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Smallholder Sugarcane Production in Malawi: An analysis of outgrower participation in the
country’s sugar industry
By
Dr Stephen Atkins
Smallholder Sugarcane Production in Malawi: An analysis of outgrower participation in the country’s sugar industry
This paper:• Details the structure and current dynamics of emerging
sugarcane outgrower sector in Malawi• Provides a focus for Sugarcane Growers Association of Malawi
(SUGAM) to address needs and aspirations of membership • Examines outgrower sugarcane financial production statistics • Estimates contribution of sugarcane to household incomes• Discusses aspects of sugar value chain• Directs SUGAM to an agenda for improving efficiency of
outgrower production systems, and improving transparency and equity in the country’s sugar industry
Agriculture is facing challenges, including:
• very small landholdings devoted to subsistence farming
• low productivity due to land degradation
• declining soil fertility
• lack of irrigation
• lack of diversified farming systems
• poorly developed markets for agricultural inputs and produce
• weak service provision (especially rural financial services, agricultural research and extension)
Agriculture’s Success
• Commercial sugarcane introduced into Malawi in the 1960s with considerable success (Gosnell 2005)
• Sugar production value chain is highly ordered with many different bye-products
• Illovo, multinational miller-cum-planter is currently the only miller in the country.
Oldest mill at Nchalo came into production in August 1964
Second mill commissioned in 1979
Both mills considered very efficient (MG NAS Report 2006)
• Ethanol distillery attached to Dwangwa mill in 1982 by the Ethanol Company Ltd
• 2004 second plant was built by PressCane close to Nhcalo
• GBI building a mini-mill close to Salima
• Another mini-mill built by Mtalimanja Sugar Corporation at Nkhoktakota
Table 1 Sugar Production Trends in Malawi 2010 - 2014
Operational Statistic 2014 2013 2012 2011 2010
Total area harvested (ha) 19,567 20,179 19,698 19,521 19,717 Nchalo 13,246 13,568 13,313 13,102 13,316 Dwangwa 6,321 6,611 6,386 6,419 6,401 Yield (tonnes cane per ha) 101 104 105 109 108Total Cane crushed (tonnes) 2,399,926 2,406,735 2,369,098 2,389,058 2,360,821Average sucrose content % 14.26 14.26 13.95 14.06 14.41 Sugar produced (tonnes) 289,013 299,494 283,487 282,445 294,962Domestic market % 58% 55% 57% 62% 66%Export market % 42% 45% 43% 38% 34%
Source: Illovo 2014
Outgrower Participation
• Smallholder outgrowers encouraged from early-on • 1979 Smallholder Sugar Authority established close to Dwangwa mill
catering for irrigated cane• Privatised in 1999 into two entities – Dwangwa Cane Growers Trust
and Dwangwa Cane Growers Ltd• Other outgrower schemes came under umbrella • Friction between entrants and SCGT/L – breakaways strarted• 1997 Kasinthula Phases I supported by operating company Shire
Valley Cane Growers Ltd and Shire Valley Cane Growers Trust • Kasinthula Phases II to IV between 2000 and 2013• Phata Sugarcane Cooperative established 2013 managed by Agricane• All above irrigated outgrower schemes• Rainfed outgrowers recently joined the industry at Dwangwa especially
in last few years
• 2005 outgrowers at Dwangwa mill were 443 • By 2014 grown to 1,730• Dramatic increase of 647 between 2013 and 2014• Expansion from rainfed cane area, but limited by capital and labour• Lack of capital and water for expansion of irrigated area• Majority of rainfed outgrowers cultivate small plots spread over very
large geographical area • Analysis of individual cropped area data provided for 37 members of
one association– combined sugarcane area 24 hectares– average size cane grown 3.35 Ha (SD 4.32) – 30 % cultivated <1 Ha– 76 %cultivated <4 Ha– Minimum 0.4 Ha, maximum 25 Ha
Outgrower Participation
Profitability of Outgrower Sugarcane
• Three production systems producing commercial sugarcane in Malawi:pressurised irrigation (centre pivot and sprinkler)
flood or furrow irrigation
rainfed
• Robust data difficult to obtain
• Focused group interviews, records from Illovo and grower associations
• Extrapolated from information obtainedrevenue flows
capital development costs
resource budgets to obtain variable costs
direct management and associated overhead costs
cash flows before tax and financing costs and receipts from Fair Trade
8 year ratoon period for irrigated systems and 5 for rainfed
examined enterprise worth (NP, IRR and payback period)
Sensitivity analyses on key parameters
Table 6 Indicative Cash Flows for Outgrower Sugarcane Production in Malawi (US$/Ha Constant 2014 Financial Prices)
Parameter
Lower Shire centre pivot irrigation
Dwangwa centre pivot irrigation
Dwangwa furrow
irrigation
Dwangwa rainfed
Net cash flow before financing and tax during 1st harvest year
-9,331
-9,157
-7,100
831
Average net annual cash flow for ratoon years before financing and tax
3,297
2,921
3,230
1,831
Plough-out year 8 8 8 5
NPV (US$/Ha) 4,442 3,490 6,269 4,435
IRR % 28% 25% 28% 928%
Break-even year 3 4 3 1
Table 8 Sensitivity analysis for four sugarcane production systems in Malawi (US$/Ha)
Lower Shire Centre Pivot
Dwangwa Centre Pivot
Dwangwa Flood
IrrigationDwangwa Rainfed
Base Case NPV (US$) 4,442 3,490 6,269 4,435
Tax deducted from Gross Revenue (30%) NPV (US$) (4,410) (1,820) (2,937) 1,461Revenue Increased by 20% NPV (US$) 10,344 688 12,404 4,417 Switching Value (%) -15% -11% -20% -45%
Variable Costs increased by 20% NPV (US$) 2,762 1,230 4,315 3,357Variable costs decreased by 20% NPV (US$) 6,212 5,751 8,333 5,513 Switching Value (%) 50% 30% 64% 82%
Admin Overheads increased by 20% NPV (US$) 3,205 2,253 5,032 4,202Admin overheads decreased by 20% NPV (US$) 5,679 4,728 7,506 4,668 Switching Value (%) 30% 56% 200% 380%
Profitability of sugarcane production systems• Cash flows highly sensitive to sucrose yields and prices• Sucrose yields depend on good crop management by outgrowers • Outgrower sugarcane management teams
