Expansion of the Sugar Trade

The rise of the sugar industry in the Philippines during this crucial eighty-four-year period is inextricably entwined with foreign markets and foreigners. The world economy supplied an ever-increasing demand for sugar, and outsiders played a vital part in supplying the industry with credit and technology. As in the earlier era, native Filipinos made their greatest contribution to the sugar business in the cultivation sector, although in Negros they became responsible for the processing as well. Until near the end of the period Capampangan continued to depend on foreigners for the last step of their manufacturing, and the division of

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Figure 1.
Philippine Sugar Exports, 1836-1920. Sources: Ramon González
Fernández and Federico Moreno y Jeréz, Manual del viajero en Filipinas (Manila:
Est. tip. de Santo Tomás, 1875), p. 185; M. J. Lannoy, Iles Philippines (Brussels:
Delevingne et Callewaert, 1849), endchart, no. 5; Robert MacMicking, Recollections
of Manilia and the Philippines: During 1848, 1849, and 1850 (London:
Richard Bentley, 1851), pp. 270-72; Angel Martinez Cuesta, O.A.R., History of
Negros , trans. Alfonso Felix, Jr. (Manila: Historical Conservation Society, 1980),
p. 365; Cárlos Recur, Filipinas: Estudios Administrativos y Commerciales
(Madrid: Imp. de Ramon Moreno y Ricardo Rojas, 1879), p. 95; Russell, Sturgis
and Company, "Principal Articles of Export in 1854 and 1855," Market Reports ,
January 7, 1856 (Baker Library, Harvard University); Alexander R. Webb, "The
Sugar Industry in the Philippines," U.S. Consular Reports 31 (1889): 371; Edward
W. Harden, Report on the Financial and Industrial Conditions of the Philippine
Islands (Washington, D.C.: Government Printing Office, 1898), p. 20; Sugar News
7 (1926): 186, 698; Philippine Islands, Bureau of Customs, Annual Report of the
Insular Collector of Customs to the Honorable Secretary of Finance for the Fiscal
Year Ended December 31, 1922 (Manila: Bureau of Printing, 1923), p. 69. The raw
data for this chart can be found in appendix A.

labor throughout the industry between those who did the overseas marketing and those who produced sugar persisted during this time of expanding frontiers.

Figure 1 portrays annual sugar exports from the Philippines during the era and illustrates the extent of transformation of the industry. Between 1836 and 1916 exports rose some 2,135 percent, from 15,097 metric tons

in the former year to 337,490 in the latter. By 1836 sugar had achieved first place on the list of exports; it continued to vie with abaca for that position throughout the rest of the nineteenth century (see table 3).

Foremost as an impetus to this dramatic transformation was an enormous heightening in demand for sugar that started even before the mid-nineteenth century, especially among industrial nations. Sugar consumption in Great Britain rose from an annual average of 16.4 pounds per capita in the years 1840 to 1844 to 90.8 in the five years from 1910 to 1914; meanwhile, the annual rise per capita in the United States went from 14.1 pounds in 1835 to 86 in 1920.^[1] Only during periods of major war did the rate dip in either country. Furthermore, all the while per capita consumption was increasing, population, too, was multiplying, in the United States from 17 million in 1840 to 125 million in 1920 and in Great Britain from 19 million in 1841 to 42 naillion in 1921. Hence, although the Philippines remained only one of many suppliers, exploding world demand almost guaranteed the islands a bigger export market each year.

The destination of Philippine sugar exports varied considerably over the period, reflecting changing realities in world market conditions. Data in appendix B convey some sense of the shifting terminals. The United States purchased on the most consistent basis, but Great Britain bought more in the nineteenth century. Even so, these numbers may be slightly misleading, for some sugar originally consigned to Great Britain ended up in American East Coast refineries.^[2] Australia, which served as a significant outlet at the advent of the era, faded after the 1870s as it began to acquire more sugar from other sources and to develop its own cane industry. In the 1880s and continuing through the rest of the period, China and, to a lesser extent, Japan became big buyers, taking up the slack as European purchases waned. Spain remained only a limited customer for its most far-flung colony, buying relatively small amounts of the very best grades of sugar available. More aggressive buying practices by British and American merchants in the Philippines partially account for this Spanish weakness, but Spain had other suppliers closer to home, in the Caribbean and in Europe. California, which early promised to be a large market, eventually came to depend on Hawaii's rising export as its chief source.

