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Business

Reforming the sugar industry (Part 2)

CROSSROADS TOWARD PHILIPPINE ECONOMIC AND SOCIAL PROGRESS - Gerardo P. Sicat - The Philippine Star

The Philippine domestic sugar industry has a wide set of components along the value chain of production and trading. Due to its past history and organization, economic inefficiencies and incidence of high concentration of economic power have created problems that need attention and reform.

The value chain of sugar. As discussed in my Nov. 2 column (see Briones-PCC Competition paper), the value of sugar at retail follows the following value-chain formation:

At the agriculture stage, cane sugar is grown on the farm, and upon harvest is sold at sugar mill gate for crushing and processing. At this point, it accounts for 60.8 percent of the value of sugar.

At the industrial processing stage, sugar is in raw form and refined sugar is the output. About 23.5 percent of value is added to the sugar product at this stage so that the value of sugar rises to 84.3 percent.

(In both the agriculture and industrial stages, other economic costs are incurred – costs of production, which includes transport costs and taxes.)

Finally, trading activities from wholesale to retail contributes another 15 percent to make up the full 100 percent value.

Reforms needed in the sugar industry. Based on the previous discussions, the reforms in the Philippine sugar industry need to touch all the three stages of the value formation.

(1) Agriculture: Sugar agriculture needs to raise its productivity to reduce per unit costs.

(2) Sugar milling. The sugar mills have to modernize their (a) machinery and (b) their sharing arrangements with planters concerning cane procurement.

(3) Industry and trade. Reforms (a) to improve domestic competition along the value chain from agriculture to milling operations, and finally to the retail level, and (b) liberalize the importation of sugar to help bring down sugar prices to respond to the world market for sugar.

The reforms recommended by the sugar policy paper of the Philippine Competition Commission focus mainly on those that help to improve competition within the industry.

Therefore, they do not encompass the full scope of development and health of the sugar industry, which are reforms (1) and (2). Lack of space does not permit discussion of these important earlier stages of reforms aimed at raising productivity.

Policy reform recommendations of the PCC. Below are some of the important PCC policy recommendations.

They are not comprehensive, but if they are implemented, they could alter the health and development of this industry. The sugar industry itself and the Department of Agriculture need to focus on a broader set of important reforms that are implied in related to the agricultural and the mill-stages of development.

(1) Liberalize importation of raw and refined sugar. This is the major recommendation of the PCC and is fully identical to the reforms (3b) affecting trade and industry. It is designed to enhance domestic competition by enabling free imports of sugar under the direction of traders rather than by a state marketing agency.

Under the current framework, the Sugar Regulatory Administration (SRA) must first determine that a supply shortage is imminent and then imports are made. Even as it issues the order to import, SRA still has powers associated with the allocation of the sugar imports.

Under this framework, the benefits from the imports do not necessarily go to consumers and domestic users of sugar, but are appropriated as rents to favored parties. Thus, the general public, consisting of consumers and domestic sugar users, do not share well in the form of price reduction.

Enabling a more liberal importation of sugar under the system of import preference for sugar in accordance with ATIGA (ASEAN Trade In Goods Agreement, at six percent) and all other countries at MFN (most-favored-nation, at 65 percent) will provide domestic protection for the local sugar industry and will enable improved flexibility in reducing sugar prices in the country. As important is the fact that the benefits to local consumers and sugar users are dispersed and not bureaucratically pre-determined.

(Further analysis of this point will be made in a future column.)

(2) Re-examine the producer mill sharing system and consider a procurement system for sugarcane. A long-standing issue between millers and sugar farmers is the institution of sharing the output from the milled sugar cane input. This policy recommendation corresponds to policy reform (2b) and in (3a) in the list of reforms that I have enumerated following the value chain for sugar.

The PCC sees the current system of sharing output from the cane between millers and farmers as being too rigid. It favors a shift out of this system toward a system in which millers bid for the cane produce. Such a shift will remove a key source of inefficiency in the sugar industry. The PCC observes that such a system already takes place in the case of mill districts in Negros island.

(3) Continue and strengthen the quedan system as a warehouse receipt system. The quedan is a warehouse receipt document that indicates ownership and values of sugar held in a warehouse.

Under the current powers of the sugar regulator, the SRA uses quedans for different types of sugar markets (for export to the US; for domestic use; for export to other countries; and for reserve). This is an inefficiency because it segments the market for sugar. This institution was devised to allocate domestically produced sugar in the old days when the sugar export to the US was large and significant. Today, much of the domestic sugar production is for domestic use.

The recommendation to liberalize imports will abolish such market segmentation for sugar, thereby creating also a single and more powerful use of the quedan system for trading. It will also enable the country to avail of cheaper sugar from the world market, forcing domestic producers to undertake more serious structural reforms within the sugar industry – both in the agricultural and the industrial milling stages.

Even as such competition reforms are undertaken, the government and the industry will still need to work out the needed reforms in sugar agriculture and milling industry.

 

 

For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/

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