Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Understanding the Factors that have impacted on Cane Production in the South African Sugar Industy 2014
Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Understanding the Factors that have impacted on Cane Production in the South African Sugar Industry Identifying Potential Business Options for Future Development 2014 Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Preamble
A CANEGROWERS contracted the Bureau for Food and Agricultural Policy (BFAP) at the University of Pretoria to Sconduct a study on the key drivers that have in uenced and led to the current state of the South African sugar industry and to propose some business options to stimulate cane production.
This document constitutes the project report and is divided into two sections / phases:
Phase I Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Phase II Identifying Potential Business Options for Future Development
September, 2014
Disclaimer
The views expressed in this report re ect those of the BFAP authors and not necessarily that of SA CANEGROW- ERS. While every care has been taken in preparing this document, no representation, warranty, or undertaking (expressed or implied) is given and no responsibility or liability is accepted by BFAP as to the accuracy or complete- ness of the information contained herein. In addition, BFAP accepts no responsibility or liability for any damages of whatsoever nature which any person may su er as a result of any decision or action taken on the basis of the information contained in this report.
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PHASE 1 Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
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Table of contents
1 Introduction ...... 10 2 Methodology ...... 11 3 Cane production ...... 12 3.1 Area under cane ...... 14 3.2 Yield ...... 20 4 Factors a ecting area and yield ...... 24 4.1 Large-scale grower indicated factors a ecting cane area and yield ...... 24 4.1.1 North Coast – Darnall, Gledhow and Maidstone ...... 24 4.1.2 South Coast – Sezela and Umzimkulu ...... 24 4.1.3 Zululand and Tugela – Umfolozi, Felixton and Amatikulu ...... 24 4.1.4 Midlands – Noodsberg and Eston ...... 25 4.1.5 Northern Irrigated –Malelane, Komatipoort and Pongola ...... 25 4.1.6 Identi cation of main factors ...... 25 5 Economic factors...... 27 5.1 Input costs ...... 27 5.1.1 Farm sta and labour ...... 29 5.1.2 Fertiliser ...... 29 5.1.3 Fuel, lubricants and mechanisation maintenance and transport ...... 31 5.2 RV payment system ...... 32 5.2.1 RV payment system’s impact on allocation of proceeds to farmers ...... 32 5.2.2 RV’s impact on sugar production ...... 42 5.2.3 Felixton’s Brix minus pol issue ...... 46 5.3 Pro tability ...... 47 5.4 Economic factors – conclusion ...... 49 6 Sustainability ...... 50 6.1 Main agronomic factors limiting sustainability ...... 50 6.2 Analysing each factor in the context of Sustainability ...... 50 6.2.1 The decline in organic carbon levels in the soils ...... 51 6.2.2 Increasing soil acidity on sugarcane elds ...... 51 6.2.3 The depletion of certain essential plant nutrients ...... 51 6.2.4 Compaction of soils due to heavy machinery ...... 52 6.2.5 Increasing insect pressure – Eldana, Thrips and Nematodes ...... 52 6.2.6 Farming for RV ...... 53 6.3 Sustainability factors – conclusion ...... 53 7 Socio-political factors ...... 54 7.1 Land reform ...... 54 7.2 Grower – miller relationship ...... 54
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7.3 Urban Development ...... 54 7.4 Socio-political factors – conclusion ...... 55 8 Summary and Conclusion ...... 55
Tables Table 1: Change in area under cane according to grower types for the 16 year period 1996/97 to 2012/13 ...... 17 Table 2: Simulated and actual yield change per year for large-scale growers and small-scale growers for 2001 to 2010 (%) ...... 23 Table 3: Sugar cane inputs – share of total input expenditure comparison for 1985/86 and 2011/12 ...... 27 Table 4: Annual percentage expenditure change ...... 28 Table 5: RV vs sucrose payment system - impact for each mill area (in million Rands for the speci c season) ...... 37 Table 6: RV compensation payments (R/ton of cane) ...... 38 Table 7: Share of divisible pool comparison under RV and sucrose payment systems, for di erent production scenarios ...... 41
Figures Figure 1: Total SA tons cane harvested (not including SASRI research farms) ...... 12 Figure 2: Production trends in milling areas where production has increased or remained relatively stable (tons cane) ...... 13 Figure 3: Production trends in milling areas where production has decreased (tons cane) ...... 13 Figure 4: Comparison of RV tons harvested for coastal versus inland and irrigation regions (RV tons) ...... 13 Figure 5: Area under cane for miller-cum-planters, large-scale growers and small-scale growers (hectares) ...... 14 Figure 6 a-o: Mill region speci c area under cane according to grower type 1996/97 to 2012/13 (ha) ...... 15 Figure 7: Registered small-scale growers and number who delivered, 1972-2010 ...... 17 Figure 8: Large-scale farmer area under cane according to production regions (ha)...... 18 Figure 9: Number of large-scale growers accrording to the di erent production regions ...... 19 Figure 10: Total area under cane change for di erent milling regions (ha) ...... 20 Figure 11: Area change comparing coastal and inland cane production regions (ha) ...... 20 Figure 12: Rainfall indications (June-May) for mill areas in main production regions (measured in mm)...... 21 Figure 13 a-m: Cane yield in tons of cane per harvested area and RV tons per harvested area ...... 21 Figure 14: Real input expenditure trends per hectare for industry (R/ha) ...... 27 Figure 15: Comparison of standardised real total xed and variable cost per hectare and per ton ...... 28 Figure 16: Real total cost index for Coastal, Midlands and Northern Irrigated regions ...... 29 Figure 17: Real farm sta expenditure per hectare for the three main production regions (R/ha) ...... 29 Figure 18: Real farm sta expenditure per ton of cane produced for the three main production regions (R/ton) ...... 30 Figure 19: Real fertiliser expenditure per hectare (R/ha and 2000 index value) ...... 30 Figure 20: Real fertiliser expenditure indexes for production regions (2000) ...... 31 Figure 21: Real fertiliser expenditure per ton cane produced (R/ton) ...... 31
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Figure 22: Real fuel and lubrication, mechanical maintenance and real cane transport expenditure per hectare compared to the real fuel index (2000) ...... 32 Figure 23: Nominal and real RV price per ton of cane (R/ton) ...... 33 Figure 24: RV percentages for di erent production regions 1987 to 2011 ...... 33 Figure 25 a-m: RV% compared to the RV tons per hectare harvested for the di erent production regions ...... 34 Figure 26 a-j: Net impact of the RV payment system compared to the sucrose payment system, after farming for RV compensation is taken into consideration ...... 39 Figure 27: Real revenue per hectare for di erent production regions (R/ha) ...... 41 Figure 28 a-f: Comparison of RV% with sugar extraction per RV ton ...... 42 Figure 29: Comparison of industry cane tons harvested and mills’ extraction ‘e ciency’ ...... 45 Figure 30: Industry sucrose loss percentage – sucrose content in nal molasses, bagasse, lter cake and undetermined losses ...... 46 Figure 31: Industry pro tability per hectare (R/ha) ...... 47 Figure 32: Coastal milling regions pro tability per hectare (average for Amatikulu, Felixton, Darnall, Maidstone, Gledhow, Sezela and Umzimkulu) ...... 48 Figure 33: Midlands pro tability per hectare (average of Noodsberg, Eston and UCL) ...... 48 Figure 34: Northern Irrigated regions pro tability per hectare (CANEGROWERS’s’ calculations) ...... 49 Figure 35: Percentage area trashed ...... 53
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Phase I: Executive Summary
HIS REPORT CONSTITUTES the phase one report, The RV payment system that was implemented for the shedding light on the factors that have impacted on rst time for the 2000/01 season, had an impact on farmer Tcane production in the South African sugar industry. revenue by altering the allocated proportions of the divisible Cane production has decreased signi cantly since 2000/01 pool, largely to the bene t of Midlands and Northern Irrigation driven by both a decrease in area under cane and cane yield. farmers who produce higher quality cane than their Coastal A 51% or just over 47 000 hectare decline in small-scale counterparts. The direct net nancial impact of the payment grower area under cane was the main driver of area decrease. system, after ‘farming for RV compensation’ was taken into A considerable decrease in miller-cum-planter cane area was consideration was shown not to be a substantial driver of largely mirrored by an increase in large-scale grower area decreased pro tability when compared to increasing input under cane. This expansion however mainly took place in costs, depressed RV price 2001/02-2005/06 and adverse the Midlands and Mpumalanga while the Coastal area under weather conditions. These calculations were however done cane decreased substantially. Cane yield decreased more using aggregate mill region data and it is likely that the pool than what can be explained by bad weather, especially in the share (and revenue) of underperforming farmers (bottom South Coast, North Coast and Zululand production regions. 25%) and the majority of small scale growers decreased In the nine years 2001-2010 South Coast large scale growers substantially, while better performing farmers within ‘losing yield decreased by more than 11%, on the North Coast large areas’ bene tted from the RV system. scale growers yield dropped by nearly 20% and in Zululand by A key premise for the introduction of the RV payment nearly 16%. Zululand small scale growers yield decreased by system was that increased cane quality would lead to nearly 38% for the same period while North Coast small scale increased sugar income. Farmers in most areas reacted to the growers yield dropped by 23.6%. cane quality incentive (low quality penalty) and produced and The area and yield declines were explained at the hand of delivered higher RV% cane. The mills however did not produce economic, sustainability and socio-political factors as indicated more sugar from the higher quality cane and sugar extraction by large scale growers and as far as possible supported by e ciency has in fact decreased considerably, at a great cost CANEGROWERS data. to growers and millers, but especially to growers. While there The pro tability of cane farming has decreased signi cantly is a clear link between cane tonnage harvested and delivered for dryland farmers since the early 2000s and especially for (throughput) and sucrose extraction rates, mill e ciency in the Coastal farmers. Midlands farmers’ net farm income percentage Irrigation and Midlands areas, where production has increased for the period 2000/01 to 2011/12 has decreased by 26% while or remained relatively stable, has also decreased. Coastal farmers’ percentage has dropped by 54%. Increasing The uncertainty brought by land claims resulted in, initial input prices played a substantial role in the dwindling as well as longer term, disinvestment in soil health and ratoon pro tability with the real average industry expenditure per replacement, with the e ect that farmers’ yield potential hectare of cane increasing by 33%, driven mainly by increased decreased. Increasing input prices, combined with a depressed fertiliser, labour and fuel prices. Though the RV price did not real RV prices (2000-2005), less than ideal rainfall conditions increase from 2002/03 to 2005/06, it did increase by more and waning yields resulted in inability of farmers to implement than 50% from 2005/06 to 2011/12 but grower reaction to the Best Management Practises (and SUSfarm guidelines) and price increase was limited by drier than normal conditions for rectify their ‘unhealthy’ production systems. a number of seasons.
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Introduction
HE SOUTH AFRICAN sugar industry is more than 150 negatively on the nancial position of sugarcane farmers. years old and is important not only for its contribution to In addition to the less than ideal sugar cane production TGDP (2009-2012 sugar cane was the largest agricultural milieu, some role-players in the sugar sector are questioning commodity produced in South Africa by volume, and the 7th the validity and equity of the industry agreed cane pricing largest by value and represented 17.4% of the total annual mechanism. Over the years the sugar industry has implemented value of eld crop production (FAOSTAT, 2014; DAFF 2011)), but a number of di erent cane pricing mechanisms. The initial cane also as a contributor to direct employment in both sugarcane weight system was replaced by the sucrose content payment production and processing as well as indirect employment in mechanism in 1926. Even though this system was in place for the support industries (chemical, transport, etc). According to a a substantial period it was deemed to be less than ideal, mainly NAMC report by Conningarth (2013) the sugar industry directly due to the fact that the value of the cane could not be directly employs approximately 113 000 workers, which constitutes linked to the value of the sugar eventually attained from it. 0.9% of total employment in SA but importantly 5.1% of total In 2000 the sucrose system was replaced by the recoverable employment in KwaZulu-Natal and Mpumalanga. The same value (RV) pricing system that also incorporates non-sucrose study estimated that nearly 600 000 people in mainly the rural impurities and bre into the pricing formula. Whether the RV areas of KwaZulu-Natal and Mpumalanga are dependent on payment system directly contributed to the decrease of cane workers employed in the sugar industry. BFAP estimates the production in South Africa is not clear. direct sugar workforce a bit lower, closer to 80 000 workers, To this end, SA CANEGROWERS contracted the Bureau for but the role of the sugar industry as a provider of livelihood Food and Agricultural Policy (BFAP) at the University of Pretoria for the rural poor cannot be overemphasised. The industry has to conduct a study on the key drivers that have in uenced also long been a signi cant contributor to foreign exchange and led to the current state of the industry and to propose earnings, with net exports of all sugar products between a business model to stimulate cane production by primary $200m and $300m since 2000. producers within the Sugar Industry Agreement and new However, over the past decade, sugarcane tons harvested Sugar Act environment. decreased from 23.8 million in 2000/01 to 16.7 million tons This document constitutes the phase one report, shedding in 2011/12; i.e. a drop of 7.06 million tons or 29.7% in eleven light on the factors that have impacted on cane production years. This decline in production has raised a number of in the South African sugar industry. Following the next brief questions regarding the general wellbeing and future of section on methodology, light will be shed on how the area sugarcane farming in South Africa. Apart from rising input and under cane and cane yield have changed over the last 25 years transportation costs, industry experts argue that a number of with a special focus on the last 12 years (2000/01 to 2011/12). external in uences such as urbanisation in the coastal regions, The main factors impacting on cane production will then be land claims, unsuccessful land reform projects and high presented and discussed. fertiliser prices have all contributed to this declining trend. In the past decade, seasonal droughts have also impacted
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Methodology
HIS STUDY HAS two main objectives, namely to statements. Rigorous quality control of the data based on identify the factors that have contributed to current 19 exclusion criteria ensures that the data is accurate and Ttrends in sugarcane production over the last decade representative of the di erent mill regions. (2000/01 to 2011/012) and to determine the extent to which In order to identify the issues that impacted on cane these factors have in uenced the decline. It was proposed production, area under cane and cane yield, group discussions that the objective could be met by answering two underlying were held with large-scale growers in all the di erent milling questions: regions with the exception of UCL Company Limited in the Midlands. Most farmer discussion meetings were held 22- 1. How has the area under cane changed (in each mill area) 30 July 2013 (Umzimkulu on 22 August) and a total of 90 and what are the determinants of this change? farmers attended the discussion meetings. The BFAP research 2. For land that has remained in cane production, what has group also met with SASRI and SMRI representatives and happened to actual yields relative to potential yields, and CANEGROWERS’ Chairman, and consulted at length and on what are the determinants of such changes? various occasions with CANEGROWERS’ Director of Industrial A airs and Manager of Economic Research. It was proposed that the two underlying questions could be Through the di erent meetings, discussions and answered by following a supply chain approach - analysing consultations the focus fell on the economic, sustainability and consulting with stakeholders in the South African and socio-political factors that have impacted on sugarcane sugar sector at various levels/nodes in the chain. Following production over the last 25 years but especially over the consultation with CANEGROWERS and perusal of their data last twelve years 2000/01 – 2011/12. The aim of the various base, it was decided that the study methodology would discussions was to identify the main factors impacting on cane depart slightly from the formal supply-chain analysis that was production, as viewed by producers and other role players, initially proposed. Though the approach used still incorporates with the objective of testing and supporting these views at most of the supply chain methodology focus points, with the the hand of CANEGROWERS and BFAP data. availability of detailed and comprehensive time series data for This study did not speci cally focus on small-scale growers’ producers in all the mill regions, it was decided that the study production trends and the reasons behind any changes. A would be done from a producer point of view. This makes number of studies, including Bates Consulting (2005), Armitage sense as the cane producer is the node in the supply chain that et al., (2009), SOI (2008) and FIRCOP (2011) have studied the connects the other role players and CANEGROWERS’ diverse “substantial complexities” faced by small scale growers (as seen time series data sets made primary data collection from other in CANEGROWERS, 2012). Though this study will shed light on nodes unnecessary. how the small scale growers cane area has changed, it will not In addition to industry production and yield data, the endeavour to study smallholder speci c issues. It has been study made use of CANEGROWERS’ large-scale grower cost suggested by numerous large-scale growers that the issues survey data. This data is obtained from large-scale growers that impact on cane area and cane yield for large scale growers who either utilize the CaneFarms Bookkeeping Service also a ect small scale growers, and in many cases in a more o ered by CANEGROWERS by completing annual cost severe manner. survey questionnaires, or who submit their annual nancial
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Cane Production
HE TOTAL NATIONAL tonnage of sugarcane harvested regions where cane production has decreased considerably in the period 2000/01 to 2011/12 has decreased are the coastal regions and regions where a large share of the Tconsiderably and at a rather constant and alarming mills’ cane is planted at a relatively low altitude. Increases and rate of more than 500 000 tons per season (Figure 1). Of relative stability in cane production were attained in mainly concern is especially the period since 2005 when the cane the Northern Irrigated and the Midland areas. tonnage delivered deceased despite a considerable increase It has been suggested that one of the indirect objectives of in the nominal Recoverable Value (RV) price paid for delivered the RV payment system was to decrease the tons of sugarcane sugarcane as well as a smaller but constant increase in the real delivered relative to the tons of sucrose recovered, and a RV price. decrease in cane tonnage would thus seem to be in line with By considering each milling region’s tonnage cane harvested expectations. However, Figure 4 shows that RV tons delivered (Figures 2 and 3), it is clear that not all the production regions for the Northern Irrigated and Midlands mills as well as the have followed the declining production trend suggested by Coastal mills have decreased, by 8 463 tons per annum on the aggregate industry harvest gures. Figure 2 indicates average for the inland mills, and by nearly 55 000 RV tons less production trends in regions where harvested and delivered per season for the Coastal mills over the eleven year period. cane tons have increased or remained relatively stable while The total quantity of sugarcane produced, harvested and Figure 3 depicts harvest trends in the mill regions where the delivered to the mills depends on the size of the area of land tons cane harvested have decreased over the period 2000/01 under cane and the production of cane per unit of land, i.e. - 2011/12. yield. The next two sections will highlight the changes in area By comparing the increasing and decreasing cane under cane and cane yield. production mill regions it is quite apparent that the milling
Figure 1: Total SA tons cane harvested (not including SASRI research farms) Note: In this report tons refer to metric tons, i.e. tonnes
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Figure 2: Production trends in milling areas where production has increased or remained relatively stable (tons cane)
Figure 3: Production trends in milling areas where production has decreased (tons cane)
Figure 4: Comparison of RV tons harvested for coastal versus inland and irrigation regions (RV tons) – 13 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
3.1 Area under cane on the area changes. These factors will be discussed in sections After increasing by 5% from 1996/97 to 2001/02, the total 4 - 7 of this report along with the factors that impacted on area under sugarcane (not including SASRI research farm yield. cane) decreased by 14.9% over the 10 years up to 2011/12 Figures 6 a-o present the area under cane for the di erent and increased (for the rst time in a decade) by 1.2% for the mill areas in the di erent production regions. A summary of 2012/13 season. The area decline from 2001/02 to 2005/06 was the change in area under cane for each mill area between relatively minor but in the ve seasons 2006/07 to 2011/12, the 1996/97 to 2012/13 is presented in Table 1. area under cane dropped by 12.4% or 52 163 ha. While MCP area under cane has decreased considerably, From Figure 5 it is clear that the South African sugarcane area most of this land initially was, or still is planted to cane, just has decreased considerably. This decline was generally not the under new ownership. It is clear from a number of the mill result of large-scale growers shedding cane hectares. Between area graphs (Malelane, Darnall, Eston and Sezela in particular) 1996/97 and 2011/12, large-scale growers increased their cane that milling company cane land has been transferred to large- plantings by 16.9%. Though most of the growth in area under scale growers or is leased to them. In addition, in many cases cane took place over the four seasons 1996/97 to 2000/01 the milling companies have sold farms to government under (16.5%), it would seem as if aggregate large-scale growers land the land restitution and redistribution programmes as well devoted to cane production remained relatively stable for the as to previously disadvantaged farmers and mill employees next 12 years. as freehold land. According to Madhanpall (2013), milling For miller-cum-planters (MCP) and small-scale growers the companies have sold an estimated 18 789 ha to 170 black opposite is true. Between 1996/97 and 2012/13 MCP cane farmers over the last number of years. These farmers and farms, area decreased by 36 538 ha or 54.1% and small-scale growers based on their land area under cane, are classi ed as large- area under cane decreased by 47 113 ha or 50.6%. However, scale growers and these cane hectares thus basically moved considering the contrasting mill region speci c trends of from the MCP category to the large-scale growers category. Figures 2 and 3, it is very likely that Figure 5’s aggregate national It is however clear from Table 1 that in Mpumalanga and the area under cane indications for millers (MCP) and large (LSG) Midlands large-scale growers’ area under cane expanded and small-scale growers (SSG) hide substantial di erences considerably more than by the size of the land sold by the between the regions. For this reason, the area under cane millers. On the North Coast however the opposite is true, with for each mill area is considered and discussed according to the MCP’s area under cane decreasing by more than 20 000 ha grower type. The actual changes in area under cane will be while the large-scale growers’ area only increased by 737 ha. presented without aiming to explain the factors that impacted
Figure 5: Area under cane for miller-cum-planters, large-scale growers and small-scale growers (hectares)
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Mpumalanga
a) Malelane b) Komatipoort
Zululand
c) Pongola d) Umfolozi
e) Felixton
Tugela
f) Amatikulu g) Entumeni
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North Coast
h) Darnall i) Maidstone
j) Gledhow k) Glendale
South Coast
l) Sezela m) Umzimkulu
Midlands
n) Noodsberg o) Eston
Figure 6 a-o: Mill region speci c area under cane according to grower type 1996/97 to 2012/13 (ha)
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Table 1: Change in area under cane according to grower types for the 16 year period 1996/97 to 2012/13 MCP change in Small-scale Large-scale Total change in Milling region area under cane growers change in growers change in area under cane change in area area under cane area under cane under cane Malelane -4698 1127 7757 4186 Mpumalanga Komatipoort 1761 3674 6767 12202 16388 Pongola 0 -1496 2990 1494 Zululand Umfolozi 0 -1981 889 -1092 -7131 Felixton -237 -2735 -4561 -7533 Amatikulu 0 -6370 1691 -4679 Tugela Entumeni 0 -6169 -5929 -12098 -16777 Glendale -1288 -8540 -1340 -11168 Darnall -5394 280 -2295 -7409 North Coast Gledhow -6293 -458 10810 4059 -36265 Maidstone -7352 -7957 -6438 -21747 Eston -2068 -2628 13942 9246 Midlands Union Coop -72 -3111 3735 552 9365 Noodsberg -2772 -1668 4007 -433 Sezela -8105 -5646 10220 -3531 South Coast Umzimkulu -20 -3435 1767 -1688 -5219 Total -36538 -47113 44012 -39639 -39639
Small-scale grower area under cane has only increased in planted to cane is mirrored by the number of smallholders the Mpumalanga irrigation areas over the period 1996/97 farmers involved in cane production. The number of to 2012/13 and especially Komatipoort has seen a relatively smallholder cane farmers reached a maximum around 1996/97 stable increase. The jump in small-scale growers’ area under and the number of registered cane growers decreased from cane for the Amatikulu and Gledhow mills in 2004/05 (see Mill an estimated 57 000 farmers to fewer than 30 000 in 2010/11. graphs above) was the result of the closure of the Entumeni Farmers who actually delivered cane (which is probably a and Glendale mills following the 2003/04 season. If the area closer indication of productive small-scale growers) basically increases in Mpumalanga are excluded from calculation, small- halved during the same period from around 30 000 to fewer scale growers area under cane declined by 51 914 hectares with than 14 000 farmers and from 2004/05 to 2009/10 small-scale 79% of this decline taking place in the Coastal production areas. farmers left the sugar industry at a rate of 2 000 growers per Figure 7 shows that the decrease in small-scale grower area annum (CANEGROWERS, 2012).
