. This applies equally to the most important industrialised countries as to developing countries. Thus India, China, the US and Japan are broadly or totally self-sufficient; and the European Union is one of the largest exporters. There is also massive intervention on the national market of less important sugar-producing countries. Very few countries expose their sugar trade to the "free" market.

Second, internationally traded sugar is often not traded on the free market, but rather by means of intergovernmental contracts. This applies, above all, to former socialist countries. However, there are also contracts between both the European Union and the US with different developing countries guaranteeing the import of a certain quantity of sugar at the domestic price. Sugar-exporting countries serve those contracts first before they sell to the free market.

World Market Prices

For many producers, world prices do not need to cover production costs. Producers can cover their fixed costs (machines, refineries) from their domestic or preferential markets so, to be attractive, world market prices need only cover variable costs (wages, rent, energy). Governments often subsidise sugar exports so that the world market prices are below the production costs of most of the producing and even exporting countries.

World sugar prices are unstable, because the world sugar market is what economists call 'thin' - there are a relatively small number of buyers and sellers and changes in one or several of the large exporters can have a large impact on price. Moreover, the international sugar market is a "remainder" market, for most producers serve the domestic market and favourable trade contracts first and orientate themselves not by the world market price, but by higher domestic prices. When climatic conditions are good, they achieve a surplus which they place on the world market. However, when crops fail in countries that are normally self-sufficient, this can lead to an enormous rise in demand for imported sugar. As a result, sugar prices were by far the most variable of any major internationally traded agricultural commodity in the 1970s and 1980s.

Since the late 1980s however, prices have been more stable, moving between 8 and 13 ct/lb. According to experts, this is due to the decrease in significance of the industrialised countries as importers. These countries pay "any" price to meet their demand, whereas the countries with a lower income react to price increases by decreasing consumption. Another reason is the fact that the decreasing preference trade has led to an increase in volume on the free market. It is not yet clear, however, if this trend is likely to continue.

Present situation

From the early 1980s to the early 1990s, world sugar supply was greater than overall demand. This reflected increasing exports from the European Union, growing production in India and China, and a switch to alternative sweeteners, especially in the US and Japan. The decrease in production in eastern Europe and Cuba - resulting from the breakdown of the socialist economies - led to a short-term deficit on the world market and thus to a price rise from 10 to 15.5 ct/lb in early 1995. Large crops in Thailand, Brazil, Australia and India subsequently caused a fall in prices in 1996. Generally in 1996, the increase in production was greater than the increase in demand so that world sugar stocks are now equivalent to almost 50% of annual global demand, compared with only about one third in the preceding years.

During the next few years, a major increase in sugar consumption is expected in Asia and in Latin America, the countries where the most significant increases in production are also expected. Europe and North America do not expect any further increase in consumption, due to existing high per capita consumption and competition from alternative sweeteners. In Africa, it is the existence of economic crises in many countries that prevents an increase in consumption. Therefore, prices are unlikely to rise in the near future.

EU Sugar Policy

Today, the EU is one of the world's largest exporters of sugar. It is the largest exporter of white sugar with a market share of 33%. Twenty years ago, the then European Community was a net importer of sugar. Europe's improved position in world sugar trade is the result of EU sugar policy, which is dominated by a strong sugar lobby leading to increasing production. This policy is based on three main principles - the basic principles of the Common Agricultural Policy:

A strong sugar lobby - the beet producers as well as the whole sugar economy and trade - has so far prevented badly-needed changes of the sugar policy. This is all the more remarkable since, in the course of the reform of Common Agricultural Policy in 1992, it was decided to reduce drastically the price level for other important agricultural products (e.g. cereals). Further upheavals, which will probably affect other agricultural products, are in the offing. In the course of discussions about the eastward expansion of the EU, and in the coming GATT/WTO Round (e.g., a complete separation of income and price policy), plans for basic reforms are becoming more and more concrete. It is not yet clear whether sugar will be encompassed by these reforms or whether it will be excluded again (which would contribute further to the existing discrepancy between sugar prices and prices for other agricultural products). The US has also largely exempted the sugar sector from the radical reform of its agricultural policy. Therefore, it is most unlikely that the US will exert pressure for EU policy reform, in the course of the WTO negotiations.

