The ironic fate of our sugar industry

A LOT of this column was published about four months ago before the “sugar crisis” we are experiencing now. I am reproducing parts of it and adding some ideas, because the issue has become a great example of how policy makers and the policy-making process have impeded the development of our agricultural sector.

While our policy makers insist on rhetoric about using science to decide what is good for the sector, policy remains the primary consideration despite the presence of compelling empirical evidence that we are facing a severe shortage of supply of sugar, as evidenced by the surge in prices in the market.

But while the existence of a shortage and the size of the supply shortage are still in question (due to sustained attacks on the report by the Sugar Regulatory Authority (SRA) indicating a severe shortage of sugar ), the best course of action is to instruct the National Economic Council Development Authority, as the government’s official think tank on socio-economic policy and the repository of official data, to carry out a simple analysis of sugar supply and demand to determine whether it is really necessary to import sugar and, if so, how much we should import to control sugar price inflation and alleviate the suffering of our million consumers.

In addition, the assistance of the Ministry of Trade and Industry should be sought to obtain data directly from food processors, who are the main users of sugar and its stakeholders, to determine if they are experiencing a shortage of sugar. supply and the quantity they need. This is what “comprehensive staff work” is, as the late revered President Fidel V. Ramos insisted.

A leading exporter in the past

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Sugar was our main agricultural export before and after World War II. It formed the bulk of our agricultural exports from the 1950s to the 1970s. The Philippines was then one of the world’s leading sugar producers and exporters. Today, we are only ranked the 12th largest sugar producer in the world, and our share of the global sugar export market has shrunk to just over 1% of the total.

What happened? Why has one of the world’s leading sugar producers and exporters become an industry laggard?

Much like the dinosaurs, which once ruled the surface of the Earth but died out because they failed to adapt to their rapidly changing environment, our sugar industry seemed to suffer the same fate. It failed to adapt to the changing realities of the global market because it believed it could cushion the negative impact of competition from other sugar-producing countries through an array of protections from our government. Of course, the protection is extended under the guise of helping our sugar farmers and working poor, whose welfare has never improved under decades of protectionism.

Overanalyzed

The problems of the sugar industry and how to solve them have been comprehensively analyzed by renowned Filipino scholars. Unfortunately, no one seems to heed their advice because in this country, just as Vladimir I Lenin (the founding father of socialism in Russia) said in his book, The State and Revolution, “politics rule!” Of course, the end result of applying this saying is the gradual collapse of the Russian economy and the sugar industry, which we are currently witnessing.

Our researchers agree on the factors that have led to the gradual and growing decline of our sugar industry (see for example Briones (2020), Habito, et al. (2021)) (Adriano, et al., 2022). They identified at least five.

The first is the fixed sharing arrangement between planters and sugar millers under Republic Act 805, or the “Sugar Act of 1952” (most of us weren’t yet born ), in which a certain percentage (i.e. 60% for growers and 40% for millers) of the final production proceeds will be shared accordingly. Experts say this sharing arrangement discourages millers, in particular, from improving their milling capacity, as any improvements will not allow them to reap the full benefits of being more efficient as they will simply share them with growers in because of the fixed split rate.

The argument is similar to that made against sharecropping (e.g. in rice farming) in support of the implementation of the land reform program because in the former case the farmer has no incentive to increase its productivity because any gain will simply be shared at a reasonable price. fixed rate to the owner. Even the late Senator Miriam Defensor-Santiago tried to revise this law but failed.

Second, the Sugar Quedan system provided for by Executive Order 18 of 1986, issued during the Cory Aquino administration, which also established the SRA. The quedan system is a means of stabilizing sugar prices by allocating the supply of sugar according to their use or destination. “A” is our allocated sugar production to fulfill our sugar quota obligation in the US market. “B” is for the domestic market (food processors or exporter). “C” is reserve sugar that can be used to fill supply gaps in “A” or “B”, if any. And “D” is sugar for the world market, which is the least preferred market due to the lower prices offered here given the competition from other sugar-producing countries.

The scheme discourages any effort to make the sector more efficient and productive since it guarantees stable and profitable prices for sugar producers. What is the point of improving agricultural productivity when large profit margins are already assured? As such, attempts to remove the quedan system and replace it with an auction system have failed miserably in the past.

Third, the fragmentation of our agricultural lands into miniscule sizes as a result of the prolonged implementation of land reform. A study by Tasso Adamopoulos and Diego Restuccia published in the American Economic Journal (2020) showed that our agricultural productivity in agrarian reformed lands decreased by 17%. For sugar, an industrial crop, a certain area of ​​land will be needed to make its cultivation economically viable. Professor Rolando Dy of the University of Asia and the Pacific estimated that it was around 50 hectares for sugar cultivation.

Fourth, the significant increase in the cost of labor as the children of farmers become better educated and choose to work in non-agricultural jobs that are less physically demanding and offer better pay. Agricultural mechanization could have alleviated labor shortages and the aging of our agricultural workers, but modern agricultural equipment and technology are simply beyond the means of farmers with small farms and not economically viable for sugar cultivation.

Finally, too much government regulation and protection of the sector has the effect of protecting it from competition and inducing the efficiency of its operation. It was much easier to impose higher tariffs on imported sugar (50% for MAV within quota or minimum access volume of 64,050 metric tons per year, and 65% above MAV ) and to strictly regulate the entry of imports through the issuance of import certificates. allowed us to do our homework to make the sector efficient. But their long-term result is the gradual decline and decay of the industry that we are currently witnessing.

Violation of trade agreements

Note that the 50% TRQ for MAV and the 65% overage MAV for sugar imports are the rates we have agreed with the World Trade Organization (WTO). These tariff rates are the highest among our agricultural products, as rice is only 35% and meat products about 40%. This already reflects the preferential treatment we give to our sugar hacenderos.

In addition, for the Association of Southeast Asian Nations (ASEAN) tariff rate, the bound rate is only 5%, which means that imports of sugar from ASEAN countries ‘ASEAN will only be subject to a customs duty of 5%. Due to sugar pricing, the requirement to obtain a sugar import permit should no longer be necessary as it is contrary to our trade agreements with the WTO and our ASEAN partners. Curiously, no one disputes the current system of import licensing by the SRA, even though it is clearly a redundant system given the pricing of sugar. Can we imagine imposing the same thing for rice, corn, pork, poultry and other liberalized agricultural products outside the sanitary and phytosanitary authorizations required for imports?

Our scholars have already advised us on the appropriate measures to adopt to arrest the further decline of our sugar industry. On the other hand, what are our politicians proposing other than responding to populist sentiment for protectionism without providing details on how to reverse the moribund state of our sugar industry?

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Rachel J. Bradford