Required Report - public distribution

Date: 4/20/2006

GAIN Report Number: SF6015

SF6015

South Africa, Republic of

Sugar

Annual Report

2006

Approved by:

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

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

Prepared by:

Herman Germishuis

Report Highlights:

After producing about 21 million tons of sugar cane during the 2004/05
season, production this year is expected to reach 21.5 million tons.
Sugar production amounted to 2.595 million tons raw value in 2004/05 but
is expected to decline to 2.585 million tons in 2005/06 due to a lower
sucrose content in the cane brought about by inclement weather. Exports
exceeded 1.2 million tons in 2004/05 and are likely to reach this target
again this year.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Pretoria \[SF1\]

\[SF\]

Summary

After producing about 21 million tons of sugar cane during the 2004/05
season, production this year is expected to reach 21.5 million tons.
Sugar production amounted to 2.595 million tons raw value in 2004/05 but
is expected to decline to 2.585 million tons in 2005/06 due to a lower
sucrose content in the cane brought about by inclement weather. Exports
exceeded 1.2 million tons in 2004/05 and are likely to reach this target
again this year. More important is that the import tariff on sugar was
cut from US\$ 36.7/mt. to zero on March 16, 2006. This mainly reflected
the higher international prices as the tariff is based on international
price movements. The higher international prices are causing the
industry to revise its plans. The proposed EU production cuts and the
switch from edible sugar to ethanol production in Brazil will likely
support world prices at these higher levels affecting the economics of
ethanol production. The renewable energy developments will the subject
of a future GAIN report.

[**www.sugar.org.za**](http://www.sugar.org.za/)

US \$1= Rand 6.05 (04/20/2006)

# **Sugar cane**

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

  Country          South                                              
                   Africa                                             

  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     429       425       430       428        0         429

  Area Harvested   322       316       325       331        0         330

  Production       19095     19095     21492     21052      0         21500

  TOTAL SUPPLY     19095     19095     21492     21052      0         21500

  Utilization for  19095     19095     21492     21052      0         21500
  Sugar                                                               

  Utilizatn for    0         0         0         0          0         0
  Alcohol                                                             

  TOTAL            19095     19095     21492     21052      0         21500
  UTILIZATION                                                         
  ---------------- --------- --------- --------- ---------- --------- ----------

###### Production

Rainfall for the 2004/05 season was below normal through the entire
industry resulting in the smallest crop since 1995/96. Conditions for
the 2005/06 season were more favorable with the final sugar cane yield
reaching 64 tons per hectare yielding a cane cut of about 21 million
tons and sugar production of about 2.5 million MT (2.6 million MT raw
value). About 100,000 ha. of the 430,000 ha. planted to cane is under
irrigation.

The 2006/07 season to date is characterized by the late start to the
rainfall season followed by very heavy rains since mid December. The
drought and irrigation water shortage in Mpumalanga was comprehensively
broken. The only negative impact on the crop could be the lack of
sunlight and heat caused by the incessant rain since the beginning of
the year. That is why we foresee a higher cane/sugar ratio because of a
lower sucrose content in the cane. At this stage we can only forecast a
21.5 million ton cane cut producing 2.5 million MT of Tell Quell sugar.

The following table contains production details:

+---------+---------+---------+---------+---------+---------+---------+
| Season  | Area    | Ha      | Yield   | Cane    | Sugar   | Can     |
|         |         | rvested |         | crushed | prod.   | e/sugar |
|         | Planted | HA      | MT/HA   | MT      | MT\*    | ratio   |
|         | HA      |         |         |         |         |         |
+---------+---------+---------+---------+---------+---------+---------+
| 2002/03 | 430 106 | 321 234 | 71,64   | 23 012  | 2 762   | 8.33    |
|         |         |         |         | 554     | 885     |         |
+---------+---------+---------+---------+---------+---------+---------+
| 2003/04 | 426 861 | 325 956 | 62,64   | 20 418  | 2 419   | 8.44    |
|         |         |         |         | 933     | 287     |         |
+---------+---------+---------+---------+---------+---------+---------+
| 2004/05 | 424 907 | 316 010 | 60.42   | 19 094  | 2 234   | 8.54    |
|         |         |         |         | 760     | 890     |         |
+---------+---------+---------+---------+---------+---------+---------+
| 05/06   | 428 372 | 330 515 | 63.7    | 21 052  | 2 507   | 8.40    |
| est.    |         |         |         | 266     | 203     |         |
+---------+---------+---------+---------+---------+---------+---------+
| 06/07   | 429 000 | 330 000 | 65.2    | 21 500  | 2 500   | 8.60    |
| forc.   |         |         |         | 000     | 000     |         |
+---------+---------+---------+---------+---------+---------+---------+

\*Tel Quell x 1.035 = Raw value

# **Cane prices**

Through the revenue sharing arrangement between millers and growers,
growers are paid a share of industry proceeds. Outlined below is recent
recoverable value (RV) prices paid by millers to growers together with
the cane price at average recoverable values for the industry. Revenues
earned in the various markets determine prices for the year. With the
remarkable recovery in the international sugar market brought about by
the energy crisis, price prospects for the new 2006/07 season have
improved considerably.

