Required Report - public distribution

Date: 5/3/2006

GAIN Report Number: WZ6001

WZ6001

Swaziland

Sugar

Annual Report

2006

Approved by:

![](media/image1.wmf)Scott Reynolds

#### **U.S. Embassy, South Africa**

Prepared by:

Herman Germishuis

Report Highlights:

Swaziland produced 598,000 metric tons of raw sugar during the 2005/06
milling season but is expected to produce 650,000 tons during the
current, 2006/07 season. This is mainly due to the two-year drought
being broken. Exports reached about 305,000 tons in 2005/06 but the
industry is hoping to export about 358,000 tons in 2006/07 to take
advantage of the high world price. The industry was in real trouble with
the EU sugar regime adjustments but the increase in the world sugar
price and the demand for Ethanol is opening up new opportunities.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Pretoria \[SF1\]

\[WZ\]

# **Summary** {#summary-1}

The marketing year used in this report runs from April to March with the
2005/06 season designated as 2006 and the 2006/07 season shown as 2007.

Swaziland's 2005/06 sugar cane crop reached about 5.2 million tons after
4.9 million tons were cut in 2004/05. The 2006/07 cut is estimated at
5.2 million tons. Sugar production reached about 653,000 tons in 2005/06
after 598,000 tons were produced in 2004/05. The 2006/07 forecast is
650,000 tons.

Southern African Customs Union, (SACU), sales reached about 315,000 tons
in 2005/06 after about 311,000 tons were sold in 2004/05. The Customs
Union sales include domestic consumption of about 150,000 tons
(including further processed products) with the rest going to South
Africa. Other, mostly preferential, export sales reached about 320,000
tons in 2005/06 after 298,000 tons were exported in 2004/05. As the
2005/06 marketing year only closed at the end of March 2006, detailed
information is not yet available. Swaziland's intention is to export
about 358,000 tons in 2006/07. The new European Union sugar regime is of
great concern to the industry but the higher world prices and the demand
for Ethanol are positives.

Source; Swaziland Sugar Association

www.ssa.co.sz

US Dollar = Rand 6.05 = Emalangeni 6.05 (05/03/06)

###### Sugar cane

  ---------------- ----------- --------- --------- ---------- --------- ----------
  PSD Table                                                             

  Country          Swaziland                                            

  Commodity        Sugar Cane                                           

  1000 HA          2005        Revised   2006      Estimate   2007      Forecast

  1000 MT          USDA        Post      USDA      Post       USDA      Post
                   \[Old\]     \[New\]   \[Old\]   \[New\]    \[Old\]   \[New\]

  Market Year                  04/2004             04/2005              04/2006
  Begin                                                                 

  Area Planted     50          51        51        52         0         52

  Area Harvested   47          48        48        51         0         51

  Production       4444        4884      5185      5164       0         5215

  TOTAL SUPPLY     4444        4884      5185      5164       0         5215

  Utilization for  4444        4884      5185      5164       0         5215
  Sugar                                                                 

  Utilizatn for    0           0         0         0          0         0
  Alcohol                                                               

  TOTAL            4444        4884      5185      5164       0         5215
  UTILIZATION                                                           
  ---------------- ----------- --------- --------- ---------- --------- ----------

###### Production

The current, 2006/07, sugar cane crop in Swaziland, for which the
milling season started in April 2006, is expected to be about 1% larger
than the 2005/06 crop. The increase is mainly due to the fact that the
serious drought was broken and irrigation water supplies increased as
all cane in Swaziland is irrigated. The average yield is expected to be
about 103 tons per hectare compared to 102 in 2005/06. The following
table contains recent production data:

