September 15 2003, 10:18 Interfax

Russia: experts say sugar price collapse is possible

Interfax news agency writes that Russian experts do not exclude a possibility of price collapse in Russian sugar market and consequent sharp cuts of sugar beet areas in the country in 2004, should market regulation measures for next year are not assumed urgently.

The state earlier intended to retain the regime, which had been in effect in recent years, i.e. tariff rate quota for raw sugar imports with sales of the quota through auctions. However, in mid-July the government's panel for protective measures in foreign trade postponed the decision on the issue, and in early July Ministry for Economic Development put forward a proposal about introduction of fixed duty for raw sugar imports. Nevertheless, no concrete decisions have been taken up to the moment, which, according to experts, adversely affects the situation in the country's sugar market.

"The current situation is a critical one. Besides legal imports, 1 million tonnes of sugar have been brought into the country under "grey" schemes", Head of the Board of company "Prodimex" Igor Khudokormov told Interfax.

"When decision on the sugar issue was delayed for indefinite term in July, the market stated to panic, because the absence of concrete decisions will entail the situation that since January 1, 2004 a duty for raw sugar of 90 euros per tonne will start to be effective against current 230 euros [the duty for over-quota sugar]", Khudokormov said. He thinks this may entail a sharp increase of raw sugar imports and considerably worsen the situation for local producers.

"If no decisions are taken in the next two weeks, the sugar price already in September will make $370-380 per tonne, compared with $420 per tonne now. That is, it will be close to the cost-price of sugar, produced from the raw, imported at 90 euro duty", he thinks.

He says that his company votes for the fastest possible enactment of the new sugar trade regime, which would first of all protect the interests of local producers. The optimal measure, according to him, would be a tariff quota, sized no more than 2.5 million tonnes per year, which is to be distributed among sugar refineries, proportionately to their share in production of sugar from sugar beet.

The Head of Analytical Service of International Sugar Company Denis Sokolov says: "Sugar stocks in Russian market have always been large, but never before have we had such a catastrophic situation as now. These stocks are "burning palms" to companies, they need to be "thrown out" in the current season [marketing year - July 1, 2003 to June 30, 2004], but as far as no decision has been made about trade regime in 2004, the companies don't know whether they should sell all the stocks now or hold on some part of them for some time more".

He says that because of the price drop the processors of raw sugar are losing $40 on each tonne of raw, but "they have no way out, as they've already paid for the quota." "If they refuse to import the in-quota raw sugar, they'll be losing 100 euros on a tonne", he said.

Sokolov thinks the optimal mechanism of sugar market regulation would be production principle. But no time has been left in this year for its working out. "Now the situation could be quite promptly corrected by way of a high flat duty", he said.

"In strategic domain, the basic mechanism of sugar market regulation must be the production principle, when the quota is granted in accordance with production volumes of beet sugar", Sokolov stated. He added that the companies would thus have a serious incentive to increase investments into local sugar beet farming and sugar refining complex.

"We are now selling sugar into loss. The prices are dropping because market participants don't know the rules of the game for next year", said General Director of Russian Sugar Company Ltd (a member of Razguliay-UKRROS Group) Dmitry Lashin. The situation has been aggravated by excessive raw sugar tariff quota and large volumes of sugar smuggles, he said.

He thinks that if the situation is not changed in nearest weeks, next year many farms will refuse from growing sugar beet and will switch onto more profitable crops.

Quoting of raw sugar imports was introduced in Russia after its excessive supplies in late 1990's created grave difficulties for local producers of sugar beet and beet sugar. In 2001 and 2002 the size of the quota was 3.65 million tonnes, in this year - 3.95 million tonnes. According to estimates, the country's demand in cane raw sugar does not exceed 3.65 million tonnes a year.