Marcos faces bitter economics of sugar imports from the Philippines

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MANILA, Philippines — President Ferdinand Marcos Jr., who took on the role of shadow farming chief to highlight the importance of elevating the sector, now faces the politics and economics of the sugar industry .

Competing soda makers have issued a rare statement confirming a shortage of premium refined sugar. Seasoned and career farm officials quit over an import dispute. Farmers have rebuffed import proposals and bemoan the dismal state of the industry. Lawmakers are firm on pursuing a congressional investigation into the sugar import boondoggle.

The evolution of the sugar import saga keeps getting bitter.

sugar crash

Large-scale cultivation of sugar cane in the Philippines began in the 1700s, when the country was still a Spanish colony, and flourished in the mid-1800s with plantations stretching from Luzon to the Visayas.

In the 1900s, during the American colonial period, sugar from the Philippines was exported to the United States. The Philippines continued to export to the United States through its preferential access even after independence. The country historically exported more than half of its sugar to the United States.

Low agricultural productivity and increased domestic demand have resulted in lower sugar exports. Sugar prices were also high due to Philippine protectionist policies with little improvement in farming methods.

According to “An Assessment of Reform Directions for the Philippine Sugar Industry,” a National Economic and Development Authority (NEDA) working paper released in 2021, Philippine sugar prices were double the world price and export prices. Thai in 2019.

PRICE OF SUGAR. Philippine domestic price of raw sugar versus Thailand and world export prices, 2001-2019. Chart by NEDA, World Bank and USDA data.

According to a Philippine Competition Commission (PCC) document released in 2020, there were only 27 sugar mills nationwide as of March 2020. In most areas, only one or two factories are in operation to serve all their planters.

The CCP said the reason for the low number of factories is the large fixed investment – at least 2 billion pesos for a new factory – which requires a large scale of production to remain economical.

According to the Sugar Regulatory Administration (SRA), local sugar production will only reach 1.8 million metric tons in 2022, below the annual demand of 2.03 million metric tons seen over the past three years.

always important

Although the sugar industry has fallen since its peak, it remains a vital part of the economy.

NEDA has estimated that sugar farms continue to employ half a million workers. The industry also covers a total area of ​​410,000 people – larger than the total area 25 years ago – and contributes 86 billion pesos to the economy.

Total sugarcane production reached $815 million in 2020, making it the fifth largest crop, after rice, bananas, corn and coconuts. But in terms of share in agricultural gross domestic product, it fell to 1.9% in 2018 from a peak of 3.6% in 1999.

NEDA added that the industry is finding new business opportunities in alternative products like bioethanol, muscovado and biomass-based electric power.

Why the sugar industry is in trouble

NEDA cited the following as some of the main issues facing the sugar industry:

  • Fragmented land ownership
  • Lack of improved cane varieties
  • Poor soil quality
  • Inadequate irrigation
  • Labor shortages
  • Low agricultural mechanization
  • Insufficient financial capital

Economists also attribute the decline to the isolation of the industry from the international market.

Republic Act 8178 or the Agricultural Tariff Act eliminated quantitative restrictions (QRs) on imports of agricultural products, replacing them with more transparent import tariffs. But in reality, the import of sugar is tightly controlled by the SRA.

Executive Order No. 18 empowers the SRA to regulate the quedan system, allowing it to segment the use of raw sugar into specific uses: exports to the United States, domestic market, reserves and world exports.

The SRA typically allocates 5-10% of total sugar production to the US market each year. In years when supply is tight, the allocation is close to zero. The SRA also heavily regulates and restricts the transport of sugar between the Philippine islands.

A compulsory sharing agreement between sugar mills and cane growers is also in place, ranging from 60% to 40%, to 70% to 30%, the share of growers and mills, respectively.

In a nutshell, while the government protected the local sugar industry, production did not improve and prices did not become competitive.

The liberal way

With soaring sugar prices and supply constraints, is it time for Marcos to open the market to more imports and liberalize the sugar industry?

“Ayaw na ayaw natin mag-import hangga’t maaari. Ngunit ang problema, hindi sapat ‘yung natin production. In kung minsan ‘yung presyo pati is napakataas. Kaya’t kailangan natin,” said Marcos during a press conference on Wednesday, August 17.

(As much as possible, we really don’t want to import [sugar]. The problem is that the production is not enough. Sometimes the prices are very high. So we have to import.)

He added that he would reorganize the SRA, although he did not specify how.

“We will reorganize the SRA and then we will come to an arrangement with industrial consumers, with planters, millers, sugar suppliers to coordinate para talaga kung ano ‘yung mayroon, kung ano ‘yung available, mailabas na sa market. And ‘yung kulang, eh kunin na natin, kunin na natin. Mag-import to tayo. Mapipilitan talaga tayo”, Marcos said.

(We will reorganize the SRA and then we will agree with industrial consumers, with planters, millers, sugar suppliers to coordinate to determine supply and release what is available on the market. For the shortfall, we will have to import. We will really have to.)

At a forum organized by the Association of Economic Journalists of the Philippines, Central Bank Governor Felipe Medalla said the laws governing the sugar industry need to be reviewed, adding that the issue is not a “technocratic question”, but a “political” question. (READ: Malacañang investigates resolution of ‘illegal’ sugar import)

The NEDA working paper noted that while liberalization would benefit consumers, it would benefit the rich more than the poor.

“All of this would have an obvious cost for those involved in the sugar industry. While industrial sugar users would benefit, the impact on them appears relatively modest,” the paper said.

The case for liberalizing the sugar trade seems weak at present. If it were nevertheless to be continued, it would be preferable to do so gradually and only partially, in particular in the face of serious distortions in the world sugar market. –NEDA

NEDA’s simulations also indicate that full liberalization of the sugar trade would predictably harm planters and millers, whose profits would fall by 57%, while consumers would gain in welfare by up to 65%.

A drop in prices of up to 11% would be felt, but employment in the sugar industry would fall by up to 16%, while domestic production would fall by 6.8%.

The CCP, for its part, has recommended the liberalization of raw and refined sugar imports.

“The closure of the domestic market to competition from foreign suppliers is a key factor in the vulnerability of domestic industry to competitive failures,” PCC said. – with reports from Bea Cupin/Rappler.com

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