+----------+-----------+-----------+-----------+-----------+-----------+
|          | My        | My        | My        | My        | My        |
|          | 2002/03   | 2003/04   | 2004/05   | 2005/06   |           |
|          |           |           |           |           | 2006/07   |
|          |           |           |           |           |           |
|          |           |           |           |           | (         |
|          |           |           |           |           | Estimate) |
+----------+-----------+-----------+-----------+-----------+-----------+
| Area,    | 48,307    | 49,932    | 50,930    | 52,196    | 52,202    |
| ha.      |           |           |           |           |           |
+----------+-----------+-----------+-----------+-----------+-----------+
| H        | 45,126    | 48,061    | 49,727    | 50,595    | 50,718    |
| arvested |           |           |           |           |           |
+----------+-----------+-----------+-----------+-----------+-----------+
| Cane     | 4,609,933 | 5,046,252 | 4,883,961 | 5,164,174 | 5,215,000 |
| prod. MT |           |           |           |           |           |
+----------+-----------+-----------+-----------+-----------+-----------+
| Cane     | 102.13    | 105.00    | 98.2      | 102.1     | 102.8     |
| yield    |           |           |           |           |           |
|          |           |           |           |           |           |
| MT/ha.   |           |           |           |           |           |
+----------+-----------+-----------+-----------+-----------+-----------+
| Sugar    | 538,014   | 628,191   | 597,563   | 652,689   | 650,000   |
| prod.    |           |           |           |           |           |
| MTRV     |           |           |           |           |           |
+----------+-----------+-----------+-----------+-----------+-----------+

Centrifugal sugar.

  -------------------- ----------- --------- --------- ---------- --------- ----------
  PSD Table                                                                 

  Country              Swaziland                                            

  Commodity            Sugar,                                               

  1000 MT              2005        Revised   2006      Estimate   2007      Forecast

                       USDA        Post      USDA      Post       USDA      Post
                       \[Old\]     \[New\]   \[Old\]   \[New\]    \[Old\]   \[New\]

  Market Year Begin                04/2004             04/2005              04/2006

  Beginning Stocks     87          87        67        76         90        94

  Beet Sugar           0           0         0         0          0         0
  Production                                                                

  Cane Sugar           598         598       636       653        0         650
  Production                                                                

  TOTAL Sugar          598         598       636       653        0         650
  Production                                                                

  Raw Imports          0           0         0         0          0         0

  Refined Imp.(Raw     0           0         0         0          0         0
  Val)                                                                      

  TOTAL Imports        0           0         0         0          0         0

  TOTAL SUPPLY         685         685       703       729        90        744

  Raw Exports          297         293       287       304        0         325

  Refined Exp.(Raw     1           5         1         16         0         33
  Val)                                                                      

  TOTAL EXPORTS        298         298       288       320        0         358

  Human Dom.           319         310       325       314        0         317
  Consumption                                                               

  Other Disappearance  1           1         0         1          0         1

  Total Disappearance  320         311       325       315        0         318

  Ending Stocks        67          76        90        94         0         68

  TOTAL DISTRIBUTION   685         685       703       729        0         742
  -------------------- ----------- --------- --------- ---------- --------- ----------

###### Production

Sugar production is expected to reach 650,000 MT raw value in the
current, 2006/07 milling season. This is marginally less than the
652,689 tons produced in 2005/06 in spite of a small increase in cane
production mainly due to lower sucrose in the cane brought about by the
lack of sunlight over the past few months.

**Trade**

The Swazi sugar industry sells into four main markets, the Southern
African Customs Union, (SACU), the European Union, the United States and
the world market. Sales to both the EU and US benefit from preferential
market access allowances.

Exports sales are expected to reach 358,000 tons in MY 2006/07 compared
to 320,000 tons in 2005/06 and 298,000 tons in 2004/05. Refined exports
are expected to grow significantly from 16,000 MT in 2005/06 to 33,000
MT in 2006/07 as a result of the increased world price. Export details
are not yet available.

**Consumption**

Domestic consumption is shown as 311,000 tons in 2004/05, 315,000 tons
in 2005/06 and is expected to reach 318,000 tons in 2006/07. These are
really SACU (Southern African Customs Union) sales as Swazi sugar enjoys
free entry into the market subject to an undisclosed quota agreement. In
2004/05 the industry apparently overstepped the agreement by 60,000 tons
and sold more than 200,000 tons into the South African market. The
2005/06 sales are estimated at 150,000 tons and a similar quantity is
expected to be supplied in 2006/07. This will, however, be influenced by
the world market movements.

