INTRODUCTION

This background paper attempts to provide a brief overview of the evolution of the Australian sugar industry, concentrating on the export sector and in particular, on the pronounced growth during the current decade. It attempts to give some indication of the factors which have influenced that growth and to make some assessment of potential for further expansion.

GLOBAL PERSPECTIVE

Australia currently ranks seventh among world sugar producers. It is well behind the European Union, China, India and Brazil and closely behind the United States and Thailand. Among exporters, Australia selss less than the EU and Brazil, competing with Thailand for third place. Since 1990 Australian production of sugar has risen by 44 percent a figure exceeded only by Brazil (70 percent). In the same period Australian exports have risen by over 60 percent, a growth rate also exceeded only by Brazil. At present Australia holds about 16 percent of world trade. Australia is highly dependent on the free market export sector, and currently about 85 percent of production is exported, a figure likely to rise to about 90 percent by 2000.

Australia, Cuba and Thailand are by far the most export dependant among major sugar exporters and Australia is the only developed country where survival of the industry is linked overwhelmingly to the export sector.

National Perspective

The sugar industry ranks fifth among the major primary industries of Australia after beef, wheat, wool and dairy and fourth in export value generating more than A$2.0 billion of income mainly from exports.

Sugar cane is grown along the coastal strip of North Eastern Australia from Mossman and the Atherton Tablelands in North Queensland to Grafton in Northern New South Wales a distance of more than 2,000 kilometres. A new small-scale industry has now been established in the Ord River district of North-Western Australia. In Queensland and New South Wales, some 19,000 people are fully employed in cane-growing, harvesting, milling, storage and marketing and a further 26,000 in related and supporting industries. Sugar has played an important developmental role in North -Eastern Australia and its presence and infrastructure have provided the incentive and spring-board for many other industries and enterprises.

History

Sugar was first cultivated experimentally as early as 1820 but was not cultivated commercially until the 1860’s, when it spread rapidly from Northern NSW up the Queensland Coast. Originally a plantation industry relying upon indentured labour, it became a family based industry from the late 1890’s. By the end of the nineteenth century, there were over 70 small sugar and juice mills operating in Queensland and New South Wales. Today there are 29 including the recently established small mills in the Ord River.

In its formative years the industry supplied the Australian domestic market, along with imports, but during the first world war, shortages encouraged stimulation of the industry by the state and federal governments and Australia became a net exporter of sugar in 1923. At the same time, an embargo was introduced on sugar imports into Australia which remained in effect until 1989..

In 1915 the Queensland government of Mr TJ Ryan introduced the Sugar Acquisition Act and regulation of Sugar Prices Act and these Acts effectively regulated sugar production in Queensland until 1991 when a new Sugar Industry Bill was introduced. NSW sugar was produced and marketed within this general framework arrangement and a Commonwealth/State agreement allowed the domestic price of refined sugar to be regulated.

From 1923, when Australia became a net exporter of sugar until 1990, there were only three planned substantial increases in the area assigned for cane growing. These took place in 1953-54 in response to new export market opportunities provided by the recently negotiated Commonwealth and International Sugar Agreements; in 1964/65 after a period of high world market prices and in 1990/91. There were smaller increases approved in 1975/76 and 1981/82, again in response to dramatically improved ( but not sustained) world market prices. Under the then prevailing regulatory arrangements, cane could only be grown on assigned areas and only on a fixed proportion (net) of the gross assignment. Mill peaks had been established in 1929 in order to ensure that production was kept in line with domestic consumption requirements plus anticipated export outlets and were only increased in line with market growth. There were also corresponding farm peaks . There was a strong sentiment among sections of the industry which prevailed well into the seventies that regulation provided some assurance of security and this position was broadly supported by governments.

As long as a significant proportion of Australian exports was guaranteed under Commonwealth (CSA) and International (ISA) Agreement quotas, this position could be justified, particularly since a sizeable share of the CSA quota received a very favourable negotiated price. There were also long term price agreements with some countries, notably Japan and of course after 1960, the US Sugar quota. But these advantages collapsed, first with the entry of the United Kingdom into the EU and the subsequent ending of the ISA, and in the early eighties, with the cessation of ISAs with economic provisions, Australia was isolated. The industry then had to stagnate or re-position itself to compete essentially without preferences, in a highly volatile market against both low-cost developing country exporters as well as high cost, but highly protected supplies from developed countries. This has been the position which the Australian sugar industry has had to face since the early eighties and which is likely to prevail in the foreseeable future.

Industry Structure

Queensland produces 95 percent of Australian sugar and NSW the remaining 5 percent excluding the 50,000 tons currently being produced in Western Australia.

