The Fall of “King Sugar”

Introduction
In last week’s column I presented a graph, which illustrated both the downward trend and the wide variations in sugar production for Guyana over the last half-century or so. To be sure, the compound annual rate of decline in sugar production for this period was minus one percent. I also observed at the conclusion of the column that the targeted average annual output was set at 450,000 metric tonnes per year, after the Skeldon Sugar Modernization Programme (SSMP) was completed. Regrettably, actual output last year was still substantially below this targeted level, years after the SSMP should have been executed.

If readers examined the targeted annual production levels for the years 2005-2010, they would find that during those six years the actual annual production had averaged about 47,000 metric tonnes, or 17 percent, below the publicized targeted amounts for those years. Indeed, the size of the annual variations has ranged from 7 percent to 27 percent over the six years, or from 19 to 80 thousand tonnes! Because the practice has been for the Authorities to reduce the targets when it becomes clear that they cannot be met, the targets which I am referring to are those originally declared in the Annual National Budgets.

King Sugar
Locating the underperformance of the sugar industry in the evolving structure of the wider Guyana economy is quite informative. Thus the half-century output dataset that I presented last week began with the three-year average for the period 1961-63. At that time sugar was colloquially referred to as King Sugar, not only in Guyana, but in the 10 West Indian sugar producers, which at that time produced a total of 1.4 million metric tonnes of sugar. As previously observed, the West Indies was then the world’s 9th largest producer!

During the years of King Sugar, the industry accounted for about one-fifth of Guyana’s GDP (at current factor cost). This rose to as much as one-third during the exceptional boom years in sugar prices (the mid-1970s). Sugar also accounted then for about 40 percent of the total value of Guyana’s exports of goods.

Over the past two decades or so King Sugar has fallen from his pedestal. Recently sugar’s share of GDP (using the rebased 2006 price series) has averaged only about six (6) percent per annum. Further, sugar’s share of total exports of goods (f.o.b.) has also averaged only about 11 percent per annum.

The reduced significance of sugar in Guyana’s economy however, has been only in part driven by the underperformance of sugar. It has been also largely due to the relative expansion of other economic sectors, of which I am sure readers are aware.

The Schedule below reveals annual changes in the real value-added for sugar during 2011 and the First Crop of 2012.

These data show the rate of growth of sugar GDP was 7.1 percent in 2011 (for both agricultural sugar and sugar processing). The Ministry of Finance in its Half Year Report 2012 has reduced the 2012 Budget estimate of 5.7 percent growth for the economy to 1.5 percent. This has occurred mainly because, as noted in the Half-Year Report 2012, there was a decline of minus 33.4 percent in the production of sugar during this year’s First Crop.

Sugar: Real GDP Performance (Rate of Growth %)
Year                                                                              Agricultural          Sugar Processing
2011                                                                                    7.1                               7.1
2011 (H1)                                                                        30.5                            30.5
2012 (H1)                                                                      -33.4                           -33.4
2012 (2012 Budget estimate)                                   5.7                               5.7
2012 (Revised, Ministry of Finance                       1.5                                1.5
Half Year Report)
Note:     H1 means First Half Year.
Source:  Half Year Report, 2012, Ministry of Finance.

High Production Costs
The sad reality underlying this is that most independent analysts estimate the unit cost of producing sugar at Guysuco (including the full attribution of its indebtedness) to be well in excess of the current price for raw sugar which obtains under the EPA, the US Quota, CARICOM, or the “residual” world market for raw sugar.

In the mid 2000s I was fortunate to access some sugar production cost data for Guyana and other CARICOM sugar exporters. Those data showed Belize had easily the lowest unit cost. Representing Belize’s cost as Index 100; the relative cost for the other CARICOM exporters ranged up to 344 for Trinidad and Tobago. Guyana’s cost index was 131. The weighted average unit cost of sugar production then for all CARICOM exporters was 29US cents per lb. (In fairness I  should point out to readers that it was not clear whether the relative cost data I had obtained fully accounted for the financing and indebtedness costs of any of the regional sugar producers).

Because of such basic considerations I do not believe the production and export sale of sugar by Guysuco in the foreseeable future would be commercially or financially viable enough to be able to generate net profits (after repayment of its present indebtedness). In this sense therefore, the sugar industry was truly dependent on the special external marketing arrangements embedded in the Sugar Protocol (SP). The moment the Authorities acquiesced to the European Community’s (EC) unilateral denunciation of the SP, sugar production could no longer continue on a “business as usual” basis. Funds allocated by the EC and the National Treasury over the years have been used, at best, to fight a rearguard action to keep Guysuco open.

Regrettably, for the future, the high unit cost of sugar production in Guyana will not benefit from significant reductions due to economies of scale. At the inception of the SSMP sufficient gains from economies of scale were anticipated (when annual output reached 450,000 tonnes) to make Guysuco’s unit cost of production competitive in the global environment. When we examine the global industry today however, we find that the leading producers are operating at scales (levels) of sugar output well in excess of 1 million, and indeed as high as 38 million metric tonnes!

Next week I shall continue this examination.

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