Appendix E

AUSTRALIAN PRODUCTION COSTS OF SUGAR AS BACKGROUND TO

POLICY DEVELOPMENT
By Dr Peter Chudleigh, Agtrans Research
Backg!"nd
It has long been argued that Australian sugar production costs are among the lowest in sugar
producing countries around the world. For example, the !"! report o# the $enate $tanding
Committee on Industry $cience and %echnology, in its consideration o# assistance #or the sugar
industry, &uoted 'arren (!"!) where the representati*e #rom +andell ,ills Commodities asserted
that only $outh A#rica and part o# Bra-il had lower ex.mill production costs than Australia. Recently,
the International $ugar /rganisation (0110) categorised Australia, along with 2ambia, 2imbabwe,
3uatemala and the Centre4$outh o# Bra-il as 5low cost producers5. %he range #or the a*erage cost
o# production o*er the period !!64!7 to !!"4!! across these countries was gi*en as 8.6" to "."
9$ cents per pound (c4lb).
'orld sugar prices are li:ely to sustain a period o# uncertainty where they might remain below
a*erage prices experienced in the past #ew decades. It is there#ore recognised that the cost o#
production o# sugar in Australia and its potential to be lowered are :ey #actors in responding to such
a low price period.
%he reality o# this situation has now emerged with Bra-il;s increased sugar output and impro*ed
&uality threatening Australian industry pro#itability *ia world prices and mar:ets. 3i*en Bra-il;s
expected large increases in production, as o# <une =th, #utures prices #or sugar up until ,arch
011= (>ew ?or: >o ) do not exceed 7 9$ cents per pound. %here is some opinion circulating
that Bra-ilian sugar production (at least that in the central4southern region) is economically *iable at
a price o# 7 9$ cents per pound or e*en less. In contrast, an a*erage price o# 8 9$ cents per
pound at an exchange rate o# 1.60 9$@4A@ has been suggested as the point where the Australian
industry (cane #arming and milling combined) ceases to ma:e any return to capital in*ested. %his
was based on *arious a*erage and indicati*e growing, har*esting and milling costs (Aeating et al,
0110). Another benchmar: &uoted by Australian $ugar ,illing Corporation is that 8.7 9$ cents per
pound (at 9$@ 1.614A@) is a brea:.e*en point #or the Australian industry. %he de#inition o# cost o#
production can *ary so that care is necessary in interpreting these numbers. Further, such prices
are sensiti*e to A@ exchange rates. Recent strengthening o# the A@ would ha*e increased these
benchmar:s.
%here are o# course *ariations in the costs o# indi*idual cane #arms and mills across Australia, and
costs o# production *ary #rom season to season. %he underlying *ariation in the cost structure o#
Australian cane #arming and milling is a :ey component in any assessment o# assisted structural
adBustment as a response to a period o# low prices. %his *ariation needs to be understood to the
maximum extent possible by region, by #arm si-e, and by management type within the same #arm
si-e4region. %his brie# re*iew assesses the in#ormation a*ailable to underpin any conclusions about
impact and opportunities open to industry and go*ernment #or de*eloping any structural adBustment
policies in cane #arming.
Re#ie$ !% In%!&a'i!n A#ai(a)(e
9nli:e other Australian maBor primary industries, there is *ery little published in#ormation a*ailable
on costs o# production o# cane between regions and #or di##erent si-ed #arms. %he only authoritati*e
study that has been conducted in the past decade has been that by ABARC (!!7). %his sugar
cane industry sur*ey co*ered the three years !!D.!= to !!6.!7 and was underta:en at the
re&uest o# the $ugar Industry Re*iew 'or:ing Party. %he sur*ey co*ered #armers in Eueensland
only.
A study by %essema and %opp (!!8) used the ABARC data to show that there were signi#icant
di##erences in returns to cane #arming between the #our Eueensland regions (northern, Burde:in,
central and southern). A summary analysis o# the a*erage production costs #or the #our regions
o*er the three years o# ABARC data is shown in %able .
