Introduction

I have been asked today to make a presentation on the Future Trends in World Sugar Consumption and Impact on Food Security. My presentation will be in 3 parts. Firstly, I will provide you with FAO's quantitative outlook on demand. Secondly, I will highlight some of the implication of the consumption trends on food security, and finally round off the presentation with some concluding remarks.

Quantitative Outlook

Methodology

The FAO world sugar model was used for generating supply and demand projections in the medium term to 2005. Trade policy developments were factored in to assist in examining their potential effects in different parts of the world. By far the most notable aspects of recent sugar policy changes concern the commitments made in the Uruguay Round Agreements (URA) in terms of reduction of domestic support, reduction of export subsidies, commitments on minimum market access for imports and tariffication. These features of policy change are taken into account in this presentation. The model used was a multi-region, non-spatial equilibrium model, consisting of production, consumption and stock demand equations for each country/region. Throughout, quantities of sugar produced, consumed and stocked, and hence traded, are expressed in raw sugar equivalent. Sugar cane and beet were combined where necessary into one supply response relationship. Demand for sugar was derived from final uses of sugar, both direct and indirect. The stock equations reflected combined public and private stockholding behaviour. Net trade (exports less imports) is determined by the usual identity. Domestic prices are incorporated (with other variables) in the supply, demand and inventory equations, and further equations link the border or world price and the domestic price by means of ad valorem tariffs. Finally, the model was closed by resort to the usual market clearing condition that the sum of all net trade across countries/regions equals zero.

Production

The analysis would not be complete if a discussion on supply was not presented, to place things in perspective. Therefore, before touching on consumption, it would be useful to briefly present projected production.

As expected from market clearing models of commodity markets, sugar production at the global level is projected to keep pace with consumption, allowing for stock changes, to reach 137.7 million tonnes by 2005. The growth rate of 1.9 percent p.a., would somewhat exceed the average growth rate of 1.6 percent obtained in the 1980s. The global situation, however, obscures some major regional and national changes. In aggregate, the developing countries are projected to account for virtually all of the global increase in sugar production, thus raising their share of world production from 63 percent in 1993-95 to about 70 percent by the year 2005. Regionally, Latin America and the Caribbean was expected to play the leading role in raising output, accounting for over 13 million tonnes of the total increase of nearly 25 million tonnes projected for the developing countries during 1993-95 to 2005. Most of the remaining additional output in these countries is projected to originate in the Far East, thus helping to meet that region's burgeoning demand.

By contrast, the developed countries overall are projected to have virtually no net increase in their sugar production. Two low-cost producers, Australia and South Africa, are projected to be the major exceptions, with production growth rates projected at 2.6 percent and 6.3 percent a year respectively. Output in North America is expected to show little change while production in Western Europe is projected to edge down by 0.6 percent a year on average to 2005. In the same period, output in the area of the former USSR is projected to contract more sizeably (2.6 percent p.a.) although other countries in transition are projected to raise slightly their combined production.

Provisional data over the long term indicate that total world sugar production will be sufficient to accommodate increased world demand.

Consumption

The demand projections for sugar were taken against the following outlook on population and income growths. World population is expected to grow from about 5.7 billion in 1995/97 (base period for the projections) to 6.4 billion by 2005. The growth rate of world population, which had peaked in the second half of the 1960s at 2.1 percent p.a., fell to 1.3- percent p.a. by the late 1990s. Despite the slower growth in population, the absolute numbers of increase is expected to remain large (more than 70 million each year to 2005). As for annual GDP, the per caput values range from about US $100 for the poorest country to US $25 000 for the wealthiest. Even among developing countries, there is great diversity as regards economic and social characteristics, with per caput GDP ranging from around US $100 to nearly US $6 000 at the higher level. Per caput sugar consumption tends to increase with rising income levels, reaching a saturation point as the food market matures, thereafter sustaining fairly stable average annual consumption levels - typically increasing in line with population growth.

World sugar consumption under the baseline assumptions about income and population growth is projected to expand by nearly 27 million tonnes between 1993-95 and 2005, to reach 137 million tonnes. The implied annual growth rate of 2 percent would thus approximate that achieved over the 1980s. The bulk of the increase in consumption, over 22 million of the 27 million tonnes total, would be in the developing countries, raising further their share of global sugar consumption, to 65.4 percent by the year 2005. Among developing regions, particularly notable growth, of 3 percent annually, is projected for Africa and the Far East, followed by the Near East (2.8 percent p.a.), Oceania (2.3 percent p.a.) and Latin America and the Caribbean (1.9 percent p.a.). Unlike in the 1980s, however, developed countries as a whole, are projected to increase their total sugar consumption between 1993-95 and 2005, albeit by only one-third of the annual growth rate projected for developing countries' consumption. The fastest growth in total consumption in the developed regions would be in North America (1.2 percent p.a.) while the slowest growth rate is projected for the economies in transition (0.5 percent p.a.).

