US embassy cable - 05KINGSTON1042

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 
 
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SUMMARY 
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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. 
 
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HISTORY 
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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. 
 
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PRICE SUPPORTS 
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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. 
 
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FAILING TO MEET QUOTAS 
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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. 
 
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REMEDIES AND ALTERNATIVES 
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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. 
 
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COMMENT 
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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