The latest financial results released by Africa’s largest sugar millers and refiners shows while sugar production is up, profits are down with no relief in sight before the 2019/20 financial year.

As the South African government and the sugar industry reportedly carry on talks behind the scenes in a bid to find a sustainable future for production in the country, the release of the annual and interim financial results for the region’s major milling groups show a year with more downs than ups.

Tongaat Hulett interim CEO, Sydney Mtsambiwa said the sugar and property development group had “encountered significant challenges” with operating profit for the period ending September 30, 2018, at 64% below the R1 471 billion earned over the same period in 2017.

He said the difficult market conditions experienced by the group’s sugar operations in South Africa and Mozambique during the second half of 2017/18 had continued into the first half of 2018/19 resulting in a negative impact on both revenue and cane valuations.

Sugar production increase

While the sugar operations recorded a combined operating profit of R1 138 billion against R1 308 billion in 2017, before cane valuations, revenue from the higher production was offset by a lower world market raw sugar price which averaged at 22% below the previous comparative period.

Sugar production for the six-month period from April 1 increased to 954 000 tons against 848 000 tons in the previous period, including the raw sugar equivalent production in Eswatini (formerly Swaziland).

Operating profits for the Tongaat Hulett group in the Southern African Development Community also dropped significantly with the Zimbabwe recording an operating profit of R537 million against R580 million before cane valuations in 2017 and in Mozambique, the sugar operations recorded an operating profit of R341 million against a R394 million before cane valuations in 2017.

Zimbabwe pays dividends

A dividend of R114 million was received from the group’s Triangle operation in Zimbabwe, bringing the total received since the beginning of September 2017 to R372 million with a process to remit a further dividend from Zimbabwe currently underway.

Tongaat Hulett will also commission its new refinery at Xinavane in Mozambique which Mtsambiwa said would replace imported white sugar and satisfy the country’s growing demand for industrial sugar.

He said in South Africa where cheap imports had severely impacted on the industry (for at least 7 weeks this year imported sugar flooded the country free of any tariff) the effects of the subsequent introduction of a higher tariff in August by the International Trade Administration Commission (ITAC) were, however, starting to kick in.

“Indications are that imported sugar is working itself out of the market although the extent of the ‘buy-in’ at the lower price may slow sales volumes in the second half of the year,” he said.

The Dollar-based Reference Price on which the tariff is calculated rose from US$566 for a ton (equivalent import price of R8 469.00) of sugar imported to US$680 a ton (equivalent import price of R10 174.00).

While the higher duty protection would assist in rebuilding margins for both millers and growers, Mtsambiwa said he believed the full benefit would only become evident in the 2019/20 financial results.

AB Sugar posts operating profit decline

In his first annual report to shareholders having succeeded Charles Sinclair as Chairman of Associated British Foods (ABF) – which wholly owns Illovo Sugar – Michael McLintock said the end of the European Union sugar regime resulted in a decline in the operating profit for AB Sugar, however, the “strength and breadth” of the group had enabled them to absorb a major reduction in profit and still achieve progress in profit for the group overall.

Ongoing global sugar businesses across the group for the 52 weeks ending September 30, 2018 posted a revenue of £1 730m (about R32bn) against £2 034m (R37bn) in 2017.

The adjusted operating profit was pegged at £123m (about R2,3 billion) versus £249m (R4.6bn) in 2017 and the adjusted profit margin at 7.1% against 12.2% in 2017. The return on average capital employed was 7.5% compared with 15.7% last year.

On the outlook for the forthcoming financial year for the group’s sugar investments, Sinclair predicted the profit at AB Sugar to be “significantly” lower, reflecting the full year effect of the current level of EU sugar prices which, he said, would represent a further reduction on the average prices achieved this year.

The EU prices, McLintock, said had mostly affected their UK and Spanish businesses, while Illovo had recorded “another successful year” and continued to be profitable.

Sugar production at Illovo Sugar which is headquartered in Durban, South Africa, increased to 1.7 million tons from 1.64 million tons last year.

“Favourable weather conditions improved irrigation and crop management more than offset lower yields in Zambia,” he said.

