Fiji's Sugar Industry: An Uncertain Future

UNCLAS SECTION 01 OF 03 SUVA 000287 SIPDIS SENSITIVE SIPDIS Manila for ADB Mission E.O. 12958: N/A TAGS: ECON EAGR ENRG SENV EUN FJ IN SUBJECT: Fiji's Sugar Industry: An Uncertain Future Ref: 05 Suva 388 This message is sensitive but unclassified. Please handle accordingly. Summary -------------- ¶1. (SBU) For decades, sugar has been the backbone of Fiji's economy. Nearly a quarter of the population depends on the sugar industry. The EU decision to drastically cut sugar subsidies over the next four years, however, casts a giant shadow over the industry's future. A variety of fixes have been proposed, including upgrading equipment to increase mill efficiency, consolidating small-scale farm holdings to facilitate mechanization, expanding cogeneration to power the mills and generate surplus power, and exploring the production of ethanol. So far, the government has focused primarily on mill upgrades, financed by a controversial and expensive loan from India. Detailed exploration of alternative uses for sugar and sugar by-products continues to lag. End Summary. The Landscape of Sugar -------------- ¶2. (U) About 20,000 small landholders grow sugar in Fiji, and sugar is a source of direct employment for 51,000 persons here, according to the Fiji Reserve Bank. In a speech at the Lautoka Sugar Mill June 27, Prime Minister Qarase declared that 200,000 persons, nearly one-quarter of Fiji's population, depend on sugar for survival. "One can only imagine the economic and social ills that will arise if the industry collapses," he said. Unfortunately, the sugar industry in Fiji, already in substantial decline, faces even more difficult times in the years ahead. The main market for Fiji sugar is the EU. However, EU sugar subsidies are scheduled to drop by 36% from 2005 levels by 2010, and will be phased out further in later years, leading to an EU price below Fiji's current sugar production costs. Because EU subsidy cuts are modest in the first two years of the program (about 5% cumulatively) and accelerate in the 2008/9 and 2009/10 growing seasons, Fiji effectively has about two years to implement major efficiency improvements and/or restructuring. The EU will give Fiji FJ$8.8 million (about USD 5.1 million) this year to help Fiji's restructuring efforts. More funds will be granted in subsequent years. The government of Fiji has not yet announced how the funds will be used, but the EU aims to focus on making cane production more efficient. The ADB reportedly is preparing plans to assist workers displaced from sugar find new livelihoods. Fiji's Sugar Farmers See the Writing on the Wall -------------- ¶3. (SBU) Most sugar in Fiji is produced by small family farms of 3-4 hectares. Most growers are Indo-Fijians who lease farmland from indigenous Fijian communal landowners. Farmers use traditional techniques; only a few own tractors. Traditionally, farmers planted and harvested sugar cane one year and used the ratoon (a new plant that grows from parts of the previous plant) one or two years further before replanting. They also let a portion of the land lay idle for a year so that the soils could replenish themselves. Officials at the Fiji Sugar Corporation (FSC) told Emboff that this traditional way of farming served Fiji well for many years. They complain, however, that because of land-lease issues (many long-term leases have expired in recent years) and lack of confidence in the long-term future of the sugar industry, farmers are not re-investing in the land. Today, they said, farmers typically farm ratoon for as many as 9 or more years to avoid the high costs of replanting, and don't let fields go fallow to recuperate. This results in cane harvests of poor quality and low volume - far too low for Fiji's four sugar mills to run efficiently. ¶4. (SBU) Several employees at the Lautoka Sugar Mill (the largest in Fiji) told Emboff that many farmers are also choosing to leave the land long before their leases expire because of opportunities in the expanding tourism industry adjacent to the sugar belt. According to sugar mill employees, up to thirty percent of farms may have been abandoned. The exodus of farmers is accelerating the industry's decline, they said. One Proposed Solution - Make the Company the Landowner -------------- SUVA 00000287 002 OF 003 ¶5. (SBU) FSC officials told Emboff the only way to solve the supply problem and to overcome the exodus of small sugarcane farmers is for the company to lease small farms and combine them into larger, mechanized farming operations. FSC officials claimed that this will make the system much more efficient. When pressed about how the land will be managed and who will provide the farming expertise, however, FSC officials did not elaborate. Will Refurbishing the Mills Make a Difference? -------------- ¶6. (SBU) Charlie Walker, the new Chairman of FSC, told us government plans to refurbish Fiji's sugar mills will go a long way toward making Fiji's sugar industry globally competitive once again. A FJ$86 million (USD 49 m.) loan from India's Exim Bank will be used to retrofit three of the four mills. The fourth and smallest mill will be retrofitted with old equipment from the other three. This process will begin in December 2006, after the crushing season, said Walker, with