Month: February 2024

Published in 2019

Introduction

This article explains why it is in the public interest to retain the South African sugar industry’s regulatory framework; the enabling legislation of which being the Sugar Act of 1978. https://sasa.org.za/custom_content/Sugar-Act-1978.pdf.

The article will also seek to shed light on the regulations as well as to expose those who call for the repeal of the Sugar Act who in so doing are driven either by ideology, naivety or worse by mala fides.

Transformation

The SA sugar industry has embarked upon a fundamental transformation journey which took a major step forward by the recognition a year ago of the South African Farmers Development Association (SAFDA) as a fully-fledged member of the South African Sugar Association (SASA) alongside the SA Cane Growers Association (SACGA). SAFDA is primarily focused on small-scale growers in the industry whose interests need specific attention.

It also has to be said that the historically entrenched/advantaged players in the industry, particularly the corporately-owned millers, have for decades had the advantage of being able to muscle-up under the protection of the sugar industry’s legislation. However, they may feel now they have sufficient strategic and operational ascendency over new and aspiring entrants to the industry that their interests would be best served by calling for the repeal of the very same legislation that has served them so well.

Also, many believe slavishly that the only economic model to follow is one where deregulation, the market economy and notion of the survival of the fittest should prevail; in other words rampant capitalism. These are the ideologues.

South Africa, as a country, is in a transformative stage and in many respects is developmental in nature. A hybrid model based on the market economy and free enterprise on the one hand and on the other, a measure of state intervention/regulation is what is needed in certain circumstances; the sugar industry being a case in point.

As a regulated industry, the statutory instruments are a good hybrid between free enterprise and state intervention and are well placed, albeit with some amendments, to reinforce and incentivize transformation in the sugar industry.

The Regulatory Framework

The statutory instruments that comprise the regulatory framework are the Sugar Act of 1978 (link above), the Sugar Industry Agreement 2000 (SIA 2000) and the Constitution of the South African Sugar Association (Constitution).

Certain amendments to the SIA 2000 and the Constitution have recently been enacted to promote transformation in the industry and are referred to as transitional provisions.

The Tariff Dispensation

The tariff dispensation afforded the industry is not a part of the industry’s regulatory framework per se but is an integral component to render effective those regulations. See the link below to ITAC’s latest report on the outcome of the recent review of the Dollar Based Reference Price (DBRP) used to calculate the import tariff. http://www.itac.org.za/upload/document_files/20180803091650_Report-588.pdf. The report also gives some good insight into the need to protect the industry from the surplus production of other subsidized sugar-producing countries.

The Regulation Cornerstones

Although the industry’s regulatory framework looks complicated and intimidating in its detail, it can be distilled into just four cornerstones; the rest of the regulations building on these cornerstones.

The Four Cornerstones

The provision for a minimum cane price payable by all millers to supplying growers

Redistribution of proceeds amongst millers

The clearing of surplus production via SASA’s statutory remit as the industry’s single desk seller

An effective tariff (ITAC)

The dumped world sugar market – Before dealing with each of the four cornerstones in turn, a brief summary of the characteristics of the world sugar market is necessary.

It is common cause that sugar traded internationally is the surplus / residual production of sugar industries (whose domestic demand is lower than production) sold at prices that do not reflect in any way the cost of production.

Weather patterns have a profound impact on this surplus market which is why sugar is one of the most volatile of soft commodities traded internationally.

In the ITAC report referred to above it comes to the conclusion that the average distortion factor in the world market price over the sample period was 29%; brought about by subsidies and other trade-distorting support measures enjoyed by most of the world’s surplus sugar producing countries. Other commentators insist that the distortion factor is much higher.

Currency movements and manipulation also play a significant role in both competitiveness and volatility.

Of the distorted nature of the world market there is no question, and it is only non-sugar producing countries that enjoy tariff-free world market sugar prices.

The South African sugar industry was a founding member of the Global Alliance for Sugar Trade Reform and Liberalization – a grouping of low cost sugar producers dedicated to the elimination of all trade-distorting sugar subsidies globally. Interestingly Brazil was not invited to become a member and was a major target of the Global Alliance together with the US in terms of its Farm Bill. Of late, India’s export subsidies have been taken to the WTO as a violation of their commitments and WTO rules; and there have been and continue to be many other such violations by sugar producing countries. Regrettably, the Global Alliance has had limited success – vested interests in agriculture are formidable and very little has been achieved over the years to eliminate these trade-distorting subsidies and other support measures.

