Sugar deal inked above market price as subsidy bill spikes
KUALA LUMPUR, Feb 3 – Malaysia signed a long-term sugar supply deal at a fixed price of US$26 (RM78.20) per hundred pounds last month despite global prices for the commodity hovering around US$23, resulting in a hike in the subsidy bill.
A Cabinet minister said today that the country would benefit if prices go up.
The market price for sugar is expected to remain soft for the next six months due to ample supply, according to most traders.
The Domestic Trade, Cooperatives and Consumerism Minister told reporters today that Putrajaya’s decision to raise the sugar subsidy and keep its RM2.30 per kilogramme peg is due to a three-year-long contract it signed in January 2012.
Datuk Seri Ismail Sabri Yaakob said the Barisan Nasional (BN) federal government had struck a deal, until 2014, to buy sugar at US$0.26 per pound.
He added that the contract would benefit Malaysians should market prices increase in the future.
“Many speculate it will fluctuate. If it goes up, we will profit,” he said.
Sugar is one of several controlled goods in Malaysia.
According to DAP MP Tony Pua, the market price of sugar slipped on a monthly basis to US$23.42 per hundred pounds by December last year after hitting a peak of US$29.47 in July 2011.
The opposition leader had previously remarked that it was a 20.5 per cent dive and asked Putrajaya to explain the increase to maintain the annual subsidy to sugar suppliers MSM Holdings and Tradewinds.
Barclays Capital forecast sugar prices will average US$0.224 per pound in the first half of 2012.
March raw sugar futures on the Intercontinental Exchange (ICE), an international clearing house for commodities, slipped US$0.011 to close at US$0.24 per pound. On Wednesday, the contract hit a three-week low of US$0.24.
Traders say an ample supply is hampering sugar prices worldwide.
Ismail admitted today that the market price for sugar had plunged in the past six months but insisted “it’s much higher compared with the previous price.”
“You have to compare the price with US$0.175 per pound when it started out. Because of the contract we have locked it at US$0.175 per pound. Without the contract, we’d have to pay much more,” he said.
He noted that the government had similarly signed a long-term contract from 2009-2011 to buy sugar at US$17.50 per hundred pounds, which saw the market price for the commodity rising to US$28.90 in January 2010 and to US$36 by the end of the year.
“[They] say the sugar price has gone down, I don’t understand,” Ismail said in his response to Pua.
“Two out of the three biggest sugar producers in the world have been affected by floods,” he said, referring to neighbouring Thailand and Australia, and added, “The price of sugar has not dropped. Even if it has, it is negligible.”
Putrajaya has increased subsidies from 20 sen to 54 sen per kilogramme of sugar.
Since the Najib administration began cutting subsidies in January 2010, the price of sugar has increased by 58.6 per cent from RM1.45 per kilogramme.
Ismail had said the government would pay RM567 million for sugar subsidy this year compared to RM262.4 million last year.