ASEAN integration and challenges to the sugar industry

Corporate Watch
Amelia H.C. Ylagan

Posted on August 12, 2014

SUGAR, a centuries-old Filipino industry, probably faces its greatest challenge ever in the forthcoming 2015 Association of South-east Asian Nations (ASEAN) trade integration and cooperation vis-à-vis global markets. Although the Philippines is the second largest sugar producer among ASEAN countries next to Thailand, the tenuous demand and fluctuating supply make the industry vulnerable to competition within ASEAN, with the 5% uniform tariff on deliveries priced on non-uniform costs.

A file photo of a worker loading sugarcane in Escalante City, Negros Occidental. -- AFP
When Ferdinand Magellan discovered the Philippines in 1521, sugarcane was already planted in many islands, particularly in the Visayas, according to historians. Under Spanish colonization, farms and other vast tracts of land headed by Spanish encomenderos were dedicated to rice and sugar, to raise tribute for the King of Spain. The encomienda system soon evolved into haciendas or the land-holding system. The real haciendas were big tracts that belonged to the King or government; the friar haciendas were likewise huge parcels of land; and the pueblo farms -- four to five hectares each allocated to native families mostly engaged in rice, sugar and corn farming, were under prohibition from further land accumulation.

But of course, in the lack of administrative and regulatory controls, the buying, selling and accumulation of land nevertheless thrived. In the mid-1800s, mestizos (Spanish-descent Filipinos), Chinese-Filipinos and rich native Filipinos had acquired vast haciendas. By the early 19th century, the Luzurriagas, Montillas, Gastons and Lopezes were already among the old-rich families with huge sugar landholdings, most of which are still planted to sugar today. In Luzon, the Roxas family of Batangas and the Cojuangcos of Tarlac, among others, came to prominence. Sugar became the Philippines’ leading export. The port of Iloilo had become an international port, to service 204,000 tons of sugar sold as of 1885 -- the third largest in production next to Cuba and Java.

After the Spanish-American War of 1899, Spain ceded its colony, the Philippines, to the United States. The protectionist comfort of America further boosted the growth of the Philippine sugar industry. Initially, only up to 300,000 tons of Philippine sugar were allowed to enter the US tariff-free, but the quota limitation was soon lifted. The 820,000 mills in Negros were replaced with American-owned centrals and rail networks under a production-sharing scheme. The country started producing centrifugal sugar of 807,000 tons by 1928.

After the devastating world depression of the 1930s, the US looked at limiting quotas for sugar importation to control rising prices due to world food scarcities. But before stabilization could be effected, World War II broke out, and many Philippine sugar mills were destroyed, made idle, or used by the Japanese to produce liquid fuel for operations.

The sugar mills were rehabilitated and rebuilt after the war and the sugar free trade between the US was extended until 1954, after which full duties were assessed until 1959. From more than 112,000 tons after the war, production rose to 1.313 million tons in 1958. Add to that the increased US demand and the raising of quota to more than 1.26 million tons, then 1.59 million tons when Cuban sugar was under embargo during the Cuban crisis of 1972. That was the heyday of the sugar industry in the Philippines.

But during martial law under Ferdinand Marcos came the worldwide glut of sugar, forcing prices to plunge. In the 1980s, high-fructose sugar from corn defeated cane sugar for food, and the sugar industry floundered further. The 1986 EDSA People Power Revolution focused attention on the agrarian reform program, implemented by President Corazon Aquino. This brought about the decline in the average hectarage allowable, resulting in the fragmentation of farms.

The 1987 Comprehensive Land Reform (extended until 2014) ordered the distribution of plantations in excess of 25 hectares to workers and beneficiaries. Sugar plantations now averaging five hectares in size face difficulties in terms of economies of scale, and are struggling for survival. Some have organized into cooperatives, and engaged shared paid management consultancies. The realities of global competition, like higher labor and operational costs, will make it difficult to compete with nine other countries in the ASEAN Economic Community (AEC) come 2015.

“Small farms cannot compete with bigger and better-financed firms in Thailand. [The government] needs to allow reconsolidation, and to remove the Comprehensive Agrarian Reform Program (CARP) Law for sugar, rice and most other crops,” Jose Maria Zabaleta, former chair of the Philippine Sugar Millers Association, said in an Inquirer interview.

Present tariffs on imported sugar now are at 18%, and will be forced to go down to 5% by the single market and distribution base of AEC in 2015. The integration allows ASEAN companies in 10 ASEAN member-nations, including the Philippines, to enter each other’s markets, encouraged by zero tariffs and reduced bureaucratic clearance requirements, analysts say. Is the Philippine sugar industry ready for this?

A master plan for the sugar industry (2010-2015) was drafted by the the Sugar Regulatory Administration (SRA), the Philippine Sugar Millers Association (PSMA) the Sugar Master Plan Foundation Inc. (SMPFI) and affiliated groups as a road map toward the 2015 AEC integration. The Master Plan declares: “The key strategy for the next five years is to harness the mill district development councils (MDDC) as the grassroots-based structure for the development of the Plan.”

The sugar industry reveals apprehensions about how it will fair, with minimal, if not absent subsidy from the Philippine government “unlike other sugar producing countries,” aside from “local politics” complicating the impact of international trade dynamics and the domestic market. “The Financial Crisis of 2008-2009 in the US and Europe raised doubts on the practicality of free trade deals and encouraged protectionism even among the core countries of the World Trade Organization (WTO).”

Still undaunted, the annual Philsutech convention of planters, millers and other stakeholders will be held starting today until Aug. 15 in Cebu to discuss and assess the progress of the industry’s preparation for ASEAN 2015. Keynote speaker Senator Cynthia Villar, chair of the Senate Committee on Agriculture and Food, is expected to talk on the Senate version of the Sugarcane Development Act, which “aims to boost the diversification efforts of the sugarcane industry” (includes ethanol and other non-food products). The SRA head, Ma. Regina Martin, will deliver the State of the Industry report.

Amelia H.C. Ylagan is a Doctor of Business Administration from the University of the Philippines.