THE SUGAR SUB-SECTOR

(Challenges and opportunities)

By:

Philip Kariuki

I. INTRODUCTION AND BACKGROUND

The sugar sector is one of the most important agricultural sectors in Western and Nyanza provinces. In 1997, it employed 35,000 workers, was a major source of income to over 100,000 small scale farmers and supported over 2 million people. However, by 2000, the number of people employed had reduced to 10,552. The status and importance of sugar as a source of livelihood and viable economic concern is under threat from various changes and factors in the sugar industry and the country as a whole. These threats can be summarized as follows:

(a) Policy and marketing problems elated to inability of factories to market locally produced sugar in the face of dumped imports

(b) Poor cane husbandry practices leading to low yields at farm level in quantities per ha and in sucrose content

(c) Low productivity levels at factory level leading to low sugar yields, capacity under-utilization and, hence, low income to farmers. This in turn negatively affects cane husbandry practices.

2. CURRENT CHALLENGES FACING THE SUGAR INDUSTRY SUB-SECTOR

The challenges facing the sugar sub-sector are elaborated on hereunder.

(i) Competition from foreign producers arising from economic liberalization;

Economic liberalization and global trade de-regulation present challenges to the sugar industry sub-sector of the Kenyan economy. Multi-lateral and regional trade treaties, specifically those associated with COMESA, EAC and WTO, have facilitated the importation of sugar into Kenya at minimal or Zero tariffs from producer member states. In addition, the sugar imported, is in most cases, heavily subsidized by its source Government This has had an adverse impact on the marketability of locally produced sugar, which because of its high production cost relative to imported sugar, cannot compete head to head with foreign sugar in the domestic and foreign markets.

Although quotas for imported sugar to address the shortfall in demand have been set over the years, the government has been unable to enforce these quotas; resulting in annual gluts of sugar supply in the local market. This is illustrated in the following tables.

Table: Production and consumption of sugar, 1996 - 2000

(000 Tonnes)	1996	1997	1998	1999	2000
Production	389	401	449	471	402
Consumption	570	580	587	609	631
Shortfall	181	179	138	138	229

Source: Economic survey, 2001

Imports in the same period are given as follows:

	1996	1997	1998	1999	2000
(000 Tonnes)	66	52	187	58	118

Source: Economic survey, 2001

The import figures have no relationship to the shortfall in consumption figures against local production. It can only be assumed that consumption figures are either exaggerated or that substantial imports are not recorded. According to reports released by sugar companies and the press, the later is most likely the case. In fact, reports indicate that there is a glut in the local sugar market occasioned by the supply of cheap imported sugar. This oversupply has been detrimental to local producers who have been unable to dispose of their higher priced inventories.

Large imported stocks have worsened the cash flow problems of domestic sugar companies and the sugar industry as a whole. Kenya is currently levying the maximum duty allowed in sugar under the WTO, whose limits are to be reduced over the coming years; making foreign competition in the sugar industry inevitable. Failure by member countries to adhere to trade rules and regulations concerning zero or minimal tariffs on imports exposes them to stiff penalties and retaliation by trade organizations and individual member states, nullifying or making extremely difficult any attempt by member states to prop up local industries in trouble.

(ii) Decline in productivity at farm level

Farm level efficiency has been in constant decline for the last 6 years. Area under cane has declined from 131,000 ha in 1996 to 107,000 ha in 2000. According to Kenya Sugar Authority data, average cane yield stands at 60.52 tonnes/ha. This is a reduction of 22% from the 1999 level of 78.42 tonnes/ha and a reduction of 33% from the 1996 level of 90.86 tonnes/ha. The rising costs of farm inputs (fertilizers, tools etc) and operations for cane production, together with lack of access to credit have contributed to poor cane husbandry and a decrease in the yield of cane suitable for crushing. Cane production is hampered further by the exorbitant cost of transport and poor communications infrastructure.