Impact on Developing Countries

Every year, the EU puts millions of tonnes of subsidised - and thus cheaper - sugar on the world market. EU sugar exports depress world market prices and cause the developing countries a loss of market share and of badly needed foreign exchange. The rapid expansion of EU sugar exports in the early 1980s was a major factor in the collapse of world sugar prices after 1979/1980. The EU's subsidised sugar exports are estimated to depress world market prices by some 12 per cent. A World Bank study estimates the annual costs as $160m for Australia and Brazil, $72m for Thailand, $50m for the Philippines and South Africa, $20m for the Dominican Republic and $13m for Columbia and Guatemala.

Because of the drastic decrease in prices, sugar production has had to be abandoned in some regions. In the Philippines, hundreds of thousands of sugar workers lost their jobs in the early 1980s. Other countries however, like the signatories of the ACP Sugar Protocol, benefited from the sugar policy of the EU.

International Agreements

Since 1953, various attempts have been made to raise and stabilise world sugar prices through international agreement. The latest agreement in 1977 established export quotas for its members and intervention stocks in order to withdraw sugar from the market when the price was low. Like most of the previous ones, this agreement ended in failure. This failure was due in part to the fact that the European Union - one of the largest exporters - refused to sign the agreement, and used the opportunity of other members' export restraint to raise its world market share. The agreement expired in 1984 and no further agreement on price-stabilizing measures has been achieved. All the succeeding agreements have, in general, been limited to market survey and information exchange and the International Sugar Organisation now has serious financial problems.

The agricultural agreement of the World Trade Organisation (WTO) The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) established, in addition to the foundation of the World Trade Organisation, the further liberalisation of trade. For the first time, the trade in agricultural commodities including sugar was affected. For the world sugar markets, this is significant, since 94% of the exports come from WTO member states and 58% of the imports go to WTO states. Furthermore, Ukraine - as the only important non-member exporter - as well as Russia and China, the most important importers, have already applied for membership. In particular, the agreement refers to export subsidies, market restrictions and internal price stabilisation programmes. The agreement must be put into practice in the industrialised countries by the year 2000 and in developing countries by the year 2004. The Least Developed Countries (LLDC's) which are not significant players in the sugar market are not obliged to liberalise.

Reduction of export subsidies

Under the Uruguay Round, public expenditure for export subsidies in the industrialised countries will have to be reduced by 36% and the volume of subsidised exports by 21%. The equivalent figures for the developing countries are 24% and 12% respectively. The base figures are the subsidised exports of 1986 to 1990. States with higher subsidies in 1991/92 may calculate on the basis of the higher volume. When this directive is put into practice, the volume of subsidised exports will decrease from 7.2 million tonnes (1986-90) to 5.4 million tonnes in the year 2000. Exports that are not subsidised are not affected by the WTO directives.

Improved market access

All the existing access limitations like variable import duties or quota systems are to be repealed or changed into fixed duties. These will have to be reduced by 36% in the industrialised countries and by 24% in developing countries. The calculation of the tariffs is based on the comparison of the domestic with the international market price in the late 1980s. Because of the hitherto high level of protection, tariffs will be quite high at first and will continue at a high level after the planned reduction.

Reduction of domestic subsidy

In general, domestic subsidy in the agricultural sector is to be reduced by 20 per cent. The impact on the sugar sector is not yet clear, for it may be possible to maintain sugar subsidies if the reduction in other sectors is proportionately higher.

In summary, it may be said that industrialised countries will not be forced into big changes in their sugar policy by the WTO agreements since the remaining tariff rates provide effective protection of their domestic markets from foreign competition. Although greater changes are required in the field of export subsidies, the agreement allows the EU to play an important supplier role on the world sugar market for the foreseeable future.

Impact on Developing Countries

The most important result of the Uruguay Round is the reduction of subsidised exports, which will be of advantage, above all, to the competitive sugar exporters like Brazil, Thailand, Cuba and Guatemala. These countries will profit from improved outlet possibilities resulting from reduced competition from the subsidised exports of industrialised countries, rather than from rising prices. Significant price increases are unlikely because of, on the one hand, the export capacity of these countries even when prices are low and, on the other, decreased demand for imports to developing countries when prices rise. Projections forecast a price rise of approximately 5% until the year 2000, as a result of the Uruguay Round; and that the sugar policy of some countries will become more predictable (fixed tariffs instead of variable ones, no export subsidies), and thus contribute to the stability of world market prices.