Cane Growing

At present there are 6,400 cane growers in Qld with an assigned area of 484,000 hectares and an average farm size of 77 hectares. The number of Qld growers declined from 7507 in 1970 to 5784 in 1990 but thereafter, in line with gradual market de-regulation, rose again to the present level. In the same time period average farm size increased from 40 hectares in 1970 to 77 in 1996.

NSW has 600 canegrowers with an average farm size of about 33 hectares. Farm sizes are smaller than in Qld , although there is a nucleus of larger farms. Area harvested and production has more than doubled since 1970.

The West Australian Industry which commenced operations only in 1995 has a target of 560,000 tons of cane from 22 farms covering 4,000 hectares.

Harvesting

All sugar cane grown in Australia is harvested mechanically, usually by independent operators or groups under contract. Australia pioneered mechanical harvesting and achieved 100 percent conversion to mechanical harvesting in 1979. Australia is a world leader in the manufacture and export of mechanical harvesters.

In areas of North Queensland and Northern New South Wales where heavy rainfall frequently interferes with harvesting, special wet-weather harvesting equipment has been developed including tracked harvesters and high flotation field transportation.

There are two methods of harvesting currently practised in Australia - burnt and green. Traditionally cane has been burnt before harvesting to remove weeds, leaves and other matters which can impede harvesting and milling operations. In the twenties, cane was also burnt as protection against Weil’s disease spread by rats and other vermin residing in the canefields.

In the past decade or so green cane harvesting has spread, a process which allows the leafy stalks to fall to the ground and act as a protective trash blanket. This blanket, as an organic mulch, considerably reduces the level of soil erosion and preserves soil nutrition for crop growth. It also helps to prevent weed germination. Fifty percent of the Australian crop is now harvested green and in the Herbert River district, near Ingham in North Queensland, the figure reaches 100 percent. However, green cane harvesting is not always possible or practical in all sugar growing areas, notably in cases where the mulch-like layer or residue can contribute to the water-logging of fields. In southern producing regions, the trash blanket has also been found to lower soil temperatures which can impede early plant growth.

Harvest-contractors are paid at a piece work (per ton rate) and large scale operations permit economics of scale in most regions, thus helping to achieve lower unit costs.

Milling

There were more than 70 sugar and juice mills in operation throughout Qld alone in 1892. By 1920 the number had increased to 34 and currently there are 25 plus 3 in NSW and one on the Ord River.The Ord River mill was the first new sugar mill built in Australia since Tully mill in North

Queensland commenced operations in 1925. A new juice mill will also soon be operating on the Atherton Tableland.

Mill ownership became more concentrated during the 1980’s and 1990’s. In 1980, 19 companies operated 33 sugar mills. Currently 12 companies operate Australia's 29 mills and one of the 12, Bundaberg Sugar, will operate the new mill on the Atherton Tableland. The state-wide rationalisation of Queensland’s sugar milling and transport operations in recent years resulted in the closure of 5 mills, QNABA ( Bundaberg), Goondi and Hambledon (North Queensland ) and North Eton and Cattle Creek ( Mackay ) The cane lands assigned to these mills were re-assigned to adjoining mills.

Of the current 29 mills, 15 are owned by public companies, one by a private company and 13 are grower owned co-operatives. Co-operatives account for about 45 percent of Australian sugar production and public/private corporations 55 percent. The Colonial Sugar Refining Company (CSR) owns mills accounting for 38 percent of Australian raw sugar output, followed by Mackay Sugar Co-operative (20 percent) and Bundaberg Sugar (Tait and Lyle ) 15 percent. The four northern co-operative mills Mossman, Mulgrave, South Johnstone and Tully formed "Sugar North Ltd" in 1993 as a network organisation to help to ensure the long-term viability of co-operative production in North Queensland. Together, their share of sugar output is 13 percent.

Bulk-Handling

Australian raw sugar has been handled entirely in bulk since 1964 with the Qld Sugar Corporation. (formerly the Qld Sugar Board) responsible for all storage and handling of Qld sugar. The Qld bulk-terminal capacity in excess of 2 million tons, is the largest integrated bulk sugar storage system in the world, with an annual output of more than 4.5 million tons. The system operates 7 terminals along the Qld coast from Cairns to Brisbane.

Sugar Refining

Sugar refineries produce a range of products for direct use by end-users and as ingredients in other manufactured food and drink products. All raw sugar used by refineries is obtained from Australian

sources. Raw sugar is bought from the Qld Sugar Corporation (QSC) and the NSW Sugar Milling Co-op Ltd and potentially will be bought from the recently established West-Australian industry. Approximately two-thirds of the raw sugar used by the refineries is purchased from QSC.

There are currently six refineries operating in Australia with a combined refining capacity of 1,300,000 tons. Australia's consumption of refined sugar is only about 900,000 tons with a very slow growth rate. New refineries were built in 1989 by NSW Sugar/Manildra Harwood NSW, and by Mackay Sugar/EDF Man at Mackay in 1993. These new ventures have dramatically affected the Australian market for refined sugar.

