Sugar industry mess

Protectionism has been the bane of our country’s economic development. The entrenched elite in agriculture and industry are expert rent seekers and use their connections in government to enjoy protectionist favors that burden consumers.

We have a sugar industry that has been overtaken by Thailand and it now penalizes consumers with a domestic price that is at least twice that of prevailing world market price. Complacency and a sense of entitlement has brought us to where we are now.

I imagine that the industry leaders know what is wrong and how they can make things right. But they are happy being parasites, living off Filipino consumers.

Is there a serious effort to be competitive? Do we have a credible roadmap of how to fix the industry? There are enough studies and the latest one commissioned by NEDA has good suggestions.

Despite all its shortcomings, the sugar industry is important to our economy. It employs over half a million workers, covers an aggregate area (around 410,000 hectares), and contributes P86 billion to the economy.

Unfortunately, the industry’s competitiveness has considerably declined over time. Because of farm fragmentation, some 140,000 hectares are held by about 74,800 small farmers or holders of less than five hectares of farmland.

Sugar farmers generally have little capability to cultivate their land because sugar is a plantation crop that requires vast tracts of land for economies of scale.

The NEDA study says the ultimate reason for the industry’s decline is its historical insulation from the international market.

There are also some “peculiar features of the domestic industry that has dampened investment to improve productivity and efficiency on the part of industry players (planters and millers) and government alike.”

Sugar is a highly regulated industry. There are restrictions on the inter-island shipping of sugar; mandatory sharing arrangement between sugar mills and sugarcane planters ranging from 60 to 40 percent  to 70 to 30 percent (planters’ and mill’s share, respectively); mandatory warehouse receipt or quedan system that segments the utilization of raw sugar into specific uses: exports to the US (A); domestic market (B); reserve (C); and world exports (D).

The Sugar Regulatory Authority or SRA has lately only allocated for A and B sugar, with domestic production already falling short of domestic requirements.

But the NEDA study observed: “While the shielded high domestic price of sugar has helped support the sugar industry, domestic sugarcane 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 competitiveness of the latter.”

The sugar industry structure must be reformed.

“The traditional planter-miller sharing arrangement is unique to the sugar industry (as provided in Republic Act 809), wherein planters receive 60 to 70 percent of the milled sugar and the millers the remainder as ‘service fee.’

“The scheme contrasts with direct crop payments that is the norm in all other farm products, and with the cane purchase system that is practiced elsewhere, where the miller directly pays the planter for all cane delivered, at prices usually adjusted for cane quality. As such, the mill acquires full ownership over the processed output.

“Still another alternative is toll milling, where the planter pays the miller a service fee while maintaining ownership of the cane and the product(s) derived from it.

“The sharing system implies shared ownership over the milled sugar, which introduces considerable disincentives on both sides of the transaction.

“To illustrate, suppose that the mill share is 30 percent, and it is contemplating a change in production practice or equipment that will yield an additional 100 tons of sugar, but at an additional investment equivalent to the value of 40 tons of sugar.

“Under cane purchase, the mill will undertake the adjustment as it keeps all 100 tons of increased output and gains a net of 60 tons. But under the sharing system, the mill receives only 30 out of the 100 additional tons. The investment will thus net it a negative 10 tons, which makes no economic sense, thereby eliminating all incentives to invest in the improved milling practice.

“The planter has a similar disincentive, best seen when compared to the toll milling arrangement. Suppose that a planter can take action on the farm that would raise cane output by 100 tons, requiring an investment equivalent to the value of 80 tons of cane output.

Under toll milling, she/he will make the investment and gain 20 tons.

“But under a sharing system, she/he must pay a share of 30 tons to the mill. The investment in improved productivity will then net a negative 10 tons, which makes no economic sense and eliminates the incentive to invest in the improved farm practice altogether.

“In both illustrations, there is effectively a penalty for investing in higher productivity. This penalty problem affects both mills and planters, made even worse by the requirement under RA 809 to reduce the mill share when mill capacity increases…”

This penalty problem explains our lower sugar extraction rates (Philippine mills then were at 78 percent while Australian mills were at 92 percent), an observation repeatedly made over the years…

This is why investments in state-of-the-art milling and cane production technologies have been minimal. The industry would rather look to the government for support.

Here are a few of the recommendations in the NEDA study:

Shift to a cane purchase system that begins on a voluntary basis.

Establish a tripartite price management system to curb monopsony.

Incentivize investments in state-of-the-art milling technologies and processing, and use of milling by-products.

Phase out segmentation of the sugar market.

Adopt a unified quedan that makes no distinction between domestic and export sugar.

Update the Sugarcane Roadmap 2020, with focus on concrete measures to raise farm and mill productivity, and with its scope extended to include sugar trade and utilization.

There is a way out naman pala. But greed prevents the sugar industry from reforming industry practices so 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 Twitter@boochanco