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Sour and sweet

Farming isn’t a line of work where promises are lightly made and it’s with that in mind that Tongaat Hulett [JSE:TON] CE Peter Staude has, in his own words, “stuck his neck out” to assure investors that production can double over its current financial year. This follows one of the worst years for sugar production in decades in South Africa – Tongaat’s biggest market by revenue – in what can only be described as a series of unfortunate events at the company.

First, a drought in KwaZulu-Natal, which resulted in lower crops and higher costs at its local operations, resulting in a R7m loss in the year to March 2011 for the South African division of its sugar business. Then a poor planting season and adverse weather conditions were also at the root of lower sugar cane yields and a 5% drop in profits from its Mozambican operations. Coupled with an unfavourable exchange rate, Tongaat’s annual operating profit dropped by 10% to R1 338bn.

Over the short term, Staude says a better planting season in all areas and higher sugar prices – particularly in key export destination, the Eurozone – will improve profits “considerably”. Over the long term, two key factors will affect its fortunes: cane development initiatives through leasing, which are expected to lower unit costs and increase downstream production, and the possibility of supplying cane fibre to power generating facilities.

Staude says the company’s initiatives to engage small-scale black farmers in SA, Mozambique and Zimbabwe to farm sugar on behalf of Tongaat are key to improving the company’s margins. “The impact on our bottom line can be substantial,” says Staude. “Our mills are capital-intensive but essentially that’s a fixed cost. The short-term challenge to our company is getting sugar to the mills.”

Tongaat’s engagement process works on a model similar to franchising. Tongaat would supply education and guidance, as well as access to materials, such as fertiliser to farmers, who are essentially acting as the franchisees. Staude is working on a five- to ten-year plan that will see around 40% of sugar cane crops in SA derived from small-scale farming. He estimates that figures in Mozambique and Zimbabwe will come in at around 25%.

However, the reality is that the company faces an uphill battle in attracting small farm owners. A report last month by the South African Sugar Association (Sasa) stated small-scale growers in SA dropped from 29 000 to 14 000 over the past 10 years. “The challenge we’re facing centres on politics and interacting with communities. In many cases there’s no clearly defined leadership in some areas,” Staude says.

Another development is the pricing by National Energy Regulator of South Africa (Nersa) on electricity generated from food waste, or sugar cane fibre as it applies to Tongaat. That’s based on the assumption that sugar production on its own is revenue uncompetitive and the example of major international sugar producers in Brazil and India are transforming their industries to produce ethanol and electricity in addition to sugar.

Sasa has predicted electricity produced from cane fibre has the potential to generate 30% of sugar producers’ revenues at a competitive price. Nersa’s announcement is due this month. 
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