Conditions for Producers

In many developing countries, the income earned by small cane farmers, and the wages and working conditions of employees in the sugar industry are very poor. These poor conditions are the result of a number of factors, including low world market prices and the great inequalities in wealth and power in many sugar-producing developing countries.

Inequalities of wealth and power

One prevalent aspect of inequality is poor land distribution. Where sugar is produced on large plantations, as is the case in many developing countries, and where landowners do not recognize trade unions, conditions are particularly bad.

In the Dominican Republic, for example, where plantations cover 12% of the country's agricultural land, the conditions of the thousands of cane cutters are appalling. Many of them are immigrants from neighbouring Haiti. They live in compounds called batays close to the sugar fields. As many as seven people may live in a single room in barracks without water or electricity. The state sugar corporation, the CEA, fails to provide adequate health services, so that children die needlessly from preventable diseases and, despite government pronouncements, there is still evidence of forced recruitment and of workers being prevented from leaving plantations. Lack of organisation within the ranks of the cane cutters has helped to keep them weak. In the Philippines, the situation is similar (see box).

In Thailand, by contrast, sugar has provided farmers with a good and stable income for a number of years. Sugar is produced mainly by small farmers (the average farm size being about 6.2 hectares) and since the 1960s cane growers' associations have represented their interests with considerable force. Since 1970, the growers' associations have negotiated a fixed price for each season's crop with the cane millers, and in 1984, an Act of Parliament ensured that the annual revenue from total sugar sales was shared between farmers and millers in a ratio of 70:30. Thai farmers have also benefited from the fact that the industry as a whole has greatly increased both production and export since the early 1980s. By the late 1980s, Thailand had become the world's third largest exporter. Favourable physical conditions, climate, and fertile soil, and a modern low-cost processing industry are the main reasons for the industry's success.

There is, however, another group of people involved in the sugar industry in Thailand: tens of thousands of people migrate each year from the North-East to cut cane in the Central and Eastern regions. It is debatable whether they receive a fair share of the revenue from the industry. They are certainly not part of the revenue-sharing system involving millers and farmers.

Low world prices

It is therefore clear that countries' internal policies and priorities have a very significant impact on the conditions of the world's sugar farmers and workers. Workers in the Philippines and the Dominican Republic see few benefits when the price of sugar on the world market is high.

Yet, conversely, their workers have been badly affected when the industries have been in crisis as a result of falling prices. Higher world prices would at least offer some protection to the jobs and income levels of workers and small farmers. This is clear from the history of the ACP countries, which receive a high price for their sugar exports to the EU (see box). Even in ACP states where ineffective government has reduced the sugar industry to a dilapidated state, as in Guyana, the conditions of the workers cannot be compared to those in a country like the Dominican Republic. In other ACP countries, revenue from the sugar industry has been used to provide schools, health services and infrastructure and to fund diversification into other sectors.

Fair Trade in Sugar

One of the problems in establishing fair trade arrangements with sugar is that, unlike coffee and cocoa, sugar can be produced in the importing countries as well. There is direct competition between North and South and, as discussed above, many countries protect their own producers by means of high tariffs. Fair trade imports too are expensive because of this policy and EU import duties are often higher than the price paid to producers.

Another problem is the fact that sugar cane needs to be processed into raw sugar immediately after harvesting and mills are expensive. Furthermore, sugar is usually sold to the consumer in purified (refined) condition and the technology needed is also quite capital-intensive. For historical reasons, all the ACP sugar is exported as raw sugar to the EU, where it is refined by Tate & Lyle in the UK. These factors mean that, again in contrast to coffee and cocoa, very few small-scale producer co-operatives exist in the South which are capable of producing export-quality sugar.

Despite these difficulties, some sugar has been fairly traded in Europe since the mid-1980s. Since 1991, unrefined whole cane sugar, muscovado, from the Philippines and fairly traded cocoa have been imported for use in Mascao brand chocolate made in Switzerland. The Philippine trading organisation "Alter Trade" buys the sugar cane at a fixed price from the small-scale producers and co-operatives on the island of Negros. This price is not only higher than that paid by the commercial "sugar centrals", but Alter Trade also collects the cane immediately after harvesting, whereas the producers would otherwise have to arrange and pay for their own transport.