Figure 7: Registered small-scale growers and number who delivered, 1972-2010 Source (CANEGROWERS, 2012)
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In total, large-scale growers’ area under cane increased large-scale growers area under cane has increased remarkably by 44 012 hectares or 17.6% during the period 1996/97 to and where this region’s contribution to total national cane area 2012/13. The irrigated cane area in Mpumalanga increased was more or less on par with that of the North Coast in 1996/97, considerably with the Malelane area expanding by 7 757 the Midlands planted 26 140 hectares more than North ha and Komatipoort with 6 767 ha (87 and 70 percent Coast growers in 2012/13. South Coast (mainly Sezela) and respectively based on 1996/97 plantings). The area under Mpumalanga also expanded while the North Coast, Zululand cane in the Midlands also increased with Eston expanding and Tugela regions’ area under cane remained relatively stable by 13 942 ha and Union Coop and Noodsberg by 3 735 and or decreased slightly. It is however clear from Table 1 that the 4 007 ha respectively. On the South Coast, Sezela plantings production area averages hide the change in cane area of increased by 10 220 ha and Umzimkulu’s by 1 767 ha. The individual mills. closing of Glendale (North Coast) and Entumeni (Tugela) mills Similar to small-scale growers, the number of large-scale following the 2003/04 season, resulted in more cane delivered growers who delivered cane has decreased. Between 1996/97 (and area recorded) to Gledhow and Amatikulu respectively. and 2011/12 the number of large-scale growers dropped by Gledhow’s area under cane again increased considerably after 366 or 22%. However, with Darnall moving to the North Coast 2008/09, but this is due to a number of Maidstone and Darnall region from the Tugela region in 2003/04, a comparison of farmers delivering to the ‘new’ Gledhow mill which was partly the number of large scale growers in 2001/02 and 2011/12 is bought by growers (25.1% grower ownership). This ‘move’ by somewhat misleading. Nevertheless, a comparison between farmers subsequently resulted in a drop in area under cane 2003/04 and 2011/12 does reveal the trend . Over these eight for the Maidstone and Darnall mills. Felixton is the only mill years 362 large-scale growers stopped farming sugarcane. Of region where large-scale growers’ area under cane decreased this total, 66% came from the North Coast (26%), Zululand considerably and where the drop is not clearly linked to closure (21%) and the Midlands (19%). It is hypothesised that a of a mill or a large number of farmers delivering cane to a substantial amount of land on the North Coast and Zululand di erent mill. Felixton’s large-scale growers area under cane has been sold to government under the land restitution and increased with MCP land sell o in 1998 and the area remained redistribution programme, so a number of farmers sold to one relatively stable until 2006/07 after which it decreased by 9 894 owner (the State). It is also possible that nancially stronger ha in 5 years up to 2011/12. It is thought that some Felixton farmers are buying up cane farms to cope with decreasing cane went to the Umfolozi, Amatikulu and Gledhow mills, but margins and to expand production. the increase in cane in these areas are too small to account By combining the area changes of MCP, small-scale growers for the substantial decline in Felixton. Large-scale growers in and large-scale growers, it is possible to see the net e ect for the Felixton area indicated that the diversion from Felixton is each mill area: linked to the mill’s untoward ‘Brix minus pol’ factor. This issue • In Mpumalanga, the area under cane for all three types of will be discussed in more detail in Section 5.2. growers increased for Komatipoort, while Malelane showed Though ‘moving’ of farmers between mills can complicate an increase in area for both small-scale growers and large- comparisons and the choice of comparing seasons in uence scale growers. ndings, the large-scale growers’ area under cane trends for • In Zululand, Pongola’s total area under cane increased the di erent milling regions are clear from Figure 8. Midlands due to large-scale growers’ area expansion and despite
Figure 8: Large-scale farmer area under cane according to production regions (ha)
– 18 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 9: Number of large-scale growers accrording to the di erent production regions
a 1 496 hectare decrease in small-scale growers’ cane. In • The total Midlands area under cane increased by 9 365 ha the Umfolozi mill region, small-scale growers cane area due to a 21 684 ha increase by large-scale growers and a decreased by nearly 2 000 ha while large-scale growers 7 407 ha drop by small-scale growers and 4 912 by MCP. area increased by 889 ha. In Felixton all three grower Eston large-scale growers’ cane area increased by 9 246 ha, groups decreased cane plantings with a total of 7 533 partly enabled by a 2 068 ha sell-o by MCP. hectares going out of cane production. • In the South Coast production region, the total cane area • In the Tugela production region the area under cane decreased by 5 219 ha as a result of the small-scale growers decreased signi cantly. With the closing of the Entumeni area decreasing by 9 081 ha and the large-scale growers mill following the 2003/04 season, most of the cane was area increasing by 11 987 - largely due to a 10 220 ha registered under Amatikulu, but both small-scale growers’ increase of large-scale growers cane in Sezela, enabled by and large-scale growers’ area decreased. In total small-scale a 8 105 ha sell-o of MCP cane land. growers cane area decreased by more than 12 500 ha and When grouping the production decreasing, stable and the large-scale growers by more than 4 200 ha with the increasing mill regions together (as was done for Figures 2, 3 and total Tugela cane area decreasing by 16 777 ha. 4), it is clear that MCP and small-scale growers area under cane • Though the closing of the Glendale mill following the decreases were more severe in the Coastal production regions 2003/04 season and the ‘moving’ of Darnall and Maidstone where milling companies owned more land and where most farmers to Gledhow complicate area inferences, it is clear of the small-scale growers are situated. In total, Coastal area that the North Coast area lost a large share of its cane land. under cane in Felixton, Amatikulu, Entumeni, Glendale, Darnall, In total large-scale growers cane area increased by 737 Gledhow, Maidstone, Sezela and Umzimkulu decreased by 65 ha but MCP cane decreased by 20 327 ha and small-scale 794 ha while inland and irrigation cane produced in Malelane, growers cane by 16 675 with North Coast mills losing more Komatipoort, Umfolozi, Pongola, Noodsberg, Eston and Union than 36 000 ha of cane. Coop increased by 26 155 ha from 1996/97 to 2012/13.
– 19 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 10: Total area under cane change for di erent milling regions (ha)
Figure 11: Area change comparing coastal and inland cane production regions (ha)
The total area under cane decreased by 39 639 ha from yields and that low yielding small-scale growers cane area has 1996/97 to 2012/13 but more recently by 57 163 ha from decreased, an increase in average yield would not have been 2000/01 to 2012/13. Given that the total cane production has unexpected. However, as the production – area under cane decreased by nearly 28% or 6 675 619 tons from 23 876 164 disparity suggests cane yields did in fact decline. tons of cane in 2000/01 to 17 200 545 in 2012/13 it would seem as if the cane production decline is not only linked to 3.2 Yield an area decrease but that a yield decrease also played a role, i.e. cane production have decreased considerably more than In South Africa, and for most of the sugarcane production what the area decrease accounts for. If one assumes that a sector, the main limiting factor to yield is rain. Depending on large share of large-scale growers’ cane area that has gone out the climatic conditions and length of cropping season, sugar of production, has been marginal land with relatively lower cane in South Africa requires between 1100 and 1500 mm
– 20 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 12: Rainfall indications (June-May) for mill areas in main production regions (measured in mm)
Mpumalanga
a) Malelane b) Komatipoort
Zululand
c) Pongola d) Umfolozi
– 21 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Tugela
i) Felixton j) Amatikulu
North Coast
g) Darnall h) Maidstone
k) Gledhow
South Coast
j) Sezela k) Umzimkulu
– 22 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Tugela Midlands
j) Amatikulu
l) Noodsberg m) Eston
Figure 13 a-m: Cane yield in tons of cane per harvested area and RV tons per harvested area
of rainfall for near-optimal yield. It is clear from the 1995/96 growers’ production per hectare decreasing by 2.19% per year – 2011/12 rainfall indications for selected mill regions, here and small-scale growers cane yield by 2.62%. In Zululand less representing the di erent production areas, that precipitation than ideal weather conditions resulted in a simulated lower levels for 2003/04-2005/06 and again 2008/09-2010/11 were yield of 0.89% per year, but small-scale growers’ yield decreased far from ideal (Figure 12). According to rainfall data obtained by 4.22% per year and large-scale growers yield by 1.73%. from an Umzimkulu farmer, nine out of the thirteen seasons Overall, large-scale growers’ cane yield decreased by 2000-2012 had rainfall lower than the long term average and 1.07% per year and small-scale growers yield by 2.48%. These in 6 seasons less than 700mm were recorded for the June-May are average gures and it can be expected that there are period. substantial variation within mill regions with some farmers’ Making use of CANEGROWERS’ production and area under yields decreasing considerably more or actually increasing, but cane data, mill region speci c rainfall data and the SASRI it is quite apparent that yields decreased considerably more in Canesim model, and assuming best ratoon, fallowing and Coastal regions. In the nine years 2001-2010 South Coast large- soil nutrition practises, Jones (2013) showed that during the scale growers’ yield decreased by more than 11%; on the North 2000/01-2009/10 period actual cane yields decreased even Coast ’ yield dropped by nearly 20% and in Zululand by nearly though the simulation model indicates that the climatic yield 16%. Zululand small-scale growers yield decreased by nearly potential has increased in some areas. Actual yield decreases 38% for the same period while North Coast yield dropped by were signi cant and of a magnitude greater than can be 23.6% for smallholders. explained by weather variations, especially in the North Coast, An issue that might have played a role in the decreasing South Coast and Zululand production regions. Figures 13 a-m trend in aggregate large-scale growers yields is the fact that graphically present the yield trends in cane tons and RV tons a substantial number of former MCP land has been sold to per area harvested for the period 2000/01 to 2011/12. previously disadvantaged farmers and these now form part of Despite the Canesim model suggesting that, based on the large-scale growers group. Some of these farms may not climatic conditions and assumed best practises, cane yield be managed optimally (for various reasons), resulting in lower would increase by 0.99% per annum on the South Coast, large- cane yields with a negative impact on the average large-scale scale growers’ yield decreased by 1.24% per annum and small- grower group yield. However, in a survey of approximately 80 scale growers’ yield by 0.39% per annum. Midlands yield was large scale growers, Jones (2013) found that the most farmers predicted to increase by 1.48% per year but decreased by 0.60% (94%) believed that yields are decreasing on their own farms for large-scale growers and 0.30% for small-scale growers. and this was also found by the BFAP team in farmer group North Coast farmers’ yield decreased the most with large-scale discussions.
Table 2: Simulated and actual yield change per year for large-scale growers and small-scale growers for 2001 to 2010 (%) Region Simulated yield change Actual large-scale growers Actual small-scale growers per year yield change per year yield change per year South Coast 0.99 -1.24 -0.39 Midlands 1.48 -0.60 -0.30 North Coast -0.06 -2.19 -2.62 Zululand -0.84 -1.73 -4.22 Northern Irrigated -0.89 -0.17 -3.21 All regions 0.04 -1.07 -2.48 Source: Adapted from Jones (2013) – 23 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
4 Factors a ecting area and yield Immature cane has more non-sucrose sugars and as a The main objective of the meetings with large-scale growers in result coastal farmers are penalised under the RV payment July/Aug was to identify the issues that impacted on cane area system and receive a lower income for their cane. If they and yield over the period 2000/01 to 2011/12. In order to elicit were able to get rid of Eldana, they can produce high RV some pre-meeting deliberation and guide the discussions an 14 month cane and spend less on insecticides, resulting in informal questionnaire was circulated to farmers beforehand. higher pro ts. Typical to the focus group discussion method of consultation, • Large-scale growers feel that the considerable drop in some of the feedback and issues indicated by farmers might small-scale grower numbers and cane area is to a large be considered as subjective and anecdotal. Some of these degree due to the RV payment system. It is very di cult for issues however speak to the general state of production and small-scale growers, who are dependent on pro t driven mind of growers and deserve mention. The issues identi ed by contractors, to supply ’clean and fresh’ cane, and as a result farmers are presented in the next section and the main issues small-scale growers receive less income for their cane. are then discussed in detail and substantiated and analysed • In the 70s about 30% of Darnall farmers burnt and 70% based on CANEGROWERS, BFAP and other credible data. trashed their cane. Now, due to high labour cost, Eldana and the fact that they are penalised for bre content, about 4.1 Large-scale grower indicated factors a ecting cane 90% burn their cane before harvesting. The same is true area and yield for Gledhow and Maidstone farmers. Because they are no Most farmers indicated that pro tability, which is a factor of longer trashing, the organic material in the soil is minimal, yield, drives the change in area under cane, as area under cane causing nutrition and compacting problems. They know depends on the grower’s replanting decision. Interestingly, trashing has longer term bene ts but cannot a ord to trash though farmers in di erent mill regions generally indicated due to high labour cost and the bre content issue under the same issues, the factors that were indicated as most the RV payment system. important, di ered. This section will present farmers’ feedback • Due to increasing input costs, farmers are not able to invest on the factors a ecting the area under cane and cane yield in soil health, nutrition (fertiliser and lime) and seed cane. and includes some candid farmer insights on cane production • The North Coast has pockets of good soil, but consists and the sugar industry. The section concludes with a summary mostly of marginal soils and steep hills. Marginal soil of the main factors to be comprehensively assessed in the requires more inputs to attain a reasonable yield under the subsequent sections of this report. RV system. Under low rainfall conditions and high input prices the Coastal regions are the rst to struggle. 4.1.1 North Coast – Darnall, Gledhow and Maidstone • A number of farmers have ‘stopped farming’ due to land Factors impacting on cane area: claims, i.e. stopped investing in the health of their soil and • Cane produced in the Darnall and Maidstone areas has in cane replanting, resulting in yield declines. reality not decreased much – the observed decrease is due • They indicated that the SUSfarm (best practise) guidelines to a number of farmers now delivering to the partly grower published by SASRI are a far cry from what they currently owned Gledhow mill. do and what they can a ord to do. • Some cane land is now planted to macadamias, but • The Gledhow farmers are positive about their miller generally coastal farmers have few crop alternatives. relationship as they have insight into the nancials of the • Though there are a couple of cane growers who mill. Darnall and Maidstone farmers are not that happy but have property development plans, most of the urban since the farmer exodus to Gledhow their mills seem more development in the region (encroaching on cane land) is willing to negotiate. driven by Tongaat Hulett. • With decreasing margins, struggling farmers should be 4.1.2 South Coast – Sezela and Umzimkulu bought out by better performing farmers but even marginal Factors impacting on cane area: land on the coast is very expensive due to development • Sezela has about 70% of cane on the coast on a 12 possibilities. month cycle while 30% of cane is inland on a 20 month • Due to the land restitution and redistribution programme, cycle. Umzimkulu has about 30% cane on the coast and productive government-bought land is removed from the 70% inland (hinterland). Umzimkulu inland farmers are market (decreasing supply), resulting in high prices for remarkably more positive about cane farming than coastal even marginal land. farmers. • Expansion for both areas is mainly inland but is limited by Factors impacting on cane yield: other more pro table crops such as macadamias, timber • Farmers felt that new cane varieties are bred for RV and not and bananas. The main expansion limitation is distance for cane tons per hectare. from the mill, i.e. transport cost. • RV focused varieties have less legs – can only be ratooned a • Coastal cane growers have limited options due to sloping couple of years before yield drops. lands. • Due to Eldana, coastal farmers are forced to cut immature • Urban development and the low profi tability level of cane cane at 12 months instead of mature cane at 14 months. production limits cane expansion on the coast.
