Volatile sugar market poses challenges for DEXIA

Escalating world sugar prices are posing serious challenges to DEXIA in maintaining reasonable prices to the consumer. Taking into consideration the impact of high prices on the consuming public and the need to provide adequate resources to DEXIA to discharge its mandate, the recommended retail price for white sugar has been increased from EC$1.04 to EC$1.20 in Area 1. The prices of the brown sugar and other commodities handled by DEXIA remain unchanged. This article attempts to provide more information to consumers on the state of the sugar market.

For two decades, DEXIA has dutifully performed its dual role of export promotion and trade facilitation, and the importation and sale of essential commodities. Funding for its varied support programmes to farmers, agro-processors, exporters and other stakeholders has been generated from the proceeds of the sale of rice and sugar. In keeping with its socio-economic mandate to stabilize commodity prices, the Agency has also heftily subsidized the prices of sugar and rice. However, within the last two years, DEXIA has not been able to generate sufficient funds to pay for these programmes. Declining sales revenue and more importantly, rapidly escalating world sugar prices have overburdened the Agency’s finances. Thus, the budgetary problems and fallout from the present volatile sugar market are exercising a debilitating impact on DEXIA’s ability to effectively execute its mandate.

Concessions to the private sector to import packaged rice severely affected DEXIA’s bottom-line, resulting in an annual shortfall in revenue of some EC$700,000. The more catastrophic blow to DEXIA’s funding and programming was dealt by the volatility of the sugar market and the meteoric rise in the world market price of white sugar. Prices over the last two years have more than doubled. Towards the end of 2004 up to March of 2005, DEXIA was purchasing white sugar from the UK at US$363.50 CIF per metric tonne. Since then prices have been on a steady incline. By June 2006 prices had spiked to US$645.00 CIF per metric tonne.

This represented a 78% increase in price. Local wholesale and retail prices however hardly budged. DEXIA’s commitment to maintain ‘reasonable and stable prices’ to the consumer only magnified the devastating impact of such price hikes on the Agency’s finances and operations. “The present world market prices, says Gregoire Thomas, DEXIA’s General Manager, “militate against our ability to continue to offer high quality sugar to the consumer at existing prices.” The new price regime is hurting DEXIA deeply. In fact, unless world market prices revert to the 2004 level or adjustments made to allow consumers to pay for such increases at the retail establishments, DEXIA will have to initiate further cuts to an already badly hemorrhaging fiscal situation.

It is very unlikely however, based on the latest trends and figures published by the International Sugar Organization (ISO), that sugar prices are going to return to levels of US$365.00 CIF per metric tonne anytime soon. Today’s market is very volatile and displays very strong bullish tendencies. Since April 2005, there has been a general increase in the average F.O.B prices for white sugar. And although prices decreased slightly in June, they consolidated and recovered in July and are expected to increase in the ensuing months. These sharp increases are being fueled by strong international demand and anticipated decreases in production. Due to rising oil prices, sugar is being converted to ethanol to run vehicles.

Additionally both Australia and Brazil, two of the world’s largest producers may experience significant production loss during the upcoming months thus contributing to upward pressures on prices. Although less volatile and onerous, prices for brown sugar and rice, have also posted moderate increases during the same period. DEXIA has been forced to absorb these increases and maintain massive subsidies to the consumer. These subsidies within the last year (May 2005 •May 2006) have been valued at almost EC$400,000.00.

Quite apart from the fiscal discipline and introduction of a number of cost-cutting measures, DEXIA has attempted to source white sugar from regional suppliers. While the price is better than that offered by the UK, consumers have demonstrated a greater preference for the better quality Tate & Lyle sugar. However, even with the better priced regional sugar, current retail prices are unsustainable.

At US$520.00 CIF per metric tonne, the Agency is still purchasing sugar at a price that is 43% higher than what it paid in March 2005. Furthermore there are a number of uncertainties surrounding the region’s supply capabilities over the long haul. In January 2006, DEXIA applied moderate increases on the price of white and brown sugar. However the price adjustment was based on projections of US$420.00 CIF per metric tonne. Since then world market prices have steadily increased peaking at US$645.00 per metric tonne.

Given the present volatility of the sugar market driven by major structural changes in white sugar supply in the EU, Australia and Brazil, sugar prices are expected to increase further or remain at a high premium. Compared to an estimated 7.5-8 mln tones in 2005/06, EU exports in 2006/07 are most likely to be capped by the WTO limit of 1.3 mln tonnes. This will continue to spur higher prices and pose significant challenges for consumer countries like Dominica. In its June Market Report, the ISO stated that “in the mid-term, taking into account the absence of the reliable supply of quality white sugar from the EU, the white sugar premium is set for higher volatility.”