Beyond the shortage

President Junior should go beyond the current sugar shortage and fix an industry that has resisted fixing for decades. Otherwise, Junior will spend his entire term firefighting the industry’s troubles.

Although it may be anathema to the sugar barons to think in terms of deregulating the industry, it is something they really have to seriously consider. Otherwise, the industry remains uncompetitive and domestic supply shortages will happen yearly.

If they keep up with this protectionist mindset, the local sugar industry will always have to sell way higher than in other countries. It encourages smuggling. And it is not fair to make the Pinoy consumer forever pay the cost of their inefficiency.

An important reform measure recommended by a NEDA commissioned study of the industry called for the adoption of a unified quedan that makes no distinction between domestic and export sugar. With the domestic sugar price now more than what the US market will pay, there is no more reason for the current system.

How does this system work? Every year before the milling season, the Sugar Regulatory Administration (SRA) will say X percent (usually five to eight percent) of all production will be allocated for US exports (A quedan) or world exports (D quedan). This is imposed on all Philippine producers (planters and millers). So, then X percent of all sugar is allocated for exports as it is produced and weighed in the mills.

Many producers export or sell the quedans to traders who then export the sugar. But this export program was challenged in court in 2017 on the grounds that the country is already short, with annual net imports always greater than exports. Furthermore, producers lose because the export price is always lower than domestic.

Central Azucarera de Bais and Central Azucarera de San Antonio wrote to President Junior last July 4 complaining that SRA rejected their request to convert their stock set aside for export to domestic use. They have been requesting this conversion since 2017.

They have not exported their sugar all these years, merely keeping the equivalent stock in their bodega. They have been given offers to export, but that would be at a huge loss compared to what they can get in the domestic market.

Bais and San Antonio are only talking of about 9,000 MT so that even if they were allowed to convert to domestic, the remaining shortage will still be huge this year.

Here is the arithmetic: Philippine average production is about two million MT (last season was very low at 1.8 MMT). Our average consumption estimates range from 2.3 MMT to 2.5 MMT if smuggling is included.

On average, there was an annual supply shortage of approximately 384,000 MT of refined sugar from 2013 to 2021. Of this supply deficit, we imported, on average, 359,000 MT from 2013 to 2021. This means we should never export.

Sugar industry sources say that “if estimated properly, SRA could calibrate future imports in tranches during the off-season or lean months to support producers’ selling prices and at the same time give consumers price stability and sugar availability year-round... Rather than deny a shortage then import 300k MT all at once and shock the whole country.”

Who is allowed to import to cover shortfalls?

Sometimes only the traders, sometimes a mix of traders and industrials can apply to import. Sometimes the producers are given the rights/certificates to import, which then act as tradable instruments that they can then sell to traders.

Of course, the scuttlebutt in the industry is that the SRA has its favorite importers getting the bulk of the import volume.

So, I asked my sources if the planters and millers are amenable to the NEDA study proposal to remove the classification so all production can go to the domestic market, with export allowed only when there is a surplus.

Yes, I am told. Planters and millers are now increasingly agreeable to the 100 percent domestic idea. If this is so, President Junior should take advantage of this sentiment and end the problematic segregation of produce for export and domestic use.

This is how it should be. We should end this attachment to the US sugar quota. It has outlived its usefulness.

Then, without the US quota, our local industry can plan to stand up on its own hind legs so to speak and start making the industry competitive by investing in modernization at the farms and at the mills.

My industry source recalls that “up until the 1980s and 1990s, the US export market was highly profitable for Philippine producers. Now it is just a tool to create a larger need for imports where the traders make most of the profit.”

It is difficult for the ordinary citizen to imagine metric tons so he explained in more ordinary terms: “Generally speaking in ‘normal’ times, export prices are 1,200 per bag. Domestic prices are 1,600 per bag. Landed Thai sugar imports are 1,100 per bag.”

Something still doesn’t add up for me. Why is the SRA insisting on a quedan for export when we have shown no capability in exporting for many years now?

Is it possible that local planters and mills are forced to set aside stock for export so that the numbers will show a bigger shortfall and create a need for bigger import volumes?

If they export to the US, the poor producers and millers suffer a big loss compared with selling domestic. Meanwhile, to fill the supply gap, favored traders import really low-cost sugar from Thailand and sell to all of us at our atrociously high domestic market prices. The unholy profits are made by folks with no blood, sweat, and tears invested in the farming and milling of sugar. The only capital of these traders is connections.

President Junior should reform the system right away. With the unfairness of SRA quedan rules gone, the industry will feel they can invest in modernization that will make our sugar production competitive in the region.

Junior must look beyond fire-fighting this supply crisis. Junior can politically insulate himself by removing the distinction between export and domestic sugar. Why are we so afraid of letting market forces regulate how stakeholders behave?

Boo Chanco’s email address is bchanco@gmail.com. Follow him on Twitter @boochanco.