Cogent solutions to reposition the sugar industry to enable it to thrive and prosper in the changed and more challenging market place with everyone on board are available. It is capital that the process of taking stock and defining the way forward is transparent, straightforward and free from deep games and the parochial politics of sugar
Anyone worth his salt in sugar as a sugar trader or a broker seasoned in the commercial intricacies of the world sugar trade will confirm that only those competitive sugar industries which benefit from remunerative prices from a significant tonnage of preferential sugar market access or large domestic markets for sugar can assure their long term viability and sustainability.
Neither of these conditions applies to the present Mauritian sugar industry.
Similarly, as is the case for commodities dependent on climatic conditions and other unforeseen circumstances, world sugar prices are basically unpredictable beyond a limited timeframe, fluctuate to the tune of market events and sentiment and are generally low around the level of the most efficient producers in the world. Thus sugar prices averaged 10.37 US cents per lb ($228.61 per tonne) in the century between 1912 and 2015 and are presently around 13.25 cents per lb. Yet the authors of the Landlell Mills Consultants (LMC) report and those who jockeyed to shape its content and disputed measures do so in the teeth of these basic market realities.
A sugar industry can only survive if it is competitive in the market place. This is a simple rule applicable to all businesses.
The 2007 LMC report examining the comparative cost competitiveness of the likely major European Union suppliers of both raw and white sugar had concluded that Mauritius’ raw sugar supply costs were (except for land locked Zambia) higher than those of its competitors in Africa and ranked 7th out of 11 ACP exporters of white sugar examined in their analysis.
The 2015 report admits that despite the 2006-15 MAAS (Multi-Annual Adaptation Strategy) cost cutting measures such as the rationalisation of the sugar industry to only 4 mill clusters to reap the economies of scale, the streamlining of the work force through the exit of some 7,500 field and factory employees through the various Voluntary Retirement Schemes (VRS) and the strategic decision to move up the value chain to produce white refined sugar in order to enhance revenue from market premia, the sugar industry is unable to cover its costs in the current more competitive market conditions.
According to the report, the estimated ex-Syndicate price of Rs 12,500 per tonne for the 2014 crop is far below the viability price of producers throughout the sector. The LMC study confirms that with the exception of small planters who are members of cooperative credit societies registered to earn the Fairtrade premium, the price of white refined sugar (WRS) obtained in the EU will not cover the industry average viability price which is moreover expected to rise further before the end of the decade. The Fairtrade premium however only benefits some 5,000 planters as the market for such sugars is limited.
Lifeline to buy time
The price gap between market prices and the viability price is expected to widen further in the light of the bearish outlook of the EU prices in the next few years in anticipation of and in the wake of the abolition of internal sugar and isoglucose quotas in the EU as from October 2017. The report estimates the revenue gap to amount to some Rs 5 billion during the period 2015-2018 and suggests amending the law to use the Sugar Industry Fund Board reserves of some Rs 5.4 billion to help the industry bridge its likely income gap over the coming years. Such a proposal which basically provides a lifeline to a loss making sugar industry helps buy time to cover the investments made. On tire nos dernières cartouches.
The various measures of MAAS received substantial financial support in the form of the EU Accompanying Measures amounting to some Euros 260 million (Rs 10.4 billion) in the case of Mauritius, the bulk of which has already been disbursed by the EU as general budget support. In accordance with the MAAS grid of allocations, the largest share of some 40% of the Accompanying Measures has been disbursed to the corporate sector. This EU funding and support to MAAS has enabled the restructuring of the industry from a sugar industry to a sugar cane cluster in order to adjust to the more competitive, liberalised and tougher market conditions prevailing post EU sugar reform.
Conscious of the writing on the wall, this strategic restructuring helped generate handsome revenue streams from the sugar cane by-product ventures in the cluster such as energy production, distilleries, etc., to make good and shore up the falling revenue from sugar and thus set the bases for a sustainable and viable sugar cane sector.
The intrinsic rationale of this approach was that should, as seems to be the case presently, the sugar production activity in the cluster no longer be viable in the market place in the wake of the elimination of market preferences and the softening of sugar values owing to fiercer competition, high biomass varieties of canes would be cultivated to provide feedstock to the various ventures in the sugar cane cluster such as energy production plants, production of value added derivatives from the cane biomass, etc.
The Terms of reference (TOR) of the LMC study clearly states that the object of MAAS was ‘to support the cane sector to operate in a cluster mode and to safeguard a crop which from 2015 onwards will be an invaluable asset in terms of the production of renewable environment friendly energy, and which has the potential of being an efficient multiproduct bio-factory for the production of high value-added products.’
Props and uncompetitiveness
Faced with the finding that devoid of the props of market preferences, the sugar industry is no longer competitive in spite of all the cost cutting measures implemented with the help of the massive support of the Accompanying Measures, the Report glibly states that Mauritius should do away with ‘the shackles of its sugar history’ and should think in terms of competition in a globalised world. Indeed. The sugar industry has for donkeys years enjoyed market preferences of every kind and hue to prop its sustainability.
