KEVIN TUTANI: The economic importance of sugar and sugarcane

Sugarcane is the source of 80%-85% of the world’s sugar supplies, with the other 15% derived mainly from sugar beet and corn starch. Apart from uses in foodstuffs, sugarcane is also used in the manufacturing of products such as ethanol, animal stock feed, fertilisers, paper, plastics and various types of chemicals. 

SA's sugarcane value chain includes 21,776 farmers, directly employs 65,000 workers and indirectly employs 270,000 people. Up to 1-million people, mainly in rural areas, are dependent on this sector of the economy for their survival.

According to the SA Sugar Association the industry has a modest annual turnover of R20bn, contributing about 1% of GDP, and makes up 6% of total agricultural output. These numbers may lead one to the conclusion that the industry is minor and irrelevant in the greater scheme of things, but it is indispensable to the economies of KwaZulu-Natal and Mpumalanga. Sugarcane makes up about half of total agricultural activity (agricultural GDP) in both provinces. Thus, the failure of the sugar industry would have an adverse effect on the wellbeing of vulnerable people in numerous towns and rural villages.    

One of the major problems the industry faces is cheap sugar imports. Owing to comparative disadvantages in production importers have been able to bring in sugar from Brazil, Eswatini and India, among others, at lower prices than charged locally. According the US department of agriculture’s foreign agricultural service, SA imported 405,433 tonnes of sugar (361,860 tonnes of raw sugar and 43,573 tonnes of refined sugar) in the 2021/22 marketing year.

As a result, some of the higher priced and less competitive SA sugar had to be sold in export markets at a loss. In the 2021/22 marketing year SA's sugar exports amounted to 534,605 tonnes (342, 266 tonnes of raw sugar and 192,339 tonnes of refined sugar). This implies that the country could have been self-sufficient in sugar had it not been for the pricing problem. 

The Health Promotion Levy (HPL), also known as the “sugar tax”, which was introduced in April 2018, has further reduced the size of the domestic sugar market. The levy is set at 2.1c/gram of sugar content that exceeds 4g/100ml. In the first year of implementation of the HPL 250,000 tonnes of sugar sales to the local beverage sector were lost and the SA sugar industry registered a revenue loss of at least R1.2bn.

In that same year a total of 9,000 farmers and farm workers lost their jobs. An additional 580 jobs were lost in the sugar processing industry, which includes milling and refining. The SA Sugar Association reported that by February 2022 about 16,000 jobs had been lost in the sugarcane value chain as a result of the introduction of the HPL. 

Fortunately for the sector, stakeholders in the industry (including the government) developed an actionable Sugar Value Chain Master Plan, which was signed in November 2020. The plan aims to revive and set the industry on a new growth path by 2030. Some sections of the Master Plan entail: finding alternative uses for sugarcane (such as ethanol biofuels); promoting SA sugar to local industry, retailers and consumers; better tariff protection; and a moratorium on HPL increases until 2025. 

SA has a biofuels industrial strategy dating as far back as 2007. This proposes blending ethanol in petrol at a rate of 2% ethanol and 98% petrol. For diesel the tabled ratio is 5% biofuel with 95% diesel. This implies that once the strategy is implemented, every fuel station will be mandated to sell blended fuel. However, this proposal has not been implemented, although the Sugar Value Chain Master Plan has revived interest in ethanol production.

If implemented, the sugar industry will benefit as more crops will be cultivated and processed for domestic ethanol requirements. This could be a win-win situation as jobs will be created, energy security would improve and the economy would benefit, while motorists should pay less at the pump since ethanol is typically cheaper than petrol. Moreover, with only a few modifications a regular petrol vehicle can take as much as E85 (85% ethanol and 25% petrol). This can be achieved by making minor adjustments such as upgrading the fuel pump and injectors.

Getting back to economics and the sugar value chain, it therefore makes sense for government to encourage motorists to upgrade to E85 vehicles and provide commensurate rebates to those who transition. This will make higher ethanol blending ratios possible and assist in strengthening the sugar value chain while adding to the economy’s industrial capacity.

Incentives could include reducing vehicle licence and toll fees for motorists who use E85 vehicles. To avoid fraud, new reflective number plates and vehicle registration books could be issued to consumers who upgrade. If the proposed policies are successful, the next target might be to blend diesel with locally cultivated biofuels. Such policies may seem radical and be met with resistance initially, but they could be a crucial part of managing energy security and reducing the fuel import bill going forward.   

Ethanol’s importance goes beyond fuel blending as it can also be used to generate electricity. Currently local sugarcane processors use a production method called co-generation, where ethanol and other sugarcane by-products such as bagasse, are used to concurrently provide both heat and electricity in the processing of sugarcane. In future, ethanol power plants of a larger size could be established across the country, with their output feeding into the national grid. Brazil provides plentiful opportunities to learn from in this area as a significant portion of its energy is provided by ethanol plants.

The Sugar Value Chain Master Plan has created mechanisms for negotiation with manufacturers and retailers with the goal of them committing to stocking at least 80% SA-produced sugar. There has already been an upswing in sugar sales at retail level as a result.

Studies into the feasibility of cultivating sugar beet and corn for sugar and their by-products may also prove useful, and assist in consolidating the sugar industry. Areas unsuitable for sugarcane may be used for sugar beet or corn, since the crops require almost opposite climatic conditions. Excellent results may be obtained if other provinces can be used for alternative sugar crops.

• Tutani is a political economy analyst.