ITAC Sugar DutyITAC recently published its findings on its investigation into sugar import duties and the method used to calculate such duties. Duties on sugar are calculated using a Dollar Based Reference Price (DBRP) formula.

What is the DBRP and how does it work

The duty on sugar is not calculated as a percentage of the value of the import (known as ad valorem duties). this is the most commonly used method of calculating import duties in South Africa. The DBRP works differently, being a formula which essentially sets an artificial floor price on imported sugar.

As an example, the reference price on sugar is $566 per ton, which is the level that is deemed breakeven for local sugar producers. If importers bring sugar into South Africa below this floor price, say at $500 per ton, then a duty of $66 per ton is levied to bring the imported price up to a level where the domestic industry can compete.
The duty does not change on a daily basis, however for the actual duty in place to be triggered or changed, the imported sugar should be below the floor price for 20 consecutive trading days, a new duty is then calculated and implemented. SASA will simply alert ITAC to the new duty which is then implemented without the need of any investigation. For importers, this means the duty is not easily predictable if they don’t carefully track the world sugar price.

Continuing with the above mentioned example, the $66 will then be converted to Rands using the exchange rate prevailing on the day that the duty is triggered. The resulting figure is then adjusted using the Real Effective Exchange Rate published by the South African Reserve Bank.

Is the DBRP acceptable?

The DBRP may be acceptable locally, however in terms of World Trade Organisation (WTO) Agreement on Agriculture (AoA), it is a questionable method and there have been other similar methods of levying duties that have been successfully challenged and found to be inconsistent with the AoA. Good examples are  Chile’s Price Band System (PBS) for certain agricultural products, one of which was sugar. This method is similar to the DBRP and was found to be inconsistent with the AoA.

In a more recent case (2015), Peru’s“Price Range System (PRS)”  a WTO Dispute Settlement Panel was established to consider a complaint by Guatemala with respect to a measure taken by Peru affecting imports of certain agricultural products including sugar. The dispute centred on the “Price Range System (PRS)” as a methodology of determining duties.

Although similar methods to the ones mentioned above are used in many countries across the world, they appear to be inconsistent with the AoA.

What is the maximum duty that may be imposed on sugar?

The bound rate on sugar is 105% when converted to an ad valorem duty. The bound rate is the maximum duty that may be legally imposed in line with South Africa’s WTO commitments.

ITAC’s important findings

Impact of the drought

It was noted that the country experienced the worst drought in 2015 leading to sugar production declining by 10% from 2.3 million tons in 2013/2014 season to approximately 2.1 million tons in 2014/2015 season. Furthermore low rainfall patterns in the 2015/2016 season led to even even greater decline in sugar production (1.6 million tons), which is a 23% decline.

However, it is expected that production will increase significantly in the 2016/2017 season. On this basis ITAC decided to maintain the existing formula for calculating duties on sugar, although with one change which is touched on below. The DBRP formula was retained as it as deemed necessary to assist and  encourage local sugar production.

Import patterns

Sugar imports declined by 48% during the 2013/2014 – 2015/2016 marketing period. This was attributed to increases in the sugar world price and the weak Rand over the last few years. The bulk of South Africa’s sugar imports are from Brazil which accounts for approximately 2 thirds of the imported volume.

ITAC noted that under normal conditions the SACU industry produces excess sugar than required by the local market. This means all quantities of imported sugar displace locally produced sugar onto the international market, which typically has low prices. This has been one of SASA’s arguments over the years when requesting for an increase in the reference price.

A higher reference price rejected

SASA had requested for an increase in the reference price from $566 to $812 or $837 per ton which is significant. ITAC rejected this request on the basis that it was not in line with production costs and would have a negative cost and price impact downstream and ultimately on consumers. Had the increase been granted that would have certainly not bode well with downstream manufacturing industries consuming sugar and for final consumers.

The reference price of $566 per ton implemented in 2014 was retained as is because it was well in line with local sugar producers costs. In other words the average cost of locally produced sugar is more or less around $566 per ton.

Alternative methods of levying duties on sugar considered

ITAC considered switching from the DBRP to a Rand Based Reference price as well as an ad valorem duty. Both methods were considered inappropriate. According to ITAC, a Rand Based Reference price was rejected because it did not result in a duty and would have resulted in lower duties than needed in future. It was also noted that such a formula would require yearly updates to the reference price.

A simple ad valorem duty was found inappropriate because it does not respond to the cyclical nature of sugar. In other words,  this method is unable to automatically trigger a duty when the world price is below the reference price or reduce or eliminate the duty when the world price is above the reference price.

Introduction of the Real Effective Exchange Rate (REER) into the DBRP

The only new component added to the formula is the REER. Any duty triggered needs to be converted to Rands. However, the weakening of the Rand in the past few years saw really large duties being calculated at some points.

ITAC acknowledged that when the DBRP formula was designed in 1999 the exchange rate was stable and the formula was appropriate. To address the significant fluctuations in the Rand in the current environment, the REER is indeed necessary and has the effect of smoothing out exchange rate fluctuations over time, eliminating the previous exchange rate swings which resulted in more protection than required for local producers in some cases. The REER is the only new variable that has been introduced into the formula.

Impact of duty on food inflation

ITAC found that while sugar prices have generally fluctuated in the last few years, the impact on food inflation on consumer products containing sugar is small or negligible. During the investigation, the impact of the duty on food products was the main argument raised by downstream food manufacturers. Indeed this concern is valid given the general upward trend in food prices. Nevertheless, it appears that (if triggered) import duties on sugar have minimal impact on food prices most likely because of other factors in the value chain.

What is the new duty?

There is currently no import duty on sugar because at the time ITAC finalised its investigation, the calculated world sugar price during the 20 consecutive trading days was an average of $597.03 per ton which is above the reference price of $566 per ton. This new position was gazetted by SARS on 28 July 2017.

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