+----------------+-----------------+-----------------+-----------------+
| SA Rand/MT.    | RV Price        | #### Cane Price | #### C          |
|                |                 |                 | ane/sugar ratio |
+----------------+-----------------+-----------------+-----------------+
| 1998-1999      | 1 046,62        | 125,85          | 8.67            |
+----------------+-----------------+-----------------+-----------------+
| 1999-2000      | 971,09          | 121,36          | 8.38            |
+----------------+-----------------+-----------------+-----------------+
| 2000-2001      | 1 105,00        | 130,50          | 8.75            |
+----------------+-----------------+-----------------+-----------------+
| 2001-2002      | 1 352,14        | 160,23          | 8.83            |
+----------------+-----------------+-----------------+-----------------+
| 2002-2003      | 1 368,79        | 171,78          | 8.33            |
+----------------+-----------------+-----------------+-----------------+
| 2003-2004      | 1 357,01        | 169,08          | 8.44            |
+----------------+-----------------+-----------------+-----------------+
| 2004-2005      | 1 297,19        | 159,55          | 8.54            |
+----------------+-----------------+-----------------+-----------------+
| 2005-2006      | 1 389.80        | 164.54          | 8.40            |
+----------------+-----------------+-----------------+-----------------+
| 2006-2007\*    | 1 600.00        | 195.00          | 8.60            |
+----------------+-----------------+-----------------+-----------------+

\*Forecast

Since the start of the current energy crisis the international sugar
price has jumped from about 6 US cents a pound in 2004 and 8 cents per
pound in 2005 to about 19 cents per pound. This is mainly due to Brazil
switching more of its production into Ethanol. As a result the economics
of envisaged local Ethanol production changed considerably necessitating
a rethink. The whole renewable energy issue will be looked at in a
separate GAIN report.

###### Centrifugal sugar

  -------------------- ------------- --------- --------- ---------- --------- ----------
  Commodity            Sugar                                                  

  1000 MT              2005          Revised   2006      Estimate   2007      Forecast

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

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

  Beginning Stocks     870           870       920       870        980       870

  Beet Sugar           0             0         0         0          0         0
  Production                                                                  

  Cane Sugar           2360          2315      2665      2595       0         2585
  Production                                                                  

  TOTAL Sugar          2360          2315      2665      2595       0         2585
  Production                                                                  

  Raw Imports          0             0         0         0          0         0

  Refined Imp.(Raw     245           245       250       200        0         175
  Val)                                                                        

  TOTAL Imports        245           245       250       200        0         175

  TOTAL SUPPLY         3475          3430      3835      3665       980       3630

  Raw Exports          750           635       950       940        0         900

  Refined Exp.(Raw     270           365       350       280        0         310
  Val)                                                                        

  TOTAL EXPORTS        1020          1000      1300      1220       0         1210

  Human Dom.           1530          1555      1550      1570       0         1560
  Consumption                                                                 

  Other Disappearance  5             5         5         5          0         5

  Total Disappearance  1535          1560      1555      1575       0         1565

  Ending Stocks        920           870       980       870        0         855

  TOTAL DISTRIBUTION   3475          3430      3835      3665       0         3630
  -------------------- ------------- --------- --------- ---------- --------- ----------

Production

The 2005/06-sugar production amounted to 2.507 million metric tons Tell
Quell (2.595 million MTRV), compared to the actual 2004/05 production of
2.235 million tons, (2.315 million MTRV). This increase was due to a
return to 'normal' production. A very similar scenario is foreseen for
the current 2006/07 milling season. The industry expects that in a
normal rainfall year 2.5 million tons of sugar will be produced and the
industry plans on this basis until the first estimates are received,
which for 2006/07 will be late in April 2006.

**Consumption**

Sugar supplies into the Southern African Customs Union (SACU) have
changed markedly since the early 1990's, when South Africa was the main
supplier in the region with over 95% of market share. In the meantime
the market was opened up and South Africa has lost market share to both
Swaziland and to Southern African Development Community (SADC) sugar
producers. The number of sugar suppliers in the market has increased
significantly and South Africa's share of the SACU market is currently
below 80%. In addition, the general import duty was cut to Zero on April
13, 2006. This was based on the formula calculation used to determine
the tariff and the high current sugar prices.

The increased flow of sugar from the region into South Africa has had a
significant impact on the South African sugar industry. The demand for
sugar in the region has grown by roughly 1% per annum over 10 years,
with demand closely correlated to growth in real disposable income and
growth in gross domestic product. Domestic supplied local consumption
amounted to 1.31 million MTRV in 2004/05 to which the imports of 245,000
tons must be added for a total of 1.555 million tons. In 2005/06 local
sales amounted to 1.375 million MTRV to which imports of about 200,000
are added for a total of 1.575 million MTRV

**Trade**

According to the South African Sugar Association, (SASA), South Africa
exported 940,000 tons of raw sugar and 270,000 tons of refined for a
total of 1.21 million tons in MY 2005/06 compared to 632,000 tons of raw
and 353,000 tons of refined totaling 985,000 in MY 2004/05. Details are
not yet available. The South African Revenue Service (SARS) reports the
following exports over the previous two seasons.