Marketing

Under the 1915-1991 Sugar Acquisition Act all raw sugar was acquired by the Qld Sugar Board which was responsible for its sale and for raw sugar storage at ports. As will be explained in the next section, changes in 1991 led to replacement of the Sugar Board by the Qld Sugar Corporation (QSC) which assumed responsibility for the sale of all raw sugar produced in Queensland and for

the management of the operations and maintenance of the 7 bulk-sugar terminals. Its activities cover four broad areas:

• Marketing and sale of raw sugar
• Storage and logistics
• Provision of industry services
• Financial management

The sale of raw sugar within Australia and New Zealand is handled directly by QSC. Outside, Australia and New Zealand, CSR Raw Sugar Marketing (as in the days of the Sugar Board) acts as an agent for the QSC in the sale of raw sugar to export customers. C Czarnickow & Co (London), in which CSR has a major interest, acts as the QSC’s principal sugar broker, while shipping services are chartered by Austral Chartering. In recent years ED&F Man has also brokered Australian sugar.

As the single seller of Queensland raw sugar output, the QSC is responsible for administering the net proceeds to mill owners and to also ensure equitable distribution of proceeds between growers and millers.

The New South Wales sugar industry markets its production of refined sugar from the Herwood refinery and under present arrangements would also market any surplus raw or refined , it may have to place on the export market. Ord-River raw sugar is sold on the domestic market though the Perth Refinery.

Industry Entities

A range of industry bodies exists to represent the interests of various industry participants. V1Z

The Australian Sugar Milling Council (ASMC), membership of which is voluntary, represents the interests of 28 mills (i.e. all except Ord-River).

Canegrowers is a Qld Statutory Organisation representing the interests of cane growers in Qld and NSW. For Qld growers, membership is compulsory.

The Australian Cane Farmers Association also represents interests of canegrowers from both Qld and NSW and membership is voluntary.

Research and Development (R&D)

The Australian sugar industry has traditionally relied heavily on research and development and maintains an on-going commitment to support through funding the research and development sector, as a crucial element of overall industry development strategy. In combination with governments, over $40 million is spent annually on sugar related research, development and extension. Five major R and D organisations are involved:

Sugar Research Institute (SRI) concentrates on mill owner needs. (Funded by mill owners).

The Bureau of Sugar Experiment Stations (BSES) serves mainly the agricultural sector (Funding approx 50% industry, 50% government).

Sugar Industry Research and Development Corporation (SRDC) is a statutory body established under the initiative of the Australian Federal Government to involve industry more closely in the determination of the objectives of R&D. The SRDC manages the distribution of funds for projects across a wide range of programme areas.

The Co-operative Research Centre for Sustainable Sugar Productions (CRC) is recently established with three themes- to protect the environment, to sustain soil and water resources and to enhance crop productivity in terms of bulk cane yields and commercial sugar content (CCS).

Industry De-Regulation

As indicated in the historical overview , the Australian industry has been made to face the fact that it is overwhelmingly dependent on exports and on world market prices. The restrictive regulatory framework of the Qld industry made it very difficult to introduce changes, particularly economies of scale and there was a high degree of rigidity regarding assignments, mill peaks, new entry, acquisitions, and the embargo on imports, which appeared to act as a severe brake on effective rationalisation. Since the late 1970’s, there have been pressures to de-regulate the industry; from 1977 until 1996, 11 major reviews of the sugar industry have been carried out, as well as several internal reviews. As far back as 1983, an Industries Assistance Commission Report recommended the abolition of the import embargo on sugar, the removal of assignment, the removal of the formula for setting prices and the removal of controls on acquisition. These findings were not accepted by the federal government although they indicated a new trend and an emerging consensus that the rigid regulatory arrangements had to be loosened to allow market forces to operate.

In 1988, the federal government decided to lift the embargo on sugar imported from July 1, 1989. The government decided the embargo should be replaced by first an ad-valorem tariff then a tariff of $115 per ton reducing to $55 by 1992 and that the Industry Commission should undertake a further review in 1991 to consider the need for import protection beyond 1992.

In June 1989 a report of a Qld government appointed Committee of Enquiry into sugar industry pooling systems recommended that the traditional formula for calculating No 1 and No 2 pool price differential should be discarded and substituted by a fixed differential of 12 percent. (No 1 pool covers up to Mill Peak and No 2 above-peak sugar produced from assigned land). This recommendation was adopted.

