BUSINESS: Why sugar price is going up

Factory price of 50kg bag up by 48% in April 2017

There is bad news for sugar consumers in the country going by current issues happening in the industry.

Official figures for the year 2016 from industry controllers Uganda Sugarcane Manufacturers Association (USMA) millers – Kakira, Kinyara and SCOUL – indicates a reduction in production of sugar from 420, 000 tonnes in 2015 to 330,867 tonnes last year.

Going by these numbers, demand for sugar, which was recorded at 360, 000 tonnes in 2015 according to the Ministry of Trade Ministerial Policy Statement for the FY2015/2016 could have surpassed supply in 2016.  And that could partly be the reason a kilo of sugar costs more today.

USMA officials told The Independent that factory price of a 50 kilogram bag of sugar has risen by 48% from Shs 125, 000 five years ago to Shs 185, 000 in April 2017.

But wholesalers in Kampala were retailing the same bag at an average of Shs 210, 000 on April 21.

Kiosks and other small retailers were selling a kilo at an average of Shs 4, 900 in most parts of Kampala on April 21 compared to an average of Shs 4, 000 in most parts of last year and early 2017.

The last time the cost of one kilogram spiked above current rate was in 2013. It cost over Shs 7, 000, the highest in the last over five years.

The price surge means more spending to consumers or cutting expenditure on the product. To a businessman, it means reduction in sales in some cases or more profits in others.

But what exactly is behind reduction in production and price hike? What needs to be done to manage this recurrent price challenge in a market that is liberal with its consumers used to consuming the product?

The causes

Government officials from the ministry of trade, Uganda Bureau of Statistics (Ubos) and private players (USMA) shared common reasons with The Independent – drought and the exchange rate depreciation that were experienced last year.

According to UBOS gross domestic product figures for the first half of this financial year (2016/2017), manufacturing growth declined by 2.8% partly due to the decline in sugar production attributed to drought.

Wilberforce Mubiru, the secretariat manager at USMA told The Independent on April 21 that around April 8, 2017 millers under USMA increased factory price by 4% to Shs 185,000 per 50 bag of sugar to accommodate the rising production cost and the depreciation of the shilling against major foreign currencies especially the US dollar (Bank of Uganda data indicates that the shilling depreciated by 6.9% year on year in March 2017 compared to a 4.4% depreciation recorded in February 2017).

Prior to April 8, Mubiru said factory prices for a 50kg of sugar cost Shs 178,000 inclusive of 18% value added tax and Shs 5,000 excise duty.

When millers added 4% cost, wholesale prices shot to 210, 000 per 50 kg bag which in turn led to the current hike in retail prices. However, supermarkets like Shoprite, Game and Nakumatt that deal in branded sugar were selling at Shs 4,500 per kg. But this may not be an alternative to many buyers. Mubiru said that sugar that is traded in branded company bags, constitute a small fraction of miller’s sales and contributes less than 5% of Uganda sugar consumption. Most of the consumption takes place through small kiosks that buy in bags of 50kgs and package in white polythene bags.

Mubiru said the other cause of price hikes has to do with shortage of cane, the major input in the manufacturing of sugar.

“Cane price has been rising of recent and cane being a major input in the industry its prices will always have a direct effect on the final sugar price,” Mubiru said, adding the average cane price has risen by over 100% from Shs  85,000 in April 2016 to around Shs 160,000 by April 21, 2017.

Because of scarcity of cane, millers are producing at below the installed capacities which directly increase the cost per unit produced and the price of sugar.

Another top player in the manufacturing of sugar that requested not to be named told The Independent that speculation across the region could be one of the reasons behind current surge in sugar price.

For instance, the source said, at factory price, a 50kg bag of sugar in Kenya cost Kshs 6,000 (equivalent to Ushs 212,000 per bag) against Uganda’s Shs 185,000 per bag.

“This could have recently attracted informal exports of sugar across the borders,” the source said.

Mubiru said there are other underlying causes of sugar price hikes that have to do with high taxes involved in the process of sugar manufacturing. He said Uganda’s tax structure on sugar is very high recorded at 21.3% (VAT 16% and 3.3% excise duty) compared to Kenya’s VAT of 16%.