Malaysia Sugar Market

From an excerpt dated 27^th august 2009:

Prevent sugar shortage

“SUGAR is one of the most heavily subsidised commodities around the world. Some 80% of foreign sugar market prices are subsidised by their respective governments to match the price of sugar in the United States, a value that is lower than production costs for sugar in those countries. Sugar is expected to be in short supply worldwide this year because of erratic weather patterns which disrupt production.

Even though the Malaysian Government has asserted that there is enough sugar, consumers are already thronging hypermarkets and supermarkets to get their supply of sugar and most small shops and convenience stores are running low on stocks. With the festive season approaching, demand will be on the rise, and it will definitely affect market stability despite the authorities’ promise to keep prices stable.

According to the Domestic Trade, Cooperatives and Consumerism Ministry, one of the main causes of the current sugar shortage is refineries cutting back production of sugar after over selling the commodity in the first six months of this year.

Unlike coarse sugar, refined sugar is not under the list of controlled items basically because it is mainly used by bakeries. Since the price of refined sugar is not under control, producers could choose to increase production, leaving the production of coarse sugar low, resulting in an artificial shortage.

The four major sugar producers in Peninsular Malaysia have deliberately produced more refined sugar to create an artificial shortage of coarse sugar in the country for their own benefit.

As part of the immediate measures to solve the problem, extensive inspections should be conducted to catch profiteers. Greater enforcement at the border will discourage smugglers, and a campaign to encourage Malaysians to live a healthier lifestyle by consuming less sugar will be helpful.

Other than that, the Government should cancel the permits of errant manufacturers, wholesalers and suppliers and blacklist them as a deterrent to ensure that there will be no shortage of not only sugar but also other essential goods in view of the approaching festive season.

The public must also cooperate by reducing the intake of sugar, preventing wastage, and report to the ministry those who hoard or smuggle sugar.

Sugar consumption can be expected to continue its upward trend in Malaysia, reflecting population and income growth. To meet domestic needs, Malaysia is likely to increase raw sugar imports, and inevitably place a heavier reliance on the global market.

To ensure future sustainability of sugar supplies in the domestic market, the Government, producers, and consumers must play their respective roles earnestly. Otherwise such problems will imminently resurface every year particularly during festive seasons.”

In the first part of the article which was taken from (http://thestar.com.my/news/story.asp?file=/2009/8/27/focus/4594848&sec=focus) stated that sugar is going to be in short supply because of erratic weather patterns that disrupts the production. In economics, state of nature is one of the main factors that  cause the supply curve to shift. Commonly, the supply curve will shift to the left, because state of nature may refer to a sudden weather changes. The graph below shows the shift of the supply curve to the left. When the supply curve shift to the left, it means that there is a decrease in supply. Thus, the market equilibrium will also rise to a new point which is previously from (P1,Q1) to (P2,Q2). Quantity supplied of sugar at this point will decrease and the price will increase slightly.

            There will also be a shortage in the demand and supply curve because the quantity supplied for sugar is less than the quantity demanded by consumers. Again, this is caused by the slow production due to the changes is weather.

Next, it has also been stated that the supply of sugar is low and the quantity demanded for sugar will rise drastically because of the festive season that is coming. A lot of consumers are hoarding the stocks of sugar to be used in making cookies, cakes and traditional biscuit during the festive season. These are the main reason why small markets and shops are running very low on stocks. The rise in quantity demanded is shown below in the graph.

When the demand curve shift to the right, the quantity demanded also shift from Q1 to Q2 which results in high quantity of sugar demanded due to the festive season. Due to the change in quantity demanded, prices of sugar per packet will also increase because the suppliers are aware that festive season is coming and the demand of sugar will increase. Therefore, the suppliers will increase the price of the sugar in order to make more profit. When the festive season arrives, the elasticity of sugar is inelastic. In these case, the total revenue generated is high and one of the reason is consumers will still have to buy sugars that are sold at a higher price because of the festive season. More sugar needs to be used in this specific times. This is one of the factors that affect the price elasticity of demand for a good which is the time elapsed since a price change. In this factor, it is stated that the more the time consumers have to adjust to a price or the longer that a good can be stored without losing its value, the more elastic the demand of the good. Since the the time for consumers to adjust to price is relatively low, the elasticity will be less than 1.

The article stated that there is an over selling of sugar for first six months in 2009. It is one of the main causes that forces the the sugar supply to be brought down. Therefore, in the first six months, there were surplus.

Surplus occur when the quantity supplied of sugar increases more than what consumers are demanding for. Therefore, you can see the surplus on the above graph at point (P1,Q1) to (P1,Q3). In order to sell of the surplus, the producer has to lower the price to the equilibrium price and it will increases the demand of sugar simultaneously. Since refined sugars are not a controlled item due to the wide use in bakeries, supplier can choose to increase the production of refined sugar leaving the production of course sugar low. This will cause an artificial shortage.       

The article did mentioned about smugglers smuggling sugar across the borders to Malaysia. This product will be illegal products. Profiteers will make the price lower but there is a possibility that the demand will decrease as a prohibition of possessing illegal sugars deters some consumers from wanting to purchase it. Although the price offered by these illegal producers are relatively lower than what the legal market is offering, some consumers are insecure about the quality of the product given to them. Therefore, the product is inelastic at this point. Government should start to monitor the borders and checking the stocks of each retailer so that there is no overselling that will occur.

“Sugar consumption can be expected to continue its upward trend in Malaysia, reflecting population and income growth.” – The Star Online.

Malaysia’s sugar consumption will rise due to the increasing in population and income growth. This can be stated as the “income effect” which meant that an increase in real or nominal income encourages the consumer to buy more units, the good is referred to as normal; most goods fit in this category.

            

            Malaysians consumers has a rigid mindset such that looking for an alternative for refined sugar is never been considered. Some of the substitution goods for refined white sugar is brown sugar or other artificial sweeteners. These consumers still remain complacent and are not considering on a better substitutes like reducing sugar intake.