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Distortions in World Sugar Trade

The high level of domestic support given by many countries to their domestic sugar industry, including production subsidies and import barriers, has distorted international trade in the commodity. It has resulted in sugar dumping by inefficient producers at prices lower than the cost of production and prevented low-cost producing countries from finding a market.
SURESH GAWALI
ndia had a closing balance of 109 lakh tonnes of sugar at the beginning of the 2002-03 season, sufficient to cover consumption for seven months. The normal closing stock should have been around 40 lakh tonnes. The Indian sugar industry has held the excess stocks for the past three years (Table 1). The closing stock for 1997-98 was 53 lakh tonnes, for 1998-99 it was 68 lakh tonnes and for 1999-2000 it was 100 lakh tonnes. Thus, the stocks started accumulating abnormally since 1999-2000. Due to this, the industry had to bear the additional burden of bank interest, which has pushed up the cost of production even as prices were declining. Internal consumption has grown but it is unable to absorb the abnormal increase in closing stocks. The sugar industry has been making hectic efforts to reduce stocks by resorting to exports. The international sugar market is highly distorted due to the high level of domestic support and export subsidies and as well as other forms of support provided by almost all major sugar producing countries. Rates of import duties in the developed countries are very high. Due to these distortions, the international market is anything but free and fair. Though India is a competitive country in the sugar world, it has not been able to secure a reasonable share in the world sugar market. The EU and other countries, in spite of their higher costs of production, have been exporting sugar at much lower rates because of the higher support given to the sugar industry in their countries by the respective governments. The price of white sugar, which 409 per tonne in January 1996 has come down by almost 50 per cent to tonne 210 per tonne in January 2003. This has also affected the Indian domestic prices of sugar. Economic and Political Weekly Export at rates below the cost of production and domestic prices constitutes an act of dumping. However, it has been regularised by the WTO Agreement on Agriculture. This legalised method of dumping is a major obstacle in the creation of a free and fair international market for sugar. Developing countries like India were not careful in signing AoA and allowed the EU and US to incorporate provisions which legalised these acts of dumping. In India, not just the government but even the sugar industry as a whole is not aware of the practices of major sugar producing countries regarding their domestic and international trade. This ignorance has also caused substantial damage to the Indian sugar industry. Some of the important characteristics of the international sugar market are: (1) Domestic prices of 90 per cent of the sugar sold are higher than of international prices. (2) Forty per cent of world sugar production is sold in domestic markets at prices 50 per cent to 400 per cent higher than those in the international market. (3) Production of 40 per cent of sugar is highly subsidised. (4) Forty per cent of sugar is highly taxed. (5) The amount of subsidy for the world sugar industry is around $ 56 bn per year on the basis of the international prices. (6) The share of developing countries in world consumption was 66 per cent in 1980, which rose to 76 per cent in 1998. (7) If the international sugar market becomes fully free and fair Prices will rise by 38 per cent. Prices in Japan will increase by 60 per cent, in western Europe by 40 per cent, in eastern Europe by 25 per cent and in China, Philippines and Ukraine prices will come down by 10 per cent. Europe, the US, Japan and Indonesia will have to increase imports by 150 lakh tonnes.

The international sugar industry will shift from inefficient regions to efficient regions. These conclusions have been supported by studies done by LMC International UK and ABARE of Australia. India will be one of the major beneficiaries of a free and fair international sugar market. Therefore, it should make efforts to remove distortions and push for the creation of a free and fair international sugar market. Seventy per cent of sugar production and consumption is concentrated in 14 countries, namely, Australia, Brazil, China, Colombia, Cuba, EU, Guatemala, India, Japan, Mexico, US, South Africa, Thailand and Turkey. Therefore, this article has considered the sugar trade practices of these 14 countries. In order to create obstacles in the imports of cheap sugar, many countries have higher levels of import duties. The AoA has allowed these countries higher bound rates of duties (Table 3). From Table 3, it can be seen that the EU, Japan and US have among the highest rates of import duties. The world average of import duties is 79 per cent. India has
Table 1: Comparative Supply and Demand Position of Sugar in India
(In lakh tonnes) 2000-01 2001-02 2002-03 Opening stock as on October 1 Production Imports Total availability Offtake (a) Internal consumption (b) Exports Closing stock as on September 30 100.10 185.11 285.21 112.00 185.29 001.00 298.29 109.00 170.00

285.21 12.44 112.00

298.29 10.82 109.00

Source: Indian Sugar Mills Association.

