Published in 2019
Introduction
The SA sugar industry stands at the edge of the abyss; in desperate need of one of the Dti’s master plans.
How is it that the sugar industry has reached this point?
What Hasn’t Changed
The current regulatory framework has been in place for the past 19 years.
The Constitution which sets out the Sugar Association’s powers and objectives is the same, save for belatedly broadening membership to include the South African Farmers Development Association.
The world market price remains a dumped one, with prices currently plumbing the depths. However this is something that the industry has had to contend with in the past more often than not and is certainly not a new phenomenon.
The dollar-based reference price used to calculate the tariff protection afforded the industry is at an acceptable US$680 per ton, having been adjusted upwards three times since its introduction at US$330 per ton.
Sugar production has declined slightly; but remains at acceptable levels; having recovered from the droughts of three years or so ago.
The division of proceeds between millers and growers has remained the same for many years.
Production costs could be reduced further although reduction of operating costs is not the panacea; this is not where the problem lies in having brought the industry to the abyss.
So What Has Changed
There is a simple answer to why the industry has gotten to this point.
Three issues have relevance, all self-inflicted and costing the industry a staggering R3,9 billion a year; 21% off the top line throwing most of the industry into a loss-making position.
- The laissez-faire approach by the Dti over the years to the flood of eSwatini sugar imports to the point that the value destruction to the SA sugar industry now stands at R2 billion rand a year and rising. This year alone, the year-on-year increase in these imports is a massive 38%.
- The introduction of the Health Promotion Levy (sugar tax) in April 2018 is costing the industry 250 000 tons (annualized) in local market sales volumes; equivalent to R1 billion a year in value destruction. This tax was introduced by Government despite warnings of its impact on the industry, with no mitigations to assist the industry with the transition and without a proper nutritional impact assessment in terms of whether or not the tax was likely to achieve its objectives of tackling obesity.
- The use for the first time in 2016 of the Real Effective Exchange Rate (REER) and not the actual ZAR/US$ rate to convert the industry’s tariff protection from US$ to ZAR for application in SA’s tariff book. To single out maize, wheat and sugar for the use of the REER makes no sense whatsoever. In sugar’s case, the price setter on the world market is Brazil; however its currency’s weighting in the REER is an insignificant 1,3%. If any adjustment is to be made it should be based on the Brazilian Real having a dominant weighting in the basket. The use of the REER is costing the industry R900 million a year.
Conclusion
Look no further than the foregoing three issues (R3,9 billion a year in value destruction) to understand why the industry is where it is.
Are they reversible – of course they are. Certainly worth reversing for the sake of the 1 million livelihoods dependent on the industry.
The industry is encouraged by what it perceives as a grasping of the nettle by new Dti Minister Patel. Time will tell whether this is a false dawn.
Justice Hunt