The complexity of shifting world markets created a need for good, current commercial intelligence, and British and American trading firms, including such giants as Ker and Company; Smith, Bell and Company; Warner, Barnes and Company; Russell, Sturgis and Company; and Peele, Hubbell and Company possessed the expertise, contacts, finances, and facilities to make the sugar trade a success. Throughout the nineteenth century these and other foreign houses controlled the export trade, al-

Table continued on next page

though the Spaniards tried through tariff legislation to end that stranglehold in the 1880s and 1890s. Spain's efforts came too late, however, and the only change in leadership in the trade arose from the vastly increased role of Philippine Chinese exporters during the last decade of the nineteenth century. British, American, and Chinese firms maintained their dominance of that trade into the twentieth century as well.^[3]

Constantly expanding world consumption explains the overall rise in sugar exports, but more specific events and factors account for short-term

fluctuations. In the 1840s the decline of West Indian production resulting from the prohibition of slavery stimulated British demand for Philippine sugar. Sharp rises in the 1850s and the early 1860s followed upon temporary curtailment of alternate sources and greater military need associated first with the Crimean War and then with the American Civil War. Limitations of American cane production, especially in Louisiana, in the period following the Civil War favored increased use of Philippine sugar by American East Coast refiners.^[4]

This upward course persisted until the mid-1880s when the expansion of the beet sugar industry, initially in Europe and later in the United States, offered new competition for cane. Germany, Russia, Austria-Hungary, and France put down extensive plantings of beets between 1850 and 1900, as did such American states as California, Michigan, and Ohio. To stimulate these fledgling industries, countries on the Continent legislated bounty systems rewarding local production of export sugar so that from the 1880s to the time of the Brussels Convention of 1903, they flooded the English and American markets with cheap, high-grade sugar. The McKinley Tariff Bill, passed in Washington in 1890, included a two cents per pound rebate on home-grown U.S. sugar, and although Congress repealed this bounty three years later, the Dingley Tariff of 1897 raised duties on imported sugar at a time when world prices remained low.^[5]

In the 1840s world sugar prices dropped because of diminished processing costs; however, in the succeeding decades growing demand held the rate more or less steady. In the 1880s, however, prices fell by almost half; except for a brief surge in 1889, they remained depressed until the boom years of World War I. The bounty system represented one early factor accounting for low rates, but at the heart of the matter lay oversupply: too much cane and beet sugar combined. Manila prices did not fluctuate so drastically (see table 4), but the amount of sugar exported leveled off as the English trade permanently declined from its 1881 high. Only the increasingly active role of Chinese traders and the China and Japan markets for muscovado maintained Philippine exports at their previous levels (in 1893 they actually reached their nineteenth-century peak). But the Asian trade, especially that of China, demanded mostly the lower grades of muscovado at cheaper prices and did not compensate entirely for the lost Western markets in the better grades.^[6]

The Philippine Revolution caused a further diminution of sugar exports, as disruptions at the port of Manila and combat in central Luzon curtailed deliveries from that northern island. Port facilities in Manila closed on and off in 1898 and 1899 while contending armies jockeyed for control of the city, and the archipelago's only refinery at Malabon shut down because of

the disruptions and because this concern lost its chief customer for refined sugar, Spain. In the south, hostilities proved far less costly, especially in Negros, although the agricultural experiment station at La Carlota was burned. Shipments through Iloilo and Cebu dropped only modestly throughout the period of struggle against Spain. By and large, sugar farmers and merchants continued their straitened business as best they could.^[7]

Declining exports in the early years of the American occupation had several causes including a disastrous outbreak of the cattle disease rinderpest that killed some 80 percent of the carabao, the main beasts of burden of the sugar industry. The disease had apparently arrived from French Indo-China in the 1880s but reached a high intensity for the first time only in 189Z Nearly one-third of the carabao in Pampanga and one-quarter of those in Tarlac died in 1902. An outbreak of human cholera in 1902 plus severe droughts and locust infestations added also to the miseries facing the population and the industry.^[8]

Disease and war did not represent the only sources of hardship in that harsh time between 1899 and 1909, for the shortage of good outlets remained as well. The archipelago's production had to compete with that of Java for the China market, and Japan began to obtain more sugar from its new colony, Formosa, acquired as a spoil of the Sino-Japanese War. Except for a brief period during World War I, the English market never returned. The Dingley Tariff inhibited U.S. sales in spite of the fact that the Philippines received a 25 percent reduction in duty after 1903. Lessening of the Cuban duty by 20 percent coupled with the cheaper cost of transportation from Cuba plus free entry of Hawaiian and Puerto Rican sugar kept the Philippines at a competitive disadvantage on the American market.^[9] Even as low world prices persisted, Philippine export stayed below half of what it had been ten years before.

