Policy enforcement effect on the competitiveness of the sugar industry: case study from Ukraine Eduard Bukin Trade and Markets Division, FAO
Objectives and methods Assessing the effect of present sugar policy on the competitiveness of sugar industry in Ukraine. Demonstrating, assessing and justifying the alternatives of the current sugar policy. Partial equilibrium approach
Harvested area of SB, HA (1000) Sugar yields, MT/HA Supar production, MT (million) Motivation: Sugar industry in Ukraine 1800 1500 5,4 6 5 1200 3,5 4 900 600 1,6 1,9 2,6 1,9 1,6 1,3 1,5 2,3 2,1 1,3 2,1 3 2 300 1 0 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Beet sugar production, MT (million) Harvested area under SB, HA (1000) Yields of beet sugar, MT/HA Source: Own calculations based on data from SSSU 0
Setting: Sugar policy in Ukraine Introduced in 1999/2000: The 2% Tariff-Rate Quota (TRQ) on raw sugar import (introduced in 2006); 50% tariff on above TRQ RAW and any refined sugar import; In addition: tolling restriction, import/export licenses and a semi-official institutional structure of the sugar industry Public sock holding and interventional buying Sugar production quota A, limits the volumes of beet sugar production intended for the domestic market; Minimal prices of the beet sugar under the quota A, and minimal prices of sugar beet;
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 SUGAR PRICE, USD/MT IMPORT VOLUMES, MT (1000) Trade policy (1) 1000 900 800 700 600 500 400 300 200 100 0 1.402 700 600 500 400 300 200 100 0 TRQ 2% level, MT (1000) Import RAW, MT (1000) Import REF, MT (1000) RAW world price, USD/MT REF world price, USD/MT EXW Ukraine REF sugar price, current USD REF import parity price, USD/MT Source: own calculations
IMPORT (-); EXPORT (+), (1000) MT NET TRADE, (1000) MT 1345 1420 699 417 Trade policy (2) 200,00 400,00 100,00 0,00 0,00-100,00-200,00-400,00-300,00-400,00-800,00-500,00-600,00-700,00-800,00-1.402-1200,00-1600,00 Import refined sugar, MT (1000) Import raw sugar in ref. equivalent, MT (1000) Export of refined sugar, MT (1000) Net trade, MT (1000) Source: own calculations based on various sources
2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 SUGAR PRICE, USD/MT INTERVENTIONAL BUYING VOLUMES, MT (1000) State support 800 700 600 500 400 300 200 100 0 800 700 600 500 400 300 200 100 0 Minimal prices are set by government annually for sugar and sugar beet but are not enforced. Large share of barter operations. Interventional buying volumes, MT (1000) World refined sugar, USD/MT EXW Ukraine refined sugar, USD/MT Minimal price Ukraine refined sugar, USD/MT Source: own calculations based on various sources
Reality: Production quota (1) Sugar production quota A is a refinery specific permit to produce beet sugar for the domestic market untradeable between the refineries free for obtaining does not restrict sugar production from the imported raw sugar over-quota beet sugar must be exported, stored, or processed into non-food uses. no farm-level quotas for sugar beet production
Reality: Production quota (2) Production quota enforcement: Quota should be distributed among refineries on the competitive the competition is held behind the closed doors. no penalties for not fulfilling the quota requirement. quota distribution is revised from 2 to 3 times per years in the middle and in the end of the marketing year. Institutional structure of the market: UKRTSUKOR association that mediates between producers and the government Very little information is accessible
tonnes (1000) Revisions Reality: Production quota (3) 3 3 3 3 2 2 2 2 2 2 2 2 2 2 2 3000 2500 2000 1500 1000 500 0 Production under quota 'A', MT (1000) Initial quota A, MT (1000) Final quota A, MT (1000) Source: own calculations based on various sources
Reality: Production quota (4) Quota revisions Sugar production under quota 'A', MT (1000) 2001/ 02 2002/ 03 2003/ 04 2004/ 05 2005/ 06 2006/ 07 2007/ 08 2008/ 09 2009/ 10 2010/ 11 2011/ 12 2012/ 2013/ 13 14 1650 1417 1455 1788 1895 2595 1859 1573 1267 1546 2331 2226 1212 Initial quota A, MT (1000) 2000 1800 1800 1800 1790 1840 1740 1740 1864 1892 1860 1833 1733 Final quota A, MT (1000) 1656 1434 1462 1791 1790 1840 1861 1575 1267 1546 1860 1833 1528 Root of the sum of the squared differences (see below) for all sub regions: Between initial quota - production Between final quota - production 124.7 120.6 119.4 705.3 141.9 238.6 157.0 148.2 182.6 183.2 155.3 139.4 176.7 7.7 7.5 2.6 2.2 29.6 236.6 3.7 2.1 0.1 0.0 154.5 126.2 108.8 Source: own calculations based on various sources
Example of a market with 3 sugar producers Source: inspired by Nolte,S, Buysse, J., Van Huylenbroek, G. (2012)
No production quota Source: inspired by Nolte,S, Buysse, J., Van Huylenbroek, G. (2012)