Table 2: World Raw Sugar Production


(In lakh tonnes) Country 19992000 200001 200102 Share in World Production (Per Cent) 14 15 7 5 5 4 4 3 3 3 37 100

Brazil 203 India 197 China 74 US 79 Thailand 58 Mexico 49 Australia 56 Germany 47 France 49 Cuba 41 Other countries 504 Total 1362

170 201 67 76 53 52 43 47 46 36 505 1299

190 198 92 70 64 51 46 40 40 37 508 1350

Source: Food and Agriculture Organisation (FAO).

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an import duty of 60 per cent plus countervailing duty of around 8 per cent. Indias import duty on sugar is lower than the world average. This is one of the main reasons for the unnecessary imports of sugar into India in the last decade. The EU, US and Japan are obstructing imports of cheap sugar from efficient producing countries not only by imposing high import duties, but also by the quota system. In 2001, the US imported 13 lakh tonnes of sugar, by distributing quotas to certain countries of their
Table 3: Import Duties on Sugar
(Per cent) Country Japan Mexico EU US Guatemala India Turkey Columbia South Africa Thailand China Cuba Brazil Australia Bound Rates as Per AoA 781 397 227 176 160 150 135 117 105 94 76 40 35 25 Applied Rates 471 172 176 151 20 60 + 8 138 20 46 94 30 10 17.5 0

choice, and also dictated the prices at which these countries should export sugar (Table 4). From Table 4, it can be seen that even though the rates of Indian sugar were lower than those of Brazil, India was given a quota of only 2,400 tonnes, while Brazil was given a quota of 1.52 lakh tonnes. Similarly, the EU imported 11 lakh tonnes of sugar in 2001 through the quota system. Mauritius has an annual production of 7 lakh tonnes, but it was given a quota of 5 lakh tonnes by EU. Fiji and Giana are also small sugar producing countries compared with India, but they were given a quota of 2 lakh tonnes each. India, the biggest producer of white sugar in the
Table 6: Ten Major Importing Countries, 2001
Country EU Russia Japan US Indonesia China Canada Nigeria Malaysia South Korea World total Source: FAO. Imports (Lakh Tonnes) 47 55 15 13 13 12 11 12 12 15 390

Source: LMC International London, January 2003/ American Sugar Alliance.

Table 4: US Sugar Imports for 2001 through Quota System


Country Import Quota Rates of Imported (Lakh Tonnes) Sugar ($ Per Tonne) 1.85 1.52 1.42 0.87 0.50 0.024 6.826 13 413 NA NA 227 408 342

Table 7: Ten Major Exporting Countries, 2001


Country Exports (Lakh Tonnes) 115 84 36 33 29 15 15 11 9 9 426 Share in the World Exports (Per Cent) 27 20 8 7 7 4 4 3 2 2

world, was given a meagre quota of 10,000 tonnes. The EU and US are importing sugar from developing countries, but the companies which supply the sugar from these countries are owned by EU or US companies. Thus, though these developed countries try to show that they are importing from developing countries, they are, in fact, importing from their own multinational companies. This is another example of unfair trade practices in the international sugar market. From Table 5, it can be seen that the domestic prices in Japan, EU, Colombia and South Africa are more than double those of their export prices. EU, Colombia, South Africa are among the major players in the sugar market. Even Brazil and Australia are exporting at low rates. Thus all of these countries are engaged in dumping practices. The domestic prices shown in Table 5 reflect the cost of production of the respective countries. The cost of production in the EU is 2.5 times higher, but it has a 20 per cent share of world sugar exports, while India has a small share of only 4 per cent (Table 7). The EU imports raw sugar and exports refined sugar produced from it, making it a major importer as well as exporter. Non-competitive countries like EU become competitive due to the excessive
Table 9: Domestic Sugar Trade in Developed Countries
Country UK Sweden Denmark Finland Portugal Austria Greece Ireland Spain Belgium Company British Sugar Danisco Danisco Danisco DAI Agrana HIS Greencore Agricolas Tirlemont Share in Market/ (Per Cent) 100 100 100 100 100 100 100 100 80 71

Dominican Republic Brazil Philippines Australia Guatemala India Other countries Total

Source: US Department of Agriculture.

Brazil EU Australia Thailand Cuba India South Africa Guatemala Turkey Colombia World total Source: FAO.

Table 5: Domestic and International Prices


Country Domestic Price (Per Tonne) 1441 669 466 460 396 298 276 258 220 178 International Price/ Export Price (Per Tonne) 214 217 214 216 214 227 214 220 214 162

Source: Oxfam UK, 2002/NEI 2000.

Table 8: Sugar Producer Support


1986-88 1999-2001 (Average (Average of 3 Years) of 3 Years) European Union Euro million Support as per cent of cost of production US US $ million Support as per cent of cost of production Australia Australian $ million Support as per cent of cost of production Source: OECD 2002. 2878 60 1152 58 89 14 2808 52 1302 56 87 10 1999 2000 2001

Japan EU Colombia South Africa Guatemala Australia Cuba Thailand India Brazil

3326 60 1587 68 48 5

2699 50 1190 50 103 13

2397 45 1140 48 111 10

Source: LMC International UK, January 2003/ American Sugar Alliance.

