ASSESSMENT AND ANALYSIS OF THE IMPACTS OF TRADE POLICIES IN THE

PHILIPPINE SUGAR INDUSTRY1

Ricalde, Ruby Grace

Dela Cruz, James

Frias, John Dave

Morales, Dianne

Onella, Rona Alynn

UNIVERSITY OF THE PHILIPPINES MINDANAO

SCHOOL OF MANAGEMENT

BS AGRIBUSINESS ECONOMICS

May 22, 2015

1 Final paper on ABE 154 – International Agricultural Trade under Prof. Luis Antonio Hualda, Second

Semester of Academic Year 2014-2015.

I. INDUSTRY OVERVIEW

A. History of the Philippine Sugar Industry

The history of sugar production was linked toward colonialism and slavery. Early European

settlers in the Caribbean started to plant sugarcane and build sugar mills to process the output. Sugarcane

plantations need intensive input and maintenance requirements. Workforce that would work long hard

hours of backbreaking labor without complaint was needed. As a result, between 1450 and 1900,

colonialists brought almost 12 million West Africans to the Caribbean to work under difficult conditions

in the sugar plantations they have established there (Henderson, 2000).

Although there was no case of slave trade in the Philippines, the sugar industry in the country has

its own history of exploitation. This is shown in the province of Negros Occidental were hacienda system

evolved and was built on sharecropping and debt relations. In the 1856, British colonizer, Nicholas

Loney, brought in a shipment of machinery for sugar production for export and established a credit

system that eventually encouraged the modernization of the sugar industry (PAKISAMA, 2012). By the

1860s, Negros Occidental was the leading sugar producing province in the Philippines and by 1880, the

Philippines produced over 200,000 tons of sugar for the first time, making it the third largest producer in

the world, next to Cuba and Java (Henderson, 2000).

The commercialization of sugar cane crop started in the Philippines in the 18th century, and by

the 19th century, sugar became a major commodity for export. By the 20th century, the growing needs of

America for sugar fuelled a major expansion of the crop. This, together with new technology in sugar

milling and the provision of adequate financing, created what is now known as the Philippine sugar

industry (Zabaleta, 1997).

B. Contribution of Sugar to GDP

Figure 1. State of the Philippine Sugarcane Industry

Source: Sugar Regulatory Administration (www.sra.gov.ph)

According to Sugar Regulatory Administration (SRA) shown in the Figure 1, the production of

sugar was valued to account 87 billion pesos to the national GDP in the crop year 2013-2014. Its

contribution to the national economy was in terms of total revenues from the sale of raw sugar, refined

sugar, bioethanol and molasses, tolling fees of refined sugar, value-added tax (VAT) on tolling and VAT

from the sale of refined sugar (Doronilla, 2014). The province of Negros Occidental was considered as

the primary producer of sugar and accounted for 51% of sugar produced and has contributed 18 billion

pesos to Negros' GDP

The Philippines was considered as second biggest producers of sugar in Southeast Asia and

seventh in the world. There are at least 23 provinces that produce sugarcane in the Philippines and about

423 000 hectares of land devoted to sugarcane production. The largest production is found in Negros

which accounts for 51% of sugarcane areas planted in the country. It is followed by Mindanao which

accounts for 20%; Luzon, 17%; Panay islands, 7% and Eastern Visayas, 4% (Master Plan for the

Philippine Sugar Industry, 2010). Sugarcane production has a of 2% share of the total agricultural

production (CountryStat, 2015) as shown in Figure 2.

Figure 2. Total Agricultural Production in billion pesos for CY 2011-2013

Source: countrystat.bas.gov.ph

In the Philippines, sugar production contributes a significant amount to the Gross Domestic

Product. However, services sector is still the biggest in the Filipino economy which accounts for 57

percent of total GDP. Real estate, renting and business activities comprise 11 percent; transport, storage

and communication comprise 8 percent; financial services accounts for 7 percent and public

administration, defense and social security for 4 percent. Industry sector accounts for 31 percent of GDP.

Within industry, manufacturing (22 percent of total GDP) and construction (5 percent) are the most

important. Agriculture, where the sugar industry belongs to, contributes to the remaining 12 percent of

GDP (Trading Economics, 2015).

C. Employment Generation

The Agricultural Sector has provided employment to 11.84 million out of 38.13 million people. It

has decreased from almost 33% in 2011 down to 31% in 2012 of the total labor force in the Agricultural

Sector (CountryStat, 2015) as shown in Figure 3.

The sugar industry, in particular, has indeed become a major business in the Philippines, therefore

providing employment to the people. The sugar industry is estimated, as of 2013, provides direct

employment to 700,000 workers in both plantations and milling/refinery plants with 5 million dependents.