– 24 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
• More cane area will go out of production on the coast as it • Low rainfall has played a massive role the last 10 years. With is too expensive to plant and harvest on the steep slopes a dry season, the yield is low and farmers cannot a ord to due to the labour component. invest in soil health. Next season is dry again, and then the • Farming units are getting bigger (number of farmers fewer). grower has the problem of low rainfall and depleted and acidic soils. Factors impacting on cane yield: • They are not positive about their relationship with the mills. • Under the RV payment system farmers need to age their cane in order to increase sucrose content and minimise 4.1.3 Zululand and Tugela – Umfolozi, Felixton and non-sucrose sugars, but due to Eldana they are forced Amatikulu to harvest immature cane. They have tried a number of methods to control Eldana, but with little success and have For this region, Felixton and Amatikulu farmers generally had to apply chemicals quite extensively. Eldana is a problem similar responses while Umfolozi farmer indications were especially in the older cane elds where there has been di erent. nothing but cane for a number of seasons. • The SUSfarm guidelines recommend trashing at harvesting Umfolozi but the RV system penalises farmers for trashing via the Factors impacting on cane area: bre content penalty. • The Umfolozi Flats had very little decline in area, only some • They know they need to trash but cannot aff ord the labour hilly farms were bought up by timber companies and and lower RV% - they need to nd a solution. Trashing is no converted to forestry. silver bullet, but it is a good start. • They cannot fi nancially aff ord to adopt SUSfarm practises, Factors impacting on cane yield: but also know that they cannot a ord not to. They feel that • By replanting 10% they manage to keep yields high. the mills should reward best management practises – they • Growers own 75% of the mill and get 25% of the value of need mill support to implement SUSfarm practises to the molasses and are positive about their relationship with the mill longer term bene t of farmers and mills. • These farmers are also much more positive about cane • They feel that they should stop planting marginal lands to farming than South Coast, North Coast and Felixton and cane but cannot a ord to produce less cane. Amatikulu farmers. • They need to break the cycle of mono-cropping and leave more land fallow, but cannot a ord to. Felixton and Amatikulu • They feel SASRI’s focus the last number of years was on Factors impacting on cane area: producing sugar and not on producing cane. • For these farmers the main issue is decreased profi tability • Newer cane varieties do well but do not last. caused by the RV payment system. • They recognise that the Bell loader has had a massive impact • One big grower’s deliveries at Felixton infl ates the mill’s on compacting cane elds and ratoon root damage, resulting cane area gures – they are actually doing considerably in yield loss. Some farmers are moving away from Bell loaders. worse. • Land claims play a big role in this area and infl uence how • Nearly 70% of all SA small-scale growers are in Felixton, and if farmers implement SUSfarm recommendations as Amatikulu and Umfolozi - the RV payment systems’ negative well as farmers’ replanting decisions. Most of the claims in impact on small-scale growers has been massive. the Sezela area have already been settled. In Umzimkulu • They feel the RV price has not kept up with the increase in about 50% of farms are under claim and this has de nitely input prices resulting in decreasing pro tability. in uenced farmers’ investment decisions. • Felixton farmers have a major concern regarding their mill’s • Farmers seem to know how to “fi x” their soils but it is a high Brix-pol factor resulting in them being penalised under longer term project and they cannot a ord to invest into the RV payment system for what they believe is a milling something they will not have the bene t of. At this stage process problem. Farmers with delivery options have left the farmers with claims on their land can only plan 2 years the Felixton mill as the Brix-pol issue results in farmers’ cane in advance. being undervalued. The Brix-pol issue was not a problem • Land claims are a very big issue and the negative sentiment for growers under the sucrose payment system. has been worsened by the droughts of the last 10 years. • These farmers feel that there is no trust in the industry. They Factors impacting on cane yield: are tired of ghting with government, the mill, Eldana and • A number of issues including age of ratoon, Eldana, soil droughts and this in uences their reinvestment decisions. health, labour cost and ‘lack of legs’ of the new varieties • Farmers feel that they are not getting their fair share of played a role, but they feel that all of these were caused molasses value. and exacerbated by the RV payment system. • They indicate that SASRI has not been supplying the • They feel the RV payment system had a number of correct lime and gypsum recommendations and as a result ‘unintended consequences’ that negatively impacted on they have big soil acidity problems. The recommendations their production systems. have been revised but it will take time and money to x the • They cannot aff ord to implement SUSfarm best farming problem. practices. – 25 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
• They feel the RV payment system has induced a reduction and input costs determines the crop. in revenue and its compounding nancial impact over • Some cane was planted on marginal soils and was taken 12 years has a ected growers’ ability to implement best out as it did not perform well enough. farming practices. • Long term supply contracts keep them in cane even • Farmers have increased the quality of their cane but the though other crops appear to be more pro table. mills are not producing more sugar from the high quality • Very high land prices put a question mark over feasibility of cane. The premise was that the size of the divisible pool sugar. would increase, but this has not happened. • High land prices limits expansion. • At the time of the farmer meetings in July / August, Felixton • Land reform had huge impact on land values as land is and Amatikulu farmers where very negative about their removed from the market. relationships with their mills, but by November 2013 there Factors impacting on cane yield: were indications that more amicable negotiations have • Stable yields under irrigation but yield has to increase to been initiated. justify cane planting on very expensive land. • Eldana is a problem when cane is left on the fi eld for more 4.1.4 Midlands – Noodsberg and Eston than 12 months. Factors impacting on cane area: • Smut problems (fungal disease). • The area planted to cane has increased in the Midlands, • With decreasing margins some farmers cut back on fertiliser mainly at the cost of grazing pastures and timber and into and best practises. areas where frost is a problem. Some new varieties are • Malelane farmers are concerned about land claims and relatively frost resistant but some farmers are now taking security of water supply. out cane in areas where they feel cane should not have • They are concerned about the sustainability of their current been planted anyway. Frost forces farmers to follow 12 production practices. month cane cycles (about 30% of Midlands farmers plant • They have very little interaction with SASRI – there do not 12 month cane). seem to be a SASRI o cer in Malelane. • Transport cost and distance to mill is the biggest limiting • SASRI agronomic practices research is focussed on dryland factor to cane area expansion. production and nothing for irrigation. • They have many crop alternatives but currently cane is • In-fi eld loading of cane impacts ratoon yields. doing well and they have diversi ed farming income • Pongola farmers feel they are losing under RV as they are streams. tied to ripening. • They have a reasonably good relationship with the millers. Factors impacting on cane yield: • Soil acidity has become a big problem as they have been 4.1.6 Identi cation of main factors applying too little lime based on SASRI recommendations. Based on large-scale growers’ feedback the main issues that They are addressing this and think yields will increase. a ected the area under cane and cane yield either directly or • The Bell loaders are effi cient and successful but cause through the change in pro tability and investment sentiment compaction and ratoon root damage with a considerable can be identi ed. These considerations are divided into e ect on cane yield. economic factors, sustainability factors and socio-political • They do not think the RV payment system has made much factors. of a di erence – they now only send their good cane to the These factors are discussed in detail in the next sections. mill. • The majority of farmers apply SUSfarm practises and soil conservation is a thing of pride for them. However, for farmers paying bonds and due to the cost of inputs, it is not always possible to follow best practices (SUSfarm guidelines). • Low rainfall last 10-12 years • Noodsberg farmers did not mention land claims but Eston farmers are very concerned about this, and it has in uenced their soil nutrition investments. They are reinvesting now, but it will take time to increase yields again. • They are generally positive about their relationship with their mills.
4.1.5 Northern Irrigated –Malelane, Komatipoort and Pongola Factors impacting on cane area: • This is a subtropical production area and there are numerous other crops farmers can produce – pro t margin – 26 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
While economic and socio-political factors can be separated production. The RV payment system and the associated and discussed individually, the sustainability factors are impact on sharing of sugarcane proceeds and the size of the inherently connected and are discussed by means of an analysis divisible proceeds pool are also discussed. of the main yield limiting agronomic factors and management thereof. 5.1 Input costs From Table 3, it is clear that labour, fertiliser, mechanisation (and 5 Economic factors associated expenses such as lubricants, fuel andmaintenance Farm-level economics in uence a farmer’s ability and costs) and transport ( eld to mill) are the major cane motivation to invest and reinvest in income generating production expenditures. Interestingly, the share of di erent production resources. Farm pro tability per hectare is a factor expenditures has not changed much over the 26 year period, of revenue, i.e. cane quantity produced multiplied by the though services (water and electricity) and administration industry negotiated price (which is based on the Recoverable (bookkeeping and audit, o ce expenses, cane levies and Value (RV)) and the cost of producing a unit of cane. In this security) have become considerable expenditures. section, the pro tability of cane farming will be analysed with Figure 14 illustrates the industry expenditure trends a special focus on the last 10 to 15 years. By analysing historic since 1985 in real terms and shows that input expenditure input trends with reference to production cost in ation, one per hectare has been increasing quite steadily since around can determine the impact of cost in ation on pro tability 2004/05 and 2005/06. which again impacts the entrepreneur’s remuneration and Table 4 quantitatively describes the trends observable in re-investment ability and thus the sustainability of cane Figure 14. Expenditure trends where rather at or even negative
Table 3: Sugar cane inputs – share of total input expenditure comparison for 1985/86 and 2011/12 Input 1985/1986 2011/2012 Change Farm Sta 29% 23% - Chemicals 4% 4% 0 Fertiliser 13% 14% + Fuels and Lubricants 7% 7% 0 Mechanical Maintenance 10% 8% - Fixture Maintenance 2% 2% 0 Services 3% 6% + Administration 2% 5% + Insurance 3% 2% - Licenses 0% 0% 0 Irrigation Costs 0% 0% 0 Sundry 2% 6% + Cane Transport 14% 10% - Rent & Leases 2% 4% + Management Salaries / Fees 6% 4% - Depreciation 3% 4% +
Figure 14: Real input expenditure trends per hectare for industry (R/ha)
– 27 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Table 4: Annual percentage expenditure change Input Annual percentage Annual percentage Annual percentage change change 1985/86-1999/00 change 2000/01- 2005/06-2011/12 2004/05 Farm Sta -0.79 -1.87 4.48 Chemicals 0.84 -3.26 5.21 Fertiliser -1.51 -0.27 8.71 Fuels, lubricants and -0.84 -4.14 3.96 maintenance Services 0.68 11.36 15.99 Administration 3.45 0.37 2.67 Cane Transport -1.14 -0.64 5.97 Management salary -2.43 -1.75 6.79
from 1985 to 1999/2000 and also for 2000/01 to 2005/06 (with per hectare. This does not bode well for pro tability for farmers’ the exception of service and administration), but between whose yields are decreasing. 2005/06 and 2011/12 cane production expenditure jumped There is little di erence between the total input expenditure considerably. Expenditure is a function of both price and per ton of cane produced for the three main production quantity and care should be taken when interpreting these regions, Coastal (average of Felixton, Amatikulu, Maidstone, industry recorded (CANEGROWERS cost survey) expenditure Gledow, Darnall, Sezela and Umzimkulu), Midlands (average of changes. For instance the decrease in farm sta expenditure Noodsberg, Eston and Union Coop) and the Northern Irrigated between 1985 and 2003/04 was due to a gradual decrease (average of Malelane, Komatipoort and Pongola). However in in farm labourer numbers, while the 4.48% annual increase standardised format (indexed with 2000 as base year) it is clear between 2005/06 and 2011/12 was to a large extent due to an that input expenditure per ton of cane produced in the Coastal increase in the wage rate. region, increased at a higher rate than that of the Midlands Figure 15 illustrates how the increasing industry input or Northern Irrigated region, thus implying that the coastal costs trends are ampli ed by a decrease in cane yield with the regions are becoming less competitive in terms of cost of increase in xed and variable cost per ton of cane produced production. Decreasing cane yields in the Coastal region is the increasing by 66% between 2000 and 2011 and only by 33% main driving factor behindthis trend.
Figure 15: Comparison of standardised real total xed and variable cost per hectare and per ton
– 28 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 16: Real total cost index for Coastal, Midlands and Northern Irrigated regions
5.1.1 Farm sta and labour illustrates the e ect of decreasing yield in the Coastal production Farm labour is the typical cane farmers’ largest production regions and the e ect this has on per ton expenditures relative cost item, whileoptions for mechanisation are limited to those areas where yield has remained relatively stable or especially in the Coastal production regions due to steep has increased. Coastal farmer farm sta expenditure per ton slopes. According to the cost surveys, farm sta expenditure of cane produced increased by 60% between 2004/05 and consists of salaries, wages, rations and other labour cost, 2011/12, while Midlands farmers spent 23% more on sta per of which wages constitutes close to 90% for most seasons. ton of cane and Irrigation farmers 32%. Farm sta expenditure per hectare remained relatively stable The 2012 review of the Sector Wage Determination for up to 2004/05 but then increased at a rate higher than the agriculture by the Department of Labour resulted in the Consumer Price Index (CPI), coinciding with the introduction minimum wage increasing from R70/day to R105/day with a of the minimum wage for farm workers. Between 2004/05 CPI+1.5% adjustment for years two and three. This 56% (year and 2011/12 farm sta expenditure per hectare for Midlands 1) cost increase in farm sta expenditure will likely have a farmers increased by 22%, while for Coastal farmers it increased signi cant detrimental e ect on the cane industry and it will by 34%, and 62% for irrigation farmers. be interesting to see how or if farmers will be able to adjust While it would appear as if the Northern irrigation farmers their production systems. spend more on labour per hectare, the graph below clearly
Figure 17: Real farm sta expenditure per hectare for the three main production regions (R/ha)
– 29 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 18: Real farm sta expenditure per ton of cane produced for the three main production regions (R/ton)
5.1.2 Fertiliser • Low phosphate supply levels in 2006 and 2007. As indicated in Table 4, fertiliser expenditure increased • Low potassium supply levels in 2007, with only a few considerably, predominately due to an above in ation companies controlling the stock. increase in fertiliser prices, especially over the period 2005/06 When considering the real fertiliser per hectare expenditure to 2011/12. International fertiliser prices increased dramatically for the di erent production regions it would appear as if the in 2007 and 2008 due to a ‘perfect storm’ of global economic Mpumalanga farmers followed the price trend (real fertiliser factors (GrainSA, 2011). The most important factors that drove index) better than the other regions’ farmers, i.e. the irrigation international fertiliser prices were: farmers did not decrease fertiliser application quantities as the • Higher demand for fertiliser due to an increase in the area price for fertiliser increased. planted to grain crops and oil seeds, driven by higher When considering the fact that Coastal cane yields have commodity prices. decreased and the coastal fertiliser expenditure trend / ton • Increased cost of nitrogen, phosphates and potassium cane harvested has remained relatively on par with that of due to the higher Brent crude oil price, which in uenced Northern Irrigated and Midlands farmers, it would appear as if transport and freight rates as well as the natural gas price Coastal farmers have in fact adjusted their fertiliser expenditure which is the main feedstock of nitrogen fertiliser. downward. This can to some extent explain the decrease in • The imposition of export taxes on nitrogen by China. cane yields on the coast.
Figure 19: Real fertiliser expenditure per hectare (R/ha and 2000 index value)
– 30 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 20: Real fertiliser expenditure indexes for production regions (2000)
Figure 21: Real fertiliser expenditure per ton cane produced (R/ton)
5.1.3 Fuel, lubricants and mechanisation maintenance increased to US$ 122 in April 2011 and settled around US$ 103 and transport in May 2013. This trend can be observed in Figure 22 where Fuel for tractors and transportation is a large contributor fuels and lubricants and cane transport costs have increased to production cost in all agricultural activities and is largely signi cantly from 2005 onwards. driven by the international oil price and the inland price which Figure 22 shows that in real terms, the cost of fuel and is determined, inter alia. by the Rand / US dollar exchange rate. lubricants has increased from R480 per hectare in 2005/06 to In January 2007 the Brent Crude Oil price was approximately R623 in 2011/12. Similarly, the cost of transport has increased US$ 54.53. Eighteen months later in July 2008, the price per from R714 per hectare in 2005/06 to R965 per hectare in barrel peaked at US$ 133.78 (an increase of 145%). The price 2011/12. dropped to around US$ 41.23 in December 2009 but again
– 31 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 22: Real fuel and lubrication, mechanical maintenance and real cane transport expenditure per hectare compared to the real fuel index (2000)
5.2 RV payment system larger share of the pool of grower proceeds than farmers The Recoverable Value (RV) cane payment system was who delivered lower quality cane. It was however anticipated introduced for the rst time during the 2000/01 milling season, that growers would respond to the new payment system by replacing the sucrose cane payment system that was used for adopting management practices that aimed to maximise more than 70 years. The implementation of the RV payment sucrose production while minimising non-sucrose and bre system was a result of an internal industry review, initiated in levels and that the size of the divisible pool, based on the 1995, aimed at improving the competitiveness of the South quantity of sugar produced by the mills, would increase and African sugar industry. One of the potential competitiveness- thus also the value of the growers’ share. improving factors identi ed, was an improvement in the It was not an objective of this study to conduct an in-depth quality of cane delivered to the mills. The SASA Cane Quality analysis and assessment of the applicability and equity of the Task Group appointed in1996, suggested that an alternative RV payment system. The impact that the payment system payment system would incentivise farmers to deliver higher has had on the pro tability and sustainability of farmers is quality cane. It was argued that the sucrose payment system however a main consideration. This section will shed light on incentivises the maximum quantity of sucrose delivered to three aspects of the RV payment system. Firstly the impact it the mill with little regard for the actual recoverable sugar has had on the division of proceeds amongst farmers, will be content of the cane (Moor, undated) and that there was no assessed. Secondly, the impact that increased cane quality has incentive for individual farmers to improve their cane quality had on sucrose and molasses production and thus the size of as the bene ts for such improvement were shared amongst all the divisible pool, will be considered. Finally the Brix minus pol growers via the industry’s proceeds sharing arrangement. With issue will be discussed in brief. this in mind the Cane Quality Task Group recommended that the RV cane payment system replace the sucrose payment 5.2.1 RV payment system’s impact on allocation of system. proceeds to farmers The RV cane payment formula incorporates the parameters The RV price, as determined by the sugar industry, remained of sugar cane quality, i.e. sucrose content, bre and non- relatively stable (depressed) for the period 2000/01 to 2005/06 sucrose sugars in such a way that farmers are penalised for but increased by 54% in real terms between 2005/06 and delivering high bre and high non-sucrose sugar cane while 2011/12, largely following the international sugar price. they are compensated for the value of the molasses recovered. Despite the increasing RV price and a lengthy period for The main objective of the RV system was to source clean (low farmers to adapt their production systems to the payment bre) and fresh (low non-sucrose sugars as linked to the burn system, farmers’ RV percentages have only increased and harvest-to-crush period) cane in order for the mills to minimally over the 11 year period since introduction in 2000. produce more sugar and grow the divisible proceeds pool to The 1987/88 to 1999/00 RV% indications were obtained from the bene t of the sugar industry as a whole (including farmers). CANEGROWERS and are based on historic sucrose and bre It was hypothesised at the time that implementation of the data and other data based assumptions. Though Figure 24 new payment system would result in a change in the division supplies a good summary of the historic industry wide RV of proceeds – farmers who produced and delivered higher percentages, the mill region speci c changes are not clear. quality sugar cane and thus more RV tons would receive a
– 32 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 23: Nominal and real RV price per ton of cane (R/ton)
Figure 24: RV percentages for di erent production regions 1987 to 2011
Despite the increasing RV price and a lengthy period for farmers regions for the twelve year period since the RV payment to adapt their production systems to the payment system, system was introduced. In Mpumalanga irrigation farmers farmers’ RV percentages have only increased minimally over were able to react to the quality incentive and were generally the 11 year period since introduction in 2000. The 1987/88 to able to combine increased quality with increased production 1999/00 RV% indications were obtained from CANEGROWERS per hectare. Irrigation farmers in Pongola did not fare as well and are based on historic sucrose and bre data and other with the RV tons harvested per hectare decreasing despite an data based assumptions. Though Figure 24 supplies a good increase in the RV%. In the Umfolozi mill region both the RV% summary of the historic industry wide RV percentages, the mill and the RV tons per hectare decreased. For Felixton the RV% region speci c changes are not clear. increased slightly over the 12 year period while the RV tons Figures 25 a-m illustrate the change in the RV% compared to harvested per hectare decreased slightly. In the Amatikulu the RV tons per hectare harvested for the di erent production region the RV% remained quite stable but the RV tons
– 33 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry harvested per hectare decreased considerably. On the North slightly increasing RV%, but with decreasing RV tons harvested Coast farmers’ average RV% trends were relatively stable with per hectare, as linked to the decreasing yields tendency, is a slight increase, but here also RV tons harvested per hectare found on the South Coast as well as the Midlands production decreased signi cantly. The same trend of a stable and / or regions.
