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November 27, 2011

The plight of smallholder sugar cane farmers in Swaziland

As a consequence of a 37% decline in the value of the Euro against the Rand since 2002, the smallholder sugar farming sector in Swaziland is facing a severe financial crisis. This was a major factor contributing to a 21% decline in the sucrose price between 2002 and 2005. With smallholder farmers responsible for investment in on-farm capital equipment including irrigation systems, the decline in the sucrose price has had profound effects on their financial viability. This is further compounded by the high interest rates charged on their finance.
Currently, newly established smallholder sugar farmers pay some 31% of total earnings in interest for both seasonal and capital loans.  In many cases, this leaves insufficient funds to cover even the repayment of the seasonal loan.  This is contributing to growing levels of indebtedness amongst smallholder sugar farmers.  This is proving a direct challenge to the operation of farmer associations as this leaves no income for distribution to members. Some of the farmers are finding their own solutions to the income needs of their families and such activities have led to a deterioration in the efficiency of smallholder sugar production.

It is essential that this downward cycle of declining efficiency be halted and reversed, before the financial effects of EU sugar sector reform are felt through the wider economy in Swaziland.  Without such reversal and support, newly established smallholder sugar farms will become financially non-viable. The key to reversing this downward cycle is the financial restructuring of smallholder loans, and concerted efforts to improve efficiency.

Financial restructuring of existing loans is essential, since without it smallholder farmers will see no personal benefit from the implementation of measures to improve yields, increase sucrose content and reduce seasonal costs. Put simply, under current circumstances the benefits of any improvements in production efficiency are not realised as the beneficiaries of such are the owners of the capital they have borrowed. The argument goes thus, “why improve when the one to benefit from such will be the bank, not me?”. Also, the average operating costs in the smallholder sugar sector increase 40% since 2002.

Review of operating costs of smallholder sugar farmers

(based on seasonal loans extended) 

 2001 2003 2005 % change
 Capital Costs per hectare (R) 22,000 26,000 29,000 +32%
 Seasonal Costs per hectare (R) 10,000 11,000 14,000 +40%

If a form of financial restructuring can be undertaken which ensures that smallholder farmers gain the financial benefit of any innovations adopted and which also ensures that, over time,  financial institutions get their money back (with in a additional a small return), then a sustainable basis can be laid for Swazi smallholder sugar production, which enables it to survive the financial consequences of EU sugar sector reform. In the absence of such a financial restructuring the current downward cycle of declining efficiency and escalating indebtedness will continue.  This will be bad for smallholder sugar farming in Swaziland and bad for the financial institutions which have lent extensively to the smallholder sugar farming sector.

 Why the Current Situation is Financially Unstainable
The table below indicates the sucrose price (Emal 1,666 per tonne) which would be required to meet current loan obligations under the currently prevailing circumstances in which:
  • average investment costs per ha are  Emal. 29,000; 
  • seasonal loans amount to Emal. 14,000 per ha;
  • the cane yield is 100 tons per ha; 
  • the sucrose content is 13.5%
  • the interest on capital loans is 15.5% and the repayment period 7 years;
  • the interest rate charged on seasonal loans is 15.5%.
It further indicates the escalating scale of indebtness under different price scenarios under these assumptions.

Price (Emal/ton)IncomeRepayments (Emal)Net income SHF (Emal/ha)Debt Situation (Emal)
It further indicates the escalating scale of indebtedness under different price scenarios under these assumptions.

What type of financial restructuring is required

Analysis undertaken by the Swaziland Sugar Association suggests that, for the smallholder sugar-farming sector to be placed on a sustainable financial basis, two things need to happen:

a)  seasonal loans need to be provided from a grant financed seasonal loan revolving fund on which a nominal administrative charge of 4% is charged;
b) the interest rate paid by farmers on capital investment loans needs to be brought down to 7% (and the repayment period extended to 10 years), so as to ensure that there is a real incentive to adopt innovations which improve yields, increase sucrose content and reduce seasonal costs.
The question arises how can this be achieved without pushing the financial institutions involved in lending to the sugar sector into financial difficulties?
…how this can be achieved…
The issue of seasonal loans and capital loans need to be tackled differently.  For seasonal loans the requirement is for the mobilization of grant financing to constitute the revolving fund.  This would need to mobilise Emal.14 million per 1,000 ha of smallholder sugar production involved in the scheme.  A tripartite approach involving contributions from the sugar industry (both as a whole and from the millers directly), the Government of Swaziland and international donors offers the best way forward for the constitution of this scheme.
For capital loans four  steps appear to be required:

1) a harmonization of interest rates by the financial institutions across all smallholder farmers involved in the scheme;
2) the unilateral reduction of interest rates charged by the financial institutions involved in the scheme to 12% and extension of the loan repayment period to 10 years;
3) the provision of an annual interest rate subsidy  of 5% from the specially constituted Restructuring and Diversification Fund, envisaged under the “Budget Support/ Levy swap” arrangement
4)  the linking of access to the interest rate subsidy facility and seasonal loan facility to the adoption of an agreed code of conduct on  best farming practices and best financial management practices. 
Such a scheme would restore financial stability to the smallholder-farming sector and lay the basis for the introduction of measures to improve yields, increase sucrose content and reduce seasonal costs.   These improvements would then equip the smallholder sector to be better able to cope with the consequences of EU sugar sector reform.
 The "Budget Support/Sugar Levy Swap" Arrangement
This simple proposal aims to address both the principal and most direct form of government revenue losses arising from the consequences of EU sugar sector reform and the need to secure the early release of financing for stakeholder led restructuring and diversification initiatives.
It involves the Government of Swaziland seeking from the EU additional annual budgetary support equivalent to the earnings currently derived from the “sugar levy” (some €3.6 million).   Such a programme would extend over the eight year time frame of the EU sugar sector assistance programme.       
In parallel with this, the government of Swaziland would set the “sugar levy” at zero while the Sugar industry through the Swaziland Sugar Association would raise a “restructuring levy” equivalent to the “sugar levy”, which would be paid into a “Restructuring and Diversification Assistance Fund”. 
This fund would then provide financial resources for support to specific targeted restructuring and diversification initiatives, designed to minimise the adverse effects of EU sugar sector reform on the Swazi economy and society.
The first priority for this fund would be the provision of a 5% interest rate subsidy on smallholder capital investment loans and a contribution to the seasonal loan revolving fund.

The benefits of the scheme 
The implementation of this scheme will put money into the hands of sugar farmers at the end of each season, with the amount of income distributed at the end of the season depending on the success achieved in adopting innovations to improve yields and sucrose content.  The successful adoption of measures to improve yields and sucrose content would be greatly improved if farmers know they would get the benefits of such innovations come the end of the sugar season.  What is more it would seem reasonable to assume that efforts to contain the escalation in seasonal costs would stand a good chance of success, if this directly increased the money paid out to smallholder sugar farmers at the end of the season.
In terms of the interests of the financial institutions, this scheme would still provide the financial institutions with a rate of interest above that recently charged for car loans in Swaziland.  It would furthermore remove the burden of seasonal loans, repayment of which is becoming more and more difficult.  It would also, of course, remove the threat of substantial defaults on sugar sector loans which overhangs the financial institutions involved, since this scheme would ensure that the financial institutions eventually got their money back.

 Swaziland Sugar Association

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