These farmers are spread across 23 sugar-producing provinces in the country (Doronilla, 2014). The type

of activity of sugar industry workers ranges from small subsistence farming and fishing to large

commercial ventures with significant export focus (Master Plan for the Philippine Sugar Industry, 2010).

Figure 3. 2013 Share of Agriculture (in %) in Total Employment

Source: countrystat.bas.gov.ph

D. Sugar Production

Cultivation of sugarcane predates the Spanish colonialism. When Magellan arrived in our islands,

sugarcane fields are widespread. However, it was until the Spaniards came when new propagation

techniques were introduced to mass produce the commodity.

Figure 4 below is the summary of the production, import, export, and domestic withdrawals of

sugar in the Philippines from 2002 to 2012. Based on the chart, there is a rise and fall in the sugar

produced by the country. Environmental calamities are considered the reason behind this fluctuation. To

have a more microcosmic look at the trends of the production and export trend in the Philippine sugar

industry, this section will focus on the crop years 2008-2013. Meanwhile, the table below shows the

production of sugar from crop year 2008-2009 to 2012-2013.

Figure 4. Philippine Sugar Production and Trade for the Past 10 Crop Years (in metric tons)

Source: Sugar Regulatory Administration

Crop Year 2008-2009

In SRA’s annual report for the CY 2009 shown in Table 1, the Sugar Regulatory Administration

noted that the actual raw sugar production declined by 14% from the previous crop year of 2007-2008,

which was then the lowest in 14 years. This is due to the drop of area planted with sugarcane since many

farmers were discouraged to plant more of the crop because of the low sugar prices in the market which

was the result of surpluses in production in the previous years (SRA Annual Report, 2009).

Table 1. Raw Sugar Production by Month (Metric Tons) Crop Years 2008-2009 to 2012-2013

Source: Sugar Production Bulletin

REGULATION DEPARTMENT

Prepared by: Planning & Policy Department

Crop Year 2009-2010

Sugar production continued to fall during this crop year. This crop year, it fell by 6% (SRA

Annual Report, 2010). This decline may be due to the decrease in the crop yield and the lack of

motivation of many sugar farmers and field owners to increase their production but instead planted them

with other fruit crops or converted them into residential/commercial areas. Another factor is that the dry

spell or El Niño began during the crop year which extended to the next crop year.

Crop Year 2010-2011

For the Crop Year 2010-2011 a total of 2,399,116 MT was produced, a 21.73% rise over the

previous crop year’s production of 1,970,784 MT, the first time production increased since CY 2007-

2008. Because of the efforts of the Philippine agricultural agencies, the Department of Agriculture, Sugar

Administration, and National Food Authority, the country has recovered from the drought it has

experienced the previous year. These agencies conducted discussions with the different stakeholders

during the year to teach them sustainable farm management practices and what to do to counter the effect

of climate change.

Crop Year 2011-2012

Raw Sugar Production for Crop Year 2011-2012 reached 2,244,131 MT, a 6.46% decrease from

the previous crop year’s record of 2,399,116 MT. In spite of the decline, the SRA reported that the

country was able to meet its export and domestic requirements. One factor of the decline aside from the

already-known causes is the damage caused by Typhoon Pablo.

Crop Year 2012-2013

The raw sugar produced in the Crop Year 2012-2013 was the highest in 6 years, 2.461 million

MT in spite of the significant reduction of export to the United States. According to the annual report of

the Sugar Regulatory Administration, this is due to the “high demand of sugar based products during the

mid-part of the year to December, stable prices and the intensified anti-smuggling efforts of the current

administration in partnership with the private sector may have triggered the increase in the domestic

consumption.”

E. Export

In 1755, due to its ability to meet the consumption domestically, the Philippines became a sugar

exporter to the other parts of Asia. By 1770s, it has managed to become the leading sugar producer in the

continent. Exportation to the United States began in 1798 after Manila opened its doors to foreign trade.

After the end of galleon trade in 1815, investors came to the provinces and Negros became the central

sugar producer (SRA,n.d.) . By the start of 1844, sugar became the leading export crop of the country and

the United States being its top sugar customer. When the Payne-Aldrich Tariff Act was passed by the

American Congress in 1909, a quota of 300,000 tons of duty-free sugar for the Philippines was

established and would later be developed into unlimited sugar exports to the American market. During the

American colonial period, sugar became an important part of the Philippine economy. In order to provide

financial services to the sugar industry, the Philippine National Bank was founded in 1916.

The unlimited free market trade framework, however, ended when the Philippines adopted the

Commonwealth status in 1934 and the sugar exports became subjected to limited quota. The Laurel-

Langley Agreement signed in 1955 and expired in 1974, bettered the previously-set quota to the duty-free

sugar and led the Philippines towards the competitive sugar global market. The agreement was

compromised, however, when a rift rose between the United States and Cuba, another main sugar

producer. As a result, the Philippine sugar quota was adjusted (Filipino Yum, blogspot.com, 2011).