Interestingly, in the Zambian operation’s annual review for the year ending August 31, smuggled sugar into the region was described as being on the increase particularly in the first half of the financial year, ostensibly as a direct result of the availability of surplus sugar on the world market.

While both Tongaat Hulett and Illovo Sugar point to cost reduction measures through improved performance and efficiency programmes, all indications are for a rough ride ahead at least until 2020 when sugar prices EU have settled and – despite intensive lobbying for the region’s sugar industry with Britain – the final outcome of the Brexit settlement between the UK and the European Union becomes more apparent.

Company profile sidebars if required:

Tongaat Hulett at a glance

Tongaat Hulett was formed through a merger between the Hulett Corporation Ltd and the Tongaat Group Ltd, with both their operations dating back to the 1800s. The group has had a primary listing on the Johannesburg Stock Exchange since 1952, and a secondary listing on the London Stock Exchange since 1939.

Tongaat Hulett is an agriculture and agri-processing business, focusing on the complementary feedstocks of sugarcane and maize.

The group has a substantial land portfolio in KwaZulu-Natal with expanded sugar mills and estates in Mozambique. The two operations namely at Xinavane and Mafambisse have a combined milling capacity of over 340 000 tons of sugar a year. The sugar estates are under irrigation.

In Eswatini (formerly Swaziland) Tongaat Hulett has 3 838ha of fully-irrigated farms which have the capacity to produce a Raw Sugar Equivalent (RSE) of about 60 000 tons a year.

As one of the most important employers in Zimbabwe, Tongaat Hulett has a combined installed sugar milling capacity of more than 640 000 tons and a total refined sugar installed capacity at 60 000 tons. The group’s ethanol plant at Triangle has an installed capacity of 41 million litres over a 48-week production season.

The group also owns Zimbabwe’s largest cattle herd.

Illovo Sugar at a glance

Illovo Sugar is Africa’s biggest sugar producer and has extensive agricultural and manufacturing operations in six African countries. The group produces raw and refined sugar regional and world markets from sugar cane supplied by its own agricultural operations and independent outgrowers who supply cane to Illovo’s factories.

Installed electricity generating capacity, fuelled by renewable resources, annually provides around 90% of the group’s energy requirements.  The group is a wholly-owned subsidiary of Associated British Foods plc (ABF), a diversified international food, ingredients and retail group operating in 48 countries.

In Malawi, Illovo Sugar (Malawi) which is listed on the Malawi Stock Exchange has 76% of the issued share capital held by the Illovo group, two operations produce sugar cane and raw and refined sugar, together with speciality sugars. Illovo Malawi is the country’s sole sugar producer with more than 60% of total sugar sales sold to the domestic consumer and industrial markets. The rest is exported to the EU, USA and surrounding countries.

In Mozambique Illovo holds a 90% shareholding in Maragra Açúcar SA with the balance of shares owned by a private minority investor.

In Eswatini (formerly Swaziland) Illovo has a 60% share in Ubombo Sugar, with the balance of shares held on behalf of the Swati nation.

Illovo holds 55% of the issues share capital in Kilombero Sugar Company Ltd in Tanzania which produced direct consumption brown sugar marketed and distributed by the company. 

Zambia Sugar is the group’s second largest sugar producer following a major agricultural and factory expansion project completed in 2009, which increased total annual sugar production capacity from around 200 000 tons to 450 000 tons. The company is listed on the Lusaka Stock Exchange with 76% of shares held by the Illovo group and the balance by institutional and private investors. With increased sugar availability following the expansion project, sales to preferential markets in the EU and into surrounding African countries have risen significantly. The company also produces speciality sugars for export to the EU and syrup for local consumer markets.

RELATED ARTICLES:

If trend forecaster Bronwyn Williams could have anyone as dinner guests they would be historian and author Niall Ferguson, Yuval Harari, the author of the futuristic book, Homo Deus, and fantasy writer Niela Gaiman.

And the talk around the table, Williams says, would be about the past, the future, how we all got here and where are we going to next.

