(posted on 23/11/04)
Cane Resources Network for Southern Africa (CARENSA)
University of Mauritius, Wednesday 17 November 2004
Challenges and Developments in the Mauritian Sugarcane Industry
Jean Li Yuen Fong
General Secretary designate
The Mauritius Chamber of Agriculture
Mr. Chairman, thank you for inviting the Chamber to make a presentation on the occasion of this international workshop. The title of the talk “The challenges and developments in the Mauritian sugarcane industry” is indeed very pertinent taking into account the many structural changes that are taking place worldwide.
Ladies and Gentlemen, if you allow me, I would like to start my presentation by making an overview of the sugar industry in order to put in a broader perspective the big challenges that are lying ahead of us.
OVERVIEW OF THE SUGAR INDUSTRY
In view of the importance of agriculture in our small island, Mauritius is often referred to as “The Green Island” which I’m sure most of you would find very appropriate. Indeed, more than 75% of the island is under agriculture, forests, scrubs and grazing lands. Agriculture covers 45 % of the surface area of the country out of which sugar cane now occupies 74,000 hectares, i.e. slightly more than 90% of the arable lands.
Sugar cane was introduced by the Dutch in 1639. Since then, it has proved without any shadow of a doubt to be the best suited crop in our local context characterized by low soil fertilities and unstable weather, on account of risks of cyclones and of droughts. The sugar cane crop, as opposed to all other crops that had been tried in the past, is highly resistant to cyclones and droughts and has the immense capacity to bounce back to normal level of production very quickly sometimes after one crop cycle. In that regard, it is often said that Mauritius did not choose sugar cane, but that it was in fact sugar cane that chose Mauritius.
Importance of long-standing preferential trade agreements
However, the sugar sector would have never developed into an extensive and reliable industrial activity in Mauritius had it not benefited over the years from a regular, stable, and remunerative source of revenue. This has been possible thanks to the long standing preferential trade agreements that the country, like other ACP states, has with the EU and USA, and in particular the ACP/EU Sugar Protocol. Indeed, the Sugar Protocol is widely acknowledged as the cornerstone of the socio-economic development of ACP sugar supplying states.
Let me briefly enumerate some of the socio-economic benefits derived from the sector:-
It provides gainful livelihoods to some 28,000 growers and direct and indirect employment to about 70,000 people. In other words, some 100,000 people rely on the sugar industry to earn a source of revenue.
Its share in the GDP is about 4.5%. In absolute terms, the sugar export proceeds represent some US$ 300 million, i.e. equivalent to almost 90% of total agricultural exports and 20 % of total foreign earnings.
It is an efficient converter of solar energy into biomass, for example, sugarcane is a much better converter than maize, rice, wheat and sugar beet.
It provides a permanent protection against soil erosion while maintaining moisture and increasing organic matter content.
It favours rural development in Mauritius which has one of the highest population densities in the world, i.e. 650 people per square kilometre. The sugar milling activities across the country has prompted the establishment and development of strong industrial sectors in rural areas, thus avoiding population migration to urban areas. Today, more than 50% of the population lives in rural areas.
Bagasse, a byproduct of sugar, is a viable and renewable source of green energy in an island totally devoid of fossil fuels. Through the burning of bagasse, complemented by coal during the off-crop season, the sugar sector is nowadays supplying nearly 50% of the country’s electricity requirements.
The cane plant mitigates the greenhouse effect as it is among the cultivated plants the one that sequesters the highest amount of carbon dioxide per unit area. This will certainly be an important asset when the Kyoto Protocol will be ratified and implemented.
All the points that I’ve just made attest the multifunctional role of sugar cane. It is important at this stage to highlight this feature as the multifunctionality of the sugar industry is too often underestimated and not given due consideration by some policy makers.
THE SUGAR INDUSTRY AT CROSSROADS
Ladies and Gentlemen, the Mauritius sugar industry is at crossroads. Not only the preferential sugar trade agreements which have been so vital for our development are now being threatened, but we are also faced with a number of challenges that have to be addressed on both the external and internal fronts.
On the international front, the World Trade Organization (WTO) negotiations in agriculture, the EU sugar regime reform, the ruling of the WTO sugar panel, the implementation of the Everything but Arms (EBA) initiative and the establishment of Economic Partnership Agreement (EPA) between the ACP and the EU are all likely to impact on the future configuration of our sugar industry.