completion expected by June 2007. Walker noted, however, that the refurbished mills would only be efficient if FSC's efforts to increase sugarcane supply and quality are successful. ¶7. (SBU) Not everyone agrees that the loan from India will be of much help. All of the new equipment will be sourced from India under the deal, and one former FSC official worried that consultant's fees and added charges make the loan very expensive. A more open bidding process, he said, would have brought Fiji a much better deal - almost any Exim bank in the world would have come through with a better offer than Fiji received from India. The former official also argued that the small fourth mill will never to be efficient and should be shut down. Several of the engineers Emboff spoke to in Lautoka shared these views. They also questioned whether the scheduled refurbishment of mills would be completed before the 2007 crushing season. Transportation Is Another Challenge -------------- ¶8. (SBU) Transportation of cane to the mills is another difficult problem. FSC officials told Emboff they consider transportation the most inefficient part of the production process. The tracks for the small-gauge farm trains that carry the cane from the fields to the mills are over 70 years old and are not well maintained. Delays cause tons of sugarcane to reach the mills much later than planned, resulting in a lower quality sugar product. Rather than spend the FJ$22 million needed to fix the trains, FSC would like to reorganize the system to use trucks only. FSC believes this will speed up the transport time and increase the efficiency of cane transport. However, this will increase the burden on farmers because they will have to pay for fuel and maintenance of the vehicles. (Currently, the Fiji Electricity Authority (FEA) pays for the energy costs of the train system.) Alternative Strategies - Cogeneration -------------- ¶9. (SBU) FSC Chairman Walker and other officials we talked to said expanded electricity cogeneration will be a big part of the restructuring. Currently, Lautoka is the only mill capable of cogeneration. The mill burns the crushed and dried sugarcane leaves and stalks left after the cane juice extraction to create steam. Large on-site turbines generate energy from the steam to power the mill. During the crushing season, the mill can power most of its own operations and still sell six megawatts of power to the FEA, the national electrical utility. In the off-season, the mill must buy energy from FEA. FSC anticipates that when the mill is upgraded, it will be able to operate its turbines year-round and double the mill's surplus energy output. Year-round cogeneration requires four million tons of sugarcane to be crushed, one million more than Lautoka's current level. Biofuels - Much Talk, Little Action -------------- ¶10. (SBU) Officials we talked to also pointed to the potential benefits of sugar-based ethanol production for Fiji, including providing a lucrative market for sugar farmers, lowering fuel import costs, and decreasing net greenhouse gas emissions. However, little concrete action has taken place to date. FSC and experts from India's Sugar Technology Mission (STM) plan to conduct a feasibility study of biofuels, but this has been delayed until after the mill upgrades. Rumors have circulated saying that ethanol production SUVA 00000287 003 OF 003 will begin at the inefficient fourth mill, but no concrete plans have been made. ¶11. ( SBU) A Biofuels Development Unit was recently formed in the Prime Minister's Office (the PM is concurrently the Minister for Sugar and Investment). A plan for the development of a biofuels industry completed by a government-private sector committee calls for the creation of a Fiji Biofuels Corporation (FBC) capable of exporting ethanol by 2008. According to officials we talked to, no concrete steps have been taken to make FBC a reality. ¶12. (SBU) The biofuels initiative was criticized by several stakeholders we spoke to. A high-ranking official in the Ministry for Energy and Natural Resources told Emboff that the Prime Minister has not held any meetings on the subject and has consequently not made many critical decisions, such as the acreage of sugarcane to plant, the amount of testing and research required, standards to enforce, and regulations to put in place. The official mentioned that many organizations are frustrated and have proceeded on their own, despite the lack of direction. The FEA has begun testing generators, the Land Transport Authority (LTA) is testing ethanol in engines, and the Department of Energy is working to develop biofuel regulations. Comment -------------- ¶13. (SBU) The leadership of Fiji insists that it is determined to make the sugar industry viable again. Politically, that may make short-term sense: over 200,000 people depend on the industry. However, as EU subsidies are reduced and farmers find opportunities elsewhere, the government appears to be spending millions in an attempt to fix an industry that will very likely never be able to compete on the global sugar market. The only hope may be to serve Fiji's domestic energy market, and the viability of that route depends greatly on long-term costs of petroleum and other fuels. ¶14. (U) This message was completed by Embassy Suva's summer intern. Mann 1