Australia’s Surprising New Cane Crop Prospects

With Australia’s sugarcane crushing season kicking off in May/June, WKS believes Australia’s new crop prospects are relatively strong, despite earlier fears that a monsoon deluge back in February would lower potential output.  After a dry start to the year, the heavy rain event resulted in thousands of hectares of flooded cane farms from Mossman to Cairns in the north right down to the Herbert/Burdekin and the Central region. If cane fields were left standing in flood waters too long, there would be a negative impact on yields and sugar content (from stunted growth and side shoots) once the harvest commences in June. WKS suggested there was a high probability that the 2019 cane crush would be moderately lower than the 32.5 mln tonnes seen in 2018 (2.6% below the 2017 crush of 33.3 mln tonnes). With a probable lower average CCS level in the affected areas, Australia’s sugar production was also thought to certainly come in lower than last season’s 4.7 mln tonnes.

However, it now seems the rainfall event has generated a net positive impact for the new cane crop from Mackay and to the north. In the event, water drained from flooded areas relatively quickly, limiting crop damage. Furthermore, the rain favoured cane development in unflooded areas.  It’s a less favourable outlook to the south of Mackay where the cane has suffered from prolonged dry conditions. Cane tonnage here is likely to be down. The Southern region has produced an annual average of 450,000 tonnes of cane over the past 5 years, accounting for around 10 % of Australia’s crop. Added to these two broad assessments are the negative impacts of localised losses of cane to bushfires around Mackay and Proserpine, and to heavy rainfall and wind from tropical cyclones.

WKS’s assessment is that cane production across all regions of Queensland, together with New South Wales, is still expected to be as much as 33.5 mln tonnes, up 1 mln tonnes or 3% from last season. Assuming average CCS content, sugar production would remain much the same as last season, at close to 4.7 mln tonnes tel quel. This assessment does come with a health warning: the full impacts of the summer weather conditions on the cane crop may yet still provide surprising results. The WKS-APIC Australian Crush Report, issued on a fortnightly basis during the season, provides up to date crush numbers and projections for the Aussie cane crush, as well as providing key insights into Australian sugar industry developments.

From an historical perspective, next year’s prospective cane and sugar production stays well within the range seen since the year 2000. Australia’s sugar production peaked in the late 1990s (5.57 mln tonnes). Output then declined during the mid to late 2000s, due to lower world prices together with a loss of area due to forestry and real estate development.  Output bottomed in 2010 due to excessive wetness (65,000 ha or 18% unharvested) at 3.4 mln tonnes tel quel. Since 2010 a recovery phase began. It took 2 years for the cane crop to recover to produce 4.2 mln tonnes of sugar in 2012, up from 3.7 mln tonnes in the previous year. Production rose to a high of 4.9 mln tonnes in 2015 but eased lower again over the next few years, due in part to weather constraints (e.g. Cyclone Debbie in 2017). High sugar content boosted output in 2018 while dry weather reigned in cane tonnage.

The Caribbean Sugar Death Roll

The "death roll" is a manoeuvre performed by crocodiles on their prey. In a disturbing analogy, it would appear lack of political will in the end could well inflict the death roll for much of the Caribbean sugar industry. Political will is crucial to the creation of a high-value CARICOM regional market for the pact’s 4 producers (Barbados, Belize, Guyana, and Jamaica) – arguably the single most important route to avoid a sticky end to the whole industry with the loss of EU preferential trade. The required political will is so far lacking. According to a March 15 Press Release by the Sugar Association of the Caribbean (SAC), the failure of CARICOM Member States to strictly enforce a 40% Common External Tariff (CET) means around 60% of imports still come from outside the region duty-free - under waiver or suspensions from the CET -  even though CARICOM already produces more sugar than it consumes. Duty free imports (typically refined but more recently brown sugar also) displaces CARICOM regional sugar and producers are forced to export elsewhere for lower returns. The SAC urged the CARICOM Secretariat to take definitive and immediate action in safeguarding the viability of the sugar industry by ensuring all 15 Member States properly apply the CET on sugar imports.

