Runaway production costs and why imports hit the sweet spot

Production costs determine whether the sugar industry can compete with duty-free and quota-free imports from the COMESA Free Trade Area (FTA). The average price of producing one tonne of cane in Kenya is Sh62,875 ($500), while that of neighboring competitors (Uganda and Tanzania) is as low as Sh23,892.50 ($190) per tonne.

The average cost of producing a tonne of sugar in Kenya is Sh109,402.50 ($870), or Sh88,025 ($700) exclusive of finance charges, compared to Sh44,012.50 ($350) in Malawi, Sh50,300 ($400) in Zambia, Sh56,587.50 ($450) in Swaziland/Egypt/Sudan and Sh37,725 ($300) in Brazil, making Kenya’s cost of production among the highest in the world.

The high cost is driven by; cane transport costs, which currently account for 13% to 28% of the total sugarcane revenue. The distance and poor roads contribute to these costs by slowing cane hauling, frequent equipment breakdowns, and deterioration, which in turn add to the cost of cane transportation.
Other factors that drive the cost high include poor agronomic practices in the sugar growing zones, high cost of inputs and old machinery at farm and factory levels, deteriorating soil fertility, low-yielding sugarcane varieties, small and uneconomic land sizes, unsustainable technical support to out-growers, and declining sugar cane production.

As a result, most millers and out-grower farms have problems operating efficiently and sustainably, with most of them returning recurrent losses and accumulating huge, unserviceable debt. Policy and political factors adversely influence the going concern of many millers as predatory importers stalk a weakening sector. Weak institutional structures and policies governing the subsector further aggravate a worsening situation.

Inconsistencies in policy, weak governance framework and weak institutional and marketing structures have contributed to the industry’s woes. Moreover, key stakeholders have not been fully involved in developing subsector policies. There is a need to implement proper policy and legislative frameworks and restructure existing ones to enhance governance.

Despite farmers producing 98% of cane, mills control all farming activities and transport them at costly rates. The Sugar Draft regulations never got gazetted by successive agriculture ministers.

Implementation of free trade
At the commencement of the implementation of the COMESA Free Trade Area (FTA) in 2000, Kenya sought and was granted a “sugar safeguard” in 2002, as the country’s sugar could not compete with sugar from other COMESA member states. In Directive No. 1 of 2007, Kenya was expected to undertake several changes to turn around the sugar subsector and make it competitive.

These include privatizing state-owned mills, conducting research into new and high sucrose content sugar cane varieties and adopting them, diversification from a single product, paying farmers based on sucrose content instead of weight only, maintaining the safeguard as a tariff rate quota with the quota increasing while the above quota tariff reducing until it reaches 0%, providing and maintaining infrastructure including roads and bridges in the sugarcane growing areas.

The safeguard was implemented in March 2002 for an initial period of 12 months and subsequently renewed by the Council of Ministers. The Council also directed that any unavoidable full or partial suspension of COMESA quotas, the East African Community (EAC) import tariff for sugar, or interruption of preferential access established under this agreement, be preceded by prior consultation with affected parties.

The subsector has performed well under the first four years of COMESA safeguard. The primary law governing the sugar industry was enacted in 2001. The Sugar Act of 2001 and its regulations provide the framework for relationships for all the industry players, except for sugar consumers with no representation in the Act. While it is an important piece of legislation for managing the subsector, according to critics and stakeholders, the Act is said to have several ineffective provisions.

Kenya has since 2002 been on COMESA safeguards to enable it to take measures to improve the competitiveness of its sugar industry. During this period, the allowable quota of sugar to be imported has been raised from 340,000 tonnes to 350,000 tonnes. To expand the mandate of the Kenya Sugar Authority, Kenya Sugar Board was established in 2001 by the Sugar Act of 2001. The expanded mandate of the Board was to regulate, develop and promote the sugar industry, coordinate the activities of individuals and organizations within the industry, and facilitate equitable access to the benefits and resources of the industry stakeholders.

The Board facilitated the expansion of the industry by licensing more private millers. The Agriculture Sector Reforms of 2003 led to the enactment of the AFA Act of 2013. The purpose of the reforms was to consolidate numerous pieces of legislation within the scrabble cable agriculture sector, address the overlap of functions, address obsolete legislations, and benefit from economies of scale. This led to repealing of the Sugar Act of 2001 and gave birth to the AFA – Sugar Directorate (AFA –SD).

To date, the sugar value chain’s regulatory, development, and promotion mandate is under the AFA – Sugar Directorate. Commodities Fund is established under Crops Act, 2013 (amended May 2016), Article 9 (1). The fund is the successor of the Coffee Development Fund and Sugar Development Fund. The Commodities Fund aims at providing efficient and reliable credit facilities along the value chain to the satisfaction of the agriculture sector – it will continually improve Quality Management System through enhanced customer service delivery to achieve vibrant, sustainable, and profitable scheduled crops in the agricultural industry.

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