Preferential treatment resulting from the abolition in 1826 by Farquhar of a duty of 10% imposed on our sugar, the Imperial Preference applicable on trade among British colonies, the Canadian Preference, the Commonwealth Sugar Agreement before Independence and the Sugar Protocol, the US Sugar Program and the Special Preferential Sugar Agreement, etc., post Independence have all sustained the viability of the industry over that time.
The industry even jockeyed for trade concessions from the US over sugar imports whilst the United Kingdom was proposing excision of the Chagos Archipelago from our territory! Such an ingrained culture to thrive under the protective and comfortable umbrella of preferences has thwarted all intent to streamline the sugar industry costs and overheads to be competitive per se.
Highlighting the gap between prospective market prices for various sugars marketed in diverse targeted markets and the industry viability prices, the Report in essence proposes through diverse measures that all the different players and stakeholders of the sugar industry and the country from the workers, the planters, the consumers, vehicle owners and almost everybody bend over or somersault backwards in a bid to accommodate and purportedly render the sugar industry viable, without any guarantee that this is going to be so.
What is flabbergasting is that among the measures blithely being proposed is the imposition of a 10% duty on refined sugar imports (with raw sugar continuing to enter the country duty free) in order to ring fence through the duty protection the bulk of the domestic market for refined sugar for the benefit of the country’s sugar refiners. What is the logic of propping the sugar industry at all costs and at the expense of everyone when refined sugar produced locally is not even competitive on the domestic market without duty protection let alone be competitive enough to support the costs of logistics and at destination costs in targeted export markets? Why force the consumer to pay a higher price for sugar? Why flog a lame horse? This is just not on.
MAAS had at least the merit of addressing and responding in a holistic manner to the preoccupations and diverse interests of every stakeholder of the industry.
The streamlining of the labour force ensured that the latter benefited from the various VRS packages; the planters benefited from FORIP de-rocking and land preparation schemes whereas the corporate sector rationalisation and conversion of the sugar industry into a sugar cane industry benefited from substantial support from the Accompanying Measures and the sale of land by sugar companies exempt of the land conversion tax of Rs 3.5 million per hectare under the SIE Act.
As is the case very often, the planter is used as a Trojan horse when in reality the key objectives in respect of irrigation and mechanization of their lands under FORIP or the 35% shareholding commitment into the sugar cane industry ventures have not been fulfilled as yet. There was a modicum of consensus in regard to the MAAS. This is the only viable model which can be applicable in the sugar cane sector. To do otherwise would be to stoke unrest and court revolt.
In contrast, the measures proposed in the 2015 LMC report have no such intent as the central object is to try to safeguard the sugar mills at the expense of everyone else. It is not at all sure if this will happen as in spite of the conjectures and analysis on market outlook and price prospects, the biggest unknown going forward is the level of world sugar prices, the key driver of prices in the various targeted markets and the pivotal factor in determining whether the industry manages to be afloat or otherwise. The analysis reveals a very naive and simplistic view of the dynamics of the world market.
Such a skewed approach is in the teeth of objects of the TOR of the LMC study whose aim was inter alia to ensure that ‘all the major partners of the industry, in particular the small planters remain competitive players in the main stream of production and continue to derive a meaningful revenue.’ Another red herring?
We should recall that the study was commissioned pursuant to high-level bi-lateral meetings with EC with the object of seeking additional support from the EU to mitigate the adverse consequences of the reform on the industry. Although the TOR also asked the consultants to quantify ‘the costs of the impact and the mitigation measures including support from the EU, there is not a single word in the report re EU financial support nor an explanation why this fundamental element of the TOR was blithely not addressed. There is instead a vague reference to tapping resources from environmental funds worldwide which are available to Small Island Developing States (SIDS). It is clear that the TOR has been sidetracked from its core objectives to meet the vested agenda of those jockeying the most for the disputed measures.
Keeping everyone on board
For those of us who have been farming cane on family estates over generations (and even paid export duty in the 70s), it is absolutely anathema to propose measures which are detrimental to the core interests of anyone of the major stakeholders. We cannot have a sugar industry where everyone is not on board and in particular the most vulnerable. Not to do so would be putting the clock back to antediluvian times. To even envisage otherwise is to go against the fundamental ethos of the industry which stems from trial and tribulations lived through and the kinship of battling it through thick and thin through generations.
The field and millwork are among the hardest jobs in the country. How can there be measures being proposed to water down and recast the terms of employment of the workforce to maintain the sugar industry afloat when they are subject to such inequalities and need the urgent establishment of a minimum pay? How can we take from the vulnerable to give to the endowed? How can there not be a sense of generosity and gratitude towards all those hardy field and factory hands who have for years contributed so much to the prosperity of the sugar industry?
The Report is also replete with unfounded clichés and flawed assertions to for example explain the spreading phenomenon of abandonment of cane cultivation by small planters. There is only one simple reason: dwindling net revenue. Why would a small planter who has farmed sugar cane for generations continue to do so today when according to the report he currently earns a paltry net revenue of Rs 9,000 in a year on a 2 hectare farm if his cost of production is Rs 15, 000 or even less if his costs are higher? It is too little revenue for too much effort.
