Bernardo M. Villegas
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Addressing the Sugar Crisis Long-Term (Part 1)

             It was almost predictable that the first governance crisis in the newly-installed Administration of President Ferdinand R. Marcos Jr. would involve the importation of sugar.  The crisis unfortunately resulted in the resignation of one of the most competent officials in the Department of Agriculture, Undersecretary Leocadio Sebastian, who had just been appointed by the President as undersecretary of operations and the President’s chief of staff in the DA. Before he was sworn in on June 30, 2022, the President had already been warned by his sister, Senator Imee Marcos, about “the midnight importations of sugar,” after the Sugar Regulatory Administration (SRA) issued an order to import 200,000 metric tons of sugar.  Senator Marcos warned that this was in violation of two temporary restraining orders (TRO) issued by the Sagay and Himamaylan regional trial courts in Negros Occidental last February 2022.  Understandably sugar planters, who sought the TRO, were strongly opposed to the importation of sugar at this time since it was their peak million season.

            Without dwelling into the human intricacies of this complicated issue, which has unleashed a political storm involving influence peddling, corruption, and smuggling, I would like to ask a fundamental question about the Philippine sugar industry.  Why is the Philippine sugar industry not globally competitive which results in its having to supplement its local production with imports?  More concretely, why is Thailand able to produce sugar at comparatively lower costs than the Philippines?  It is understandable that in the rice sector, Thailand (and Vietnam) have a competitive advantage over the Philippines in palay farming because of their practically unlimited supply of water from their ocean-like rivers.  In contrast, sugar cane is not a sensitive crop and can be grown in almost all types of soil, from sandy to clay loams and from acidic soils to calcareous sedimentary deposits.  In fact, at least seventeen provinces of the Philippines have traditionally grown sugarcane, of which the two on Negros Island account for half of then nation’s production.

            An article in the Philippine Star by Louise Maureen Simeon, reporting on a benchmarking analysis with Thailand by the Sugar Regulatory Administration sometime in early 2020 (just at the beginning of the pandemic in the Philippines) may give us certain clues in answering the question we have posed.  What Thailand doing that we are not doing?  Then SRA Administrator Hermenegildo Serafica observed that the success of the Thai sugarcane industry is mainly anchored on the organized, collaborative and supportive effort of the Thai government, millers and sugarcane growers.  Having served in the board of the Victorias Milling Company during the 1990s, I can say that from first-hand knowledge, this close cooperation among the major stakeholders of the Philippine sugar industry was very difficult to achieve.  On the contrary they were like cats and dogs constantly warring against one another, complicated by undue political interference from both national and local government officials.  I pray that this is not what is happening in the current sugar import controversy!  At least during that period, planters were so unconcerned about the common good of the entire industry so that they were practicing pole vaulting.  They were willing to travel hundreds of kilometers away from their respective milling districts in order just to get a few pesos more of additional income.  I understand that this practice is still ongoing.

            In Thailand, the Office of the Cane and Sugar Board, which is composed of five representatives from the government, nine from the sugarcane growers and seven from the sugar mills, sets sugar prices at the start and end of the milling season.  It also announces the start of each milling season.  According to Mr. Serafica, “The Thai Cane and Sugar Act of 1984 mandates a 70-30 revenue sharing scheme for growers and millers where the growers receive 70 % of the total revenue from the sugarcane, less coss and taxes, and mills earn the remaining 30 %.”  In contrast, in the Philippines, the sharing can be 60 – 70 for growers and 30 -40 for mills depending on the mill and what is being shared is only the sugar and molasses produced from the sugarcane.  In Thailand, all sugarcane growers are registered to the mill where they will deliver their canes and the growers commit a certain volume of cane to the mill.  The growers receive an 80 % initial payment of the share expected at the end of the season.

            Unlike the cut-throat competition that often prevails among millers and planters in the Philippines, in Thailand deliveries of sugarcane to the sugar mills are programmed and scheduled by the mills from their registered sugarcane farmers and the time between when the sugarcane is harvested from the farm to the time it is fed to the crusher of the mill.  A zoning scheme is also strictly implemented to avoid supply competition and to lower hauling cost while a sugar fund is set aside to provide loans for growers at 2% interest rate.    In terms of research and development, the Thailand Society of Sugar Cane Technologists in Kasetsart University in Bangkok receives an annual grant for sugarcane research of $2 billion.  The funding for the equivalent Philippine Sugar Research Institute is so miniscule to preclude any significant contribution to the improvement of the productivity of the sugar industry in the country.

