II.                EXPECTED SOCIO-ECONOMIC IMPACT OF THE REFORM

 

A.     Background Information

 

The EU reforms will result in a cumulative price decline of 36% over a four-year period between 2006 and 2009, resulting in a price cut from the current €523.7 to €335 per tonne as shown in Table 19. Then the prices will remain constant for about ten years, wherein the EU might introduce a new wave of reforms.

 

Whilst there are presently no threats to the Sugar Protocol quota allocations guaranteed under the Cotonou Agreement, the allocations for the Special Preferential Sugar are not guaranteed and are being subject to a system of annual allocations which is less predictable (and thus bringing less guarantees). The system to allocate these quantities is still to be developed by the European Commission.

 

The impact analysis relates only to effects of the price cuts ignoring the possible loss of the SPS allocation[1]. Monetary effects of the reforms are considered for industry revenues and the government revenue streams, although it has serious multiplier effects on the whole economy.

 

 1.      Revenue Earnings of the Industry

The more direct impact of the reforms will be on the revenues obtainable from sales into the EU market. The direct impact on Swaziland of the price decline for the EU Protocol sugar may be calculated as the difference between the revenues received without the reform and those expected with the reform actually in effect. The figures are shown in Table 19.

 

It is assumed that the Sugar Protocol allocation will be maintained at the current allocation of approximately 120,000 tonnes (raw-sugar equivalent) and that the 30 000 tonnes previously sold through the SPS will be sold to the world market, given that all other preferential markets are now fully subscribed thus increasing Swaziland’s exposure to the world market. Furthermore, two big irrigation projects (KDDP and LUSIP) are expected to bring in about 200 000 tonnes of sugar which will be sold in the world market in the medium term, causing a further reduction to the average price.

 

Table 19:  Decline in Swaziland’s Earnings from EU Sugar Sales

Marketing Year	Raw Sugar Price, €/t	Sugar Protocol Quantity  t	Revenues Earned, €	Revenues Lost, €
2005/06	523.70	120,000	62,844,000	0
2006/07	496.80	120,000	59,616,000	3,228,000
2007/08	496.80	120,000	59,616,000	3,228,000
2008/09	434.10	120,000	52,029,000	10,752,000
2009/10	335.00	120,000	40,200,000	22,644,000
				39,852,000

 

The industry will therefore lose about €40 million in the period of the price cuts (2006-9). The revenue reduction of about €23 million per year after 2009 is about a third the annual industry expenditure on social services. If then, the current SPS sales of 30,000mt are sold to the world market at the 2005 prices, the revenue loss is estimated at €7 million per year from the time of the full price cut (2009).

 

Table 20 below shows the impact of the EU price cuts on the industry’s revenues and that will have a direct effect on the incomes of sugar cane growers and millers. Revenues earned on sugar protocol exports and those earned on special preferential sugar exports to the EU accounts for around 30% of total industry revenues.  The cut will have a particular impact on the sucrose price paid to growers which will fall by E270. The miller return on 96⁰ sugar will reduce by E135.

 

Table 20  Post-EU-Reform Projection, Industry Revenues
						2005	2006	2007	2008	2009
Raw S. fob Price, EU Quota, €/t						523.70	496.80	496.80	434.10	335.00
Raw S. cif Price, EU Quota, €/t						474.09	447.19	447.19	384.49	285.39
	Exchange Rate, E/€					7.85	7.85	=	=	=
Raw Sugar Price, EU Quota, E/t						3,722	3,510	3,510	3,018	2,240
Raw Sugar Price, World, $/t						143.42	143.42	=	=	=
	Exchange Rate, E/$					6.05	6.05	=	=	=
Raw Sugar Price, World, E/t						868	868	=	=	=
Raw Sugar to World Market						27,513	64,183	=	=	=
Sugar Sales					Quant. t	Amounts, E1000
	Refined				197,861	510,975	510,975	=	=	=
	VHP				209,065	405,337	405,337	=	=	=
	Raw EU quota				119,878	446,139	420,825	420,825	361,821	268,564
	Raw, EU, SPS				36,670	125,998	0	0	0	0
	Raw, US quota				15,687	33,821	33,821	=	=	=
	Raw, WM				27,513	23,873	55,691	=	=	=
Sales Revenue from Sugar						1,546,143	1,426,649	1,426,649	1,367,645	1,274,388
Sales Revenue, Molasses						38,483	38,483	=	=	=
Total Sales Revenue						1,584,626	1,465,132	1,465,132	1,406,128	1,312,871
Total Marketing & Gen. Expend.						273,070	273,070	=	=	=
Net Distributable Proceeds						1,311,555	1,192,062	1,192,062	1,133,058	1,039,801
	Growers' Share of Proceeds					0.681	0.681	=	=	=
Amount to Growers, E1000						893,169	811,794	811,794	771,613	708,104
Sucrose produced in the field, t						686,425	686,425	=	=	=
Grower Return on Sucrose, E/t						1,301.19	1,182.64	1,182.64	1,124.10	1,031.58
Amount to Millers, E1000						418,386	380,268	380,268	361,446	331,696
Sugar produced telquel, t						597,563	597,563	=	=	=
Sugar prod., expressed as 96º						641,935	641,935	=	=	=
Miller Return on 96º Sugar, E/t						651.76	592.38	592.38	563.06	516.71

                            Note: = means the variable is assumed to remain constant over that period.

Due to the dilution effect of sales in other markets, the prices to growers and millers are estimated to drop by about 20%. If instead of holding the world market constant at last year’s level of $143/t, it were assumed to continue at its current level of $350/t, sugar export revenues would decline by 15%.