In 2004/05 the local cane price dropped to R1126/ton from R1375/ton in
2003/04, mainly due to the drop in international prices. Prices declined
further in 2005/06 but is expected to increase again in 2006/07 as the
international market increased.

The recent EU market reforms are important to Swaziland. The reforms of
the EU sugar regime are primarily targeted at the internal EU market but
because of its historical link with Swaziland's preferential access, its
impact will be felt even more by the beneficiaries of the preferential
access. Swaziland is a beneficiary of both the Sugar Protocol and the
Special Preferential Sugar, both giving duty free access to Swazi sugar
into the EU market.

The EU has always been an important market for Swazi sugar, dating back
to the 1970s when exports to the EU members (primarily Britain) started.
The EU has been taking an average of 163,057 tons per annum since 2001.
Although this is 30% of the industry output of about 650,000 tons per
annum, in terms of revenue it contributes about half of the total
industry revenue.

# Swaziland benefits from the EU market primarily because whilst on the one hand it is highly priced (at some stage about 3 times the world market price), it is also a protected market wherein preferential sellers like Swaziland can exploit the full benefit. Any change to this price and the protection therefore affects the profitability of the market.

In some years, when world market prices have been depressed, EU prices
have been nearly 6 times higher than world market prices (e.g. June
2002). On these occasions this means more money is earned on exporting
the 163,000 tons of sugar to the EU than could be obtained from selling
Swaziland entire sugar production on the world market! Even when world
market prices are exceptionally high, as is currently the case, EU
prices are still higher.

In many respects, exports to the EU have provided the foundations for
the expansion of the Swazi sugar sector, which is so important to the
Swazi economy. Any changes in the income earned on exports to the EU
thus carries important implications for Swaziland.

But, the EU market is losing some of its shine. This has already been
witnessed, for since 2002 the value of the Euro against the South
African Rand (to which the Emalangeni is pegged on a one to one basis)
has fallen 37%. This means that, in Emalangeni terms, for every ton of
sugar sold on the EU market, Swaziland has received 37% less than was
the case in 2002. This has been the major contributing factor to a 21%
decline in the sucrose price paid to Swazi farmers since 2002. This has
had serious consequences for all components of the industry, from the
large companies to the small growers. It also has implications for
government revenues, since the tax obtained from the sugar sector is
shrinking as earnings and profitability decline.

The EU has subsidized Swaziland's sugar industry since 1966 by
purchasing an annual quota at a price higher than the global ruling
price. However, from July 2005 the preferential prices were slashed as
shown in the following table.

European Union, Changes in prices for Swazi sugar.

+-----------+-----------+-----------+-----------+-----------+-----------+
| Year      | EU        | C         | Sugar     | SPS       | Total     |
|           | price/MT  | umulative | protocol  | losses    | losses    |
|           |           | % change  | losses    |           |           |
|           | (Euro)    |           | (Euro     | (Emill)   | (Emill)   |
|           |           |           | mill)     |           |           |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2005/06   | E523.7    | 0         | 0         | 0         | 0         |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2006/07   | E496.8    | -5.1%     | E3.509    | 0         | E3.509    |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2007/08   | E496.8    | -5.1%     | E3.509    | 0         | E3.509    |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2008/09   | E434.1    | -17.1%    | E11.687   | E2.045    | E13.632   |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2009/01   | E335.0    | -36%      | E24.613   | E5.276    | E29.889   |
+-----------+-----------+-----------+-----------+-----------+-----------+

At the large companies reduced earnings have forced management to focus
on core business activities, while for many newly established
smallholder sugar farmers, the decline in the sucrose price has driven
many of them to the point of bankruptcy.

As an alternative outlet the Royal Swaziland Sugar Corporation (RSSC)
commissioned a R134 million Ethanol project in September 2005. The aim
of the project, when operational, is to expand the production capacity
of the distillery from 13 million liters per year to 32 million liters
of absolute potable ethanol. This will absorb all the molasses produced
by the company.

The industry is looking at increasing Ethanol production to stabilize
the market.