Ta)(e *+ S"&&a, !% P!d"c'i!n C!-'- A#eaged !#e T.ee Yea- /01'!nne !% cane
de(i#eed ), 2"een-(and %a&e- *3345*3367
>orth Eld Burde:in Central Eld $outh Eld All o#
Eueensland
A*erage
Production
(t c per #arm)
7, 1,0=0 8,D1 =,=!7 7,6!"
A*erage cash
costs (@4t)
0.18 06.= 0D.6! 0=.6! 0D.7
A*erage
depreciation cost
(@4t)
D.7 0.D" D.1D D.8! D.17
A*erage imputed
#amily labour cost
(@4t)
=.76 D.08 =.00 7.! =.6!
A*erage total costs
(@4t)
0"."8 D1.8! D1."= D6.D1 D1."
($ourceF Compiled #rom ABARC, !!7)
Although based only on three years and a restricted number o# #arms (!6 across the #our regions),
these a*erages show that cash costs per tonne o# cane produced are generally lower in northern
Eueensland than those in other regions. %his was despite the northern Eueensland a*erage #arm
ha*ing only a #arm production o# around 7,111 tonnes o# cane per year, the second smallest
a*erage production across the #our regions. %his result could ha*e been associated with the rain
#ed (as opposed to irrigated) nature o# much o# northern Eueensland production. It should be noted
howe*er, that di##erences in the sugar content o# cane between regions is not accounted #or in the
abo*e analysis. +ower sugar content o# cane in northern Eueensland compared with other regions
could reduce or o##set the region;s lower cane production cost.
Family labour costs are higher per tonne o# cane produced in southern Eueensland where #arms
generally produced less cane per #arm than in the other three regions. Further, the southern region
had a higher capital in*estment per tonne o# cane than the other three regions.
%he #igures in %able include interest paid and any land leasing costs (both included in cash costs).
/n a*erage these costs represented only about @ to @.61 per tonne o# cane and there is no other
allowance in these #igures #or any return on total capital employed. A D percent return on #ull e&uity
o# a @.0 million a*erage total in*estment (a*erage cane #arm in*estment as reported in the ABARC
sur*ey) would represent on a*erage o*er @6 per tonne o# cane (@D7,111476!" tonnes), or about a
#urther @= per tonne o# cane (@6.61 less @.61) o*er and abo*e the #igures in %able .
It should be noted that 8 9$ cents per pound translates approximately into a sugar price o# about
A@D11 per tonne and a #arm price o# @07.08 per tonne o# cane at an exchange rate o# 1.60 9$@4A@
and an a*erage CC$ o# D.6. At an exchange rate o# 1.67, 8 9$ cents per pound is about A@0"1
per tonne o# sugar (see %able 0). %hese translations are only approximate as there are li:ely to be
di##erences between the 9$ cents mar:et price and the Australian price that is paid by Eueensland
$ugar +imited (E$+) to millers. %his is because o# E$+ costs in mar:eting to #ob
(.*e), E$+ hedging policies (G*e), and any regional premiums that E$+ recei*e (G*e). Also, these
translations to cane prices are sensiti*e to CC$ under the existing cane pricing #ormula.
Ta)(e 8+ C!n#e-i!n !% US cen'-1() Pice '! A"-'a(ian S"ga and Cane Pice- /CCS 9*:;<7
$i'. Va,ing Exc.ange Ra'e- /c!n#e-i!n- d! n!' 'ake in'! acc!"n' 2SL &ake'ing c!-'-=
egi!na( pe&i"&- and .edging p!(icie-7
$cenario 9$@4A@ H 1.60 $cenario 0 9$@4A@H1.67 $cenario D 9$@4A@H1.6!
9$ c4lb @A 4t
sugar
@A4t cane 9$ c4lb @A 4t
sugar
@A4t cane 9$ c4lb @A 4t
sugar
@A4t cane
= 80 6.D = 71 =.07 = 60 D.68
=.6 != 8.7 =.6 "1 6.!8 =.6 8 6.!
6 06 !.11 6 011 8.7" 6 !1 7."
