The common perception is that Brazil achieved its international sugar market dominance through a lucky mix of natural resources and sweat equity. Well, time to reconsider that perception with the release of a new report that looks at Brazilian government subsidies – both direct and indirect – that the nation’s sugar industry enjoys.
“Sugar is the most distorted commodity market in the world because of subsidies and other policies that manipulate the market,” said Jack Roney, policy director for the American Sugar Alliance, which commissioned the report. “In fact, every country that produces sugar – more than 100 in total – has some form of government intervention.
“The United States has long advocated for a world sugar market free of subsidies. Because of our efficiency, U.S. producers would thrive under a free market approach. That’s why we push for a ‘zero for zero’ strategy in the WTO, where we’d get rid of U.S. sugar policy if other countries would agree to get rid of all market-distorting policies.
“Before we can get to that point, it’s important to know what these global policies are. This can be a challenge because most countries have a myriad of nontransparent policies and poor data reporting.”
Read the report here.
Brazil currently controls, roughly, 50 percent of global sugar exports. To put that into perspective, Saudi Arabia controls about 19 percent of the crude oil exports, said Roney, who spoke during an April 17 press conference.
“Understanding global sugar subsidies is particularly important as Congress debates (a new) farm bill and the future of U.S. sugar policy. Some are urging to gut U.S. sugar policy, essentially disarming unilaterally and outsourcing our market and sugar jobs to Brazil and other subsidized foreign players.”
Report author Patrick Chatenay, a UK-based sugar and ethanol expert with ProSunergy,said in the United States, as in Europe and elsewhere, “many see Brazil as a free market player that became an agricultural powerhouse thanks mainly favorable natural resources and shrewd private operators. Brazil itself has actively promoted this view and used it to demand that other countries open up trade to its agricultural exports, including sugar.
“That view isn’t entirely correct – and certainly not for sugar. Brazil’s sugar industry owes most of its growth and immense influence to years of strong government intervention which continues to this day.”
Even conservative estimates, said Chatenay, show Brazilian sugar producers receive no less than $2.5 billion annually in direct and indirect government programs. “These subsidies include direct payments, alleviation of pension taxes, usage mandates, lower tax rates, special interest rates on government loans and on tax liabilities. Actual subsidies could be much higher than $2.5 billion because they are unreported debt restructuring and tax write-offs. All told, Brazil would need at least a 15 percent increase in the sugar price to compensate for losing those subsidies.”
Effect on prices
Because of Brazil’s sugar market dominance, its subsidies “certainly have an effect on international prices,” said Chatenay. “The world sugar world price is essentially a ‘dump’ price that should never be used as a yardstick to measure what benefits or costs may accrue from true free trade.”
Considering all that, Chatenay cautioned the United States against “outsourcing its sugar production to subsidize foreign producers like Brazil.”
The report will now be sent to Capitol Hill, the USDA and to the U.S. Trade Representative (USTR) to ensure all are “aware of the extent to which foreign subsidies distort the world sugar market,” said Roney. “The U.S. farmers aren’t operating on a level playing field. Our cost of production is below the world average but we can’t compete with foreign government subsidies.”
At the same time, reports are that Agriculture Secretary Tom Vilsack is considering buying U.S. sugar to help with depressed prices.
Roney said Vilsack is “looking at a number of options to deal with the fact that U.S. sugar prices have dropped more than 50 percent in the last two years.
“We’re not clear – and I don’t believe (Vilsack) is clear yet – on what actions he’ll take, if any. But they are monitoring the situation and are aware that prices are at historically low levels. They’re aware that the 2008 farm bill gives them a number of tools to deal with the price disaster we’re facing.”
While he stepped right up to the line, Roney would not commit on whether the Brazilian sugar subsidies are against WTO rules. “We’ve had many conversations with USTR over the years about (this). We’ve supplied USTR with information in the past. … This is the most in-depth look we’ve had at any one country. And Brazil merits that look because it has such a dominate role in the world sugar market.
“We’ll leave it to USTR to decide which of these subsidies violate WTO rules. That’s more their area than ours.”
Chatenay added that the legal framework at WTO, “doesn’t necessarily capture all grants and subsidies and help and support that are given by governments. There are strict definitions. From a company point of view, from a business point of view, all support plays a role.”
Since 1995/1997, Brazil has presented itself in sugar terms as a perfect free trader having built its competitiveness on free market principles, said Chatenay. “That’s the image they project and some people have doubted that.
“But this study brings into perspective is the fact that there are two elements that are often forgotten. One is the history of the industry. You have to go back to 1972 to see how government support really built the whole thing on ethanol. Second, ethanol is half the industry and that means it is half the sugarcane and practically half the mills. In a capital intensive industry the economies of scale play a great role. If you’ve doubled your size thanks to government intervention, you’re gaining an advantage on all your products.”
The study “shows that more clearly than what people usually have in mind,” Chatenay continued. “There is a ‘hidden’ part of the industry, which is ethanol and basically domestic. That ‘hidden’ part of the industry impacts considerably the competitiveness of the (sugar) side. … The study shows that well and may change the feeling people have towards Brazil when it claims to be a free trade players and on that basis asks other nations to open their borders.”