Thursday, February 16, 2012

Global Sugar Prices Down, But Subsidies Up?

The Minister of Domestic Trade, Consumerism and Cooperatives, Datuk Ismail Sabri has announced earlier this month that the Government has entered into a 3-year contract to import raw sugar for US$26 per 100 pound signed in January 2012.

As a result he has announced that the Government had to increase the subsidies for sugar sold in the country from 20 sen to 54 sen per kilogramme. According to the Minister, the increase in subsidies to was due to “skyrocketing” global prices.  Consequently, the government would now have to pay RM567 million for sugar subsidy this year compared to RM262.4 million last year.

The question that needs to be asked however, is why did the Government sign a 3 year contract to purchase sugar at US$26 per 100lbs when the last traded price of sugar as at December 2011 was on US$23.42 per 100lbs or a significant 10% below the Government’s purchase price?

Based on the fact that Malaysia imports approximately 1.24 million tonnes or 2.73 billion pounds of sugar per annum, Malaysia would have overpaid by RM64 million.

What is of greater concern is that the Government is locking in the purchase of sugar at high prices when the global sugar prices have been trending downwards.  After hitting a peak of US$29.47 per hundred pounds in July 2011, the price of sugar has fallen consistently every month – US$28.88 (August), US$26.64 (September), US$26.30 (October), US$24.52 (November) to US$23.42 (December) per 100lbs.

In fact, a February 5th Bloomberg report cited Macquarie Group Ltd as claiming “sugar prices may fall to as low as 18 cents a pound this year as a forecast surplus for the 2011-12 season becomes available”.

The report further added that “sugar supplies are set to outpace demand by 9 million metric tons in the 2011-12 season that began in October, according to trader Olam International Ltd. The estimated surplus has started to reach the market and will increase throughout the year, said Carlos Murilo Barros de Mello, managing director at Macquarie Brasil Participacoes Ltda.”

If sugar prices does indeed hit US$18 per 100lbs, then Malaysia stands to lose approximately RM491 million per annum. Instead of having to increase subsidies, Malaysia could have further reduced sugar subsidies without having to increase the price of refined sugar.

Datuk Ismail Sabri must explain how the US$26 per 100lbs transaction is arrived at.  The Minister had arrogantly said “let me remind you that the government is smart” when announcing that the Government had entered into the long-term contract.  It is now looking like the Government is being completely foolish in its attempt to be smart and it’s costing the tax-payers hundreds of millions of ringgit more than necessary.

The Minister must also explain why is it that it is the Government who has to commit and pay for raw sugar import when it should be the Malaysian sugar duopoly – Malaysian Sugar Manufacturing Bhd and Tradewinds Bhd which should importing the raw sugar at the lowest possible prices.  Shouldn’t these companies be forced to compete and not be sheltered by the Government from market risks?
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