Mpumalanga
a) Malelane b) Komatipoort
Zululand
c) Pongola d) Umfolozi
Tugela
e) Felixton f) Amatikulu
– 34 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
North Coast
g) Darnall h) Maidstone
i) Gledhow
South Coast
Tugela
j) Sezela k) Umzimkulu
f) Amatikulu
– 35 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Midlands
l) Noodsberg m) Eston
Figure 25 a-m: RV% compared to the RV tons per hectare harvested for the di erent production regions
Caution should be taken when interpreting these mill region estimates the regional advantage or disadvantage of the RV averages as RV percentages di er considerably between payment system. farmers within milling regions. What is also clear from Figures Over the twelve year period 2000/01 to 2011/12, the 25 a-m is that the Northern Irrigated and Midlands farmers total value of the change in the cane payment system, i.e. have on average consistently produced higher RV percentage the aggregate sum of the yearly monetary value that was cane than farmers in the North Coast, South Coast and di erentiallydistributed amongst growers due to the change Zululand. The average RV% for Midlands farmers and Northern from the sucrose payment system to the RV payment system, Irrigation farmers for the period 2000 to 2011 was 12.9 and adds up to just over R148.27 million (R138.46 million in 2005 12.7 percent respectively, compared to 12.0% for the South real terms). In other words, over the twelve year period, higher Coast and Zululand and 11.6% for the North Coast. RV% cane producers’ share of the divisible pool increased with While it would seem as if farmers, on average, struggled to R148.27 million and lower RV% cane producers’ share decreased increase their RV percentages signi cantly, Coastal farmers by the same amount. Table 5 indicates the average impact for especially struggled to maintain production levels. Under the di erent mill regions and, as was indicated previously, it is the new RV payment system where farmers’ compensation important to point out that there are ‘better’ farmers’ (better is linked to the quality of their cane, it thus follows that the quality soil, conditions, management, etc) within the ‘losing’ farmers in the higher RV% producing areas received a larger regions that bene tted from the RV system. However, the share of the divisible grower proceeds than the lower RV% average picture, on which policy and decisions tend to be and decreasing tons per hectare farmers on the coast. It is thus made, is quite clear. The lion’s share of the R148.27 million was of interest to compare the returns to cane for farmers under received by Midlands farmers in Eston (28%), Noodsberg (25%) the RV payment system to that of the previously used sucrose and Union Coop (13%) who produced higher quality cane and based payment system. was lost by farmers in Felixton (36%), Maidstone (23%) and By comparing actual RV tons and price and assumed (based Sezela (12%) who produced lower quality cane. on CANEGROWERS historic data) sucrose tons and price for the Under the RV payment system (compared to the sucrose di erent milling regions it is possible to calculate the bene t payment system): or cost to farmers for the RV payment system compared to • Felixton, Darnall and Maidstone milling regions were the sucrose payment system (see Table 5). All data for these worse-o in every season, calculations was obtained from CANEGROWERS. It is important • Amatikulu farmers on average were better-off for 4 from 12 to note that these calculations are based on the actual cane seasons, tons produced when farmers were producing with the RV • Gledhow farmers were better-off in 3/12 seasons, payment system in mind. It is possible that if farmers were not • Interestingly, Umfolozi farmers were better-off for 10/12 farming for RV but for sucrose, their production practises might seasons while Pongola irrigation farmers were only better- have been di erent to optimise sucrose with disregard for o in 3/12, bre and non-sucrose sugars. It is also true that if farmers were • Malelane and Komatipoort farmers were better-off in 10/12 not (more strictly) nancially incentivised to produce higher and 9/12 seasons respectively, quality cane, their sucrose levels would have been lower. It is • Noodsberg and Eston farmers were better-off in every thus not totally clear whether the comparison under- or over- season while UCL were better o in 11/12 seasons,
– 36 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry 4.20 1.83 -6.46 -5.62 17.82 15.94 18.62 41.63 36.46 11.77 -18.28 -14.99 -34.26 -15.65 -53.00 12 years Total for for Total - - 9.41 7.14 3.10 0.29 0.18 3.34 0.91 -6.67 -0.45 -4.25 -5.85 -3.40 -3.75 2011/12 - 4.23 1.25 1.26 1.97 5.40 3.95 0.08 -3.39 -2.79 -3.45 -2.23 -0.13 -4.67 -1.48 2010/11 - 2.29 2.39 1.26 1.29 2.83 3.50 0.42 -2.49 -2.24 -1.62 -1.21 -0.18 -4.78 -1.47 2009/10 - 1.33 1.63 0.47 0.54 4.48 3.88 0.10 -2.47 -1.02 -0.97 -1.16 -5.57 -0.52 -0.72 2008/09 - 1.86 0.56 1.26 0.41 1.31 4.55 3.00 -1.23 -1.88 -0.12 -1.64 -6.03 -0.88 -1.16 2007/08 - 1.55 1.80 1.55 2.45 2.06 0.14 1.83 -0.19 -1.25 -1.55 -0.64 -1.54 -6.00 -0.22 2006/07 - 1.67 2.27 3.66 2.60 0.46 1.50 -3.08 -1.63 -0.11 -2.38 -0.72 -0.73 -3.31 -0.20 2005/06 - 0.57 0.25 0.65 2.38 1.27 1.24 0.29 -0.59 -0.10 -0.37 -2.54 -0.83 -0.54 -1.66 2004/05 1.55 0.76 2.81 4.43 4.68 0.54 0.82 -2.75 -1.06 -0.48 -2.80 -0.76 -1.98 -4.73 -1.04 2003/04 0.09 0.50 0.50 1.17 2.54 2.64 3.71 0.02 0.36 0.90 -3.61 -1.38 -0.86 -5.60 -0.96 2002/03 1.57 1.24 2.96 3.64 5.51 0.13 0.47 2.17 0.48 -0.95 -3.41 -1.85 -5.30 -2.16 -4.48 2001/02 1.93 1.57 1.19 2.06 2.01 0.73 0.47 0.89 -1.10 -2.51 -1.37 -2.32 -1.06 -2.43 -0.05 2000/01 Mill Komatipoort Malelane Umzimkulu Sezela Union Eston Noodsberg Gledhow Maidstone Darnall Amatikulu Entumeni Felixton Umfolozi Pongola Table 5: RV vs sucrose payment system - impact for each mill area (in million Rands for the speci c season) - impact for the speci payment system 5: RV vs sucrose (in million Rands for each mill area Table
– 37 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
• On the South Coast, Sezela farmers were better-off 4/12 is suggested that farmers follow up with their mills if there is seasons while Umzimkulu farmers were better o in 7/11. any doubt about this compensation payment or the value of In order to make the switch from a sucrose payment system any other subsequent compensation schemes as the 2000/01 to the RV system, the sugar mills agreed to pay farmers a agreed compensation rate and assumed compensation ‘compensation for farming for RV’ fee. This fee was negotiated by payment stream has a considerable direct nancial impact each mill with their farmers and is summarised in Table 6. While (mainly for the farmers receiving a per ton compensation). most mills negotiated a compensation rate per ton, Northern Though these compensation payments were linked to Irrigation region farmers agreed to a ripener subsidy, an input potential increased production costs related to ‘farming for directly linked to ‘farming for RV’. The agreed rate per ton was RV’, farmers in mill regions who bene tted most from the to be adjusted each year by the year-on-year change in the RV new payment system received smaller payments from their price and paid to farmers in March based on the tonnage of mills than the farmers in regions where the RV system had a cane delivered by each farmer. The gures in Table 6 were not detrimental impact. Based on the ‘loss’ calculations and the obtained from CANEGROWERS or farmers but were calculated compensation rates for Amatikulu, Felixton and Maidstone, using the formula described in a 2003 CANEGROWERS it would appear as if the Sezela farmers’ negotiated rate was Division of Proceeds working group report (D.09/47) and the comparatively low. actual rates reported for 2000/01 and 2003/04 are also based By applying the compensation rates to the per ton RV vs on this document. Actual compensation rate data for the sucrose advantage / disadvantage comparisons it is possible other seasons was not available. According to this document to calculate a direct net nancial impact of the new payment (D.09/47) the agreed compensation for irrigation farmers was system, as re ected in Figures 26 a-j. It is important to note 50% of ripeners for Pongola farmers, and 75% of ripeners for that these graphs only illustrate the direct payment net e ect Komatipoort and Malelane farmers. and do not take possible changes in the production system Based on conversations with farmers and CANEGROWERS (potential changes in input expenditure) due to ‘farming for it was not clear whether all farmers received this agreed RV’ into consideration. Graphs for the Irrigation region are not compensation or whether these compensation payments were presented as the direct nancial impact of a ripener subsidy is actually made for the full study period 2000/01 to 2011/12. It not clear and not all irrigation farmers make use of ripeners.
Table 6: RV compensation payments (R/ton of cane) 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Umfolozi 0.650 0.740 0.905 0.916 0.908 0.868 0.930 1.139 1.139 1.346 1.529 1.722 2.020 Felixton 1.250 1.422 1.740 1.762 1.747 1.670 1.789 2.191 2.191 2.589 2.940 3.311 3.884 Amatikulu 1.100 1.252 1.532 1.550 1.537 1.469 1.574 1.928 1.928 2.278 2.587 2.914 3.418 Darnall 1.000 1.138 1.392 1.410 1.397 1.336 1.431 1.753 1.753 2.071 2.352 2.649 3.107 Maidstone 1.250 1.422 1.740 1.762 1.747 1.670 1.789 2.191 2.191 2.589 2.940 3.311 3.884 Gledhow 0.900 1.024 1.253 1.269 1.258 1.202 1.288 1.577 1.577 1.864 2.117 2.384 2.797 Sezela 0.450 0.512 0.627 0.634 0.629 0.601 0.644 0.789 0.789 0.932 1.058 1.192 1.398 Umzimkulu 0.400 0.455 0.557 0.564 0.559 0.534 0.572 0.701 0.701 0.828 0.941 1.059 1.243 Noodsberg 0.300 0.341 0.418 0.423 0.419 0.401 0.429 0.526 0.526 0.621 0.706 0.795 0.932 Eston 0.500 0.569 0.696 0.705 0.699 0.668 0.716 0.876 0.876 1.036 1.176 1.324 1.554
– 38 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Zululand
a) Umfolozi b) Felixton
Tugela
c) Amatikulu
North Coast
d) Darnall e) Maidstone
– 39 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
North Coast
f) Gledhow
South Coast
g) Sezela h) Umzimkulu
Midlands
i) Noodsberg j) Eston
Figure 26 a-j: Net impact of the RV payment system compared to the sucrose payment system, after farming for RV compensation is taken into consideration – 40 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Under the RV payment system (compared to the sucrose pay- 2000/01 to 2011/12, with the compensation payment includ- ment system) and with the additional compensation payment: ed, they were better-o under the RV payment system 9 out of • Umfolozi farmers were on average better-off , in direct pay- the 12 seasons. ment terms, in all 12 seasons, For the mill regions where farmers were largely worse-o • Felixton farmer were better-off in 4 from 12 seasons, under the RV payment system (Felixton, Maidstone and Sez- • Amatikulu farmers were better-off 11 from 12 seasons, ela and to some degree Gledhow), losses were increasingly • Darnall farmers were better-off 9 from 12 seasons, severe in the last four to ve seasons and it would seem as if • Maidstone farmers were better-off 5 from 12 seasons, the income share that mainly Coastal farmers are losing to the • Gledhow farmers were better-off 7 from 12 seasons, higher quality cane producers, is increasing. The simplistic cal- • Sezela farmers were better-off 5 from 12 seasons, culation in Table 7 sheds light on why coastal farmers seem to • Umzimkulu farmers were better-off 9 from 11 seasons, be ‘losing’ at an increasing rate. As Midlands (and other farmers • Noodsberg and Eston were better-off in all 12 seasons. – some also on the Coast) produce increasing volumes of high From the above it is clear that the ‘farming for RV’ compen- quality cane and Coastal farmers produce less (or just relatively sation payments, had, if indeed these payment were made, a less) cane which is generally of a lower quality, the divisible substantial impact on whether production regions were ad- pool share for the farmers producing less and low quality cane vantaged or disadvantaged (based on direct payments) by the decreases at a faster rate than what would have been the case RV payment system. Excluding Entumeni and the Irrigation under the sucrose payment system, with the causative factor regions from the comparison, under the RV payment system being the di erence in the RV%. there were 68 region speci c ‘negative impact seasons’ and 64 Despite an increase in the real RV price and additional com- ‘positive impact seasons’ over the twelve year period. If com- pensation payments, revenue per hectare (cane quantity x pensation payments were made as was agreed in 1999/2000, price) remained relatively constant (Figure 27) in the Midlands the number of negative seasons, based on direct payments, and Coastal areas due to generally lower yields. With more would have decreased to 33 seasons. For instance, where the consistent yields under irrigation, Northern Irrigation farmers RV vs sucrose payment system comparison in Table 5 showed were able to make the best of higher cane prices and revenue that Darnall farmers on average were worse-o every season per hectare increased by 66% between 2007/08 and 2011/12.
Table 7: Share of divisible pool comparison under RV and sucrose payment systems, for di erent production scenarios Farm region Tons delivered RV% RV tons Share under Share under % Di erence sucrose RV Situation 1 Midlands 1000 15 150 50% 56% Coastal 1000 12 120 50% 44% -12.5 Situation 2 Midlands 1200 15 180 55% 60% Coastal 1000 12 120 45% 40% -13.6 Situation 3 Midlands 1200 15 180 60% 65% Coastal 800 12 96 40% 35% -15.0
Figure 27: Real revenue per hectare for di erent production regions (R/ha) – 41 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
5.2.2 RV’s impact on sugar production cane. Figure 28a compares the total industry RV% and sugar A key premise of the motivation to move to the RV payment extraction per RV ton. By tting a polynomial trend line it is system was that the production of higher quality cane would possible to observe the impact of regime changes (compared result in an increase in sugar production by the mills. It was to a linear trend line where the average trend is indicated). anticipated that production of higher quality cane by farmers While industry RV% has shown an increasing trend since the would result in an increase in sugar revenue and a reduction middle 1990s, the industry sugar extraction rate per ton of RV in molasses proceeds with an overall increase in industry pro- has decreased considerably since the introduction of the RV ceeds and thus the size of the divisible pool (Moor, undated; system in 2000 and especially after 2005. This same trend is Hackman 1999). It is however clear from Figures 28 a-e that observable to a greater or lesser degree in all the main produc- sugar mills did not extract more sugar from the higher quality tion regions (Figures 28 b-f).
a) Industry
b) Northern Irrigated
– 42 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
c) Zululand
d) North Coast
– 43 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
e) South Coast
f) Midlands
Figure 28 a-f: Comparison of RV% with sugar extraction per RV ton
– 44 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
The reason for this apparent declining mill e ciency is not to- cake and undetermined losses. A number of mills (mainly on tally clear. Farmers and other industry role-players have sug- the Coast) have been running substantially below capacity as gested a number of possible reasons, including: cane production levels have decreased and it appears as if this • Ageing mills has impacted negatively on sucrose extraction. However in • Increasing investment in sugar activities and mills in the rest the Northern Irrigation and Midlands areas where production of Africa by sugar companies, at the cost of local mills’ im- and mill throughput have been increasing or have remained provement and maintenance budgets relatively constant over the period 2001 to 2012, extraction ef- • Experienced and key mill personnel being relocated to “rest ciency has also declined. of Africa” mills Figure 30 illustrates the trends in sucrose losses depicted by • Insuffi cient cane supply for mills to run near capacity (low the increasing sucrose percentages in especially molasses and throughput) bagasse and undetermined sucrose losses, albeit hiding con- • Declining profi tability of sugar milling in South Africa siderable variation between mills. Though it can be expected • Increased profi tability of molasses that a certain percentage of sucrose cannot cost e ectively It is not clear whether mills’ declining sugar extraction is be extracted from cane, it is the increasing sucrose loss per- linked to a conscious business decision or if it is symptomat- centage that is of concern. A few mills, including Amatikulu, ic or the causative factor of the general declining cane and Darnall, Komatipoort and also Felixton (since 2008) have seen sugar pro tability trend. A comprehensive assessment of the a decrease in the sucrose percentage in molasses but the re- reasons for this decline falls outside the scope of this study. maining mills have seen an increase. Union Coop’s molasses It is however clear from Figure 29 that there is a strong link sucrose percentage has increased remarkably, albeit from a between harvested and milled cane tonnage (throughput) low level, and is still well below the industry average. and the amount of sucrose ‘lost’ to molasses, bagasse, lter
Figure 29: Comparison of industry cane tons harvested and mills’ extraction ‘e ciency’
– 45 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 30: Industry sucrose loss percentage – sucrose content in nal molasses, bagasse, lter cake and undetermined losses
In addition to the increase in sucrose percentage in molas- concern as they, the growers, are penalised (through a lower ses, the sucrose content in bagasse and the undetermined cane quality valuation) for what they perceive to be a miller losses have also increased to the detriment of both parties. problem. Even though a decline in the extraction rate of one or two per- In April 2002 the Industry established a task team compris- cent seems small, the impact this has had on sugar produced ing of members of Cane Testing Service (CTS), CANEGROWERS is substantial especially for cane producers. A lower sugar to and Tongaat-Hulett Sugar (THS) to investigate the matter. Dur- RV tons ratio means amongst others that more sugar is ‘lost’ ing the 2002 and 2003 milling seasons a wide range of inves- to the divisible pool (of which farmers get a larger share) and tigations where undertaken and a nal report was submitted. more higher value molasses (of which farmers receive only a Though the researchers were able to identify and eliminate relatively small share) is produced. The average sugar to RV many factors, no de nitive contributory factors could be iden- tons extraction rate (Sugar%RV) for the 10 years 1996/97 to ti ed to explain the untoward Brix minus pol factor di erences 2005/06 was 95.4% while the average for the six years 2006/07 at Felixton (Ravno, 2005). The study identi ed two issues for to 2011/12 was 93.9%. If the 2000/01 industry extraction rate further investigation, namely the method of bagasse analysis (96.81%), which is the highest in the twenty- ve years since used in the SA sugar industry and the impact of speci c Fe- 1987, is used as the achievable benchmark, farmers have lost lixton di user operating conditions. A number of subsequent out on their share of proceeds from more than 565 000 tons of studies and reviews including amongst others Barker (2005), sugar (in total) over the eleven years 2001/02 to 2011/12. Barker and Davis (2009) and Barker and Davis (2010) have not been able to shed much more light on Felixton’s high brix-pol 5.2.3 Felixton’s Brix minus pol issue issue. The SMRI technical report - Consolidated Report on Ex- In order to ensure that there are no sucrose losses across the traction Audit of South African Factories by Davis and Barker extraction plant prior to the massing and analysis of mixed (2010) concluded: juice, a number of factors are monitored at each mill, includ- “It appears that there are two issues at FX. There is a system- ing the weekly pol and Brix factors. The Brix minus pol factor atic in ation of both Brix and pol factors resulting from an un- has been an issue of concern for some time for the industry known cause that a ects both factors together (such as mass- and when the RV payment system was introduced in 2001 and ing, sampling or mass balance calculations), but which varies cane purity became a crucial factor in cane value calculation, in extent from season to season. Secondly, there appears to be the actual extent and impact of the issue became apparent. a consistent pol loss in the extraction plants leading to low pol The Brix minus pol factor varies over seasons and between factors that only become apparent once the systemic devia- mills but the Felixton mill’s Brix-pol factor has been higher tions are reduced. This highlights that the high Brix-pol factor than the industry accepted norm for most seasons. Felixton di erences are most likely due to a low pol factor and not a farmers have indicated this untoward Brix-pol factor as a major high Brix factor. This is con rmed by large negative MJ – DAC
– 46 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry purities for FX in most seasons………During the audit there able Brix-pol factor would have made on farmers’ bottom line, was a large purity drop across the di user(s) of between 16 but from the next section on pro tability it is clear that pro t and 17 units. FX also returns shredded cane that has spilled to margins, especially on the Coast, have come under consider- the oor back to the di user on a weekly basis. This will also able pressure. lower the pol factor.” Even though it impacts on cane quality assessment, pricing 5.3 Pro tability and as a result on farm turnover and pro t, a technical investi- Based on the preceding discussions on increasing production gation into mill e ciencies falls outside the scope of this BFAP costs and a relatively de ated revenue for most regions, it will project. A considerable amount of work has been done on this come as little surprise that cane grower pro tability has been issue by specialists over an extended period of time and still decreasing. While a number of low rainfall seasons impacted the issue has not been resolved. In the 2012/13 CANEGROW- dramatically on especially dryland yield and thus pro tability, ERS Board of Directors’ reported that it is conceded that “The the correlation between the increased production expenditure cause of the problem at Felixton remains a mystery and the and the decreasing real net income is apparent from Figure 31 long-term implications remain a concern.” below. Where real net income per hectare before deduction of The 2009 “high Brix minus pol factor di erence” and “low pol a management salary, interest and tax was relatively consist- factor” compensation agreement between Felixton growers ently in the R2 000 to R3000 range in most of the 1980s and and THS seems like a step in the right direction in the absence 90s, it dropped to below R2000/ha from the 2003/04 season of a technical solution. Under the sucrose payment system the and remained there for seven out of the nine seasons up to Brix-pol factor was not an issue and its impact on cane pay- 2011/12. ment was not contemplated when the 2000 Sugar Industry The average industry trends however hide considerable dif- Agreement was concluded (Melmoth Growers and others v ferences between the production regions. For Coastal farmers THS, 2008). Though the compensation agreement is a posi- for the period 1985/86-1999/2000, the average earnings be- tive intervention, Felixton large-scale growers and small-scale fore management salaries, interest and tax (EBSIT) was 24% of growers cane area have decreased by more than 11 000 hec- revenue, while earnings before interest and tax (EBIT) was 18% tares since the introduction of the RV payment system. How and net income was 13% of revenue. For the period 2000/01 much of this decrease can be attributed to the Brix-pol issue is to 2011/12 these gures decreased to 16, 11 and 6 percent not clear. respectively. It is quite clear that it would have been very dif- Calculating the compounding nancial e ect of the un- cult for Coastal farmers to earn a living and repay a bond after toward Felixton Brix-pol factor on growers is by no means 2002/03. The 1985/86-1999/00 average net farm income (be- straight forward and would require a considerable amount fore tax) per hectare, in 2000 real terms, was R1 255 and this of time, data, insight and miller cooperation. To the BFAP re- decreased to R630 for 2000/01-2010/11 and R337 for 2003/04- searchers it is not exactly clear how big a di erence an accept- 2010/11.
