The price recovery since the first quarter of this year has been remarkable for both its speed and its size. It is worth recalling that on the 29^th of February this year the ISO daily price fell to 4.7 cents/lb and the average for March was only 5.14 cents/lb. Compare that with average for August of 10.44 cents/lb; twice the average for March and 2.2 times the years lowest price. The recovery began in April, when prices averaged 6.02 cents/lb, and gathered pace in May (average 6.91 cents/lb, June (average 8.37 cents/lb) and July (average 10.94 cents/lb). The recovery was first based on expectations, primarily that drought in Brazil would substantially cut production and that heavy frosts and floods in China would reduce production sufficiently to bring China back to the market by the end of the year. By mid-year it had become apparent as the new season got underway that the drought in Brazil had been more severe than had been originally thought, with the reduction in output amounting to 20 per cent, rather than the 10-15 per cent originally anticipated. Consequently, the recovery accelerated with raw sugar prices surpassing 11 cents/lb in July.

The pace and the extent of the recovery has surprised many senior analysts, including myself. Taking into account the level of surplus stocks, particularly in India, many of us thought that the rise, although justified by events in Brazil alone, would be capped at around 8 cents/lb. Even though it is now a fait accompli and has been sustained now for two months, the current price level still seems to me a little unjustified, given the surpluses that had been built up over the past five years, and particularly since India is having a record crop and has approved 1 mln tonnes of exports by the end of the year. However, I sincerely welcome current prices, and long may they be sustained, so that many more exporters can cover their cost of production. Several explanations have been put forward for the extent of the price rise. The activity and attitude of the funds has, as usual, surfaced as a reason. The real extent of the downturn in Brazil and some buying activity already by China may have further raised expectations from mid-year. The most plausible explanation I have heard is that cane exporters sold their crops forward around mid-year, believing understandably that the improvement by then, almost double the low of February, was as good as it would get. This selling forward has itself created a shortage of nearby raw sugar in the third quarter, explaining the climb from 8 cents/lb to over 11 cents/lb in July.

Attention is now firmly focussed on the 2000/01 crop cycle which begins in October. There is every prospect of the first deficit of production in relation to consumption for the first time in 6 long years. The ISO will release its first estimate for 2000/01 on September 28^th, too late for this conference. However, preliminary work suggests that the deficit will be of the order of 3.5 mln tonnes. This would be a very substantial and welcome adjustment to he overproduction of the last five years, and should mean that prices can be sustained at around current levels. Surplus stocks remain high at around 16 mln tonnes at the end of the 1999/2000 crop cycle, but a 3.5 mln tonne deficit will reduce them by 20 per cent and the market takes more notice of the current situation than of the legacy of the past.

Welcome though the recovery in prices is I must, however, sound some notes of caution. First and foremost, Brazil. It is now crystal clear that the overwhelming reason for the cut back by Brazil was weather – drought. It must be remembered, even etched onto everyone’s memories, that Brazil’s largest expansion took place in 1999 when raw sugar prices averaged only 6.27 cents/lb for the whole year. In 1999 Brazil exported a phenomenal 12.4 mln tonnes of sugar (roll that figure around in your minds), up from 8.7 mln tones in 1998 (42.5 per cent!) and produced 21 mln tonnes, up from 19 mln tonnes in 1998. There is simply no evidence to suggest that with a price recovery Brazil will not return to their former production level and even expand further. I think it is significant that Brazil recently imported alcohol again. The quantities were small but the purpose was clear – to free up sugar for export at the current very attractive prices to Brazil. Also, it must be remembered that droughts are rare in the Central/South of Brazil – the last one was in 1989/90. So I think other exporters must factor into their thinking a return to high production levels in Brazil, when the effects of the current drought have worked through the system. Also on the supply side, I have already mentioned India’s ability to export large quantities, and the monsoon this year was a good one.

It is also necessary to be cautious about the demand side in 2000/01, particularly with the improved prices. There are three areas of concern:

 

 

China: The trade is getting very excited about China – it is the main reason for the improved and bullish demand expectations – for two reasons; the sharp reduction in production this year from 9.5 mln tonnes to 7.5 mln tonnes (partly due to weather and partly due to rationalization) and the efforts now being made by the government to control saccharine. However China holds large stocks and has indicated that any deficit will first be filled from stocks. This delays large imports until 2001 when domestic production will have had the chance to recover from the bad weather. In addition, China has put forward a proposed TRQ, if it joins the WTO, of 1.6 mln tonnes rising to 1.9 mln tonnes in 4 years. Even if filled, these quota levels will not be enough to "save" the world sugar market.

1. Russia: Russia has announced, end July, a TRQ beginning December 2000 of 3.7 mln tonnes. When it is considered that imports in 1999 were 5.2 mln tonnes (that is according to Russian sources; imports as reported by exporters exceeded 7 mln tonnes in 1999) the implementation of this quota will severely curtail Russian imports in 2001. The quota has been applied to raise the internal price in Russia in order to protect the domestic industry.
   
