Sugar sector wants a sweeter deal

06 Jul 2018

Business, 06 July 2018
By Lynley Donnelley

The local sugar industry is up in arms about rising cheaper imports, which it says are pushing the sector to a “tipping point” and it wants the import tariff on sugar to be raised.

But trade experts draw attention to the level of protection the local industry already receives, albeit that the situation is similar in many other countries, which has led to a distorted global market. Sugar is the only agricultural sector in South Africa that has not been fully liberalised under democracy and it operates under its own Act. It is also highly concentrated, dominated by a handful of large companies, which raises concerns about transparency, according to experts.

In late June, the industry made representations to the International Trade Administration Commission (Itac), which is considering an application to increase the dollar-based reference price to 6 a tonne. The reference price is a key determinant in how import tariffs for sugar are calculated and the rate at which import duties are set. (See “How the sugar tariff is calculated”) Previous efforts to increase the reference price have been refused because of concerns about the negative effect the increase would have on downstream users and consumers.

At a media engagement in Mpumalanga hosted by the South African Sugar Association (Sasa), the body outlined the effect of increasing imports, which come on the back of the recently implemented tax on sugary drinks, known as the health promotion levy, and a severe drought. According to Sasa figures, South African Customs Union imports rose by about 84% between 2016-2017 and 2017-2018, taking over a 25% share of the local market. The imports come largely from Brazil and the United Arab Emirates. “The industry is in a state of rapid decline,” said Trix Trikam, Sasa’s executive director. “From what I have been told by millers and growers, they are saying it’s a tipping point. They can’t manage anymore.”

About 85 000 people are directly employed in the industry, with a further 350 000 employed indirectly, according to Sasa data. The situation has been exacerbated by the government’s failure to properly implement tariff revisions during the past year. At a recent results presentation, Tongaat-Hulett said, from February 2017 to July 2017, the combination of a falling world price and a strengthening rand triggered a revision of the duty four times.

Nothing was done and the duty remained at R636 a tonne, the company said. This was followed by an administrative error that resulted in a R0 duty being applied, which stayed in place for seven weeks, when the duty should have been R1 807 a tonne, it said. Government is addressing the issue of implenting triggers much faster, said Itac. Tinashe Kapuya, a trade economist who spoke to the Mail & Guardian in his personal capacity, said the industry’s concerns are not misplaced.

His past research has shown that sugar imports are highly responsive to increased tariffs, and a 1% increase in tariffs results in a 0.89% reduction in imports. But Kapuya pointed out that very few changes to the reference price have been agreed to in the past and not at the levels requested by the industry. The last was in 2014, when it was set at 6. But the industry is “in a state of regression” after years of drought, said Kapuya. It could possibly seek other forms of protection, such as safeguard duties or anti-dumping duties.

“If [the sector] can show significant material injury … they can argue for a safeguard,” he said. A safeguard duty is a temporary measure to protect a domestic industry, allowing it time to recover, he said. If the industry could prove that sugar from other countries is being sold at prices lower than those in their domestic markets, an anti-dumping duty could also be applied to provide a more targeted response, he said.

The tariff formula on sugar, wheat and maize was reviewed last year because of concerns about the effect that the prices of these commodities have on South Africans. During the process, the sugar industry requested that the current reference price be increased, which Itac refused. Itac’s chief commissioner, Meluleki Nzimande, said the decision took into account the negative effect the increase would have on downstream users and consumers, particularly the poor.

“The commission considered that the [reference price] level of 6 a tonne would place South African sugar producers and their foreign counterparts on an equal competitive footing,” he said. It was in line with local producers’ production costs and sensitive to food affordability and the impact on downstream users. This time round the commission will be evaluating, among other things, the effects of increased imports from highly subsidised regions such as Brazil, the increase in production costs and increasing producer losses, including those by small-scale black sugarcane farmers, Nzimande said.

An associate at the Trade Law Centre (Tralac), Ron Sandrey, who is also a professor extraordinaire in agricultural economics at the University of Stellenbosch and a former adviser to the New Zealand government, said that although the local industry says it needs protection, it is not the case. “The South African sector is now one of the more heavily protected in the world,” he said. The European Union’s protections have been coming down, he said. Brazil, the world’s largest producer, was lightly protected, he added, although there were questions about the effects that subsidies for ethanol have had. In a 2015 working paper for Tralac, Sandrey and coauthor Masego Moobi found, based on producer support estimates from the Organisation for Economic Co-operation and Development, South Africa’s levels of support were exceeded only by those of the United States.

Kapuya said estimating protection levels in major sugar-producing countries can be very difficult, particularly in countries such as Brazil, because of subsidies granted for ethanol production, which is derived from sugar, as well as subsidies in other parts of the value chain. The cumulative effect of subsidies for these other byproducts suggests that there are much higher protection levels, he said. But the South African industry is highly concentrated and protected by the Sugar Act. Key information such as the sector’s costs of production are not public, which makes it difficult to assess its efficiency. “A lot of people have been uncomfortable with how closed the industry is and the lack of transparency,” he said.

Nevertheless, it is an important sector, which employs a large number of small-scale farmers. The industry had 21 889 registered sugarcane growers, according to its most recent data, comprising 20 562 small-scale growers and 1 327 large-scale growers, which included 323 black emerging farmers. Judith Wilson, the commercial director for Sasa, said the level of support for the sugar sector is low. The only protection it has is the import duty. “We don’t have on-farm support, we don’t have any industrial incentive programmes,” she said.

South Africa also did not provide support for alternative uses of sugarcane such as ethanol production or the cogeneration of electricity. “Our own estimation is that our [levels of protection] are extraordinarily low,” she said.

The industry uses estimates published by LMC International, a global agribusiness consultancy, which does regular independent surveys to assess production costs in the world’s top 100 sugar-producing countries, she said. It does however provide consolidated figures, gathered from local millers and cane growers, confidentially to Itac. “But our numbers are very similar to the LMC numbers,” she said. Trikam said that in most sugar-producing countries cane is regarded as a development crop. It is a policy position of the government that South African producers manufacture more sugar than the local market can consume, and the surplus is sold at a loss internationally, he said. Sugar cane is typically grown in areas where it would not be possible to grow another crop that was as large and had the same market. If the industry did shrink to provide sugar only to the local market, this would mean a reduction of about 600 000 tonnes, or the equivalent of taking about 100 000 hectares of land used to grow cane out of production. He estimated that this could cost about 34 000 to 35 000 jobs, and small-scale growers are likely be the first to be hit.

As a sweetener in its bid for a higher reference price, the industry has offered a package of “reciprocity commitments” valued at R1-billion over three years. These include premium payments to black growers for their cane, seed capital to complement the government’s land reform and acquisition programme and developmental finance for small-scale black cane growers.