Sugar: a journey into the unknown

Our sugar sector is exposed to the risk of not being profitable enough to sustain the activity in the face of global uncertainty

 Our sugar sector is exposed to the risk of not being profitable enough to sustain the activity in the face of global uncertainty

 

In 1973, the UK became a member of what was then known as the European Common Market. Soon after, there were doubts in Britain whether it should continue to remain a member of the “European Communities” (EC). Factors like loss of national sovereignty and fears that Europe’s Common Agricultural Policy would impact incomes of domestic agricultural producers led to a referendum held in 1975 to decide whether Britain should continue to be a member of the EC. Almost two-thirds of voters supported continued membership.

Access to a bigger market

It is in the wake of this UK-EU deal that Mauritius gained access to the European market, along with Britain, for its sugar and other exports. Earlier on, Mauritius, as a former British colony, had guaranteed sugar exports to the UK under what was known as the Commonwealth Preferential Sugar Agreement. Under the new deal, our export markets were diversified to embrace European economies under the Lomé Convention signed up by ACP countries (including Mauritius) with the EU in the footsteps of the UK’s decision to join Europe.

It must be said that we have employed the security of supply so obtained to considerably improve our economic perspective. For, the Convention not only gave us a larger number of European economies to trade with for our sugar at guaranteed prices for a minimum export quota. It also gave our non-sugar exports the same duty-free, quota-free access to Europe’s markets. Our textile and garments exports were therefore also favoured.

This quota arrangement for sugar is to go away as from 1st October 2017, according to a pre-ordained decision by Europe to phase out preferences and quotas to the EU. This has nothing to do with the June 2016 referendum held in the UK in which British voters decided by a majority, this time, to break away from the EU. It’s rather part of a long-standing EU policy decision to make way for “free trade” without preferences. The EU gave us advance notice and requested us to adapt our economic structure accordingly.

Exposed to the international market price

As experience of immediately preceding years has shown, while our sugar production costs have remained high, the price fetched per tonne of sugar produced has declined. We didn’t also change sufficiently our efficiency of production to be able to competitively adapt to changing circumstances. Lots of small farmer lands are lying abandoned for different reasons, including the lack of a prior strategy and an overall effective response plan to deal with the new situation.

In the last two years, the government decided therefore to draw funds from out of past reserves accumulated by the Sugar Insurance Fund Board (SIFB) to top up the per tonne price paid to sugar producers, cost of production having exceeded sale price and made production economically unviable. This practice cannot continue for long as any remaining SIF reserves will get depleted.

The situation is made worse by prevailing international market conditions. For some time, the international market price of sugar (which is where we’ll sell our sugar henceforth) was remaining more or less steady around US 20-21 cents per pound (Rs 7.20). Currently, it has fallen to about US 14 cents (Rs 5.04) a pound; it had even dipped to US 12 cents (Rs 4.32) in the past month. Access to the EU market at a guaranteed price has long protected us against such wild market international market price fluctuations. We no longer have such a protective umbrella.

It is said that, other than the global supply-demand situation, the international market’s sugar price is also decided by shifting of speculative funds on international financial markets among the various commodities, sugar being one of them. Thus, if market fund managers speculate that the price of gold might go further up (sugar, not really), investment funds for futures purchases would shift from sugar to other commodities. It is due to this that the price of gold which used to remain below $1100 in 2015 is currently near $1250 an ounce. But speculation can affect any commodities’ prices, including sugar.

Overcoming vulnerability

It is clear that we are too small a global sugar producer (compared with Brazil, China, India, the EU, Australia, Thailand, etc) to change anything about the global sugar price. Besides, with the forthcoming dismantling of production quotas in a place like the EU, its sugar beet producers are no longer bound to limit their sugar production. It is therefore likely that, from having been an overall importer of sugar so far, the EU might become a sugar exporter. This carries risk of further depressing the global market sugar price. More cost-efficient sugar producers will carry the day in such a context.

Our sugar sector is exposed to the risk of not being profitable enough to sustain the activity in the face of such global uncertainty. Having seen past ebbs and flows in the international price of sugar, we might have anticipated this kind of vulnerability. We did so to an extent, unlike some of our brethren in the ACP community of sugar producers.

We anticipated that we could make more money by producing “special sugars” (Demerara, etc.) which fetch a higher price on markets and we’ve been selling part of our sugar production thus at a premium. We’ve diversified into sugar by-products to have additional sources of income into the sector although Ethanol, as an oil additive or partial substitute, has to vie for its economics against low or even falling international oil price.

We haven’t yet transformed our sugar into a component of higher value-added exportable confectionery for international markets. Nor have we raised up, along with the international market threat, complementary other bio-agricultural activities in our lands retaining the verdant charm of our landscape.

Our competitive response hasn’t been so blunt but not brilliant enough to end up salvaging a sector of economic activity associated with the origins of Mauritius. Market conditions even under favoured high EU prices did not keep us from having to draw up in the last two years from the Sugar Insurance Fund Board’s past reserves to compensate sugar producers for below-cost-of-production earnings.

Our serious job now is to employ these vicissitudes visiting upon our sugar sector to increase our domestic food self-sufficiency (import-substitution) while, at the same time, compensating ourselves for foreign exchange earnings lost due to the current changed international market condition for sugar.

Despite the dictum that the best laid plans of mice and men often go awry, economic strategies are usually made well in advance of events producing overturning situations. Can we overcome the deficit, nevertheless?

Anil Gujadhur

Add a Comment

Your email address will not be published.

Solution by Web Vision Ltd