As a surplus producer, South Africa faces the distorted world market with a large proportion of its production. Put another way, the livelihoods of 1 million South Africans in KZN and Mpumalanga rely on the industry’s regulations and tariff protection.

I’ve no doubt that the SA sugar industry’s regulations and tariff protection would be substantially different were world market prices for sugar to be cost-related. But they are not.

Cornerstone 1

The provision of a minimum cane price payable by millers to growers

This is a fundamental cornerstone. Sugarcane is very different from most other agricultural crops. Not only is it a ratoon crop, but once harvested it needs to be crushed within ideally 48 hours to ensure that the quality of the sucrose content in the cane does not deteriorate. It cannot be stored once harvested and there is very little latitude to vary the timing of the harvest. It is a low density crop to transport making the economic distance for delivery to a mill measurable in tens of kilometres. One has to bear in mind that the sucrose (sugar) content of cane is about 12%, the balance essentially being fibre and moisture.

What this means is that given the siting of the mills in SA, growers are at the monopsonistic power of the nearest miller. Without a minimum cane price as provided by the regulations (in terms of which the growers share a fixed % in the sugar and molasses proceeds of the miller) the miller would hold all the cards in a negotiation on the cane price. In India for example, the authorities set the cane price, an intervention to safeguard growers in that country.

Without a minimum price based on the proceeds of the resultant outputs (sugar and molasses), no grower could take the risk of investing in a 7-year ratoon crop like sugar cane with only one buyer and no bargaining power.

Cornerstone 2

Redistribution of Proceeds Amongst Millers

The second cornerstone was initiated in 2000 to create an optimal level of competition in the domestic market between the six local milling companies.

Prior to 2000, a miller was only able to sell each year on the domestic market a tonnage equivalent to its % share of the industry’s total production. The balance of the production was delivered to SASA as the single desk seller for sale on the lower priced world markets.

Amendments to the legislation in 2000 to bring about an increased level of competition, allowed a milling company to sell as much of its production it could on the higher priced domestic market. However, given that SA is a surplus producer, without a floor in place competitive forces and market dynamics would likely collapse the domestic sugar price to the below-cost world market price. This in effect would render the tariff protection afforded the industry worthless. And so this cornerstone 2 (termed by the industry as a redistribution of proceeds) was also legislated in 2000 effectively as a floor price; where the ‘overselling’ miller redistributes to the ‘underseller’ the financial benefits of its ‘oversell’. By doing so all millers are also in a financial position to pay the minimum statutory price for cane (cornerstone 1) and and as a consequence share equitably (in proportion to shares of production) in the lower prices achieved on the dumped world market.

It also has the effect of protecting the smaller independent and grower-owned mills from the dominance of the multi-mill corporately-owned millers RCL, Illovo and Tongaat Hulett who between them own 11 of the 14 mills; forestalling a further concentration of milling capacity. When one takes the eSwatini industry into account where RCL and Illovo own the three mills there, the tally is 14 out of 17 mills owned by Illovo, RCL and Tongaat Hulett.

The regulations give the three independently-owned mills a ‘seat at the table’; and with transformation of the sugar milling sector a sine qua non, the transformed mills will also have a seat at that table – the regulations facilitating them to ‘box well above their weight’.

Whilst the benefits and comfort the smaller millers draw from these instruments are clear, there are no discernable provisions or benefits at all in the regulations for the small-scale growers vis a vis their larger commercial grower counterparts. This is something the industry will have to look at in the distribution of proceeds within the growing fraternity as well as between millers and growers generally.

Cornerstone 3

The clearing of surplus production via SASA’s statutory remit as the industry’s single desk seller

This cornerstone 3 clears the production not sold on the domestic market. The legislation provides that a miller must deliver production not sold on the domestic market to SASA as the single desk exporter to the world markets. It is an efficient clearing mechanism ensuring that the domestic market is always fully supplied as well as providing an orderly and cost efficient surplus clearing mechanism.

Cornerstone 4

An effective tariff (ITAC)

This cornerstone is not part of the industry’s suite of regulatory instruments, but is crucial to the effective functioning of the above 3 cornerstones.

Without tariff protection, the SA and eSwatini sugar industries would be wiped out, no matter what regulations were in place. Those who call for tariff protection to be withdrawn are in effect asking SA to capitulate to the world’s highly subsidized sugar producing countries who adopt many trade distorting policies. We would be sacrificing 350 000 jobs in SA which together with dependents means the destruction of 1 million livelihoods; the livelihoods of our fellow South Africans. To be frank such calls are a betrayal of our country and should be treated with the contempt that one reserves for the unpatriotic amongst us.