In 1970s, however, after the Laurel-Langley Agreement expired and the quota system was

abandoned, the Philippines set its sugar’s selling price below the production costs. This was due to the

ineffective control of the International Sugar Agreements of the worldwide sugar pricing. As a result, vast

fields of sugar canes were left unharvested and workers were forced to move from place to place to find

another job. To help alleviate the situation, the Philippine government created Philippine Sugar

Commission (PHILSUCOM) in 1976 by virtue of Presidential Decree No. 388. The agency, however,

worsened the situation as it was tainted with countless controversies and corruption scandals. On May 28,

1986, after the People Power I, in accordance to Executive Order No. 18, the Sugar Regulatory

Administration (SRA) was established. Today, the sugar industry is still administered and governed by

the SRA (SRA, n.d.).

In accordance to Sugar Order (SO) No. 1, s. 2008-2009, the national sugar production allocated

10% of the total volume of the production to the Type “A” sugar. It is the type of sugar exported to the

US. Moreover, seven percent (7%) is given for world market export while the remaining 83% is used for

domestic consumption (). The Philippines focus more in exporting to the US market rather than the world

market. That is why the data shown below in Table 2 focused more in the US as an export market.

Table 2. Sugar Export Shipment to the USA from CY 2008 -2009 to CY 2012-2013

Source: SRA Annual Report 2013

The country exported 137,343.10 metric tons (MT) to US valued US $ 48,443,462.43 for CY

2008-2009. Since CY 2007-2008 was not available, we cannot identify if the export in CY 2008-2009 has

increased.

In CY 2009-2010, the export of the country to US increased. According to SRA, the increase was

due to the failure of other sugar-exporting countries to ship. From the original quota set by the US was

adjusted from 142,160 MT to 170,957.37 MT and it was valued US $77,511,960.89.

In CY 2010-2011, the Philippines was unable to export sugar from August to 2010 to January

2011 due to the drought spell or El Niño experienced during the period. However, because of the efforts

by the SRA, the industry bounced back. The efforts include implementing a sugar import program thru

the National Food Authority by using tax expenditure to stabilize the prices of sugar in the country and

ensure enough buffer stocks of sugar during the lean months of September and October. The export

increased to 212 505.15 metric tons which was valued US$ 141,427,631.41.

In CY 2011-2012, the exports of Philippines to the US decreased as much as 12,000 MT since the

majority of the export went to export markets which include Japan, South Korea, Singapore, Canada,

Samoa, Tonga and Malaysia (Ang, 2012).

The reduction in sugar exports in CY 2012-3013 is due to the oversupply of the commodity in the

US because of the abundance of sugar supply from Mexico, when it enjoyed the zero-tariff and zero-

quota trade agreement with the US in the same year. In a report by Czeriza Valencia for the Philippine

Star, then-SRA Board Member Cocoy Barrera pointed out that because of the agreement, the Mexican

sugar price is lowered and therefore looks more attractive than the Philippine sugar.

As shown above, the Philippines does not export all-year round or every month throughout a crop

year (September-August), this is because the SRA forecast the demand of the American and world market

demand of the commodity to understand how much the Philippines should export as a response to such

demands so that the market price will be regulated and the Filipino producers will not be affected much

by changes in economic situations of the sugar-importing countries. This is why in C.Y. 2012-2013, the

Philippines shipped sugar for only two months, February and July 2013.

II. SUGAR-RELATED TRADE POLICIES AND PHILIPPINE LAWS

Sugar prices have been fluctuating over the years. More countries are now consistently producing

and exporting higher amounts of sugar which pushes sugar prices in big regions such as the United States

and Europe to drop. This brings a difficult situation where countries are forced to decide to import sugar

for cheaper prices or have local farmers decrease their prices of risk being put out of business.

Many of the leading countries in sugar imports and exports are instigating sugar trade policies.

The goal is to try and combat the over production of sugar and the take over their own markets from other

countries (Greenwood, n.d.)

Trade, in terms of raw sugar equivalent, is heavily influenced by the export and import activity of

the European Union (EU), which although a net exporter on balance, is also the main importer of sugar.

The main net importers are Russia, Korea, Japan and the United States of America. The main net

exporters are Brazil, Thailand, Australia and the EU (FAO, 2004).

FAO Trade Policies on Sugar

The international sugar market is riddled with distorted trade policies in both local and

international markets. The Food and Agriculture Organization (FAO) oversees some of the trade policies

that are under major agricultural commodities like rice and sugar.

A key driver of change in sugar sector policy during the 1990s was the implementation of the

Uruguay Round Agreement on Agriculture (UR AoA).This agreement pushed countries to convert non-

tariff barriers to tariffs. In addition, countries agreed to allow imports up to a minimum of 3 of

consumption, or pre-agreement import quantities, whichever was greater. In principle, tariff rate quotas

(TRQs) specify that imports would be permitted up to the minimum access levels at low tariffs, and larger

volumes of imports would face higher tariffs (FAO, 2004).

