Sugar industry mess | Philstar.com
Protectionism has been the scourge of our country’s economic development. The elite rooted in agriculture and industry are expert rent-seekers and use their connections in government to cash in on protectionist favors that hang over consumers.
We have a sugar industry that has been overtaken by Thailand and now penalizes consumers with a domestic price that is at least double the prevailing price on the world market. Complacency and a sense of entitlement got us to where we are now.
I imagine the industry leaders know what’s wrong and how they can fix it. But they are happy to be parasites, living off Filipino consumers.
Is there a serious effort to be competitive? Do we have a credible roadmap on how to fix the industry? There are enough studies and the latest one commissioned by NEDA has some good suggestions.
Despite all its shortcomings, the sugar industry is important to our economy. It employs over half a million workers, covers a total area (about 410,000 hectares) and contributes 86 billion pesos to the economy.
Unfortunately, the industry’s competitiveness has declined significantly over time. Due to the fragmentation of holdings, some 140,000 hectares are held by approximately 74,800 small farmers or owners of less than five hectares of agricultural land.
Sugar growers generally have little capacity to cultivate their land because sugar is a plantation crop that requires large tracts of land for economies of scale.
The NEDA study indicates that the ultimate reason for the decline of the industry is its historical isolation from the international market.
There are also “particular characteristics of the domestic industry that have inhibited investments aimed at improving productivity and efficiency by industry players (growers and millers) and the government”.
Sugar is a highly regulated industry. There are restrictions on inter-island transportation of sugar; mandatory sharing agreement between mills and cane planters ranging from 60-40 percent to 70-30 percent (planters’ and planters’ share, respectively); mandatory warehouse receipt or quedan system that segments the use of raw sugar into specific uses: exports to the United States (A); internal market (B); reserve (C); and world exports (D).
The Sugar Regulatory Authority or SRA has recently allocated only A and B sugar as domestic production is already below domestic needs.
But the NEDA study observed: “Although the high domestic price of sugar has helped sustain the sugar industry, domestic sugar cane production has not achieved higher productivity; nor has the industry as a whole become more competitive over time.
“On the other hand, it has increased the cost of sugar for consumers and for food and beverage manufacturers, in turn undermining the latter’s competitiveness.”
The structure of the sugar industry must be reformed.
“The traditional sharing arrangement between planters and millers is unique to the sugar industry (as provided in Republic Act 809), in which the planters receive 60-70% of the ground sugar and the millers the remainder under form of “service charge”.
“The program contrasts with the direct crop payments that are the norm for all other agricultural products, and with the cane purchase system that is practiced elsewhere, where the miller pays the planter directly for all the cane delivered, at prices generally adjusted according to the quality of the rod. Thus, the factory acquires full ownership of the processed production.
“Yet another alternative is toll milling, where the planter pays the miller a service fee while retaining ownership of the cane and the product(s) derived from it.
“The sharing system involves shared ownership over the ground sugar, which introduces considerable disincentives on both sides of the transaction.
“To illustrate, suppose the factory’s share is 30% and it is considering a change in production practices or equipment that will produce an additional 100 tonnes of sugar, but at an additional investment equivalent to the value of 40 tons of sugar.
“Under the purchase of cane, the factory will undertake the adjustment as it retains the 100 tons of increased production and gains a net of 60 tons. But under the sharing system, the factory only receives 30 of the 100 The investment will thus bring him back 10 negative tons, which does not make economic sense, thus eliminating all incentives to invest in the improved crushing practice.
“The planter has a similar deterrent effect, best seen in comparison to the custom milling arrangement. Suppose a planter could take action on the farm that would increase cane production by 100 tonnes, requiring an investment equivalent to the value of 80 tons of cane production.
Within the framework of custom machining, he will make the investment and will earn 20 tonnes.
“But under a sharing system, he/she has to pay a share of 30 tonnes to the mill. Investing in improved productivity will then return a negative 10 tonnes, which makes no economic sense and completely eliminates the incentive to invest in improved farming practices.
“In both illustrations, there is effectively a penalty for investing in higher productivity. This penalty problem affects both mills and growers, compounded by the requirement under RA 809 to reduce mill share as mill capacity increases…”
This penalty problem explains our low sugar extraction rates (the Filipino mills were then at 78% while the Australian mills were at 92%), a finding repeated over the years…
As a result, investment in advanced cane crushing and production technologies has been minimal. The industry would instead look to the government for help.
Here are some of the recommendations from the NEDA study:
Switch to a rod purchase system that starts on a voluntary basis.
Establish a tripartite price management system to combat monopsony.
Encourage investment in advanced milling and processing technologies, and utilization of milling by-products.
Phase out sugar market segmentation.
Adopt a unified quedan that makes no distinction between domestic sugar and export sugar.
Update the 2020 Sugarcane Roadmap, with a focus on concrete measures to increase the productivity of farms and factories, and with its scope extended to include trade and use of the sugar.
There is a naman pala way out. But greed prevents the sugar industry from reforming industry practices so that it can become competitive and not penalize consumers. Their sense of entitlement is appalling.
Boo Chanco’s email address is [email protected]. Follow him on [email protected]