Under the circumstances, it is legitimate that the small planter calls it a day after assiduous contribution to the sector for so long. As they represent a potent entrepreneurial class, appropriate steps must be swiftly taken to train and facilitate where possible their reconversion into other more remunerative agricultural activities. The miller planter would also have abandoned cane cultivation if his dwindling net sugar revenue was not made good and beefed up by remunerative income flows from revenue from the other activities of the sugar cane cluster such as energy production, distilleries, ethanol production and eventually other value added derivatives from the cane biomass. The delay in providing similar conditions of revenue though the promised 35% shareholding in industries of the sugar cane cluster has been instrumental in accelerating the abandonment of cane cultivation by planters.
It is a fallacy to compare the revenue of the miller with that of the planters and say that the latter also obtain dividends from the Sugar Investment Trust (SIT) as only 24 % of the shares have been acquired by the planters owing to the adverse perception of poor return from the initial 20% SIT stake in the sugar mills in 1994. The unsold shares were taken up by the corporate sector which holds 35% with the employees holding 41%.
It is therefore imperative that the unrealized commitment agreed since December 2007 of a 35% shareholding of present planters and workers in the sugar cane sector be implemented forthwith through a new investment vehicle holding stock in the more viable and remunerative sugar cane cluster industries of the future. This means in electricity producing power plants, rum distilleries, ethanol production plants and other viable streams of activities using the by-products of the cane as feedstock rather than in the sugar industry refineries which are beleaguered by un-remunerative prices, a weak Euro and difficult and unpredictable market conditions.
Just as is the case presently for the corporate sector, the 35% investment should therefore provide, after generations of diligent commitment to the sugar industry, a remunerative legacy for the future to the planters and employees, the other historical stakeholders of the sugar industry.
Hype and reality
The Report keeps silent on so many key issues. With a falling sugar production, only 15% of the electricity produced by the sugar sector is produced from a green feedstock: bagasse. This tonnage will fall further subject to the improvement in energy output through the use of more pointed technology or the use of biomass and field residues. The rest of the energy from the industry IPPs (Independent Power Plants) is produced in cogeneration plants from coal.
Beau Champ runs a coal only power plant. The report builds a hype about green environment friendly energy production when the quantum of green energy production is finite but sweeps under the carpet the fact that burning coal is also a leading cause of toxic air pollution through the emissions of carbon dioxide, sulphur dioxide, particle matter and mercury causing serious illnesses in the population. They also cause smog and acid rain. They require stringent air pollution control measures. It is therefore high time to open up and encourage as many solar panel, wind energy farms or other green feedstock fuelled power plants subject to technical feasibility to really enhance our green energy footprint.
There are also some glaring inefficiencies in the industry regarding the micro management of the crop. The rigorous application of protocols in respect of timely harvest according to the varieties planted or the programme of replantation leaves much to be desired as the field management seems overstretched. Mill stoppages owing to frequent breakdowns after mills are completely overhauled in the inter crop period are disconcerting. The stoppages in the 2014 crop ranged between 10 – 29 days. It causes major hardships to planters. All this ineptitude does not help maximize sugar output from the falling volume of canes available. The near 119,000 tonnes of cane left un-harvested at the end of the delayed 2014 crop cannot be justified solely by the 9-day strike which affected the industry in November last.
The present structure of the industry and the safeguards enacted to ensure fair arbitrage between the stakeholders of the industry is the result of careful and judicious thought aimed at striking the right balance among conflicting interests of the stakeholders. Similar arbitrations take place in all the sugar industries across the world.
For example the Cane Planters and Millers Arbitration and Control Board which controls weights and sugar content of producers is a key element of this arbitrage. Similarly, the Mauritius Sugar Syndicate which inter ala developed the sale of special sugars from one container in 1978 to some 100,000 tonnes marketed as the world market leader across the world generating hundreds of millions of Rupees of additional revenue for the benefit of all producers alike is an important element of this arbitrage and part of the Syndicate’s marketing goodwill belonging to all producers.
The producers are able to oversee policies and the distribution of proceeds. How and through what mechanism would the planters obtain as presently a fair price from the proceeds of sugar sales if his mill were to be also granted the status of an authorized body? It would be foolhardy, as suggested in the Report, to open this Pandora’s box which would lead to harmful competition among our own sugars to the detriment of all producers, whittle the huge value of the goodwill and basically irrevocably rock the boat.
Sugar is obviously an emotional subject. Should we not bell the cat and say that the measures proposed are an admission that it is the end of the road? Cogent solutions to reposition the sugar industry to enable it to thrive and prosper in the changed and more challenging market place with everyone on board are available. It is capital that the process of taking stock and defining the way forward is transparent, straightforward and free from deep games and the parochial politics of sugar. The Minister of Agriculture must not allow himself to be hustled by loaded parliamentary questions but seek wise counsel as the disputed array of measures proposed some of which are too specific not to be tell tale, provide a short fuse for ire and raise serious questions about sugar’s future. There are already potent signs of that.
* Published in print edition on 8 May 2015