Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

How Uganda frustrates its commercial sugar industry

Of recent, the media has been awash with stories depicting a lack of competitiveness of
Uganda’s agricultural sector vis-a-vis other countries visited by Ugandan progressive farmers.
The American Chamber of Commerce in Uganda organised an expo in Kampala dubbed
‘Generation Agripreneur: Shaping the next 25 years of Ugandan agri-business’ with lessons on
the traits of the typical American farmer. What the stories inform the public is that despite
Uganda enjoying a Comparative Advantage ‘GOD’s NATURAL BLESSING’ relative to other
countries, agricultural productivity remains low. The stories contribute to the current debate on
Global Value Chains and Competition; the Name of the Game Today. The pressure of
competition is being felt due to the globalisation of industries, as they strive to create and
capture value across processes that are dispersed in space and time through coordinated value
chains (VCs).

The quest for competitiveness determines international trade flows, location of production
facilities, capital in-flows and out-flows, and foreign direct investments. Therefore, nations,
regions, industries/sectors and firms compete to; capture value (profits; margins), lure
investments, and win the hearts and minds of customers in markets across space and time in a
globalising world.. In this context of a competitive game; competitiveness describes the
economic strength of a country, industry or a firm with respect to competitors as value for
money (goods, services, skills and ideas) moves freely across space and time through
coordinated VCs. Consequently, highly competitive value chains are winners while low
competitive value chains are losers in the global competitive game.

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

Having studied the Uganda commercial sugar industry over the past five years, the evidence
emerging suggests that this is a sector which does not enjoy a comparative advantage in sugar
production relative to other countries in the world.  Sugar is number 1 trading commodity in the
world, and according to the Global Ranking Report of 108 Sugar Producing Countries for 2013,
Uganda is ranked number 38 in sugar production and number 41 in sugar yields per hectare.

The table shows that SADC Sugar Producing countries have a comparative advantage of early
market production of 9-12 months while Uganda requires 15-18 months (depending on whether
its ratoon or plant cane crop). This translates into a a market lead-time or lag time of 6 months
for Uganda. Cane maturity is a direct function of cane sucrose growth which  is influenced by
weather conditions. While countries in the SADC region are achieving a growth rate of 1
TS/ha/month, Uganda realises half of that (0.5 TS/ha/month). The extent to which the Uganda
sugar industry is not competitive can be illuminated when one looks at the average yield per ha
in the context of cane maturity. When we look at the average yield alone, it is easy to
erroneously conclude that Uganda is doing well, against say South Africa, at 67 tonnes per ha
and 55.38 tonnes per ha, respectively. However, in this globalised economic environment, the
time to market is a key indicator of how competitive a country is against others, with the shorter
time to market offering first-mover advantages. So, South Africa is able to market its cane in
nine months while Uganda needs another six months to market its cane.  This means South
Africa accumulates 83.07 tons in a similar period of 15-18 months, thus rendering Uganda
uncompetitive.

In our study, polar types of Uganda commercial farmers were selected, namely High Performing
Entrepreneurs and Low Performing Entrepreneurs. The study was carried out at Kinyara Sugar
production cluster where current trends show emerging commercial entrepreneurs that are
breaking regional industry norms, by producing between 100 to 180 tonnes per ha, under dry
land production, thus challenging the general perception that Ugandan agri-business
entrepreneurs are unproductive (Special thanks for Kinyara Sugar Limited for the innovation of
the Bio-fertiliser that has partly contributed to the observed astronomical productivity).

Why do countries advance –or fail to advance – in the global economy? The question can be
explored at three levels: Micro (Enterprises), Meso (Value Chain - Industry), and Macro
(National Policies & Regulatory Environment) in the context of productivity. Economists agree
that productivity increases is a true measure of a nation’s growth, as opposed to market
speculation. In this case, agricultural productivity reflects a true measure of Uganda’s growth in
comparison to say the real estate sector which may be subject to market/investor speculation.

There are key entrepreneurial traits that could be nurtured for unlocking productivity and

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

success especially for SME’s in agri-business. These include; (i) personal involvement in
business, (ii) being passionate about one’s business, and (iii) timely application of agronomical
practices.

This finding leads to another question; if micro production level can have champions, what
hinders or frustrates the diffusion of these success production capabilities across the sugar
industry?  The answer is surprising; it points towards failure to craft inclusive growth policies for
value chain actors, thus rendering the sugar industry a frustrated success story. In particular,
three key policy and regulations (SADC Success Policy Lessons) need to be addressed in the
on-going Drafting of Uganda’s Sugar Act 2015. The three Policy Prescriptions that will revamp
Uganda’s ailing frustrated sugar industry and promote competitiveness are;  revised Cane
Payment System,  a Balanced Power Sharing Regulatory Board ‘Uganda Sugar Board”, and
dismantling the Ring Fencing Policy ‘i.e., specifies One Mill per 25 kilometre radius’.

