a.         Impact on Cane Suppliers, particularly Smallholders

 

Smallholder farming is useful in the national fight against poverty, especially in the lowveld region, where sugar is grown. Besides investment made by the millers to develop the smallholder cane growing sector, the Government has made huge investments to the development of irrigation projects primarily targeting the growing of sugar cane. Through the government projects, a further 16,000 ha of land will be planted to sugar cane in the next 5 years.

 

Out of the total area supplying cane to the Simunye and Mhlume mills, 7,358 ha belong to “Medium and Small-scale Growers”, where this category is either a multi-member Smallholder Farmers’ Association or an individual grower producing less than 1,000 t of sucrose per year. These growers represent 23% of the supply area of the two northern mills (Simunye and Mhlume). The Ubombo mill is presently supplied from 3,286 ha of cane belonging to Medium and Small-scale Growers, representing 18% of the mill supply area.                  

 

If one assumes that over the next four years all production costs will remain at their 2005 levels, as well as the exchange rate of the Rand/Lilangeni and all prices for Swazi sugar except the one obtained in the EU, the sucrose price to the grower will have dropped from above E1,381/t in 2005 to E1,031 in 2009. For the average Medium and Small-scale Grower (given his cane yield of between 90 and 95 t/ha), such drop will have the effect of taking his gross margin per ha from above E5000 down to E1189. This decline includes the negative effects already being felt by this sector due to the strengthening of the local currency, reducing the local value of export earnings. At this margin, there will be no surplus to cover internal overheads and debt servicing. As the figures in the example of Table 21 show, most smallholder cane growers will fail to service their loans and would eventually go out of business in the near future.

 

Table 21: Impact on Gross Margins per ha for Smallholder Cane Growers
(Mabhudvu Farmers’ Association)

	Before EU Price Drop  2005		After EU Price Drop 2009
Cane Yield, t/ha	93		93
Sucrose in Cane, %	13.89		13.89
Price of Sucrose, E/t	1,381.09		1,031.58
	E/ha		E/ha
Revenue		16,807		13,326
Expenditures on:
Vehicles and Equipment	87		87
Fertilizer	1,280		1,280
Chemicals	550		550
Labour	909		909
Irrigation	1,835		1,835
Harvesting and Haulage	7,224		7,224
Other	252		252
Total		12,137		12,137
Gross Margin		4,670		1,189
Estim. Annual Debt Servicing Cost		6,551		6,551
Loss before other overheads E/ha		-1,881		-5,362

 

 

Assuming the continuing strength of the Rand/Lilangeni, but assuming in addition that the world market sugar price will maintain its 2006 level (i.e. at $350/t instead of $143), the sucrose price to the grower will drop to only E1,111/t, and gross margins for growers would drop to just over E2000/ha. Even then, many growers would drop out because of their inability to fully cover overheads and debt servicing. These farmers have an average debt burden of about E43,000 per ha, whilst interest debt service alone is averaging about E7,000 per ha. This situation is compounded by the need to service seasonal loans, which also carry high interest rate charges.  On seasonal loans of E14,000 per ha and interest rate of 15.5%, interest charges on seasonal loans alone take some E2,170 per ha.

 

This situation suggests that without immediate financial restructuring of both seasonal loans and capital investment loans, a substantial proportion of recently established smallholder sugar farmers will be not financially viable. This would undermine a key component of Swazi economic empowerment pursued by the Government with the assistance of the EU and other external donors since the mid 1990s. Their situation is aggravated and unsustainable in an environment of decreasing local value of export sales and the further reduction in EU prices.

 

One of the most vulnerable groups among the small and medium-scale growers are those recently established (and those to be established) Farmers’ Associations in the Komati Downstream Development Project (KDDP) and those to come under the LUSIP. The capital costs related to developing land and establishing the irrigation systems are now unsustainable if they are financed on borrowed funds.

The large growers at both Ubombo and the northern mills are likely to survive at lower EU price levels. They consistently produce yields in excess of 120 tons per ha and have long since recovered the capital expenditure applied to their initial irrigation infrastructure and establishment of cane stands.