Loophole of ‘committed sugar’ that leaves bad taste in mouth

What you need to know:

  • Broke and desperate public millers are now turning to such barons to auction their sugar in advance — a risky survival strategy that is hardly talked about.

  • Critics of the “committed sugar” and “committed molasses” — as the exchange is called — believe that it is one of the undoing for the millers, pushing them further into the debt pit.

It was at Muhoroni Sugar: A sugar baron who had loaned the struggling company some money arrived. He stormed a managerial meeting and demanded to get his share of “committed sugar”, which he had paid for in advance before the factory’s six-months closure.

The management, sources say, was thrown into panic, and allowed the trader to truck away all the sugar that had been milled to calm him down.

Broke and desperate public millers are now turning to such barons to auction their sugar in advance — a risky survival strategy that is hardly talked about.

Why the millers turn to their bulk sugar buyers is the untold story of the sector. Normally, they do not sell at market price — at times for recurrent expenditure.

RISKY GAMBLE

Critics of the “committed sugar” and “committed molasses” — as the exchange is called — believe that it is one of the undoing for the millers, pushing them further into the debt pit.

The survival strategy widely practised by both private and public millers is, however, supported by the managers who see it as the easiest way of accessing credit after all the other avenues have been clogged by old debt, including tax arrears.

Muhoroni Sugar Company joint receiver manager Francis Ooko said if millers do not suffer from unavoidable scenarios after making such commitments, it remains a workable survival strategy for the cash-strapped mills.

“It is called committed sugar because we do it is in such a way that the distributor pays upfront. But then uncertainties like plant breakdowns happen. It works very well when you cannot operate due to lack of cash when the market demand is high,” the manager said without disclosing how much Muhoroni had in unpaid committed sugar.

While this commercial relationship is based on trust, it sometimes gets rocky and dangerous.

The practice is a risky gamble for the millers for such borrowing could attract hefty interest while sugar prices may fall drastically during the period before they honour the pledge, leaving them with a loss. The case is worse when sugarcane prices raise the cost of production when they have committed to give sugar to their lenders at a fixed price.

LOOPHOLE EXPLOITED

Mr Gabriel Nyangweso of Chemelil Sugar, however, believes the practice is a saviour for the mills especially when they are faced with an odd financial situation like when all utilities are suspended.

“We use committed sugar as a way of getting a soft loan when the prices are good but that can shift in no time. It is however a huge relief in restoring operations like in August 2017 when we had water cut off the entire plant and our staff were forced to look for water all over the town.

“Since this factory is a lifeline around here, the whole of Chemelil town was dead and insecurity was fast becoming a concern. At that point, any plan that revives the mill is a godsend,” Mr Nyangweso said.

The miller, which had Sh227 million worth of committed sugar unpaid as at end of last year, started compensating the bulk buyers gradually reducing the amount to Sh135 million by October 2018.

While it works well to keep the mills running when they are down, some factory insiders believe it is one of the official ways of stealing from the mill within the first few days of starting operations.

Farmers and other people owed by the mill are always convinced that the miller is still channelling what they are producing to honour the committed sugar pledges, a loophole that is exploited to sneak out tonnes of sugar according to the insiders.

CRITICAL MATERIALS

With opaqueness surrounding how much sugar the factories pledge to such buyers, farmers and employees believe it is one of the easiest ways to steal especially when the factories take too long to complete honouring the deals.

“It is the excuse we are always given. You wonder how comes we always have some committed sugar gap to fill. The farmer who gives the sugarcane is left waiting, the suppliers of critical materials are also left aside and even the employees running the mill have to wait for months as the mill reportedly satisfies the buyers.

“It is complicated and I am not sure many of us agree with it especially when it is not transparent,” a mid-level manager at Muhoroni said.