Two ways of quota enforcement Source: inspired by Nolte,S, Buysse, J., Van Huylenbroek, G. (2012)
All three cases
Consequences (1) Production quota: is not enforced, restricts market access, disincentives producers creates opportunities for rent-seeking behaviour among producers causes multiple negative externalities: investment shortage barter exchange between sugar beet producers and sugar mills reduces competition on the market and the overall industrial competitiveness
Number of operating refineries Consequences (2) Number of operating refineries 250 215 196 200 190 162 160 150 121 120 116 119 110 100 50 140 70 110 109 111 111 111 73 77 56 63 38 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EU Number of operating refineries UKR Number of operating refineries Source: own calculations based on various sources
SUGAR CONTENT IN SB, % Consequences (3) Sugar content in sugar beet, % 18,5 18 17,5 17 16,5 16 15,5 15 14,5 14 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EU Initial sugar content in beet, % UKR Initial sugar content in beet, % Source: own calculations based on various sources
Daily sugar production, MT Consequences (4) Average sugar production per refinery, MT per day 1600 1400 1200 1000 800 600 400 200 0 1.398 1.270 1.322 1.368 1.211 1.247 1.266 1.110 1.096 1.125 1.159 513 421 365 402 422 234 242 278 277 285 332 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EU average daily sugar production per refinery, MT UKR average daily sugar production per refinery, MT Source: own calculations based on various sources
DURATION OF PRODUCTION, DAYS Consequences (5) Duration of sugar production 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EU Duration of production UKR Duration of production Source: own calculations based on various sources
Competitiveness (7) Geographical change Source: own calculations based on various sources
Modelling exercise One market net-trade dynamic partial equilibrium model Solved using the (nlp) Non-linear programming solver in GAMS (i.e. CAPRI). TRQ tariff switching condition introduced as a sigmoid (logit) function (Britz and Wytzke 2004, 2014 CAPRI model). Estimates welfare and market effect of different scenarios.
Model structure Yields (Y t ) Harvested Area (HA t ) f(ha t-1, SBP t-1, S t-1 /D t-1 ) SB Domestic Price f(p t ) Initial sugar content (ISC t ) Sugar supply (S t ) f(ha t, Y t, ISC t ) - + Stocks beginning (Stb t ) Exchange rate (EXR t ) GDP (GDP t ) Population (POP t ) Sugar demand (D t ) f(cpc t, P t, POP t, GDP t,) + Price domestic (P t ) f(exr t, CPI t, Pw t, Qnt t ) Cons. Price Index (CPI t ) Net trade (Qnt t ) f(p t /Pw t, S t /D t, Ste t-1 ) = Stocks ending (Ste t ) Price world (Pw t )
Assumptions and scenarios Post conflict economic crisis Scenarios: Baseline - the conflict and economic crises as it is now No-conflict - Hypothetical (impossible) scenario simulated from 2013 Full liberalization - Abolition of tariffs and TRQ from 2016 Doha (gradual liberalization) - Gradual reduction of import tariffs and TRQ over 5 years.
CONSTANT UAH/MT Results domestic price 7000 6500 6000 5500 5000 4500 4000 3500 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 base doha full-liberalisation no-conflict world price when conflict world price when NO conflict
Sugar supply, MT (1000) Results sugar domestic production 2.000 1.950 1.900 1.850 1.800 1.750 1.700 1.650 1.600 1.550 1.500 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 base doha full-liberalisation no-conflict
Net trade, MT (1000) Results net trade 50 40 30 20 10 0 2013-10 2014 2015 2016 2017 2018 2019 2020 2021 2022-20 -30 base doha full-liberalisation no-conflict
constant UAH (Millions) Welfare consumers surplus 7.000 6.500 6.000 5.500 5.000 4.500 4.000 3.500 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 base doha full-liberalisation no-conflict
constant UAH (Millions) Welfare producers surplus 8.500 8.000 7.500 7.000 6.500 6.000 5.500 5.000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 base doha full-liberalisation no-conflict
Welfare constant UAH (Millions) Welfare total welfare 14.000 13.500 13.000 12.500 12.000 11.500 11.000 10.500 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 base doha full-liberalisation no-conflict
Conclusions Example of a misrepresented policy Immediate actions: abolition of the sugar production quota; market protection through the trade policy; reforming of the tolling restriction; Further works: Enough of research time to act! Investments Research limitation: Lacking numerical evidence and consequent difficulty in the problem modelling
Acknowledgements PhD. ir. Bérénice Dupeux Prof. Dr. ir. Jeroen Buysse Prof. Dr. Dr. h.c. Dieter Kirschke Thank you! Eduard Bukin edwardbukin@gmail.com eduard.bukin@fao.org
Thank you! Eduard Bukin edwardbukin@gmail.com eduard.bukin@fao.org