South Africa is proposing a project that will increase sugar cane production in

Question

South Africa is proposing a project that will increase sugar cane production in the country. South Africa is a net exporter of sugar cane and exports to the UK. Assume the following: • The CIF at Liverpool, UK is £360 per ton • Freight, insurance and unloading from Cape Town, a South African port to Liverpool is £15 per ton • Local port charges at South Africa is 150 Rand per ton • Transport and marketing costs from warehouse to the port in Cape Town is 120 Rand per ton • Storage, transport and marketing cost from point of production to warehouse is 50 rand per ton • No export taxes • The Exchange rate is £1= 12 rands Where the rand is the South African currency and £ is the British Pound Sterling Answer the following questions

a) Estimate the FOB price at the Cape Town port in South Africa in £

b) Estimate the FOB price in Rands

c) Estimate export parity price at a warehouse in South Africa

d) Estimate the export parity price at farm gate in South Africa.

Explanation / Answer

Exchange Rate : 1 Pound = 12 Rands

CIF at Liverpool = 360 Pound/Ton

Freight, Insurance and Unloading from Cape Town to Liverpool = 15 Pound/Ton

Local port charges at Cape Town = 150 Rand/Ton

Warehouse to Port in Cape Town transportation charges = 120 Rand/Ton

Storage, Transportation and Marketing Charges from Production to Warehouse at Cape Town = 50 Rand/Ton

Answer:

(a)          CIF at Liverpool (in Rands) = 360*12 = 4320 Rands (A)

Less: Freight, Insurance and Unloading Charges (In Rands) = 15*12 = 180 Rands (B)

Less: Local Port charges at Cape Town = 150 Rands (C )

FOB at Cape Town (A)-(B)-(C ) = 4320-180-150 = 3990 Rands

                FOB at Cape Town in Pounds = 3990/12 = 332.5 Pounds (Answer)

(b)          FOB Price in Rands = 3990 Rands (Calculated Above)

(c )          Export Parity Price at Warehouse = FOB Price (A) – Cost incurred from taking product from Warehouse to Port (B)

Therefore, Export Parity Price (A)-(B) = 3990-120 = 3870 Rands (Answer)

(d)          Export Parity Price at Farm Gate = FOB Price (A) – Cost incurred from taking product from Farm Gate to Port (B)

Therefore, Export Parity Price (A)-(B) = 3990-170 = 3830 Rands (Answer)

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