Romeo Malalay, chairman of one of the co-operatives supplying Alter Trade says, "When we were under the landlords, we earned just enough income to live, but with no leeway. Now with the co-op all our earnings are shared. We have the leeway to decide what to do with the money."

With the payment of higher prices and advice from different European fair trade organisations, part of the cultivation could be converted to organic production and the quality of the finished product could be improved, which is particularly important for chocolate production. Since 1996 muscovado has also been supplied by the Panay Fair Trade Centre which is a marketing organisation for farmers' associations and co-operatives led by women's organisations on the island of Panay. For two years, refined cane sugar from the co-operative Coopeagri in Costa Rica has been imported on fair trade conditions. Coopeagri is a large co-operative with about 5000 members of whom 670 are cultivating sugar cane. The co-operative also owns a finca (farm) where it employs 49 permanent workers, and a sugar refinery where it employs 30 permanent workers and 95 temporary workers (during the harvesting season from January to May). Social security and insurance are guaranteed for both groups of workers. Sugar provides about 25% of the co-operative's income and is the second most important product after coffee (37%). In 1993 Coopeagri produced 160,000 tonnes of sugar cane which were refined to produce 19,000 tonnes of white sugar. Even though the proportion of total production which can be exported under fair trade conditions is small (120 tonnes in 1994), the higher returns allow for important investments in technology and social security.

The Philippines

From the beginning of this century until the mid-1970s, the Philippines exported virtually all its sugar to the US under a special agreement. In 1970, sugar accounted for about 18 per cent of the country's export earnings. The US market continued to be of importance to the industry until the early 1980s, when two factors combined to end the country's quotas for the US market. First, the US government wished to put pressure on Marcos, whom it had supported throughout the 1970s. Second, when Pepsico and Coca Cola announced that they would allow unrestricted use of alternative sweeteners in their drinks, US demand for sugar plummeted. Between 1982 and 1987, the US cut its sugar imports by 70 per cent. This hit the Philippines and the Dominican Republic very hard, as well as a number of Central and South American countries. On Negros, a quarter of a million people were left jobless in 1985 when the US quota was slashed, leading to widespread famine. Desperate sugar workers tried to farm the land which the sugar estate owners could not afford to cultivate. But they were prevented from doing so by the estates' private armies.

Today, the Philippines is no longer a major sugar exporter: sugar products account for little more than 1% of export earnings. But for the large number of landless or near-landless people on Negros, work on the sugar estates is still the only means of a meagre survival. The average daily wage of male cane cutters is little more than the cost of the daily rice needs of a typical family of six. So all family members have to work and families cannot afford to send their children to school. A recent health survey found that long-term deficiencies in the workers' diets would soon result in severe retardation of their mental development. Even more shocking, the average life-span of cane cutters is just thirty years.

Land reform laws have been in place for several years, but the landlords have largely blocked their implementation. By 1993, only 9000 hectares of the 70,000 hectares of cultivated land on Negros had been redistributed.

Many landowners do not recognize unions and serious harassment of activists is common. But through collective action, some sugar workers have been able to improve their lives dramatically. On a number of estates, workers have gained access to land to grow food for their own consumption and for sale in local markets. They gained the land either through squatting or by negotiating with the landowners through the National Federation of Sugar Workers. For the first time, workers have an adequate diet and, with the help of the union, several of the new communities have set up initiatives to provide health care and education.

The ACP Countries

In 1975, the European Union signed the Lom Treaty with 70 states in Africa, the Caribbean and the Pacific (the so-called ACP countries, all of them former colonies). The treaty, which is still in force today, stipulates trading relations between the European Union and its former colonies. One important component of the Lom Convention is the Sugar Protocol (signed by sixteen of the ACP countries), according to which the European Union imports 1.3 million tonnes of sugar each year, at prices closely related to the high prices received by EU sugar beet farmers. This Protocol is a blatant example of the lack of coherence between the development policy of the European Community and its agricultural policy. On the one hand, some countries are granted free market access and relatively high prices, while on the other, its misguided agricultural policy has been an important factor in the depression of world sugar prices for years.

