Cheap sugar arrangements turn sour

Press, 14 May 1980, Page 23

Cheap sugar arrangements turn sour

The retail price of sugar suddenly went up in the first week of April from 57c a kilogram to 74c, a rise of 30 per cent. The effect

is already being felt in the cost of everything, from beer to biscuits. Here, GARRY ARTHUR looks at the reason why sugar has been relatively cheap over the years, and the Government’s role in sugar pricing ...

The recent 30 per cent upward hike in the price of sugar was a signal that the days of cheap sweetening are over. After years of buying at favourable prices under long-term contracts with Queensland and Fiji, New Zealand has had to start 1 buying large quantities of raw sugar on the world market, notorious in the' commodities trade for its wildly fluctuating prices. Producing countries consume most of their own sugar crops, andthe sugar traded on •; the ' world “spot” market is whatever surplus they have after meeting contractual commitments. Prices consequently vary widely according to how much sugar is around; This .season there is not much — and the price is rising fast. New Zealanders' consume about 160,000 tonnes of sugar a year. l Since 1973, when the" Commonwealth and - international sugar agreements broke down, ‘ we have bought most of it on long- - term contracts from. Aus- c tralia and Fiji. • The rest * is bought - bn the world market from the surplus production of such countries as Cuba, the - Philippines,;and'Taiwan. ; "Contracts’ 1 with Australia . 1 and Fiji ensured,a reason-,. ably reliable supply at a 1 stable . price. 'But', our. agreement. with .Australia (in effect, with} the; Colonial Sugar Refinery, Ltd, which markets the bulk of Queensland’s; sugar crop) expired at. the end of 1977 and Australia- has proved reluctant' to'- sign another long-term contract.. : f are now 4 under way again and the

Cabinet is expected to announce an agreement in the next few weeks. The price will be kept confidential. Colonial Sugar (C.S.R.) represents the Queensland Government in its negotiations with the New Zealand Government. As C.S.R. wholly owns the only New Zealand sugar refinery, at Chelsea, Auckland, this means, that C.S.R.’’ is selling its Queensland sugar to itself. The details are kept secret, but some observers believe that a system • known as “transfer pricing” applies. This would mean C.S.R. taking a profit as its own middleman, on the sale of sugar to its own wholly-owned subsidiary. ... Asked.if this was the , case, a Trade and Industry spokesman said: “We are' . concerned, only about, buying sugar at a favourable price.” He added that the . department’s concern was that New Zealand, should not be any worse off because of the commercial arrangements. ■ Tf Although Australia has not yet come to the party, New Zealand 4 has negotiated another supply contract with Fiji. The terms again are secret, but it is i a five-year ' contract, expiring in- 1983, for 60,000 ... tonnes of sugar a year. - ; i “The price is worked out over a period of . time,” says;. Mr Jim Collins,: Trade- and Industry’s sugar expert “It is tied to how we see the world price moving. The agree- ’. ment provides for a relatively stable 4 price rather than a fixed price.” The terms are-related to both a' fixed 4 price and the' floating world price.. In

view of Fiji’s successful attempts in the past to have contract terms varied in the light of big changes in the world price, it. seems likely that the new contract also contains review provisions.

Why is the price kept secret? Mr Peter Ralph, managing director of New Zealand Sugar, says the reason is to protect Fiji. “They wouldnt’ want other countries to know the price they’ve arranged with New Zealand.”

A desire to support the Fijian sugar industry has been qited by the Government as the main reason why it does not favour a sugar beet industry in Mid-Canterbury. Fiji relies heavily on sugar production for overseas earnings, arid our previous contracts with Fiji included a premium which the Govern-, ment regarded as a form of foreign .aid.

