Sugar under Quotas

The age of quotas began in crisis. The Jones-Costigan Act decreed a retroactive limit on duty-free sugar shipped to the United States of just 920,971 tons for 1934, some 231,870 tons less than the amount actually sold; moreover, the Philippines still had 1934 sugar held in customs bond that could not enter the American market before January 1, 1935. Hence, Philippine sugarmen faced an effective 1935 quota of some 520,000 tons for sugar exported in that calendar year, less than half the total sent the preceding year (see table 15).

Whereas total centrifugal sugar production for the 1933-34 season reached a record 1,431,920 metric tons, that for the 1934-35 season came in at just 631,142 tons. Beginning as early as May 1934, Negrense hacenderos, in anticipation of the impending curtailment and because of a temporary credit squeeze, began laying off workers, and employment remained depressed until late in 1935. In early January 1935 sugar piled up in overcrowded warehouses while nervous millers and farmers awaited

the government program to determine their individual quotas for the year. To lower their harvests, many planters destroyed standing cane; some diversified, raising livestock and other crops on a limited scale to support themselves. Anxiety rose highest among marginal producers, who feared that even a modest loss of output would move them below the survival level. The drop in production for 1935 represented a major blow to the well-being of workers and small farmers without an economic cushion. The consequences of crop reductions spilled over into related industries; thus, the government-owned Manila Railroad faced sharp revenue losses because of decreased sugar movement from central Luzon, and provincial and insular governments laid off employees in the face of declining tax revenues.^[1]

Expressions of gloom haunted the local press as sugarmen anticipated the closing of the duty-free American market. Comparisons of the cost of producing and shipping Philippine, versus Cuban, sugar to U.S. refineries revealed that the former had almost no chance of ever competing on an even basis with its Caribbean rival. Furthermore, the state of the world sugar economy, of oversupply and underdemand, dictated long-term Filipino dependence on North American sales. This judgment seemed confirmed when attempts to improve local purchases of centrifugal and refined sugar came to naught. Instead, sugarmen found that avenue dosed because shoppers continued to prefer cheaper muscovado sugars; what increase in consumption occurred, came about because planters sold cane not allowed to go to centrals to insular millers of crude sugar.

Bad news afflicted markets sporadically in the first half of 1935. Inauguration of the new quota system caused some temporary dislocations, and brief shortages in the availability of domestic Philippine sugar supplies created an anomalous situation whereby in the early months of that year local retail sugar sold at higher prices than the export product. In midyear rumors that the U.S. Supreme Court might strike down quota provisions of the Agricultural Adjustment Act caused the price of Philippine sugar to plummet (see figure 5). Enactment of Jones-Costigan had sent sugar prices back up to 1930 levels, but fears of its elimination caused momentary panic. Producers and buyers of insular sugar feared that in the event of such a judicial decision, Cuba would be allowed to flood the American market with its less expensive product, while the Philippines would still be bound by the duty-free limitations of the Tydings-McDuffie Act. Only when it appeared that the law would stand did sugar prices climb again.^[2]

Not all initial consequences of the Jones-Costigan and Tydings-McDuffie acts proved harmful to the Philippine sugar industry. Assignment of quotas all the way down to the level of the individual farmer had proceeded effi-

[Full Size]

Figure 5.
Sugar Prices on the Manila Market, 1935-41. Sugar News 16-22
(1935-41).

ciently and, by most accounts, equitably. Governor-general Frank Murphy, in charge of allocation of quotas, turned this complex project over to his assistant, E. D. Hester, and to the collector of insular customs, J. Weldon Jones, and they managed to keep the distribution free from political influence. By October 1935 each planter and miller had a firm allocation for the amount of sugar he or she could produce. A further advantage of market stabilization under the quota system flowed to planters when the New York Coffee and Sugar Exchange voted to allow trading in Philippine sugar futures, beginning in 1935. Planters and merchants could now sell their crop earlier, at times when they could realize a higher price for it. The government began releasing small quantities of domestic consumption ("B") and export ("A") sugar from warehouses as early as January 1935, and in March

Secretary of Agriculture Henry Wallace allowed mills to grind cane for the manufacture of twenty million gallons of alcohol for local and U.S. sale.^[3]