WTO negotiations on agriculture
Following the failure of the Cancun Ministerial Meeting in September of last year, the WTO negotiations have progressed leading to the agreement on a general framework for modalities by 31 July last. The interesting point in respect of the framework on agriculture is that it provides adequate negotiating space to all the various interests at stake. From the Mauritian perspective, there are a number of positive points that have been taken on board, for example (i) there is recognition that sensitive products have to be dealt with in a different manner, and (ii) the importance of long standing preferences is fully recognized and the issue of preference erosion will be addressed. The WTO talks on modalities are now ongoing and it goes without saying that this phase is the most critical one as the outcome will define the future orientation of world agricultural trade.
Reform of the EU sugar regime
The EU sugar regime reform is of direct relevance to our sugar industry since the price of our sugar export to the European market is based on the price obtained by the European sugar beet producer. It is therefore a matter of great concern to us and the ACP sugar suppliers as well when the EU Commission comes with a proposal to reform the sugar regime through a drastic price cut of 24% in 2005 and 37% in 2007. I do not need to go into details about the devastating consequences that the EU reform would have on the economies of the respective ACP sugar suppliers as these have been fully publicized in the media.
I would refer to the press release issued in October last by the ACP states signatory to the Sugar Protocol wherein they affirm that they are cognizant of the need to enhance competitiveness and to reform; however, such reform cannot be sustained unless a steady flow of predictable and remunerative earnings are met. Consequently, they call on the EU to (i) establish a Competitiveness Fund in 2005 to finance the adjustment programmes in advance of any reduction in earnings and (ii) compensate all losses due to price cuts with an automatic and predictable mode of disbursement. They also reminded the EU of its obligations under the Sugar Protocol and expressed the view that since the ACP are in similar situation with the outermost regions of the EU, they should therefore benefit from comparable treatment. Finally, they stated that the EU sugar reform should be implemented over a period of not less than 8 years and starting in 2008.
WTO panel on sugar
The ruling of WTO sugar panel is now official and in favour of the complainants, namely Brazil, Australia and Thailand. The panel has indeed upheld the complainants’ charges on all counts. It is very likely that the EU will appeal against the ruling of the sugar panel. Of particular note to Mauritius, the panel report is obviously not in our favour as it undermines the commonality of interests between the European and ACP sugar producers. However, it makes some positive comments in respect of ACP sugar suppliers whereby it refers to the keeping of import preferences and the retention of an attractive market and reminds the EU to fully stand by its commitments to the ACP and India. The ACP will most probably join the EU in its appeal as third party.
The EBA initiative was introduced in 2001 in favour of the Least Developed Countries (LDC) to give unlimited access at zero duty for all products originating in these countries except for sugar, rice and bananas which are subjected to some transitional measures in the form of quotas until 2009. It is clear that the inception of EBA initiative was meant to be at the expense of the ACP sugar suppliers as evidenced by the ensuing significant drop in tonnages exported under the Special Preferential Sugars Agreement. It is also clear that the principle underlying the EU sugar reform takes into account the threat of oversupply in the EU sugar market resulting from the full implementation of the EBA initiative in 2009 when the LDC sugar will have quota and duty free access.
The EBA sugar is currently the object of lot of debates and in this regard the LDC have proposed to defer the gradual liberalization of the import tariffs between 2006 and 2009 by 10 years subject to additional access opportunities under a second tariff quota and the maintenance of preferential access at a remunerative price. However, this proposal does not seem to attract the EU for reasons that it may not be WTO compliant.
ACP-EU Economic Partnership Agreement (EPA)
The EPA is scheduled to come into force as from 2008 in the context of the Cotonou Agreement signed in 2000 between the ACP and EU. The new partnership agreement is based on the establishment of trade arrangements that are to be negotiated between the ACP and the EU at regional level. For strategic reasons, Mauritius has decided to join the Eastern and Southern African region (ESA) together with 15 other states. It is to be noted, however, that since the Sugar Protocol cuts across the ACP regions, it has been decided that sugar will not be negotiated at the level of EPA but at the all ACP level in order to avoid any conflict of interest between the ACP sugar suppliers. It has also been agreed that such negotiations will be backloaded and start only after more visibility has been achieved in terms of the current WTO negotiations and the reform of the EU sugar regime.
This decade 2000 – 2010 is crucial for our sugar industry as all these events are taking place concurrently and will unfold one after the other within the next few years.
In short, the direct implications for the Mauritian sugar can be summarized as follows:
Improved market access for our competitors
Erosion of ACP trade preferences
Reduction of Sugar Protocol price
Disappearance of SPS quantities
Loss of commonality of interests between the EU beet producers and the ACP sugar suppliers
Challenges on the local front
On the local front, our biggest challenge is to maintain our sugar production at levels that will enable us to continue satisfy our market requirements and concurrently reduce production costs in order to remain competitive.
