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Sugar industry reform: problems with the “Two Tier” Pricing System [The Fiji Times, 7 April 1995 and 8 April 1995]

29/03/2012

The sugar industry seems to be facing contradictory advice.

On the one hand, enormous pressure for “reform” and diversification from the sugar industry keeps recurring as an important topic of discussion in the media, at National Economic Summits, and has again surfaced as World Bank advice to the Government.

On the other hand, there is other “expert” EU advice (as reported in the Fiji Times of 21 September) suggesting thatFijishould not look at diversifying, given thatFiji’s EU quota at preferential prices was increasing.

This EU advice (basically keepingFiji’s eggs all in one basket), surely is not sensible for the long term.

However, the reformers’ advice also poses difficulties.

The World Bank and other reformers argue that in the near future, there is likely to be a significant decline in the preferential prices being received for Fiji’s sugar exports to the European Union; Fiji’s sugar industry will face severe crisis, and thousands of farmers will face ruin, as they will not be able to survive on the much lower “free market” price. There is no disagreement about this.

But the reformers therefore recommend that the Fiji Government should immediately put in place a two-tier quota and pricing system which will expand the output from the more efficient cane farmers, and encourage inefficient cane farmers to diversify to other cash crops.

However, will the current cane farming sector become more efficient and successfully diversify as a result?

Or are there a lot more interventionist policies required of Government before the two tier system can lead towards the desired result?

These are the two issues focussed upon by this and the next article.

Possible problems with the “two tier” pricing system

There is no doubt that the cane growing industry does have inefficiencies which have developed over the last one hundred years.

Some “reformers” think that the key “players” on the sugar fields are to blame:  cane farmers are accused of being complacent, myopic, inefficient and unwilling to get off the gravy train; FSC is accused of lacking vision and initiative in diversifying; the Agriculture Department is accused of not doing enough in Extension and Marketing; and Government, is accused of not being willing to do anything, for political reasons.

Such criticisms may have a grain of truth in them.  However, this article suggests that the criticisms are unrealistic.  Even if sugar prices do fall significantly (and this is not certain either), a two-tier pricing system, without complementary policies, may significantly undermine the country’s broader development objectives, and could be a potential disaster.

But first, by how much will sugar prices fall, if total deregulation occurs in the world sugar markets?

By How Much May Sugar Prices Fall?

The reformers argue that there will be a major drop in sugar prices and earnings if and when the sugar markets are totally deregulated.

It is probably true that if sugar markets are totally deregulated, there will be some decline in the average sugar price received by countries such asFiji.

However, the current “free market” price for sugar is not a genuine free market price.  A large part of the world’s sugar is still sold through agreements, and the free market therefore is only for sugar sold outside the agreements.

Should all sugar be sold in a free market, it is likely that the average prices received for Fiji’s sugar will be above current free market prices, even if somewhat below the current preferential prices.

Fiji will therefore receive more for its free market sugar, even if less for the sugar currently sold under preferential arrangements.  Total sugar revenues may not therefore decline as much as currently thought.

It may also be kept in mind that current preferential EU prices for sugar do have some relation to what the EU farmers receive for the sugar they produce.

But the EU sugar industry (as in theUS) is one of the most assisted and protected agricultural sectors in the world.  Full deregulation of these protected sugar industries in the developed world may well result in theFijisugar farming and milling industry (and in otherThird Worldcountries) turning out to be relatively cheaper for the EU consumers (hence the EU advice for us to keep producing sugar?).

This may require a maintenance of output or even further expansion of our sugar industries, not a contraction as envisaged by reformers.

Whatever diversification policyFijicurrently attempts, should therefore keep in mind thatFijishould be ready to take advantage of this possibility, if it arises.  This preparedness is possible, as is suggested in the next article.

It must also be kept in mind that it is also in the interest of world trading blocks like the EU to maintain access to developing country markets and their raw materials.

The costs of preferential prices to the EU may well be less than the wider overall economic benefits of keeping links with developing economies.

The Two-tier Pricing System

One of the mechanisms of reform being suggested is the two-tier pricing system for cane.

Under this system, each contract farmer would receive a quota and higher cane price, related to the higher priced sugar sold to the EU; and receive another quota and a lower cane price for the other lower-priced sugar sold in the other markets.

Farmers who choose to continue to produce as currently, will receive exactly the same total income as they receive currently.

It is also argued, however, that some of the inefficient cane farmers will know that the lower price is not profitable enough, and will therefore, (for a pure profit) sell their lower price quota to the more efficient farmers, who will expand their production and achieve greater economies of scale.

The inefficient cane farmers will grow other cash crops instead of their quota of lower priced cane.

The cane growing industry will supposedly become more efficient, and the farming industry will benefit all round through.

What are the Likely Results?

There is no doubt that there will be some developments of the kind being envisaged by the reformers, but not without significant costs, given the current structure of theFijicane farming industry.