Issues in International Trade Policies

Since there are inconsistencies and distortion in trade policies in the international market,

especially ones that puts developing countries in a disadvantage. On 15th October 2004, a WTO panel

ruled on a complaint brought by Brazil, Australia and Thailand against the use of EU sugar export refunds

and the cross subsidization of exports. The panel found that 2.7 million tons of exported EU “C” sugar

was cross-subsidized by the high guaranteed prices paid for A and B quota sugar. The panel also held that

an additional 1.6 million tons of refined sugar, which the EU exported to the world market, corresponded

to the amount of raw sugar that it imported from India and African, Caribbean and Pacific Group of States

(ACP) countries.

Another issue tackled by the WTO is the pushing of EU for developing countries to include sugar

in the Economic Partnerships Agreement (EPA). This changes the import quotas of ACPs to change to

10% which is clearly higher than the stated 5% of the UR AoA agreement. Regional Trade Agreements

are also being reformed as other countries are selling their sugar in higher-tier prices than what is

approved, this pushes importing countries to lessen their allotment to lower-tier quota holders. The

Regional Free Trade Agreement is being pushed by the US to Mexico in order to slowly decline Mexico’s

high tariff rates until free trade is allowed.

Another problem presented is the escalating subsidization of sugar in top exporting countries.

High subsidies decreases sugar prices but puts other countries out of the sugar exporting business. This

will push countries to rely on foreign imports which would endanger local producers (United States

Department of Agriculture, 2014)

US - Philippine Trade Agreement

A. Philippine Trade Act of 1946

In 1946, after World War II, the Philippine Rehabilitation Act and the Bell Trade Act, known as

the Philippine Trade Act, were signed by President Truman. Under the Philippine Rehabilitation Act,

war-damaged sugar mills were given monetary grants. The Bell Trade Act, provided for the continuance

of sugar free trade between the Philippines and the US until 1954. Under the said Act, a gradual

imposition of US tariff duties was to be placed in effect for a period of 20 years after 1954. Starting in

1974, full duties were to be assessed to Philippine sugar imports to the US. It also set absolute quota of

980,000 short tons free of duty (PAKISAMA, 2012).

B. Laurel-Langley Agreement of 1955

United States-Philippine Trade Agreement also known as the Laurel-Langley Agreement is an

obsolete trade agreement between the Philippines and the US. This trade agreement was signed in 1955

and expired in 1974.This agreement enabled US citizens, business corporations and investors 100%

ownership in all areas of the economy. This agreement pushed the Philippines deeper into poverty while

the US leeches off the Philippine economy. This also affected the sugar industry as it provided a

progressive reduction in the Philippine duty-free quota. The US is able to import a large amount of sugar

from the Philippines with only paying a substantial amount of levies (Ligaya, 1997).

When the Laurel-Langley Agreement expired in 1974 access to the US market was continued but

limited to just 13.5% of the total US sugar import requirement. The major cuts in its quotas for sugar cane

was because of the development of US own sugar industry based on High Fructose Corn Syrup.

Suddenly, the Philippines was forced to sell its sugar on the world market, which was basically saturated

with cheap and highly subsidized sugar. However, in 2006, the US increased the Philippine quota to an

additional 50,000 MT Commercial Weight of raw cane sugar that resulted to reduction of the local supply

of sugar in the market (SRA, 2006).

ASEAN Free Trade Agreement (AFTA)

The ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of Southeast

Asian Nations (ASEAN) which aim to support local manufacturing in all ASEAN countries. It was signed

by the involved parties on January 28, 1992 in Singapore. The primary goals of AFTA seek to:

• Increase ASEAN's competitive edge as a production base in the world market through the

elimination, within ASEAN, of tariffs and non-tariff barriers; and

• Attract more foreign direct investment to ASEAN.

The primary mechanism for achieving such goals is the Common Effective Preferential Tariff

scheme, which established a phased schedule in 1992 with the goal to increase the region’s competitive

advantage as a production base geared for the world market. Members of the ASEAN are working

towards the total elimination of import duties on all products to achieve the ultimate objective of a free

trade area. The AFTA presents gains and losses to local industries. AFTA will bring the tariff of sugar

imported to other ASEAN countries from 10% in 2014 to only 5% in 2015. Reduction of tariffs will

increase trade flow throughout the region but will hurt the chances of locally grown sugar to rise in the

market .This will result with farmers suffering losses because of high cost of production (Cororaton,

2013).