A proviso of the Jones-Costigan Act allowed compensation to planters for cane burned during 1934-35. The payback money came from a processing tax on finished sugar (one-half cent per pound) imposed on U.S. refiners. Between January 1935 and July 1936 more than 17,000 Philippine planters received some $14,000,000 in payments at P2.40 per picul. To celebrate, Bacolod hacenderos held a "processing tax ball" accompanied by the usual beauty contests. These benefit payments to farmers, a typical New Deal program, ceased in the Philippines with the establishment of the commonwealth. Later in the 1930s the U.S. government revived the practice of returning sugar tax funds to the Philippines, but because of court decisions the money went to the commonwealth government for broader agricultural planning.

While the initial benefits program aided suffering farmers, distribution of funds did not proceed without problems, especially for tenant producers. Money went to planters and landowners of record at centrals; however, the law stated that all who actually grew cane on a reduced scale should receive a proportionate share of the payments. But casamac and inquilinos, primarily those from central Luzon who lacked documentary evidence of their production, had to depend on the largesse and goodwill of their richer partners to receive shares of the benefit payment, and some cheating took place.^[4]

Economic distress associated with the 1935 constraints dissipated gradually during that year. Despite reduced operating hours, centrals still in debt to PNB yet managed small payments on their notes beginning as early as March. By December all mills resumed regular production schedules that continued into 1936, when market conditions improved to the point that even the Japanese purchased small quantities of Philippine sugar. Aside from 1935, sugar exports remained abe the levels of the 1920s, and initially at least, prices rose, from a prequota low of P4.50 to P9.10 per picul in mid-1936. Most mills earned considerable profits, and by 1937 all the bank centrals save Binalbagan had redeemed their mortgages. The managers at both the San Carlos and Silay-Hawaiian centrals issued exuberant reports for 1936, and the general prosperity in sugarlandia led to an increase of P6,000,000 net profit over the preceding year for PNB. Subsequent seasons did not witness the same prosperity, but centrals still managed to pay dividends to investors until at least 1940. Philippine coconut oil and hemp quotas under Tydings-McDuffie subsequently underwent revision, but the sugar quota held firm.^[5]

American officials decreed that both the Tydings-McDuffie and Jones-Costigan trade provisions, and those of the latter's successor, the Sugar Act

of 1937, would continue to apply simultaneously. The Philippines was entitled to a quota of between 900,000 and 1,000,000 long tons based on its allotted share of U.S. annual consumption, but the independence act stipulated that only 800,000 long tons (812,846 metric) of raw "A" sugar and 50,000 (50,802 metric) tons of refined "AA" sugar could enter duty free. In practice insular sugarmen usually abided by the lower nondutiable figure, since with the tax added, they could not compete in terms of price with other suppliers (see table 15); thus, each year save 1940 they allowed their untilled quota under U.S. tariff law to be divided among other offshore producers. The commonwealth government also set annual quotas for raw sugar for domestic consumption that varied between 70,000 and 150,000 short tons and a reserve supply ("C") of raw sugar of between 30,000 and 100,000 short tons to fill any shortfall in the export quota.^[6]

Further legislation regarding sugar exports reaffirmed regulations already in place. In response to pressure from American refiners, the U.S. Congress refused to allow the Philippines to raise its quota of refined sugar or even to export a washed, purer grade of raw sugar called turbinado. In early 1937 Quezon and Roosevelt, in accordance with section thirteen of the Tydings-McDuffie Act, convened a conference of commonwealth and U.S. government representatives to adjust economic arrangements between the two states prior to and following Philippine independence in 1946. The Joint Preparatory Committee on Philippine Affairs recommended only minor alterations in sugar matters: for example, it urged postponement of the imposition of the first export tax (5 percent of the total U.S. duty) from November 15, 1940, to January 1, 1941. The Tydings-Kocialkowski Act of 1939 legalized that change. During April 1937, emissaries of the commonwealth participated with the American delegation in the London International Sugar Conference, called to regulate global production. As a signatory to the May 6 agreement, the Philippine government pledged not to export sugar, including muscovado, anywhere but to the United States so long as the Tydings-McDuffie quota lasted. The international agreement, designed to apply initially for five years, merely confirmed Philippine dependence upon the American market^[7]