6.6 0D8 01."= 6.6 001 !.D! 6.6 01! ".==
7 06! 00.7" 7 0=1 0.1 7 00" 01.17
7.6 0"1 0=.60 7.6 071 00." 7.6 0=8 0.7"
8 D10 07.D8 8 0"1 0=.60 8 077 0D.D
8.6 D0D 0".0 8.6 D11 07.0D 8.6 0"6 0=.!D
" D=6 D1.16 " D01 08.!6 " D1= 07.66
".6 D77 D."! ".6 D=1 0!.77 ".6 D0D 0"."
! D"" DD.8D ! D71 D.D8 ! D=0 0!."1
!.6 =1! D6.6" !.6 D"1 DD.1" !.6 D7 D.=0
1 =D D8.=0 1 =11 D=.8! 1 D"1 DD.16
As @D1." per tonne o# cane is the a*erage cost estimated in the ABARC sur*ey (%able ), a #arm
cane price o# @D1." less about @.61 (@0!.D1) would co*er all costs but would not ser*ice any
capital except #or depreciation. %his is e&ui*alent to a price o# around A@DD6 per tonne o# sugar
and this could be ta:en as an a*erage re#erence sur*i*al price #or cane #arming as the industry
exists today. %his price would co*er cash costs, depreciation, and an allowance #or #amily labour,
but no capital ser*icing except #or depreciation. Further, it would not co*er interest payments #or
many #arms that are now more highly indebted than in the mid !!1s.
I# no allowance #or depreciation is made (any capital replacement is assumed de#erred), the sur*i*al
re#erence price would be in the order o# @D per tonne o# cane less, or around @D11 per tonne o#
sugar. /b*iously the #arm business could not be sustained #or *ery long without capital
replacement. It should be noted that these re#erence prices are based on a*erage costs #rom the
ABARC sur*ey.
It should be recognised also that input costs and producti*ity might ha*e both changed since the
ABARC sur*ey in the mid !!1s. I# the estimates in %able are to be used as indicati*e o# current
costs, it needs to be assumed that any cost increases since !!6 ha*e been o##set by producti*ity
impro*ements. %he price estimates assume a direct con*ersion #rom the world price #or sugar and
that paid to millers. %he re#erence points can there#ore only be considered indicati*e.
%here is no other recent authoritati*e industry.wide data a*ailable on #arm costs than the ABARC
data presented. Iowe*er, it should be noted that CA>C3R/'CR$ is currently conducting a #arm
economics sur*ey that will impro*e this situation.
Economies of Size
ABARC (!!7) concluded that that there was no empirical e*idence o# economies o# si-e in
Australian cane #arming. %his was based on an analysis o# the cost o# production data #rom the
ABARC sur*ey #or the year !!=4!6. A more detailed report by %essema and %opp (!!8) pro*ided
a similar *iew and a use#ul #re&uency table o# a*erage costs by si-e o# #arm (%able D). %hese data
showed that there was no consistency in cost o# production by si-e o# #arm, and that considerable
numbers o# *ery e##icient producers #ell in each si-e category.
Ta)(e :+ Di-'i)"'i!n !% "ni' c!-' !% p!d"c'i!n ), -i>e !% %a&
Area JD= ha D=.=6 ha =6.76 ha 77.!= ha K!= ha %otal
9nit costs
(@4tonne)
L #arms L#arms L#arms L#arms L#arms L#arms
+ess than 0D 0.8 =.! 0.7 6.1 =.! 01.
0D to 07.6 D.1 =.= D.D 6.D =.1 01.1
07.7 to D1.1 =.6 =.! =.! 0.D =.1 01.7
D1. to D6.0 =.1 .! 6. D.6 6.1 !.6
KD6.0 7.1 D.7 D.! =.1 0.7 01.