Late cane harvests by some factories, low cane prices and delayed payment by factories for cane delivered has proved a major disincentive for cane farmers, who are increasingly turning to other crops to sustain their livelihoods.

(iii) Decline in productivity and efficiency at factory level

Factories in the sugar belt are operating at less than optimal standards needed to maintain profitable operations. Last year 402,000 tonnes of white mill sugar was produced, 15 per cent lower than last year. With the exception of Mumias Sugar Company, none of the factory's has invested substantial amounts of capital in the upgrading of their facilities and training of their staff in new methods of operations. As a consequence, the machinery to be found in some factories is obsolete and cannot perform at the levels expected. In 2000, capacity utilization in all factories, except Mumias, Chemlil and Sony, was below 50 per cent, with Mumias recording the highest utilization at 79 per cent. The resulting inefficiency at factory level contributes heavily towards the high cost of locally manufactured sugar. It is estimated that Kenyan consumers pay up to 3 times the world price for domestic sugar. Sugar in Kenya is priced to cover the production costs of the least efficient producers.

Parastatal factories are notorious for not collecting cane from farms on schedule due to capacity constraints on their part. The amount of sucrose they extract per tonne from late harvests is low, meaning that they have to crush a larger amount of cane than an efficient factory to extract the same amount of refined sugar - adding to their already monumental inefficiency problems. Farmers whose late harvests are accepted by such factories receive less payment, aggravating their financial situation.

Therefore, the amount of sugar produced by such companies is below market demand and expensive and hardly able to effectively compete with cheaper imports. Moreover, the marketing function of factory sugar has largely, until recently, been left to the retailer, with no effort made by the manufacturer to distinguish their sugar from other locally produced or imported sugar to the final consumer.

(iv) Failure in Institutional structures, processes and policy to address current issues in the sugar industry.

(a) Research and development into more productive cane varieties and methods of cane husbandry has not been given the attention it deserves, particularly in this era of globalization and intense competition. Factories have, by and large, left this important aspect of cane development and production in the hands of agricultural research institutions; which, due to lack of resources and negligible lobbying by sugar industry stakeholders, have not made much headway in cane research and development. The sucrose content of cane grown by Kenyan farmers is much lower than that found in sugar exporting countries such as Sudan and Brazil.

(b) Extension services for cane farmers are limited in scope and not nearly enough resources are allocated to this important aspect of good cane husbandry. Evidence shows that access by farmers to extension officers dramatically improves and sustains good quality crop yields. A few sugar companies, such as Mumias Sugar Company, have invested in and provide reliable extension services to contracted farmers. The lack of significant investment in this vital area of cane growing is partly responsible for the poor cane yields and quality produced by farmers in a number of sugar growing areas.

(c) Given the rising costs of farm inputs, it would be prudent to facilitate the easier access to cheap credit by farmers to enable them by purchase the necessary inputs and make improvements to their farms. However, this has not materialized, leaving farmers with no choice but to scale back their acreage under sugar, or abandon sugar altogether for an economically sustainable crop. Stakeholder and shareholder institutions, such as factories and grower cooperatives, have been slow to take the initiative and provide farmers badly needed credit.

(d) The Government, despite being a major shareholder and stakeholder in the sugar sub-sector, has been unable to address the problems bedeviling the industry in a satisfactory manner. Its involvement in the sugar industry, together with the lack of private sector orientation and political interference in the running of sugar companies has been cited as one of the main reasons for low levels of productivity and investment in this sector. In contrast, Mumias Sugar Company, with its limited government shareholding and private sector management and orientation, has been able to post an operating profit and make substantial investments in its equipment and outgrower activities. Government levies and taxes on sugar inputs (fuel, fertilizers, implements) and refined sugar are excessive and contribute heavily to the high and uncompetitive price of local sugar vis-à-vis imported sugar.