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support given to the sugar industry in these countries. Table 8 gives details of the sugar producer support given in some major countries. Sugar production in the US is only 30 per cent that of in India. The turnover of the Indian sugar industry in a year is approximately Rs 30,000 crore. From the Table 8, it can be seen that the support to the US sugar industry is $ 1,140 million (Rs 5,472 crore). US support to sugar industry comes to Rs 72 per kg and EU support comes to approximately Rs 60 per kg, in comparison with the cost of production of Indian sugar is around Rs 14 per kg. This shows the excessive support given to the sugar industry in developed countries. On the basis of this support, these countries become competitive in the world market and grab a larger share of exports. Even the most competitive Brazil is not lagging behind in supporting its sugar industry. The direct subsidies given by Brazil to its sugar producers totals around $ 200 million. It also gives loans at subsidised rates of interest. Brazils ethonol programme is also supported to the extent of $ 3,000 million. Brazil has banned the use of diesel vehicles. Another important player in the sugar market is Thailand, which also supports its sugar industry on the above lines. In India, however, the support of the central and state governments is very limited. The export subsidy given to cover freight charges is not even 1 per cent of the cost of production. The levy system was in fact a negative subsidy on the Indian sugar industry by which, the sugar factories were forced to sell levy sugar to the government at rates below their cost of production. The main feature of the international sugar market is that there is no difference between major developed and developing sugar producing countries in support policies. Thus the international as well as domestic sugar trade is highly distorted. Government support to sugar cane cultivators as well as to sugar factories is provided almost all the countries. Market intervention is also resorted to by a number of countries. The domestic sugar trade in many developed countries is also highly monopolised (Table 9). Table 9 shows that several countries allowed their domestic trade to be monopolised by one company. This enables the companies to artificially keep up domestic prices of sugar. For example, in Economic and Political Weekly

1998, the US retail price of refined sugar was 42.98 cents per pound, while the world price was only 11.59 cents. International trade in sugar is also controlled by some major companies. Exports are canalised. In Australia, 95 per cent of the sugar is produced in the Queensland province. The entire sugar produced has to be sold to Queensland Sugar, which controls the Australian domestic market. Sugar exports are also canalised through this company. Other forms of support adopted can be classified as follows: Minimum support price for sugar: EU, US. Minimum cane support price: EU, China, India, Japan, US, Thailand, Turkey. Import controls: Brazil, Cuba, EU, US, Turkey, South Africa, China, Thailand, Japan. Countries which give export subsidy: Australia, Brazil, EU, US, Cuba, South Africa, Turkey, India (freight subsidy). Other forms of support: Australia, Brazil, Colombia, Cuba, EU, US, Mexico, Thailand, Turkey, South Africa, India. It is thus clear that government support policies in almost all stages of production as well as market interventions are followed by developed and developing countries. The Indian sugar industry is today at a crossroad. Sugar cane arrears stand at around Rs 2,000 crore. Over 75 factories closed down. The unpaid wages workers are approximately Rs 250 crore. The number of sick mills is around 200. The industry is holding huge stocks and prices have fallen by almost 25 per cent. Bank loan arrears are also mounting. The taxation policy needs to be reviewed. In 2001, the sugar industry in Maharashtra

paid Rs 2,010 crore to the state government against the production of 67 lakh tonnes, which comes to Rs 3.68 per kg (33 per cent of the cost of production). The state and central governments are in fact major beneficiaries of the sugar industry. It should be noted that EU has declared its intention to continue the present policy on sugar. The US has passed Farm Bill 2002 and has declared through this bill that it will continue its policy of support to agriculture. In this background, the Indian government should formulate its sugar policy. It should take into consideration the realities in the international sugar market. The present direction of Indias sugar policy is based on the assumption that the global sugar industry is becoming free and fair and that all types of government support and market intervention is being dismantled. However, facts do not support this assumption. The sugar industry is not stable. There is a cyclical up and down in production and prices. Therefore, the industry cannot be run entirely on the basis of market forces. The respective governments have to give and are giving support to this industry. The present policy of the Indian government is aiming at the withdrawal of support to and let market forces play their own role. This will be suicidal for the Indian sugar industry. Government support will have to be maintained, and increased in some areas. The areas in which government support is obstructing the progress and efficiency of the industry will have to be reviewed. A new sugar policy should be designed after consulting industry, farmers, workers and other concerned sections. EPW

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