In 1991 after much consultation with the industry, the Qld government effectively repealed the 1915 Sugar Acquisition and Sugar Cane Prices Acts and introduced the Sugar Industry Act of 1991. This Act abolished the Cane Prices Board and the Sugar Board. Marketing and administrative functions were amalgamated and transferred to the Qld Sugar Corporation. The Act also established local boards and a streamlined appeals process through a Sugar Industry Tribunal. It approved area expansion over a five-year period of at least 2.5 percent per year,(approximately 10,000 hectares per mill area) and allowed a simplified and more flexible assignment system. The abolition of the Central Cane Prices Board permitted decisions to be made at a local level, from ground-level up, rather than centrally from above.

Two further major industry inquiries were carried out in 1992 and 1993, first another Federal Industry Commission, and secondly a Sugar Industry Task Force.

The basic objective of the latter was to identify impediments to the sustainable growth and competitiveness of the Australian sugar industry and to recommend means of overcoming them. The second was to determine the appropriate level of future government funding for the industry, including the appropriate level of sugar tariffs.

In February 1993, as a result of the task force findings an "agreed sugar package" was announced by the Commonwealth and Qld governments which included:

• 40 million of infrastructure funding for approved industry projects
• Maintenance of the sugar tariff at $55 per ton until 30 June, 1997
• A reduction of the Queensland raw sugar price differential between No1 and No2 Pools from 12 percent to 6 percent by 1996.
• An "in principle" agreement to the transfer of ownership of the bulk sugar terminals from government to Sugar Industry.
• The retention of unitary or "single-desk" selling arrangements, subject to review in 1996.
• Industry expansion decisions to be made at local levels.

The package also stated that while assignments would remain the basis for local agreements it would not be used as a constraint to growth.

Vision 2000

Representatives of the cane-growing and sugar milling sections have been closely associated with the evolving de-regulation process and during 1995 developed a concept of how they would wish the industry to develop over the next decade. They considered that as the industry’s major stockholders they were best placed to advise on which arrangements best suit the practical needs of their industry in terms of productivity, efficiency and sustainability.

Their joint approach, called "Vision 2000" which was determined at joint sessions of the full Canegrowers’ and Australian Sugar Milling Councils, is for the industry to be a sustainable competitive raw sugar industry, which is environmentally responsible, focused on improving productivity and the preferred supplier to all outlets.

National Competition Policy and 1996 Sugar Industry Review Working Party

The 1974 Commonwealth Trade Practices Act on the need for a national competition policy was based on the recognition that Australia had become a single market. Improvements in transport and communications meant that state boundaries were no longer impediments to the trade of goods and services within Australia. This agreement subsequently came to focus on the Commonwealth Government’s micro-economic reform process introduced during the 1980’s to focus on the internationalisation of the Australian economy. In October 1992, the Prime Minister set up a National Completion Policy Review Committee subsequently known as the Hilmer Committee (after its Chairman, Prof. Fred Hilmer) to conduct a thorough review of the scope and operations of the Trade Practices Act of 1974, in particular where the provisions of the Act needed to be extended to ensure competitive conduct was adhered to by all Australian corporations and individuals. In addition the Committee was requested to identify alternative means of ensuring competitive conduct outside the scope of the Trade Practices Act

The Hilmer Committee in effect drew up a blueprint for National Competition Policy (NCP) which was endorsed by all Australian governments during 1994 with implementation from July 1995. The guiding principle under NCP is that legislation should not restrict competition unless it can be demonstrated that:

1. the benefits of the restriction to the community as a whole outweigh the costs; and
2. the objectives of the legislation can only be achieved by restricting competition.

Review of Sugar Legislation and Tariff

When the Qld Sugar Industry Act was introduced in 1991, it was publicly stated that the legislation would be subject to review within five years. Additionally when the Commonwealth and Qld governments adopted an "Agreed Sugar Package" in February 1993, it was specified that some elements of the package pooling price differentials and tariffs on sugar imports would be subject to review in 1996.

Accordingly, in 1996 the two governments announced a joint review of the Qld sugar industry regulatory arrangements and the sugar tariff.

A sugar Industry Review Working Party (SIRWP) which included representatives of Commonwealth and Qld governments, growers, millers, QSC and users commenced operations in October 1995.

After submissions by interested parties and public hearings the Working Party presented its final report in November, 1996 to the two governments who at time of writing (April 1997) were due to make their decisions on which recommendations to adopt.

The key terms of reference were two-fold:

1. To review the need for a tariff on raw and refined sugar. In its assessment the Working Party was asked to focus primarily on benefits and costs to the general community of such actions.
2. To review current legislative arrangements for the promotion and regulation of the sugar industry in Queensland and to investigate alternative arrangements. The objective of any new legislation should be to facilitate the sustainable development of an internationally competitive, export oriented industry, which benefits both the industry’s participation and the wider community.

