Sugar price pressure

International prices lead to pressure on sugar industry

By Allan Jackson – August 2008

Artificially low international sugar prices mean that this very important industry is coming under severe pressure as input costs rise and other challenges affect the industry as well.

This rather gloomy picture emerged during a media tour this month in which journalists were exposed to various industry experts and had the opportunity of meeting and questioning Dr Zweli Mkhize, Provincial MEC for Finance and Economic Development. It emerged from the tour that the various stakeholders are well aware of the problems but that the implementation of solutions is bogged in a mire of bureaucratic procedure and on-going discussions.

SA Sugar Association external affairs director Johan van der Merwe said that the key to ensuring the long-term prosperity of the industry is to stop thinking of it as a process dedicated to producing sugar. The fact of the matter, he said, is that sugar cane should be viewed in a wider context as an energy crop, and not as the feedstock for sugar production.

This view of cane is rapidly gaining ground around the world and is helping to put sugar growers and millers in other regions on a sounder economic footing. He pointed to the example of the sugar cane industry in Brazil which is now playing a major role in energy provision for that country, by providing 50% of its fuel needs in the form of ethanol and 3% of the country’s requirement for electricity.

The Brazilian government promoted the production of ethanol by introducing legislation in 1977 which made it mandatory that all fuel sold in the country should be blended with 20% bio-ethanol. The required percentage was boosted to 25% in 2007 with 100% ethanol fuel also being available at the country’s pumps.

The fact that producers have a mandated market for ethanol has been of great assistance in boosting the profitability of the industry and in spurring them on to expand sugar cane production. The sale of 100% ethanol fuel has also benefited the local economy by opening up a market for vehicles which can run on pure ethanol, and prompting major vehicle manufacturers to establish plants in Brazil to manufacture them.

The other revenue stream open to Brazilian sugar farmers is in the generation of electricity by burning bagasse, the fibrous remains of the sugar cane after it has been crushed to extract the juice. The electricity generated is used to power the sugar mills, themselves, and the surplus is sold to the Brazilian national grid.

The industry in Brazil has advanced to the extent that their sugar association has said that sugar is no longer the industry’s primary product, in spite of the huge volumes of it being produced. The key to the success of the Brazilian industry, said van der Merwe, is that the government has supported it closely by mandating the use of bio-ethanol and the sale of electricity to the grid.

David Meadows, executive director: technology at Tongaat Hulett, supported the view that sugar cane should not be seen as merely the source for sugar but as the ideal renewable energy crop. In a presentation to assembled media, he said that sugar was an extremely efficient converter of sunlight and carbon-dioxide into energy.

He pointed out that South African sugar mills already generate their own electricity by burning bagasse and that some of these mills are already selling their surplus electricity to Eskom. On the face of it, the sugar industry seems to be an ideal co-generation partner for Eskom, because it is already experienced in electricity generation.

Meadows said that the industry could ramp up its production of electricity dramatically and could eventually produce 2% of South Africa’s requirements. He estimates that the sugar millers would have to spend in the region of R10-billion to upgrade their generation capacity but that, given a satisfactory agreement on pricing with Eskom, the first co-generation project could come on stream by the end of 2010, with many of the other mills following by 2013.

The production of bio-ethanol from sugar cane is already underway in the country in a limited way, with the product being sold to liquor producers among others. Large-scale production for fuel purposes cannot, in van der Merwe’s view, take place in the absence of legislation mandating its use by the fuel industry.

Dr Mkhize acknowledged the importance of the sugar industry to the economy of the country, and to KZN in particular, and the urgent need to settle the issues of electricity co-generation and bio-fuels. He said that the issues were being discussed urgently at government level in an attempt to reach a conclusion and ensure relieve some pressure on the industry.

Other challenges facing the industry include the many land claims pending against cane farms and the fact that current owners were not making needed investments while these claims were pending. Dr Mkhize said that efforts were being made to speed things up but cautioned that the process was extremely complicated and that the government did not have the budget and resources to purchase all the land, where claims were successful, and assist new landowners to take over the land.

The weak state of the Rand is also causing a major problem with the cost of fertiliser having risen 200% in the last year, for example. Roger Armitage, CANEGROWERS’ director of economic services said that he expected the Rand to normalise in the $8.50-$9.0 by the end of 2009, which would result in greater revenues for growers, which would help to offset rising input costs.

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