“Our sugar industry should remain viable despite absence of any ‘filet de protection’”
Qs & As —
Devesh Dukhira – CEO Mauritius Sugar Syndicate
* ‘Over the last 3-4 years, we have already been operating in a free market environment and it has not been all doom’
Come October 2017 thee will be the liberalization of production quotas of cane sugar as decided by the EU. In view of this eventuality, we asked Devesh Dukhira, who is the CEO of the Mauritius Sugar Syndicate, to give an overview of the future of the sugar and its related cane-products sector in Mauritius. He is positive that these sectors still have a future, but that this will depend on increasing cost-efficiency, and already some measures have been introduced such regrouping of small growers to make economies of scale and Fairtrade certification which acts as an incentive. There are other issues, such as shortage of labour and decreasing land mass under sugar cultivation. These and other factors that impact on the sectors are discussed.
* Statistics Mauritius forecasts, in its National Accounts Estimates of March 2017 , a local sugar production of around 390,000 tonnes. In 2003, we were producing 537,155 tonnes. In that same year, the contribution of sugar to GDP and as a percentage of total exports compared to 1968 was already 6 times smaller, and in terms of total employment it had gone down to 4.4%. It is certainly no better today, and it’s not likely to improve come October 2017 with the liberalization of production quotas as decided by the EU. This begs the question: how long can this last?
The area under cane cultivation has indeed decreased by around a third over the last 15 years, attaining some 50,000 ha presently, with an annual sugar production capacity now estimated at some 400,000 tons. At the outset, a reduction in the surface area could have been anticipated as the country diversified its agro-based economy to other industrial sectors, hence triggering competition for land resources for other purposes such as manufacturing, housing, hotels, road infrastructure, etc. However, land abandonment accelerated, especially among the less efficient producers, with the abolition of the ACP/EU Sugar Protocol in 2009, which entailed the disappearance of guaranteed prices for Mauritius sugars alongside a significant price drop in the EU market: the ex-Syndicate price paid to sugar producers which had reached Rs 17,891 per ton sugar prior to the price reduction in 2006 consequently decreased to Rs 13,535 for the 2010 crop.
A reduction in the area under cane was already foreseen in the 2006-2015 Multi- Annual Adaptation Strategic Plan, though it was forecasted to decrease to only some 63,000 ha by 2015. The greater-than-expected land abandonment meanwhile was largely as a result of the continuous increases in operational costs, including labour, transport and fertilizers, which planters were not in a position to cover from their declining revenues. In order to adapt to a free market environment, efficiency had to prevail at all levels, including in the fields, where growers with economies of scale had recourse to mechanical harvesting while smaller planters were encouraged to be regrouped, and in sugar processing, which had been consolidated to only 4 sugar factories, but with larger processing capacities and more geared towards value-addition.
The liberalisation of production quotas in EU in October 2017 will indeed be one last heavy blow to our traditional trade preferences. I would like to underline that since the decision was taken by the EU in 2013 to remove all restrictions on EU beet sugar sales, EU prices have become more closely aligned with world market prices, which was indeed the target of the EU Commission, while they were at least 3 times higher during the old Sugar Protocol days. Consequently, over the last 3-4 years, we have already been operating in a free market environment and I should hasten to say that it has not been all doom. In fact, after two subsequent years of low sugar prices, as a result of depressed market conditions worldwide, our sugar exports had a breath of fresh air for the 2016 crop, when the ex-Syndicate price increased to over Rs 15,500 / ton.
I therefore believe that our industry is prepared to face this new challenge of further market liberalisation. After having undergone the required reforms, Mauritius is now considered as a medium-cost sugar producer and prides itself in being a supplier of only value-added direct consumption sugars, hence the flexibility to supply any segment in any destination. We, however, need to retain, and even enhance, our competitive edge in order to be able to face difficult market conditions which will arise periodically. In addition, through the recent revaluation of the cane by-products, namely bagasse and molasses, the revenue of producers is being broadened, which will help to dampen the effects of future sugar price volatilities.
* The Mauritius Sugar Syndicate must have undertaken some scenario planning in view of the liberalization of production quotas, in the light of which it must have examined the possibilities and formulated strategies to meet this challenge. What do you expect all the stakeholders involved in the sugar sector should be doing in that regard?
Prices in the EU are already aligned with world market prices, though with less abrupt price fluctuations owing firstly to the prevailing terms of sales contracts, and secondly to the slight protection from world market distortion given its import tariff of EUR 419 / ton. As Mauritius continues to benefit from duty-free access under the Economic Partnership Agreements, hence being on a par with the EU sugar industry, and given the reputation acquired over the years as a reliable supplier of direct consumption sugars, demand for our products in the EU is likely to persist.
However, going forward, EU prices could at times also fall below those obtainable in other markets, hence the need for the Syndicate to be increasingly versatile while arbitrating between EU and non-EU sales destinations, and prioritizing those offering the highest prices at a specific time. In the same vein, the marketing resources within the Syndicate are being intensified in order to be closer to the final customers and thus be able to respond more rapidly to changing market needs.
Market diversification with the view to spread market risks has been an ongoing process since abolition of the Sugar Protocol. The high value added unrefined special sugars, now comprising around one quarter of the industry’s product mix, have been exported to non-EU destinations over a number of years: in addition to some 70,000 tons being sold in 22 countries across EU, another 60,000 tons are now being exported to over 30 other countries, including in the US. Since 2014 we also started exporting our white refined sugar to the regional market, sales over the last 3 years having neared 70,000 tons. Total sales outside EU hence attained some 16% of total exports for the 2016 crop. However, to be able to maintain that flexibility on market diversification, cost efficiency at all levels of production and along the supply chain should prevail.