Thirty-three-year-old Williams, guest speaker at this year’s South African Sugar Technologists’ Association (SASTA) congress, is a Trend Translator and Future Finance Specialist for the Johannesburg-based Flux Trends. She has over a decade’s experience in marketing management and trend research, working predominantly with brands in the financial and B2B industries.

Her congress address – titled: The Business of Disruption – is expected to delve into how the fourth industrial revolution and artificial intelligence will affect manufacturing and agri-processing taking into account how digitisation, social media, individualisation and virtual reality disrupts society as we know it across the globe.

“Drones, blockchain technology, and the Internet of Things are three key technologies for the future of farming,” she said.

Blockchain technology, in short, is a system of de-centralised and transparent record keeping and the Internet of Things is  – as Wikipedia explains – a network of physical devices, vehicles, appliances and other items embedded with electronics, software, sensors, actuators and connectivity which enables these things to “talk” to each other.

Also, employment will continue to shift away from mass farms towards micro farms and farming technology and jobs that currently exist will be replaced by an entirely new set of functions.

Williams predicts the growth of neo-subsistance farmers or educated, former professional classes who are already investing in small scale boutique farming projects such as urban bee farming, hydroponic plants and even rooftop farms.

“Some companies are even researching self-efficient table-top vegetable and herb farms for every kitchen. There is also a trend towards a return to door-to-door delivery of farm fresh produce such as milk and greens.”

This trend she says is in response to the emergence of on-demand and GIG economies, or more simply put, a labour market driven by short-term contracts and freelance work resulting in people being subjected to a constantly evolving timetable.

Research she added was also now mainly driven by the private sector rather than by the state-sponsored academia which she says is changing the focus of technological research and where and how the results of that research is put into practice.

And, on how she would deal with the current messaging about the negative impact of sugar on diet and the sugar tax (now known as the Health Promotions Levy charged on sugar drinks), Williams said as an honest marketing message, the industry should promote moderation while waiting for the next food trend. “Food fashions come and go.”

Businesses across the world, whether in agriculture, manufacturing or in the services industries are finding themselves running two different entities at the same time. In other words, keeping the current business afloat, while focusing on the staggering acceleration of change. “There is no fail-safe method for a business to stay alive. The trick is to get comfortable with failing fast and often, and to understand that leaders have to break and re-break their businesses many times over in order to succeed.”

As a result, Williams says, big businesses requiring complex organisation are inherently less agile than smaller start-ups and will feel the impact of these trends acutely. “Speed and agility to adapt to the changing market conditions are the primary indicators of long-term business success.”

• The 2017 SASTA Congress attracted 603 delegates – the highest number ever in the history of the event. Also, the 87 presentations were the most ever and for the first time the number of papers on factory projects overtook the number of papers on agriculture topics.

• The South African Sugar Technologists’ Association was established in 1926 and is an organisation for technical workers and others interested in the technical aspects of South Africa’s sugar industry.

RELATED ARTICLES:

While South Africa’s water supply was in crisis, delegates at the conference heard how the challenges were not insurmountable and sustainable water supply in the future was indeed possible through improved legislation and recognition of the importance of the role of the Water User Associations (WUA) for the effective management of domestic and agricultural supply.

Water expert Professor Anthony Turton, a keynote speaker at the two-day event on the East Rand, cautioned against halting all development in the country in a bid to save water.

“Water is an infinitely renewable resource, not a finite and limited resource. This latter belief has led us to a situation where we have crippled our economy because of the focus on gathering water in dams and limiting its use. We need to get ourselves into a new paradigm of abundance or our economy won’t progress,” he said.

Focusing on the impact of the drought on the economy of the Western Cape, he said if South Africa continued aggressively managing demand for water it would kill the economy.

“As a result of limiting water there has been massive disinvestment in the Cape and the unintended consequences are unemployment and higher crime. The Reserve Bank is currently busy with a study into defaulting on banking loans due to unemployment in the Cape as a result of the drought. No one can dispute the devastating effects of the drought in South Africa.” Turton said.

The “paradigm of scarcity” which had defined the country’s views on water had resulted in delicate eco-systems becoming “fundamentally altered” and a shift in view was fundamental if both water supply and the country’s economy was to become sustainable. ‘If we shift our view to water being an infinitely renewable resource it will change the way we manage our water and our economy,” he said.