While exports held constant, from 1936 on sugar prices followed a persistently downward course, hitting a low of P4.6 in April and May 1941. The market became so unfavorable that Spreckels and Company, formed in 1933 to purchase and export Philippine raw, ceased operations in late 1938, preferring to supply its parent U.S. West Coast refineries with greater quantities of Cuban sugar. The London agreement failed to reduce supplies sufficiently to reverse the slide, and prices dropped sharply during 1937 and the first half of 1938. Moreover, while other London signatories used the commencement of hostilities as an excuse to suspend their own

quotas, the restriction on the Philippines to ship exclusively to the U.S. market remained in effect. Even on the eve of Pearl Harbor in 1941, when shippers appeared in Manila ready to purchase sugar for delivery to Russia via Vladivostok, the Philippines could not gain a release to fill those orders.^[8]

The onset of world war did not push prices upward. In the East, Sino-Japanese conflict in Manchuria and northern China left India and Java without an important market for their product. When Hitler's armies crossed into Poland in September 1939, sugar futures in New York surged briefly, and Roosevelt suspended quotas; however, since various countries had stocked up in advance in anticipation of the war, local shortages failed to occur, and he reimposed quotas in December. In 1940 a combination of factors, including the expectation of higher prices and a rush to beat the first Tydings-McDuffie duty of 26 centavos per picul in January 1941, led Filipino producers to rush large quantities to market; however, the higher prices never materialized. By early 1941 sugar prices had sunk so low that exporters proved reluctant to ship, since they were not even earning the cost of production. When global stocks finally began to diminish and prices started to rise in late 1941, warfare made commercial vessels more ex-pensive and scarce. The war-induced shortage of shipping only worsened conditions. Fifty kilos of ammonium sulfate, the preferred fertilizer, went from P7.50 to P9.00 between 1940 and 1941, while the price of a ten-pound bag of domestic granulated sugar fell from P6.15 to P5.80. George Fairchild devoted considerable effort that year in New York and Manila attempting to find transports; nevertheless, by early December the Philippines had not sent all its 1941 quota, and the invading Japanese found local warehouses stuffed with export sugar for 1942.^[9]

Confronted by continuing world overproduction, rising freight rates, and the prospect of accelerating duties that would eventually make their sugar uncompetitive even in the U.S. market, Philippine sugarmen considered several remedies for their economic plight: lowering their production costs, limiting the number of producers, and diversifying their economic activities. Members of PSA suggested postponing the date of independence in order to maintain the privileged access for Philippine sugar. Others even spoke of nationalizing the industry in the event of dire emergency, but the first three plans, which all stressed cutting back on output and costs, received the most attention. And when planters and millers contemplated reducing expenses, they did not figure to do it by improving productivity—in those years sugar research by the industry largely ceased rather, they thought to do so by cutting jobs and wages.^[10]

While quotas became a fact of life, Manuel Quezon increased his control over the sugar industry and commenced charting its future. Recent scholarship has demonstrated how he gained near dictatorial power over the

domestic political process at the insular, provincial, and local levels. He had rewarded some of his supporters by obtaining favors for them within the sugar industry, and as president of the commonwealth he sought to play an enhanced role in shaping the country's most economically vital activity. In a systematic way he strove to govern the sugar industry so as to encourage consolidation, to make it less politically influential, and to initiate internal changes that would weaken the potential for radicalism among poor sugar hands. Quezon had relied on sugar support in achieving victory over rivals Sergio Osmeña and Manuel Roxas during the political struggles over independence; now he employed sugarmen to act as his lieutenants in handling the industry.^[11] To exert domination over sugar, lest its leaders oppose any of his plans or ambitions, he used a variety of mechanisms: supervision of the quota system, influence over PNB credit policy, and control over negotiations with the Americans on tariff relief and related matters.