Some Philippine Laws on Sugar

A. Biofuel Act of 2006

Anticipating the impending liberalization of the sugar industry by 2015 and by virtue of the

AFTA commitments, the big sugar planters and millers started implementing their “master plan” for save

the sugar industry. In the guise of climate change and environmental concerns, big sugar planters and

millers through Senator Migs Zubiri started lobbying in 2005 for the enactment of the Biofuels Act.

With Biofuel Act, sugarcane becomes one of the materials for bio-ethanol production. Bio-

ethanol production does provide income opportunities for small sugar planters. The study by

Ploughshares-Oxfam on the Philippine biofuels industry estimated an annual income of Php 60, 000 per

hectare. However, there are other considerations to be made before farmers decide to pursue biofuels

production as an option. There is the validity of biofuels production as a mitigation measure for carbon

emission, its potential impact to food and water security, environmental impact considerations and

potential persistence of unfair trade relations between small planters and millers.

B. Sugar Industry Development Act of 2015

On March 27, 2015, President Benigno Aquino signed the Republic Act No. 10659 entitled An

Act Promoting and Supporting of the Competitiveness of the Sugarcane Industry and for Other Purposes.

As what were state in the act, the policy was geared towards promotion of the competitiveness of the

sugarcane industry, utilization of the sugarcane resources and improvement of the income of the farmers

and farm workers through improved productivity, and product diversification, job generation and

increased efficiency of the sugar mill. In order to achieve these, the government shall provide and

establish productivity improvement programs, enhance research and development of other products

derived from sugar, sugarcane, and its by-products. They will also provide financial assistance and

resource development services to small farmers.

III. IMPACTS OF TRADE AGREEMENTS TO THE SUGAR INDUSTRY

A. POSITIVE EFFECTS:

Reduction of tariffs may increase the flow of trade in the region

Since trade barriers are weakening, entry of foreign products specifically sugar will gradually

increase yearly. Through this, rate of competition will also increase. It will further result to even decline

in the price of sugar that can benefit the consumers and the sugar-using sectors in the country. The flow of

cheap imported sugar in the country is advantageous for some sectors but disadvantageous for sugar

producers and millers if they will become competitive.

Decrease in the price of sugar

Free trade would result to higher world sugar prices but would lower the prices in formerly

protected markets. World prices of sugar would rise by 40 percent and prices in formerly protected

markets would drop by 25% in the US. (Virata, n.d.)

In the last 23 years, total sugar production in the Philippines was marked by an irregular ebb and

flow pattern, alongside a steady rise in farm gate prices until 2010. From the pits of P9.15 per kilo in

1992, farm gate price hit the roof at P32.50 per kilo in 2010, but started to dip again to P30.84 in 2011,

P28.03 in 2012, and P27.09 in 2013. (Mariveles, 2014)

Figure 5 shows the trend of the sugar prices in the Philippines, European Union, Unites States and

the world from year 2007 to 2011. Price of sugar in the Philippines increased from 2007 to 2008, but it

decreased in 2009 due to some events. It again increased in 2010, then decreased in 2011.

Figure 5. Comparative Sugar Prices (U.S. cent/kg)

Figure 5 also shows the wholesale and farmgate Philippines sugar prices and also the world price

from year 2000 to 2011. It can be seen that sugar prices goes to a series of increase-decrease and

decrease-increase. On the last two years, it can be observed that prices of sugar, both wholesale and

farmgate, were decreasing. Whereas for the world price, it is increasing.

Figure 5. Prices of Sugar in the Philippines from 2000-2010

Increase in Imports

In ASEAN countries, Thailand is a net exporter of sugar and its imports of sugar are almost zero.

The Philippines is also a net exporter, but most of its sugar exports are shipped to the United States and

the Philippines has a heavy import protection on domestic sugar market. Indonesia is a net importer of

sugar, it also has heavy protection for its own sugar sector. When all the import protection in sugar sector

among ASEAN region are eliminated, sugar production and sugar exports of Thailand would increase,

and, on the contrary, imports of Indonesia and Philippines would increase. (Zabaleta, 1997)

Export of sugar to the United States and the world market accounted for $111.76 million of the

country’s last crop year. And the estimated total value of investments in 28 sugar mills, 14 refineries, and

six molasses-based and two sugarcane-based bioethanol distilleries reached P86 billion, while

investments in repair and maintenance of these facilities were estimated at P17.20 billion annually.

(Doronilla, 2014)

High wage and profit

Computations made by Sugar Regulatory Administration (SRA) in 2013 (As cited in Mariveles,

2014) show that the earnings of planters increased by P10,000 per hectare over a four-year period starting

in 2010, beginning at around P42,000 per hectare with a cost of production of P70,000 per hectare. The

computations were based on the 65-percent share of the planters computed at a price of P1700 per 50-kilo

bag or LKG. Considering that sugarcane is harvested only once a year, though, a sugar planter may need

at least 10 hectares to be able to support a family comfortably. But those who have less may still be better

off than sugar workers. Assuming that they are being paid the minimum wage, plantation workers have

been getting a maximum daily rate of P255 while those in non-plantations receive only P245, based on

the latest Regional Tripartite Wages and Productivity Board VI order that took effect on November 29,

2013. Compared to past wages, that’s already good going. In the last 10 years, wages have climbed

slowly at a rate of less than P10 a year.