Major Recommendations of SIRWP

1. Removal of sugar tariff combined with strengthening of anti-dumping laws to provide protection for industry producers. Removal of the tariff would ensure domestic refineries and industrial users access to sugar at world market prices. This would result in a decline of Qld raw sugar revenues of the order of $26.7 m annually (and by implication to NSW of about $8.0 million). On the other hand, other sectors of the economy would receive corresponding benefits.
2. Marketing and related arrangements:

3. Cane supply and processing arrangements. Increased local determination of cane supply and processing matters.

A local area negotiating process is proposed to provide more flexible, contractually oriented cane supply and processing arrangements. Matters impacting on season length and expansion will continue to be determined locally (i.e. mill area level).

Cane growers will retain the right to negotiate collectively with mill-owners, while also enabling the negotiation of individual agreements. Additionally through these agreements, mill owners should be assured of supplies. Individual agreements between growers and mill-owners should not disadvantage collectively negotiated agreements (assuming the latter will remain predominant).

4. Ownership and Management of Bulk Terminals

The Working Party recommends these be owned and operated as a single entity and ownership be vested in QSC on behalf of the sugar industry.

5. Production and marketing institutional arrangements

The Working Party supports the NCP principle that regulations functions be separated from commercial functions. Consequently the QSC should be divested of any regulatory functions, except those which are clearly ancillary to its marketing role. Its marketing regulatory functions should be maintained but production regulatory administrative functions be separated.

The Working Party recommends that these limited remaining centralised non-marketing regulatory arrangements be overseen by a newly created part-time "Sugar Industry Commissioner".

6. Research development and extension arrangements

These would remain basically unchanged. The Working Party recognises the sugar industry’s long term commitment to research and development and its critical contribution to the Australian sugar industry’s international competitive edge.

NSW Industry

The NSW industry was not covered or consulted in the SIRWP Review, a factor which appears, quite naturally to have caused some resentment. It has operated independently since 1989 - marketing virtually all its sugar domestically through its Harwood refinery. In 1996 it exported small exports of raw sugar to Singapore. It has however, under the import party domestic pricing arrangements had the benefit of the $55 per ton tariff.

General reaction to SIRWP Report

At time of writing, it seemed that most recommendations were widely accepted with the exception of the tariff removal which many growers (particularly in NSW) and country regions opposed. These groups emphasised that Australia was already more than meeting its GATT obligations. The current tariff is only about 15 percent while other major producers including EU, Thailand, US and Japan have tariffs well in excess of 100 percent. In fact the effective Australian tariff is only about 8 percent because of a 5 percent developing country preference. Perhaps more important, they are concerned about the impact on their own industries particularly in NSW of a loss of some $35 m in revenue.

impact of de-regulation

Since the planned expansion of area began in Qld from 1988 onwards, there has been a growth in assignment for cane growing of 40 percent, an increase of over 143,000 hectares. In New South Wales, area harvested has also risen from 14,000 hectares to 18,500 an increase of 33 percent. There are also the 4,000 hectare planting's coming into full production in the Ord River. The decline in numbers of growers in Qld from 1980 to 1990 was reversed in 1991 and has since continued to rise. At the same time, average farm size has increased from 50 to 75 hectares. The natural attrition of growers had revealed some rationalisation in farm sizes and the average farm size is still increasing with the entry of new growers. The average tons of cane produced per farm has also risen from 3,500 tons in 1980 to 5,500 tons in 1995. Interestingly, despite the rise in numbers and scale, structurally there has been little change with the family farm still the dominant form of ownership.

Harvesting

Harvesting of cane has also been further rationalised over the past 5-10 years with average harvester group size rising from 16,000 tons to 32,000 tons and numbers of harvesters declining. The expansion in the growing sector has been exceeded by increases in capacity of Queensland sugar mills. Average tons of cane crushed per mill have increased from 750,000 tons in 1980 to over 1.4 million tons in 1995. Average crushing rates have also risen from 350 tons per hour (TCPH) to over 500 tons in 1995. Raw sugar produced in Qld mills rose from 3 million tons in 1980 to more than 5 million tons in 1995 and in NSW from 180,000 tons to 248,000 (285,000 tons in 1996).

Australian cane yields have risen from 83 tons per hectare in 1990 to 98 tons per hectare in 1996 and sugar yields from 11.4 tons per hectare to 13.4 tons per hectare in 1996.

As indicated in the historical review, there has been significant rationalisation of mill groupings with Mackay Sugar emerging as Qld’s largest private company and Australia's second largest sugar miller behind CSR. A major international sugar company Tait and Lyle has entered the scene with its take-over of Bundaberg Sugar.

Among the various regions the greatest expansion in area has occurred in Herbert River-Burdekin and in cane and sugar output in Herbert-Burdkin and Central. The average growth rates in NSW have compared very closely with those of Qld.

The above increases have come about as a result of massive investment in new area, land preparation, irrigation, farm improvements, cane transport and milling capacity, increased yields improved extraction rates in mills reflecting also in part, return on industry investment in R&D.