  ----------------------- ---------------- ----------------- ------------
  Export Trade Matrix                                        

  Country                 South Africa                       

  Commodity               Sugar                              

  Time Period             April/March      Units:            MT

  Exports for:            2003/04                            2004/05

  U.S.                    23646            US                23405

  Others                                   Others            

  Japan                   145 040          Japan             163 000

  South Korea             140 000          South Korea       140 000

  Mozambique              169 785          Mozambique        112 151

  Saudi Arabia            0                Saudi Arabia      79 000

  Kenya                   48 254           Kenya             74 229

  India                   49 500           India             73 822

  Malaysia                80 000           Malaysia          49 000

  Tanzania                16 157           Tanzania          37 325

  Mauritius               30 857           Mauritius         37 059

  Madagascar              46 076           Madagascar        33 731

  Total for Others        725 669                            799 317

  Others not Listed       259 174                            135 903

  Grand Total             1 008 489                          958 625
  ----------------------- ---------------- ----------------- ------------

The trade shown going to Mozambique consists mainly of sugar shipped to
other destinations through the port of Maputo.

Published imports amounted to 43,013 tons in MY 2004/05. Imports from
Swaziland shown in the trade matrix are estimated as trade amongst
Customs Union members are not recorded.

  ----------------------- ---------------- ----------------- ------------
  Import Trade Matrix                                        

  Country                 South Africa                       

  Commodity               Sugar                              

  Time Period             April/March      Units:            MT

  Imports for:            2003/04                            2004/05

  U.S.                    48               U.S.              45

  Others                                   Others            

  Brazil                  1 338            Brazil            13 984

  Zimbabwe                4 343            Zimbabwe          12 615

  Malawi                  14 042           Malawi            8 613

  Zambia                  9 118            Zambia            7 309

  Swaziland\*             200 711          Swaziland         202 144

  Total for Others        229 552                            244 665

  Others not Listed       600                                490

  Grand Total             230 200                            245 200
  ----------------------- ---------------- ----------------- ------------

\* Estimate

## **Domestic prices**

In regional trade, the local market is still the most important source
of income. Protecting and growing the domestic market, and thereby
minimizing exposure to the world market, remains a major priority for
the Sugar Industry. These efforts require careful consideration, as they
are required to meet the developmental and trade objectives of the SADC
protocol (about 50,000 tons) and the SACU free market arrangement, while
at the same time minimizing disruptions and protecting the value of the
domestic market. In this context the Swaziland Sugar Protocol is of
vital importance to the region as it is intended to ensure equitable
access to the SACU market from the regions' two main producers, South
Africa and Swaziland. The importance of an equitable arrangement cannot
be understated as it underpins the value of market for both
participants.

During the 2004/2005 season Swaziland chose to disregard the market
access agreement and supplied the domestic market with approximately
60,000 tons of sugar over and above their agreed access tonnage. The
short-term effect on the South African farmers\' was that it displaced
an equivalent tonnage of South African sugar onto the world market.

Sugar prices in SACU are established in a regulated environment
determined by the duty payable on sugar imports, recently cut to zero.
Millers, who sell the sugar domestically, compete against each other in
the market, but also face competition from SADC countries, Swaziland,
and world price imports from other origins.

The dollar based reference price system was established by the DTI on
the basis of a 10 year average of the No. 5 world refined sugar price
adjusted for certain elements. Domestic sugar prices have historically
tended to increase at below the consumer price index. In 2003 sugar
prices decreased with millers reporting a 7% decline following the
strengthening of the Rand. In general, ex-factory sugar prices have
remained mainly unchanged since 2003 due to the ongoing strength of the
Rand.

The current ex-factory refined sugar price is about R3,500/MT. or
R3.50/kg. or \$579/MT or 58 US cents/kg. at the current exchange rate of
US\$1=R6.05.

The only protection the industry enjoyed was the import tariff, which is
based on the price formula administered by the Department of Trade and
Industry. On September 23, 2005, the formula kicked in and the import
tariff for sugar was cut from 55 c/kg (R550/ton) to 23.3 c/kg
(R233/ton). In US\$ terms the tariff was \$86.6/ton which was cut to
\$36.7/ton. On March 16, 2006 the high world sugar price caused the
formula to kick in again and the import tariff was reduced from the 23.3
c/kg. to free. All protection has thus been removed.

The Division of Proceeds

The Division of Proceeds is the formula through which revenue is
allocated to the millers and growers as part of the partnership
arrangement. The proceeds from the sale of sugar in the national market,
raw export sugar and molasses comprise total industrial proceeds. Total
proceeds are determined by the size of the crop and the prices achieved
on the local and export markets. Prices for sugar and molasses are
dependent on market conditions both locally and abroad as well as the
Rand/dollar exchange rate.