International Herald Tribune
Bowring: Getting sugar right
Wednesday, May 21, 2008

HONG KONG: The world is short of food, we are told, due to increased bio-fuel production, global warming, rising incomes in China and India, and many other reasons.

If this is so, why has the price of sugar just slumped 20 percent, making a 35 percent drop since the beginning of this year?

Sugar is selling on international markets for just 10.6 cents a pound, half its level of two years ago and one-twentieth of the inflation-adjusted peak it hit in 1974. It has dipped below the 11 cents a pound considered to be the break-even production cost of the world's most efficient producers - and now commands half the price in world markets that protected U.S. sugar farmers get for their crop.

All this comes at a time when rising rice and corn prices are causing world-wide concern, with an emergency summit meeting of the UN Food and Agriculture Organization set for next month. Meanwhile, the U.S. Congress is almost certain to pass, with scant opposition, another mega-billion-dollar farm subsidy bill. In Europe, efforts to trim the EU's equally wasteful Common Agricultural Policy are threatened by farm lobbies that are hypocritically using the current high prices to justify subsidies in the name of helping the undernourished in Africa and Asia.

Anyone who wants to understand why world agriculture is in such a mess - and why all the talk about "bio-fuel versus food production" misses the point - should start with sugar. Few commodities are more traded around the world. Yet none is subject to quite so many distortions due to subsidies, price controls and special arrangements.

With oil prices sky-high and demand for bio-ethanol rising, surely the cost of sugar should also be going up. It is the largest source of bio-ethanol production, accounting for a big chunk of output from the world's largest sugar producer, Brazil. Sugar from cane is not only a cheaper source of bio-ethanol than most alternatives, it also leaves a smaller carbon footprint.

Unfortunately, when it comes to agriculture, the world is upside down. There is a very simple connection between the high price of corn and the low price of sugar. U.S. tariffs, tax breaks and subsidies keep Brazilian ethanol out of America while promoting the production of corn-based ethanol and corn syrups as a sugar substitute. This not only pushes up the global price of corn - the leading exporter of which is the United States - it also drives up the price of wheat, soybeans and other crops as well.

Of course, entrenched protectionism in the United States and the European Union do not explain all the recent price volatility. But U.S. and EU policies do explain why the countries that are best positioned to supply the world with stable and cheap supplies are unable to do so. India, Brazil, Thailand, South Africa and others could readily produce a lot more sugar if world prices were reasonably stable - in the 15 cents-a pound range. But there is no chance of an even half-efficient market developing when the major developed countries, including Japan, insist on paying 50 to 150 percent above world prices to keep their own sugar farmers in business.

Not that the developing world is blameless. China is more protective of its sugar producers than of most other crop producers. High prices help keep consumption well below the Asian average and thus limit the need for imports. Exporting countries such as India and Thailand have elaborate price-support and consumer-subsidy schemes to cushion domestic supplies and prices against the vagaries of the world market. But the basic problem lies in the reluctance by the Western countries and Japan to practice the free market values that they preach.

The direct result is that, whether measured on a 10 or 40 year average, world sugar prices have been lower than those of any other farm commodity. With sugar, even more than corn, wheat and rice, market distortions have caused huge hardship. Yet sugar also happens to be particularly suited to tropical and sub-tropical regions of Africa and South Asia, where food needs are greatest, and the areas of Africa and Latin America where new land is still available. Get the sugar trade right and a lot of food will follow.