            Thailand, as a newcomer to the sugar industry compared to centuries-old production of sugar in the Philippines, was able to avoid the very counter-productive intrusion of politics and vested interests in the Philippine sugar industry that have militated against the long-term improvement of productivity in this vital agricultural sector.  Thanks to a very insightful commentary by one of the most knowledgeable agricultural scientists in the country, Dr.Fermin Adriano, President Marcos Jr. and his economic team need not look far for advice on how to use the ongoing sugar supply crisis to finally come out with long-term solutions.  In a summary of findings of his colleagues from the academe, Dr. Adriano enumerated in a column he wrote for the Manila Times (August 18, 2022) the major causes of the long-term decline of the Philippine sugar industry.

            First, as I personally experienced as a member of the board of Victorias Milling Corporation in the 1990s, there is the fixed sharing between the planters and the millers that was mandated by Republic Act 805 (The Sugar Act 1952).  Under this scheme., a certain percentage (i.e. 60% for the planters and 40% for the millers) of the proceeds of the final output shall be shared as prescribed by the Act.  We saw this arrangement as unfair because the benefits of any major expenditures we made to improve our productivity in the mill would go mostly to the planters, even if they did nothing to deserve the increase in the revenues.  Dr.  Adriano points out that the argument proffered by the millers is similar to the one leveled against share-tenancy (such as the one prevailing in rice farming before the agrarian reform program) because under that sharing scheme, the farmer had no incentive of increasing his productivity because the gains would just be shared at a fixed rate with the landlord even if the latter did nothing to deserve the increase in revenue.

            The second reason for the underperformance of the Philippine sugar industry is the complete disregard for the benefits of competitive forces that resulted from the so-called sugar “quedan” system that was provided for by Executive Order 18 during the Administration of former President Cory Aquino in 1986.  This Executive Order also established what is now in the limelight during the current sugar import controversy:  the Sugar Regulatory Authority (SRA).  The quedan system is a super-complicated means of stabilizing sugar prices (a reasonable objective) by allocating sugar supply depending on their utilization or destination.  “A” was for the sugar output allocated to fulfill the Philippine sugar obligation for export to the U.S. market.  “B” was the amount destined for the local business community (food processors or exporters).  “C” is reserve sugar that can be used to fill supply gaps whether in “A” or “B”, if any.  And “D” is sugar sold to the world market, the least preferred because of normally lower global prices given competition from other sugar producing countries. As usually happens, when market forces are disregarded, this complicated scheme discouraged efforts to make the sector more productive and cost-efficient because the allocation system guaranteed stable and profitable prices for the producers (whether planters or millers).  Especially at the farm level, what is the point of improving productivity when hefty profits are automatically assured?  Efforts to replace the quedan system with some form of auctioning were systematically foiled by the strong vested interests, especially as the sugar industry was heavily politicized.

            The third reason has to do with the law of economies of scale.  The Comprehensive Agrarian Reform Program (CARP) implemented in the 1980s led to the fragmentation of sugar farm lands into very small uneconomical sizes.  Although the fragmentation of land under an agrarian reform program is justifiable for reasons of social justice (it was unjust that huge tracts of land would be in the hands of a few families, especially in the Western Visayas region), the Philippine Government could have emulated the common sense of the Taiwanese Government under the leadership of Chiang Kai-Shek.  Taiwan was one of the first East Asian economies to implement a most rigorous land reform program.  They, however, had the practical sense of exempting the sugar industry from the program, They kept the farm sizes large to achieve economies of scale, enabling their sugar producers to reach high levels of productivity.  As Dr. Adriano pointed out in his column, a study of Tasso Adamopoulos and Diego Restuccia published in the American Economic Journal (2020) showed that Philippine sugar farm productivity in areas subjected to agrarian reform declined by 17 %.   As my colleague at the University of Asia and the Pacific and Director of the Center for Food and Agribusiness, Dr. Rolando Dy, estimated in a study of the Philippine sugar industry, the minimum size for economic viability in sugar farming is 50 hectares.  As an aside, it was also Dr. Dy who, when he was at the World  Bank in the 1980s, advised the Malaysian Government to avoid the mistake of defining food security in rice as 100 % self-sufficiency.  From the very start, Malaysia realized that they could never match the cost effectiveness of the Thai or Vietnamese rice farmers.  Malaysia always imported part of their domestic requirement for rice and decided to devote a great part of their land resources to higher-value crops in which they had a comparative advantage, such as palm oil and rubber.  The rest is history:  Malaysia became the biggest producer of palm oil in Southeast Asia and made more than enough money to import low-cost rice from Thailand and Vietnam.  To be continued.