The Philippine Sugar Administration, formed in late 1937, served as a major vehicle of Quezonian authority. Over its extensive staff he appointed two of his favorite henchmen, first Rafael Alunan and then in late 1938 Gil Montilla. Both had long careers in Negros politics, and the latter had served as speaker of the National Assembly when Quezon had needed a pliant friend in that position. As sugar administrators with cabinet rank they presided over an agency that not only set yearly domestic and reserve quotas, but settled numerous policy matters as well, including standardization of the size of sugar bags and regulation of muscovado sugar output that competed with centrifugal in the domestic market. Even more important, the administrator began to intervene in cases involving the reallocation of export quotas to planters and millers in the event of changes in land ownership and milling contracts. This latter authority, infrequently exercised before the Japanese occupation, offered the government great potential power over the lives and fortunes of many in the industry. With the first of the major milling contracts, at San Carlos, coming up for renegotiation in 1942, Quezon made it clear that the administration in-tended to play a part in redistributing industry profits more equitably. The Philippine Sugar Administration did not achieve absolute control over the industry; for example, it proved ineffective in preventing the dumping of sugar on the local market; nevertheless, sugarmen increasingly turned to this agency and to Quezon for decisions on policy matters.^[12]

As senate president Quezon had in the 1920s and early 1930s exerted sway over PNB loan policy and had thus affected economic life in sugarlandia. In the later 1930s that influence only grew. Governor-general Frank Murphy in 1934 appointed a Quezon man, sugar corporation lawyer Jose Yulo, chairman of the board of directors of the bank, and Yulo stayed in

that position until 1938 while simultaneously serving as the common-wealth's secretary of justice. Meanwhile, PNB greatly strengthened its financial position with record profits from sugar and with the recovery of its loans to the bank centrals. Quezon thus held direct access to the PNB's decision-making body, and he used his leverage and the bank's enlarged assets to control and protect the sugar industry. To provide relief for struggling hacenderos the bank gave mortgages on reserve sugar, supplied money at reduced interest rates, and even provided cash to tenants who could offer only their crops as security. At the same time, the bank sought to discourage planters from using their crop loans to invest in mining stocks and other outside ventures, as they apparently did in large numbers in 1937. The net effect of this overall policy was to keep many farmers in business despite slumping prices and to assure their political docility and allegiance to Manuel Luis Quezon.^[13]

While Tydings-McDuffie and the Sugar Acts of 1934 and 1937 set the main parameters for political and economic relations between the commonwealth and the United States, protecting Philippine sugar interests still demanded considerable attention, and here again Quezon took command. Sundry problems required ongoing settlement, and he carried out the negotiations through such surrogates as Resident Commissioner Joaquin Miguel (Mike) Elizalde and Felipe Buencamino. Both sugarmen attended the London Conference, and the former, along with Jose Yulo, defended Philippine positions during deliberations of the Joint Preparatory Committee on Philippine Affairs. Over the course of seven years the common-wealth fought over recovery of the excise tax on sugar stipulated in the Sugar Act of 1937, postponement of imposition of the Tydings-McDuffie export tax, relief for the sugar industry because of the damage done by the shortage of wartime shipping, prohibition of the U.S. Army in the Philippines from buying cheaper Javanese sugar, and clarification of the definition of refined sugar under the quota system. The commonwealth did not always have its way in these matters; however, in directing the negotiations, Quezon clearly established himself as chief spokesman for, and defender of, the sugar industry. Before 1935 the PSA had served as the sugar industry's main voice in Washington; its role now diminished. Harry Hawes continued as the organization's lobbyist until the war, but the PSA overseas office shrank in both size and activity. Elizalde became the most important figure at the U.S. capital on behalf of Philippine sugar, for he defended the industry as a whole rather than, as did the PSA, chiefly the millers.^[14]

The commonwealth government also strove to consolidate its sugar holdings at home. It purchased the Insular and Malabon Sugar Refineries and so gained control of about 85 percent of the country's refining capacity.

In addition, despite efforts by individual investors to buy the Binalbagan Central from PNB, Quezon elected to keep it and had the government purchase the outstanding private shares. Furthermore, the administration transformed the former Philippine Sugar Centrals Agency into the chief marketing agent for Binalbagan Estates Company. The government thus had a position in refining, in milling, in marketing, and through its ownership of the Manila Railroad Company, in transportation. In making its moves the government not only rationalized its own stake in the sugar industry, it also acquired further leverage to influence sugarmen.^[15]