More jobs

Net imports of sugar to the most protected countries would increase by 15 million tons a year,

creating jobs for about 12 million workers in developing countries. The Bank estimates that multilateral

reform of sugar policy would produce the greatest global gains (greater than bilateral or regional FTAs)

worth $4.7 billion a year. (Virata, n.d.)

In the Philippines, since there would be an increase in sugar imports, many companies and

factories that uses sugar mainly would emerge and thus, would hire more workers. With this, the rate of

unemployment in the Philippines would also decrease.

Shift to other crops

The decline in sugar tariff and production output would encourage farmers to shift from sugar to

other crops. The reduction in sugar tariffs generates several economy-wide effects. One of these effects is

the resource reallocation from sugarcane farming activities to the rest of the agricultural sector. Thus,

output of the rest of agriculture improves. Smaller farms in the sugar sector could in fact be more

productive than bigger ones. The improvement in output of the sugar using sectors attracts factor resource

movements from the sugar milling and the rest of the nonagricultural sector. (Cororaton, 2013).

As shown in Figure 6, there will be an increase in the output of other agricultural sectors since

smaller sugar farmers would engage in farming of other crops. On the other hand, there will be a decrease

in the output of the other non-sugar-using non-agricultural sectors. It is because if there will be cheaper

sugar, then businessmen would rather engage to businesses that involve sugar since the cost of production

is lower than that of the non-sugar-using business.

Even though shift to other crops is a positive impact, consideration on the alternative crop to be

planted on the land must be necessary. Aside from the alternative crop, weather, soil type, technical

know-how of the farmers and availability of the inputs must also be considered. Thus, further research

and studies must be done first.

Figure 6. Effects on Output of Other Agricultural and All Other Non-Sugar Non-Agricultural Sectors (%

change from the baseline)

Benefit the sugar-using industries

Cheaper sugar as a result of reduced tariffs could benefit a whole range of sugar-using industries,

notably those processing or manufacturing milk, ice cream, fruits, vegetables, bakery products, cocoa,

chocolate, softdrinks, animal feeds, flavoring extracts, and other food items. (Cororaton, 2013).

The increased availability of sugar imports at lower costs because of the elimination of the high,

prohibitive sugar tariff rates in the Philippines reduces the cost of production of several sugar-using

downstream sectors. Figure 7 shows the increasing trend of outputs of the sugar-using sectors.

Figure 7. Effects on Sugar-Using Sectors in the Philippines (% change from baseline)

Increase business opportunities

Ma. Regina Bautista-Martin, SRA administrator said (As cited in Mariveles, 2014) that there will

be good tidings in the investments of business heavyweights, Lucio Tan, Manny V. Pangilinan, Ramon

Ang, and the Gokongweis into sugar milling and bio-ethanol production. Because of these big players, it

can be said that the industry can survive. Moreover, according to her, a U.S. company had already asked

if the Philippines could sell sugar that would be used to extract a chemical for Spandex, a synthetic fiber.

Ironically, one of the most popular uses of Spandex is for undergarments that cinch waists bloated by

sugar- and fat-laden products. With this be realized, Philippines’ GDP will increase.

Reduced poverty

Real income improves across household income groups. Although the improvement in income is

not uniform across groups. As a result, the poverty incidence declines from 26.34 percent to 26.27

percent. (Medalla, 2009)

Figure 8 show the reduction of sugar tariffs induces a decline poverty incidence especially in

rural areas.

Figure 8. Poverty and Income Distribution Effects in the Philippines of Sugar Tariff Reduction

B. NEGATIVE EFFECTS:

Unfair competition

The reduction of tariff inevitably exposes the industry, its producers and workers to unfair

competition from Thailand, the world’s second-largest sugar exporter (behind Brazil) and largest

producer and exporter in Asia. Thailand provides direct and indirect support for its sugar industry, such as

supplemental payment to farmers, low interest loans at 2 percent per annum, fixed domestic prices, free

irrigation services, and a well-developed and maintained transport infrastructure such as road networks

and trans-loading ports. (Doronilla, 2014)

Moreover, according to Negros Occidental Governor Alfredo Marañon III (As cited in Mariveles,

2014), sugar farmers in Thailand have been enjoying subsidies and flexible credit schemes. Therefore, if

the Thai sugar farmers fail to pay their loans, there would be restructuring. Whereas in Negros and other

areas in the Philippines, farmers’ land would rather be foreclosed by the banks.