I will not go into any detail on the tariff mechanism which has as its foundation a dollar-based-reference-price; save to stress the importance that the level of the tariff needs to position the industry as sustainable at its current level of production. Anything less would destroy jobs and livelihoods in resource-poor deep rural areas, particularly in KZN. These details can be accessed on this ITAC link http://www.itac.org.za/upload/document_files/20180803091650_Report-588.pdf

Motives

This article opened by saying those calling for the repeal of the Sugar Act of 1978 (as well as a withdrawal of tariff protection) were driven by ideology, naivety or mala fides.

Hopefully those driven by naivety are now better informed and have been converted. Perhaps even the ideologues see some sense in it.

To those who might act with mala fides, I would say pause and spare a thought for the 1 million livelihoods that you seek to destroy. Even if you have in mind a shrinking of the industry to eliminate exports, you’re still talking about 400 000 livelihoods. Insofar as the mitigations that you might offer such as other crops, etc. are concerned, please know that we’re talking about an extensive 380 000 hectares, not all necessarily that conducive to other crops. The transition to other crops as a mitigation in shrinking the size of the industry needs to be seamless and labour intensive.

Conclusion

The industry needs to remain regulated and appropriately protected as a strategic labour-intensive industry.

That my friends is ‘The Inconvenient Truth’.

Justice Hunt

Published in 2019

South Africa’s Constitution

Embedded throughout the Constitution of the Republic of South Africa and its Bill of Rights is the pursuit of social justice for South Africa’s citizens.

Social justice entails the fair and equitable distribution of wealth as well as access to opportunities and social privileges.

Social justice is a prerequisite to the dignity that every South African is Constitutionally entitled to.

The preamble to the establishment of the International Labour Organisation (ILO) recalled that “universal and lasting peace can be established only if it is based upon social justice.”

It is a sine qua non that our democratically-elected Government’s policies should advance the cause of social justice, including in its international trade policies.

I’m sure the custodial ministry of South Africa’s trade policies, The Department of Trade and Industry, would fully subscribe to the foregoing, particularly in that it is now led by Mr Ebrahim Patel MP. The Minister’s background in labour activism, amongst others, during the apartheid years gives South Africa’s workers cause for optimism that finally the Country will ‘grasp the nettle’ in the preservation and pursuit of job creation. Government policies that destroy jobs are anathema to social justice and thus it could be argued, if not explicitly then certainly implicitly, are contrary to South Africa’s Constitution.

South Africa’s International Trade Agreements

All of South Africa’s international trade agreements should have safeguard measures to protect against unintended and unforeseen outcomes; and where in the unlikely event that these provisions are not explicitly included in existing agreements, their inclusion should be negotiated by way of amendment.

Safeguard measures are precisely that; they protect South Africa’s citizens and promote social justice, both of which are Constitutional obligations imposed upon Government.

It goes without saying that the foregoing must apply to the Southern African Customs Union (SACU) agreement as well.

The emaSwati Nation

The Kingdom of eSwatini is a small nation with a population of just over a 1 000 000.

Its GDP per capita is roughly US$4,6k, below that of SA’s US$6,4k but above that of Nigeria’s US$2k and many others.

Its GDP of US$4b is understandably dwarfed by SA’s US$370b. It is heavily dependent on SA economically, with the bulk of its exports and imports being with SA. Its currency, the lilangeni, is linked to the ZAR on a one-for-one basis and is in the common monetary area. The eSwatini fiscus relies on the SACU common revenue pool (tariffs mainly collected by SA and improportionally redistributed to eSwatini, amongst others) for its budget revenues.

Without in any way disparaging eSwatini and its sovereignty, these metrics suggest that eSwatini is more akin to one of SA’s larger cities economically and demographically.

The SACU Agreement and the South African Sugar Industry

Despite repeated calls for it to act, the Dti under former Minister Rob Davies, adopted a lassaize-faire approach towards resolving the eSwatini issue and by so doing failed

• to protect the South African sugar industry against the assault by the eSwatini sugar industry on the former’s sustainability,
• to protect the 1 000 000 livelihoods dependent on the sugar industry in SA, and
• to protect and grow the 350 000 jobs, both direct and indirect, provided by the SA sugar industry.