Policy Prescription  No. 1: Revised  cane payment system

Worldwide, current theory and practice suggest that the design of a competitive cane payment
system should have incentives for both Producers/Growers and Millers in order to; maximize
cane quality for enhanced recovery, boost yields per ha, improve mill performance

Currently, Uganda’s cane payment system is based on fixed quantity price formulae; this form
of quantity-delivered-cane-payment system can be described as a 19th century outmoded
practice.  The formulae is Price per ton of Cane = P x R x 35 %, WHERE;

P =The weighted average market price per tonne of mill white sugar sold by miller

R = The weighted average Rendement (Tonnes Sugar Produced per 100 tonnes Cane Milled).
The period for calculation of average market price and rendement is basically annual.  Good
rendement should not be below 9.0. In the above formulae, Farmer’s share of the sugar value is
35 percent while Millers is 65 percent. However, based on mill white sugar only, the intense
negotiations between the farmer and the miller results in value sharing  ratio fluctuating between
35-40 percent for Farmers and  65-60 percent for Millers.  . This type of formulae is referred to
as fixed cane payment system and when payment is changed by paying based on individual
farmer’s rendement as opposed to an umbrella average rendement, then it is called Sucrose

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

Cane payment system.

South Africa abandoned Quantity Delivered ‘Fixed’ cane  payment system in 1925/26 season
because it is a disincentive to productivity.  The farmer is concerned with delivery of quantities
with little care of achieving desired sucrose ‘i.e., accounts for sugar crystal recovery’. On the
other hand, millers have no incentive for installing efficient mills since they can break even by
declaring the level of average sucrose recovered and determine a fixed pay per tonne of cane
delivered by farmers. In addition, millers gain from cane by-products such as molasses.

South Africa transformed to Sucrose Cane payment system in the 1926/27 season. Under this
system payment based on level of sugar recovery per tonne of cane delivered by farmer. High
productive farmers get high revenue for their sucrose compared to low productive farmers.
Therefore, this form of payment system is an incentive for high productivity in terms of cane
quality because as the farmers strive to  improve the agronomical practices to achieve sucrose,
it acts also as a double edged sword for better yields per ha. Since miller is purchasing sucrose,
efficient mills have to be established to maximize the recovery of sucrose from cane otherwise;
the miller will not be able to make profits.

The Recoverable Value Cane payment system that was introduced in 2000/01 season takes
care of molasses in cane payment and currently being reviewed to match industry needs. Under
Recoverable Value (RV) cane payment system is observed that during milling some sucrose is
lost in molasses and fibre. Therefore, an efficient mill has to be installed to maximize sucrose
recovery and also revenue from molasses is shared with farmers. This form of revenue sharing
promotes equitable distribution of value created between growers and millers. With respect to
South Africa, under RV Formulae; Farmers receive 64 percent: Millers 36 percent of the mill
sugar and molasses proceeds.

Therefore, since Ugandan cane farmers formulae is based only on mill sugar proceeds, without
molasses then the 35-40 percent share is high, possibly farmers are earning less than 30
percent of the value of cane sugar and its by-products. This potentially makes Ugandan sugar
farmers as  one of the highly exploited in the world, since worldwide most farmers earn in range
of 60-65 percent while millers earn 35-40 percent of the sugar industry proceeds. This happens
to be the reverse trend in Uganda. This high level of exploitation possibly explains why vertically
integrated millers (backward integration) into the farmer part of the value chain can afford to
produce their cane 100s of kilometers away from their mills as they can ‘subsidise’ the potential
loss of their farms from the huge margins they earn as millers. However, for cane farmers who
entirely depend on outsourcing the milling of their cane, even a short distance from the miller
can render their businesses unprofitable as they are currently not on the ‘sweet side’ of the

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

cane payment system.

This can be confirmed with the study Survey whereby approximately 90 percent of respondents
said that the currently cane price formulae system was exploitative.

Therefore, there is an urgent need for Uganda to implement the RV Cane Payment System in
the proposed Uganda Sugar Act 2015 in order to bring back farmer confidence and regain
competitiveness. In the proposed RV system, the value that will be shared between farmers and
millers will take care of Sugar and all the Sugar by- products such as Molasses, Bagasse for
Power Generation being exported to the National Grid by millers and mud-fertilizers among
others. The industry framework below is proposed to guide the formulation of an RV Price
Formulae:

Calculation of The Rv price

The Recoverable Value (RV) Price is not industry ceiling price but the floor price to guide
negotiations between millers and cane producers

Further, the establishment of the National Cane Growers Association will drive and strengthen
the formation of primary co-operatives that will enable farmers obtain affordable credit for their
business. According to our study some farmers rely on commercial banks (annual interest
approximately 30%) which are quite high for agricultural enterprises. Interestingly, in some
circumstances majority of farmers cannot obtain credit from commercial banks and have to rely
on money lenders ‘economic sharks’ demanding monthly interest of 20-30 percent. Thanks to
the School of Liberal Reforms and its dominant precept; markets are self-regulating and leads
to better outcomes. While this study is not entirely against liberal reforms BUT Uganda
government pulling away entirely from the Financial Sector illuminates a fundamental policy
failure as it gave rise to financial predators, leading to a  Frustrated Success Story for
Competitiveness of Commercial Agricultural Enterprises.