2. Indonesia: With the low world prices, 1998-2000, Indonesia grossly over imported sugar and built up large stocks. Domestic production, about 1.6 mln tonnes in 1999, was unsaleable and stocked. To combat this a new increased tariff rate of 60 per cent has been implemented from June 2000. Along with the much higher world prices, Indonesian imports are likely to be severely curtailed as a result of the implementation of this tariff – they are likely to fall from around 2 mln tonnes in 1999 to around 1 mln tonnes in 2001. So it can be seen that overall the demand side is likely to be considerably weaker in 2001.Now I would like to discuss briefly the medium and long-term future. First of all the demand side.

In general, demand prospects for sugar look very bright for the new millennium. Let me start my analysis with a little recent history. From 1990 to 1998, when the Asian financial crisis took effect and halted demand growth in Asia, world sugar consumption grew by 1.6 per cent per annum. But this rather conservative overall growth rate masked a rather startling trend in developing countries. Over the same period, 1990 to 1998, developing country consumption grew by a very healthy 3.5 per cent per annum (most of the growth coming from Asia). In fact, developed country consumption actually declined during the period, by 1.5 per cent per annum, the result of the aftermath of the break-up of the Soviet Union (i.e. the steep decline in per capita consumption plus the reclassification of the eastern republics as developing countries in Asia). In 1990 developed country consumption was measured at 45.6 mln tonnes and by 1998 it was 40.5 mln tonnes, so you can see that the decline was rather dramatic.

Perhaps more significantly, the share of developing countries in world consumption in 1990 was 58 per cent, developing countries having achieved more than half of world consumption in the 1980s. By 1998, their share had risen to 67 per cent, two thirds of world consumption, having risen during the period at the rapid rate of one per cent per year.

So you can see that as the developing country share rises, so the world growth rate in consumption will rise and approach the developing country growth rate. This will be especially so if developed country consumption stabilizes or even increases, and there are positive signs that Russian consumption, having declined steeply after the break-up of the Soviet Union, is beginning to grow again.

Of course the Asian financial crisis has been a set back to consumption growth, but many of the economies are now recovering, and even Indonesia, hitherto the fastest growing sugar importer and consumer, will eventually recover. In the context of the 21^st century, the Asian financial crisis will be a mere blip, and Asia will again take its place as the dynamo of the world sugar economy. This is especially likely since at last China is beginning to deal with the saccharine problem. For 23 years, since I worked on sugar, I’ve been told that China was about to "save" the world sugar market. Of course it never happened – increases in demand were met by saccharine and when China did generate a considerable surplus, as it did in the 1990s, it was exported and not put into consumption. Now, with a programme to close saccharine factories with the ultimate aim that saccharine will be exported only, there is a real prospect of an increase in consumption – saccharine consumption is estimated at the equivalent of up to 5 mln tonnes of sugar. But we should be cautious about how much of this will accrue to the world market. China has a proven ability to produce over 8.5 mln tonnes of sugar, and could expand further Realistically, at least half of the increase in consumption will be met from increased domestic sugar production, since the government has a de facto policy of self-sufficiency. This is backed up by the proposed tariff rate quota under the WTO of 1.6 mln tonnes. It is very significant that the long-term average of Chinese net imports is 1.5 mln tonnes, in spite of China having imported almost 4 mln tonnes in 1988. There seems to be a long term policy to limit imports to an average around 1.5 mln tonnes and to meet demand from domestic production of sugar and, up until now, saccharine.

To give you some idea of the potential for increased sugar consumption in developing countries, in 1998 Asian per capita consumption was only 13kg, and Africa only 14.7 kg; compared with Europe 37kg, North America 34.1kg and a world average of 20.4kg. Central and South America, at 43.5kg and 46kg respectively, are special cases being surplus areas with higher per capita consumption levels than even developed countries. Increases in per capita levels are unlikely here, but nevertheless total consumption can be expected to continue to grow at he population growth rate, i.e. in excess of 2 per cent per annum. And I remain an optimist about Africa. I believe that sometime in the 21^st century African economies will begin to grow and if that happens, Africa has the potential to rival Asia as a growth centre for sugar consumption.

To give some dimensions to the potential for market growth, when developing countries, having recovered from the Asian financial crisis, resume their consumption growth rate of 3.5 per cent this will lead to consumption growth of approximately 2.9 mln tonnes per year. If only half of this consumption growth accrues to the market (the other half being met from domestic sugar production) this will mean annual market growth of 1.45 mln tonnes, which is a very healthy market growth.

