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South African miller diversifies revenue base while supporting smallholder sugar cane development

26 January 2014

In November 2013, Tongaat Hulett reported the company’s highest level of sugar production in 10 years, with production this season projected at “between 1,366 and 1,408 million [tonnes]”, up from 1,254 million tonnes last season. However, according to CEO Peter Staude, the financial benefits of increased sugar production are “offset by the current revenue dynamics and the impact of imports”, with “the world sugar price at its lowest level in many years” and regional and local market sales being impacted by increased imports.

Mr Staude has called on the South African government to adjust import tariffs “to be more in line with the dynamics of today’s world”. World sugar prices have fallen by “49% since reaching a three decade high in 2011”, as sugar production has been expanded in response to the high prices.

In the longer term, Tongaat Hulett aims to increase the sugar it processes in South Africa by “improving yields and getting more hectares under cane… through community and small-scale farmers, with support from the government”. Under a cooperation agreement already concluded, “an additional 8,000 ha of new cane land supplying Tongaat Hulett’s mills are expected to be planted in the current year.”

In the 6 months to September 2013, Tongaat Hulett saw a record performance by its land conversion division (with former sugar estate lands being converted to other uses, largely real estate), more than doubling the profit generated from land conversion “from R246 million to R512 million”. According to press reports, over the next 25 years “the company will probably sell about 13,000 hectares.”

Also during November, the ISO raised its estimate for the sugar surplus in 2013–14 to 4.73 million tonnes. However, the ISO also highlighted the prospect of “the first output deficit in five years” next season, with lower prices curbing sugar production. Next season, Brazil will utilise more of its cane for ethanol production, reducing sugar output to a projected 39 million tonnes from 41.1 million tonnes. But given the level of sugar stocks, despite projections for increased sugar consumption, this return to a production deficit is not expected to lead to any significant rally in sugar prices. 

Editorial comment

Volatility in raw sugar prices is leading to major ACP-based sugar milling companies diversifying their revenue streams and reducing their exposure to raw sugar production. Tongaat Hulett has therefore become increasingly involved in property development on former sugar estate land in the coastal areas of KwaZulu-Natal, while at the same time lending its support to government-sponsored smallholder sugar cane farming schemes.

Raw sugar prices have been volatile since 2010, but on a largely consistent downward trend since July 2012. This has meant both lower prices and lost markets for South African sugar exporters such as Tongaat Hulett, hence the growing emphasis on revenue diversification, a process which is successfully under way.

For most sugar cane farmers, income is based solely on revenues from sales of raw sugar and molasses. Small-scale and independent farmers are thus highly vulnerable to lower raw sugar prices, particularly since they have no share in any revenues derived from value-added products produced from molasses and cane waste. Reducing the vulnerability of small-scale farmers and independent growers to declining raw sugar prices (particularly in a context of rising input costs) may be considered an urgent policy priority in the sugar sector, and one that increasingly needs to be addressed within any public–private sector cooperation initiatives to promote smallholder sugar cane farming schemes.

In the absence of moves to address the vulnerability of cane farmers to raw sugar price falls, the danger is that the financial viability of smallholder sugar cane farming schemes could be undermined.


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