Tongaat Hulett delivers sweet results, but the earnings come from land, not sugar
Agriculture is a funny business, one that is highly susceptible to a wide range of risks and unique challenges, and one that occupies an interesting place from a regulatory perspective. On the risk side, there's weather, and underinvestment, and price volatility, and the threat of competition and so on, all of which combine to cause results like those recently released by Tongaat – earnings from sugar were down quite substantially thanks to falling global prices and rising competition.
To me, though, the most interesting part of the story is the role that import duties play in Tongaat's business success. Usually, I'm opposed to import duties, which needlessly raise prices for consumers. But when it comes to agri products, I can see the argument in their favour. Farming is a risky business, and without some price stability, farmers wouldn't be able to produce a substantial amount of food year in and year out. Add to that the risk you take when your nation becomes dependent on foreign food, and I can see why import duties have a role to play in maintaining a robust agricultural sector. – FD
ALEC HOGG: Welcome back to Power Lunch. As a sugar workers' strike looms, Tongaat Hulett posted its full-year results today; that was for the year-to-end March. On the line is the company's Chief Executive Peter Staude. Peter, in a way, you're a victim I suppose of your own success if you were just a sugar company – your operating profit down from R1.4bn on the sugar side to R900m – a big drop in this past financial year. I'm not so sure people would be out on strike that quickly, but because you've managed to do so well in selling off land etcetera, overall the numbers look good and I guess the workers say 'where's ours?'
PETER STAUDE: Obviously, negotiations are currently underway – the industry negotiations – so this thing from other sectors…we negotiate together with our workforce.
ALEC HOGG: But just take us through the swing that you saw in this past financial year with the land area, the selling off of land generating the biggest section of your profits. Is this a first?
PETER STAUDE: It's the first time we ever made more out of land, at operating profit, than we've made out of the sugar side. We've established a lot of momentum over a number of years in our land activities. As we see, a saner outlook is actually expected to continue over the next five years.
ALEC HOGG: And the starch side benefitted there from the maize, the fact that local maize prices were in line with other parts of the world. Talk to us about sugar. I was looking at the sugar graph. In July 2011, it was USD30 per pound and today, it's USD17.5 per pound. That, I guess could change, but the way things look right now and with all the negative publicity sugar's getting, how do you balance – from your perspective – these kinds of challenges?
PETER STAUDE: Look, two things are currently at play here. The first one is the sugar price has always been very volatile and during times of surpluses…obviously, for any country that opens up its market, if it's a sugar producer for other people to put surplus sugar in (because they have to sell it as they've made it), it's a bad place. We had exactly that in this last year in South Africa as well as in Zimbabwe. In Zimbabwe, the imports were nearly half the local market. The good news for us has been that in South Africa, they've uplifted the reference price where duty kicks in. That's been increased from 16 U.S. cents per pound to 25.6 U.S. cents per pound. In the months of April and May, the imports were very small. In Zimbabwe, they've introduced duty protection. It's now ten percent, plus another 6.3 U.S. cents per pound and that will be a very good protection against imports. Imports have already dropped off there. On the world's side, it's not a demand conversation. The demand's still going up and typically, going up by two percent per annum. It is all on the supply side that causes the volatility. It creates a great market for the bears to fight with the bulls. Currently, they're about equal, but I believe the next winner will be the bulls again – very soon. On the production side, tobacco and sugar production is always farmers, there's weather, and the combination of farmers who don't invest in land when prices are low together with weather, very soon leads to a shortfall.
GUGULETHU MFUPHI: Peter, it's Gugu here with Alec. I recall speaking to you in Davos. You mentioned that Africa is an opportunity for you, but you'd rather stick to the areas that you know. In addition, the increased threat of competition and trading in commodities, which are common on the continent: does that still defer you away from exploring the rest of the continent as an investment opportunity?
PETER STAUDE: Look, it's not so much a question of whether Africa's an investment opportunity. It's a question of whether you want to build new sugar mills and you sit with some seven-hundred-thousand tons of unutilised capacity after growing by some four-hundred-thousand tons over the last three years. That seven-hundred-thousand tons of unutilised milling capacity you'd have to put in place would cost you more than R13bn. What are you going to concentrate on? Our relentless progress and focus at the moment is to get the most of it full. Over the next three years, we plan to up them with another four-hundred-thousand tons, which is quite a considerable increase in sugar production.
ALEC HOGG: That was Peter Staude, the Chief Executive of Tongaat Hulett. Looking at the long-term graph, it was 6 cents per pound in February 2004 (that's the sugar price), and went as high as 29 cents per pound seven years later, and it's come down to 17 cents per pound now. I wonder how much of that has to do with the fact that the Americans have fracking, they've changed their energy equation, and they no longer have to pay for ethanol for their maize farmers. There are big issues going on in the sugar market. Of course, sugar has helped the whole ethanol production as well. It's a complex world we live in.