Subsidy cuts boost Africa’s sugar producers

Ben Zwinkels
The European Union agriculture ministers have recently agreed to cut the prices offered to European sugar farmers by 36 percent, bringing the European Union sugar rules into line with global frameworks. African sugarcane producers are among the first beneficiaries.

This change was demanded of the European Union after the World Trade Organization (WTO) ruled earlier this year that its existing 40-year-old guaranteed pricing system was illegal. The WTO's judgement followed a formal complaint from Sugar Cane Producing Countries. Countries like Australia, Brazil and Thailand will now benefit from a reduction in subsidised European sugar on the global marketplace, along with other smaller sugar producing countries in Africa like Uganda, Cameroon, Rwanda and Kenya.

In the past international campaigning groups for poor countries have highlighted many times the absurdities of agricultural subsidies, by focusing on those for sugar, a product that developing countries are especially good at producing.

The sugarcane raw material generates sugar, anhydrous alcohol (a gasoline additive) and hydrated alcohol for the internal and external markets, with different price and demand dynamics. Supplying these markets without significant variations requires planning and management efforts.

Over centuries, this had been carried out by local governments, starting in the decade of the 90's, in a process that was concluded in 1999, responsibility was totally transferred to the private sector, and what exists today is a free market system without subsidies, where sugar and alcohol prices are set according to variations in supply and demand. Sugarcane prices are set according to raw material quality, to prices effectively obtained by the final producers and their percentage participation in the products' final price.

Brazil is the largest world sugarcane producer, followed by India and Australia. On average, 55% of Brazilian sugarcane becomes alcohol and 45% sugar. The sugarcane plant offers one of the most cost-effective renewable resources among those renewable energy options that are readily available in developing countries.

It is a highly efficient converter of solar energy and, in fact, has the highest energy-to-volume ratio among energy crops. It is a highly diversified resource, offering alternatives for production of food, feed, fibre and energy. Such flexibility is valuable in the developing world where fluctuations in commodity prices and weather conditions can cause severe economic hardships.

It is expected that the abolished subsidies by the European Union on European sugar farmers will lead to more production of sugar cane in the developing countries, especially in Africa. International sugar prices are ruling now around USD 350 a tonne, which is good news for sugar mills also in Africa.
The Ugandan sugarcane production for example is already since a long time an important crop. One of the leading companies in the sugarcane industry in Uganda now is the Madhvani Group, which started the Kakira Sugar Works in 1940 near the pristine shores of Lake Victoria.

The creator of the Karika Sugar Works was the Indian Muljibhai Prabhudas Madhvani, a man with great vision, who settled himself in 1912 in Jinja in Uganda. With little more than brains and an outgoing personality, he set up his own trading concern - his first step into a business that would later account for 10% of Uganda's GDP.

Nowadays Kakira Sugar Works is a successful sugar cane plantation of 9.500 ha with a workforce of 7.500 staff and workers. The company cooperates with over 4.000 out growing farmers supplying sugar cane to the factory. The social infrastructure includes staff housing, electrical distribution systems, roads, a hospital and 12 schools for employees’ children.

With the abolished subsidies on sugar in Europe more possibilities will be created for Africa Sugar Cane companies. Kakira Sugar Works is already working on a major expansion programme in order to increase out growers land under cane to 13.000 hectares - with subsequent expansion to 18,000 hectares in the next 2-3 years.

In this respect the Madhvani Group will contribute substantially to guiding the out growers with initial seeds, crop cultivation and harvest methods. All this will lead to an annual increase of more than 160.000 tons of sugar.

On the processing site Kakira Sugar Works is actually realising an important investment in the modernisation of the production plant and is creating a co -generation capacity of 21 MW of electricity, which will be delivered to the National Grid on a 24 hours/day basis.

Co -generation capacity will be possible by using “bagasse”, which is a by-product of the processing plant and creates now a substantial added value by producing electricity for at least two middle sized towns in Uganda. The Madhvani Group in Uganda can be proud of their constant efforts in developing the private sector in that country and in creating local knowledge for sustainable growth and ownership.

The absurdities of agricultural subsidies on sugar in Europe have shown that the system obstructed the African agricultural development. With the new policy in hand Africa is now able to become a real player in the international agricultural business.

Ben Zwinkels is a Senior Investment Officer of the Equity Department at the Netherlands Development Finance Company FMO