Weak markets prevented recovery, especially in central Luzon; more-over, several old sources of credit to the industry had dried up by this time. The two American firms that had supplied so much cash and machinery in former years had gone bankrupt, Russell, Sturgis in 1876 and Peele, Hubbell in 1887, while a large British lender, Smith, Bell, faced deep financial trouble because of its inability to sell its overstock of sugar in New York. It took Smith, Bell from 1905 to 1909 to remove itself from debt and to begin rebuilding its cash reserves. Absence of credit led farmers to advocate the creation of the Agricultural Bank, launched in 1908; however, this institution made few loans to farmers, because they generally lacked the good, clear land titles acceptable as collateral. Furthermore, Pampangan farmers complained that too many government loans at the time went to

Negros. In 1916 the bank was absorbed by the far more successful Philippine National Bank (PNB).^[10]

Philippine sugar producers began to focus on the need to garner tariff concessions on the American market, and here the government proved more helpful. Such efforts took time to succeed, however, for American beet and other offshore cane producers lobbied the U.S. Congress to limit preferences for Philippine sugar. It required the influence of William H. Taft, the first head of the Philippine Commission and later president of the United States, plus the efforts of other lobbyists for the Philippines to gain those import privileges. Under the Payne-Aldrich Bill of 1909, the Philippines received a 300,000-ton duty-free share of the U.S. sugar market, and in 1913 under the Underwood-Simmons Bill, even that weight limitation was dropped. Despite these concessions, however, the Philippines still competed with such heavy suppliers as Cuba, Puerto Rico, and Hawaii, and in most years of the 1910s it had to sell substantial portions of its product on the less lucrative Asian market.^[11]

The underlying problem for Philippine export was the quality gap: processors turned out the same low-grade sugar they had for the past eighty years, but on a world market that now demanded a higher degree of purity. In 1813 an Englishman, Charles Howard, invented the steam-heated vacuum pan that, under reduced pressure, boiled sugar syrup more efficiently and quickly at a lower temperature. Invention of the centrifugal separator, a steam-driven cylinder that removed molasses from crystal sugar cleanly and rapidly, followed in the 1840s. By the late nineteenth century Java, Hawaii, and Cuba were already using these innovations; however, the cost of erecting a modern steam-run central ran very high, reaching the hundreds of thousands of dollars.^[12]

The Philippines remained the last major world producer of cane sugar without centrals. The less expensive machinery introduced into the Philippines in the nineteenth century to replace the crude equipment of earlier times included steam-driven metal grinders; hornos economicos that, instead of wood, burned ground cane refuse (bagasse ) as fuel; and batteries of open kettles (see figure 2). The first two used in tandem produced more efficient extraction rates of juice from cane; the latter improved the polarization of mat sugar. By the latter part of the century, Negros turned out a good sugar with an 85º average polarization (degree of sucrose content) that compared favorably with the finished pilon sugar of Pampanga; neither kind, however, matched the 96º of centrifugal sugar. For the introduction of even this cheaper equipment, credit belongs mainly to foreign risk takers: Nicholas Loney and Yves Germain Gaston on Negros

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Figure 2.
Advanced Muscovado Mill System. G. E. Nesom and Herbert Walker
Handbook on the Sugar Industry of the Philippine Islands (Manila: Bureau of
Printing, 1912), pt. 2, p. 100.

Island and Paul de la Gironiere, Adolphe Delaunay, and M. M. Vidie on Luzon. The big trading houses supplied the machinery and financed its purchase when native planters followed the lead of those innovators. No one, however, attempted the erection of a complete central. The refinery at Malabon that functioned from 1887 until the outbreak of the Revolution had an array of modern equipment; even so, this plant's operation was limited in size by the circumscribed market for fully refined sugar.^[13]

For the most part, Philippine growers did not even care to invest in better farming techniques to improve their profits, and the Philippines possessed the lowest yield per hectare of all the major sugar-producing regions of the world. A 1920 report indicated that Hawaii and Java had 6.66 times the per hectare yield of the Philippines; for Cuba and Puerto Rico it was 2.6 times, for Queensland, Australia, almost 3 times, and for Jamaica 2. Even beet-

producing areas of Europe and America had higher productivity. Not until well into the twentieth century did planters begin regularly to fertilize their fields, rotate and irrigate their crops, and select the best cane for planting.^[14]

In the mid-nineteenth century Philippine muscovado drew praise for its quality, but by the late 1870s criticism started to appear, and the new realities of the international sugar trade began to hurt the Philippines by the mid-1880s. Because of ad valorem duties on high polarization sugar brought into America and England (until 1874), it remained economical for these two countries to import 85º muscovado. But with the rising availability of high-quality beet sugar, first from the Continent and then from domestic growers, both countries began to insist on 96º centrifugal. As the century ended, muscovado was losing the competition for valuable European and North American markets.^[15] The next decade proved an unmitigated disaster for Philippine sugar. Table 3 reveals that, even as overall Philippine trade continued to grow despite war and natural calamity, sugar's share of that trade declined from a high of 47 percent in 1893 to just 10 percent in 1903 and only 16 percent as late as 1909.

