Sugar or Ethanol?
1
The global sugar trading industry is becoming very fragile. With the rise in oil
prices and the production of sugar increasing steadily, many Least Developed Countries
(LCD’s) are starting to feel the effects of the sugar pinch. As more countries produce and
export sugar at consistently higher rates than the year before, the price of sugar in other
regions such as United States and Europe, which already have a large enough a crop, is
beginning to drop. This price hack creates a situation where countries are forced to
decide, whether it is it better to buy outside products at a cheaper price, or have their own
farmers lower their prices and risk getting forced out of business. This decision is
ultimately going to lead to failure either way. Either the LCD’s loose their exporting
industry or the hometown farmers loose their profits and are forced to close their farms
due the lack of capital required to maintain their land. Through my report I hope to shed
some light on the issues of tariff – rate quotas (TRQ’s) and ethanol production as a way
for a nation to sustain GDP while building their GNP at the same time.
Many of the leading countries in sugar imports and exports are instigating sugar
trade policies. The goal is to try and combat the over production of sugar and the take
over their own markets from other countries. The United States Department of
Agriculture reports that “the US imports sugar under a system of tariff-rate quotas
(TRQ).” A TRQ is a two-tiered tariff for which the tariff rate charged depends on the
volume of imports.” They have also learned how to capitalize on their imports through
the Sugar re-export programs. The first, “The Refined Sugar Re-Export Program,”
establishes a license against which a refiner can import world-priced sugar for refining
and export as refined sugar or for sale to licensed manufacturers of sugar-containing
products”. The second, “”The Sugar-Containing Products Re-Export Program,” allows
2
U.S. participants to buy sugar from any of the refiner participants for use in products that
will be exported onto the world market. Both countries benefit from these programs; the
seller doesn’t have to pay a tariff on the amount of product being sold; the US is able to
resell the finished product on the global market once they have refined the sugar.
Part of Europe’s policy on sugar programs is starting right at home. They are
attempting to lower the amount of sugar being used for consumption by offering
subsidies and tax exemptions for producers and users of ethanol. Through these incentive
farmers will still be able to produce sugar for consumption but they will be encouraged to
set aside a certain percentage of productions for materials to be used for the production of
ethanol. This program helps the European Union in more ways than one. It will play a
large role in lowering the world’s supply of sugar and by lowering the cost of sugar so
much, many farmers may be forced out of business. They will also gain the knowledge
of ethanol production, and become less dependent on other nations for energy. James
Kanter of the International Herald Tribune states that Europe is also trying to ban the use
of “bio-fuels from crops grown on some kinds of land covered in forest, wetlands and
grasslands, because they believe they will do more harm than good in fighting the
world’s climate change.”
The process of converting sugarcane to ethanol to limit the dependency of oil has
been around since the 1970’s oil crisis. Brazil, the world’s largest and most efficient
producer and exporter of sugar (raw and refined) and ethanol, uses fifty percent of their
sugarcane to produce ethanol, accounting for fifty two percent of the world’s ethanol
market. The International Food Policy Research Institute reports that Brazil has
remained atop the ethanol market because after the 1970’s crisis, Brazilians continued to
3
produce ethanol because it was promoted by price controls and favorable taxes. Even
though in the 1990’s sugar cane, ethanol, and gasoline prices became independent of
government control, the government is involved in promoting ethanol through regulating
the ethanol/gasoline mixes at the pump. Today nearly all cars in Brazil run on an
ethanol/gasoline mix and new flex cars can run on both. See figure 1 below.
Figure 1
In an attempt to learn from Brazil, India the second largest exporter of sugar in the
world is planning to allow production of ethanol from sugarcane juice. This will cut the
inventory of sugar and compensate for the loss due to the supply exceeding the demand.
Biopact (a nonprofit organization specializing in the production of bio-fuels and bioenergy) argues that “this will make the production of bio-fuels more affordable.” The
main reason for India’s ethanol push is because they feel that with the world’s supply of
sugar being at the level it is now, they are no “guaranteed buyers” but with ethanol there
are guaranteed buyers. Madan Bhosale, chairman of a co-operative sugar mill, points out
that India’s stock of sugar may “remaining unsold for next two to three years.” There are
4
also many financial benefits to the producing of ethanol. Deepak Desai, chief consultant
with Ethanol India, reports that mills pay 500-700 rupees (€9.18 - 12.86 / US $12.28 17.19) to produce one ton of sugar, while the cost to produce one liter of ethanol is just
twenty rupees (Biopact).
The challenges facing the sugar industry are similar to other industries that are
highly regulated and are slow to liberalize. If sugar prices are too high then the producer
is uncompetitive; however, if it is too low, sugar farmers and producers will not be able
to make a profit. Efficient countries or countries with low labor costs will fare better
with low-cost sugar because they will still be able to make a profit. If there were no
quotas or tariffs, sugar producers in Europe and the U.S. could go out of business with a
flood of cheap sugar into their market. But sugar is major crop for developing countries,
whose GDP rely much more on agriculture than other industries. European and American
tariffs hurt farmers in developing countries who cannot compete. In the past, the U.S. has
bought-out industries (such as peanuts) if they were uncompetitive. Europe has already
begun to offer incentives to its farmers to decrease sugar production or shift into ethanol
production. As the price of gasoline continues to rise, with no end in sight, ethanol may
prove to be the silver lining to help sugar producers around the world.
5
Works Cited
Biopact Towards a Green Energy Pact Between Europe and Africa, “Switch to ethanol
can alleviate sugar crisis in India.” June 9th 2007
http://biopact.com/2007/06/switch-to-ethanol-can-alleviate-sugar.html
Christophe, Jean, and Alex Gohin, Loic Guinde, and Guy Millet. “EU Sugar Reforms and
their Impacts.” International Food Policy Research Institute. June 1st, 2007.
http://www.ifpri.org/events/conferences/2007/20070601sugar/Bureau_etal.pdf
Kanter, James. “EU considers banning the import of certain fuel crops.” International
Herald Tribune. January 14th, 2008.
http://www.iht.com/bin/printfriendly.php?id=9208073
Sandrey, Ron and Nick Vink. “Future Prospects for African Sugar: Sweet or Sour.”
International Food Policy Research Institute. June 1st, 2007.
http://www.ifpri.org/events/conferences/2007/20070601sugar/SandreyVink.pdf
U.S. Department of Agriculture. “Sugar Briefing.” U.S. Department of Agriculture.
http://www.ers.usda.gov/Briefing/Sugar/Trade.htm
Photo Cited
Graph; “Ethanol Demand Driving the Expansion of Brazil’s Sugar Industry.”
http://www.ers.usda.gov/Briefing/Sugar/sugarpdf/EthanolDemandSSS249.pdf
Sugar cube; Uwe Hermann, http://www.flickr.com/photos/uwehermann/132244825/
6