It is on the supply side that the most radical changes are likely to occur in the 21^st century. Developments in the last years of the old millennium will profoundly affect the market of the new millennium. I refer of course to the explosion of the Brazilian alcohol bomb. When Brazil embarked on the alcohol programme in the late 1970s they planted enough cane which, if used for sugar production, could supply the whole of the world sugar market. Up until 1990 the alcohol programme was fully government supported and priority was given to alcohol production. But in 1990 there was an alcohol shortage and the requirement that the majority of new cars should be 100 per cent alcohol powered was lifted. Through the 1990s the number of pure alcohol cars declined, and with it the demand for hydrous alcohol. Anhydrous demand did increase, as the statutory blend of alcohol and gasoline was raised, but eventually alcohol demand levelled off. Finally, alcohol was deregulated in 1998 and 1999. The levelling off of alcohol demand in Brazil and the significant devaluations in the real have shifted the goalposts for the world sugar market. Brazilian (Centre-South) cost of production has been significantly lowered – we calculate to around 5.5 cents/lb. Circumstantial evidence for this is the significant expansions of Brazilian output and exports which took place in 1998 and 1999 when world prices fell as low as 5 cents/lb (the 1999 average price was 6.27 cents/lb). To illustrate, in 1998, Brazilian exports rose 2mln tonnes to 8.675 mln tonnes, 27 per cent of world exports. Figures for 1999 are even more astonishing. Exports may have risen to 12.4 mln tonnes, around 35 per cent of the world market! Shares of this magnitude give Brazil a dominance of the world market. By raising or lowering sugar production they can, if they choose, control the world price. There is evidence from the work of Landell Mills that in the 1980s and 1990s the average cost of production of cane sugar and the real world price of sugar were converging. In other words, there is a relationship between the world price and the cost of production of efficient exporters. I believe that the market dominance of Brazil has changed the basis on which the new equilibrium price will be set in the future. It is now likely to be set by Brazil’s cost of production plus a margin – my guess is around 8 cents/lb. I must emphasize that I am talking about an average here – I am not saying that the price will never again hit 10 or 12 cents/lb, only that if it does it will be very tempting for Brazil to increase production again, and so lower prices. Again, the choice will be Brazil’s.

If I am right, that the new equilibrium will average around 8 cents/lb, how will this effect the structure of the market? The new market will consist of Brazil, those elements of other exporters that can compete with Brazil, subsidized exports for as long as they survive the WTO process, preferential trade and NAFTA trade.

In spite of the recent price recovery I still hold with this view of the long-term equilibrium. I am talking about a tendency over the long-term, which does not preclude prices temporarily exceeding that level due to weather reasons, as we have now. In any case, it will be at least 5 years before I’m proved wrong and I won’t concede defeat for 10 years, by which time I will have retired!

Frankly, I think the supply side at the moment is a mess, and cries out for some sort of organization. Two years ago I suggested an industry initiative to coordinate and control production, retaining a place for all legitimate suppliers. That suggestion fell on deaf ears, but I still think it is an action that should be taken in spite of the improvement in prices. As I said before, when Brazil recovers from the drought, the same situation will reassert itself. My suggestion of a 10 per cent cut in production by all the major exporters was branded interventionist – yet all non-commodity industries when faced with overproduction and increasing stocks cut production – it is normal market behaviour. Why should sugar be different? I recently discussed the sugar situation with a World Bank official – and the World Bank is a temple of free marketeerism – and he profoundly lamented the lack of action and organization by sugar producers. He pointed out that recently copper producers had taken such action successfully in the face of oversupply and low prices. And there are precedents in sugar. In the early 1930s, when sugar faced low prices and oversupply, there was the Tarafa Action and the Chadbourne Agreement. Both were taken strictly at the industry level, with no involvement of governments whatsoever. What it requires is leadership and vision and a rational appreciation of the problem. It should be clear that I am not speaking here on behalf of the ISO – the ISO is an intergovernmental organization and most governments, in their wisdom, have opted out of sugar policy. Neither am I calling for an agreement with economic clauses and all that that involves, only for more coordination of policy in order to manage the sugar market rationally for the good of all exporters.

I would like to complete this section on the long term with a few words about reform. As many of you will know, in 1997 I wrote an article about reform that in a small way has become quite famous, even a little bit notorious. In that article I tried to set out the limits of reform. It was not an anti-reform article. However, it was totally misread by virtually everybody. Don’t worry, I am not going to repeat the arguments from this article, but I would like to make my position on reform clear. I think that a reading of history shows that all good and successful reform – not only economic reform but political reform – has a moral underpinning. I believe that the moral underpinning for WTO trade reform should be a redistribution of wealth from richer to poorer – from privileged to underprivileged. Therefore, addressing those of you whose governments are members of the Cairns group, who have been my fiercest critics, if you attack, in the upcoming WTO round, subsidized exports, you have my full support. If you attack the tariff rate quota, you have my full support. But if you attack the sugar industries of poorer developing importing counties, I cannot support that. My criterium is simple: who benefits? It could equally be applied, in the WTO, to labour standards and intellectual property.

And be sure of one thing, reform will not solve the Brazil problem; in fact it might even make it worse, if the last vestiges of support for alcohol are removed. And I would pose the question to you: how much alcohol do you think Brazilians would add to their petrol if the government did not intervene and make 24 per cent mandatory?