Raw sugar exports

Raw sugar exports have risen by 42 percent from 1989-1996. In 1995 exports exceeded 4 million tons for the first time compared with 2.5 to 3.0 million tons during the eighties. This reflected the success of the industry expansion programmes which resulted in increased export availabilities, but also in the successful implementation by the Qld Sugar Corporation and its marketing agents of their marketing programmes. In 1996, some 64 percent of exports went to Asian markets followed in importance by Canada and New Zealand. However QSC has been remarkably successful in opening diverse new outlets in the Middle East and in Eastern Europe and countries of the former USSR.

The single desk selling arrangement allows QSC to co-ordinate the management of production, quality, storage and shipping to offer an ‘integrated marketing package" on behalf of raw sugar producers. QSC also undertakes risk management for the industry and has successfully implemented sugar price, foreign exchange and interest rate risk management programmes.

With its widely dispersed bulk terminals along the Queensland coast, QSC is able to meet supply commitments even if some producing regions might be experiencing production short falls, since it is unusual for the whole state to be effected in any given period. The Corporation is virtually able to supply its customers a guaranteed package of quantity, quality and type of sugar required on a regular basis.

Similarly it is able to place sugar on the most profitable markets concentrating on those areas where Australian sugar has a particular advantage, be it freight, season, or other. QSC and its principle marketing agent, CSR, continue to express confidence that there will be sufficient consumption growth to enable all available raw sugar supplies to be exported remuneratively in the foreseeable future.

Market for refined sugar

Changes in the domestic refined sugar industry have been dramatic in recent years. In 1989, when NSW Co-operative broke its connection with the Qld Sugar Board it, in equal partnership the Manildra Company built the Harwood/Mildara Refinery with a capacity of 280,000 tons. With a modern, efficient refinery, well placed to supply metropolitan markets, the operation was successful and profitable. However in 1992, Mackay Sugar announced its intention to build a refinery in joint partnership with ED&F Man with a capacity of 350,000 tons. CSR partly rationalised its refinery base by closing down its operations in Adelaide and Sydney but still retains a refinery capacity of 520,000 tons. Bundaberg sugar also developed further its refinery capacity to 150,000 tons.

As previously indicated this has resulted in an Australian domestic refining capacity of 1,300,000 tons compared with domestic consumption of 900,000 tons and the results have been disastrous for all parties.

In 1993 when the difficulties of entering the export market profitably on a large scale became apparent, Mackay Sugar/ED&F Man and CSR applied to merge their operations, which would have resulted in a significant reduction of CSR’s older refining capacity and a rationalisation of the market. However this arrangement was rejected by the Trade Practices Committee on the grounds that it would be at variance with National Competition Policy. Consequently the price war continues and Mackay Refined Sugars actually commenced legal action in December 1994 against CSR alleging various contractual breeches, including misuse of market power.

The position has been at least theoretically aggravated by the SIRWP recommendation that cane sugar for domestic refining be priced at export or world parity rather than the existing import parity. This would remove the margin equivalent to the tariff, currently enjoyed by the Australian industry. In practice however, the margin has probably been discounted in the on-going price war.

In its 1995 report, Mackay Refined Sugars indicate that gains have been made in market share in Australia and New Zealand and that exports are also growing with the company now being seen as a major player in regional white markets with BIBO (Bulk in Bagged Out) sales to the Islamic Republic of Iran, China, Sri Lanka and Indonesia and container exports to India, Philippines, Fiji, China, Republic of Korea, Vietnam and China, Hong Kong Special Administrative Region.

Nevertheless Mackay Refined Sugars is still losing money, and under present conditions stands little chance of recuperating capital cost. It remains to be seen how long either partner in the venture will be willing or able to sustain such losses. The same problem, though perhaps less severe, applies to the other refineries although they may not be in the position of having to recoup capital cost.

New South Wales Sugar Co-operative has indicated that if it loses its tariff protection, it will have to enter the export market on a regular basis and may even put pressure on state and federal governments to obtain a share of the US raw sugar quota.

The perilous state of the domestic refining industry is causing very considerable concern in sugar industry and government circles and at time of writing, there were firm reports that consideration might be given to re-considering the question of an amalgamation between Mackay Refined Sugars and CSR refineries. Similarly there have been statements in state and federal parliaments that the SIRWC recommendation on tariff removal should be held over.

FUTURE OUTLOOK

The raw sugar industry is united in its objective of continuing to expand to meet export market opportunities and is confident that it can continue to compete effectively with other low cost and protected suppliers.

It expects that over the next 5 years world sugar prices will remain under pressure. QSC will continue to refine its risk management techniques aimed at protecting producers against price falls.

The question is to what extent the high growth rates from 1990-1996 can continue. The industry modestly forecasts that with present capacity, production in 2000 would be about 6 million tons compared with the current 5 million tons.