Turton outlined the dire economic situation in the country saying it was crucial to attract investment as the country was “beyond” bankrupt. “Foreign direct investment in South Africa has disappeared. We can’t get it back without water. We can’t create jobs for 26 million people without water.

“We need to base our thinking of water around recycling, desalination and a paradigm of abundance where we invest, not where we just come to a halt. There is a lot of capital that is willing to flow if government is willing to get on board, instead of bringing everything related to water to a standstill in an effort to save it. I don’t see a future in South Africa unless all coastal cities go the desalination route. This is possible and there are companies who want to implement the technology at a fraction of the cost than what was previously thought. This will then free up water that can be used for agriculture.”

Turton said the drought had now forced the country into making improved decisions and was changing the way of doing things around the efficacy of water supply, which would ultimately lead to great improvements. 

“We will turn this thing around – this crisis will not go to waste,” he said.

Improved communication critical for sustainable water resource management

Legislative delays, operational shortfalls and a disconnect along the whole water value chain from users, to government to water management institutions were largely to blame for inadequate water management in South Africa.

Speakers at the water user association conference in Boksburg highlighted the need to improve communication and to find ways to collectively manage water in a sustainable, responsible way geared to improve quality of life and build the economy.

A major stumbling block they said was weak institutional capacity in the Department of Water and Sanitation (DWA), local municipalities, and the delay in establishing Catchment Management Areas (CMA). To date only two out of the nine needed were established and operational.

In a statement relayed to the conference, Thoko Sigwaza, the chief director of institutional oversight at the DWA said the drought had shown the need for effective compliance monitoring and enforcement of water regulations.

This, the statement said, required the presence of strong local institutions to support government in these regulatory activities.

“Sadly CMAs  have only been partially implemented since the promulgation of the National Water Act, partly due to a lack of clarity as to whether to proceed with the establishment of CMAs or not. At the same time, however, DWA’s performance of its water management and regulatory functions has been weak. The two CMAs that were established have been hampered in their operations by an absence of delegations, late budget transfers and other constraints.”

Further problems in water management by government were highlighted in the statement:

• The setting of charges and collection of revenue for water resource management charges have not yet been taken up by CMAs as envisaged. This relates to the slow pace of CMA establishment as National Treasury is insisting on revenue collection and working towards financial sustainable institutions.

• Revenues are insufficient to meet the water resource infrastructure financing needs of the country as a whole. The reasons for this may be threefold: price levels may be too low, fiscal contributions are insufficient and the registration, billing and collection processes by DWA are inadequate resulting in revenue losses.  Some institutions are not paying the Department.

• Progress in allocating water for productive purposes to promote transformation has been very slow and water use patterns are still highly skewed and unequal.

• Uncertainty and a lack of clarity with respect to institutional roles and responsibilities have contributed to poor performance.

• Frequent changes in leadership within the Department over the last ten years, and the loss of experienced staff have also negatively affected performance.

• Municipal investments in water conservation and demand management activities are sub-optimal.

CEO of SAAFWUA, Nic Knoetze, said while the DWA had admitted its failures, the fact that the National Water Act was still in a draft form and not implemented, was frustrating and indicative of the failure by government to deal with sustainable water supply.

“Meanwhile they are concentrating on amending the bill when the old bill has not even been in use.”

The 75 delegates agreed the WUAs and Irrigation Boards were a proven way to better manage water.

Knoetze said where these institutions were operating effectively, illegal water usage was at a minimum compared with the water supply under government management which he described as a “grey area” difficult to control.

In the statement, Sigwaza agreed economic growth was dependent on a reliable and secure supply of water. “The water management sector is not a significant employer, but it contributes to a flourishing economy through irrigation expansion, it enables sustainable rural livelihoods and ensures water is provided reliably, safely and at least cost to other economic sectors. The sector is also critical for power generation,” she said.

