Lithuanian sugar industry upset by return of price regulation

VILNIUS - Lithuania's confectionery industry and the two sugar refineries owned by Denmark's Danisco Sugar criticized a government decree that reintroduced state regulation of refined sugar prices beginning Sept. 28. Only Marijampoles Cukrus, Lithuania's other sugar producer, was pleased by the move, which was designed to help rescue it from bankruptcy.

Since 1995 the government has been setting an annual target price for sugar to use in calculating how much manufacturers should pay for raw sugar beets. This time it set a target price of 2.50 litas ($0.62) per kilogram. But for the first time since 1999, it also set a minimum price of 2.43 litas per kilogram, below which refiners are forbidden to sell white sugar. The government said budgetary constraints prevented creating an "intervention price," at which the state itself would commit to buy up sugar.

Market players said sugar prices were up 10 percent to 15 percent since the announcement, though the new minimum was only about 7 percent higher than previously prevailing market prices.

The government said in a statement it was targeting social welfare in Marijampole, a depressed region which already had one of the highest unemployment rates in the country. Higher sugar prices would save jobs, it explained.

Arvi, a fertilizer company that is trying to rescue the bankrupt Marijampoles Cukrus, had asked the government for help, noting it would be unable to make required payments this year on the refiner's old debts without a price hike.

Most other market participants and observers said the policy was misguided, a step back toward socialism. But the government is confident that temporary price regulation is the best way to prepare Lithuania's sugar industry for competition in European Union markets.

Kestutis Kristinaitis, who resigned as minister of agriculture on the eve of the new sugar decree, said returning to price regulation would complicate Lithuania's EU accession negotiations as well as efforts to get a World Bank structural adjustment loan. Those organizations are pushing for market liberalization to raise efficiency in the agriculture sector instead of giving false hopes to non-competitive producers.

"We are amazed and bewildered by the situation," Lithuanian confectionery industry spokeswoman Rasa Bagdoniene told The Baltic Times.

"It means protecting one company at the expense of all Lithuanian consumers," she added.

Bagdoniene said consumers and local confectionery makers would clearly be hurt by higher sugar prices. Meanwhile, sugar beet growers would gain nothing since the regulated white sugar price was not linked to the price refiners paid for raw materials. And in the end, refineries themselves will suffer as dropping domestic sales force them to sell more excess sugar abroad at well below world prices. She noted demand for sweets was very price sensitive, while bread and pastry makers were mulling options to substitute sugar with less costly sweeteners.

"Really we'll just be subsidizing foreign consumers and foreign competitors," Bagdoniene predicted. "We'll take a loss selling them more sugar, and then they will bring their cheaper confectionery products into Lithuania to compete with local producers."

Danisco Sugar felt betrayed by the government's decision. Danisco's refineries in the Lithuanian towns of Panevezys and Kedainiai have a combined sugar production quota this year of 90,000 tons, compared with Marijampoles Cukrus' 22,000 tons.

"Since spring we tried to convince Marijampoles Cukrus and government officials that such a price is unacceptable," a spokeswoman for Danisco told The Baltic Times on behalf of the company's Lithuanian head of operations, Michael Persson.

"Finally we compromised, agreeing to a minimum price of 2.38 litas per kilogram for one year, with the Marijampole refiner obliged at last to bear its fair share of sugar exports, which always involves a loss," she said. Ultimately, however, the government set an even higher price and failed to specify how much sugar Marijampoles Cukrus would have to export.

Kraft Foods, which makes chocolate in Kaunas for sale throughout the Baltic region, said the regulated sugar price would only impact its operations in Lithuania.

"Kraft buys sugar for export production in Lithuania but at lower export prices," the U.S. food giant's Lithuanian spokeswoman told The Baltic Times.

In Latvia, the situation with sugar prices is similar, with sweet makers able to purchase sugar at world market prices while for the local market a fixed price is in place.