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[February 05, 2014]
Kenya's sugar production costs set to remain high [Business Daily (Kenya)]
(Business Daily (Kenya) Via Acquire Media NewsEdge) The cost of producing sugar is likely to remain high in Kenya even after implementation of a raft of reforms which seek to make factories efficient, findings of a new study show.
The study by the Competition Authority of Kenya (CAK) shows that even before processing begins, sugar firms incur up to 78 per cent of production costs in raw materials and farm overheads.
The price for procuring raw material (sugarcane) alone accounts for 52 per cent while agricultural overheads that include transport and storage expenses take up the remaining 26 per cent of the overall cost of producing sugar.
Factory overheads and distribution costs make up four and eight per cent of the costs respectively.
"Contribution of each item to ex-factory price varies from one factory to another depending on operational efficiency, but the cost of raw materials and agricultural overheads generally account for the largest portion in most factories," the study states.
The study is likely to bring about a policy shift in Kenya's long running campaign to integrate its sugar industry with the regional market. The campaign has concentrated on addressing efficiency at the factory level.
"Factories have been easy targets because they operate at 60 per cent and their cost items are identifiable," Kenya Sugar Board CEO Rose Mary Mkok told the Business Daily on Wednesday.
READ: High costs sour outlook for local sugar industry She said the board was also exploring several options for reducing the unit cost at farm level ranging from bulk purchase of inputs to increasing per hectare yields.
The improved supply of cane and higher factory capacity will push up sugar production this year to 700,000 tonnes and reduce unit cost.
"We appreciate the fact that the cost of producing sugar will never come down unless we address costs at each stage of the entire value chain," she said.
Ms Mkok, however, disputed findings that suggest the tail-end of the sugar value chain exert most of the cost pressure on the industry. The raw materials only account for 40 per cent of the production cost while transport takes up 38 per cent of the industry's production cost, she said.
According to the CAK study, the cost of producing sugar which is $1250 (Sh106,250) per tonne in Kenya is highest in the region and more than double the global average of $500 per tonne.
The high cost of production has seen Kenya restrict the space of its partners in the Common Market for Eastern and Southern Africa (Comesa) in its market.
Kenya produces about 520,000 tonnes of sugar against an annual consumption of 740,000 tonnes.
While Comesa members are generally allowed to ship in sugar into Kenya without paying duty, the government has frequently negotiated for safeguards that limit intake to 220,000 tonnes, equal to the production deficit.
The safeguard expires for the third time at the end of this month but the government is already lobbying for its extension through the Ministry of Trade.
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