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‘Hold off on sugar tax’

Sep 25 2016 06:29
Dewald van Rensburg

Local sugar farmers and millers this week made their case for the proposed sugar tax to be postponed.

The main argument by the Sugar Association of SA (Sasa) is that the sugar tax plan should be put on ice, at least until a long-planned, but never executed, Total Dietary Intake Study is completed to definitively establish the role of sugary soft drinks in the national diet.

This study has apparently already been two years in the making, with industry groups and the department of health agreeing to co-fund it.

Sasa also thinks that Treasury’s stated intention to implement the tax by April next year gives producers too little notice.

Speaking to City Press after a press briefing this week, Sasa’s chairperson, Rolf Lütge, said: “They aren’t giving us much time. If they do push it through, how do we adapt?”

Unlike the cooldrink makers organised under the Beverage Association of SA (Bevsa), the primary industry is not trumpeting firm predictions of what the tax will do.

Sasa members include the country’s cane growers and six major sugar milling corporations.

“There has been limited cooperation [with Bevsa] ... We obviously do have different interests,” Lütge said.

“It is hard to comment on the accuracy of the Bevsa studies.

“We do not know what the tax will mean. We are in touch with National Treasury and working on that. We would like to wait for those studies,” he added.

However, the sugar industry has a more straightforward case against the tax than the soft drinks sector, which will actually be paying the tax.

The drink producers can mitigate the effect of the tax by reformulating their products, selling them in smaller volumes and ultimately passing the costs onwards through retailers.

These adjustments are among the hoped-for outcomes of the tax. The sugar industry cannot do any of these things, and a successful sugar tax will inherently reduce their domestic sales.

The soft drink makers are Sasa members’ largest pool of customers, consuming 620 000 tons of sugar per year, about 38% of the total domestic market, which for Sasa means the Southern African Customs Union.

It has also been the source of much of the growth in the past decade or more.

Total “industrial” sales of sugar have more than doubled since 2000, while direct sales of sugar stagnate.

If the tax suppresses local sales, that sugar will get diverted to the export market, where a more or less standard global price prevails.

Sugar blues

That price makes most South African sugar loss-making, at least on average, claims Lütge.

According to him, the current profit margins in the industry probably do not exceed 2%, making any drop potentially devastating.

Whatever amount of sugar gets diverted out of the local market, it would dilute the industry’s revenue, he said.

At the moment, that is actually not true.

The London Sugar No 5 price – sugar’s equivalent of the Brent crude price for oil – has surged in the past year and this week hit parity with South Africa’s controversial “dollar-based reference price”: $566 (R7 871) per ton.

Sugar and wheat are both protected against imports by this mechanism, which sets a minimum price floor for the local market and then automatically adjusts the import tariff to maintain import parity.

The minimum local sugar price was raised from $358 to $566 in 2014 after the industry had asked for $764, which it said would cover costs.

The higher reference price and the severe weakening of the rand since then provided significant protection against the current price surge caused by bad crops in Asia and the end of restrictions on Brazilian producers, which would rather put their sugar into the production of ethanol fuel.

Brazil is the world’s second-largest producer of ethanol fuel.

Despite this, two of the country’s 14 sugar mills are lying idle.

Sasa blames local unprofitability on the lack of subsidies that competitors abroad enjoy – as well as the lack of a state-supported ethanol industry.

According to Sasa vice-chair Suresh Naidoo, the land under sugar cane has fallen from 421 621 hectares in 2000 to 382 840 hectares today.

The drought has led to Sasa projecting this year’s sugar crop as the smallest in decades – 1.6 million tons. That is slightly less than normal domestic demand.

Some of this is due to the conversion of former cane land into property developments, but Naidoo says the drop is mostly due to fallow farmland.

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