I95

SUGAR BEET OR SUGAR CANE: A COMMENT

Deryke &Ishaw .ad Joha BrydeD Overseas Development Group, University of East Anglia

In an article published in Vol. XX, No. 1 of this Journal, Dr. Ford Sturrock argued that sugar beet grown in England has become competitive with Jamaican sugar cane, and that this situation is likely to continue for some time.

While not taking issue with Sturrock’s conclusion that money costs of sugar production in Jamaica and England are now comparable, we wish to point out the limited policy implications which his analysis suggests, lest they be used by sectional interests as an argument for increasing sugar beet production in the U.K. The only valid conclusion that can be drawn from an analysis of trends in money costs is to advise a private investor that his return would be greater from k t sugar in England rather than cane sugar in Jamaica. However, the article was written to “discover whether either crop has a fundamental advantage over the other as a source of sugar”. This objective cannot be attained by the form of analysis used in the article, i.e. the comparison of average costs of production at prevailing market prices based on traditional Ricardian comparative cost assumptions.

Taking as our starting point the relatively simple problem of the calculations of the relevant money costs of production, three methodological objections are relevant. Firstly, the data should not be used to compare cane versus beet in general. The reason for this is that Jamaica is widely known to be a high cost sugar producer, partly as a result of strong trade union pressure able to force up wages and prevent mcchanisation, partly due to inefficient processing, and partly due to generally lower cane and sugar yields than have prevailed else- where.* On the other hand, the U.K. data refer to the Eastern Counties; these have lower production costs than the other a r m in the U.K. which accounted for approximately one-third of U.K. production in the year in question. It is well known that Scotland, in particular, is a high-cost beet producing area.

Secondly, Sturrock’s discussion of dynamic aspects is confined to an examination of possible shifts in the position of the point of average cost, assuming constant total production in both cases. Since the comparison refers only to average costs it yields no reliable guide regarding the effects of increasing or decreasing production of sugar cane or sugar beet, since this would require the determination of the shupe of the industry supply curves in both cases. For example, Sturrock mentions that the cane production costs on farms adjoining the major estates are below the average. In particular, since the marginal cost of increased production in the small farm sector is 1ow.t the major proportion of any production increase would rationally occur

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*The author, in his conclusion. appears to regard Jamaica as typical of Wat Indian conditions. This is not the case.

t Unlike the estates, the expansion of sugar on smallholdings would require additional inputs of unpaid family labour, in addition to suitable land. Money costs would be negligibk. and real costs arc represented by the margmal opportunity costs of small- holder labour and land, which at best would be the returns on low-value food crop.

I96 DERYKE BELSHAW AND JOHN BRYDEN

on these farms and average money costs would fall, ceferispuribus. There is the further point that Jamaican factories are operating on smaller throughputs than British factories, suggesting that an increase in Jamaican cane production could utilise excess capacity, i.e. with very low marginal costs, leading to a reduction in the average costs of processing. In the U.K., on the other hand, at best the industry’s average cost curve would exhibit constant returns to scale, and any significant entry of new producers would presumably reduce technical efficiency, at least initially during the learning process, so that the average cost curve would slope upwards.

Thirdly, the comparison of money costs of production is ma& in terms of a prevailing rate of exchange between f Sterling and Jamaican Dollars. Table 4 in the original article suggests that 1964/65 Jamaican cane production costs on a c.i.f. London basis were f52 per ton raw sugar, compared with the Commonwealth Sugar Agreement price of f47 per ton c.i.f. London, implying that Jamaican cane sugar production is unprofitable in the long run.* However, this situation could be alleviated by the devaluation of the Jamaican Dollar which would lower production costs (in terms of f Sterling) overnight. A devaluation of 1 I per cent would have been sufficient to reduce average pro- duction costs to restore both long-run profitability and equivalence with U.K. costs per ton of sugar. Clearly, the arbitrary effect that exchange rate decisions can have on money costs underlines the unsatisfactory nature of this kind of comparison in disccrning “fundamental advantages” in the international location of production.