Our production potential is subject to 2 main factors: land under cane and productivity. The encroachment of residential zones and of infrastructure over agricultural land has led to a substantial decrease in the total area devoted to cane cultivation. In general, we have been losing about 500 hectares per year and this trend is likely to intensify in the coming years. The productivity gains in terms of tonnes of sugar per hectare have to a large extent compensated for the loss of agricultural lands. The contribution of Research will therefore remain of paramount importance for the future of the sugar industry.
A comparative analysis of the production costs of ACP suppliers was presented in the workshop that was organized last year on the occasion of the 150th anniversary of the Mauritius Chamber of Agriculture. According to the presentation, the production cost in Mauritius is 17 cents per pound which is close to the one determined by the Mauritius Sugar Authority, 18 cents, and about 60% higher than the world market price. This illustrates the gap that our sugar producers need to cover in order to match the big players such as Brazil, Australia and Thailand in a WTO driven more liberal trade environment.
Measures to enhance the industry's competitiveness
Mauritius has always been conscious of the need to adapt to the changing environment and has taken, in this regard, a number of measures to rationalize the industry and to bring down costs. For example, the Blue Print on centralization of sugar milling activities in 1997 provided the guiding framework to drive the centralization process. As a result, the milling sector is now comprised of 11 sugar mills as opposed to 19 in 1997. In 2001, the Sugar Sector Strategic Plan (SSSP) was established to give new impetus to the ongoing reform process. The objectives of the SSSP are, inter alia, to –
reduce the cost of production from 18 US cents/lb to 14 cents by 2005 and 10/12 cents by 2008,
reduce the number of factories to 7 or 8
generate as much electricity from bagasse
effect a substantial reduction in the labour force through socially feasible Voluntary Retirement Schemes (VRS),
create an enabling environment for efficient field operations and ensure a more efficient and judicious use of land and water resources
rationalize Global Cess and the funding of service providing institutions.
The implementation of the VRS has led to the voluntary retirement of some 8,000 employees. it has been a costly but necessary adjustment measure that was wholly financed by the producers themselves. However, it has resulted in substantial indebtedness of the sugar industry.
2005-2015 Accelerated Action Plan
The recent proposal of the EU Commission – 37% price cut within 3 years – has confirmed the fact that it is more than ever imperative for us to complete our reform process before the implementation of the price cuts. That’s why all the stakeholders are now working together for the preparation of an Accelerated Action Plan, for the period 2005 – 2015, that would speed up the reform process. It is expected that the plan would be released very shortly and would address the following issues, among others –
All these measures of course are aimed at ensuring that the sugar cane industry remains commercially viable and sustainable in the long term and continues to fulfil its multifunctional role. In this respect, it is worthy to note that Mauritius has decided to carry out a macro-economic study in order to -
(i) evaluate and quantify the benefits derived from our sugar industry by virtue of its multifunctional character and which enjoys EU market access under the trade preferences and
(ii) assess and validate the investments and funding requirements to enable the local sugar industry to remain competitive taking account of the proposals of the EU Commission.
The study will also address the issue of accompanying measures that the EU Commission is proposing to negotiate with the affected ACP sugar suppliers. The study has been entrusted to LMC International and will be completed early next year.
Before concluding, the possible configuration of the Mauritius sugar industry by 2015 can be foreseen as follows:
the current trend of diminishing acreage under cane would be intensified and that cane would be cultivated on only 60,000 hectares in 2015;
sugar production would consequently drop to some 525,000 tonnes
electricity production from bagasse would double with the setting up of 3 new plants, from 350 GWH to 700 GWH – this excludes the additional electricity production that would be obtained from coal;
Ethanol production would most probably be undertaken on a larger commercial scale yielding more than 60 million litres per year;
The number of factories would be further reduced to 6 with bigger milling capacities;
Mechanical planting and harvesting would be undertaken on a much larger scale in the corporate sector while most of the cane lands belonging to the independent planters would have been prepared for at least some basin mechanized operations;
Irrigation facilities would be extended to cover the near totality of the dry areas, i.e. 32,000 hectares.
Finally, to conclude, we can say that the sugar industry has a vital role in Mauritius. It provides a stable and reliable source of revenue and is the springboard for economic diversification. Its role is multifunctional with cross linkages with the environment, energy and tourism sectors. It is aware of the challenges that it has to face and has embarked on an ambitious reform plan. But, it will never be able to overcome certain natural and structural constraints inherent to its condition of Small Island Developing State and Net Food Importing Country. The need for Special and Differential Treatment and Trade Preferences is therefore amply justified.
Ladies and Gentlemen, thank you for your kind attention.