Figure 31: Industry pro tability per hectare (R/ha)
– 47 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 32: Coastal milling regions pro tability per hectare (average for Amatikulu, Felixton, Darnall, Maidstone, Gledhow, Sezela and Umzimkulu)
Figure 33: Midlands pro tability per hectare (average of Noodsberg, Eston and UCL)
The picture for the Midlands looks considerably better but it For the Irrigated areas the picture is considerably di erent is clear that the same decreasing pro tability trends persist. with pro tability increasing after dropping dramatically for the Up to 1999/2000, the average EBSIT was 28%, EBIT 25% and 2004/05 season and again in 2007/08 due to drought and ir- net income was on average 19% of revenue. For the period rigation restrictions. While Coastal and Midlands farmers’ prof- 2000/01-2011/12 pro tability decreased to a 22% EBSIT, 17% itability have decreased, the Northern Irrigated farmers’ pro t- EBIT and 14% net income. The 1985/86-1999/00 average net ability seems to be increasing. farm income (before tax) per hectare, in 2000 real terms, was For small-scale growers the pro tability picture is even R1 628 and this decreased to R1 330 for 2000/01-2010/11 and worse than that of the large-scale Coastal growers. According R1093 for 2003/04-2010/11. to the FIRCOP project report (2011), more than 70% of small-
– 48 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
Figure 34: Northern Irrigated regions pro tability per hectare (CANEGROWERS’s’ calculations) scale growers had an average yield of less than 30 tons per The RV payment system that was implemented for the rst hectare and 68% of small-scale growers who delivered cane in time for the 2000/01 season had an impact on farmer revenue 2008/09, delivered less than 50 tons. As a result the net return by altering the proportions of the divisible pool, largely to the from cane farming was less than the minimum wage for most bene t of Midlands and Northern Irrigation farmers and to the small-scale farmers - they would have been better o selling detriment of Coastal farmers. The direct net nancial impact of their labour at the minimum rate, than farming themselves. the payment system, after ‘farming for RV compensation’ was Bates Consulting (2005) seen in CANEGROWERS (2012) noted taken into consideration, is however, in the context of increas- that “If growers do not nd themselves involved in a pro table ing input costs, depressed RV price 2001/02-2005/06 and ad- activity they will give up”. This is exactly what is happening. verse weather conditions not as substantial as some farmers Though rainfall conditions were slightly better in other sea- would argue. sons compared to 2008/09, the limited pro tability of cane A key premise for the introduction of the RV payment sys- farming (relative to minimum wage and welfare grants) for tem was that increased cane quality would lead to increased small-scale growers resulted in a dramatic drop in small-scale sugar income. Though farmers generally reacted to the RV% grower area under cane (47 113 ha or 50.6% between 1996/97 incentive and produced and or delivered higher quality cane, and 2012/13), while their numbers also dropped (by 14 015 sugar mills did not produce more sugar from the higher qual- farmers between 1996/97 and 2012/13). ity cane. Sugar extraction rates have decreased to the detri- ment of both millers and growers, but growers seem to have 5.4 Economic factors – conclusion lost more as their share of molasses proceeds is smaller than The pro tability of cane farming has decreased considerably that of sugar. for dryland farmers since the early 2000s and especially for The dire combination of increasing input costs and a Coastal farmers. Midlands farmers’ net farm income percent- number of seasons with low rainfall resulted in decreased in- age for the period 2000/01 to 2011/12 has decreased by 26% vestment by farmers in the maintenance of their productive while Coastal farmers’ percentage has dropped by 54%. resources means. For cane farmers this mainly translates into Increasing input prices played a substantial role in the dwin- lower application of fertiliser and other soil nutrition products, dling pro tability. The real average industry expenditure per less replacement of old cane and less use of seed cane. A num- hectare of cane increased by 33%, driven mainly by increased ber of farmers indicated that they just cannot a ord to apply fertiliser, labour and fuel prices. the much needed chemicals and, with consecutive dry sea- Though the RV price did not increase between 2002/03 and sons, the situation worsened even further and farmers were 2005/06, it did increase by more than 50% from 2005/06 to not able to return to best production practises. As indicated by 2011/12. Farmers’ reaction to the price increase was however Richards et al. (2005) “...it is hard to be green when you are in limited by amongst others drier than normal conditions. The the red.’’ 12 years 2000/01 to 2011/12 saw a number of low and very A number of Coastal large-scale growers however indicated low rainfall seasons and few average to good seasons. that the unintended impacts of farming for RV, i.e. impacts on
– 49 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry the production system, might have had a larger impact on South Coast sustainability and longer term pro tability of cane production 1. Soil acidity (both sub and top-soil) than the direct nancial losses su ered by lower quality cane 2. Decrease in organic matter (burning vs trashing) producers. This issue and the main agronomic factors that im- 3. Decreased age of cane at harvest in response to Eldana pacted on yield and farmers’ production systems will be ad- 4. Poorer weather dressed next. Midlands 6 Sustainability 1. Compaction from increased mechanisation (Bell loader) During interviews conducted with cane growers in the various 2. Decreased fertiliser milling areas, many causes for the decline in cane yield were 3. Decreases in soil organic matter (burning vs trashing) raised. Interestingly, similar agronomic factors were raised in 4. Limited investment while land under claim nearly all milling areas, whether Coastal, Midlands or Irrigated. These included the e ect of increasing Eldana pressure, con- North Coast sequential shortening of ratoon cycles to 12 months, poor 1. Poorer weather ratoon-ability of newer cane varieties, soil acidi cation and 2. Decrease in soil organic matter content (burning vs trash- nutrient depletion of soils, high incidence of Thrips and Nema- ing) tode problems and increased weed pressure. These were also 3. Decrease in area under cane that is trashed at harvest the factors identi ed by the recent SASRI study (Jones, 2013), 4. Decreased age of cane at harvest in response to Eldana and are thought to have caused yields to decline system- 5. Increase in sub-soil acidity atically over the past 10-15 years, putting the pro tability of many farms under pressure as was shown above. This has led Zululand to changes in farming practices and reduced reinvestment in 1. Poorer weather farms. Many farmers have indicated that at the moment (2013), 2. Decreased age of cane at harvest in response to Eldana they just cannot nancially a ord to apply good agronomic 3. Increased pest pressure practices (liming acidic soils and trashing their elds or apply- 4. Compaction from increased mechanisation ing essential plant nutrients such as phosphates and trace ele- 5. Stool damage due to increase mechanisation ments). 6. Increase in sub-soil acidity As the investigation into the agronomic factors causing the 7. Decrease in soil organic matter (burning vs trashing) decline in yield was progressing it became clear that despite all the negative agronomic factors in each milling area, there Irrigated North seemed to be a big di erence in sustainability of the top 25% 1. Compaction from increased mechanisation producers, who were still making a reasonable living, and the 2. Stool damage from increase mechanisation bottom 25% producers who were under pressure and going 3. Decreased fertiliser out of business. Upon closer investigation it was established 4. Decrease in soil organic matter (burning vs trashing) that the top 25% were, to a large extent, still managing to fol- 5. Poorer weed control low sustainable farming practices, which led to better yields, 6. Decline in irrigation e ciency better cane quality and better returns on investment. It was found that less herbicides and pesticides were used, bringing These factors, raised in the various regions, correspond to the down their exposure to increasing chemical input costs. These issues indicated during the farmer discussion meetings and producers also managed to take o more ratoons before the seem to be interlinked - in many cases one issue leads to the cane had to be replanted, with resulting savings on establish- next problem. This initiates a negative cycle which develops ment costs. into an environment where sustainable production of cane Declining cane yield is a complex issue and needs to be is nearly impossible. In an attempt to address all factors in a approached from a cross-disciplinary perspective as no single sensible manner, a cross-disciplinary investigation needs to factor addressed in isolation can give the desired outcome. be undertaken. The upside of this tall order is that extensive A brief summary of the agronomic factors raised in the vari- research has already been done by SASRI on many of these ous milling areas will be presented to set the background for factors and only needs to be integrated into a logical manage- further detailed discussions on speci c issues raised. The main ment approach. contributing factors to the decline in sugarcane yield will be discussed separately and will then be drawn into a logically 6.2 Analysing each factor in the context of consistent management approach to address the decline in Sustainability yields. Wherever a farming system’s sustainability is under pressure, 6.1 Main agronomic factors limiting sustainability it is necessary to dissect each contributing factor and try to The SASRI study by Jones (2013) lists a number of mill region link its causes and e ects with as many of the other contrib- speci c reasons for cane yield decline, in order of importance uting factors as possible. In most cases it becomes evident as indicated by the large-scale growers. that one aspect can trigger a whole chain of events which can have devastating e ects on a farming enterprise. The question – 50 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry is often raised why the yields in maize have increased substan- can save 40kg of nitrogen at R10/kg of N per year. This is a sav- tially in the past decade, but that yields in the sugar industry ing of R 400 per hectare per year on fertilizer. This needs to be have declined. The answer lies rst and foremost in the fact monitored by analysing the carbon % as well as the inorganic that sugar is a perennial crop which is grown in a monoculture nitrogen levels in the soil. system, whereas maize is an annual crop where crop rotation Given the above bene ts of humus and organic carbon on soil (especially with legumes) is practiced. This makes a di erence fertility and cane production in general, it makes sense to in- in soil fertility and tilth. The soil biology is also much more di- vest in humus building practises, i.e. trashing. verse and balanced, which reduces the prevalence of root dis- eases and insect pressures. In short, it is easier to implement 6.2.2 Increasing soil acidity on sugarcane elds Best Management Practises in a maize system than in a sugar Soil acidi cation is a common problem in conventional mono- system. cropping systems and needs to be managed very carefully in The following factors were identi ed as contributing to the de- order to avoid crop limiting soil conditions. The limiting factors cline in yields under the current sugarcane production system. of acidic soils are the following: toxic levels of aluminium and manganese cause a reduction in the cation exchange capac- 6.2.1 The decline in organic carbon levels in the soils ity of the soil and reduce the availability of phosphate, which The increasing practise of burning instead of trashing has led creates a ’low energy’ plant which is susceptible to diseases. to decreased organic material in the soil. Organic carbon or hu- Another e ect of soil acidity is limited accessibility of macro- mus is the foundation upon which soil fertility and tilth is built. nutrients such as calcium, magnesium and potassium (Bohn During the break-down process of organic matter, a wide host et al. 1985, p.153). of micro-organisms and macro fauna is stimulated, thereby These factors combined, result in restricted root develop- creating a biologically well balanced soil. Such a biologically ment, which leads to poor water usage and nutrient uptake active soil reduces the prevalence of plant pathogenic organ- (Passioura 1992). A small root system also results in less organic isms in that bene cial microbes compete with pathogens for carbon in the soil and poor ratoon-ability. If these factors and nutrients and root space. the combined e ect they have on the yield of a sugarcane During the humi cation process, the microbes secrete crop are taken into account, it should be clear that a proper sticky “gum-like” mucilages (Wright and Upadhyaya, 1996; Co- liming program for all acidic soils is essential (Marschner 1995, mis, 2002), which bind the soil particles together. This gives the pp.626-643, Trapnell and Malcolm 2004). soil a crumb structure and improved tilth. This aerates the soil which in turn improves water in ltration and lowers water run- 6.2.3 The depletion of certain essential plant nutrients o (water from e.g. thunderstorms can be used more e cient- ly). It also promotes vigorous root growth and reduces com- With dwindling pro ts and socio-political issues such as land paction, which is a problem in modern sugarcane production. restitution claims and land reform generally, many farmers are There is also a correlation between new root development and applying only certain macro-nutrients that are regarded as ’es- ratoon-ability i.e., the bigger the root system, the better the sential’.. This has resulted in the ’mining’ of sugarcane elds in new ratoon. the sense that more nutrients are being removed by the crops Humus can also hold 80-90% of its own weight in moisture than are being replenished. Because many farmers were not (Whitehead et al., 2006). This dramatically improves a soil’s abil- conducting regular soil and leaf analyses, they did not realise ity to sustain a crop under drought conditions. When consid- the serious extent of the nutrient depletion that was occurring. ering that drought and the stress caused by water de ciency Nutrients which showed the biggest de ciencies were: cal- has been one of the main reasons for declining yields in the cium, phosphate and silica. rain-fed areas, it makes sense to invest in building humus and Because farmers regarded the value of lime as purely its organic matter in soils. This also has an e ect on the severity ability to address acid saturation or aluminium toxicity, the of Eldana infestation, as statistics have shown that in drought true value of the calcium in the lime as an essential mineral years, the Eldana infestation has been signi cantly higher than nutrient was ignored (Trapnell and Malcolm 2004). The true in years of good rainfall. value of calcium lies in the fact that it is a big ion which has The biochemical structure of humus enables it to bu er the ability, when in solution, to move in-between the colloidal acidic or alkaline conditions in soils. In the light of acidi ca- plates in the soil and by doing this to occulate the soil. This tion of the top- and sub soils being highlighted as one of the creates little air pockets which aerates the soil and improves reasons for declining yields, it will de nitely alleviate the ef- soil tilth. Soils with good calcium levels possess better wa- fect of acidic soils on the plant. Humus is a colloidal substance ter in ltration, are less prone to surface capping and tend to which greatly improves the soil’s ability to retain nutrients and compact less when heavy machines move over it. Soils high prevent them from leaching. It improves the cation exchange in calcium are conducive to good root growth, which in return capacity (CEC) of the soils - this is a big problem especially on promotes e cient nutrient uptake and better ratoon-ability. the light sandy soils on the Coast. This improves the sustainability of a sugarcane eld dramati- Organic carbon can release an estimated 75-80kg/ha of Ni- cally. Farmers who addressed the calcium requirements indi- trogen for every 1% of carbon in the soil. This mineralizes over cated that they were able to take o between four and eight a 12 month period. If a soil’s carbon percentage is increased ratoons more than they were able to sustain on elds where by 0.5% by trashing the cane instead of burning it, the farmer the calcium levels were de cient. At a re-establishment cost – 51 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry of about R20 000/ha, the costs of supplementing the calcium a few ratoons. With the high costs of re-establishing cane, this levels in the soil are negligible. Addressing calcium de cien- seriously a ects the sustainability of the farming enterprise. cies also signi cantly reduced the prevalence of grass weeds in the cane elds, which also resulted in big savings on chemical 6.2.5 Increasing insect pressure – Eldana, Thrips and herbicides. Nematodes Another important bene t of calcium is its function as a cell When studying all the research and data on crop quality and wall binder, which means it strengthens the plant cell walls yield, it is clear that parasitic insects such as Eldana have had and by doing this increases the plant’s resistance to diseases a major e ect on the sustainability of sugarcane farmers in (RSD and smut) and insects (like Eldana and Thrips.). It is also on the rain fed warm Coastal areas. Due to the damage caused this function of calcium where the importance of silica comes by Eldana saccharina – the African sugarcane borer, coastal in. Silica in combination with calcium enhances the cell wall farmers are forced to harvest immature low RV% cane after 12 strength to such an extent that it was proven that the addition months instead of mature high RV% cane at 14 months. Imma- of silica resulted in a signi cant reduction in Eldana damage ture cane has higher non-sucrose levels (glucose and fructose) (Kvendaras et al., 2006). This makes the supplementation of as the plant has not had time to convert these into sucrose. silica a must for all the Coastal areas that struggle with Eldana Under the RV payment system the farmers are penalised for infestations. Sources of silica are calcium silicate (slag) and dia- non-sucrose sugars. The yields have also declined because of tomatious earth. the shortened growing season. Many growers indicated that The third plant nutrient found to be de cient in sugarcane since they started farming for RV and started to burn their is phosphate. The de ciency in many cases seems to be more cane, the Eldana infestation has increased. A few farmers, who related to the poor movement of phosphates in soils as well as were still trashing their cane elds, indicated that they had less phosphates being locked and unavailable to plants due to soil Eldana on the trashed elds. This and research on Eldana indi- acidity. In a system where the cane is burnt prior to harvesting, cates that “stressed” sugarcane is more susceptible to Eldana, the soil is left barren. This leads to the topsoil drying out and than “healthy”, vigorously growing cane. In order to nd a solu- also capping. In conditions like this, the roots of the cane seem tion to the problem, one needs to understand why a stressed to be absent in the top 50mm of the soil. Because of the poor plant attracts parasitic insects more than a healthy plant. movement of phosphates in the soil, the applied phosphate The answer to this question was researched by Chaboussou often doesn’t reach the roots. The moment a trash-blanket is (1985) who focussed on the digestive system of plant parasitic left on the soil, the soil doesn’t dry out that much and the soil insects. He found that these insects could only digest plant surface does not cap because of the organic carbon released cells full of free nitrogen, amino acids and reducing sugars and by the trash. In such an environment, the roots grow vigor- that insoluble, complete proteins were of no nutritional use ously in the topsoil and are able to take up the phosphate. The to them. He established that the relationship between a plant moment the phosphate levels in the plant go up, the plant’s and the parasites was primarily nutritional in nature. Predomi- “energy” levels (ATPases) increase and the plant is able to syn- nance of protein synthesis increased the plant’s resistance or thesise proteins which increases the plants resistance to dis- “immunity” to disease and parasitic insect attacks. ease or insect attack. Some farmers mentioned that the use Predominance of protein breakdown (proteolysis) on the of “Langfos”, which is a soft rock phosphate, seemed to have a other hand increased a plant’s susceptibility to disease and par- positive impact on their yields and on the RV%. This con rms asitic insects. Protein breakdown causes the plant to become the points made above, as “Langfos” contains calcium and insect bait. This happens when a plant is under water stress, the phosphate. root system is restricted because of soil compaction or when high volumes of nitrogen are applied on a soil with low carbon 6.2.4 Compaction of soils due to heavy machinery or humus levels. Proteolysis takes place when the plant’s “energy The susceptibility of sugarcane elds to compaction is to a levels” are low because of low phosphate and calcium levels large extent dependant on the organic carbon and calcium and when microbes which assist the plant in converting nitrog- content of the soils. Both these elements possess the capacity enous fertilizer into complex proteins are absent. to aerate and bu er the soils. In this case the use of a green The question now is how does one manage a plant to syn- manure such as sun hemp greatly improves the carbon con- thesise proteins instead of breaking them down? It is all about tent in the soil and also adds to the tilth of the soil (Tillman, et managing the stress factors of the plant as far as possible. The al., 2004). way to do this is to implement SUSfarms especially Best Man- The impact of compaction on the yield and longevity of the agement Practices (BMPs). cane cannot however be ignored. As soils become more com- A rather simplistic answer to seemingly complicated and pacted, the root system deteriorates and becomes smaller and interlinked issues thus is: Start trashing and adding organic shallower. The smaller root system impairs the plant’s ability to carbon to the soils. Apply lime where acidi cation is a prob- e ectively take up the essential nutrients required to synthe- lem and add calcium and silica as a standard amelioration to size plant proteins. This causes yields to decline and crops to all soils. Ensure that phosphate levels are su cient in the soil be more susceptible to insect and disease damage. and in the plant by means of soil and leaf analysis. Combine The deteriorating root system leads to poor follow-up ra- all nitrogen fertilizer with a carbon source or use half-organic toons, which have to be ploughed out and replanted after only nitrogen.
– 52 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
6.2.6 Farming for RV mation, it does not seem as if RV had a large impact on the For Midlands and Northern Irrigation farmers the main produc- practice. Most farmers also conceded that the increase in la- tion system change, when farming for RV instead of sucrose bour cost is a big driving factor for them to burn as trashing was introduced, is the use of ripeners, while some producers is considerably more labour intensive. In addition, burning is also indicated that they topped lower and only delivered the also a method of controlling in eld Eldana populations on the good quality cane. Coastal farmers indicated that the main Coast. changes to their production system was that they stopped The use of cool burns in the early morning when dew is planting marginal land to cane and that they started to burn still present (as recommended by SUSfarm guidelines), ensures more instead of trashing in order to decrease the bre con- that a greater quantity of burnt tops is left as mulch. Accord- tent in their cane deliveries. Burning is vital in the Midlands as ing to SUSfarm, when the burnt tops are left scattered (i.e. not a thick trash blanket prevents ratoon regrowth due to a low windrowed) after harvest, they provide a mulch, which is about soil temperature so trashing was never widely adopted in the 50% as e ective (in terms of soil and water conservation), as Midlands regions. a full trash blanket. For the Coastal regions where increasing As was discussed above, increasing the presence of organ- the level of organic material in the sandy soils is hindered by ic material in the soil (especially sandy coastal soils through increasing labour cost, the cool burn approach might be a vi- trashing) is vital as organic carbon or humus is the foundation able option. It is however not clear how many farmers have upon which soil fertility and tilth is built. The Jones (2013) study adopted this approach or what the farm-level impacts are / mentions that up to 70% of farmers on the South Coast used would be. to trash, compared to approximately 10% in 2012. Farmers on the North Coast and in the Coastal Tugela and Zululand areas 6.3 Sustainability factors – conclusion also indicated that most of them used to trash instead of burn The SASRI report by Jones (2013) to a large degree con rmed and they indicated that they have probably underestimated in great detail the large-scale growers’ discussion feedback. the importance of trashing. Coastal farmers also indicated that This decline in yield is a complex issue and needs to be ap- burning led to increased use of herbicides as weed develop- proached from a cross-disciplinary perspective, as no single ment is not suppressed as it was with the trash blanket. Due to factor addressed in isolation explains the phenomenon. It is limited historic data it is not possible to verify to what extent therefore somewhat disconcerting to note that there seems to trashing has really decreased. However, Figure 35 shows that be an ‘overload’ of single disciplinary, detailed research infor- though it would appear that trashing has decreased, it has not mation in the hands of industry extension o cers and techni- decreased from a very high level (max 26% on the North Coast cal advisers. This has to some extent ‘paralysed’ these o cials/ in 1997) and there actually seems to be an increasing trend for technical advisors, as one recommendation, which is based on the South Coast. one research study, is contradicted by another. This has caused More historic data would serve to clarify whether a larger many farmers to choose to stick to their ‘old ways’ until a better number of farmers used to trash, but based on current infor- approach can be proven.
