Cane farmers face dairy dilemma

South Africa’s cane growers have declared a dispute marking a breakdown in an 80-year partnership with local milling groups over government plans to restructure the industry.

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The millers insist that low-value bulk industrial sales, which comprise 45% of the market, are used as a proxy for total market proceeds. The latter figure is used to calculate how much growers get for their cane, with the prepack market (where millers achieve their best margins) left out of the equation. The industry is dominated by Illovo, a subsidiary of Associated British Foods, Tongaat-Hulett Sugar and Transvaal Suiker Beperk (TSB), who together account for 80% of sugar produced in South Africa.

A survey found that between 1995 and 2005 cane price rises did not keep pace with inflation or production cost increases, suggesting growers are increasingly facing a profit squeeze. Illovo and Tongaat posted group operating profits totalling over R2,3 billion in the last financial year, up from R1,5 billion the year before.

The growers believe if the Department of Trade and Industry (DTI) caves in to the millers’ demands it will leave them in the same predicament as dairy farmers, with smaller producers squeezed out by processors maximising shareholder profits. Growers and millers were supposed to submit a joint position to the DTI on reviewing the Sugar Act in May, but were unable to reach agreement after five years of bitter wrangling. Both parties have since submitted separate proposals. The act, which falls under the DTI, has governed the interdependent relationship between millers and growers since 1935. Cane is only profitable within a fixed radius from a mill, and millers need security of supply to ensure viability.

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A complex proceeds-sharing arrangement ensures growers aren’t exploited by local mills, usually the only bidders for their produce. It divides all industry revenue, after industry research and marketing costs are deducted, between growers and millers according to fixed percentages. The growers’ share is used to calculate the price paid for the portion of cane used for making sugar, which varies per ton according to quality.

The Sugar Act grants the industry an import tariff to protect it from dumping by subsidised world producers and allows it to set an artificial price for the local market that approaches import parity, including the tariff.  Industrial sugar buyers, such as softdrink and sweet makers, are not happy with the arrangement as it limits their ability to bargain on the open market.

Government also wants the highly regulated industry liberalised, giving more competition among millers and abolishing the artificial pricing system. DTI proposes that the actual price achieved for sugar in the market must determine what growers get paid, rather than vice versa.

“We have no problem with this,” said SA Canegrowers’ Association chairperson Bruce Galloway. “But we just want our fair share of the pie, as determined by the market.” Galloway believes the unfair price calculation, together with having to share the costs of substantial rebates offered to industrial sugar customers, will drive many growers out of business.

Smallscale growers, who make up 95% of SA’s cane farmers although producing only 10% of the total crop, and newly established black commercial farmers, who face far higher land and interest costs than their white counterparts, will be hardest hit. The SA Millers’ Association declined to comment, referring all queries to the DTI. Illovo MD Don MacLeod said discussions on reviewing the act were complex and technical, and could not be addressed in isolation. Tongaat-Hulett Sugar MD Bruce Dunlop and TSB financial director Gerrit van der Walt declined to comment.

So far DTI has refused to take sides. Elize Koekemoer, the official handling the review, says government’s position hasn’t yet been finalised but that state intervention would focus on “fairness throughout the value chain”. The department expects to finalise its position by the end of the year and submit an amendment bill to Cabinet in the first half of 2008. – Stephan Hofstätter