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Sugar industry reform: what diversification and how?” The Fiji Times,8 April 1995.

29/03/2012

Most economists would agree that there isa need for diversification into high value agricultural crops, grown with some economies of scale, exported in raw or preferably processed form to lucrative metropolitan markets, and resulting in higher net profits than sugar cane.

 

Some of this is already occurring to some extent with a handful of farmers.

 

However, the “reformers” do not explain how exactly diversification will occur throughout the sugar belt, nor why it has not occurred already, if the potential returns are so high.

 

On the contrary, there are a number of quite plausible reasons why diversification is notlikely to occur, because of very rational economic behaviour by the farmers, FSC and Government agencies.

 

The magic deregulation wand waved around by Government and academic free market economists is not by itself going to result in diversification of agriculture.

 

Why Have Not the Farmers Diversified already?

 

As some sugar industry spokesmen have already pointed out, if agricultural diversification could have occurred into more profitable crops and activities, it would already have occurred amongst the larger and better cane farmers.  Why have they not diversified?

 

Diversification on a scale envisaged to substantially replace sugar cane requires many essential links in a long chain: secure leases, considerable farming capital and credit, research and development of new commercial crops, sound agricultural technology and skills in crop selection, pesticide and fertiliser application, irrigation, a local and international marketing infrastructure, reasonably safe markets, and reasonably guaranteed prices.

 

We should remember that when the clever British imperialists, more than a century ago, wanted cheap guaranteed supplies of tropical products such as sugar, copra, bananas, cocoa, palm oil, etc., they very successfully set up precisely allthese links in the chain, leaving nothing to chance, “free markets” or individual entrepreneurs.

 

Millions of peasant subsistence farmers responded all over the world, clearing bush and growing these crops, on which was built a protected British industry and Empire, or in the case of Fiji, an extremely successful Australian company, CSR.

 

In Fiji, now, basically similar small uneducated farmers face many possible breaks in the chain if they want to diversify away from sugar cane: expiring leases, harsh or non-existent credit, lack of agronomy skills in new crops, risks from pests, absence of irrigation, absence of crop insurance, undeveloped marketing infrastructure, insecure overseas markets which disappear for years, if one fruit fly or larva is found by zealous overseas quarantine inspectors, and low farm-gate prices which generally are a fraction of the final price to the overseas consumer.

 

The end result of a break in any oneof these links would mean a disastrous drop in income, deeper debt, and for some, the possible loss of their only asset, their small blocks of land, and absolute poverty for the farmer and family.

 

It is not surprising, therefore, that the average small risk-averting cane farmer very rationally prefers his lower, but assured, income from sugar cane, rather than a possibly higher but risky income from a new crop.

 

Given that no-one in the world has the power to control climate and crop pests and diseases, agriculture is one economic activity for which totally free markets will lead to enormous swings in supply and prices.

 

Look at the Suva Market prices of cabbage when in season, when the price does not even pay for the transport costs, and farmers are forced to let their crops rot in the fields.

 

Farming communities in all developed countries have established market control mechanisms (marketing boards) and co-operative value adding activities (such as food processing factories) to minimise the damaging effects of free markets in agriculture, and maximise security and income to farmers.

 

Why is this not happening inFiji?

 

Why No Entrepreneur in Food Processing?

 

One easily understands why small cane farmers (or groups of them) are unlikely to diversify or invest in agricultural processing: they have difficulty in co-ordinating their own cane harvesting, let alone starting off complex business organisations and  ventures.

 

But why has not some company or institution got into the act in the cane belt, perhaps establishing an agro-based set of activities with raw commodity exports, processed exports (drying, freezing, canning, pickling., etc.)  Again, there are obvious explanations.

 

For internationally competitive food processing and exporting, there is need for large capital investment (if economies of scale are to be achieved) in the appropriate technology, guaranteed agricultural supplies of the desired crops, with the desired minimum levels of quality, in volumes sufficient to run factories and plant efficiently throughout the year.

 

There is no lack of money to be borrowed from banks.

 

What is missing are the private entrepreneurs who will risk their personal collateral, invest in the appropriate technology, organise hundreds or thousands of small unskilled farmers (with insecure leases) to guarantee adequate supplies of the crops, while fighting for markets against already established giant competitors in Australia, NZ, and US.

 

Neither will this be done by some bureaucrat from the Cane Growers Council, the National Farmers Union, or the Government Ministries.

 

If the staff of these entities had entrepreneurial urges and the skills to survive in competitive market environments, they would not remain for long in their current employment. They would already be in the private sector, running their own companies, and enjoying better incomes.

 

Why Not FSC?

 

There may be legitimate criticisms of FSC for not going adequately into sugar processing activities. (One wonders how sweet companies inFijisurvive despite having to buy FSC sugar at much higher than world market prices.

 

FSC if it wished to process its own sugar, could presumably buy sugar from itself at world market prices).

 

However, criticisms of FSC for not venturing into crop diversification or food processing in the cane belt, are probably not justified.

 

FSC shareholders require the best financial return for their capital, which is currently invested in a product with guaranteed markets and reasonable, even if not particularly high, returns.

 

In the absence of instructions from the owners, there can be no justification for FSC management to venture into new risky investments, where their own already constrained surpluses may be frittered away through forces beyond their control.

 

There are possibilities, however, in combined efforts from FSC, Fiji Cane Growers’ Council and Government.

 

Need for FSC, FCGC and Government Involvement

 

There is no doubt that together, FSC, the Fiji Cane Growers Council and Government, are in the best position to plan and implement diversification initiatives in the cane belt, which will not endanger already existingbenefits from the sugar industry.

 

FSC has an extensive Extension and transport infrastructure, a good pool of qualified industrial technologists, and experience of international marketing, all of which would be invaluable in any new agricultural export venture.

 

They also have a direct interest in ensuring that any agricultural development that takes place in the cane areas, while making use of their existing infrastructure, does not jeopardise their established interests in sugar cane processing.

 

The FCGC also has a developed organisation infrastructure and an interest in the canefarmers’ long-term welfare, whether based on the sugar industry or other economic activities.

 

The Fiji Government has an obvious interest, and ability to provide political support for international trade access, the necessary agricultural training and research at its educational and research institutions, and political assistance in the area of lease security.

 

An Independent Private Company

 

It would be extremely unwise, however, to set up another statutory organisation financed by public funds to develop initiatives in this area.

 

This would be a sure recipe for political interference, bureaucratic inefficiency, and eventual bankruptcy, with loss of public funds.

 

There would be no loss to the responsible individuals, who would continue to rise like the proverbial phoenix from the ashes, to be recycled in some other arm of Government or public enterprises.

 

What is needed is an independent private company, owned and managed by FSC, FCGC and private investors (perhaps a third each).

 

To ensure full commitment from all the parties, there has to be a real cost to them if the venture fails: the parties should invest their own capital, and have corresponding representation and voting powers on the company’s Board.

 

The company would employ personnel from the private sector with proven track records, who could also be given a shareholding stake in the new company, in lieu of bonuses, as an incentive to perform.

 

Through their involvement in the Management Board, the FSC and FCGC would be aware of the full implications of the development of the new initiatives.

 

With their assistance, such a company could plan effective and meaningful diversification ventures, with selected farmers, cane lands, crops, selected food processing initiatives, and export initiatives.

 

At the same time, they could keep in mind the needs of the existing sugar industry, as well as of the new ventures.

 

Conclusion

 

While the current markets for sugar may look reasonably stable and attractive, it would be unwise for the industry and sugar farmers to continue to depend totally on sugar revenues.

 

Diversification must begin to be investigated now, to ensure that farmers and FSC do have other options, ten years down the track, if sugar prices are not sufficient to make an acceptable living.

 

This diversification will not occur by individual farmers’ own actions, aided by the wave of some magic free market wand and two-tier sugar cane prices.

 

There has to be concerted intervention by Government, leading to the creation of a fully independent private agro-business company, with inputs from FSC, FCGC and Government, planning all the essential links in the agricultural chain, leading to reasonably guaranteed incomes for the farmers.

 

Without such an effort, there is unlikely to be any significant diversification, except for a very small number of unusually able farmers, who unfortunately, cannot make much difference, nationally.

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