Sugar-coated challenges

THE story of the sugar industry and its supply in Malaysia has a long history and often sparks intense debates. As highlighted in this week’s cover story, ensuring food security, particularly for essential items like sugar, requires constant attention from the government.

The first predicament for Malaysia (and to be fair, many other countries in the world) today is that we hardly grow any sugar crops.

We rely mostly on importing raw sugar to be processed by the only two refiners in the country – MSM Malaysia Holdings Bhd (MSM) and Central Sugars Refinery Sdn Bhd (CSR).

There are complexities. Rising raw sugar prices and a government-imposed cap on the retail price of sugar has crimped refiners’ margins.

The price cap has been at RM2.85 per kg since 2011.

Other quarters, especially in Sabah and Sarawak, have long complained about the lack of sugar supply, the result of inefficient distribution systems to get the refined sugar there.

As a result, some parties have lobbied and secured approved permits (APs) to directly import refined sugar into the country. The move has been described as a means to stabilise sugar supply in the local market.

In 2023, the Domestic Trade and Cost of Living Ministry revealed that 37 companies were granted approval to import a total of 285,700 tonnes of refined white sugar that year.

It isn’t clear how much of refined sugar is actually being imported. But the issuance of the APs led to concerns by the refiners that things could go awry.

Cheap sugar imports, especially when driven by temporary dumping from certain countries, could put significant financial strain on our refiners, potentially forcing them out of business.

If and when that happens, the supply and pricing of sugar could remain entirely in the hands of importers. What if prices spike or importers reduce their purchases? There may also not be any stockpiling.

A crucial fact is that the two refiners in Malaysia have more than enough capacity to meet the country’s needs. These refiners also have an obligation to keep a certain stockpile of sugar.

Their grouse remains basic economics – they have to face rising raw sugar prices while keeping retail sugar prices capped.

Why not remove the cap and let market forces determine the price of retail sugar?

But like how the government seeks to cap the price of other necessities, there has been a lack of political will to do so due to concerns of a public outcry.

In effect, the government is subsidising sugar for the rakyat by capping its price, spending RM500mil annually.

Arguably, this should be dealt with in the same way as with fuel subsidies – removing it and providing a safety net for the poorer segments.

Many governments impose strict controls on imports in order to protect their own upstream and downstream sugar industries. One way is by imposing tariffs on sugar imports.

Some reports indicate sugar products from Thailand have been increasingly exported to Malaysia since last year.

This followed a ban and the imposition of tariffs by China on those products from Thailand.

This raised concerns from local refiners about a potential dumping effect.

It is also interesting to note that the ban by China was partly related to concerns over factory hygiene. This raises even more concerns about the halal status of the refined sugar products coming into Malaysia.

Other countries like the United States use a complex system for their sugar sector.

First, the government offers cheap loans to producers and the terms come with a juicy twist – refiners can repay the loan with interest or forfeit the sugar as repayment if prices fall below support levels.

This mechanism effectively creates a price floor – processors will unlikely sell below the support level because they can simply forfeit the sugar.

There are also tariff-rate quotas, limiting the amount of sugar that can be imported at low or zero tariff; any sugar imported above that quota faces prohibitively high tariffs, thus making it economically impractical.

When necessary, the US Department of Agriculture can also buy sugar from the market to support prices.

It also stores sugar and offers storage loans to refiners. This offers short-term relief to prevent price collapses when there’s a surplus.

Malaysia could take a leaf from some of these measures.

The Malaysian government is seeking to address the issues.

One is to rejuvenate sugarcane cultivation. It is all at an early stage.

In 2023, then Economy Minister Rafizi Ramli said the government had begun identifying land – up to 405ha in northern Perak – for potential planting.

In May, MSM’s CEO revealed that the company is conducting feasibility studies to restart domestic sugarcane cultivation – targeting Sarawak and northern Peninsular Malaysia.

MSM has also reiterated that it remains actively engaged with the government through the Joint-Sugar Industry platform to finalise a sustainable pricing framework and implement import controls on refined sugar.

Given the constraints on funding and execution for upstream development, along with the lack of political will to remove price caps, the most feasible approach is to prioritise ensuring that local refiners operate within the most optimal and cost-effective frameworks.

Second, distribution especially to Sabah and Sarawak needs to be sorted out.

Finally, tighten the importation of sugar via quotas and tariffs to ensure that what is coming in isn’t the result of dumping or worse, from questionable sources of hygiene and certification.