Figure 35: Percentage area trashed
– 53 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
This section on the declining cane yields should be regard- have again started to follow the required fertiliser practices. ed as a rst step in a process of re-evaluating the system within They do feel that they still have some way to go in order to which sugar is farmed in South Africa. The aim is to challenge correct the damage done. many of the ‘traditional’ ways and to try and learn from case In the coastal areas farmers have indicated that a number studies where di erent methods of farming are successfully amongst them have “stopped farming” (stopped looking after practised. Within all of this, it is important not to go overboard the cane, and just taken o what is available), while others in- and throw all the established and tested practises out of the dicated that they can only plan about two years ahead as they window. The South African sugar industry is blessed with ex- cannot a ord to invest in something they will not be able to tensive data and research available on numerous aspects of bene t from. Others indicated that while they initially stopped sugarcane farming. The challenge now lies in harnessing it in investing, they started again but struggled due to the low RV order to develop a more sustainable way of sugar production. price in 2001-2005, the substantial increase in input prices in Bringing SASRI’s research focus more in line with the economic 2005/06-2007/8, as well as low rainfall and the damage done importance of certain issues, as was suggested in the 2013 to yields by the earlier disinvestment. SASRI Committee Meeting notes, seems to be a step in the right direction. For instance while Eldana and other stem bor- 7.2 Grower – miller relationship ers cause approximately 47% (R930 million) of the pest related While the second phase of this study will likely spend more crop loss (R1 968 million) in the industry, only 10% of SASRI’s time on discussion of the grower-miller relationship, it has be- budget is spent on stem borer focused research. The “Inte- come quite clear from talking to farmers that the nature of the grated Pest Management Manual for Eldana”, developed by a relationship with the miller plays an enormous role in farmer’s cross-disciplinary team (entomology, soil science, pathology, cane production sentiment. In mill regions where growers breeding and biotechnology specialists), and which promotes own a share of the mill, they were noticeably more positive the principal of borer control through the combined use of re- about the future of cane and sugar production, despite the sistant varieties, habitat management, appropriate crop nutri- fact that they were not doing all that well nancially. They indi- tion and husbandry and the judicious use of agro-chemicals, cated that by having insight into the nances of the mill, they also seems to be a laudable initiative in line with a more holis- are able to rationalise cane prices and payments and no longer tic production approach. had the feeling that the miller is trying to take an iniquitous cut of the cane value. But growers are more satis ed even in 7 Socio-political factors areas where there is more open discussion between farmers While economic factors impact on a farmer’s nancial ability and millers, even in the presence of land claims. and motivation to invest in his income generating farming However, in other milling regions growers and millers seem activities, and sustainability factors impact the health and lon- to su er from adverse relationships. These coincidentally (or gevity of the production system, the socio-political factors dic- maybe not so coincidentally) are also the mill regions where tate the milieu in which the farming decisions are made and cane production has taken a turn for the worst over the last 10 activities take place. Socio-political factors including govern- years. ment’s land restitution and redistribution policies, urban de- velopment in cane production regions and the grower-miller 7.3 Urban Development relationship, in uence farmers’ state of mind regarding invest- There has been limited development by cane farmers in the ment, management and general predisposition regarding the North Coast region, as most development has been driven by equilibrium in his industry and the equitable distribution of Tongaat Hulett’s property development arm. Tongaat Hulett proceeds. has converted more than 2 000 hectares of mainly North Coast cane land into golf, lifestyle and commercial estates and prop- 7.1 Land reform erties and while another 1 000 hectares will be developed in While 70 627 ha or 21% of commercial cane area has already the near future, and a further 8 500 hectares has been iden- been transferred to freehold black farmers, an additional 130 ti ed for potential future projects. Other developments that 400 ha (38% of total cane area or 44% of large-scale growers’ have impacted on cane area in the North Coast area include cane area) is under unsettled Gazetted land restitution claims. the new King Shaka Airport (850 ha) and the planned Dube This means that a substantial number of large-scale growers Trade Port facilities that will in total cover an estimated 2 000 do not know how long their farms will still belong to them and hectares. this in uences their production investments. Farmers in espe- Farmers indicated that the amount of land ’removed’ from cially Eston (Midlands), Sezela and Umzimkulu (South Coast) the market through the land restitution and redistribution and Maidstone, Gledhow, Darnall (North Coast) indicated that programme as well as actual urban development and the ex- they are concerned about land claims. pectations of future developments on the coast, have caused Eston farmers indicated that a number of them initially the price for even marginal cane land to increase. In an ideal stopped investing in soil health and ratoon replanting in the market a better performing farmer should, under conditions of early 2000s due to the uncertainty brought about by land thin pro t margins, be able to react and increase land holding, claims. Many however realised that disinvestment would de- but due to the land price increases this is not possible. crease the value of their land (when sold) and as a result they
– 54 – Understanding the Factors that have Impacted on Cane Production in the South African Sugar Industry
7.4 Socio-political factors – conclusion farmers’ dropped by 54%. Increasing input prices played a sub- Coastal farmers indicated that farming under conditions where stantial role in the dwindling pro tability with the real average there are marginal pro ts, low and variable rainfall, a constant industry expenditure per hectare of cane increasing by 33%, ght for every cent with the miller, increasing input costs, la- driven mainly by increased fertiliser, labour and fuel prices. bour issues and uncertainty about ownership of your biggest Though the RV price did not increase 2002/03 to 2005/06, it asset (land), is emotionally draining. An Umzimkulu farmer in- did increase by more than 50% from 2005/06 to 2011/12 but dicated “We are no longer the custodians of the soil - we rape grower reaction to the price increase was limited by drier than the soil to survive and cannot a ord to put anything back”. normal conditions for a number of seasons. While the land restitution and redistribution programme The RV payment system that was implemented for the rst time does not exactly create an ideal production environment, it is for the 2000/01 season had an impact on farmer revenue by al- the delayed process that creates substantial uncertainty and tering the allocated proportions of the divisible pool, largely to impacts on growers’ longer term investment decisions. It can the bene t of Midlands and Northern Irrigation farmers who be expected that the planned re-opening of claim submis- produce higher quality cane than their Coastal counterparts. sions, even before the previous phase has been completed, The direct net nancial impact of the payment system, after will exacerbate the situation even further. ‘farming for RV compensation’ was taken into consideration In the regions where growers have a good relationship was showed to be an insubstantial driver of decreased pro ta- with their miller, they seemed more positive about the future bility when compared to increasing input costs, the depressed of cane production despite land claims and decreasing pro t RV price in 2001/02-2005/06 and adverse weather conditions. margins. They seemed excited about the possibilities of pro- These calculations were however done using aggregate mill ducing alternative products from cane with the mill as their region data and it is likely that the pool share (and revenue) partner. However in some of the struggling Coastal mill re- of underperforming farmers (bottom 25%) and the majority gions the adversarial relationship between millers and growers of small-scale growers decreased substantially, while better have made the rather dire cane farming situation even worse. performing farmers within ‘losing areas’ bene tted from the RV system. 8 Summary and Conclusion A key premise for the introduction of the RV payment sys- This report has endeavoured to shed light on the factors that tem was that increased cane quality would lead to increased have impacted on cane production in the South African sugar sugar income. Farmers in most areas reacted to the cane qual- industry. Cane production has decreased since 2000/01, driven ity incentive (low quality penalty) and produced and delivered by both a decrease in area under cane and cane yield. A 51% higher RV% cane. The mills however did not produce more or just over 47 000 hectare decline in small-scale grower area sugar from the higher quality cane and sugar extraction e - under cane was the main driver of area decrease, while most ciency has in fact decreased considerably, at a great cost for of the miller-cum-planter cane land ‘decline’ was bought by growers and millers, but especially for growers. While there is large-scale growers, many of whom are new freehold black a clear link between cane tonnage harvested and delivered farmers. (throughput) and sucrose extraction rates, mill e ciency in the Cane yields decreased more than what can be explained by Irrigation and Midlands areas, where production has increased weather variations, especially in the South Coast, North Coast or remained relatively stable, has also decreased. and Zululand production regions. In the nine years 2001-2010 The uncertainty brought by land claims resulted in initial South Coast large-scale growers’ yield decreased by more than as well as longer term disinvestment in soil health and ratoon 11%, on the North Coast by nearly 20% and in Zululand by replacement, with the e ect that farmers’ yield potential de- nearly 16%. Zululand small-scale growers’ yield decreased by creased. Increasing input prices, combined with a depressed nearly 38% for the same period while on the North Coast it real RV price (2000-2005), less than ideal rainfall conditions and dropped by 23.6%. waning yields resulted in inability of farmers to implement Best The area and yield declines were explained in terms of eco- Management Practises as contained in the SUSfarm guidelines nomic, sustainability and socio-political factors as indicated and to rectify their ‘unhealthy’ production systems. from discussions with large-scale growers and as far as pos- Based on the ndings of this study, phase two of this project sible supported by CANEGROWERS data. presents viable options and makes recommendations on how The pro tability of cane farming has decreased signi cantly the current seemingly dire production situation of especially for dryland farmers since the early 2000s and especially for Coastal cane growers can be improved and how cane farming Coastal farmers. Midlands farmers’ net farm income for the could be stimulated to the bene t of the total industry. period 2000/01 to 2011/12 decreased by 26% while Coastal
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References
Armitage R.M., Hurly, K.M. and Gillitt C.G. (2009). Enhancing support measures to small-scale growers and new freehold growers in the South African Sugar Industry. Proc S AfrSugTechnolAssoc 82:354-369. Barker, B. (2005). Investigation into the analysis of nal bagasse. SMRI Technical Note No. 3/05 RC. Barker, B., and Davis, S.B. (2009). Audit of extraction plant at Felixton. SMRI Technical Note No. 10/09 RC Amended. Bohn, H.L., McNeal, B.L., and O’Connor, G.A. (1985), Soil Chemistry, 2nd edn. John Wiley & Sons, New York, USA. CANEGROWERS (2003). Division of Proceeds working group report, (D.09/47). CANEGROWERS (2012). Addressing the small-scale grower sustainability issue, (G/071/2012). Chaboussou, F., 1985 (English 2004 trans.), Healthy Plants, A New Agricultural Revolution, Jon Carpenter, Charlbury, UK. CTS (2004). Report of the Felixton Working Group Comis, D. (2002). Glomalin: Hiding Place for a Third of the World's Stored Soil Carbon. Agricultural Research (United States Depart- ment of Agriculture, Agricultural Research Service): 4–7. Conningarth Economists, (2013). Growing the Sugar Industry in South Africa. A National Agricultural Marketing Council Report. DAFF (2011). A Pro le of the South African Sugar Market Value Chain. Directorate Marketing. Davis, S.B., and Barker, B. (2010). Consolidated report on extraction audit of South African factories. SMRI Technical Report No. 2083 RC Amended. Page 22. FIRCOP (2011). Report on the FIRCOP Survey Data Analysis to the February 2011 Board of Directors CANEGROWERS (G/032/2011). GrainSA (2011). Fertiliser Report. Hackman, H. (1999). The impact of cane quality on the South African Sugar Industry’s competitiveness. South African Sugar Indus- try Agronomists’ Association, Proceedings of the Annual General Meeting, 18 November, 1999. International Sugar Organisation (2008). Sugarcane in Sub-Sahara Africa: Status, Challenges and Strategies for Development. MECAS (08)05. Jones, M. (2013). Internal Technical Report on Yield Decline in the South African Sugar Industry: 1980/81-2009/10. SASRI Project 10SD05. Madhanpall (2013). Seen in Business Day Article: Sugar industry rolls up sleeves to help state resolve land claims by Hopewell Radebe, April, 2, 2013. Marschner, Horst, (1995), Mineral Nutrition of Higher Plants, 2nd ed., Academic Press, San Diego, USA. Melmoth Growers and Others v Tongaat Hulett Suger Limited (2008). In the Sugar Industry Appeals Tribunal. 29 September. Moor, H. M. (Undated). Enhancing cane quality incentives in the SA Sugar Industry – The Recoverable Value (RV) Payment System. Passioura, J.B. (1992). ‘Overview of the processes limiting crop production on duplex soils’, Australian Journal of Experimental Ag- riculture, Vol. 32, pp. 987-990. Ravno, A. B. (2005). A brief literature survey on the extraction of soluble materials from sugarcane. SMRI Technical Report No. 1961 (RC). Richards, A.C., Lawrence, G. and Kelly, N. (2005). Beef Production and the Environment: Is it really 'Hard to be green when you are in the red'? Rural Society: Vol. 15, No. 2, pp. 192-209. Tillman, G., Schomberg, H., Phatak, S., Mullinix, B., Lachnicht, S., Timper, P., and Olson, D. (2004). In uence of Cover Crops on Insect Pests and Predators in Conservation Tillage Cotton. J. Econ. Entomol. 97(4):1217-1232 Trapnell, L.N. and Malcolm, L.R. (2004). ‘The net bene ts of liming acid soils’, Conference Proceedings, AFBM Network, Orange, New South Wales, Australia. Whitehead, D.C., Tinsley, J. (2006). The biochemistry of humus formation. Journal of the Science of Food and Agriculture. Wright S.F., Upadhyaya A., (1996) Extraction of an abundand and unusual protein from soil and comparison with hyphal protein of arbuscular mycorrhizal fungi. Soil Sci. 161, 575-586.
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PHASE 11 Identifying Potential Business Options for Future Development
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Table of contents
1 Introduction ...... 59 2 Alternative business options ...... 60 2.1 The sugar industry outlook and the surplus removal scheme ...... 60 2.2 An alternative cane payment system ...... 66 2.3 Increasing revenue streams for growers ...... 68 2.3.1 Milling e ciencies ...... 69 2.3.2 Reducing surpluses through alternative uses ...... 70 2.4 Key drivers of a competitive production system ...... 72 2.4.1 Strategic partnership between SASRI and CANEGROWERS ...... 73 2.4.2 Trashing versus Burning ...... 73 2.4.3 Supporting small-holder farmers ...... 75 3 Summary and conclusion ...... 76
Tables Table 1: Macro-economic baseline assumptions ...... 61 Table 2: Baseline for sugar ...... 62 Table 3: Key assumptions for global scenarios ...... 65
Figures Figure 1: Historic price and trade space for sugar ...... 61 Figure 2: Baseline price and trade space for sugar ...... 63 Figure 3: Impact of scenarios on world sugar prices...... 63 Figure 4: Comparing maize and sugarcane trends since the deregulation of markets...... 64 Figure 5: Impact of scenarios on world sugar prices...... 65 Figure 6: Quality of sugarcane delivered ...... 66 Figure 7: Cane harvested versus sucrose losses ...... 69 Figure 8: Average mill utilization rates ...... 69 Figure 9: 64/36 cogeneration division - Income and margins ...... 70 Figure 10: 30/70 cogeneration division - Income and margins ...... 71 Figure 11: 64/36 ethanol & cogeneration division: income and margins...... 71 Figure 12: 30/70 ethanol & cogeneration division: income and margins...... 72 Figure 13: Milling areas with declining production trends ...... 73 Figure 14: Gross margin per hectare – Coastal Region ...... 74 Figure 15: Gross margin per hectare – Midlands Region ...... 74 Figure 16: Gross margin per hectare – Northern irrigation region ...... 75
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Introduction
he South African sugar industry nds itself at a cross- quality of cane delivered by farmers improved, sucrose ex- Troads. Coming from an era of a highly regulated indus- traction per ton of cane or RV did not and the percentage of try and producing large surpluses of sugar with favourable sucrose losses actually increased over time. The ine cien- pro t margins for producers and millers, the environment has cies of the mills cannot be attributed to the RV payment changed with area and production shrinking and milling com- system. It seems like there is a combination of factors that panies’ investment sentiments potentially shifting under sig- led to the ine ciencies of some of the mills. The level of ni cantly tighter pro t margins with much lower throughput throughput, for example, has an inverse relationship with at a number of mills. Furthermore, the price discovery mecha- milling e ciency and with the drop in cane production nism that is used to set the notional price for sugar has led to a number of mills are facing lower throughput. Overall, it the elevation of local sugar prices to import parity levels, with seems that due to the xed ratio agreement of the division the result that the local industry now faces increased competi- of proceeds millers do not have the incentive to boost ef- tion from imported sugar. ciencies and share revenue with the growers but to rather The sugar industry stands in contrast with the rest of the focus on cost saving. South African agricultural sector where the abolition of the • Over the twelve year period 2000/01 to 2011/12, the total Control Boards in 1997/98 led to a drastic shift from a regu- value of the change in the cane payment system, i.e. the lated environment to a free market and brought about major aggregate sum of the yearly monetary value that was di er- structural shifts that included the shaking out of ine ciencies ently distributed amongst growers due to the change from or marginal production areas. For example, one third of the to- the sucrose payment system to the RV payment system, tal area under maize production was lost since the deregula- adds up to just over R148.27 million (R138.46 mil in 2005 tion of the maize pricing mechanism in 1987 and the eventual real terms). In other words, over the twelve year period, demise of the Maize Marketing Scheme. By contrast, the shift higher RV% cane producers’ share of the divisible pool in- in the sugar industry has only partially occurred. The new Sug- creased with R148.27 million and lower RV% cane produc- ar Act will force a more deregulated environment onto stake- ers’ share decreased by the same amount. holders by means of decentralizing some of the negotiating • Farmers in areas with a higher agriculture potential (mid- functions while the single channel export scheme will remain lands and irrigation) that deliver a higher quality cane ben- intact and producers will nd some support from local prices e tted most from the shift to RV while the coastal farmers, trading at import parity levels despite the production of a sur- who produce on more marginal soils and deliver a higher plus of sugar in the local market. bre cane, where disadvantaged by the RV system. This This report presents Phase II of the research project and is seems counter-productive in terms of the creation of a based on the key ndings from Phase I. The objective of this large and healthy sector. On the other hand, it seems as if report is not to present a comprehensive business plan but to the millers are making payments more in line with the qual- present alternative business options and highlight the plausi- ity of cane that is delivered under the RV system. In other ble implications of these business options into the future by words, before RV was introduced, the coastal millers were making use of a set of market and farm-level models. The main paying too much for the cane delivered and the millers in objective of these business options is to point out potential the Midlands and irrigation areas were paying too little in levers of change that can turn around the downward trend of relative terms. the industry and bring it back to a sustainable level. • In assessing why the area of sugarcane has declined over The rst phase of this project dealt with the largest share of the the past decade, it became clear that the negative impact terms of reference, namely providing an overview of the sta- that the RV payment system has had on coastal farmers tus quo of the industry and then using this information to an- was outweighed by other factors. For example, whereas the swer the speci c questions raised by CANEGROWERS. This was impact of RV is estimated to be in the order of R148 mil- completed by interrogating various databases and conduct- lion over twelve years as previously mentioned, Eldana and ing extensive surveys amongst all stakeholders in the industry. other stem borers cause approximately R930 million of the Although the following list of questions and observations does pest related crop losses of R1.9 billion per year (SASRI Com- not provide an exhaustive summary of all the ndings coming mittee Meeting notes, 2013). The uncertainty of land reform out of Phase I, these are the selected elements that need to that prevents growers from re-investing in new ratoons, ap- be considered in any future strategy and business model that plying adequate fertilisers or following other best manage- CANEGROWERS considers. ment practises, successive droughts and rising input costs, especially labour costs due to the minimum wage are all A) Was the RV payment system bene cial for the SA sugar factors that also stymied cane production in the period industry compared to the sucrose payment system? 2000/01 to 2011/12. • A key premise for the introduction of the RV payment sys- • Therefore, RV can be regarded as an add-on reason that tem was that due to increased cane quality, the size of the impacted on the pro tability of coastal farmers, but it is divisible pool would increase. From the data that was ana- certainly not the main driver of lower pro ts. There are still lysed, this does not seem to have been the case. While the growers on the coast that are realising healthy pro t mar-
