SUGAR MARKET FACES UNCERTAIN FUTURE IN 1990S

5:09 AM Apr 5, 1993

SUGAR MARKET FACES UNCERTAIN FUTURE IN 1990S
Geneva 5 Apr (Chakravarthi Raghavan) -- The world sugar market faces a "particularly uncertain future" in the 1990s, according to Alexandre Rands Barros of the International Sugar Organization (ISO) in London.

The Uruguay Round negotiations, structural changes in eastern Europe and the still unsolved debt problems of the developing countries are among elements likely to have a significant impact on the future development of the sugar economy, Barros adds in a just published UNCTAD discussion paper 'Prospects for the world sugar trade' in which he has sought to assess the likely impact of some of these elements with differing and even opposite effects.

Barros foresses the share of world trade in consumption seeing a further increase in the first half of 1990s and and registering a slight contraction in the second half. The role of sugar trade in total consumption, according to Barros, would increase, diminishing only in eastern Europe, where they will increase production and cut down imports. But the final outcome for share of trade in consumption is difficult to predict.

If in addition to reducing imports, east Europeans also bring too much pressure in world financial markets, developing countries might be forced to increase their domestic production because of credit constraints, thus reducing role of trade for developing country importers and increasing export availability in exporters. This would reduce trade and prices.

A simple projection of sugar data for last two decades, according to Barros, would suggest an average annual growth rate of two percent for production and consumption, with some tightness between production and consumption emerging at end of the century, and a redistribution of production around the world, with share of developing countries and eastern Europe expanding and that of industrialized countries shrinking.

However, changes in Eastern Europe, the Uruguay Round Negotiations, the Third World debt problems and adjustments in international financial markets would be some major factors whose developments would affect future of the sugar economy and international trade in general, according to Barros.

The outcome of the Uruguay Round, "although it will not dramatically change the structure of the existing protection may play a major role in shaping the sugar trade during this decade," according to Barros.

As a result of structural changes, domestic sugar production could increase in eastern Europe, while the unsolved debt problems and resulting foreign exchange constraints of Third World may force countries to increase domestic production to meet consumption rather than resort to imports, he adds.

The assessment of prospects for the sugar market in the paper are 'qualitative' rather than quantitative. Barros explains that despite significant development in econometric techniques and improvement in data availability, "it is still difficult for economists to produce reliable forecasts".

In comments that go beyond forecasts for sugar and apply to other projections and predictions being bandied about, the ISO official adds: "Shortcomings in forecasting are aggravated when significant structural changes, with still unknown outcomes, are in progress. The current state of the world economy provide a particularly unfavourable context for assessing the future, given the structural changes it is undergoing. This has led institutions such as the World Bank to become more conservative and less confident in their forecasts."

While multi-commodity approach to commodity forecasts emphasize inter-commodity effects and introduce some macro-economic changes too, and thus more suitable for appraising effects of significant changes, such as those introduced by the GATT negotiations, Barros notes that they all call for a "significant subjective judgement" by researchers to define the structure of the model. When this difficulty is added to the "arbitrariness of quantitative assessment of future developments....the final results depend heavily on assumptions introduced by the researchers."

An important aspect of the sugar economy, Barros notes, is its close relationship to general macroeconomic developments and excessive concentration within the sugar sector could lead to misinterpretation of aspects linked to other macroeconomic developments. Thus while the trough in sugar prices in mid-1980s was often attributed to over-production, this failed to take account of fact that prices of most other primary commodities had a similar behaviour pattern at that time.

In terms of the world sugar economy, China and India are major players. Since 1970s, China has been an important importer with very unstable trade. Production has increased in China under current economic plans, but so has consumption and thus imports. At the same time, China has acquired technology to produce HFCS and artificial sweeteners like saccharin, but this has not been sufficient to remove China from list of major importers.

In India production has closely followed trends of consumption. A major importer in the mid-1980s, a few years later India returned to the market as a major exporter, but in very unstable circumstances.

In eastern Europe while in the former USSR, since about 1982 domestic consumption has increasingly relied on domestic production other east Europeans have increased their dependence on the world market since early 1970s. Before Cuba joined the CMEA, these east Europeans had been almost self-sufficient or net exporters and, even after Cuba became their principal supplier, they did not stop domestic production -- though the technology used had low yields. With imported technology, better management and labour discipline, Poland and former USSR have a large potential for sugar production.

The conclusion of the Uruguay Round and tariffication of alternative protection measures should improve responsiveness of domestic production and consumption to changes in world prices. The reduction in overall protection should raise equilibrium prices in the international market and the constraints on future increases in protection should prevent excessive falls in prices due to adjustments in an insensitive environment.

And notwithstanding "the low probability" of any breakthrough in the Uruguay Round negotiations, Barros believes other gains could be obtained for the world sugar economy, particularly of policies that would be adopted by eastern Europeans, China and Cuba.

A significant gain would come if negotiations prevent a new wave of increased protection. The responsiveness of developing countries to unsatisfactory world prices might also change and, instead of protectionist measures for the sector, they might adopt exchange rate, fiscal and monetary policies within a broader macroeconomic approach.

China's entry into GATT might improve the links of domestic production and consumption to world price, increasing the stability of prices and volume of trade. Currently, production and consumption of sugar in China is only weakly connected to the world market. Domestic sots are high and farmers' earnings and retail costs are linked to world prices through political decisions.

If new GATT rules could increase exposure of domestic producers and consumers to world price, world price movements would become more stable and an increase in Chinese imports would have an important impact on the world market. In 1989 China's imports accounted for five percent of world trade and this proportion could increase substantially. HFCS substitution for sugar in China could also be curbed if domestic sugar prices were lower and there was less control of imports.

"Chinese compliance with GATT rules could play an important part in preventing the diversion of sweeteners market to HFCS, which would strengthen position of sugar in the world's largest potential sugar market."

In eastern Europe the current recession, likely to last for two more years, would mean reduced consumption. Production increases with imported technology is feasible after 1994, with actual expansion dependent on domestic policies adopted. The need of these countries for hard currency, low competitiveness of their industrial products and rising unemployment may result in protectionist sugar policies.

Other factors that would influence policies include relation of individual countries with the EC . If the level of domestic policies they adopt would be similar to that of EC, their domestic production would increase considerably and, if they succeed in obtaining technology transfer from the EC, might start rising soon.

But if GATT negotiations manage to curb escalating protection, any early commitment to the GATT rules by these countries could play an important role in avoiding excessive protection.

The collapse of the preferential markets for Cuban sugar under the CMEA, and the resulting low prices for Cuban sugar, may also lead to rearrangements of Cuban production and some diversification away from sugar. Cuba would be one of the major losers in any future rearrangements in world sugar trade.

The conclusion of the Round and GATT rules could also play an important role in reducing domestic prices for HFCS in the large producers such as the US, Japan and the Republic of Korea. HFCS are available in liquid form only and cannot completely replace sucrose. Upsurge in HFCS consumption is possible only if there is strengthening by China of its substitution programme, elimination of restrictions in HFCS consumption by the EC, failure of the GATT negotiations, and start of production of HFCS on a large scale in eastern Europe.

Barros expects high intensity sweeteners like saccharine, as in the past, not to substitute sugar but look to new markets for expanding consumption, markets that are not open to sugar because of its calorific content,