No sweet deal

Big Sugar has been granted increased protection just as the global sugar price has reached a 28-year high.

The local industry, which is protected against distorted global sugar prices, received an increase in the dollar- based reference price (DBRP) last week, despite objections from major industrial sugar users, including Nestlé and the South African Federation of Soft Drink Manufacturers.

The DBRP, which was raised from $330 (about R2 600) a ton to $358 (just more than R2 800) a ton, acts as a trigger to tariff protections against cheaper sugar imports from international producers.

When the global price of sugar falls below the DBRP for 20 consecutive days the customs tariff is applied.

The tariff is calculated as the difference between the reference price and a moving average of the international refined sugar price traded on the London International Financial Futures and Options Exchange.

But global markets have seen unprecedented highs for both raw and refined sugar because of shortages after droughts in India, the world’s second-largest producer.

In addition, the supply from the world’s largest producer, Brazil, has increasingly been diverted to the use of biofuels.

As of Tuesday refined sugar traded at $552.10 (R4 345) a ton, while raw sugar traded at 21.92c (US) (R1.73) a pound.

According to one analyst who wished to remain anonymous, the rising price is unlikely to affect local consumers, who are generally used to paying more than the world price, given the protected status of the industry.

But he estimated the local price to be just less than the world price, sitting at 20c (US) (R1.57) a pound. This is a ‘notional price”, he said, as raw sugar prices are determined by varying negotiations between producers and clients and these can be opaque.

The South African Sugar Association (Sasa) told the Mail & Guardian that there was no local price for sugar, but the price of raw bulk that Sasa sold to customers was confidential for ‘competitive reasons”.

Nevertheless, food producers and manufacturers are concerned that the increase in the DBRP will hurt consumers, particularly if international sugar prices fall again.

Nestlé argues that, historically, South Africa’s sugar price has been higher than that on international markets. ‘Historical data shows that the South African price is generally higher than world market prices. Nestlé sees this as hampering our ability to source more competitively elsewhere, while understanding that the current tariff structure is intended to protect this specific industry,” said company spokesperson Ravi Pillay.

‘It must be noted that the duty structure in place is — an obstacle to import at competitive prices because of this industry being regulated. Price increases are imposed on customers and not negotiated.”

The DBRP aims to create a domestic price in line with a ‘normalised world price for sugar”, according to a discussion document by the department of trade and industry on the review of the Sugar Act.

The Sugar Act of 1978, which has been amended a number of times, and the Sugar Industry Agreement (SIA), govern the workings of the local sugar industry.

The Act and the supplementary SIA allow, among other things, for the industry to determine the level of domestic market requirement and remove the surplus to export to world markets.

It also requires millers — who sell more than their allocated share to the local market — to pay an amount to Sasa that is distributed to underperforming mills.

The DBRP, with these legislative protections, has helped boost the local industry, but critics, among them Nestlé, which form part of the South African Chocolate and Sweet Manufacturers Association, say it is not competitive enough to warrant this level of protection. The South African Federation of Soft Drink Manufacturers echoed these concerns.

The increase of the DBRP is a ‘counter-productive measure and not in the spirit of opening up competition and trade”.

Mandla Tisani, the president of the federation, said increases in the sugar price since July 2008 totalled about 20%.

Although input-cost increases for the industry might have played a role, the ‘bottom line is that household food products which contain sugar are impacted by these increases,” he said.

‘I hope the sugar industry will act responsibly and delay any further increases until the first half of 2010. Our representatives have taken this up with Sasa.”

The International Trade Administration Commission of South Africa (Itac), which instituted the changes to the DBRP, defended its decision. ‘In terms of the revised tariff dispensation for sugar there will currently be no duty in the light of the prevailing high world price. Sugar can therefore be imported at reigning world prices to compete with South African sugar,” it said in response to questions from the M&G.

It said that increased food prices were a concern but, according to research by the National Agricultural Marketing Council, of 24 products sugar has shown the second-lowest price increase since 2008.

‘In terms of Itac’s recommendations, there will be no customs duty payable on sugar in the current circumstances and it therefore can be imported from anywhere in the world, putting downward pressure on prices,” it said.

Itac chief commissioner Siyabulela Tsengiwe said that, given the distortions in the global sugar market, Itac was unlikely to review the tariff dispensation on sugar.

Should the issue of agricultural subsidies be resolved under World Trade Organisation negotiations and freer trade be achieved, it might consider revising its stance. But the Sugar Act review was still not finalised, despite being instituted in 2001.

Leon Louw, executive director of the Free Market Foundation, said the issue remained that the sugar industry had ‘never been weaned off its protections” as other agricultural sectors had been. He said that the argument that freer trade would undermine the long-term viability of the local industry was usually posited by protected sectors.

The industry had to be more competitive and efficient, he said, and where there was a risk of job losses resources could be reallocated to create jobs elsewhere. He also noted that earlier research done by the Free Market Foundation indicated that sugar is included in many foods, not simply confectionary and soft drinks. Because of this price fluctuations for sugar may ultimately affect the consumer–Additional reporting by Percy Mabandu