Policy Papers

  • 01.04.2011

    Raw sugar toll refining a sensible policy?


    Raw sugar toll processing has been extensively used in international trade. Under tolling, raw sugar is imported duty free, refined and then re-exported as white sugar or in sugar-containing products. This creates a trade that does not harm the essential interests of domestic producers of similar goods. Raw sugar toll refining is especially pertinent to the countries with highly protected sugar markets, like the USA, EU or Russia. For these countries toll processing is mainly aimed at compensating domestic sugar-contained products producers for high domestic sugar prices resulting from expensive sugar market policies; for sugar producers, though, toll refining facilitates better use of processing capacities mainly after the relatively short campaigns s of sugar beet processing.

    In this policy paper we demonstrate that raw sugar toll processing is a sensible policy for Ukraine as it partly compensates for welfare and efficiency losses resulting from the sugar tariff rate quota regime. This is mainly achieved by reducing the fixed costs per unit of output by better use of processing capacities after the sugar beet slicing campaign. Using model calculations we demonstrate that a typical Ukrainian sugar factory could save about half a million USD due to toll refining. For about 40 sugar factories in Ukraine that are capable of processing raw cane sugar, this could accumulate to about 20 mln USD of cost savings. Further potential gains might include: i) additional investments in factory processing facilities/ in sugar beet production; ii) additional benefits to the personnel of a sector in terms of increased salaries; iii) decreased sugar prices; iv) additional local and administrative tax revenues.

    Toll refining also might benefit export-oriented sugar-containing goods producers. Purchasing sugar on world markets import duty free, they stay internationally competitive and balance the market during periods of shortage. According to our calculations, although toll refined sugar should have been only marginally if economically interesting at all for export-oriented sugar-containing goods producers until the fall 2009, it could alleviate the 2010 high price shock and help maintaining their production costs at a competitive level. This, however, did not happen as there has been a ban on tolling of the agricultural and food products since the beginning of 2010.

    Under certain circumstances, toll refining could open up some export opportunities for Ukrainian sugar. Ukraine lies between two highly regulated sugar markets, Russia and the EU. The restructuring of the EU Sugar Market Regime resulted in an annual structural deficit of about 3 mln tons of sugar. This marketing year, a mixture of adverse weather and high world sugar prices expanded the deficit further by about 1.8mln tons. The EU domestic prices reacted accordingly, whereby the EU is trading at about USD300/t above the Ukrainian price level at this moment. Since the EU has allowed import quotas of 300 000 tons of sugar at 0% duty to alleviate sugar deficits, Ukraine could toll raw sugar and export it into the EU. Also, Ukrainian sugar producers could export white tolled sugar under the Inward Processing Relieve program to the EU. Toll processing of raw sugar would allow Ukrainian sugar producers competing with Russian factories for the Asian export markets. This, in case of oversupply, might help finding export markets even for Ukrainian beet sugar.

    Concerns about the negative effects of tolling raw sugar on the domestic sugar beet sector are very unlikely. According to our model calculations, increasing sugar beet yields and extraction rates (especially in vertically integrated structures) make sugar beet processing more competitive vis-à-vis raw sugar refining, especially in the current high raw sugar price environment. Russia’s experience supports this, where despite extensive raw sugar refining, sugar beet acreages increase.

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