Pricing policy for locally produced molasses

George I. Callaghan, Guest Writer

I refer to the article in the Financial Gleaner of Friday, September 7, titled 'Import bias in molasses pricing irks supplier'.

Allow me to make a contribution to the debate regarding the pricing arrangements for Jamaican molasses sold to the distillers of our very prestigious rum products. My views do not necessarily reflect the position of the Sugar Transformation Unit of the Ministry of Agriculture and Fisheries, of which I am head.

Molasses is a dark brown viscous liquid obtained as a by-product in the processing of both beet and cane sugar. Molasses is the syrup remaining from the crystallisation of sugar cane and sugar beet juice.

In sugar processing, blackstrap molasses is obtained after the last of three boiling or extraction processes that sugar cane goes through to produce molasses. Blackstrap molasses is used worldwide mostly as a feed supplement for livestock, in food products and in the production of alcohol.

The production of molasses is highly correlated with the production of sugar, and by extension sugar cane. At the current level of cane production in Jamaica - 1.5 million tonnes in the 2011-12 crop - we are likely to produce an estimated 45,000 tonnes of molasses.

The distillers, however, need about 105,000 tonnes of molasses per annum. Therefore, the Island's cane production needs to be increased to about three million to 3.5 million tonnes per annum in order to eliminate imports of molasses.

I suggest that a consistently remunerative price for sugar cane is a key element in the drive to ensure adequate supplies of locally produced molasses to the market (distillers).

MARKET CONDITIONS

As indicated in the article, the price paid by Jamaican distillers for locally produced molasses is some 34 per cent less than the import parity price (IPP), which is "The price that a purchaser pays or can expect to pay for an imported good," according to Deardorffs' Glossary of International Economics.

This price calculation includes the cif import price plus tariff, and transport cost to the purchaser's location.

Is it appropriate to apply import parity pricing to the local market for molasses sold to distillers?

Geoff Parr, in his publication in 2005 Import Parity Pricing: A Competitive Constraint or a Source of Market Power?, notes that "Import parity pricing is a pricing policy adopted by suppliers of goods for which the domestic supply is inadequate to fulfil the entire domestic demand, so that the entire domestic output is priced at marginal cost, which in this case would be the IPP cost of the last unit imported."

Clearly, the local trade in molasses fits the bill. The application of import parity pricing to locally produced molasses is even more appropriate, given the fact that Jamaica Cane Products Sales Limited is a dominant supplier of this product and Caribbean Molasses Company Limited is by far the predominant buyer.

Quite obviously, if import parity pricing is applied to the local trade in molasses, the cost of the product to distillers will rise from US$119 per tonne to around US$180 per tonne.

On the flip side, this will incentivise increased local sugar cane output and thereby eliminate the need for our distillers to import such large volumes of foreign molasses.

George I. Callaghan is an agricultural economist. Send feedback to business@gleanerjm.com or gicallaghan@moa.gov.jm