Policy Prescription 2: A balanced power sharing regulatory board

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

Part II of the Draft Uganda Sugar Act 2015 stipulates the establishment and composition of the
Uganda Sugar Board. The initial proposed composition had a Chairperson, 5 Government
Officials, 3 Millers and 2 Growers. After a haggle, government representation was decreased by
2 and increased millers and growers representation to 4 and 3 respectively. In comparison, the
South Africa and Tanzania Sugar Regulatory Agencies composition and representations are
better.

The South African Sugar Association (SASA) is composed of two major bodies, namely South
African Cane Growers Association (SACGA) and South African Sugar Millers Association
(SASMA). Both SACGA and SASMA are equal partners at electing 11 members to SASA
Council, while Chairmanship and Vice rotates every two years.

With respect to Tanzania, a country that is comparable to Uganda, the Tanzania Sugar Board
has a chairman appointed by the President as advised by the Minister, who works with 1
Consumer representative, two members from Millers Association, two members from Growers
Association, and one member representing Government from Ministry of Agriculture.

The establishment of a Sugar Regulatory Body in Uganda was a key issue in our research.
According to the survey we conducted, approximately 85 percent supported the idea of
establishing a Sugar Regulatory Body regulated by the Sugar Act, with a purpose of regulating
players in the Sugar Industry including determining prices to be paid to farmers annually based
on fair agreed pricing formulae. It should be noted that globally, distribution of earnings in global
value chains is about power relations. In the context of the proposed representation on
Uganda’s Sugar Board, the following questions need to be carefully explored to constitute a
fairly representative board; (1) Where is the balance of power in the proposed representation on
Uganda’s Sugar Board? and (2) What is the role of all that multi-layered government
bureaucracy in a liberalized & private sector led-growth economy?

Examining the three country case studies presented above, South Africa has the best
representation and the composition demonstrates that the key players, namely millers and
growers are equal partners in the industry and this promotes a competitive sugar value chain
with industry proceeds distributed fairly equally.

Policy Prescription 3: Dismantling of the ring fencing cluster policy

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

The Sugar Policy states one mill per 25 km radius which is being adopted in the proposed
Sugar Act 2015. According to our study approximately 85 % respondents said this policy was
restrictive and that it deterred fair competition as envisaged by the liberal reforms agenda.
Experience from other countries on this issue may provide insights how Uganda can reform the
ring-fencing cluster policy.

A case study of Umufolozi Sugar Mill in South Africa shows that despite liberal reforms it is a
co-operative based arrangement.

A case study of one the world's best sugar producers emanates from USA; the architect and
preacher of liberal reforms. What we find here is that the Sugarcane Growers Co-operative of
Florida Belle glade is vertically integrated, and co-owns the largest refining sugar company in
the world; American Sugar Refining Inc. The Sugarcane Growers Co-operative jointly with the
American Sugar Refining Inc also operates 8 sugar refineries across North America and
Europe.

In both the cases studies above farmers sell cane to the mill but they receive more revenue
from processing based on pro-rata value of cane delivered to mill by each individual farmer, and
thus promoting equitable value chain wealth distribution.

As a way forward, this study proposes that where the Ring Fencing Policy is to be applied, then
the following investment arrangements are proposed:

Primary producers/growers must have equity shares in the mill for equitable wealth distribution.

Or growers to supply cane to mill be paid but again receive more revenue after milling based on
pro-rata value of cane delivered by each grower.

In case of two above not applicable, then allow 2-3 competing mills in the cluster to foster
efficiency and competitiveness.

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Bitter sugar story

Written by By Michael Mugabira

Sunday, 31 May 2015 22:58

The discussions regarding the Draft Sugar Act 2015 during the Sugar Council Meeting in
Masindi on Saturday 02 May 2015 (representing more than 6,000 sugar farmers) made the
following recommendations:

The 40:60 pricing share between Millers and Growers respectively based on RV Cane Payment
System was recommended to be adopted in the Draft Sugar Act 2015. They argued that even in
neighbouring countries like Kenya farmers share was not less than 52 percent.

The meeting objected to the unbalanced representation on the sugar board. In their
recommendation, they proposed that since farmers in Uganda generally supply over 60 percent
of the mill cane, then the growers should have more representation on the board than the
millers and they recommended 4 growers and 3 millers.

The meeting recommended the dismantling of the ring fencing cluster policy. They
recommended that at least 2 mills from competing investors be established per 25 kilometre
radius. Their argument was that this will reduce the high levels of exploitation of the
farmers/growers in the industry.

Once these Policy and Regulatory prescriptions are given clear attention in the proposed Draft
Uganda Sugar Act 2015, then the Sugar Industry will turn around from A Frustrated Success
Story to a Global Competitive Success Story.

Michael Mugabira is a (PhD Student) Graduate School of Business – University of Cape Town;
and Prof. Richard Chivaka Graduate School of Business – University of Cape Town.

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