Although the ACP countries who signed the Sugar Protocol are a diverse group showing great differences with regard both to their general economic situations, and to their sugar economies, what they have in common is that the production and export of sugar is important to them. For some of them, their sugar exports to Europe are vital to their economic survival. Among them are the small ACP countries of the Caribbean with their high-cost production (like Jamaica, Barbados, Trinidad and Tobago) and those whose entire economy has been based on sugar since colonisation (like Mauritius and Guyana). Their sugar industries would not be competitive at all if they had to produce exclusively for the world market. Overall, the ACP sugar industries and related economic activities employ almost 700,000 people.

At first sight, the Sugar Protocol seems to be a generous concession granted by the colonial powers to their former colonies. However, the historical context throws a different light on it. The agreement was drawn up in 1973 when Great Britain joined the European Union, and it was necessary to ensure the supply of raw sugar to British sugar refineries, which specialised in the processing of raw sugar. At that time, the European Union still had to import sugar and world market prices were relatively high. Consequently, there was a great interest in long-term treaties in order to ensure sugar supply at then relatively attractive prices.

World sugar market changes and a drastic increase in EU internal production led to a completely different interest constellation within a short time. Many people now regard the Sugar Protocol as a historical relic rather than a useful economic contract: the same quantity of sugar imported from ACP countries has to be placed on the world market with the help of high export subsidies and in addition to excess production volumes.

More and more voices advocate the abolition of the Sugar Protocol and/or the whole Lom Convention. A common argument is that the Convention cements unilateral dependence on sugar production and on structures which help to avoid economic development instead of promoting it. Furthermore, it is questioned whether the Convention is compatible with GATT rules at all. For the GATT Agreement allows preferences for developing countries, provided that these preferences are not limited to a particular group, but are granted to all countries on equal terms. In the next year or so, the discussion on the future of the Lom Convention will become even more heated, since the current Convention expires in the year 2000 and negotiations on its future are soon to begin. In its green book on the relationships to the ACP countries - published in November 1996 - the European Commission made clear that the relationships between the European Union and the ACP countries were at a turning-point and that the preferential treatment in trade with the EU could not be a pat solution for an ACP policy of the future.

In contrast to the main contracts of the Lom Agreement, the Sugar Protocol has no fixed term. However the terms and conditions - especially the sugar import price - are not stipulated. Even if the Sugar Protocol remains in force into the new millennium, it is feared that prices will be considerably reduced. This would be disastrous for many of the ACP countries, particularly if the reduction in price is not accompanied by other development measures (such as diversification, etc.), as the following examples show:

Mauritius

Mauritius is the country with the highest EU import quota. Of the 650,000 tonnes of sugar produced per year, about 500,000 tonnes go to the European Union. Until the end of the 1970s, nearly 90% of the country's export earnings were achieved by the sugar sector. Meanwhile, the country has made enormous efforts to diminish its economic dependence on sugar- both within the sugar sector, through diversification (like the offering of special sugar qualities) and outside the sector (like the establishment of a textile industry). Although these efforts have been successful, the sugar sector continues to play an important role in economy. In 1993, 28% of all export earnings were still achieved by sugar sales. Even today, 75% of the cultivable land is used for sugar cane which provides a livelihood for 35,000 small farmers. Because of the natural geographical conditions and small-scale cultivation, it is almost impossible to compensate for falling prices by reducing production costs,

Guyana

This country with the third biggest EU import quota, was founded by the colonial powers exclusively for the purpose of sugar production for Europe. Today, sugar exports account for approximately one third of the foreign exchange earnings of the country. Nearly 20% of the population depend on the sugar industry. For many years, the country has been going through a serious economic crisis resulting from the concurrence of several different factors including a decrease in production and export of the most important economic goods, growing debts, and a steady deterioration in living standards (75% of the population live below the poverty line).

The sugar industry is the country's most important employer and income source. All the factories and most of the plantations are state-owned, but have, since 1990, been managed by Booker Tate, a subsidiary of the British multinational sugar group Tate & Lyle. Domestic production costs are far above the world market price so that without access to the European preference market, the sugar industry of the country would not be viable.

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