Queensland

The SIRWP looked at possibilities for growth over the period up to 2005 for Queensland and came out with the following "possible" expansion in land area:

The figures for Mackay-Proserpine region have been raised to take account of a study by "Mackay Sugar' and "Canegrowers Mackay" which included likely production from areas external to traditional Mackay Sugar boundaries. That study indicated Mackay Sugar could be processing 8.3 million tons of cane from 97,000 hectares in the 2000 season and 9 million tons of cane from 100,000 hectares five years later.

These very rough indicative figures give some idea of land availability which if brought into production and assuming present yields (i.e. no productivity gains) would result in increased sugar output ranging from 1 to 3 million tons up to 2005. This would result in total Qld output of about 6-8 million tons. Actual output would be higher since further productivity gains could be anticipated.

Over the past few seasons Qld sugar mills have consistently demonstrated transport and crushing capacities in advance of rising cane supply. Capital investment by sugar mills in plant and equipment as well as transport infrastructure has been enormous. CSR has invested particularly intensely at Victoria, Macknade and Inkerman in new plant and at Plane Creek in transport, but co-operative and other mills have also invested heavily. Twenty of the twenty five Qld mills operate a continuous crushing mode.

In 1996/97 there is a reluctance among mills, particularly company mills to enter into a further round of new capital expenditure. Prevailing low world market prices and high loan capital interest do not provide a sufficiently attractive rate of return to shareholders on their investment. Farmers on the other hand are generally keen to continue expansion and to bring new land into production.

Co-operative mills are in an essentially different position since their shareholders are also their suppliers and there is less conflict of interest. Some such as Proserpine, are reported to be prepared to commit substantial funds for new investment. The same also applies to Mackay Sugar, although the co-operative's 50 percent share of refinery losses would have significantly reduced funds available for further investment in milling capacity.

Therefore unless some understanding can be reached between millers and growers re financing, there may be a significant slowing down in expansion of crushing capacity. There is of course a new Juice Mill (Tait & Lyle) coming into production on the Atherton Tableland which will handle about 800,000 tons of cane over the next five years in addition to the 400,000 tons currently produced in the region and supplied to existing mills. Furthermore there are reports that growers in the Burdekin region are beginning to urge the establishment of a new growers co-operative mill in that region. The Sugar Industry Act was amended to enable the granting of assignment to the Atherton Tableland mill, so that there are no longer any regulatory restrictions to the setting up of new mills. They are however an extremely expensive operation.

In the present climate, Qld millers are strong proponents of vertical integration at field and mill level to raise productivity through field improvement and higher milling extraction rates. Mills are particularly keen to extend the crushing season to use existing capacity more fully, but many growers oppose such an extension because sugar content of cane is low early in the season and falls off sharply late in the season so that unit returns to growers (based on commercial sugar content of cane, CCS) would decline. Average Qld crushing season is about 20-22 weeks and studies indicate an extended season of about 25 weeks would be optimum. This matter was examined at some length by SIRWP and it would appear that a compromise would need to be reached in each area

between millers and growers, which would extend the season but provide adequate protection to growers for the associated decline in CCS.

NSW

Canegrowers in NSW are as committed to sugar cane cultivation as their Qld counterparts. Alternatives are limited, less remunerative and less reliable. Despite a nucleus of large holdings farms are smaller but growers are resilient and often earn off-farm additional income. The growers Co-operative is efficient and attuned to efficiency and innovation and the joint Sugar Co-op/ Manilda refinery seems to run smoothly.

NSW has certain advantages in proximity to domestic markets, abundant water which virtually eliminates the need for irrigation and low fertiliser usage. The smaller NSW mills are of course at a disadvantage but they operate as an integrated operation. The co-operative is confident it can face the future and compete if necessary against its northern neighbour. The NSW crushing season currently operates up to 26 weeks and given its southern latitude, sugar content of cane does not fall off sharply late in the season as it does in Queensland.

The three NSW mills expect to process 2.4 million tons of cane in 1997 and there is moderate room for expansion. Management estimates that under current technology and farming methods and varieties, NSW sugar output could rise to 350,000 tons over the next five years, that is an increase of more than 20 percent over 1996 output.

Western Australia - Ord River

The new Ord River sugar mill crushed its first cane in November 1995 and it is planned for the region to grow about 500,000 tons of cane manufacturing about 75,000 tons of raw sugar. Production in 1996/97 was reportedly about 50,000 tons. The mill, owned by CSR, is reported to have struck problems. Planned costs of some $30m are believed to have risen sharply as major modifications have had to be made and more conventional machinery installed. Also, yields have been lower than expected.

