Monday, January 30, 2012

Sweet Nothings

YB Tony Pua wants some questions answered (excerpt):

Sweet Subsidies for Who?

The Star published on its front page news yesterday with the headline “Sweet Subsidies”. It reported that the Domestic Trade, Cooperatives and Consumerism Minister, Dato’ Seri lsmail Sabri Yaakob said that the government has increased subsidies from 20 sen to 54 sen per kilogramme of sugar in order to maintain the price of sugar at RM2.30 because the “global price of sugar is skyrocketing”…

…What is extremely intriguing however, was that global sugar prices over the past 6 months since the last price hike in May 2011 had in fact declined significantly, and not the purported “skyrocket”.

In fact, after hitting a peak of US$29.47 per hundred pounds in July 2011, the price of sugar has fallen consistently every month – US$28.88 (August), US$26.64 (September), US$26.30 (October), US$24.52 (November) to US$23.42 (December) per hundred pounds. This meant that global sugar prices traded on the Sugar, Free Market, Coffee Sugar and Cocoa Exchange (CSCE) has fallen by 20.5% since July last year.

Even after taking into account the fact that the Malaysian Ringgit has depreciated against the US Dollar by 7% between July 2011 and December 2011, the global price of sugar would still have declined by 13.5% in Ringgit terms.

Therefore by maintaining sugar prices at RM2.30, the Government should in actual fact have to subsidise less, and not more, as proudly boasted by Datuk Seri Ismail Sabri. What is more perplexing is the fact that our subsidy had to increase by 170% to cope with the non-existent “skyrocketing” global price of sugar.

So who’s right? In a sense both are right, and both are wrong.

Here’s the chart:


YB Tony is absolutely right about that the recent price action has brought the price of sugar down. On the other hand, you could base the government’s argument on higher annual average prices, which in 2011 was US$0.2624 compared to US$0.2089. That’s about 25% higher prices on average for 2011.

What’s missing here is the exact mechanism of the sugar subsidy – is it an annual or monthly subsidy? Is it paid at the wholesale level (before processing) or at retail (after processing)?

But going beyond all that, my actual preference is – we can avoid all this back and forth by forgoing the sugar subsidy entirely. In fact, given the health implications, I’d fully support slapping on a punitive tax on sugar production and use as well.

At the Subsidy Rationalisation Open Day (which if memory serves, Tony attended), the overwhelming sentiment was for abolishing the sugar subsidy immediately without a phase-in period. I think in this case, public support for abolishing the sugar subsidy might be a lot stronger than the government thinks.

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