%otal 01.0 !.8 !." 01. 01.6 11.D
$ource (%essema and %opp, !!8)
A li:ely explanation suggested in the %essema and %opp study is that there are mechanisms that
smaller #armers can use to a*oid capital and labour lumpiness such as strategies o# contracting,
wor:ing o##.#arm, and also being more #lexible, timely, and care#ul with their own labour inputs to the
cane enterprise. %he ABARC conclusion o# absence o# economies o# si-e was used in the Report
o# the $ugar Industry Re*iew 'or:ing Party (Maughan R B, !!7, p01D) to argue that the cane
assignment system was not impeding the achie*ement o# si-e economies in cane #arming.
/n the other hand, a di##erent position was ta:en by the Industry Commission (IC) (!!7) where it
was argued that, based on a small case study, the minimal e##icient cane #arm in the Burde:in area
was D11 hectares (ha) and that the assignment system was impeding the achie*ement o#
economies o# si-e. A similar position was argued in a Centre #or International Cconomics (CIC)
report (!!) where it was intuiti*ely assumed that there were economies o# scale that were not
being exploited (CIC, p0). Ianlon et al (0111) suggest there are signi#icant economies o# si-e in
cane #arming. %hey &uote total cost o# production o# @".01 per tonne o# cane #or *ery large #arms
(11,111 tonnes) but up to @D6 per tonne o# cane #or *ery small #arms (0,611 tonnes). As with
ABARC, they stress that there are e##icient producers in all si-e categories. %he indicati*e data o#
Ianlon et al were based on 08 #arms that participated in a benchmar:ing proBect, rather than being
drawn #rom a random sample. %he #arms were spread o*er the Ierbert, Burde:in, Bundaberg and
,aryborough districts.
%he a*ailable published conclusions are not consistent with one another with regard to si-e.
Iowe*er, the #arm si-es analysed #rom the ABARC sur*ey data co*er only broad groupings o# si-e
with the largest #arms grouped into the greater than != ha category. I# economies o# si-e apply to
#arms towards the end o#, or e*en outside o# the current industry si-e distribution, any economies o#
si-e might not be demonstrated in the analysis.
%here is an e*en more power#ul argument #or pursuing changes to structures in the industry
associated with #arm si-e. %he existing cost data assembled are in#luenced by the past set o#
industry arrangements and structures that are based on e&uity and sub.optimal e##iciency goals,
rather than whole.o#.industry e##iciency. Changes to these arrangements might well result in
economies in #arm si-e becoming more apparent than hitherto. For example, much sugarcane is
har*ested by contractors whose charges do not o#ten discriminate between bloc:s and #arms that
impose di##erent costs through di##erences in length o# rows, proximity to the next bloc: or #arm,
shape o# bloc: etc. $uch a*eraging and the implicit cross.subsidies would be #a*ouring the smaller
bloc:s and #arms.
C!nc("-i!n- %!& '.i- Ana(,-i-
$ome conclusions areF
(i) %here is some e*idence that economies o# si-e in cane #arming exist and can be exploited
in any mar:et led or assisted structural re#orm.
(ii) %o be e##ecti*e, any initiati*es to rationalise #arm si-e with regard to lowering industry costs
should include changes to organisational arrangements such as #or har*esting. %hat is, i#
policies co*ering exit and aggregation with regard to #arm si-e are not underta:en in
conBunction with other structural re#orms, they might be less e##ecti*e.
(iii) $mall #arms without o##.#arm income are li:ely to be currently struggling to pro*ide li*ing
expenses #or their #amilies, more so than larger #arms, as any margins abo*e essential
production costs are li:ely to be lower.
(i*) Farms in the southern Eueensland region are li:ely to #ace more se*ere hardship in a price
downturn than in other regions due to their higher costs o# production per tonne o# cane.
%his region also has signi#icantly higher total in*estment per tonne o# cane produced and
could ha*e more di##iculty in ser*icing any return to capital, whether it be e&uity or loan
capital. %his situation is currently exacerbated in parts o# the southern region by the lac: o#
irrigation water a*ailable.
(*) Although in#ormation is currently una*ailable on debt le*els by #arm si-e, it is li:ely that
#arms o# all si-es with high debt le*els will experience se*ere #inancial di##icultiesN the
southern region will be particularly *ulnerable to debt ser*icing problems.