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gins. Yet having said this, when the long-run average return Felixton mill’s Brix-pol factor has been consistently higher than on assets in farming is taken into consideration, a small im- the industry accepted norm for most seasons. Felixton farmers pact of 1% or 2 % as may be the case with RV can be the have raised the Brix-pol factor as a major concern as they as last ‘drop in the bucket’ to induce a negative spiral. In many growers are penalised (through a lower cane quality valuation) cases the negative or reduced pro t margins implied that for what they perceive to be a miller problem. There have been farmers were forced into unsustainable farming practises in a number of investigations into the reason for this but even the order to survive in the short term. 2012/13 CANEGROWERS’ Board of Directors’ report concedes • It was shown in the phase 1 assessment that the agreed that “The cause of the problem at Felixton remains a mystery ‘farming for RV compensation payments’ had a considerable and the long-term implications remain a concern.” mitigating impact on the direct negative e ect of the RV sys- tem for Coastal farmers. Whether these compensation pay- D) Farmer – SASRI relationship not delivering the optimal ments actually took place in all seasons since the introduction results of RV was not clear and it is recommended that growers in the Although top-class research is undertaken by SASRI, questions various production areas follow up with their mills. are raised regarding the practical applicability of the research. • Given the assumption that the RV payment system will be Farmers want to see the on-farm production and economic the fall back payment system under the new Sugar Act, the impacts of SUSfarm recommendations. Although closer col- application of the RV compensation payments has to be taken laboration between SASRI extension services and CANE- forward. GROWERS is required to align strategies, the lack of imple- menting SUSfarm recommendations at farm-level is not only B) Grower - miller relationship determined by the nature of the extension services. In many From the farmer discussion group meetings it was clear that instances a negative spiral, induced by a combination of fac- growers who have shares in a mill are noticeably more posi- tors that include the impact of the multi-year drought condi- tive about the future of cane production. In a number of cases tions and Eldana on the pro tability of the farms on top of the where farmers have shares in mills, there is a greater degree uncertainty to undertake long-term investments due to land of transparency and less suspicion between farmers and mill- claims has simply made it una ordable for farmers to adopt ers. It was clearly pointed out that the transparency by millers SUSfarm recommendations. A balanced strategy between the regarding the payment for cane and molasses plays a decisive high-level research of SASRI and farm-level cane production role in the miller-grower relationship. Although vertical slic- research requirements of CANEGROWERS is required. ing under the new Sugar Act will provide the opportunity for milling groups and their growers to agree on unique proceeds E) Struggling coastal farmers need assistance and incen- sharing formulas that suit the competitive advantages and tives to correct their production systems. cost structures of the growers and the milling group, the verti- If cane production is to continue on the Coast at a sustainable cal slice approach does not provide a silver bullet to improve level, farmers’ production systems need to be addressed as a the relationship between millers and growers. This relationship matter of urgency and it is likely that a large number of these will prove to be vital for the long-run sustainability of the in- farmers are not able to nancially a ord implementing these dustry. best practises. The new Sugar Act could potentially leave growers more exposed but structural changes are occurring in the industry F) Small scale growers have been most a ected by the where growers are moving from a vulnerable position, due narrowing pro t margins. to a big surplus of cane, to a position where mills with lower The area under sugarcane production by small scale growers throughput will either have to shut down or start engaging has declined to less than 50 000 ha from its peak of almost 100 actively with growers under more transparent terms in order 000ha in the mid-nineties. Since the surplus removal scheme to secure cane delivery. is maintained by the Department of Trade and Industry and it provides a major support mechanism for the industry at large, C) Milling ine ciencies cost farmers and millers millions the establishment and support of small scale growers not Ine ciencies (high sucrose percentage in molasses, bagasse, only remains a vital element for lobbying a favourable marker lter cake and undetermined losses) seem to be correlated dispensation for the industry, but the sugar industry can and with the low throughput (decreased cane production) at mills should make a meaningful contribution to the rural unem- and resulted in the loss of sugar tonnage in the divisible pool. ployed population by the creation of jobs. This loss costs farmers and millers millions of Rands The Brix minus pol factor has been an issue of concern for 2 Alternative business options some time for the industry and when the RV payment system was introduced in 2001 and cane purity became a crucial factor 2.1 The sugar industry outlook and the single channel in cane value calculation, the actual extent and impact of the export scheme issue became apparent. Under Phase I, the report dedicates a The South African sugar industry has been operating under a section to analysing this factor. The Brix minus pol factor varies single channel export scheme for many years. The key features over seasons and between mills but what is striking is that the of this regime are presented in Figure 1 where it is evident that the historic notional price of sugar has been trading around – 60 – Identifying Potential Business Options for Future Development import parity levels but with signi cantly less volatility than ture and even more fundamentally, what is the outlook for the the parity prices, despite the fact that SA is a surplus producer industry as a whole. Taking a view on the potential outcome of sugar. This price discovery mechanism provides signi cant of future scenarios for the sugar industry is essential when fu- support to the millers and growers because sugar is sold in the ture business options are considered. The methodology that local market at import parity levels. BFAP has developed links scenario thinking techniques to a The single export channel can be maintained because sur- set of empirical models at global, national and farm level. The pluses that are produced in the local market are isolated and starting point for the empirical impact analyses is rst to set a exported at a loss. This mechanism provides the scope for the benchmark from where potential deviations can be measured. industry to set the notional price for sugar, which is the reason For the purpose of this study, this benchmark is the most ba- why sugar prices have traded at or even above import parity in sic outlook that is simulated in the BFAP sector model and is the past. This scheme can, however, only exist if an import duty referred to as a deterministic baseline projection. The trends is imposed on imported sugar. The sugar industry has recently that are generated in the baseline will be used to illustrate a successfully applied for a new reference price of $566/ton. The number of business options. loss that is incurred on the export market is then deducted Baseline projections provide a 10-year outlook of commod- from the total revenue and divided amongst the growers and ity markets that are grounded in a series of assumptions about millers based on the formula set by the division of proceeds. the general economy, agricultural policies, the weather, and Alternative uses for sugar such as ethanol can reduce the sur- technological change. The macro economic assumptions that pluses and therefore the losses that occur on the world mar- are used to generate the baseline are presented in Table 1. The ket, but until these options materialize, it is in the industry’s outlook for the international sugar and ethanol price was gen- best interest to maintain the single export channel in order to erated by the Food and Agricultural Policy Research Institute remove surpluses from the market. (FAPRI) at the University of Missouri in February 2014. The question is however what the likely surpluses are in fu- Apart from the macro-economic assumptions, it is assumed
Figure 1: Historic price and trade space for sugar Source: FAPRI, February 2014
Table 1: Macro-economic baseline assumptions 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Crude Oil Persian Gulf: 101.0 95.5 100.9 105.4 109.8 114.3 117.7 121.0 124.4 127.8 (USD/barrel) SA Population (Millions) 51.2 51.4 51.7 51.9 52.1 52.3 52.6 52.8 53.0 53.3 Exchange Rate (R/USD) 10.65 10.29 10.75 10.98 11.54 11.88 12.23 12.58 12.94 13.31 World sugar price, NY no 11 16.50 16.62 17.24 16.99 17.18 17.19 17.20 17.29 17.16 16.89 (c/lbs) Brazil anhydrous ethanol price 2.34 2.19 2.06 2.05 2.05 2.06 2.06 2.06 2.05 2.02 ($/gallon) Source: BFAP & FAPRI, 2014
– 61 – Identifying Potential Business Options for Future Development that ’normal’ rainfall conditions will prevail over the outlook pe- assumption of normal weather conditions, between 18 and riod. One can, therefore, anticipate that the deterministic out- 19 million tons of cane will be produced per annum over the look is far less volatile than what will actually be the case. Based baseline. In terms of consumption, per capita consumption in on these macro-assumptions, a 10-year outlook is generated South Africa has increased by 32% over the past decade. With for the South African sugar industry. This 10-year outlook is real per capita GDP increasing at a much slower rate over the presented in Table 2. next ten years, local consumption of sugar is expected to in- Under the baseline, the total area under sugarcane is ex- crease by approximately 13% over the baseline. pected to continue a declining trend over the baseline. In the RV prices are expected to increase from their current level outlying years, the area under cane settles around 350 000 of around R3500/ton to R4900/ton by 2023. This will boost ha. The cane farmers’ pro t margins will remain under pres- sugarcane prices from R421/ton to R549/ton by 2023. More sure with international sugar prices stagnant around USD 16c importantly, the model has been set to continue determining to 17c /lb and rising input costs. The baseline already incor- prices on a cost plus fair return basis and not to trade at import porates the higher reference price of $566/ton that provides parity levels over the outlook period. Because import parity some level of protection against imported sugar. The alterna- prices increased drastically over the past decade, this pricing tive revenue streams like cogeneration and ethanol will only mechanism has been absorbed in the market. However, as become a reality in three to four years from now and for the international prices have lost steam and declined, local prices purpose of the baseline have not been taken into considera- were suddenly above the import parity prices and imports of tion. In the following sections alternative scenarios that in- sugar increased rapidly. This causes a dilemma for the indus- clude ethanol and cogeneration will be illustrated. try as more imports lead to higher volumes that have to be As can be expected, it will be the marginal hectares that fall exported (at a loss) due to the surplus removal scheme. Yet, out of production. The coastal areas have been worst hit by the the industry holds rm that it will be able to maintain this pric- prevalence of Eldana and consecutive droughts. Over the long ing mechanism and the losses that are incurred on the export run, coastal areas will also experience more pressure from the market are outweighed by the revenue gained on the local rising minimum wages, while mechanization is not an option market. in most of the coastal areas due to the steep slopes. As the Going forward the industry will have to realise that this area under production is declining the average yields will start pricing mechanism will be exposed to more pressure from to increase gradually as the relative shares of productive land imports, especially in a scenario where the regional produc- and hectares under irrigation start to increase. Whereas the tion of sugar increases. The announcement by ITAC to increase net revenue is expected to decline in real terms over the next the reference price for imported sugar to $566/ton will provide four years as total costs increase at a faster rate than total rev- some level of support for local prices not to decline below this enue, the increase in yields will be su cient that by 2019 net level. The tari protection is, however, not applicable to coun- revenue in real terms will increase again and the area under tries like Swaziland that are exporting to South Africa under sugarcane will stabilize around 350 000ha. Under the baseline the South African Customs Union.
Table 2: Baseline for sugar SUGAR BASELINE 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 thousand hectares Area in sugarcane 373.9 371.8 366.5 361.2 356.5 353.9 352.3 350.6 350.0 350.2 t/ha Yield 67.4 67.5 67.6 67.6 68.7 69.8 70.9 71.9 73.0 74.1 thousand tons Cane Production 18 936 18 878 18 705 18 458 18 494 18 593 18 769 18 962 19 185 19 460 Sugar Production 2184.1 2177.4 2157.5 2129.0 2133.2 2144.5 2164.8 2187.1 2212.8 2244.6 Sugar dom. use 1968.8 1985.0 2002.9 2021.3 2039.5 2057.8 2076.2 2095.1 2114.6 2134.6 Sugar exports 694.7 791.4 768.3 743.5 678.3 646.6 653.1 678.9 704.2 747.6 R/ton Sugar recoverable value 3581.3 3623.5 3729.4 3867.2 4092.4 4301.5 4481.6 4642.2 4803.0 4951.1 Sugarcane average price 421.1 425.9 438.2 454.0 470.0 484.1 494.9 513.4 532.0 549.1 Source: BFAP sector model, 2014
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Figure 2: Baseline price and trade space for sugar Source: FAPRI, February 2014
As previously mentioned, it is evident that the surplus re- culations, South Africa’s Producer Support Equivalent (PSE) for moval scheme has to remain in place in order for millers and sugar comes in at 16.52%, which is signi cantly higher than growers to reap the bene ts of import parity pricing in the lo- South Africa’s total agricultural PSE gure of approximately 3% cal market. This in itself presents a major support mechanism (Figure 3), which is more in line with countries like Brazil and for growers and millers. In fact according the latest OECD cal- Australia.
Figure 3: Impact of scenarios on world sugar prices. Source: OECD, December 2013
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Whereas for other industries the abolition of the Control Lastly, to conclude this section it is important to stress that Boards meant a shift to a free-market environment, the sugar the outlook for world sugar prices can di er from what is pro- industry managed to keep its surplus removal regime is place. jected in the baseline and prices will not necessarily decline Figure 4 compares the trend in the area under production for over the medium term before increasing again. The world sug- maize and sugarcane. Compared to the sharp drop in the area ar market is heavily distorted and government policy and in- under maize production when the Maize Scheme was abol- terventions will have an in uence on the global sugar market ished, the area under sugarcane started to increase and it was in future. In a report by Chatenay (2013) Brazilian government only in 2008 when the area under sugarcane started declining. support is estimated at 7% of market sales. Since Brazilian ex- More than 1 million hectares of maize went out of production ports amount to nearly half of what is traded internationally, simply because production in these areas was not economi- the government subsidies do weigh in on world prices. Sugar cally sustainable and would probably never have been plant- reforms in Europe will also have a major impact on future sugar ed in the absence of state intervention in the maize industry. prices. The fact that there is no real undistorted world market Whereas maize yields increased by an annual average of 7% for sugar is a strong motivation for the local industry to receive over the past decade to remain competitive in a free market some form of support, otherwise local production of sugar will environment, sugarcane yields have remained relatively stag- be substituted by subsidised sugar imports from other parts of nant and in some areas declined. This fact drives the focus on the world. yield improvements, which are critical for the survival of the Therefore, for the purpose of this study, apart from the industry. The following section deals more in detail with estab- baseline that was already presented, two alternative scenarios lishing sustainable production systems. where simulated by FAPRI in the global modelling system to
Figure 4: Comparing maize and sugarcane trends since the deregulation of markets. Source: BFAP, February 2014
– 64 – Identifying Potential Business Options for Future Development present a high road and low road scenario given certain policy Any changes to these drivers will have a signi cant impact assumptions. on world markets. Therefore, the two scenarios that are pre- Three of the main drivers that will determine the future out- sented in this study impose relative shifts in these three drivers come of global sugar markets are: and are summarized in Table 3. • The economics of sugarcane production in Brazil, The high road presents a scenario where the growth in hec- • The US biofuel policies and tares dedicated to sugarcane in Brazil is slower compared to • The EU sugar policies. the projections under the baseline together with a sharp rise
Table 3: Key assumptions for global scenarios Growth in Brazilian U.S. Ethanol Net E.U. Net Sugar Area Imports 2023 Imports 2023 hectares/year million gallons ‘000 tons Outlook 140 -453 3 253
High price 100 1500
Low price 200 792 Source: FAPRI, February 2014
Figure 5: Impact of scenarios on world sugar prices. Source: FAPRI, February 2014
– 65 – Identifying Potential Business Options for Future Development in the imports of ethanol by the US as the mandatory blending Growers and millers do not share the price risk and the burden levels are increased from the current blending level of 10 per of price volatility rests with the miller. In some seasons a de- cent to 15 per cent. The EU sugar policy remains unchanged. crease in sugar prices results in negative pro t margins for mill- For the low road scenario, Brazilian hectares rise faster com- ers and in seasons when the sugar price increases after cane pared to the baseline and the EU backs out of sugar imports payments have been made, growers feel exploited. The main in a meaningful way. Based on the results generated in the general critique of the xed revenue share system is that the alternative scenarios, it is apparent that whereas world prices sharing of revenues on a xed basis weakens the incentive to are projected to trade around 17cents/lb under the baseline, improved technical performance of both growers and millers. prices could trade lower than 13cents /lb and higher than The grower receives the same price per ton of cane irrespec- 20cents/lb. tive of the quality of cane delivered, and thus has no incen- tive to improve quality. The miller has a reasonable incentive 2.2 An alternative cane payment system to improve extraction as the more sugar he produces from a Under the new Sugar Act, it is envisaged that the principle of given quantity of cane, the more money he makes. However, vertical slicing will be introduced, which provides the oppor- the miller will of course weigh investment in improved e - tunity for growers to share in the revenue of sales of products ciency against the increased revenue and given a poor quality other than cane and molasses like bioethanol and cogenera- of cane the incentive to invest will be low. The disincentive is tion. This implies that the industry will be in need of a revenue even more obvious for millers for whom investment in equip- sharing model that goes beyond the current division of pro- ment to improve sucrose extraction e ciency can be huge ceeds based on the sales of sugar and molasses only. Apart compared to the value of the small share of additional sugar from catering for alternative sources of income in a new pay- produced. ment system, one also has to ensure that a new cane payment In the case of variable revenue sharing arrangements, the system drives the correct incentives and rewards for e cien- sharing will vary as the sugar price changes. While from a tech- cies and investment in alternative sources of income, which nical and economic perspective these arrangements o er sig- currently seems not to be the case. ni cant advantages over xed price and xed revenue share Based on a review of international cane payment systems by systems, they are much more complex and costly to adminis- Todd, Forber and Digges (2007) there are basically three types ter (Todd, et al., 2007). of payment and revenue sharing systems: The South African Sugar Industry division of proceeds • Fixed cane price system where growers receive a fi xed price agreement and RV payment system is an example of the xed for cane and where this cane price is not necessarily directly revenue share system. Through the implementation of the RV linked to the value of the sugar produced. payment system in 2000, the industry increased the incentive • Fixed revenue share system where cane prices and miller for growers to improve cane quality and, based on Figure 6, it margins are linked to sugar prices and shared by growers is clear that farmers responded to this incentive and adjusted and millers based on a xed agreed ratio. their production systems to produce higher quality cane on • Variable revenue sharing where, beyond a benchmark level average. However, despite the higher quality of cane that was of cane quality and factory e ciency, any incremental im- produced, the sucrose extraction rate achieved by the mills on provement in cane quality is entirely to the bene t of cane average started to decrease from 2006 onwards. Since grow- growers, while any improvement in sucrose recovery in the ers are incurring additional costs by producing higher quality factory bene ts only the miller. cane under longer production seasons, their incentives to pro- The main weakness of the xed cane price systems is that duce higher quality cane are critical. there is no link between the cane price and the sugar price. There are a number of factors that are impacting on the
Figure 6: Quality of sugarcane delivered Source: BFAP calculations, February 2014 – 66 – Identifying Potential Business Options for Future Development level of extraction. The throughput at the mills is one critical management and transport logistics, and growers will have driver. Even though cane quality has increased, cane produc- to be incentivised. Mill consolidation would also result in a tion (especially on the coast) has decreased and as was shown considerable increase in transport costs for which growers will in the Phase I report, there is a strong correlation between su- have to be compensated. Millers would therefore have to run crose recovery and mill capacity, with sucrose extraction rates nancial scenarios to determine under which proceeds divi- decreasing as mill throughput is declining and mills are forced sion ratio a push towards increased sugar recovery would be to run at below optimal speeds. Section 2.3.1 covers milling nancially viable. e ciencies in more detail. Apart from the pricing and the value of molasses, the BFAP Looking ahead, a more important question is if the current team is of the opinion that the real pricing of sugar by millers payment system and division of proceeds provides the cor- in the market seems to be a more important issue to address. rect incentives for the mills to strive for higher extraction rates. Before 1994 the pricing of sugar was totally regulated, includ- There is an incentive for millers to optimise extraction because ing prices for bulk sugar and all the retail packs and transport the RV price a miller pays is calculated on the average industry cost FOR Durban. The price at which the millers sold the sugar extraction rate, and therefore if the mill is achieving less than was the price re ected in the division of proceeds pool. In this average, it will be paying for sugar it does not produce and 1994 the rst round of deregulation resulted in only the bulk vice versa if it has a better than average extraction. It is, how- sugar price being subject to a maximum promulgated price, ever, possible that a miller optimising its extraction is perhaps and millers could sell their pre-packs at di erent prices in the not optimising the industry situation. retail market. This did not lead to signi cant changes in pricing. Another observation from farmer and industry discussions Then in 2000, under pressure from the dti to become more is that the drop in sucrose extraction rates has fuelled the belief ‘market orientated’, the notional price was introduced. Initially by some growers that mills ‘hide’ sugar in molasses. This higher this concept worked well, until the millers started increasing sucrose molasses is then sold at a higher price while the farmer the gap between the notional price and the actual price that only shares in the agreed industry molasses price. There are dif- sugar is sold for in the market place. This e ectively changed ferent opinions regarding this suspicion, however, taking the the division of proceeds and has created a great deal of un- economic realities and incentives for a mill into consideration, certainty and suspicion and it is recommended that a system there should not be a bene t for a mill to sell crystal sugar at is introduced to capture the actual pricing of sugar in order to a much reduced price within molasses unless the ‘premium’ of determine the true market value of the revenue pool. molasses with additional sugar is greater than the 36% share Based on the cogeneration and ethanol scenario presented that the miller receives out of the revenue generated from sell- in the following section of this document, it is clear that these ing crystal sugars. Yet, even if there was a payment system that potential future activities would add a relatively small addi- acknowledged the higher proportion of sugar in the molasses tional income stream to the returns from sugar. Revenue from it would do so at the molasses sugar value which is a fraction sugar will in all likelihood, for the near future, remain the main of the value of crystal sugar. For example molasses at 43% total determinant of cane value and as such it is envisioned that the sugars and sold for R500/ton values the sugar in a ton of mo- RV payment system will remain the ‘default’ payment system in lasses at R1 162/ton while the average value of sugar to a miller the absence of an alternative mill-farmer cane pricing formula is probably in the region of R5 000 /ton. The rst phase of this speci cally agreed on within a slice. study was not able to unequivocally prove that mills or mill- The RV formula is a measure of the sucrose content of both ers intentionally ‘spike’ molasses to the detriment of growers. sugar and molasses and where a fair value of molasses can be Having said this, it is important to note that a number of mill- negotiated or linked to actual market value the RV payment ing companies have integrated vertically (e.g. Merebank distill- system creates the correct incentive by rewarding growers for ery, Voermol, Molatek etc.) and now buy their own molasses high quality cane. Where an income stream from cogenera- to produce feed and in some cases ethanol. If the revenue in tion becomes a reality the RV formula has to be adjusted with these markets is higher than selling crystal sugars, since 100% factors representing the value of bre or for that matter any of the revenue in these income streams is for the millers ac- ‘future’ cane based product. Depending on how the sugar in- count and is not shared with the growers, then there might be dustry or mills approach ethanol production opportunities, it is grounds for the ‘spike’ suspicions. There is no molasses testing imagined that ethanol production would rather impact on the system in place, which comes back to the point made earlier derived sugar price than on the cane valuing formula. Howev- of the importance of a transparent system where the quality of er, for ‘future’ crops like cogeneration and ethanol, negotiations product, the actual price at which it was sold and the volumes between growers and millers may need to consider the rela- that were sold are known to all stakeholders. To this end, an tive value of investment to determine grower / miller shares. independent company could be appointed to undertake this There are a number of factors to consider when determining function for the industry. the value of bre. The millers are already using the bagasse However, the bottom line is still that improving milling ef- produced from the cane crush to provide power for their fac- ciency in a decreasing cane production situation is problem- tories. It has been the millers’ obligation to dispose of the ba- atic. It might be possible for mills to increase throughput by gasse produced, and they have historically used low e ciency decreasing the length of the milling campaign or by closing boilers at a lower cost to utilize all of the bagasse. In the past mills and redirecting cane to other mills. A shorter milling cam- the miller has been able to utilize any surplus bagasse created paign might however result in increased pressure on harvest for whatever use. The industry negotiations for the new Sugar – 67 – Identifying Potential Business Options for Future Development