Text Boxes:

Statistics on water in South Africa:

• Average rainfall in South Africa is only 465 mm per year compared to the world average of 860 mm
• Only 9% of rainfall ends up as run-off in rivers
• Only 4% of rainfall recharges our aquifers
• Over 60% of river flow comes from only 20% of the land area
• SA’s water security relies mainly on fresh surface water captured in dams
• There are more than 4395 registered dams, of which 342 belong to the government
• Only 15% of water consumption comes from groundwater sources
• Agriculture is the largest water user at 61% of total available water
• Over the last ten years, the domestic sector water use (including industrial and commercial use) increased from 22% to 27% of the total water usage
• 98% of available high assurance water supply is already allocated, leaving only 2% remaining
• It has been calculated that by 2030 there will be a shortfall of ±17% of available surface and ground water supply

Source: Judge Antonie Gildenhuys

Text box 2:

Where does climate change fit in?

 Farmers should use historical data to mitigate the risks of uncertain weather.

Prof Hannes Rautenbach from the South African Weather Service answered four key questions on climate change:

Q: Does climate change exist?

A: Yes, but it has less of an effect on global weather patterns than is commonly believed. Global warming is taking place, but it is at a very slow rate. Our region has only experienced a 0.5ºC change per decade.

Q: So climate change has not been responsible for the drought in the Western Cape?

A: There is no evidence to suggest that. Historical rainfall trends show variables. There have been wet and dry years. But overall we are not in an area that is favourable for rainfall because of our location on the globe. We are in a part of the world that has some of the biggest deserts. Rain is an anomaly in our area.

Q: But there we have seen some changes in weather patterns?

A: Yes, the intensity of rainfall is increasing and we are seeing rain over a short period. There are more dry days over the eastern part of the country and there are increases in rainfall in the north of the country. The 10 warmest years in the 136 year record have all occurred since 2000 with the exception of 1998. The year 2016 ranks as the warmest year on record.

Q: How can these extremes be mitigated?

A: The focus is so strong on climate change that most people ignore historical records and trends. I can’t stress the importance of keeping sound records and observing your environment enough. This is crucial to prevent disasters because the trends in your records will warn you in advance. Become more informed and prepared. Take note of your surroundings and have a look at your extremes. Use seasonal predictions and basic observations in your area regarding rainfall, temperatures and wind.

Text box 3

Does your Water Users’ Association tick all the right boxes for effective management?

All WUAs should be subjected to an annual performance review to ensure they are functioning optimally.

The National Water Act (No 36 of 1998) provides the following requirements for an effective WUA:

• Performance agreement in place for CEO
• Business Plan
• Latest Annual report
• Water Management Plan
• Operation and Maintenance Agreement in place
• Operation and Maintenance Manual in place
• Signed Billing Agent agreement
• Do you have a signed Risk Management Plan / Emergency preparedness plan (in the case of dams)?
• Are Scheme Regulations in place?
• Do your remunerate Board Members?
• List of approved Policies
• Action plan to address outstanding policies
• Reflection on process to determine tariffs
• Assessment roll of members / water users available

In recent years the Loskop dam in Mpumalanga has been transformed in recent years, from a polluted water source, to a lifeline for the regions farmers, thanks to effective management.

RELATED ARTICLES:

Janet Edmonds, the fulltime co-ordinator for the Midlands Sustainable Sugar Supply Chain Collaboration, with the framed Bonsucro Inspire Award.

A strong conservation ethic and a vision for a future where sugarcane growers worked in concert with the environment and their neighbouring communities, has seen one of South Africa’s most sustainable farming models, SUSFARMS®, land international recognition.

SUSFARMS®, which was founded by timber and sugarcane growers in KwaZulu-Natal’s Noodsberg district in 1998, was runner-up in this year’s global Bonsucro Inspire Awards held in Managua Nicaragua during the Bonsucro Week 2018.

The accolade is awarded to an “organisation, partnership or individual in recognition of their exemplary and transformative contributions to the sustainable sugarcane sector”.

Brazil’s Association of Sugarcane Suppliers from Guariba in Brazil were the overall winners with their Top Cane Project aimed at building “gradual and continuous improvement processes for the better management of farms”.