(e) Cane prices are determined by the Kenya Sugar Authority, which sets a uniform price for all cane sold to sugar mills. This does not take into account the rise in production costs over the years or the inefficiencies inherent in particular zones throughout the sugar belt, resulting poor remuneration for farmers and market distortions that affect the price of the final product. (in 1997, the per ton cost of producing cane in Western and South Nyanza is Ksh 979 compared with Ksh 1,479 for Kisumu sugar belt. Cane pricing in all zones around the country was a uniform Ksh 1,730.)

3. THE FUTURE OF THE SUGAR INDUSTRY

Stakeholders in the sugar industry have through the years offered suggestions and solutions as to how the ailing sugar industry in Kenya can be revived and improved. Suggestions cover core functions relating to cane husbandry and factory operations, processes and improvement. Lobbying for change in government policies and actions that have negative impact on the sugar industry have been ongoing for many years. The Government enacted Sugar Bill has implications for the sugar industry, but, according to stakeholders, does not go far enough in addressing the fundamental problems that continually plague the sugar industry.

Clearly, a lot of change needs to take place if the sugar industry is to be revived. These changes have to be introduced at farm level, factory level and policy level to have a comprehensive impact on the whole sub-sector. Proposed solutions and improvements in cane husbandry, factory efficiency and sugar sector policy are presented below.

(a) Cane husbandry

· Increased resources devoted to extension services to assist farmers improve the yield and quality of harvest.

· Increased focus and resources on research and development to introduce high yielding, sucrose rich varieties of cane into the sugar sub-sector.

· Reduced taxes on important farm inputs such as fertilizers, fuel and implements to reduce the costs associated with growing cane; make cane growing more profitable for farmers and; make Kenyan sugar more competitive.

· Improved factory efficiency to eliminate late harvests and reduce the financial burden to farmers.

(b) Factory efficiency and productivity

· Increased capacity utilization and productivity at sugar factories through the purchase of new machinery with greater processing capacity. This would substantially reduce operational costs, reduce production shortfalls and reduce or eliminate the purchase of late harvests from cane growers.

· Privatization of parastatal sugar factories to introduce a commercial orientation into their operations, boost their productivity and increase their profitability. The attendant benefits that arise from privatization will devolve to other stakeholders in the industry (as is the case, apparently, with Mumias Sugar Company)

· Although playing a small role at present, sugar factories should increase their involvement in R & D of cane varieties and extension services provision to farmers. Both factories and farmers stand to benefit from cane yields that are of a better quality and quantity.

(c) Sugar industry policy

· A reduction in taxes on farm inputs and refined sugar to significantly increase the competitiveness of Kenyan sugar in both the domestic and foreign markets.

· Allowing sugar companies utilize the cess fund paid to local authorities to improve the road infrastructure in cane growing areas. Currently, local authorities in cane growing areas do not utilize funds obtained from sugar factories to maintain access roads.

· Speedy divestiture of Government from the management of sugar companies and the inclusion of cane growers as shareholders in sugar companies. The case of Mumias Sugar Company is an example of what a sugar company, commercially oriented and free from government shareholding and political interference can achieve. Mergers of poor performers with successful companies should be encouraged.

· Devolving the power to set cane producer prices from the KSA to committees composed of outgrower organizations and sugar company management, to ensure that prices for produce are relevant and fair to all. Alternatively, the market should determine the price of harvested cane; a more realistic measure of value of produce that promotes efficiency.

· Developing a Government policy on research and development in productive sugar cane varieties and husbandry practices and contributing resources towards the achievement of the above. Alternatively, Government can offer tax concessions to sugar companies that engage in research and development of sugar cane varieties or cane husbandry.

· Zealous enforcement of sugar quotas and imposition of taxes and duties on imported sugar, to enable local sugar factories reduce their inventories and acquire a breathing space to implement necessary changes to improve their performance.

The survival of the Kenyan sugar industry hinges on the successful implementation of most of these recommendations. Failure to implement these recommendations in a timely fashion exposes farmers and factories to collapse in the face of foreign competition; as tariffs and quotas are withdrawn in a few years to comply with regional treaties (COMESA, EAC) and WTO regulations.