Furthermore, unlike Qld and NSW, there are alternatives to cane in the Ord, particularly cotton. The 22 registered growers are entrepreneurs, some with canegrowing experience obtained in Qld. Sceptics say that Ord growers are not family farmers committed for life to cane as most Qld and NSW growers appear to be, but rather, sizeable entrepreneurs who could move into other areas if deemed more profitable.

The writer is not in a position to assess this situation objectively. However, given the known problems regarding milling and yields, it would seem realistic to assume any expansion beyond the present phase would be fairly slow. For the present it is therefore assumed that Ord River sugar output would not exceed the planned 75,000 tons over the next five years or so.

In summary Australian sugar output could be of the order of 6 million tons by 2000 and 6.5 to possibly more than 8.0 million tons by 2005 which would leave an exportable surplus of 5.5 to 7 million tons, depending of course on domestic and world market developments in the interim..

SUMMARY AND CONCLUSIONS

The recommendations of the Sugar Industry Review Working Party seem likely to provide the framework in which the Queensland, and by implication, the Australian sugar industry will function over the next five years or so and certainly into the new century.

As a result of the de-regulation of the past decade, the regulatory system based on mill area assignments can no longer be regarded as hampering the industry’s ability to expand, or to rationalize, as may be necessary to deal with changing market circumstances and opportunities. Nevertheless, it seems likely that the industry will continue to operate within tan overall broadly integrated framework and continue to be overwhelmingly export-oriented. Indeed, it is expected that the present export dependency ratio of 85 percent will rise to 90 percent by 2000.

Indications are that Australian sugar output will continue to expand. ABARE has projected a figure of 6.4 million tonnes by 2001-2; indeed a figure of the order of 9 to 10 million tonnes implying an export surplus of 8 to 9 million tonnes would be technically feasible if market conditions and economic returns justified the expansion in acreage and milling and hand-milling capacity.

Land is not a serious constraint and growers are keen to expand. In most sugar growing areas, especially Queensland and Northern New South Wales, sugarcane is still farmers’ preferred option and there are few equivalent alternatives. Productivity is high and further gains are predicted as a greater proportion of cane is grown under irrigation and superior varieties of cane are developed. There will be further technological improvements at farm level and no doubt further application of economies of scale, although the family-farm unit is likely to remain dominant.

Factory capacity could be a constraint given the reluctance to contemplate a new round of expansion so soon after the dramatic capital investment undertaken in the past five years. The constraints imposed on capital borrowing by high interest rates and low prices received for sugar have been mentioned. Much will therefore depend on future developments in world market prices and ability to reduce further growing, milling and marketing costs. In the short-term every effort will be made to increase throughput and reduce costs with existing capacity through rationalization, application of improved technology and extended crushing seasons. Opportunities for season extension will be enhanced by allowing millers and growers to negotiate bonus payments to growers to offset increased risks and lower c.c.s.

In the longer-term, however, it will probably be necessary to enter into further investment in new capacity. Further rationalization may occur with re-grouping and ownership changes. Competition for ownership of mills and for supply of cane will undoubtedly intensify among the major players, namely CSR, Mackay Sugar and Bundaberg Sugar, which could lead to further mergers or take-over bids and the smaller cooperatives will need to remain vigilant to consolidate their position. But such developments are inevitable in any dynamic industry.

On the marketing side, the integrated packages of the Queensland Sugar Corporation have been successful in placing sugar on the most profitable markets where Australian sugar has a particular advantage and in enhancing its reputation for competitiveness, quality and reliability. Efforts will continue to provide an element of stability through price, foreign exchange and risk management programmes. There may in the future be some attempts to relax single-desk selling arrangements and accommodation may need to be made for New South Wales and the Ord River, should they become significant exporters. But this will involve tinkering rather than fundamental structural changes.

Detailed cost data are not published but Australian sugar industry spokesmen indicate that the industry would be sensitive towards investment if sugar prices fell below 10 US cents per lb for a sustained period, but could survive for some time at lower prices. Much depends therefore on future demand growth and demand/supply balance and on whether Australia can maintain and enhance its competitive position - also of course general economic developments, interest rates, etc.

In summary, it might be said that growers and millers are confident. The same can be said for the export-marketing sector. Indeed, both the Queensland Sugar Corporation and its principal marketing agent express confidence that there will be sufficient consumption growth to enable available supplies of Australian sugar to be exported remuneratively in the foreseeable future. I might add that latest reports also indicate that rationalization measures are being taken which may help to resolve the current hiatus in the refined sugar sector.

Australia has many natural advantages, not least that the location and spread of the industry from high tropics to temperate zone provide insurance against the impact of weather on production and enhance reliability of supply.

The family-based farming sector is knowledgeable, dedicated, self-reliant and confident, as indeed is the general work force on farm, factory and in the bulk-handling terminals. Productivity is high and all segments of the industry, including research, are geared towards furthering efforts to maintain and enhance Australia’s competitive position.