mixed ability
differing pricing systems
lack of business plans
cash flow problems
poor record keeping
lack of financial management skills (not accounting skills)
• Poor dissemination and transparency of information • Haulage costs are a high proportion of variable costs• Rainfed cane haulage systems very inefficient• Rural roads poor• Rainfed haulage contractors are small, poorly run enterprises• Loan interest rates onerous – +/- 46% per annum• Sugarcane can assist rural households move out of poverty
Table 9 Profitability of sugarcane production systems
Farming System
Financial Returns with Capital Costs
Included(US$/ha per day)
Financial Returns with Capital Costs
Excluded(US$/ha per day)
% Change
Lower Shire centre pivot irrigation 4.27 8.12 90%
Dwangwa centre pivot irrigation 3.70 7.54 104%
Dwangwa furrow irrigation 4.92 8.17 66%
Dwangwa rainfed 3.97 3.97 0%
Profitability of sugarcane production systems
• To sustain good yields and good revenue streams the industry needs to:
develop professional standards
have ability to regulate
invest in emerging farmers associations
• These are key roles for SUGAM
• Pertinent to understand how sucrose prices are determined, and how industry profits are usually distributed through the value chain, and how production standards could be regulated
Sugar Pricing and Payments to Growers % Sucrose Yield During Harvesting Season
(Source: in Mathias 2009)
Sugar Pricing and Payments to Growers
• Industry standards should be used to provide for fair and equitable development amongst stakeholders
• Standards usually enshrined in Cane Supply Agreements (CSA) between millers and growers
• Harvest and deliver cane to miller on a strictly rateable schedule • Rateable delivery schedule dictates the cut and haul procedures,
establishes optimum harvest delivery schedule to ensure mill capacity is maximised, that sucrose content of outgrower cane does not drop through unnecessary delays on the road and at mill gate
• Provides growers and millers more efficient harvest and mill operations and better returns on the substantial capital invested mill complexes
Sugar Pricing and Payments to Growers
• Cane payment system is largely based around the ‘estimated recoverable sucrose’ (ERS)
• Involves complex process for assessment through laboratory testing incorporating recovery system, percentage brix and fibre, moisture content and purity of juice
• Value of molasses factored into the sucrose payment• Can have other bye-products included but not usual• Division of proceeds (DOP) sugarcane pricing is usually
transparent and fair system• Well-crafted CSAs and DOPs can provide powerful platform for
developing openness, equity and trust
Division of Proceeds• Growers tonnes cane delivered multiply by estimated Growers sucrose % cane = Growers tonnes
sucrose
• Growers tonnes cane delivered multiply by estimated Growers recoverable sugar (ERS) % = Growers ERS
• Industry mill door proceeds =
Sugar revenue
Add molasses revenue
Minus depot costs
Minus opening stock at selling price
Add closing stock at selling price
Minus packing and dispatch costs
Mill door proceeds divided by total ERS = Industry revenue per tonne ERS
• Industry revenue per tonne ERS multiply by 60% = Growers revenue per tonne ERS• Growers revenue per tonne ERS multiply by Growers ERS = Growers value of ERS• Total value of Growers ERS divide by Growers tonnes sucrose = Growers sucrose price per
tonne
An Agenda for SUGAM
• SUGAM should become the voice of outgrowers’ advocating and lobbying government and other stakeholders
• Promote the development of all outgrowers including organisation structures
• Maintain annual register of growers and catalogue production data as presented in this paper
• Campaign for cheaper development and seasonal loans from commercial and development banks
• Support general improvement in outgrower technical and financial management skills, advise on contracts
• Develop one-stop-shop for technical and managerial extension support including the much needed financial and taxation advisory services
An Agenda for SUGAM
• Promote block farming, following best practices • Operationalise soil sampling facilities at Chitedze and
Bvumbwe for outgrowers• Promote formation and operationalise mill cane committees• Broker codes of best practice for cane cutting and haulage
contractors• Assist develop CSA documents and DOP formulation, and
communicate to members, in simple terms, the ramifications and logic behind them
Guidelines for Developing CSA and DOP
• Keep things simple but fair and equitable to all parties with the minimum contentious points
• As outgrowers become more experienced and knowledgeable fine-tune the agreement to mutual benefit, so build this into the process
• Ideally CSA should include:
Payment quantum
Payment determination mechanism
Payment range (fixed versus flexible)
Institutional structures to drive the process forward
Capacity building and production support activities
Delivery rules and payment mechanism
Cane testing procedures (if applicable)
Guidelines for Developing CSA and DOP
• Collect data and information wherever possible• Have a clear time bound action plan to refine the system• Build institutional capacity and relationships at every step• Develop a system fit for purpose, learn from others but do not
copy them• Have a well-respected third party arbitrator to determine
fairness based on industry norms and standards • Make the document fit its ownership • Ensure local languages and customs are incorporated without
making it too complicated
There are many other action points not discussed today, but I hope this presentation has given some weight for industry support to the development of SUGAM as an apex sugarcane outgrower body and voice, which I think is vital to the transparent and sustainable growth of the outgrower sugarcane subsector.
Thank You