* It was said earlier by the International Sugar Organisation that after four years of world sugar surplus, the world market should soon start a deficit cycle and prices can only increase. How soon will that happen – if at all it does?
Like for most commodities, sugar undergoes alternate global surplus/deficit cycles. While consumption keeps rising worldwide, with increasing population and also enhanced purchasing power, especially in lesser developed countries, global production, irrespective of the impact of weather conditions, might not always follow the trend. When prices are attractive, there is a tendency to invest in additional production, thereby entailing a surplus, while low price levels stifle production growth thereby leading to subsequent deficits.
After 5 consecutive years of global surplus until 2014/15, a new deficit cycle started in 2015/16, triggering an increase in market prices, and which also explains the higher price levels obtained for our 2016 crop, hence the improvement in the ex-Syndicate price by 18% compared with the preceding harvest. Such cycles can, however, last over shorter lapse of time, and a global surplus is forecasted to kick-in again in 2017/18.
I would like to underline that world sugar prices can also be influenced by factors other than production/consumption, namely the value of the currency among the world’s largest exporters, oil prices, bearing in mind the flexibility to produce ethanol from cane for running motor vehicles, and non-trade investment in sugar futures.
* Does this mean you are confident that this erstwhile major pillar of the Mauritian economy still has a future? If so, how will it shape up in the short, medium and long terms?
As long as the industry retains its competitive edge, both on the production front and along the supply chain, it should remain viable despite absence of any ‘filet de protection’. Mauritius is one of the rare ex-Sugar Protocol beneficiaries to have undergone major industrial reform whereby it now has the necessary tools to trade in a free market environment. An obvious export destination is the African continent, which represents an annual deficit of some 7 M tons sugar, but we should not lose sight of the fact that our competitors, namely other ACP countries also having to divert sugar from EU, not to mention the world’s largest sugar suppliers like Brazil and Thailand, are increasingly aggressive in the region. It is therefore essential that we keep improving our cost-efficiency.
We should also not undermine the importance of maintaining a sugar industry in the long term beyond the economic front, namely for food security, for preservation of the environment and our lagoons, also a sine qua non for the tourist industry, and for its social impact, still providing livelihood to some 15,000 planters. On the other hand, in addition to its sugar content, cane is an important biomass, which is already being exploited in Mauritius, namely in co-generation and in the production of alcohol and ethanol.
* The acreage of lands previously under sugar cane cultivation and abandoned for various reasons but mostly due to unfavourable returns from the current sugar prices has increased down the years. It will require a lot of convincing for planters, mostly the small ones as well as the medium-sized sugarcane land holders, not to abandon their lands, isn’t it?
Given that we will have to adapt to price level fluctuations, we should be able to take advantage of the profitable crop years to be prepared to face more dire market conditions. While the broadening of the revenue base with cane by-products will help dampen the impact of lower price levels, it is essential that planters continuously invest in increasing the efficiency of their crops, namely through good cultural practices and regular cane ratoon renewal.
It is interesting to note that the average cane yield in Mauritius has been on a declining trend and is now much lower than in the rest of Southern Africa, hence less sugar is presently being produced over the same surface area. This tendency can be reversed if there is a commitment from the part of the planters: those producers’ cooperatives having undergone Fairtrade certification have in fact been able to improve their yields, not only through better cultural practices, as per Fairtrade principles, but also with the financial support they have obtained from the premium.
Government has announced on the other hand the setting up of a land bank to try to recuperate abandoned lands to be leased to planters willing to invest in efficient cane cultivation. This should help restore a critical mass of cane for the industry to be viable. It should be noted that there is increasingly a strong correlation between planters and millers, as the former need millers to be efficient to optimize their revenue while the millers need a critical mass of cane to be sustainable. It is therefore in everyone’s interest that we retain as much land under cane cultivation.
* The earlier range of measures made available to planters down the years to enhance the productivity of their cane production – from de-rocking to replanting, has, according to the planters themselves, not met their objectives. What else could be done in terms of incentives to the planters for them not to abandon their cultivations?
The major constraints presently faced by planters, including larger entities, are availability of labour and their increasing cost. With an ageing planters’ community while Mauritians are less keen to work in cane fields, it has become essential for the sugar industry to consider other options, such as having recourse to competitive imported labour, just like for the other sectors of the economy such as in textile, seafood and construction.
Secondly cost-efficiency can be increased through regrouping of growers, as those having embarked on Fairtrade certification have experienced: it not only provides them the economies of scale with respect to operational costs but also allows savings on purchase of fertilisers, transport, etc. Thirdly, further broadening of the revenue base from the by-products of cane would cushion planters from future fluctuations in sugar prices.
* Haven’t we also missed the train in terms of maximizing opportunities, such as by working on by-products and sugar-based new products, which would have compensated for revenue shortfalls from low sugar prices?
It should be recalled that, in the latest revision of the SIE Act in December 2016, Government has already taken steps to increase planters’ proceeds from bagasse and molasses, namely through the Sugar Cane Sustainability Fund and Contribution from Alcohol Distillers/Bottlers respectively. While no stone is left unturned to explore all potentially remunerative market outlets for the different types of sugars being produced, even if further product development is required, we should ensure in the case of development of sugar-based products, that the sugar delivered obtains the highest price levels.
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