What the Sugar Bill 2016 should address

By Mike Ibrahim Okumu

The sugar industry has since 2006 witnessed an inflow of millers from 4 millers that is Kakira Sugar Ltd., Kinyara Sugar Ltd., Sugar Corporation of Uganda Ltd. and Sango Bay Estates Ltd., with over six more millers coming on board and many more with licenses but are yet to set up shop.

Besides there has been an increase in capacity installation which in addition to the increase in the number of millers has contributed to a jump in sugar production from 193,769 Metric Tonnes (MT) in 2004 to over 500,000 MT as of 2015. Some sugar millers have equally set up plants to produce electricity, spirit and manure beyond making sugar out of sugarcane.

The increased sugar production capacity and development of plants that use sugar production by-products has exerted enormous pressure on sugarcane supply. Unfortunately, unlike Kakira Sugar Ltd., Kinyara Sugar Ltd., Sugar Corporation of Uganda Ltd. and Sango Bay Estates Ltd. which have in-house sugarcane farms the new millers rely largely on outgrowers.

Furthermore, while Kakira Sugar Ltd., Kinyara Sugar Ltd. and Sugar Corporation of Uganda Ltd. have invested heavily in outgrower development, the new sugar millers are typically poaching on existing outgrowers. With poaching there has been increased theft of sugarcane

The increased competition for sugarcane supply from outgrowers has led to an increase in outgrower sugarcane prices from Shs73,000 per MT in 2014 to Shs110,000 per MT in 2016 and currently going for at least Shs165,000 per MT in Busoga region.

Even with high outgrower sugarcane prices, supply is not consistent with the demand for sugarcane to the extent, millers (even established ones) are operating at under capacity besides have been forced to buy immature sugarcane (sugarcane harvested at less than at least 16 months old) which is a loss to both the miller and outgrowers.

Millers experience low sugar recovery from immature cane which is a loss to sugar production. Farmers who on other hand harvest immature sugarcane incur a 5 MT loss per hectare for each month lost to maturity.

Low sugar recovery yields more molasses which is however used in the production of ethanol, implying that millers with ethanol plants can offset the potential loss from low sugar recovery from immature sugarcane otherwise molasses is sold to ethanol producers.

Furthermore, some millers are able to offset the effects of low sugar recovery by generating electricity from bagasse (a fibrous matter that remains after sugarcane are crushed to extract their juice) which is connected to the national grid or selling bagasse as a fuel.

The bigger picture is that with the high cost of outgrower sugarcane, millers have no choice but to charge higher prices on sugar and it is no surprise that the price sugar has risen in the recent past otherwise sugar production could potentially be loss making among millers.

Besides, harvesting of immature sugarcane is likely to inhibit household livelihood transformation among sugarcane farming households attributed to the loss in income amounting to Shs825,000 per hectare for each month that sugarcane is harvested before maturity.

Such state of affairs makes regulation of the sugar industry paramount. Indeed, the Sugar Bill, 2016 is before cabinet for review. Some of solutions that bill puts across is; determination of the minimum price of outgrower sugarcane per MT and setting of the 25km radius from one sugar mill to the other.

The 25km radius from one mill to the other is partly aimed at abating sugarcane poaching. The minimum price of outgrower cane is aimed at partly protecting outgrowers pricewise.

Establishing a minimum outgrower sugarcane price may be challenge in an environment of variations in productivities across different regions implying differences in the cost of sugarcane production which may stagnate sugarcane production in high cost areas while enhancing production in low cost areas.

Secondly, sugarcane is used in as a raw material for sugar, bagasse, ethanol and electricity; however, not all millers engage in the production of the various products attained from sugarcane implying that minimum price could potentially be toxic to say millers that only produce sugar and molasses but not ethanol or electricity.

Furthermore, in an environment of weak regulatory framework a high minimum price risks millers engaging in off-the-balance sheet profits while showing losses on the balance sheet.

Also a weak regulatory environment could result in the minimum price or higher than minimum price being paid only when sugarcane supplies are short suggesting that supply and demand factors come to play during poor crop years, average crop years and good crop years.

With regard to restricted zoning, what happens if a farmer chooses to supply his or her cane out of her zone in say Bunyoro in the search for higher prices in for example Busoga?

Indeed, farmers are ferrying sugarcane all the way from Bunyoro to Busoga in such for higher prices. Implying that if sugarcane is being ferried from Bunyoro all the way to Busoga, then for zones within the same region it's a no brainer for as long as there is a search for better prices!

What happens if a farmer is mapped out in another zone but feels comfortable getting farm inputs credit from a miller in another zone? What happens if a farmer is registered at least for now with a miller in another zone but by virtue of the sugar bill falls in a new zone?

Also with restricted zoning, what happens to situations where a sugar mill is incapacitated to buy sugarcane at 16 months for the second crop and 18 months for the first crop? For example Kinyara is now harvesting sugarcane that is 21 months old thereabout with the expectation that 18 months old sugarcane will be harvested in August 2017, so what happens to second crop sugarcane that is at least 16 months old now?

I am of the view that controlling the price payable to outgrowers sugarcane might not the optimal choice, however a price determination formulae should be developed which considers sugarcane as a raw material for electricity, sugar, ethanol, molasses besides taking care of inflation.

Furthermore, a platform has to be created to allow for a balancing act between outgrowers and millers in the price negotiation process.

Furthermore, zoning ought not to protect inefficient millers at the expense of outgrowers to the extent that where signals of inefficiency at the mill are apparent outgrowers should be given an outside option.

Otherwise a situation could arise where farmers with sugarcane way over the maturity age are not availed harvesting permits just because there supply is restricted to a particular zone.

Also the bill should be explicit about the traceability of outgrower sugarcane in ways that can abate theft of sugarcane with the assistance of millers and local administration.

Finally, in the absence of financial instruments such as outgrower friendly insurance policies or credit facilities to smoothen household consumption the bill could perhaps suggest a minimum acreage for one to be a sugarcane outgrower while requiring millers to buy sugarcane that is at least 16 months old for the second crop and 18 months old for the first crop.

Writer is a lecturer at the School of Economics at Makerere University