Former Minister Davies might defend this stance by stating that on many occasions he requested the South African sugar industry to meet with its counterparts in eSwatini to thrash out a resolution. This approach failed repeatedly. This is not surprising – it was a ‘fools errand’, a task with no hope of success. Minister Davies should have known there was no appetite from SA’s counterparts to compromise, as well as the fact that the Council of the SA Sugar Association has conflicted Councillors whose investments in the eSwatini sugar industry enjoy the benefits of the status quo.

It is worth noting that the 1 000 000 livelihoods dependent on the SA sugar industry is not substantially dissimilar in number to the total population of eSwatini. One could forgive the oft quoted charge that hitherto the policy of the Dti towards eSwatini’s sugar exports to SA has seemingly ranked the livelihoods of eSwatini’s citizens ahead of its own; and as such has failed in the pursuit of social justice and job creation as it is Constitutionally required to do.

Win-Win

As I remarked at the outset, now that there is a new Minister in situ, there is cause for optimism.

The dramatic escalation of sugar imports from eSwatini dwarfs the other challenges facing the SA sugar industry and is by far the single biggest issue threatening its sustainability.

The good news is that in conflict resolution there is more often than not a win-win option available.

The sugar industry in eSwatini is an important sector in its economy; a sector which is overly concentrated in terms of ownership and control. Three corporates own and control the eSwatini sugar industry; RCL, Illovo and Tibiyo Taka Ngwane – the latter an SOE corporate in eSwatini.

Given the importance of the eSwatini sugar industry to its economy coupled with eSwatini’s dependence on SA economically, surely the R2 billion the SA sugar industry transfers to eSwatini each year can be delivered in way that does not bring the job-strategic SA sugar industry to its knees. The current situation is tantamount to asking the SA sugar industry to enjoin with the SA government in providing eSwatini with financial and fiscal assistance.

The argument that the SACU agreement prevents any action, which I believe the previous administration might have made, does not wash. Government‘s international trade policies must not and cannot threaten and prejudice the pursuit of social justice in SA.

The request of Minister Patel (perhaps with the Minister of Finance) would be to find a way of continuing to render financial assistance to eSwatini (which should not be too difficult to restructure given that it already receives assistance via a wide range of measures) without sacrificing jobs and social justice in SA.

1 000 000 SA livelihoods wait and watch with renewed hope.

Justice Hunt

Published in 2019

Introduction

I have read the disturbing news in the North Coast Courier this week of the impending retrenchment of many workers from the employ of a miller in the South African sugar industry. This is the last thing the Country needs – which begs the question; why has this become necessary?

The Problem

The tonnage of sugar supplied by South African millers to the domestic market has plummeted by a massive 25% in the space of a couple of years. This has had the impact of reducing the industry’s annual revenue by a massive R1 billion; or put another way it has reduced the margins of producers by at least 8 percentage points. I doubt very much whether in agriculture the remaining profit margins amount to much, if any at all.

So why has sugar offtake dropped by 25%.

• The introduction of the Health Promotion Levy (HPL) or sugar tax; and

• The influx of sugar from eSwatini.

It cannot be in the interests of South Africa for the foregoing to continue at a time when the public interest demands both the retention and creation of jobs.

In the case of the former, there is scant evidence that the sugar tax will have any impact whatsoever on obesity. Repeal it!!!!

In the latter case, the GDP of eSwatini is a fraction of that of South Africa. It draws substantially more of the SACU revenue pool than its GDP share. The argument that the terms of trade favour South Africa justifying eSwatini’s continued assault on the South African sugar market doesn’t wash.  It seems that any shortfall in eSwatini’s fiscal revenues should be dealt with from the SACU revenue pool rather than have the South African sugar industry asked to shore up the economy. Send them packing!!!!

Distractions

There is also a cry for improved competitiveness in the South African sugar industry; which is a noble and necessary call. However, this is not going to turn the tide in terms of the industry’s ability to compete with the dumped world sugar market. The mantra of competitiveness at all costs as espoused by many economists of yesteryear is out of date. Going forward some investments will have to have a much greater empathy towards the public interest. I hope that the CEO’s, Institutional Shareholders and Government policy makers who hold in the palms of their hands the livelihoods of tens of thousands of South Africans can find space for socio-economic investments. Come on – we need to protect our jobs and demand fair play.

Common cause for sure.

Justice Hunt

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.

1. 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%.
2. 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.
3. 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