Madagascar Sisal Industry - Coursework Example

Table of contents 1.0 Madagascar sisal industry 2 1.1 Factors that favor Madagascar sisal industry 2 1.3 Sugar cane as alternative investment 4 1.4 South Africa and SACU/SADC 6 1.5 Investment in the sisal industry 6 0 Madagascar sisal industry Sisal production in Madagascar in 2013 stood at 8.823mtons in comparison 8.246mtons of 2012. The total sisal fibre export was 7.175 mtons in 2013 against 7.078 mtons in 2012. The high quality of the sisal in addition to shortage supply in Kenya and Tanzania the demand has outstripped the level of production. During this time of high demand there has been high price for the commodity and this is expected to be even better depending on sisal price development in Kenya and Tanzania. The sisal produced in Madagascar mostly is exported in China or North Africa. Production of sisal suffered considerably to towards the end of 2013 as a result of the drought like conditions that prevailed. Lack of rains resulted to some of Madagascar sisal plantations curtailing their level of fibre production. Harvesting of the sisal in the drough conditions it was feared that could damage the plants and this would negatively impact on the quality of fibre that would be produced the following year. With rains having started again beginning of this year sisal production is back to normal. However, an increase of fibre production this year without endangering the wellbeing of sisal plantations looks unlikely. 1.1 Factors that favor Madagascar sisal industry Sisal production is likely to remain one of the major cash crops in Madagascar because of a number of reasons. Sisal is well suited for soils in Madagascar being a succulent plant belonging to the cactus family it has good adaptation for survival in dry sandy conditions which prevail in most parts of Madagascar. It is not affected a large extend by poor soils and poor rain patterns like other crops that are grown in the country. Incidences of prolonged droughts are associated with poor harvest for other crops but sisal is least affected by drought events. With the supply of sisal being relatively stable the price is expected to be more stable as compared to other agricultural goods produced in the country. This scenario is of great importance terms of planning the industries that depend on the sisal. The current fluctuations and increased prices of crude oil, there is a lot of uncertainty in the prices of synthetic fibres is highly uncertain. In the US, Europe and indeed in other places there has been growing consciousness about the sustainability of crude oil and the products that are made of the crude oil such as synthetic fibre. This increased in consciousness has been often powered by environment consciousness and there being a desire of purchasing products made in environmentally friendly manner. All this is positive news to sisal industry world wide including Madagascar. In recent past a lot has been happening in terms of research and development aimed at widening the areas in which fibre is to be used and this has led to discovery of huge potential of that is likely to make sisal to be a major commercial crop as it was before the incoming of synthetic fibre. This together with the concern of sustainability and environmental concerns, the uses of sisal that were once considered as being unfeasible are becoming feasible with increased chance of their adaptation. Already in the automobile industry there is utilization of sisal fibre as a composite material in the construction of some car models. This makes the automobile to gain points in terms of sustainability and use of environment friendly techniques in production. Sisal being a labour intensive crop makes it suitable for Madagascar where unemployement rate is high. Sisal production is expected to create many jobs. This is has even more chances of becoming a reality if the downstream application re brought on board including using sisal waste in for BioGas while the major product being used in paper industry, making of handicrafts and in agriculture industry. The sisal industry is linked to other industries and thus its development would result to development in other sectors. Investment in sisal industry may move into value added goods production, and this will be boosted by the fact that many developed countries in recent years have taken the route of outsourcing production processes that are very labour intensive to developing countries like Madagascar as away of improving their price competitiveness and being able to compete with importations from Asia. 1.3 Sugar cane as alternative investment Sugar cane has been one of the leading activities in Madagascar accounting for 60% food processing output in 1986 by value. Developing of agro-industry ranked in the government development priorities and thus there were no discrimination of sugar cane farmers as was the case with farmers of other crops. Nominal Rates of Assistance (NRAs) even with high fluctuation depending on the price pattern at the international market has had an average of zero since 1960s. One of the challenges in the sector has been is that of the cane growers facing long delays before receiving payment for cane delivered to the factories. One of the efforts that have been made to improve the sugar industry was the extensive rehabilitation 1985 and 1987 of SNCBE and SIRAMA which are the two sugar companies that are owned by the state. For local market sugar supply, the price fixing was the responsibility of the Ministry of Trade up to 1989 after which it was upon the wholesalers and retailers to fix their prices. Starting fro 1991 Madagascar became a net importer of processed sugar with exports rebounding in 1999. Madagascar had an export quota of 7258 to United States and 10760 metric tons to EU in 2001. Even though most of the sugar produce in Madagascar ends up in the local market, the preferential market access that the country has had has been very important for the survival of industry. The state companies have had various difficulties that have led to a deficit in production and at some point the country has not been able to fill the EU quata and stopped exportation to US. Reduction of the favored export price which comes from the preferential access given by EU to Madagascar has increased vulnerability of the industry. Improvement of the industry is believed can come through privatization and this was expected to be effected in 2001. This was not done instead the government sought technical assistance from private sector. Even though there is high taxation on imported sugar in Madagascar there are high inefficiencies as a result of low capacity utilization and low sugarcane yields and this makes it uncompetitive at the international scene. The other problem in the industry is domestic distribution where there is high level of inefficiency. When these challenges are addressed and more invest directed in this industry, then the industry may be another option for investment instead of sisal. 1.4 South Africa and SACU/SADC As by 2007 there were no tariffs being charged on sugar importation into South Africa where all products from SACU partners had duty free entry as well as al most all products from SADC countries with exception second hand clothes. Things are quete complex when it comes to domestic market arrangements where there is a complex pricing system with the South African Sugar association being the only exporter. There is protection of sugar trade within SACU and SADC by the SADC 2004 Protocol on trade, Annex VII, which deals with sugar trading. Here sugar is considered as requiring special treatment as per the PROTOCOL so that the sugar industry within SADC region does not suffer any injury with its long term objective being establishment of full liberalization of trade in the sector in the SADC region in 2012. Inside SACU, a fraction of the SACU sugar market on the basis of the annual growth of is to be allocated to SADC surplus producer depending on each of the relative net surplus produced. The 1.5 Investment in the sisal industry i) Reducing investment by 5% each year for the next 50 years and/or indefinitely The graph of reducing investment by 5% each year for the next 50 year with the cost of credit being set at 0, 3, 6, 9, 12, 15 and 18% is as shown in figure 1. From the figure it can be seen that the invested money is only recovered where the rate is 0, 3 and 6 but at higher rate 50 yers elapses before the invested money is recovered. Figure 1 ii) increasing investment by 5% each year for the next 50 years and/or indefinitely Here the invested money is recovered with 50 years in the where the cost of borrowing is 0, 3 and 6% . it can be seen from the graph that at 0% interest rate invested money s recovered within the first 20 years. Figure 2 iii) maintaining investment at the current level (NPV level) for the next 50 years and/or indefinitely References Mitchell, D. 2005. Sugar in the Caribbean: adjusting to eroding preferences. World Bank Policy Research Working Paper, 3802, December. OECD. 2006. Review of Agricultural Policies: South Africa. Paris: OECD. OECD. 2004. An analysis of sugar policy reform and trade liberalisation. Paris: OECD. Read More