Bacaoco: China's sugar industry

THE Chinese sugar industry has metamorphosed dramatically in the past decade and a half. It used to be highly fragmented and loss-making when it was still ran by the state. Privatization and government intervention led to the consolidation and resurgence of the industry.

In 1995, more than 50 small, inefficient and poorly financed mills, most of which were state-owned, operated in the PRC. Yet, sugar farmers had the incentive to produce as much cane because of high support prices from the government.

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Oversupply eventually drove down sugar prices but government entered the picture by buying the surplus and storing it as strategic reserve, thus stabilizing sugar prices. When domestic prices sometimes surge, government digs into this reserve to stem the increase.

Aside from low productivity and high production costs, the industry was also plagued with smuggling and the increased use of the artificial sweetener saccharin. In '94-'95, legitimate and illegitimate imports amounted to 3 million mt.

Thus, in the late 90s, the PRC shut down almost 150 of the smallest mills which resulted to a 20% drop in production. The state also cracked down on sugar smuggling and strictly regulated the use of saccharin. Tariffs also slowed down imports but, under its WTO commitment, China allows imports of almost 2 million annually.

The entry of the new millennium saw the infrastructure for the industry's growth firmly in place. There was a growing market demand, imports were strictly limited by quotas and tariffs, saccharin use was controlled and investors were beginning to consolidate and modernize the processing industry.

By 2008, 60% of domestic production was controlled by the top ten sugar groups, including British Sugar. These groups comprise a mix of private Chinese companies, state-owned companies and some foreign invested corporations.

Sugar production in China is centered on the sugarcane-growing southern provinces of Guangxi, Guangdong, Yunnan and Hainan. Patches of sugar beet are grown up north in Xinjiang and the region covering Helongiang, Inner Mongolia and Hebei.

From 1998 to 2008, Chinese domestic production has risen 40%, from 8.8 million mt to 12.3 million mt. The annual growth rate is almost 4%. Cane sugar accounted for the increase, as the northern beet-growing provinces produce barely 1 million mt annually.

Among the cane-producing provinces, Guangxi leads the pack. Back in '98-'99, its production was less than 4 million mt and accounts for only 42% of national production. In the 2008 campaign, Guangxi produced 7.6 million mt, representing 62% of total sugar production.

For the 2008-2009 season, Chinese sugar production was pegged at 12.3 million mt, down by 17% compared to the previous season's bumper crop of 14.8 million mt. Guangxi's production drop was the largest at 1.8 million mt out of the 2.5 million decrease.

Sugarcane farming enjoys a favorable environment in China as prices are generally set in advance by the provincial government. Last year, it was pegged at RMB260/mt (approximately P1,800/mt), plus a premium on high-yielding varieties.

Local governments support sugar production because it is a main contributor the local economies. Aside from providing substantial incomes to rural farmers and allied industries, it also generates vast amounts of tax revenues.

In one province, for example, as much as 50% of tax revenues come from the mills. No wonder, then, that local governments encourage their constituents to go into sugar farming. The mills, which have an average utilization of only 80% of capacity, also strongly encourage farmers around their mills to go into sugar farming.

The Philippines has roughly 400,000 hectares devoted to sugarcane. In Guangxi province alone, sugarcane is grown in one million hectares of land. A similar area is devoted to rice.

Yields and sugar contents have been steadily improving, though much of the cultivation and harvesting is still done by hand. In this aspect, the Philippines shares a similar problem with China's sugar industry.

The rapid growth of industrialization in China's cities has been drawing rural folks into the urban areas to work in factories. This has multi-faceted implications on China's economy.

For one, the influx of rural laborers into the cities translates to fewer laborers available for farming in the countrysides. This has driven up the cost of labor in sugar farms, to the extent that they have to pay the equivalent of more than P500 per day for the extra laborers needed to cut and load the canes during harvest.

In the broader perspective, this has caused a decline in China's agricultural production. While China has become one of the largest manufacturers of various products in the world, this distinction also came with the high cost of food insufficiency. China has to rely on food imports because of the decline n agricultural production.

Some Chinese leaders are alarmed at the PRC's growing dependence on other countries for their food security. In fact, when Chinese sugar authorities were asked about the progress of their ethanol program, they replied that they do not have the canes for the ethanol.

"We don't even have enough sugarcane to provide for our domestic sugar consumption. We can't spare the canes for ethanol," they explained.

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Tim Gilkinson, managing director of the Pacific Business Press, is here for a visit in Bacolod. Welcome to our city, Tim. I hope you find your stay enjoyable and fruitful.

The Pacific Business Press publishes the Asian Counsel, a Hong Kong-based monthly magazine devoted to the legal profession which circulates in the Asia-Pacific region. Aside from its hard copy, it also has an online version published weekly which contains updates of recent legal deals and moves in the region. I help edit the online version.

Welcome back, too, to Yvette, the data manager of Pacific Business Press. Yvette is a Bacolodnon but she is now based in Hong Kong. I hope you can visit our city more often, Yvette!

(For reactions and suggestions, email bbacaoco@yahoo.com.)