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HOLLARD

VERSEKERING

Sugarcane and sugar outlook- South Africa

Tariff free imports from mainly Eswatini, together with the wider imposition of the Health Promotions Levy (HPL) has had a major impact on local production and market demand and has reduced sugar industry revenue by approximately R1.5 billion. The impact of the HPL on sugar-sweetened beverages (SSBs) has been considerable, with the tax somewhat curbing demand for these beverages, but especially with companies formulating away from cane sugar as sweetener, resulting in a drop in local demand of as much as 250 000 tonnes (about 15-20% of the local market). The sustained low level of the NY No.11, raw price and London No 5, refined price ($330 per tonne), has also impacted the industry, as all export revenue that is earned, is realised at below the majority of farmers' cost of production.

In total, more than 70 000 hectares of sugarcane have been lost over the past decade and due to the dwindling profit margins over the last number of years, the trend of farmers moving away from sugarcane and diversifying into other long term crops (macadamias, avocadoes, citrus etc.) is continuing at a rapid rate. These farmers will not switch back to cane, as establishment of these high value crops is extremely capital intensive.

Under the 2019 Baseline projections, given implemented current protection allowance levels, a further 17 000 ha will be lost over the next decade. It is envisioned that under the rather bleak baseline outlook, sugar mills might have to close in the Coastal production regions. This could result in accelerated decline in hectares, a loss of over 20 000 direct jobs (farm and mill) in the next five to seven years and negatively affecting the livelihoods of over 90 000 people.

Decreasing cane production has over more than a decade led to decreased mill through-put, and milling and logistic inefficiencies putting severe pressure on milling companies' balance sheets as well as their relationship with their farmers and the communities they operate in. The closing of some mills could increase the through-put of the remaining mills, but the additional transport cost to bring cane from mill-less production regions will have to be absorbed in an already stretched system and it can be expected that considerable hectares will be lost in regions where mills close down.

The South African sugar sector has over the last 150 years contributed immensely to development in rural Mpumalanga and especially KwaZulu-Natal, with towns growing around mills to provide up and down stream cane and sugar related inputs and services. While some of these towns have grown past its total sugar dependence, in excess of a half million people in South Africa still largely depend on sugar production and processing for their livelihoods. Within the current marketing structure, international sugar and biofuel markets and increasing local production costs, a large share of the development and good done by the industry will come under even more pressure in the next years as the industry is forced to consolidate.

Given the potential communal and socioeconomic pressure it will be critical for Government and industry to consider alternatives, for example a biofuels regime, that could potentially assist the industry in converting their export sugar into a more lucrative product, such as ethanol or for Government to finally come to some economically viable decision on electricity cogeneration. In a recent study by BFAP, alternative future scenarios were simulated and it seemed apparent that the industry was close to a tipping point where it could enter a phase of consolidation that is significantly faster than what is presented in this outlook.

This tipping point was most likely prevented by ITAC's increased allowance in the import tariff from $566/ton to $680/ton, but despite of a slower decline under the increased reference price, the industry is still projected to contract for the next five years until a more sustainable equilibrium is achieved with less surplus sugar. A positive note for the future seems to be the fact that new and improved chemical control of the African sugarcane borer has over the last year or two enabled, especially coastal farmers, to harvest more mature cane, resulting in higher cane and sugar yields.


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