The major casualty of the sugar depression of the early twentieth century was the pilon industry of central Luzon and Pampanga's in particular. Before 1850, pilon sugar that was reclayed in Manila represented the top of the export trade and found its way readily to Western markets; however, an improved Visayan mat earned a significant share of those markets over the second half of the century. Pampangan farmers damaged themselves as well by lacing their sugar with molasses, a practice that drew criticism in the 1870s. Instead of improving their polarization, then, they became more dependent on the Manila fardarias to raise the quality of their product. By the 1890s annual exports from Manila, chiefly superior pilon, to North America and England began to drop drastically, while Iloilo shipments of Visayan mat to those destinations continued to rise. The Revolution savaged the industry in central Luzon; it never recovered. Sugar exports from Manila dropped from 127,000 tons during the 1887-88 milling season to nothing in 1909.^[16]

In the next ten years Pampanga began to move away from pilon when some planters switched to making mat sugar by hiring sugar maestrillos expert in the Visayan boiling technique. In a more desperate move, other farmers after 1914 commenced sending their cane to the newly erected central at Canlubang, Laguna, despite the serious loss of sucrose content caused by the delay between harvesting and grinding.

Pilon no longer sold well, and only the best mat could compete for markets with the poorest grades of centrifugal. During World War I, the Continental beet sugar industry was incapacitated, and cane producers

everywhere profited from the shortage as world prices touched extraordinary heights. In the Philippines, Asian and Western buyers vied with one another for Philippine sugar to such an extent that, for the first and only time, the United States bought small quantities of Philippine refined: Even so, muscovado sold for from five to more than ten pesos lower than did centrifugal; moreover, not every Western refinery could handle muscovado-quality sugar any longer.^[17]

Despite the imperatives, potential investors in Philippine centrals faced formidable obstacles. First of all, there existed a problem of cane supply. To remain profitable, large, modern mills required that ample stocks of sugar cane be delivered throughout the milling season, and most centrals in other countries possessed guaranteed stocks through ironclad lease arrangements or through ownership of the surrounding fields. In the Philippines, however, acquisition of large tracts of public land was illegal, and there were insufficient private estates for purchase or lease.

Second, the matter of cost loomed large. Participants in the Philippine sugar industry generally lacked the resources and incentives to purchase expensive factories. The Spanish colonial government, more inclined to worry about paying its burgeoning bureaucracy, took little interest in aiding industrial development. Long-term depreciation of its silver-based currency over the last quarter of the nineteenth century as well as a large outflow of its precious metal reserves left the Philippines with a cash shortage.^[18] Equipment that cost hundreds of thousands of dollars before the onset of World War I cost millions once it began. Local lending institutions at the time could not supply such amounts, and private families feared making big investments on their own, knowing little of the financing and construction of such enterprises. Lack of expertise constituted part of a bigger problem: confidence—or lack thereof in the future of sugar. A decade of weak prices and fierce world competition made all but the most intrepid investors chary of perilous commitments. Again, it took foreigners to lead the way to change.

As to the first matter, the guaranteed sources of cane, several solutions emerged. The initial one involved a stratagem to avoid provisions of the Public Land Act of 1902 that prohibited the granting of public lands greater than 16 hectares to individuals and 1,024 hectares to corporations. This law, partially passed at the behest of American beet sugar interests, effectively prevented development of centrals along traditional lines by denying the centralists ownership of sufficient cane fields. But a careful reading of the law governing the disposal of the friar estates, newly acquired from the Catholic Church, allowed corporations to bypass the law on public domain and to buy extensive tracts of the land formerly owned by the religious

orders. With the aid of Philippine Commissioner Dean Worcester, an American syndicate representing mainly Horace Havemayer of the American Sugar Refining Company purchased some 18,000 hectares of unused friar land in San Jose, Mindoro, in 1909, and subsequently erected a central there. The project ultimately failed because of the malaria that plagued the area, the peaty soil, and the unavailability of an adequate work force; nevertheless, a precedent had been set, and a central capable of milling some 1,500 tons of cane daily had been built in the islands.^[19]

