BITTER PROSPECTS FOR JAMAICAN SUGAR INDUSTRY

UNCLAS SECTION 01 OF 03 KINGSTON 001042

SIPDIS

STATE FOR WHA/CAR (BENT) AND EB/TRD (MATTINGLEY)

E.O. 12958: N/A
TAGS: ECON EAGR JM
SUBJECT: BITTER PROSPECTS FOR JAMAICAN SUGAR INDUSTRY

REF: BRIDGETOWN 785

--------------
SUMMARY
--------------


1. (U) The sugar industry is on the decline in Jamaica,
suffering one of the worst years on record in the 2004-2005
season. Damaged by extreme weather, hampered by inefficiency
and labor disputes, the industry will most likely not meet
its production targets for this year. To make matters worse,
the European Union will be reducing its guaranteed price for
sugar by 37 percent over the next three years, forcing the
"brown gold" industry that once formed the centerpiece of the
Jamaican economy to finally come to terms with the need to
adapt or perish. Industry insiders continue to insist that
sugar can survive by focusing on value added products,
implementing greater mechanization, improving land management
and entering the energy sector. Other observers are more
skeptical, noting that there has been talk about reform in
the past, but precious little action. In the long run, it
appears that Jamaican sugar is unlikely to return to its
long-ago glory as the driving force in the island's economy.
End Summary.

--------------
HISTORY
--------------


2. (SBU) While sugar has been the dominant crop in Jamaica
for centuries, providing a significant percentage of its
foreign exchange, the industry has been in a gradual decline
since its heyday in the late 1700s, when the profits brought
in by sugar exports were at their peak in real terms
(adjusted for inflation). The end of the slave economy in
1838 and competition from European beet sugar in the 1800s
forced Jamaica to diversify its economy, though "brown gold"
remained a centerpiece of its agricultural sector. After
independence in 1962, annual output fell from 515,000 tons in
1965 to 193,000 in 1984, and to 153,000 tons in 2003.
Whereas the industry once employed 18 percent of the island's
total work force, only 40,000 now work the cane fields and
refineries. On March 14, Karl James, General Manager of
Jamaica Cane Products Sales, told emboff that the industry is
also aging, as young people no longer see a future in cane
and are reluctant to enter the industry.


3. (U) Studies have found that many factors contributed to
the decline of sugar, including an overall drop in the world
market price due to globalization, a drop in real prices when
adjusted for inflation, the elimination of traditional
one-way preferential trading agreements, funding constraints,
inadequate crop rotation - leading to decreasing yields per
hectare, crop damage from fire and livestock predations, soil
depletion, lowered quality standards, poor maintenance, low
productivity, bad debt, mismanagement, and aging, inefficient
factories. Eleven mills have closed their doors since 1996,
leaving only seven to process the cane. Both a GOJ
parliamentary committee and the University of the West Indies
conducted studies of the sugar industry in 2001, with the GOJ
report finding that the industry could be saved in the short
term with an infusion of JD three billion, though significant
structural changes would be needed to survive in the long
term.


4. (SBU) James said he attributes much of the industry's
productivity decline to poor management under GOJ control.
At the peak of production in 1965, the industry was
completely privatized. In a de-facto re-nationalization of
the industry, price controls introduced by the GOJ in the
1970s drove out many private sector owners, and the
government took control of the unprofitable plants to
"rescue" the workers. James claims that the cooperatives
were inefficiently run by GOJ appointed managers, causing
productivity to decline substantially.


5. (SBU) On March 11, Howard Brown, an agronomist with the
St. Thomas Sugar Company, told emboff that poor land
stewardship has also affected the cane output levels.
Jamaican cane farmers generally do not use fertilizer,
insecticide or crop rotation techniques, and the soil is
becoming exhausted. The majority of the farmers have small
operations, and their profits from one season are mostly
consumed paying for the following year's harvest. Since the
cane re-grows like a weed following harvest, the farmers have
traditionally relied on natural regeneration, rather than
spending money on soil quality maintenance or modern
re-planting techniques.

--------------
PRICE SUPPORTS
--------------


6. (U) Since independence, Jamaican sugar has enjoyed
preferential access to the European Union market, where it is
guaranteed prices much higher than those paid on the world
market. With the recent reforms in the EU's agricultural
policies, however, the prices offered by Jamaica's primary
export market will drop by 37 percent between 2005 and 2008.


7. (U) Though the GOJ initially lobbied the EU to maintain
the current price levels, it met with little success. On
February 16th, Agriculture Minister Roger Clarke instructed
sugar industry representatives to "prepare for the
inevitable", telling them they would have to cope with the
scheduled drop in the price offered by the EU for Jamaican
sugar. The GOJ has traditionally backed its commitment to
supporting the sugar industry. In 1999, the GOJ stated that
it would not "get out of sugar" due to concern for the
welfare of the workers in the industry, and spent JD 2.8
billion (USD 500 million) to enable the factories to begin
working that season. In 2002, a further JD 3 billion (USD
500 million) was used to bail the industry out. Critics have
charged that this amounted to an enrichment of large cane
farmers with political ties at the expense of the taxpayers.
(Note: Clarke himself is a cane farmer, and has strongly
supported the industry in the past, so his statement is a
significant indication that the GOJ does not plan to assist
the industry with additional subsidies to make up for the
European price decrease. End Note.)