Disparate trends in demand and production at national level, coupled in some instances with increased market access opportunities arising from policy changes in recent years, are projected to give new impetus to international trade in sugar.

The bulk of the market opportunities, however, are expected to arise in markets where domestic production cannot keep pace with demand. Regionally, it is projected that Africa's net imports would increase by 7.3 percent a year followed by the Far East (5.8 percent p.a. notwithstanding the increase in Thailand's projected export expansion), and the Near East (3.1 percent p.a.). Among developed regions, too, some large increases in net imports are projected, including North America with net import growth of 4.0 percent p.a. (and 5.9 percent in the United States alone) and 4.1 percent p.a. for the Russian Federation and other CIS countries.

Food Security Implications

Sugar plays two very significant roles in relation to food security. First of all, sugar as a food crop may be considered an inexpensive and abundant source of calories and thus important in the fulfilment of basic human energy requirements. Secondly, sugar plays an important economic role in generating income, employment and export earnings.

Sugar is typically one of the most significant contributors to dietary energy supply. In fact, sugar is the third most important source of per caput dietary energy supply (DES) after cereal products. And it is a relatively inexpensive food. The cost of calories from sugar is about 15 percent less than that from cereals. At the global level, sugar, including non-centrifugal sugars, currently contributes more than 8 percent of total caloric intake, after cereals (52 percent) and oils (10 percent). Given the global population balance, these percentages closely reflect the situation in developing countries where sugar accounts for nearly 8 percent of total caloric intake, after cereals (57 percent) and oils (9 percent).

As for its economic importance in food security, sugar is an important source of export earning. Sugar exports were valued at US$ 12 billion in 1998; large compared to most other agricultural commodities, with developing countries earning nearly US$ 6.5 billion from their sugar exports, nearly 5 percent of the value of their total agricultural exports. In recent years, the ratio of sugar export earnings to global food import expenses was nearly 4 percent. The overall impact of sugar export earnings as a means to finance food imports is more pronounced for developing countries, which generated 54 percent of global sugar export earnings. The ratio of their sugar export receipts to the value of their food imports was nearly 7 percent.

While the value of exports is significant, it should be recalled that less than 30 percent of global sugar production enters the world market. Therefore, the economic significance of the commodity is far greater, encompassing all activities from the cultivation of the sugar cane or beet to the processing into sugar. The value of sugar production globally (which includes those amounts exported) was estimated at nearly US$ 30 billion in 1998, and this figure would be substantially higher if the value added by industry were taken into account. In developing countries, the contribution of the crop to national GDP can be very significant. For example, in the ACP sugar producing countries, the sugar sector contributes about 20 percent of GDP and employs up to 30 percent of the workforce of the countries involved.

Concluding Remarks

If sustained income growth materializes, and if it is associated with improved distribution both among and within countries, it is likely that food security will improve world-wide, although in certain areas major concerns will remain over many future decades with regard to precarious food situations. Sugar with its broad appeal in most diets and with its relatively low cost; will certainly continue to constitute a major component of improved diets. Also, it may be expected to fulfil an important food security role in a number of least developed countries, which are also significant producers of the crop.

Historically, the world sugar market has been faced with recurring supply/demand imbalances, which got reflected in extremely volatile prices on free markets. For most years in the past four decades, world production of sugar has been in excess of consumption, leading to low prices and stock overhangs. But there have, of course, been periods of deficit, usually caused by crop failures in one or more of the main producing countries, in which prices rose very sharply, followed by equally sharp declines.

Volatility of prices in the free market has been a long-standing feature of international trade in sugar. The 1980s, for instance, opened with a world sugar price "spike", raw prices soaring to US cents 47 per lb. against a long-term average of about 10 cents per lb. Typically, such price booms were followed by long periods of relatively depressed prices with occasional dips, even to below the costs of production in major low-cost exporting countries. It has long been expected that the development and diffusion of alternative sweeteners would help to stem the magnitude of such price spikes. Also, the growing involvement of developing countries in global sugar consumption, with their greater sensitivity of demand to price, has been cited as a possible contributor to the reduced variability of prices in recent years. The possible price sensitivity effect may well have been offset by the weak economic situation in several major importing countries, particularly in recent years (mid-1997 to 1999). Coupled with the prevailing supply surplus and already high stocks, this means that reversal of the most recent slump in the free market price may well hinge as much on recovery in the economies affected as on the interaction of short-term supply and demand factors. Unless this occurs, there could be further potentially damaging consequences for investment planning in sugar production and industries.