Cane payment in the SA Sugar Industry explained

Following the shock announcement of this year’s much reduced RV price, Industrial Affairs Manager at SA Canegrowers, Muhammad Kadwa writes for Shukela on the background to the Recoverable Value (RV) Cane Payment system since 2000, how the price is calculated and the remuneration trend for sugarcane growers since its inception. Kadwa also emphasises the urgent need for tariff protection for the future health of the industry and the reasons behind the 15% drop in the 2017/18 RV price compared with the previous season. Over the same period the notional price dropped by about 20%.

RV Payment System

Sugarcane farmers in South Africa have been remunerated for their sugarcane according to the Recoverable Value (RV) Cane Payments system since 2000. This was agreed following the decision by the industry to seek an alternative to the sucrose-based payment system, which had been in place since 1926.

The objective of moving to a RV payment system was to incentivise growers to produce better quality cane i.e. to maximise sucrose and minimise non-sucrose and fibre content – with the negative impacts of non-sucrose being greater than fibre.

The RV Payment System recognises that not all the sucrose in cane delivered to the mill can be recovered as sugar – the amount of sugar that can be extracted from cane during the milling process does not depend only on the amount of sucrose in the cane, but also on the amount of non-sucrose and fibre present.

RV is a percentage of sugarcane and RV yield is the basis for cane payment, which is calculated as follows:

Cane Revenue = RV Price (Rands/RV ton)   X   (Tons cane over weigh bridge   X   RV%)

= RV Price (Rands/RV ton)   X  RV tons

The Recoverable Value (RV) Formula:

RV% = S – dN – cF

Where:

S = Sucrose % cane delivered

N = Non-sucrose % cane delivered

F = Fibre % cane delivered

d = The relative value of sucrose lost from sugar production per unit of non-sucrose taking into account the value of molasses recovered per unit of non-sucrose

c = The loss of sucrose from sugar production per unit of fibre

RV% cane generally ranges from 9% to 14% throughout the sugarcane milling season.

As is the case in most sugarcane producing countries in the world, sugar is the most valuable output from sugarcane and this can only be processed, on a large scale, at a sugar mill. The majority of sugarcane produced in South Africa is supplied by independent farmers.

Therefore, the SA sugar industry operates as a partnership where all proceeds from sugar sales (both local and export) and molasses sales are pooled and then distributed among farmers and millers according to a Division of Proceeds ratio.

Initially, this split was determined by the farmers and millers proportionate costs of production that were calculated each season.

However, a fixed Division of Proceeds ratio was introduced in the 1994-1995 season and was reviewed in 2003-2004. The Division of Proceeds calculation is essentially in the determination of the RV price and all revenue is received from within the industry structures (no government or external revenue).

Determination of RV Price

Gross Revenue from local and export sugar sales and from molasses sales is termed Total Industrial Proceeds (Figure 1 below). Various industrial costs, including the South African Sugar Association (Sasa) administration lev and, core South African Sugarcane Research Institute (Sasri) funding, among others, are deducted from the Total Industrial Proceeds to yield the Net Divisible Proceeds. The Net Divisible Proceeds are then split between farmers and millers according to the fixed division of proceeds ratio to yield the Farmers’ Share and the Millers’ Share (approximately 64% to growers and 36% to millers). Proceeds are estimated and distributed monthly until the fixed price per ton of RV paid to farmers is calculated at the end of the season by dividing the Farmers’ Share by the total tonnage of RV delivered in the industry.

Figure 1: Division of Proceeds calculation in the South African sugar industry

There are several factors that drive industry net revenue and, hence, the RV Price. Some of the key factors are as follows:

• Total saleable sugar production
• Total saleable molasses production
• Cane quality – especially RV% cane
• Local Notional Price for refined sugar
• Local Notional Price for brown sugar
• Local Notional Price for molasses
• Sugar sales in the SACU region
• Rand/ Dollar exchange rate
• World white sugar price
• World raw sugar price
• Industry costs
• Sugar to RV Ratio

RV Price Trend

Figure 2 below illustrates the RV Price trend since the introduction of the RV payment system in 2000-2001 sugar industry season (which runs from April to March). The RV Price has gradually increased for most seasons until the 2015-2016 season. The price increases are attributed to small crops, due to drought, which resulted in minimal export availability. There was a considerable decrease in the 2017-2018 RV price, which was largely attributed to the high volume of imported sugar which has displaced local sales and increased export availability.

Drop in 2017-2018 RV Price

The RV Price increased 23.9% in 2016-2017 and then decreased 15.1% in 2017-2018. The large increase in 2016-2017 was due to the drought, which resulted in a significantly smaller crop and limited export exposure, as displayed in Table 1.

The major reason for the drop in the RV Price is due to insufficient protection from cheap imported sugar for most of the 2017-2018 season. 517 967 tons of sugar were reported to have been imported from January to December 2017, or 417 959 tons between April 2017 and March 2018. This resulted in about 40% of local sugar production being exported and forced the South African sugar industry to drop the notional price by more than 20% over the past 12 months. Over the same period, the world price has decreased by more than 30% and the Rand has strengthened against the Dollar. The combined effect of reduced local and export prices has been the key factor in the significant reduction in the 2017-2018 season RV Price, compared to the 2016-2017 final price.

Another factor that has reduced local demand for sugar is the implementation of the Health Promotion Levy (HPL). The reduced demand from the HPL-affected sector is largely a consequence of the reformulation initiatives by sugar-sweetened beverage manufacturers, which included the use of non-nutritive sweeteners to substitute sugar, as well as smaller pack sizes.

Table 1: 2016/17 vs 2016/17 RV Price Major Factors

*estimated values

Insufficient Import Protection

The local notional price for sugar usually trends with the consumer price index in South Africa. However, South Africa is generally a net exporter of sugar. This is due to local production, on average, being greater than the local demand for sugar. The industry price realised for export sugar is typically lower than local prices due to a distorted world market, which can partly be attributed to many sugar producing countries benefitting from production subsidies and other government interventions.

The South African government protects the sugar industry from imports by using an import tariff, based on a Dollar-Based reference price (DBRP).

The DBRP has been $566 per ton sugar since April 2014. The DBRP is designed to ensure that an importer will pay at least the equivalent of $566 for imported sugar. SA Canegrowers believes that this the current DBRP is far below the local industry cost of production.

Unfortunately, the DBRP has not increased since April 2014 and the industry believes that the current DBRP level provides insufficient protection from world market imports. Furthermore, there have been periods over the past few seasons where there has been a delay in the South African government gazetting a new tariff, which has allowed significant volumes of imports to displace local sales and has increased export availability.

The large drop in the notional price over the past year is not sustainable in the long-term. The South African sugar industry requires enhanced import protection, for example, through an increase in the DBRP or capping import volumes, to survive in the long-term.

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