8. (SBU) Brown told econoff that the industry would have a
difficult time breaking even without the EU price supports.
He held out hope for increased GOJ assistance in the form of
loan guarantees in exchange for the sugar industry's
political support. However, James and Delroy Armstrong, an
agricultural economist with the Sugar Company of Jamaica,
stated that the industry could not cut costs sufficiently to
make raw sugar profitable. Instead, it would have to
diversify into value-added products such as ethanol, molasses
and refined sugar, and niche products like "organic" sugar.
Through the Caribbean Basin Initiative agreement, he said,
Jamaica has special access to the United States ethanol
market, and could compete with larger producers on that
basis. James expects that the primary consumers of Jamaican
ethanol would be the domestic market, where it could replace
up to 10 percent of the gasoline used on the island, meeting
a demand of more than 15 million gallons per year.

--------------
FAILING TO MEET QUOTAS
--------------


9. (U) Though Jamaica has the opportunity to sell into the
United States and EU markets up to the limit determined by a
quota, declining productivity and factory closures have left
Jamaica unable to meet its quotas consistently for the past
two decades. In some years, the domestic supply has been
short enough that food processors find it less expensive to
import sugar from low-cost producers abroad, such as Brazil.


10. (U) The 2004-2005 season appears to be one of Jamaica's
poorest to date. James said publicly on February 18th that
the industry has so far produced only 12 percent of its
targeted output for export since the grinding period began in
December, less than half of what it produced in the same
period in 2004. Only five of the remaining seven processing
plants were in operation in January, with the remaining two
not commencing with grinding operations until mid-March.
Many factories are not even running a third shift, due to a
recent wave of violent night time criminal attacks against
cane workers. Despite these problems, James announced that
the industry could meet its quota obligations before the end
of the grinding season in July, and avoid paying a fine to
the United Kingdom for missing its targets.


11. (SBU) However, on March 1st, Clarke contradicted James,
stating that he does not expect the local sugar industry to
meet its export quotas in 2005. He cited crop damage from
the hurricanes that struck Jamaica in 2004 and delays in
processing that have caused deterioration in the harvested
cane. James told emboff that the current estimates do show
that the target of 185,000 tons will not be reached, and that
the official report due to be released in April will show
whether or not the current season will fall short of the
record low in 2003. Both Armstrong and Brown continued to
express confidence that production would be close to target
levels.

--------------
REMEDIES AND ALTERNATIVES
--------------


12. (SBU) Livingston Morrison, executive director of the
Sugar Company of Jamaica, met with labor representatives on
March 3rd. He said that further industry downsizing and
factory closures were not the way to deal with the problems
facing the industry. Rather, he addressed the industry's
need to shift from production of raw sugar to value added
products, such as rum, ethanol and molasses. He also called
for an aggressive program of modernization and mechanization,
which would improve efficiency and boost per-hectare yields.
This call for expansion and modernization was echoed in
statements made to econoff by James, Brown and Armstrong, who
are awaiting the April release of a report to the Prime
Minister outlining the sugar industry's options. Armstrong
told emboff he expects the industry to be much more
diversified into value-added products, with greater levels of
automation and a substantially downsized workforce.


13. (SBU) The idea of converting the cropland currently under
sugar cane cultivation to a higher-value product, such as
sea-island cotton, has been discussed many times over the
past two decades. However, according to Brown, most of the
cane farmers are traditionalists who are carrying on a family
tradition, and are extremely reluctant to risk switching to a
new crop.


14. (U) The sugar factories are set up to generate some of
their own electricity by burning processed cane husks to run
on-site power plants. Though the current technology is
somewhat inefficient, it allows most factories to reduce
their energy costs significantly and to approach electrical
self-sufficiency. James explained that by expanding and
modernizing the co-generation equipment, the sugar factories
could earn revenue by selling power back to the Jamaica
Public Service (JPS) national electrical grid.

--------------
COMMENT
--------------


15. (U) The sugar industry has been on the verge of collapse
for decades, surviving mostly on sales into the European
market at guaranteed prices following the turmoil and
investor flight from the industry after the GOJ imposed price
controls in the 1970s. The removal of the EU price supports
and the possibility of a new low in output have finally
prompted the industry to begin considering significant
changes. It is telling that all the remedies now being
considered have been discussed regularly for the past thirty
years without significant action being taken. Given the
strong political support the industry continues to enjoy, it
seems unlikely that Jamaica will follow the example of St.
Kitts and Nevis, which is closing down its unprofitable sugar
industry after this season (reftel). Instead, by shifting
production to higher value-added products aimed at the
domestic market, increasing automation, and turning their
factories into energy profit centers, the Jamaican sugar
industry hopes it can re-invent itself as a leaner, more
profitable industry. However, with the continuing growth in
importance of the tourism sector, Jamaica's brown gold will
never again occupy the central role in the island's economy
it once held. End comment.
TIGHE