Waiting for an Australian agreement to be signed and sealed, the New Zealand refinery has had to buy the rest of its

raw sugar requirements on the world market. At least one shipment has come from Queensland, but during the last year most of our world market sugar was bought from Cuba. This was not the first time. More than half of our sugar imports came from Cuba in 197576, and again in the 1977 year. Those early purchases came in for strong criticism from some politicians who objected to the purchase of sugar from an Eastern bloc country. Fiji’s supplies of raw sugar are s'*: : in the first half of the year, which is why the Government is now negotiating with

Queensland — to fill, the second half. * Rapidly rising prices of the world market indicate that there is not much surplus sugar around. Ralph says spot prices are the highest they have been for nearly three' r months. Last year’s purchases on the world market were made at very favourable prices — $2ll a tonne, f.o.b. — but today’s price is around $665 a tonne. To control the retail price, the Government, entered into a price stabilisation agreement with- ... New Zealand Sugar in 1972. It was renegotiated early this year for a fur- • ther term of three years,

with a possibility of extension by mutual agreement. The idea is that shortterm rises and falls in the cost of raw sugar will be equalised to make sure that the retail price of refined sugar does not change every time a new ; shipment of raw sugar ar- • rives at the refinery. “If the world price moves up significantly, the Sugar Company notifies the Secretary of Trade and Industry that it intends to raise the price,” explain'- Mr David Pennington, an executive officer of the department. “It gives us the details . and explains its reasons, and we have a look at it” He says the Government could not veto a price increase, but the company was limited by the stabilisation agreement. ‘There is only a certain amount that they can allow the sugar stabilisation account to get into deficit.” Under the agreement, the company was also limited to a certain percentage profit

on the raw sugar it bought. There is an agreed “notional price” for sugar, and if the world price drops below it, the stabilisation account balance increases. If the world price rises the account approaches- deficit. “If very large amounts are being .built up in the account, they (the company) would prefer to decrease the price and increase sales,” Mr Pennington says-. •• “If a deficit is being approached, they are obliged to notify us that a price increase is planned, or they would have to shoulder the deficit themselves. We look at it and give out impressions, and that is taken into account.” New. Zealand Sugar’s monopoly of the sugar business is one of the reasons the Government is involved. in supply and pricing arrangements. New Zealanders each consume about 37kg of sugar a year — 102 grams a day. or 386 calories . — which is more than the nationals of practically any other country except Australia. Sugar is an important commodity, and a price increase of 30 per cent like the one inflicted recently affects prices* throughout the food and drink industries, with significant consequences for the cost of living. Refined white sugar is sold by the refinery in 35kg bags at a uniform price of $630 a tonne, or 63c a kg. The current maximum retail price is 74c a kg, although grocery chains often use sugar as a "price leader” and sell it at a discount.

From total imports of 166,359 tonnes of raw

sugar in 1978, the sugar company produced 134,100 tonnes of refined sugar. The 78 imports of 163, 682 tonnes cost $44.3 million. As it is not a listed company, its shares are not traded on the New Zealand Stock Exchange, and its profits are not made public. As well as controlling Queensland’s- raw sugar sales to New Zealand, and owning the New Zealand sugar monopoly, C.S.R. used to own _the four sugar mills in Fiji. It sold them to the Fijian Government in the early 19705.

Britain has traditionally taken the bulk of Fiji’s sugar surplus, and this has continued since the United Kingdom joined the E.E.C. thanks to the Lome Convention which enables Third world countries of Africa, the Caribbean. and the Pacific to export certain commodities to the E.E.C. at favourable prices. Most of the sugar produced by those countries goes- to Britain, which has the only cane sugar refineries in the E.E.C. But the E.E.C. as a whole produces large surpluses of sugar from sugar beet. It is often disposed of by dumping on the world market ’ at subsidised prices, thus depressing the world price to other producing countries. At last year’s UNCTAD talks, the “Group of 77” (which President Nyerere of Tanzania calls the “trade union of the poor”) criticised the E.E.C. for increasing its sugar exports and failing to participate in the International Sugar Agreement. France rejected the criticism on the E.E.C.’s behalf.