Firstly, those farmers being targeted for the sale of their quotas, are the small supposedly inefficient farmers producing cane on marginal cane lands.  A large proportion of these smallest farmers are indigenous Fijians.

It should be noted that the FNPF experience is that the largest proportion of those who choose the lump sum payment rather than the extremely lucrative pension, are indigenous Fijians, who are generally short on liquidity, while long on financial obligations.

It is therefore quite likely that the largest proportion of those selling their low priced quotas, will be indigenous Fijians.  This is hardly a desirable objective in an era when Government is trying to encourage indigenous Fijians into cash cropping agriculture.

There is also no guarantee that putting smaller farmers out of cane production will result in the more efficient farmers increasing their cane production.

Do the larger farmers have spare land in order to increase production?  Will they have access to the lands being taken out of cane production? Or will the small farmers simply subsist on their land, while enjoying the pure rental payment for their unused quotas, thereby resulting in lower total output of sugar cane and sugar receipts, and jeopardising of international sugar contracts?.

Is there also the possibility that if the lower quota price were set low enough and the higher quota price high enough, it might be the larger efficient farmers who take some of their land out of cane production?

Finally, is there any reasonable guarantee that any farmer leaving cane production will be able to diversify into something else? (This is dealt with in the next article).

Unity of Cane Farming Industry

From the outset, it must be forcefully emphasised that the elimination of thousands of small farmers from the industry is not particular desirable, given the nature of the industry and the overall lack of opportunities elsewhere.

Most World Bank textbook reformers (and sympathisers), even if they know colonial economic history, completely ignore the essential historical “cooperative unity” of industries such as sugar, copra, palm oil, etc.

Originally, CSR’s investments in sugar milling were based on the need to fulfil minimum sugar quotas which required certain minimum amounts of cane.

CSR found in the colonial era (as did FSC afterIndependence), that it was most profitable to use thousands of small cane farmers (and the unpaid labour of their families) to produce the required total amount of cane, rather than produce it themselves.

Historically, an integrated system of sugar contracts, Extension advisory work, cane harvesting, cane carting railway lines, and cane payments has evolved and still exists.

Cane farmers are not free to go to any miller of their choice; millers are not free to buy cane from their chosen farmers; cane farmers do not receive their money when they deliver their cane to the mill (as in a normal sale or purchase), but must wait until the entire sugar proceeds are determined and shared, and this also depends on the cane output of every other farmer, and the output of sugar and molasses by the miller.

Common sense indicates that the cane farming industry is not a “free market” for cane growers and millers.

Without the output of these thousands of small peasant cane farmers,Fijiwould not have been able to satisfy the sugar quotas, nor build what is now the most developed economy amongst the South Pacific islands.

Political leaders of the country have a moral responsibility to ensure that free market policies in sugar cane pricing do not take away the livelihoods of thousands of farmers and their families, without first putting in place viable alternatives (see next article).

What of World Bank Advice?

Political leaders need to keep in mind that while some World Bank advice may be useful to consider, their record throughout theThird World(and in some parts of the Pacific) on social concerns and wider development objectives, is not particularly good.

In their attachment to economic growth, the World Bank’s policies and projects in the developing world have often harmed millions of small cash and subsistence farmers, education and health systems, natural ecology and environment, and welfare of women.

Recent World Bank expressions of concern in these areas  still play second fiddle to growth objectives, and are easily ignored by countries eager for growth of income and jobs in the “modern” sectors of the economy.

The advice given by World Bank “Missions” usually comprises the current wisdom prevailing in the WB Head Quarters inWashington.

The WB Staff are unlikely, even if they had the time, to risk their enormous salaries and pensions (easily totalling $200,000 a year) by searching for locally suitable policies (which may be different from current World Bank policy) for every country they visit.

Certainly, World Bank advisers are not accountable: nowhere in theThird Worldhas any World Bank Mission been called back a decade later to account for their blunders.

Government politicians may not have this advantage, and therefore need to be extremely cautious of World Bank advice.

Conclusion

 

Some free market reforms are no doubt necessary and beneficial.  However, the current reform proposal, may pose severe disadvantages.

 

The two-tier pricing system, without complementary diversification policies, will probably eliminate thousands of small farmers (mostly indigenous Fijian), probably reduce total sugar cane and sugar output, possibly lower sugar earnings and native lease rents, and  increase rural unemployment and stress, and rural urban drift.

 

There is likely to be further worsening of urban squatter settlements, nutrition, and crime, and increased stresses for urban housing, education, and health.

 

The reformist view is that the adjustment mustbe made, and that these short-run costs are the medicines necessary for the long run recovery of the patient, i.e. the diversification of agriculture away from sugar.

 

However, there is surely a better way to go about it than playing “Russian Roulette” with rural people’s lives.

 

The next article suggests one possible way forward.

 

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