The World Market for Sugar

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Sugar is produced in 110 countries in the world and consumed in all of them. Most sugar is produced and consumed in the same country; only about 25% is traded internationally, and much of that increasingly within regional trade blocs.

World sugar prices, that is, those quoted on international futures markets, are characterized by two basic features: volatility and levels far below average costs of production. These two features are as one would expect given the residual nature of the international market.

It is therefore important to recognize that world market sugar prices are not an appropriate benchmark for determining a politically or economically "fair" price for sugar, these prices represent the market only for residual production and/or residual demand.

World market prices reflect a very narrow base of supply. The top ten exporters account for over 75% of world exports, and the top four exporters over 50%. With some exceptions, few of the major participants on the world market rely on world market receipts as a significant component of total earnings, and few of them sell on their domestic markets at levels close to the world market price.

Given the particular nature of sugar production (e.g. ratoon crop cycles) and the trade (e.g. logistics and finance), it is rational for an 'average' sugar producer to aim to produce a little more than is required to satisfy their domestic market, say 10% or 20% more as an insurance against a poor harvest. It is this "marginal" sugar production which mostly finds its way onto the world market, and it is more often than not purchased by private buyers in a limited number of less developed countries who are solely motivated by the potential for an immediate trading profit. This structure not only adds to volatility, but it also tends to force producers to hold all the stocks, which tends to depress world market prices further as they attempt to relieve the burden by over-exporting when prices are low.

Today it is evident that non-sugar factors are exerting an influence on world market sugar prices often in excess of and divorced from considerations of supply and demand. In turn, this affects not only outright price levels, but also the real value of exporters' earnings.

Two issues predominate:

Speculator activity: The influence of speculative funds on world market sugar futures prices has increased to the point of largely dominating short and medium term price movements. The presence of these funds benefits the sugar futures markets by adding to liquidity, however, at the same time, the funds greatly increase volatility and the extremes of price movement, and worse, their presence tends to divorce world market prices from fundamental reality. The invesment funds typically make trading decisions based on complex mathematical analyses of price data ("technical analysis") which quite deliberately ignores the fundamentals of supply and demand of sugar, and thus tends to distort actual supply and demand of world market sugar.
Currency and interest rate factors: World market sugar trades in United States dollars, whereas most imput costs are incurred in local currencies. Consequently, any assessment of the true economic value of export receipts is meaningless unless exchange rate factors are included. The recent devaluation of the Brazilian real illustrates the point rather clearly. When the Real began to falter in January 1999, the value of raw sugar on the New York sugar futures market was around 8.50¢ per pound for May delivery. By March, the sugar futures price had collapsed to below 6.00¢ per pound, however, the Real had devalued by around 60%. When the benefit of the devaluation is accounted for, receipts in local currency terms for a Brazilian exporter have increased between January and March 1999 to the equivalent of 9.00¢ a pound. Compounding the currency factor are high interest rates and low receipts for the alternative product of cane alcohol for motor fuel. Thus it becomes easier to understand why Brazilian sugar exporters are, firstly, keen to export as they producer and, secondly, may actually expand production for export even at today's ostensibly ruinous world market prices.

It is therefore economically irrational for policy-makers to seek to align EU and ACP sugar prices with prices for world market sugar.

Nevertheless, it is this irrational method which is used by the OECD to calculate its "producer subsidy equivalent", and by the WTO for use as a measuring tool to measure the cuts in agricultural support levels agreed as part of the Uruguay Round. In the case of sugar, world market prices are a wholly inappropriate benchmark, and if these prices are used as a benchmark in the forthcoming "Millennium Round" of WTO negotiations, this will severely damage the world sugar economy. It may be justifiable to use average production costs adjusted for currency and interest rate factors and differing levels of social and environmental protection.