Noodsberg sugarcane grower and conservation activist, Ant Edmonds, who is also a co-founder of SUSFARMS® and sits on the Bonsucro sub-committee dedicated to driving ethical production of the commodity across the globe, said the award was particularly significant for the South African programme, not only because of the value of the recognition, but because it gave impetus to the immense work that had already been done.

“Unfortunately, there is a perception that SUSFARMS® is applicable only to KZN Midlands farmers, because it was developed here. But it is a values-driven programme that can be applied across the agricultural sector, and in particular on all commercial and smallscale sugarcane farms,” Edmonds said.

SUSFARMS® started out when the Noodsberg Canegrowers’ Association decided in 1998 to develop conservation management guidelines for the district.

“They realised the need to improve the environmental standards on their sugarcane and timber farms. So, they started with the development of an Environmental Management System. That was completed in 2002. In 2004 the World Wildlife Fund (WWF) then partnered with the growers by supporting a more practical system which resulted in SuSFarMs®.

“In 2012 the South African Sugar Research Institute (SASRI) initiated a legislation update and simplified the system once more before launching the second edition of what is now known as SUSFARMS®. The publication of the fourth edition is imminent,” Edmonds said.

Today the Collaboration has the support of Illovo Sugar Africa, Solidaridad Southern Africa, Coca Cola Beverages South Africa, WWF-SA with funding from the Nedbank Green Trust, UCL Company, Noodsberg Canegrowers’ Association, Illovo Planters Group in Eston and the South African Sugar Association and SASRI.

Edmonds said what was really exciting was the adoption of the programme by Illovo Sugar on all its outgrower programmes in both South Africa and the SADC region. “This is really where we see the sustainability of the programme and more importantly its outcome in better farming practices throughout the sub-Saharan region,” Edmonds said.

While the uptake of the programme on the KwaZulu-Natal coastline is still limited, he said at least 85 000has in the KZN Midlands were being managed using the SUSFARMS® Progress Tracker or self-assessment tool. This comprises Illovo Sugar’s Eston and Noodsberg mill supply areas, as well as the UCL Company’s mill supply area around Dalton.

The SUSFARMS® tool has three specific chapters headed Prosperity, People and Planet.

“Prosperity deals with the measurement of economic planning and record-keeping. People assists to measure the social responsibility aspects of the operation and then planet which measures environmental stewardship.”

Edmonds said growers also provided information on the yield and quality of their harvested cane, and data such as rainfall, irrigation water, diesel, electricity, fertiliser and chemicals.

He said the development of the tool was at a point now where the whole idea was to try and develop metrics – or standards of measurement – around the total impact of a farm operation.

“We have to stress though that SUSFARMS® is not about policing growers, although there is that perception, it is rather for each individual to benchmark their performance against their peers. For example, one grower might find he is using more input than other guys. It is about getting on that trajectory of continuous improvement,” Edmonds said.

RELATED ARTICLES:

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.

RELATED ARTICLES:

Shaun Madho, who is the head of Factory Support and leads areas of consulting, training, technology transfer and factory performance figures management at South Africa’s Sugar Milling Research Institute NPC (SMRI) based in Durban, writes for Shukela on the readiness of the country’s sugar factories to adapt to the modern tech-savvy age or, as it is more commonly known, the fourth industrial revolution, in order to find solutions to age-old problems.  He asks whether or not the country’s sugar factories are ready to embrace ubiquitous and mobile supercomputing, the internet of things, system integrations and big data and analytics? Or, he asks, are they to continue filling out chalkboards and analysing performance reports by line, armed with a sharpened pencil and a ruler?  

A quick look around sugar mills will tell you that we are indeed ready for change. Decision-makers at the mills are mostly tech-savvy Generation Y’ers (born 1977-1994), while hot on their heels are Generation Z’ers (born 1995-2014) who are already being employed as operational staff and managers-in-training. 

And when asked about how they and their needs differ from the traditional sugar technologists, these Y and Z’ers responded as follows: 

• We are certainly less resistant to change. New technologies are being developed at Mach-speed, yes, but they are also becoming outdated at an equally rapid pace. Growing up with these developments we have become used to change and are ever willing to adopt new ideas.  
• Real-time information please. At our fingertips. If possible to program and control our equipment as well. Just more information in general and available quickly.” 
• Social media has made us more open to constant communication and sharing of information. Holding on to precious information? No, we want to share our knowledge with as many people as possible in the hope that we acquire new knowledge in the process.  

