Introduction
In an effort to encourage ACP countries to embrace the Sugar Protocol (SP) in the mid-1970s, European officials were at pains to stress that, when fixing the annual price for sugar, account would be taken to ensure a “reasonable rate of return for a reasonably efficient sugar enterprise, over the long run.” To be sure this was crucial if the privately- owned sugar companies operating in the ACP were to survive.
As I indicated last week, at that time the expectation was that, over the long-run, there would be intensified world commodity shortages as global supply would fail to keep pace with the growth of global demand. As matters turned out, however, except for brief interludes (for example 1980-81) world raw sugar prices were relatively low until recently, after the SP came to an end in 2009.
Value of income transfers
Several estimates have been made of the value of income transfers to Guyana as a result of the SP arrangement. As stated last week, these have been arrived at by multiplying the volume of sugar sales made under the SP by the prevailing difference between the price on the world market and that paid by the SP. For the convenience of readers, Table 1 below shows the estimates made by the IMF; these have the virtue of access to official data on prices and quantities exported:
Table 1: Estimated Income Transfers to Guyana:
Sugar Protocol
Period % of GDP (Approximate)
1990 8.5
2000-05 6.5
2008-09 2.75
Source: Based on IMF Estimates
As the data above show, on average during the 1990s up to 2005 when the SP was still in force, it afforded transfers equivalent to 7.5% of Guyana’s GDP. During this period, on average, Guyana’s SP annual quota was 160,000 tonnes of raw sugar. However, the income transfers shown would only yield a net gain for Guyana’s economy if GuySuCo did not waste these through mismanagement, corruption and inefficiency, which it did.
Denouncing the SP
It is a matter of historical record that the European Union Council notified the ACP sugar-supplying countries in 2009 that with effect from October 2009 it would “denounce” the SP. As an indefinite (treaty) arrangement the ACP countries could have legally challenged this and taken it to international arbitration. But none of them had the courage to do so as the EC had made it known it would retaliate. Accompanying this, the EC introduced a phased reduction in the import quota price paid under the SP. This fell annually from 523.7 euros per tonne of raw sugar in 2006 to 335 euros per tonne of raw sugar by October 2009.
This phased reduction was treated as part of a number of transitional arrangements, including an EU offer of financial support for ACP countries to diversify out of sugar or make their existing sugar enterprises more efficient in order to cope with lower, and henceforth more “market-based” arrangements for selling sugar in Europe.
For the period October 2009 to September 2010, a price floor was guaranteed for raw sugar sold by Guyana to the EC. If, however, the world price of raw sugar exceeded this price floor (or minimum reference price) Guyana was free to sell its sugar on world markets. As we shall note later, recently the world market price for raw sugar has been enjoying an unusual boom and GuySuCo has been, since the last quarter of 2009, taking advantage of this arrangement. It should be noted here that it still remains doubtful whether the guaranteed minimum reference price will be in place after 2012.
Under the Cariforum-EC, Economic Partnership Agreement (EPA) which came into force on October 2008, Guyana can sell sugar to the EC “duty free and quota free” (DFQF). There is a transitional safeguard mechanism in place for the first six years to protect Europe if a surge of exports to their markets causes serious disruption to the sugar supply-demand balance in European sweetener markets.
Three observations
Three observations are warranted at this point. The first is that as observed earlier the price of raw sugar on the world market has been enjoying an unusual boom since Q1, 2010. The data in support of this observation are shown in Table 2. From an annual average of 13.84 cents per lb in 2009, prices have nearly trebled by Q2, 2011 (at 38.56 cents per lb).
Second, it would be unrealistic to expect that this rise in sugar prices would not (as on previous occasions) be followed by a longer-term decline in world prices. One must caution against being lulled into the false belief that this time, if not before, commodities have made a breakthrough and that their prices will spectacularly rise in relation to the prices of manufactured and industrial goods, as well as services.
Third, I cannot pursue in any depth in this column the reason why the EC has sought to bring the Sugar Protocol arrangements to an end. I do, however, want readers to note that, in my view, the principal motivation for the changes it has introduced is to “reform” the sugar marketing regime in force in Europe over the previous decades. That regime was not market-based and ended up with Europe being simultaneously one of the world’s largest importers and exporters of sugar! The hope is that with the new regime, the market would determine the demand and supply of sugar. When, however examined in close detail there is a lot of hypocrisy in this approach of the EC.
Table 2: After the Sugar Protocol: World Price of Raw Sugar (2009-2011)
Price (US cents per lb)
2009 (annual average) 13.84
2010 (Q1 average) 25.86
(Q2 average) 20.23
(Q3 average) 26.57
(Q4 average) 35.45
2010 (annual average) 27.03
2011 (Q1 average) 34.78
(Q2 average) 38.56
2011 (semi-annual average) 36.67
After 12 weeks of analysis of the sugar industry, I intend over the next two or three weeks to provide my assessment of where the Guyana sugar industry stands today and outline a possible way forward. Regrettably, ‘business as usual‘ at GuySuCo means more hard times and wasted resources for Guyana.