(*i) An a*erage re#erence sur*i*al price is probably around @D11.DD6 per tonne o# sugar. %his
is e&ui*alent to between 8 and " 9$ cents per pound at an exchange rate o#
1.60 9$@4A@, and assuming a direct con*ersion o# the world price to that paid to millers by
E$+. %hose #armers who can #urther de#er capital replacement, those who ha*e
o##.#arm income, and those with minimal or no debt would lie towards the lower end o# this
re#erence sur*i*al price range (@D11 per tonne). %hose small #arms with no o##.#arm
income, and those o# any si-e with signi#icant debt will #all at the upper end o# the range
(@DD6 per tonne) and will ha*e a sur*i*al price possibly much higher. Also, it should be
recognised that such a re#erence price is an a*erage and such a price will *ary #or
indi*iduals due to other #actors apart #rom those mentioned abo*e, as well as with the
seasonal conditions that will in#luence cane yield and CC$.
(*ii) %he analysis o# ABARC data (%able D) indicated that 01 percent o# #arms in the sur*ey had
cost o# production less then @0D per tonne, while at the other extreme, 01 percent had costs
greater than @D6 per tonne, with the remaining #arms in between. %he report o# Ianlon et al
also indicates that there are large di##erences in cost o# production between cane #armers.
(*iii) In general, a*ailable authoritati*e industry.wide in#ormation on costs o# production by #arm
si-e and region is outdated and inade&uate. It is understood that this is currently being
addressed through a CA>C3R/'CR$ #arm sur*ey.
In%!&a'i!n in S")&i--i!n-
A number o# the submissions recei*ed in the current Assessment commented on si-e and the
#amily #arm.
%he submissions strongly indicateF
(i) there is widespread recognition that some #orm o# rationalisation o# cane #arming is
re&uired, particularly in relation to #arm si-eN
(ii) the #amily #arm is seen by some as a strength o# the industry in terms o# its greater #lexibility
and hence ability to sur*i*e downturnsN
(iii) while small #arms might re&uire o##.#arm income to be sel# sustaining in pro*iding a li*ing #or
a #amily, some can be e##icient in terms o# cost o# production as presently measuredN
(i*) there is general recognition that many #arms can not sur*i*e the expected #all in incomes,
particularly small #arms without o##.#arm income and those #arms carrying large debtN
(*) there is some concern that large corporate or cooperati*ely run #arms might be less
e##ecti*e in supporting the existing community #abricN and
(*i) the range o# costs o# production reported in the submissions is consistent with those in the
ABARC sur*ey.
De)'
%he Eueensland Regional AdBustment Authority (ERAA) debt in#ormation pro*ided to
CA>C3R/'CR$ shows that debt has increased in the past two years #rom December !!! to
December 011 by @60 million (m) (#rom @,10" m to @,"1 m). %he debt when the #irst sur*ey
was underta:en in !!= was @60 m so that there has been an increase o# @77" m o*er the past
se*en years.
ERAA data show that there are currently 0,86 borrowers in the industry, similar to the last re*iew
when there were 0,8"= borrowers. %he a*erage debt per borrower is currently @=0",111, up #rom
@D7!,111 in !!!. In addition the rating o# debt has deteriorated in the past two years with a
signi#icant increase in B debt, de#ined as 5borrowers who are experiencing debt ser*icing
di##iculties and a deteriorating debt situation but with continuing support #rom lenders5.
Ta)(e 4+ Cane Fa& B"-ine-- De)'
!!= Dec !!! Dec 011
%otal #arm Debt (m@) 60 ,10" ,"1
$ourceF ERAA
Genea( C!nc("-i!n-
. %here is li:ely to be serious hardship #aced by #armers gi*en the expected low prices o# sugar.
Farms that will be most *ulnerable to any sustained downturn in price will beF
smaller #arms without o##.#arm income, particularly those small #arms in the southern regionN
and
any si-ed #arm with signi#icant debt exposure.