These three points relate to money costs. However, the fundamental objection to this type of analysis arises because money costs based on market prices do not necessarily, or usually, measure real costs, i s . costs at social prices. In the real world, money costs tell us nothing about the optimal allocation of international resources between the two types of sugar. In Jamaica, where wage rates have been raised by strong union pressure, and unemployment exists, it is certain that labour earnings in the sugar industry exceed the marginal opportunity cost of labour. The rise in money production costs occasioned by the rise in wage rates may be viewed as a manifestation of social policy, being at least partially a transfer from private profits to wages. Changing emphases in domestic social policy relating to income distribution patterns cannot be regarded as determining the fundamental structure of real costs. Furthermore, it is well known that in Jamaica profitable alternative uses of the land currently under sugar cane are not easy to 6nd.t In fact, until sufficient employment opportunities emerge to change real factor cost ratios, there is no social case for investment in labour-saving mechanisation which would lower the money costs of cane production. In the U.K., on the other hand, with an absence of structural unem loyment and relatively weak agricultural

opportunity cost of labour, and profitable alternative crops an easier to find on the good land which is used for sugar beet.

The effect of all this is to lower the r e d cost of producing cane sugar com- pared with beet sugar. Once the transition is ma& to social pricing, it is clear

unions, wages are liable to be fairy P close to, or even below, the marginal

S i n e the cane production data was provided to a Government Commission enquiring into the pro6tability of the industry, one may suppose that any bias in the data would be likely to exa te costs. Since the accounts me compiled with the assistance of the S u p M a n s m n ’ Association such a possibility cannot be strongly discounted. The reliability of the cost data is not discussed in the artick.

t The significance of the relative opportunity cost of land is probably smaller cf labour becaw while rents had b a n allowed for in Eastern Counties b e t growen’ costs it is not clear whether the implicit profit kvel for Jamaican sugar estates rcfkas the capital investment in land.

SUGAR BEET OR SUGAR CANE: A COMMENT I97

that the real wage costs in the West Indies become significantly lower than the Jamaican rates used by Sturrock. Thus, the relevant social price, the "shadow" wage rate (SWR), is set somewhere between the consumption of labour (c) and its marginal product in agriculture (m), both calculated at world market prices.' Given the nature of labour skills in sugar production, the rural location of the estates and the suitability of small farms for the production of sugar, it is clear that the appropriate SWR must lie close to the agricultural marginal productivity of labour. A generous estimate for Jamaican conditions would lie in the region of m+f(c-m) so that the SWR for sugar production would be in the range 21 per cent (if disguised unemployment exists) to around 40 per cent (marginal value product in domestic food markets) of the estate labour earnings.t Ignoring the other points made above concerning the possible over- estimation of cane production costs and the nature of the respective marginal cost curves, the use of a social price for labour suggests that the real average costs of raw cane sugar production were in the range €33-€38 per ton delivered to the U.K. compared with €46 for raw beet sugar in the Eastern Counties, i.e. some 17-28 per cent cheaper. Added to this are considerations of the relative efficiency of the Eastern Counties in the U.K. industry and Jamaica in the West Indies industry, and the relative scope for further technological shifts in the respective production functions which Sturrock's discussion indicates would probably favour the West Indm. Clearly, the West Indies retain an unassailable advantage over the U.K. in sugar production in real cost terms.

Finally, although Sturrock did not make the suggestion in his paper, his comparison showing increasingly favourable money costs of production of Eastern Counties beet could be taken as a suggestion that British beet should replace part of present imports of cane sugar. If we restrict ourselves to con- sidering Britain's economic interests, the sole criterion is the relative cost, in terms of foreign exchange, of imported and domestically produced sugar supplies. The domestic cost structures of the sugar industries in supplying countries are not relevant.: The lowest price which a supplying country can rationally accept must be socially profitable in the long run, i t . it must cover the average real costs of production including replacement of fixed capital. In terms of their real efficiency, cane sugar producers deserve an expanding sugar market in the U.K. (and in Europe a fortiori). Should such a desirable situation, from the point of view of U.K. and E.E.C. growth rates, not occur. no one should be under the illusion that the influences of sectional interests can be masked by claims of competitiveness in production costs of beet sugar.

-~ __-_ - ' I . M. D. Little and J. A. Mirrlcu. Monual of Industrid Project Analysis in Developing

Countries. Vol. 11. Social Benefit : Cost Anolysis, 1969. Paris : Development Centre, Organisation for Economic Co-operation and Development.

Assuming that IS per a n t of estate labour earnings are taxes and savings, and that a positive marginal value product in the domestic food market would be around one- quarter of average labour earnings on the estates.

From the point of view of the U.K. growth rate, it is irrelevant whether Jamaica permits atate wage rates to rise faster than productivity, and then chooses a form of subsidy or tax rebate, or devalues. to maintain the private profitability of sugar producers faced with a given export price for sugar. Such a policy may appear to lower Jamaica's rate of growth and increase unemployment at the margin. On the other hand, income redistribution policies of this kind may be viewed as averting a more traumatic disruption of the economy.