CASE STUDY - THE DELTA SUGAR COMPANY IN EGYPT

Egypt is the second largest sugar producer in Africa. The Egyptian government encourages the production of beet sugar especially in the northern part of the country because it is less water intensive than sugarcane. In 2007/2008 sugar production was about 1.67 million tons. In 2008/2009 Sugar production was about 1.7 million tons, only 1.4 percent more than in 2007/08, because attractive cereal prices, especially for wheat, have contained the expansion in beet areas. In 2009/2010 Sugar production in Egypt reached 1.8 million tons, 100,000 tons more than in 2008/09, in response to increases in beet area driven by remunerative beet returns. In 2010/2011 sugar production in Egypt, remain about the same as last year.

The consumption in sugar in Egypt surpasses its domestic sugar production, a situation that can be attributed to growth rate in population. Sweets are very popular in Egypt, and it is estimated that Egyptians' consumption will increase more and more per year, with much of this met through imports. The confectionery subsector accounts for the lion's share of sugar demand, while the soft drinks sector is also increasingly contributing to this demand growth. Consumption rose along with the growing population and rising disposable incomes. Such higher per capita sugar consumption in Egypt is due to the fact that sugar is considered a complementary good for tea. And it is natural product which is better than the artificial sugar.

The Egyptian government has dedicated areas to the farming of sugar cane reasonably constantly, so as not to limit employment in this economically vital industry. However, sugar cane production growth is hampered by the scarcity of domestic water resources and land; this means that the main factor underpinning future output growth is likely to be higher yielding crops. Sugar beet is therefore seen as a worthy and lucrative crop with the potential to significantly reduce the sugar import burden in future. Whilst cane production is predominantly state-owned, due to the costliness of maintaining the required water resources, beet cultivation is almost entirely in private hands.

The government plays a major role in providing people with good quality products. In Egypt, Delta sugar production is the highest quality of sugar beets which ensure its customers receive the best quality of granulated sugar. Sugar is a fundamental human food product. Besides its direct consumption, there are all the industrial applications in which sugar becomes one of the components of the final product. Delta Sugar is the leading producer of sugar beet in Egypt providing more than 25% of the country's sugar requirements. The sugar industry in Egypt is regulated by several entities including, the Ministries of Agriculture, Investment, Trade and Industry. The former sets the national crop plan and minimum procurement prices, whereas the latter ministries govern the establishment of factories/refineries and trade of sugar, both domestically and internationally.

The government has had a monopoly on sugar processing since 1963. The existing eight sugar mills, as well as the one sugar refinery and distillery at Hawamdia, are under the Sugar Integrated Industries Company (STIC). During 2009/2010, the market is composed of 63% subsidized sugar packs supplied through card holders. (Tamween Sugar), 37% commercially packed sugar by public/private companies from imported and local sugar origins. At present, the market consists of five public and four private companies with a combined production that is divided between cane and beet companies with the former holding a share of 61% and the latter a share of 39%. There is only a sole sugar cane producer in the local market namely, Sugar Integrated Industries Company (SIIC) which controls 62.83% of total sugar capacity, 61% through its sugar cane facility and 1.83% through its sugar beet facility. The remaining four companies in the market use beet in producing sugar and hold a combined share of 37.2% of total sugar capacities.

One problem the country faces is volatility in the price of international sugar: although world sugar prices fell between February and May 2010 from a 29-year high in January, sugar prices have moved steadily upwards again. In December 2009, the Egyptian government decided to extend the exemption of duties on raw and white sugar imports until the end of June 2010. After experiencing a very strong growth of 20.8% between 2004 and 2009, sugar production in Egypt is forecast to experience a slight slowdown, expanding by 18.9% during 2014.

On the demand side; domestic sugar demand is unlikely to experience any sharp decline, even in the face of an economic downturn. This is because the bulk of demand comes not from the highend confectionery industry, but, rather, for domestic use and from the mass market soft drinks and confectionery industries; these sectors tend to be more resilient in the face of an economic downturn. However, if food price inflation were to continue to remain high, this would eventually have an impact on even these mass market industries. The sugar quantity consumed is influenced by the number of population, the price of sugar, real individual income, and the production and imports of sugar.

In order to ensure that the supply of sugar continues to grow in accordance with rising demand, the Egyptian government has announced substantial investments in the sector; the government has also sought to encourage private-sector foreign investment. The investments will also be used to boost beet sugar production at several factories, including a new plant for Delta Sugar Company second production lines at Dakahlia Sugar Company and Nubariya Sugar. Meanwhile, in recent months a number of multinational firms have begun to target Egypt's sugar refinery industry.

The consumer price is affected by the changes in sugar price that is affected by the changes in consumption. The price elasticity of demand estimated at 0.115 and the income elasticity of demand estimated at 0.088 reveal that sugar is a necessary commodity with low income elasticity of demand. Supply elasticity in 2010 is 0.03 (inelastic supply). Quantity supplied does not respond strongly to changes in price, as supply price elasticity is less than one. This inelasticity is related to the unavailability of producing more sugar in this short run period because increasing the production would need two things in the same time and the time required to activate a new production line takes time between 2 and 3 years.

Questions:

1. Give examples from the case to explain concept of scarcity, trade off, opportunity cost.
2. List the factors affecting demand and supply from the case 3.Determine the reason behind shortages in the sugar market.
3. Give example for sugar complements and substitutes
4. Explain the role of the government to improve market outcome
5. Interpret the meaning of the sugar price elasticity and the supply elasticity

Answer rating: 100% (QA)

1 Scarcity Tradeoffs and Opportunity Cost Scarcity The case highlights the scarcity of domestic water resources and land in Egypt which hampers the growth of sugar cane production This scarcity forces ... View the full answer