Currently it is cheaper to import sugar than to produce sugar at GuySuCo
Recently, I had the opportunity to examine world sugar prices and I reviewed the efficiency changes GuySuCo will have to undertake in order to become internationally competitive, given the level of sugar price in world markets, the termination of the European sugar subsidies, and the end of preferential access to European markets. Unquestionably, the transformation required of GuySuCo to become internationally competitive is significant and marginal changes will not suffice. Consequently, policymakers need to examine this situation carefully, if they are serious about a financially viable sugar industry.
Evidence will show that GuySuCo’s total annual production is approximately one-tenth of one per cent of total world output of 165 million tonnes (http://www.sucden.com/statistics). This implies that GuySuCo’s output is almost invisible and it would not be missed in either good or bad production years in world sugar markets. Without the European Union (EU) market, GuySuCo sugar will become indistinguishable, competing with world exporters that produce and export far more than GuySuCo does. World exporters, including our neighbour Brazil, can supply sugar at lower US prices per pound than GuySuCo, due largely to greater efficiencies in their operations.
Since GuySuCo cannot compete on volume and since GuySuCo in world markets cannot be a price maker but only a price taker, it is therefore imperative that it be transformed into a low cost producer. This can only be attained by GuySuCo becoming more efficient through the following activities: improved yields in the field and in the factory; employing only high productive workers; building a more streamlined, capable and experienced management team that understands the technology; and by no less than 51 per cent of the owners’ representatives in Parliament appoint a visionary Board of Directors that understands the science of agriculture and the rudiments of financial management of an agricultural enterprise.
The immediate responsibility of the Board is to introduce and enforce efficiency targets, and implement appropriate incentives that are linked with profitability and sustainability indices. Above all, there must be a reporting responsibility by the management and the Board of Directors at the end of every crop to the Select Parliamentary Committee. In addition, the GuySuCo annual audit report should be presented by the Auditor General to the parliamentary committee by the end of the first quarter of the New Year. It should be made mandatory that the audit should be completed by the Auditor General. Based on the audit report, the report of the Board of Directors and the findings of the Select Committee, Parliament can then make decisions on the facts presented and not on the wishes of any one politician. Incidentally, this approach should be adopted by state agencies that receive taxpayer funds from the Consolidated Fund or from other sources.
If these changes cannot be implemented in GuySuCo, it is clear that policymakers in Guyana will have to put a line item for a permanent subsidy in billions of dollars in the National Budget. The political justification being that without it, 18,000 people will be without work and there will be no need for any economic justification, as it will be a welfare transfer under a social programme for only sugar workers and their families. The political chorus has already started, as over the last few years taxpayer money has been doled out to GuySuCo under an opaque system; the outcome of which has resulted in declining output, multiple excuses, and new requests for more money in an unending cycle of non-accountability. There is also the threat of a political cost to all those who oppose additional funding for sugar. Put differently, good governance, defined here to include sustainability without treasury subsidies, is sacrificed without economic justification; and in the end, this will only be political gamesmanship at taxpayer expense.
During the period 1985 to 2013, world sugar prices averaged 11.51 US cents per pound, with a low of 6.24 US cents per pound in 2002 and a high of 26.24 US cents per pound in 2011. For twenty-five of the twenty-nine years during the period 1985-2013, world prices have always been below 15 US cents per pound. They climbed above 25 US cent per pound only once in 2011, but have since declined to 17 US cents by February 2014.
Referring to data published by Dr Clive Thomas in his recent Sunday Stabroek article (March 16) the sugar estates with the least cost per pound of sugar in 2012 are Blairmont and Albion, estimated at 26 and 27 US cents, respectively, while the high cost producers in 2012 are LBI and Skeldon at 48 and 52 US cents, respectively. These prices are generally way above the average world price of 11.51 US cents per pound, with our best performers, Blairmont and Albion, still more than 15 US cents per pound higher than the world price. Furthermore, the GuySuCo projections for 2017, after injecting several billion dollars in 2014, are not encouraging either. The projected least cost producers are Blairmont, Albion and Rose Hall, with average cost per pound between 22 and 25 US cents per pound, and high cost producers being Enmore, LBI and Skeldon, with average cost between 31 and 39 US cents per pound.