0. In order to lower the cost o# production it would be help#ul #or industry to pursue strategies that
encourage an increase in #arm si-e. %his will enable the industry to ta:e ad*antage o# any si-e
economies that exist within the current organisational structure o# the industry.
D. %o be e##ecti*e, any strategies to rationalise #arm si-e should be associated with changes to
existing organisational arrangements that impose added costs on the industry as a whole. I#
strategies and accompanying policies addressing exit and aggregation are not underta:en in
conBunction with other structural re#orms, they might be #ar less e##ecti*e.
=. Presumably the de#inition o# the #amily #arm used in the submissions is to do with sustaining a
li*ing #or the owners o# the #arm, where the owners li*e and wor: on the #arm. A
non.#amily #arm is *iewed as a corporate or company #arm that is only pro#it moti*ated and
where the mainstream labour input is hired. 'hile the corporate structure is rare in cane
#arming, there appears a serious concern that mo*ements in this direction will occur and will be
detrimental to the social #abric and local community.
6. $mall #arms that are e##icient and sustainable should not be 5#orced out5 by industry and
go*ernment restructuring policies. In other words, the *ery producti*e, e##icient and
hardwor:ing #armers who might or might not ha*e o##.#arm employment and that are seen by
many to pro*ide #lexibility and strength to the industry, should be able to continue i# they wish.
%his is pro*ided the real cost o# their operation and si-e is re#lected in the economic costs and
hence charges they #ace.
7. %here is no e*idence to support an optimal or minimal #arm si-e that should be targeted.
8. %here is e*idence to show that the di##erence in costs o# production between #armers *aries
widely. It is concluded that there are li:ely to be signi#icant potential sa*ings on an industry
basis through management impro*ements.
". Industry in#ormation on costs o# production by #arm si-e and type is outdated and inade&uate
and steps should be ta:en to remedy this situation. %he current CA>C3R/'CR$ sur*ey
should impro*e the situation, but economic in#ormation should be assembled in an ongoing and
consistent #ramewor:.
Re%eence-
ABARC (!!7) 5Eueensland $ugar Cane Industry $ur*ey, !!D.!= to !!6.!75, Report Prepared
#or the $ugar Research and De*elopment Corporation, Canberra.
Borrell B Euir:e, D and Mincent D (!!) 5$ugarF 'inning in a Corrupt 'orld ,ar:et5, CIC,
Canberra.
Ianlon D, ,c,ahon 3 3, ,c3uire P, and Beattie R > (0111) 5,anaging +ow $ugar Prices on
Farms . $hort %erm and +onger %erm $trategies5, Proc. Aust. $oc. o# $ugar Cane %echnol.
00, .".
International $ugar /rganisation (0110) 5Aey Dri*ers o# the 'orld $ugar ,ar:et5, +ondon.
Industry Commission (!!7) 5$ubmission to the $ugar Industry Re*iew 'or:ing Party5, $ubmission
>umber =1, Brisbane.
Aeating BA, Antony 3, Brennan + C and 'egener , A (0110) 5Can Renewable Cnergy Contribute
to a Di*ersi#ied Future #or the Australian $ugar Industry5, ! pages OCD.R/,P. A$$C%F Australian
$ociety o# $ugar Cane %echnologists 0110 Con#erence.
$enate $tanding Committee on Industry $cience and %echnology (!"!) 5Assistance #or the $ugar
Industry5, A3P$, Canberra.
%essema 3 A and %opp M (!!8) 5$i-e Cconomies on $ugarcane Farms in Eueensland5, in
5Coastal Eueensland and the $ugar IndustryF +and 9se Problems and /pportunities5. $RDC
%echnical Report no 4!8 ('or:shop held in association with the =
st
Annual Con#erence o# the
Australian Agricultural and Resource Cconomics $ociety).
Maughan R B (!!7) 5$ugar.'inning 3lobally5, Report o# the $ugar Industry 'or:ing Party,
Department o# Primary Industries, Brisbane.
'arren R (!"!) 5'orld $ugar $upply. %he +in: between Price and /utput5, Paper presented at
>ational Agricultural /utloo: Con#erence, Canberra.