Bittersweet proposal

Bittersweet proposal

Cane farmers gird for the end of government subsidies and floating the retail price, but nobody knows when deregulation will occur.

A farmer trims leaves of sugar cane at a plantation in Suphan Buri province. Cane farmers are about to see the end of government subsidies and price supports, but without the promised deregulation supposed to go with it. (Photo by Jiraporn Kuhakan)
A farmer trims leaves of sugar cane at a plantation in Suphan Buri province. Cane farmers are about to see the end of government subsidies and price supports, but without the promised deregulation supposed to go with it. (Photo by Jiraporn Kuhakan)

After spending about a year reforming the sugar system to free up the industry by the deadline of Dec 1, Thailand is unlikely to liberalise its sugar industry on time and is expected to leave the manufacturing and trading system to be regulated by the status quo that has been used for more than three decades.

Even if Thailand could finally liberalise its sugar system next year, it would still be forced to leave some mechanisms unchanged to continue indirectly subsidising sugar farmers.

That would pressure the government to seek another support measure for farmers at a time when global sugar prices are expected to be weighed down by a surplus this year, said industry officials.

Thailand, the world's second-largest sugar exporter, is committed to overhauling its sugar production and distribution system after being accused in the World Trade Organisation (WTO) by Brazil, the biggest sugar exporter, of subsidising sugar prices and making sugar from other origins to be uncompetitive in the global market.

This is not the first time Brazil has challenged a country over sugar subsidies. Brazil won a landmark case against the EU in 2004 that triggered a complete overhaul of the bloc's policies for sugar production, which had long-lasting implications for the global market.

To comply with the WTO regulation, Thailand is scheduled to deregulate its sugar system by next month. This includes revoking the fixed retail price, which is controlled by the Commerce Ministry to keep the domestic retail price steady to curb inflation.

"We are working on it and there are several legislative procedures to work out," said Warawan Chitaroon, deputy director-general of the Office of the Cane and Sugar Board (OCSB), which oversees Thailand's sugar industry.

To overhaul its sugar system, Thailand needs to amend five sugar-related laws and regulations under the Cane and Sugar Act of 1984 to revoke Quota A, which is a quota set aside for domestic consumption. This is meant to free up the domestic retail price.

"If it takes longer than expected to amend the laws, we still have regulations for the incoming sugar-crushing season," said Ms Warawan, declining to say whether the industry would be liberalised on time.

Sugar traders, millers, and industry officials also expect delays in the reform process and project Thailand to continue sugar-crushing and trading in the current 2017/18 season using existing regulations.

"If the new rules have not yet been officially approved, we have to use the existing ones as the sugar cane is completely matured and we need to harvest it and start the crushing process," said Sirivuth Siamphakdee, chairman of the Thai Sugar Millers Corporation.

SUPPLY GLUT

Thailand is scheduled to start its 2017/18 sugar-crushing season in the first week of December. The country is forecast to produce 11-12 million tonnes of sugar from around 105 million tonnes of sugar cane.

That is 10% higher than the 2016/17 crushing season, making for another year of abundant output.

Of the total, 2.6 million tonnes has been set aside for domestic consumption, with the rest earmarked for export.

Rising supply from Thailand will add pressure on sugar prices as the global supply is forecast to outpace demand.

The International Sugar Organisation (ISO) has forecast a global sugar surplus of 4.6 million tonnes in the 2017/18 crop compared with a deficit of 3.9 million the prior season.

The inter-governmental body said in a quarterly report global sugar production is expected to climb by nearly 7% to a record of 179.3 million tonnes. Higher production in India, the EU, Thailand and China has helped drive rising output, the ISO said.

That matches the forecast of Tris Rating, which expects global sugar production for the 2017/18 season to increase sharply to 179.6 million tonnes.

Traders and millers seem happy with the new deregulation as it will free up retail prices after being fixed for more than three decades.

FLOATING PRICE

Traders and industry officials say a floating retail price should help cut the subsidy imposed on local sugar prices and should allow Thai consumers to buy Thai sugar at a realistic price.

Thai consumers are forced to buy sugar at above-market prices because the government added a five-baht per kilogramme subsidy to the domestic retail price in 2009. The subsidy is collected by the Cane and Sugar Fund, which pays a subsidy to farmers to help offset their lower earnings in years when the global sugar price slumps.

With the five-baht subsidy, the domestic retail price is fixed at 23.5 baht per kg.

The fixed retail price has sometimes caused sugar supply to tighten in the country as a certain amount of sugar is smuggled for sale in neighbouring countries. This happens when the global sugar price exceeds the fixed domestic price.

"It should be better for Thailand to float the retail price, following the global market as there will be no smuggling because the prices would be similar," said one trader who asked for anonymity.

The OCSB said the new retail price should be calculated from the benchmark London consumer-grade white sugar futures, which sets the global price standard, and the Thai sugar premium rate, while abandoning the five-baht subsidy.

Adding packaging and logistics costs, the retail sugar price should be around 20 baht per kg, said senior government and industry officials.

Shoppers grab multi-kilo bags of subsidised sugar at a far held by the Internal Trade Department. (Photo by Somchai Poomlard)

The Commerce Ministry will calculate the retail price and announce it to the public every month once the price floats.

The one party not pleased with deregulation is sugar farmers, who are projected to earn less and may ask for another type of government subsidy.

FARMERS' EARNINGS

The current system is 70:30 profit-sharing, where 70% of total sugar revenue made each year goes to farmers, with the remaining 30% allotted to millers.

Under this system, farmers are paid immediately by millers the "initial cane price" when they harvest the cane and deliver it to millers during the start of the season, which normally begins in November. This initial cane price is aimed at securing farmers earnings before any sugar is produced as this takes a long time.

The initial cane price is calculated from the global sugar price of a harvest season, which might not reflect the real global sugar price for the whole year as the price swings all the time.

The system then requires millers pay farmers again at the end of the harvest season if the global sugar price exceeds the initial cane price. This second payment happens at the end of season, normally in October.

If the global sugar price at the end of the harvest season is lower than the initial cane price paid to farmers, the growers do not have to pay back the difference in price to millers, as the Cane and Sugar Fund is liable for such payment.

For this 2017/18 crop season, farmers have been paid an initial cane price of 880 baht a tonne, slightly lower than the previous season at 960 baht.

But with a current supply glut in global sugar, the global sugar price at the end of the season in October next year will be lower than the initial cane price, which means the Cane and Sugar Fund will be expected to pay again.

This is the key reason farmers want the Cane and Sugar Fund to remain no matter what the new regulations state as farmers are adamant they still want a price subsidy regardless of deregulation.

"The government can liberalise the sugar system, but the Cane and Sugar Fund needs to exist and the government should figure out a plan to put money into it to support farmers," said Theerachai Sankaew, head of the Northeastern Cane Growers' Association.

He said there are millions of farmers relying on the sugar price and government subsidies. Millers benefit from the sugar cane the farmers have grown, said Mr Theerachai.

The Cane and Sugar Fund has outstanding debt of around 9 billion baht borrowed from the Bank of Agriculture and Agricultural Cooperatives and Krungthai Bank to pay farmers over the past several years.

The government has set aside around 450 million baht a year to pay for the fund's debt. It is unclear how or whether the government would maintain the existing fund and its liquidity.

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