The main finding from the data is that the best performers, Blairmont, Albion and Rose Hall, are not competitive, implying that GuySuCo can only sell sugar in the domestic market, given its monopoly status where they can charge whatever they please and ask politicians to stop imports which will be cheaper. This decision can of course foster smuggling as there are profits to be made by creative entrepreneurs. A second finding is that all GuySuCo sugar estates are loss-making enterprises that are unable to break even; and these estates will only be around as a result of union and political pressure on the government.
Reducing the cost per pound of sugar is not tied to increasing output by planting more lands, but to increasing the productivity of the land, more sugar-cane per acre; the optimal number of ratoons; increasing the productivity in the factory (less cane per ton of sugar); and reducing the overhead costs in the head-office and management structures. More cane per acre is related to the practice of improved agriculture science, the optimal use of commercial inputs, and the employment of skilled and experienced agriculturalists in many different fields for farm production and research. The same goes for marketing and factory improvements that need upgrades in sugar manufacturing, and less down time, among other structural changes. Selling the problem-prone Chinese sugar factory at Skeldon as scrap iron (cut the losses now), and using the money to buy spare parts and equipment for the working factories that can be efficiently refurbished should be seriously considered. Interestingly, the cost of this Skeldon factory is significantly much more than US$200 million dollars, and with every day that it is not working the cost increases with no offsetting benefits. Incidentally, based on the 2017 projections, Skeldon with all the new investments is still ranked among the high cost producers and is only in front of the worst three at the bottom – Wales, LBI and Enmore.
In a presentation in 2012 before the standing Parliamentary Economic Services Committee, Mr Errol Hanoman, the former CEO of GuySuCo, stated that “…between 35 and 37 per cent of our industry’s cultivation was uneconomical; meaning that the yields for over 37 per cent of our cultivation cost us more to harvest than the revenue we got from the sugar we gleaned from those lands.” (KN, May 29, 2012).
Based on recent GuySuCo production information, it is not likely that the productivity problem has been solved; and given the cut in the EU prices, GuySuCo will not be in a position in the near term to make a profit, despite the proposed injection of $5 billion in subsidies from the 2014 National Budget. Profitability will only return, if and only if, costs on all estates are reduced by an average of 59 per cent. This is a huge challenge and it is not likely that this can be achieved in the next three to 5 years by tinkering at the edges.
So what is the way forward? Here are some suggestions, some of which have been advanced before. Finding out why Blairmont, Albion and Rose Hall are the best in the group of estates and implement a plan to increase their efficiency and enhance their profitability. There are many experienced Guyanese who can do this task, if only professionalism is the criterion used to select these persons. Party politics need to be set aside. Incidentally, the presentation by the Minister of Agriculture during the budget debate only emphasized spending with no information on incremental net benefits from these additional investments. Until this is done, taxpayer money will continue to be wasted on dubious sugar projects in GuySuCo.
Second, of the other estates, including the three worst performing estates, Enmore, LBI and Wales, consideration should be given for exploring talapia farming. See the proposal by Mr Tony Vieira. Assistance could be obtained from the Food and Agriculture Organization (FAO) to conduct a detailed feasibility study to ascertain the technical parameters, profitability measures and export opportunities needed for large-scale fish farming and financing. It is not good business practice to dismiss a project without the facts as was so stated by the Agriculture Minister, who said: “… For those who harbour any thoughts of an exchange of sugar for tilapia or for ethanol, our answer is unequivocal: sugar…” This approach by the Minister must be supported with the facts, and the Minister should reconsider. Ethanol should be investigated the same way as tilapia. Contact our Brazilian neighbours who are world leaders in production and exports in this field. Three, better use should be made of molasses as there might be opportunities in the international health food market which is expanding rapidly. This should be investigated by persons who know this market. Four, the sale of electricity to GPL should be properly managed and profitability measures determined. Five, a feasibility study should be done for converting one of the worst performing sugar estates in the Demerara cluster into dairy farming. Professional assistance can be obtained from several sources and this investigation should be undertaken.
To conclude, it is clear that a more efficient use of GuySuCo assets is what is required, as existing arrangements are not sustainable. Currently, it is cheaper to import sugar than to produce sugar at GuySuCo. From a financial point of view, there are no export markets as we cannot sell someone something at higher prices than what they can obtain at cheaper prices from someone else. Finally, if insignificant improvements in efficiency persist in sugar, then GuySuCo will continue down the road of being a welfare agency that supplies some sugar at high prices to domestic consumers. The current performance indicators so confirm this path, for as the welfare payments from the EU end, the treasury welfare payments will expand and taxpayer money will be squandered in one more loss-making political activity.
C Kenrick Hunte