Act have established that growers should be able to partici- price and then the revenues / losses gained out of the eth- pate in any new projects with their miller in future. Therefore, if anol production are shared amongst growers and millers there are future projects which require bagasse as a raw mate- based on the equity share. rial, the costs of investing in more e cient boilers and factory • There has to be transparency in the actual pricing received e ciencies such as electri cation of the front end of the mill to and volumes sold of all products to eliminate unnecessary create the surplus bagasse, less any cost savings, will be a rst suspicion in the relationship. Apart from the current income charge to the new enterprise. A value of the bagasse can be of sugar and molasses, this also includes the potential value established by calculating the returns of the project after tak- of bre in future. ing into account the costs of creating the surplus bagasse and • In any new opportunities such as cogeneration and bioeth- the other costs of the project, including returns on the pro- anol production, millers and growers should have an equal ject capital at the hurdle rate required by the milling company. opportunity for investment and revenue sharing. The for- Value attributable to the raw material could then be shared. If mula should be structured in such way that the initial inves- the growers invest in the project they will receive their returns tor receives the appropriate future revenue ow. It should relative to their shareholding in the project. be a holistic approach where a range of options are consid- Apart from the value of bagasse, the value of ber where ered for investment and revenue sharing. It will have to be a farmers are trashing and not burning can also provide an ad- value chain approach that moves away from just looking at ditional source of income. The potential revenue from the ber farm-gate prices and even includes projects like generating delivered in the trash is illustrated in section 2.3.2. value from the waste ow from mills. A good example is the The basic building block of cane payment is a transparent concept of setting up separate companies that the miller system that incentivises good quality cane and appropriate and growers can invest in to develop new initiatives such as behaviour (optimising) of the grower and miller. There are cogeneration or bioethanol production. improvements that can be made, but this can only really be • The challenge for the industry is to fi nance new options achieved e ectively at a mill/mill group level because the so- from a nancial position that is in many instances cash lutions for the various milling areas will di er. The droughts, strapped. Again, the ability of the industry to work together sugar price, imports and lack of funds to invest by certain mill- will be critical to the development of comprehensive busi- ers and growers have resulted in both parties being under sig- ness models that can be packaged for nancing by invest- ni cant pressure and in many cases cash strapped. Therefore it ment rms or alternative options such as the IDC were can’t be business as usual going forward. Developing a healthy small-scale growers can be incorporated in the business relationship between growers and millers is essential. As al- plan. ready mentioned, growers who have shares in mills are notice- • Although CANEGROWERS will play an important role in the ably more positive about the future and one key element that process of designing and negotiating the overall principles sticks out in these positive examples is that there is a greater of a revenue sharing model for the vertical slice, getting measure of transparency. involved in the speci c negotiations between millers and growers will remain problematic since CANEGROWERS is a To summarize: general grower body that cannot represent only one spe- • The RV payment system can still provide the fall back pay- ci c grower group. Sound governance principles and trans- ment system. parent information are of essence in all of the negotiations. • Based on the principle of vertical slicing, the specifi c ratio In conclusion, Todd et al. (2007) summarized the problems that is applied to the division of proceeds of the revenue surrounding the development of a payment system with the pool can be determined by the local negotiations between following statement: “It is not possible to devise a perfect pay- growers and millers. This represents a major shift away from ment system, if for no other reason than industries evolve over an industry dispensation where millers did not have the time and payment systems often lag behind this develop- incentive to maximize e ciencies. It made more sense for ment.” millers to save R1 than increase revenue by R1 and only re- ceive 36% of the additional Rand. 2.3 Increasing revenue streams for growers • Growers and millers should share in the same revenue pool There are a number of business options for increasing the rev- with the correct incentives on both ends to improve e - enue of millers and farmers. Under the new Sugar Act, the divi- ciencies. sion of proceeds will bring a complete change in the dynamics • The payment system must accommodate alternative in- between growers and millers and the role of CANEGROWERS come streams and the value of the proceeds should be will change due to the decentralization of negotiations. For the measured at accurate market prices with the correct vol- industry the move from its current position to a more sustain- ume and quantity sold. An alternative option is to value able position will imply a consolidation at both grower and sugar for bioethanol production as the sugar equivalent, miller level. It will further require signi cant capital to re-invest but this might open the door for more mistrust as the cal- in the industry and the options of generating additional capital culation will be based on a derived formula for the ethanol are limited. It will take coordination by the industry at large to proceeds. It is rather suggested that the sugar that enters leverage any sustainable initiatives. the ethanol process is valued at the average sugar market
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2.3.1 Milling e ciencies ed milling e ciencies. An example of such an initiative is the One of the low hanging fruits in the industry is to increase the Gledhow mill agreement, which has led to a level of grower/ throughput of mills. This is a basic principle but given the his- miller cooperation that many would seek to emulate. torical grower-miller relationship the potential bene ts of co- Milling e ciencies need to improve and since this seems operation and joint initiatives has been underestimated and to correlate with the level of throughput, it is obvious that the a lack of trust and communication has undermined e orts. level of throughput at the mills, especially on the Coast, needs There are already the rst examples where milling companies to improve. Figure 5 illustrates the correlation between the are leveraging stronger partnerships with growers to boost percentage sucrose losses and the tons of cane harvested. throughput and let the growers share in the revenue of add-
Figure 7: Cane harvested versus sucrose losses Source: BFAP, February 2014
Figure 8: Average mill utilization rates Source: SMRI data, BFAP calculations February 2014
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Figure 8 portrays the estimated relative average utilization composition of average annual income per hectare over the rate over the period 2011 to 2013 for all mills. If this graph is long-run (2020-2022) where alternative sources of income can illustrated over time, it is clear that the utilization rates have support the income of growers and millers. It is important to been falling. With a future scenario of more stabilized produc- note that these are long-run projections (averages for 2020 – tion levels at the Coast but no immediate drastic increases in 2022) generated by SASRI’s Canesim and BFAP’s FINSIM mod- production levels, closure of one or two mills on the Coast els. The darker blue bars on the left represent the gross margins seems inevitable. Consolidation of mills at the Coast will boost under the alternative scenarios where combinations of alter- throughput and therefore e ciencies of the remaining mills natives are simulated like cogeneration, bagasse and the pro- but signi cantly increase transport costs. These options and duction of ethanol. These alternative margins are compared to potential impacts will in uence milling companies’ long-run the bars on the lighter blue bars on the left that represent the investment strategy in the South African sugar industry com- gross margins generated under the baseline conditions with pared to alternative and additional opportunities for invest- the current income streams within the pool. ments, including the general interest in expanding cane pro- Whereas the results presented in Figure 9 are simulated duction in other African countries. under the current 64/36 division of proceeds ratio, Figure 10 presents the potential income for growers under an alternative 2.3.2 Reducing surpluses through alternative uses division of proceeds where millers earn 70% and growers 30%. This section links to section 2.1 where the surplus removal As previously mentioned, under the vertical slice, alternative scheme is discussed. In principle, the best position for the in- ratios can be negotiated that will most likely depend on the dustry to be in over the long run is to reduce the losses in- nature of equity uptake in new initiatives. curred by surpluses in the export market. Although the short Figure 9 shows the annualised total income and gross mar- term solution will involve the further consolidation of hectares gin per hectare for each region, compared to the margins un- under production in marginal areas, over the long-run addi- der baseline conditions. Only the Coastal farm was modelled tional local demand for sugarcane can be generated beyond with trashing practices. While all the regions modelled show the use of sugar and molasses only. an increase in gross margin, the Northern Irrigation region As already mentioned in the report, the introduction of the seems to bene t most. This is obviously due to the high ton- new Sugar Act will provide opportunity for growers and mill- nage (thus more bre) yielded under irrigation. The income ers to share in the same revenue pool created by additional from electricity generation was divided up as per the normal income. The following sequence of gures provide a typical division of proceeds ratio of 64/36.
Figure 9: 64/36 cogeneration division - Income and margins Source: BFAP FINSIM (2014) & Botha D. (2014)
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Once vertical slicing has been introduced, the contribution of According to the results, if growers were to practice trash- electricity generation versus sugar to gross margin can change ing while only receiving 30% of the revenue from cogenera- depending on the area. It could be possible for Coastal farm- tion, the gross margin per hectare would end up being less ers to invest and also share in cogeneration, as the additional than if they had carried on burning practices as usual. Thus it income would more than o set the bre penalties of the RV is imperative that a balance be struck between growers and payment system. millers so that everyone may bene t from the new revenue Employing the practice of trashing in combination with stream. To summarize, under a 30/70 ratio that favours mill- cogeneration could be pro table in all regions, depending on ers, only the Northern Irrigation region will bene t marginally the division of proceeds. If the larger portion of income from from cogeneration with gross margins projected to be slightly electricity generation is allocated to the mills, the additional higher than under baseline conditions. For a grower in mar- costs of trashing will most likely not be su ciently covered at ginal coastal land that is already in a negative spiral, gross mar- farm-level and farmers delivering trash will need to be incen- gins are expected to decline from R5915/ha to R5421/ha and tivised. Figure 10 presents the average income and gross mar- therefore, these growers will not bene t from cogeneration. gins from 2020 to 2022 in each region, with a 30% grower, 70% Figure 11 also assumes that all regions practice trashing at miller division of proceeds from cogeneration. This division of farm-level, while removing 70% of the trash for baling and co- proceeds could incentivise the millers to invest in increasing generation. milling e ciency and generating electricity, however growers When introducing ethanol at the mandatory blending level will most likely not settle for this arrangement. of 2% and cogeneration with a 64/36 division of proceeds, the
Figure 10: 30/70 cogeneration division - Income and margins Source: BFAP FINSIM (2014) & Botha D. (2014)
Figure 11: 64/36 ethanol & cogeneration division: income and margins Source: BFAP FINSIM (2014) & Botha D. (2014) – 71 – Identifying Potential Business Options for Future Development model illustrates that Coastal and Northern farms will bene t will decline further and extraction rates will be compromised. from the new revenue streams, yet Midlands farms actually end up with a smaller gross margin per hectare. Gross margins 2.4 Key drivers of a competitive production system for the Coastal farms are still rather low at R8151/ha compared Phase I has highlighted the dynamics in the production system to R7 736/ha under the baseline. of the various regions, with signi cant di erences in challeng- For the last scenario, the division of proceeds is switched es faced by the Coastal, Midlands and Irrigation farmers. As al- for the ethanol and cogeneration simulation. The results are ready mentioned, the pro t margins in the Coastal areas have presented in Figure 12. Margins are signi cantly lower, due to been under far more strain due to the prevalence of Eldana, the fact that proceeds from ethanol production (substituting the impact of several severe droughts in recent years and to sugar) are weighted towards the miller. It is apparent from the some extent also the RV payment system. These exogenous results that the 30/70 ratio is not viable for growers. drivers, together with the uncertainty of land reform, have in The scenarios presented in the section above illustrate how many instances triggered a downward spiral where growers sensitive the potential income of alternative revenue streams is have entered ‘exploitative’ farming systems. There is an urgent for the way the division of proceeds is determined. The bottom need to turn around unsustainable farming practises, yet at line is that the returns that millers achieve from the alternative the same time a number of these farming units are in nancial revenue streams need to be large enough for the millers to di culties and do not have su cient cash ow to support a invest in these projects. There are clearly no easy solutions, but move towards more sustainable farming practices. In the sec- options need to be considered and compared. If investments tion below, a number of topics are covered to highlight some into greater e ciencies and alternative revenue streams are of the options, and more importantly the potential impacts on not implemented within the foreseeable future, more margin- the nancial position of farmers. al land will be forced out of production. Throughput at mills
Figure 12: 30/70 ethanol & cogeneration division: income and margins Source: BFAP FINSIM (2014) & Botha D. (2014)
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Figure 13: Milling areas with declining production trends (tons) Source: SA CANEGROWERS data, BFAP calculations, November 2013
2.4.1 Strategic partnership between SASRI and CANE- • An alternative model for the industry could be to external- GROWERS ize the extension services from SASRI and bring it under the Due to Eldana, growers are forced to cut cane earlier, which SA CANEGROWERS structure. This could provide the neces- has had a major impact on the volume and the quality of cane sary incentive for the extension service to provide inputs delivered in the coastal areas. Ironically, though some progress on-farm that are economically driven in combination with has been made in the development of cane with GM traits, sustainable farming practises. SASRI has put the GM program on ice due to the major invest- • A more balanced strategy is required with harmonization ment required over a long period of time to develop a prod- between high-level research by SASRI and the farm-level uct that can be commercialized. While Eldana and other stem requirements of CANEGROWERS. The focus should be on borers cause approximately 47% (R930 million) of the pest re- research with the economics of sustainable production sys- lated crop loss (R1 968 million) per annum, only 10% of SASRI’s tems in mind. budget is spent of stem borer focused research. A stronger strategic partnership between SASRI and CANE- 2.4.2 Trashing versus Burning GROWERS will boost the alignment of the vision and mission As mentioned earlier in this report, farmers need to reinvest of the industry at large. Although top-class research is under- and revise their practices to become more sustainable and taken by SASRI, questions are raised regarding the practicality pro table. The issue of trashing versus burning at farm-level of the research. Farmers basically know what to do, but want to has been exhaustively debated. The introduction of cogenera- know how and when best / better practises will result in nan- tion income might persuade more farmers to adopt trashing cial bene ts. Bringing SASRI’s research focus more in line with (and removal of the trash). However the current industry struc- the economic importance of certain issues, as was suggested ture might not be as friendly to green harvesting of sugarcane. in the 2013 SASRI Committee Meeting notes, seems to be a Trashing practices could lead to improved sugarcane quality, step in the right direction. The strategic partnership between soil health and reduced fertiliser use. All these savings come at CANEGROWERS and SASRI can take the following elements some cost, as labour and transport costs increase. into consideration: Using the BFAP FINSIM model, it is possible to compare the • The critical function by SASRI is to ensure disease free cane impact of switching from burning to trashing. Figure 11 shows and the investment in GM cane and partnerships with com- the modelled impact of Coastal farmers employing trashing panies or institutes that have made more progress with GM practices instead of burning. Trashing practices signi cantly cane has to be re-considered. improve the gross margin per hectare. While expenses do in- • A stronger link between SASRI’s extension services and crease from R18 600/ha to R20 300/ha under sugarcane, the CANEGROWERS needs has to be established to align objec- modelled increase in tons sugarcane harvested leads to an tives and the transfer of technology by extension services. R850/ha improvement in gross margin. For example: integrating SUSFarm agronomic principles should be aligned with the economics of farming by CANE- GROWERS.
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Figure 14: Gross margin per hectare – Coastal Region Source: BFAP FINSIM, March 2014
Figure 15 shows the burning versus trashing margins for an ing can result in low soil temperatures that inhibits ratoon re- average farm in the Midlands region. Interestingly, the burning growth. practice yields a better margin in the Midlands where trash-
Figure 15: Gross margin per hectare – Midlands Region Source: BFAP FINSIM, March 2014
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Figure 16 shows the burning versus trashing results for the bottom line is, however, that small scale growers are gener- Northern Irrigated region. As with the Midlands region, the ally more adversely a ected than struggling large scale farm- Northern region had a larger gross margin per hectare through ers and most of these operations nd it di cult to survive. burning, as opposed to trashing. This is most likely due to ir- A change in industry structure that negatively impacted on rigation practices, as the bene t of a trash blanket is nulli ed. small scale growers was the abolition of the two pool scheme The results indicate that trashing is a viable, perhaps even that operated from 1986 to 1994. Under the pool system grow- necessary practice to adopt in the struggling Coastal region. ers over a minimum size were given an A pool quota based on The only problem is that the bene ts of trashing are not im- their historic production. The price paid for A Pool cane was mediately gained, and the additional costs of labour, transport higher, based on the local market revenue, while all produc- and RV penalties make it an unattractive option for farmers in tion above the A Pool quota received the B Pool or export
Figure 16: Gross margin per hectare – Northern irrigation region Source: BFAP FINSIM, March 2014 the short term. The bene ts of trashing over burning will only based price. All small scale grower production was considered manifest over a couple of years. to be A Pool. This not only gave them a price advantage, but it Building on the results of burning versus trashing, an ar- made it worthwhile for millers to support and incentivise small gument can be made for trashing for the purpose of cogen- growers delivering to their mill as this enhanced their share eration. By adding trash and bagasse to a farm’s sources of of the A Pool. The pool system had a number of positive at- revenue, coastal growers may actually be able to receive a tributes, but in the nineties the dti was opposed to any type of ‘fair value‘ for their bre, o setting and preferably exceeding quota and the system was phased out as part of the deregula- the penalties on the delivery of lower quality cane enforced tion in 1994. through the RV payment system. The introduction of the new Sugar Act can provide op- portunities to revive or introduce incentives that can support 2.4.3 Supporting small-holder farmers small scale growers to develop into commercially viable op- Given the critical central role by CANEGROWERS to maintain erations. This is an opportunity that can be driven collectively the surplus removal scheme and import tari dispensation, at industry level as well as by individual milling areas. There nding sustainable business models for the small scale grower are a number of initiatives that the industry can leverage to community remains a priority in any business model. The only boost the production of small scale farmers. For example, mill- way to get more smallholders to produce cane is through in- ing companies can gain enterprise development points and creased pro tability and like most other agricultural sectors, through the Department of Rural Development and Land Re- economies of scale play a role in the economic sustainability form’s recap program, recapitalization can be undertaken at of small operations. The sugar industry still provides a major farm-level. In recent years there have been examples of coun- opportunity for a large number of unskilled workers. tries imposing some form of trade restrictions within the SACU CANEGROWERS has initiated strong programmes to sup- region to boost local industry. For example, Namibia imposed port small scale growers and rich databases are available a 2-to-1 export restriction where 2 animals have to remain in that provide a sound understanding of the complexities. The the country for each animal that is exported to South Africa.
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The possibility can be explored with dti to replace at least the industry has to realise that it is not a given fact that govern- some of the imported sugar from SACU countries with sugar ment will automatically be inclined to the levels of support to produced by developing farmers? Through these types of ini- the sugar industry in future. tiatives, the industry at large will bene t and therefore support In some instances, however, the association has not been the initiative of reversing the small-scale grower trend. able to leverage the abundance of research and information to the bene t of the industry. An example of this is the fact that 3 Summary and Conclusion the bene ts of top end research that is undertaken by SASRI This report has highlighted a number of options that CANE- does not always seem to be implemented by growers or does GROWERS can consider for future planning. Apart from favour- not really address the most pressing needs of the growers, for able weather patterns that can alleviate much of the losses example the push for the development of genetically modi- occurred during the drought and ll up the mills to boost ef- ed cane that can support the farmers in combating Eldana. ciency, there are no ‘silver bullets’ that will result in a quick The fact that the industry will become more decentralised un- turnaround in pro tability. The solutions o ered are strategic der the new Sugar Act where vertical slicing will shift a large of nature and the ultimate challenge will be to generate the amount of responsibility to the farmers to negotiate with the additional revenue to manage the industry into a more sus- millers, means that the functions that do remain central are tainable position. The challenge is however to transform these even more important to CANEGROWERS than in the past. options and business strategies on paper into tangible actions. It is important for all stakeholders in the industry to realise Naturally the alternatives that are presented in this report that this new status quo will not necessarily be at the same should be interrogated and discussed at length to ensure that level that the industry used to operate under. Grower leader- all elements are covered and they are practically executable. ship has to position itself in the new environment where cane This can ideally be dealt with in a comprehensive scenario throughput becomes critical. The relationship between millers thinking exercise where the vision and the mission of CANE- and growers will change signi cantly under the new Sugar GROWERS are carefully revised and the options considered. Act and vertical slicing will potentially provide a far healthier Moving such a large organization forward provides a chal- incentive structure with the opportunity of revenue sharing lenge in itself. It is striking to note the volume of research that from the same pool. This will have de nite implications for the has been undertaken and the information that is collected. In role that CANEGROWERS as an organization can play. There some instances SASA and CANEGROWERS per se, have been should be no uncertainty about the complexity of the task that very proactive and managed to utilize information and re- lies ahead for each role-player in the industry. Moving from search to the bene t of all stakeholders in the industry. A tan- its current position to a more sustainable position will imply gible example of this is the fact that the industry has success- a consolidation at both grower and miller level. It will further fully managed to convince government that the industry can require signi cant capital to re-invest in the industry and the only operate within a single channel marketing system where options of generating additional capital are limited. It will take surpluses are removed and the local market trades at import coordination by the industry at large to leverage any sustain- parity levels and an import tari is applied to protect the in- able initiatives. dustry against cheap and more competitive imports. However,
References
Botha, D. (2014). Unpublished draft Masters Dissertation. Department Agricultural Economics, Extension and Rural Development, University of Pretoria. Chatenay, P. (2013) ‘Government Support and the Brazilian Sugar Industry’, Report prepared for the American Sugar Alliance, 17 April 2013. Available at: http://www.agri-ulse.com/uploaded/Chatenay_ Brazil_Study_0413.pdf Todd, M., Forber, G. and Digges, P. (2007) Cane Payment Systems, in Sugarcane, Second Edition (ed G. James), Blackwell Publishing Ltd, Oxford, UK. doi: 10.1002/9780470995358.ch8
– 76 – www.bfap.co.za