Features International Sugar Journal

Subsidies, policies and productivity

What fun gods are currently having with the global sugar industry. The frustration of the Indian sugar millers, sighing relief after being bailed out by export subsidies of some US$64/tonne only to be thwarted by weakening of Brazilian real which has depressed sugar price to below 13 cents/lb. In fact, the drop in the value of real has mirrored the drop in price of sugar – see figure. According to the Indian Sugar Mills Association, raw sugar exports, with the subsidy, will be viable only if global prices reach 14.4 cents per lb. Now if the Indian millers got a subsidy of US$100/tonne as the Pakistani millers have secured for export of 250,000 tonnes, things would have been marginally better for them. While the likes of Colombia, Australia and EU are crying foul against India and making representations at the WTO (World Trade Organization), accusations by USA against Brazil (for farm subsidy programme), and Brazil against Thailand (for subsidies to sugar producers) have not gone unnoticed. What is clear is that woeful policies appear to be the key driver for subsidy support.

Ed comment-April15

Source: Thomson Reuters

Ironically the condemnation of Brazil for subsidizing the sector, which has seen some 68 mills closed down over the last four years or so due to lack of government support and inclement policies, comes from the US sugar industry enjoying a safety net which cushioned it with over US$300 million bailout from the government last year.

In the case of India, such an accusation would be fair, as the current export subsidy is simply a manifestation of what can be politely described as a curious policy. To placate some 50 million cane growers and continue to rely on their votes, politicians simply did not have the gall in 2013 to relax the production control arm of the twin policy – only the market control was decontrolled. With the cane payment system heavily skewed against millers who perennially fail to fully pay cane growers – current arrears according to local press reports amounts to Rs 17,000 crore (US$2.7 billion) – the government has to bail out millers to help pay the cane growers.

But scratching the surface reveals that the underlying problem is that of poor cane productivity adversely impacting production costs. None of the top sugar producing industries are currently producing sugar at global market price. Smallholders who dominate the cane industries in India, China, Pakistan and Thailand are simply not productive. It is apparent that if the Indian government invested at the outset in improving the productivity of cane growers through combination of directed applied research, sound extension support to transfer research products, high yielding cultivars, and education and training, any resulting gain in output could helpfully inform reduction in “fair remunerative price” – cynics may remain unmoved by this, but the logic is compelling. But the cynics maybe right in thinking that the current piecemeal approach by the politicians in India has served them well, so why change it.

In their recent thought piece, McKinsey consultants1 note that “The most effective agricultural policies facilitate end-to-end value-chain development, from promoting the right inputs to encouraging creative business models to enabling low-interest financing and risk sharing.” One suspects, that the policy makers well know this, it is the case of whether their political masters are persuaded, distracted as they are by less lofty matters, but quite important to them – their own livelihood.

Reference

1 Nicolas Denis, David Fiocco and Jeremy Oppenheim (2015) From liability to opportunity: How to build food security and nourish growth. http://www.mckinsey.com/insights/Food_Agriculture/From_liability_to_opportunity_How_to_build_food_security_and_nourish_growth?cid=other-eml-alt-mip-mck-oth-1503&p=1