Also, almost all sugarcane farms in the Philippines are small, which are about 5 hectares. The

large sugarcane lands have been redistributed under the CARP. Since sugar is a plantation crop that

requires large areas for more efficient farming, small farms are not as productive and efficient as larger

farms in bringing down the volume of production while increasing its cost (Doronilla, 2014).

Hurts the chances of locally grown sugar to rise in the local market

Lower tariff would allow the entry of more imported sugars in the Philippine market that are way

cheaper than the locally grown one. As a result, consumers would definitely buy the cheaper sugar.

Moreover, it is in the Filipino culture that patronizes foreign products. With the imported sugar more

affordable, locally produced one will more likely be thrown out of the picture.

Decline in the production of local sugar

Martin-Bautista said, in a paper presented to the Asia-Pacific Sugar Conference in 2012 (As cited

in Mariveles, 2014), that cheap imported sugar would also lead to a decline in the production of local

sugar. She noted that among the factors affecting the profitability of producing local sugar are the

fragmentation of farms due to agrarian reform, the lack of financial capability by small farmers, and the

lack of infrastructure support from the government. As a result, more sugar farmers will shift into other

crops, making a decline in the sugar production.

Decline in exports

In any case, the Department of Trade and Industry (DTI) has cited the country's mutual trade with

Malaysia as an example of how the Philippines would benefit from the trade policies like the AFTA. In a

July 10, 2013 article posted on the DTI website, DTI cited data from the National Statistics Office (NSO)

showing that the country exported a total of US$1.017 billion worth of goods to Malaysia in 2012, down

slightly by 7.38 percent from 2011’s US$1.099 billion.

Local producers will suffer from high costs of production

The high cost of production of Philippine sugar derives from the high cost of labor and farms not

fully mechanized and have been broken up into small ones on account of agrarian reform. SRA classifies

about 90 percent of sugarcane farms as “small” – five hectares or less; to be viable, sugarcane farms

should measure from 30 to 50 hectares. In a down market, landowners would be compelled to reduce their

labor force to be able to cut production costs. Also, the government’s agrarian reform program has

triggered “cynicism” among planters who refuse to invest in farm mechanization because they could not

put up their land as collateral in obtaining loans from banks. (Mariveles, 2014)

Locally produced sugar prices are likely to fall by 2015 but planters would still have to contend

with high costs of production in order for them to compete with the emerging cheaper imported sugar,

according to Rafael Coscolluela, national president of the Confederation of Sugarcane Producers

Associations, Inc. (As cited in Mariveles, 2014). Compounding these problems is the lack of efficiency of

sugar mills in extracting sugar.

IV. RECOMMENDATIONS

With 5% uniform tariffs for sugar, as per AFTA commitment, sugar industry of the country is at

risk. It would be disastrous for the sugar industry especially that sugar is considered a vulnerable

commodity for the Philippines due to unstable production. Philippine sugar industry has to do a lot of

work to bring down the cost of its product and counter the competition from foreign sugar unleashed by

an ASEAN free trade regime. If this will not occur the sugar industry will collapse. The government

agencies, sugarcane producers and millers, private sector should work hand-on-hand in order for the

country to compete with other Asian nations like Thailand.

The ASEAN Integration can be considered as an avenue for the country to improve and apply the

outward oriented growth strategies. If our country aims to be an export market for sugar and opens our

economy towards more free trade and free capital flow from abroad then these strategies should be

considered. Concentrating more on increasing export products and export revenue can entail growth.

With outward oriented strategy, the country can increase its international trade and become

globally competitive. By competing with multinational companies, local firms will be able to improve its

competitiveness. There will be more efforts put into R&D. Marketing team will be more aggressive. Also

they can learn the unique features of rivals’ product & perhaps make a large improvement over their

existing ones to enlarge market share (Low, 2009). With this strategy more opportunities for investment

in mill modernization, infrastructure and farm and equipment are seen to flourish in the Philippines given

the need to be competitive in world sugar production.

Moreover, the following are recommendations for action gathered from literatures in response to

the ongoing crisis in the Philippine sugar industry:

1. Increase Productivity and Reduce the Cost of Production

Private sector data show that other countries produce cheaper sugar, the cost of which is

equivalent to even one-half the cost of Philippine-produced sugar. With the ASEAN Integration in 2015,

we need to be competitive with other ASEAN countries and consider the integration as an opportunity to

improve ourselves. We must produce sugar at a cost lower than the projected landed cost of imported

sugar. To achieve this, the main strategy is to increase productivity and reduce our cost of production.

The Philippines has to be a net exporter of sugar by 2015 in order to be in the offensive move

rather than be flooded with imported sugar. According to the sugar industry road map of 2015 by SRA, in

order to be in the offensive move, we have to sustain the domestic requirement of 2.3 million MT of the

sugar, maintain as a stable supplier of 150 000 metric tons to the world and comply 100% US quota

exports.