Before the Philippine legislature closed the loophole in the Public Land Law in 1914, California interests under the leadership of Alfred Ehrman and the Pacific Commercial Company acquired 8,000 hectares of the Calamba and Biñan estates in Laguna and used this property as the basis for erecting a large central at Canlubang. The enterprise flourished so well that in 1919 its owners put up another central in Del Carmen, a barrio of Floridabianca, Pampanga. Only at San Jose and Canlubang, however, did the owners acquire extensive plantations, and other investors in centrals had to look elsewhere for solutions to their cane problem.

The real answer to access to cane came with the establishment of the highly successful San Carlos Milling Company in 1912 and is indicated in the opening statement of the company's prospectus:

Briefly stated, this Company has secured from the principal planters of North San Carlos District, Island of Negros, Philip-pine Islands, contracts to grind all of the sugar cane grown by them for the term of thirty years, and in return for this the Company is to receive forty per cent of the sugar manufactured.^[20]

The long-term milling contract became the model arrangement' used by other centrals erected in the Philippines and gave the archipelago a unique identity among the world's sugar-growing regions. San Carlos's success encouraged uncommitted planters to sign up with newly rising mills, and many farmers settled for less advantageous contracts containing a fifty-fifty split, especially during the boom years of World War I, when soaring prices promised great returns to those in the market.^[21]

The difficulty of financing centrals was solved in several ways. The first involved large infusions of foreign capital mainly American, as some of the biggest mainland U.S. and Hawaiian sugar concerns sought opportunities in the islands. At Canlubang, California interests came to the fore, and with Pasumil, the Spreckels West Coast refining interests joined Ehrman in supplying capital. Hawaiian money constructed the centrals at San Carlos and Silay, Negros Occidental (1920). Various firms representing

long-time Spanish residents of the islands also became involved in central building: the Elizalde-Ynchausti interests financed a major factory at La Carlota that commenced milling in 1920, and Tabacalera, a Spanish company built out of the remnants of the government's old nineteenth-century tobacco monopoly, funded a large central at Bais, Negros Oriental, in 1919. Two other groups of Spanish investors put up small centrals at Ilog and Kabankalan in 1916 and 1917 respectively.^[22]

Because of the shortage of domestic capital and available credit sources, native Filipino investors faced a more difficult challenge entering the central construction field. The Roxas family and Esteban de la Rama managed to erect small centrals on their own property at Calatagan, Batangas (1914), and at Talisay (1912) and Bago (1913) respectively, and Lizarraga Hermanos put up another little mill at Kabankalan (1914). Only Miguel J. Ossorio, however, could organize the private support to construct two big centrals, at Manapla (1917) and Victorias (1921). It took government intervention to assure that Philippine interests could afford to build centrals. The PNB, founded in 1916, loaned substantial amounts of cash for the erection of six large Filipino-owned mills: at Isabela (1919), Ma-ao (1920), Bacolod (1920), Talisay (1920), and Binalbagan (1921), all in Negros Occidental, and at San Fernando, Pampanga (1921). In the case of the five on Negros, these projects originated with prominent families, including the Yulos, Lizareses, and Montillas, who applied to the PNB for funds that included most of the capitalization.^[23]

Reluctance to invest ceased during the second decade of the century, not just because of desperation over dwindling markets for muscovado, but because the American tariff situation promised better market opportunities than had existed for some time. In addition, the opening of the Panama Canal in 1914 reduced transportation time and costs to the East Coast refineries where Philippine sugar sold best. Indeed, inauguration of the Panama Canal meant much more to Philippine economic development than had the opening of the Suez Canal in 1869. The government, by founding the PNB and expanding railroad facilities, demonstrated its willingness to assist the industry, while prices during the war added to the sense of optimism and to improvement of the investment climate.

Out of the private sector and government service came technicians experienced in the financing and engineering aspects of central construction and operation. Almost all of the early specialists were Americans who advised investors on how to obtain and finance central machinery. A major journal, Sugar News , designed to promote the industry and to disseminate technical information, began publication in 1919. As a result of the availability of so much specialized information, investing in centrals became less

of a mystery. By the end of the decade the first group of Filipino technicians trained in the intricacies of producing better sugar entered the industry. The era of the centrals might have started a little earlier except that the war created a shortage of shipping and machinery, so that rapid construction had to await the armistice. Not until 1921 did the export of centrifugal surpass that of muscovado.^[24]