Un-Thai-ing The Global Sugar Subsidy Mess

June 4, 2015

The futures contract for raw sugar is mathematically the most volatile commodity market in the world.

Over the past 40 years, prices on the world market have moved between 3 cents per pound and 57 cents. And in the last four years alone, prices have fallen from 32 cents per pound to less than 12 cents.

Jack Roney, an economist with the American Sugar Alliance, explained the reason for the volatility and why prices have dropped by more than half in written testimony submitted to the House Agriculture Committee.

    Foreign governments subsidize their producers so egregiously that many of these countries produce far more sugar than they can consume. Rather than store these surpluses, or close mills and reduce production and jobs, which would harm their industry, these countries dump their sugar on the world market for whatever price it will bring, which threatens to harm our industry.

    As a result of these dumped surpluses, the so-called “world price” for sugar has been rendered essentially meaningless. Rarely in the past few decades has the world price reflected the actual cost of producing sugar – a minimal criterion for a meaningful market price.

The biggest exporters and subsidizers of sugar, Roney explained, are Brazil, India, and Thailand. Brazil’s supports have been well chronicled in past research, and mounds of press clippings have documented India’s rapid increase in subsidies.

But the other big culprit, Thailand, has largely escaped criticism…until now.

Brazil’s sugar industry is urging its government to pursue a case against Thai sugar in the World Trade Organization. And a new study commissioned by U.S. sugar producers sheds light on the intricate web of Thai subsidies.

That study, which was conducted by Antoine Meriot and released on June 3, details how Thailand has used at least $1.3 billion in annual subsidies to expand its sugar production at a time when prices are so low.

Meriot, a French agricultural economist who traveled to Thailand to examine its industry and sugar policies, notes that Thailand is less efficient than other sugar exporters and is hampered by excess mill capacity and adverse weather conditions. Yet, the country’s sugar exports climbed 70% from 2011 to 2014 and are projected to grow another 50% over the next five years.

“How, then, was the Thai sugar industry able to achieve such a production gain while world sugar prices were falling?” he wrote. “The answer is government intervention. The Thai government has been closely involved with the Thai sugar industry for decades, and has taken major steps to expand Thai sugar production and exports, regardless of world market pricing and needs.”

Thailand’s sugar policy is patterned after the old European Union quota system, which was declared illegal by the World Trade Organization (WTO) in 2005.

The country’s price pooling system acts as an indirect export subsidy, which boosts subsidies when prices decline and totaled about $775 million in 2014.

And there are other subsidies, including up to $525 million in direct payments a year to growers when prices fall; preferential government loans; subsidies to offset input costs; government control over prices and marketing and planting decisions; ethanol subsidies; and tariffs to block imports.

Meriot further explains that the Thai government is currently working to entice rice farmers to switch to sugarcane, which will further add to the glut.

Farm Policy Facts first reported on the interesting dynamic between Thai rice and sugar last October. Meriot summarized the situation this way:

    Previously the Thai government had encouraged rice production expansion, and the government massively stockpiled rice, in hopes of exporting their surplus onto a rising world market. However, world rice prices did not rise as the Thais had hoped, and the government is seeking to address the rice surplus problem by diverting rice land to sugarcane.

So what’s the path forward?

Roney told the House Agriculture Committee that U.S. producers are backing the equivalent of a global subsidy cease-fire. Under this Zero-for-Zero sugar policy, America will roll back U.S. sugar policy if other countries will eliminate their subsidies and let a true free market form – where the world price for sugar reflects the cost of producing it.

“The U.S. sugar industry supports elimination of all these subsidies, multilaterally,” he concluded. “We cannot, however, endorse efforts to modify U.S. sugar policy without any foreign concessions. This would amount to unilateral disarmament and the sacrifice of American jobs in favor of foreign countries where governments continue to subsidize.”