These responses are relevant as we move to best utilise the skills available to address current challenges in the sugar industry.  

South African sugar technologists are generally well regarded as some of the best in the global sugar industry.  Many of these technologists have spent their entire working lives in the industry, have accumulated significant knowledge and expertise, and are now either retired or nearing retirement age.  

It is imperative then that their knowledge and expertise is made available in new ways for the next generation to improve the recoveries and profitability of the industry. 

At present there is a lot of interest by milling companies to “get back to basics” with general operations and troubleshooting to find root causes of problem areas , and it is widely acknowledged that this is an area that the SMRI can influence and where the institute ought to be proactive.

In order to do so, the SMRI has adopted an approach that is both relevant to the times and will address some of the long-standing sugar technology issues.

These are some of the initiatives already in place or planned for development:  

• As an enhancement to existing routine factory control procedures there is the roll-out of SMRI-NIRS (near-infrared spectroscopy) prediction equations to mill laboratories for the rapid prediction of sucrose, fructose, glucose, pol, brix, dry solids, colour and ash in factory streams and products. The NIRS application on factory streams has been carefully developed by the SMRI with thousands of samples included within the prediction equations, to the extent that the technique is sufficiently robust and reproducible enough on factory streams to be able to replace conventional analytical methods. Factories can benefit from the technology by performing more analyses (many not previously possible at mills, e.g. sucrose predictions), more often and without the use of hazardous lead (used for pol analysis – which is now also not required as direct sucrose predictions are available). The technique has already been approved by the Factory Control Advisory Committee (FCAC) and mills are equipped to implement the technology. 
• Development of SMRI-NIRS decision-making toolkits that provide insights into problem areas. New to factories will be daily data on loss of sucrose across unit operations (due to inversion); reducing sugars, ash and colour profiles on all factory streams (useful for troubleshooting and developing operational strategies); Target Purity Difference (TPD)determinations  on C-molasses (from every centrifugal determined on-demand at the factories, as opposed to a composited sample analysed a week later at the SMRI); pointers to previously difficult-to-detect, unwanted reactions (e.g. Maillard reactions between glucose and amino acids that result in colour formation); and more. The daily information and individual toolkits developed, integrated within the factories’ laboratory information management system, will not only provide results but will highlight problem areas.  
• Development of a forum-type mobile app, to be used by SMRI Ten-Week Course in Sugar Engineering alumni (of which there are several hundred) to post queries on sugar-related matters. The app uploaded on smart devices will enable queries to be sent from anywhere. Replies are anticipated to be provided by peers and subject-matter experts. The app is to be webinar and podcast friendly and will be used to transfer knowledge from experienced technologists. 
• Introduction of e-learning programmes to provide convenient and far-reaching knowledge-transfer. 
• Adding functionality to existing SMRI factory performance data reports to produce intelligent reports that don’t just give data but use algorithms to highlight potential problem areas. 
• Development of software for mining the SMRI factory figures database to produce dashboards with trends on demand. 
• Compilation of best practice guidelines for notoriously difficult-to-operate processes and situations. Guidelines are to be widely available on forums that are easily accessible to sugar factory managers e.g. as electronic links when problem areas are identified through intelligent reports. 
• Development of energy monitoring and benchmarking tools to allow for internal and inter-factory energy use reporting and comparison. Instead of just reporting Steam % Cane as a measure of energy usage, the tools being developed are to use data from various platforms in factories (laboratory systems, control systems and reports) to highlight areas of energy losses. Going forward real-time data analytics should be possible. 

These initiatives by the SMRI are the first steps towards assisting the industry to address the evolving needs of the new look work-force so as to best exploit their talents, while using the captured wisdom of experienced sugar technologists. 

We look forward to the new generation Y and Z technologists continuing the proud tradition of the South African sugar technologists in finding ways to improve performance and also raising the bar by finding new ways to solve old problems using new technologies. 

RELATED ARTICLES: