Issue link: http://read.uberflip.com/i/13901
FROM THE ASA by Phillip Hayes Thai-ed up in Subsidies When worldwide sugar prices started a meteoric climb last year, many traders were left scratching their heads. Before you knew it, sugar was the flavor of the day on cable financial programs, and instead of getting media calls about sugar consumption or trade policy, the American Sugar Alliance’s phones were lighting up with people looking for “get rich quick” tips. Most traders who spoke with ASA staff were told to take a deep breath. “Sugar is the world’s most dangerous commodity market,” said ASA Director of Economics and Policy Analysis Jack Roney. “It’s a thinly traded dump market and historically the most volatile of all,” he ex- plained. “Global subsidies and government policies are at the heart of it all.” In fact, about 80 percent of the sugar produced in the world is consumed in the country where it’s produced and never traded on this unpredictable market. Sure enough, world prices came crash- ing back down this year just like they inevitably do after quick run-ups. And that kind of volatility, Roney says, is why he’d never sink his retirement nest egg in the world sugar market. Over the past few decades, prices have fluctuated from 3 cents per pound to 70 cents per pound. Prices usually hover be- low worldwide production costs; so if you plan to ride that market, buckle up. And you might want to read up on glob- al sugar subsidies, recommends Roney. “There are 120 countries that produce sugar, and there are 120 governments that subsidize domestic sugar producers, or consumers, or both.” Unfortunately, these policies can change as quickly as the prices, and locating up-to-date, accurate information can be a www.SugarProducer.com 23 challenge. That’s because most developing countries favor less transparent subsidies such as government-backed no-interest loans, price fixing, or government-run marketing bodies. Roney used Thailand, the world’s second biggest sugar exporter, to help drive home this point. The Thai sugar industry is highly regulated and govern- ment controlled through the Thai Office of the Cane and Sugar Board. The country’s sugar policy regulates domestic and export marketing, domestic sugar prices, and the distribution of revenue between sugarcane growers and millers. Throughout the years, no-interest loans that largely went unpaid; subsidies to help growers offset input costs; favorable financing for exporters; and restrictive licensing schemes to block foreign com- petition have supplemented the program. The industry has been so propped up by government aid that in May, the govern- ment announced its intention to allow the industry to expand production by 20 per- cent and increase exports. This announce- ment of the construction of 12 new mills sent U.S. officials scrambling for answers. Just how much government aid will be involved in the expansion is still unknown, but announcements like this certainly keep world prices moving. “It’s exactly this kind of volatility and uncertainty that scares consumers,” Roney said. “Food manufacturers want a stable, reliable supply of affordable sugar, and that’s where U.S. sugar policy comes in.” U.S. sugar policy ensures that America— which is already the world’s second-largest sugar importer—doesn’t get flooded with a glut of unneeded, subsidized sugar from places like Thailand. That’s important because if oversupplies put U.S. producers out of business, then America would be particularly vulnerable when worldwide supplies again dry up. “This policy makes sure the domestic sugar industry here in America doesn’t get run over by foreign treasuries,” Roney concluded. “But unlike many other coun- tries’ policies, ours doesn’t cost taxpayers anything.” n