2. Well-defined Extension Programs by the Government

There is a need to carry out a well-defined extension program to educate, train, and motivate

farmers to intensify management and apply modern methods. The gains in productivity, considering

climatic conditions and soils in the Philippines, can be astounding provided that support can be given to

the farmer and there is an assurance of secure facilities and credit to match modern methods.

For the sugar industry to remain relevant, viable and competitive, the government must intervene

through funding supports.

3. Focus on Small Farms through the Block Farming Program

Small farms are greatly affected by the 5% tariff rate of sugar. The cheap imported sugar would

lead to a decline in the production of local sugar. Among the factors affecting the profitability of

producing local sugar are the fragmentations of farms due to Comprehensive Agrarian Reform Program,

the lack of financial capability by small farmers.

The Comprehensive Agrarian Reform Program (CARP), a law passed in 1987 to cure social

unrest in the Countryside, distributes large plantations in excess of 25 hectares to its workers and

beneficiaries. The distribution of farms in parcels of 3 to 5 hectares, patterned after rice to pacify the

landless, and the natural redistribution through inheritance of farms over 100 years, have rendered most

Philippine sugar farms uneconomical in terms of size and harvesting systems, and have made extension

extremely difficult (Zabaleta, 1997).

With problems in CARP, Block Farming is considered by the SRA as their flagship program.

They will consolidate small farms into block farms of 30-50 hectares to achieve farm efficiency and

economies of scale (Martin, 2014). The farmers will have to work together in order to attain higher

productivity. They can also maximize their land. In block farming they can consolidate a particular

product volume, attain agreed quality, and implement meetings and product mobilization.

Thus, the government must provide funds that are directed to primarily assist small sugarcane

planters, especially the beneficiaries of the CARP. The government agencies should also conduct

seminars to educate the farmers on the different rules that govern the ASEAN market and the institutional

buyers.

4. Diversification of Sugar Product

According to the SRA, the Philippine sugarcane industry has to be diversified to be competitive

that is why SRA shifted their focus from sugar as a product, into sugarcane as a raw material from which

a multitude of products can be derived but still sugar will be the major product. The government agency

started their research on developing other sugarcane-based products, starting with specialty sugar. They

adopt technologies utilizing the cane juice and other by-products of sugar production in creating new

marketable goods. Aside from sugar, other products they want to produce are bio-ethanol, liquor, animal

feeds and paint. They also want to create products like bio-power, bio-fertilizer and battery out of

sugarcane. In order to achieve product diversification, expanding the sugarcane areas and increasing cane

production are necessary.

5. Promote and Support Changes in Government Policies affecting Agriculture in General

and Sugar Industry in Particular

The extensive crisis in the sugar industry requires crucial participation by the government of the

Philippines through policies and programs to help the industry stabilize and diversify into other crops and

products. There should be enactment of rules and policies and its proper and transparent implementations.

The government should also clarify the applications of its land reform policies.

Investments in sugar mills, ethanol distilleries, power cogeneration plants and other economic

enterprises are also needed in order to sustain sugar product diversification in the long run.

A wide range of infrastructure improvements will be necessary for the success of the

diversification programs. Irrigation will be very important. Improvement in farm-to-market roads, rail and

port facilities are all need and will require public investment.

V. CONCLUSION

Sugar is a commodity that is a big part of every Filipino household. In fact, it is never missing in

the kitchen. We use it almost every day to enhance the taste of our food and drinks. It adds sweetness to

every Filipino’s lives.

The commodity has indeed changed shape as the time passed by. Not only is this good needed in

the household level, but it has also evolved to the industrial level usage such as food services, food

processing, food preservation and other value adding activities.

Indeed, sugar has become important for the people not only in the Philippines, but also all around

the world. Because of the increasing demand for sugar, big sugar producing industries have sprouted in

various countries throughout the years.

Sugar, a centuries-old Filipino industry, probably faces its greatest challenge ever due to the 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. (Ylagan, 2014)

Given this, challenges, government agencies headed by the Sugar Regulatory Administration

(SRA) along with big sugar corporations and small-scale sugar producers and millers should unite and

cooperate in order for the country’s sugar industry to thrive and compete with countries in the Southeast

Asian Region.

Government interventions like extension programs in farm management and practices; credit

assistance for financially incapable small farmers; research and development for sugar product

diversification, and infrastructure improvements in roads and irrigation are the outmost needs of the sugar

industry. Thus, transparent implementation of these government interventions should be properly

legislated.

The ASEAN integration is an opportunity for the country to be the driver of trade and sugar

exportation. Efficiency in production as well as cost minimization is needed to achieve the goal of global

competitiveness and inclusive growth of the Philippines.

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