Bitter pill for sugar industry

Published on January 09, 2006 - The Nation - Thailand

Even in Thailand, one of the world’s top producers of this most common sweetener, the sugar industry remains tightly regulated, so much so that the retail price in the domestic market, which was fixed 22 years ago at Bt13 per kilogram, has been allowed to rise by only small increments to today’s Bt14.25. During that period the cost of living and people’s purchasing power have far outpaced it, not to mention the rising production costs of the sugar industry, which comprises planters, millers and traders who operate within a cartel-like structure.

There was originally a perfectly rational explanation for the stringent price control: the government of the day was promoting the fledgling sugar industry by fixing a domestic retail price significantly higher than the world market price.

In other words, the Thai people were forced to buy expensive sugar from domestic producers for the sole purpose of ensuring high profitability, which in turn served as an incentive for planters, sugar millers and traders to expand production. The scheme was bolstered by government protectionism to keep out competition from cheaper foreign sugar.

In a way, it is correct to say that people in the sugar industry owe their livelihood to the government, which has protected it, and to the Thai public for paying more for sugar than they would have if there had been competition from foreign producers. The arrangement worked well initially, and Thailand’s sugar industry has grown by leaps and bounds.

There are an estimated 600,000 sugar-planters and tens of thousands of workers in sugar mills in several parts of the country, not to mention a host of workers in processing, packaging and transport. At present, Thailand produces some five million tonnes of sugar annually, about two-thirds of which is exported, earning hard currency and keeping a sizeable chunk of the Thai population employed.

The sugar industry has worked out a profit-sharing scheme under which proceeds from sales of sugar on domestic and international markets are split 70/30 between planters on the one hand and millers and traders on the other.

With the passing of time, the price-fixing arrangement began to backfire as the sugar industry got too comfortable with protectionism. Shielded from foreign competition, complacent planters have neglected to upgrade production methods, leading to a steep slide in productivity. Due to over-investment, mills continue to operate way below capacity.

Thus the industry is vulnerable to any significant dip in world prices.

With world prices having shot past the fixed Bt14.25 for domestic retail sugar, planters are now demanding that the government float the domestic retail price in line with changing global market prices. The demand makes sense only if planters, millers and traders put their heads together to upgrade production to prepare for future fluctuating prices in the international market.

The government has balked at raising or floating the domestic retail price, saying that would hurt consumers as a whole who have already been pinched by rising prices of consumer goods as the result of high oil prices. The argument may sound sensible, but on closer examination it does not quite hold up.

Fixing domestic sugar prices at an unrealistically low level in relation to world prices is tantamount to subsidising particular industries like food and beverages and cushioning them from competition.

The government must base its decision on the need to strike a balance between consumers’ need to be protected and the requirement for the sugar industry to become more competitive. While consumers, the sugar industry and the food and beverage people who are big users of sugar all need to be protected, they also need to be exposed to market forces for their own good.