WKS believes if CARICOM governments cannot forge a regional sugar market behind an effectively applied CET, several Caribbean sugar industries will be condemned to a not so sweet end. CARICOM historically imported refined sugar – mainly from Guatemala and Colombia – while exporting raw sugar to preferential markets in the EU and US. CARICOM members regularly applied the 40% CET to imports of raw and brown sugar but for refined sugar the CET wasn’t applied because there was no refining capacity within CARICOM. That was the case because there was no incentive to invest in capacity to produce refined or plantation sugar because producers had long benefited from preferential access to the EU and US for their raw sugar. CARICOM typically showed a 140,000-215,000 tonne tel quel production surplus between 2010 and 2016.

CARICOM Sugar Balance Running up to EU Quota Abolition (ISO data 2010-2016)

Annual Production: 420,000 to 515,000 tonnes, tel quel.

Annual Demand: 285,000-300,000 tonnes (excludes Haiti).

Annual Exports of Raw Sugar: 315,000-380,000 tonnes.

Annual Imports: around 150,000 -180,000 tonnes to meet CARICOM’s refined sugar needs.

But EU quota abolition in October 2017 (resulting in lower EU prices and shrinking imports) proved very disruptive as for decades EU preferences had sustained sugar production in the four CARICOM producers at prices well above world market levels. With prospects of far lower income for Caribbean sugar industries with the loss of EU preferences, the pursuit of an integrated high-value CARICOM sugar market was identified as perhaps the single most important route to avoid a sticky end to the whole industry. That’s not to say other strategies aren’t important and these are highlighted below. The 4 Caribbean producers are at different stages of charting and implementing a way forward within the context of all these possibilities.

Creating a regional market provides the opportunity for the CARICOM industry to produce high quality direct consumption sugars and plantation white sugar to satisfy the Caribbean market- in effect replacing imports of cheap refined white sugar, while industrial users would instead mainly use CARICOM plantation white sugar.  

Proponents of a CARICOM market for CARICOM producers correctly stressed that such a market could only be achieved if the CET were applied to all sugar (the CET tariff must be effectively managed and enforced across the region - there must be a uniform application of CET on all sugars, without exceptions). 

So is political will lacking simply because only 4 of CARICOM’s 15 Member States produce sugar? Or is a lack of political will an acceptance that 200 years of decline for Caribbean sugar, accelerating after slavery ended in 1838, simply cannot survive the change in EU sugar policy. Whatever the reason, time is running out. Full political support is crucial. SAC has no option but to sound the alarm bells and insist that the CARICOM single market and economy works for sugar.

Does Government Doubt the Sustainability Credentials of Queensland's Sugar Industry?

Sugar produced by Queensland’s Smartcane Best Management Practices (BMP) accredited growers is increasingly recognised as “sustainable” in Australia and internationally, but the environmental credentials of cane farming do not seem to be ringing true for the State government and scientists in their quest to protect the Great Barrier Reef.

Most of Queensland’s raw sugar is exported and refined in the Asia-Pacific region, where food and beverage manufacturers are looking to source certified sustainably-produced sugar. So the CANEGROWERS organization was quick to celebrate news earlier in March that Coca-Cola Amatil had approved the industry’s Smartcane BMP program and the international program Bonsucro as meeting its on-farm sustainable sugar requirements. Coca-Cola Amatil announced that all sugar purchasing contracts to 2021 will be a mix of Smartcane BMP and Bonsucro certified sugar.

According to Canegrowers, Smartcane BMP provides a framework for growers to demonstrate and implement farm practices that improve productivity and profitability while also reducing the risk of environmental impact, particularly to the Great Barrier Reef.  More than 70% of the state’s sugarcane land is being managed by growers who are involved. Furthermore, CANEGROWERS is now working with the big sugar trading and supply chain firm Czarnikow (https://www.czarnikow.com/) and its VIVE program for sustainable sugar on a joint path to compliance.

Whilst sugarcane growers are celebrating growing recognition of their sustainability and environmental credentials by industrial users and other sustainability marques, they are having far less success in convincing state government and scientists that cane farmers are doing enough to stop significant quantities of fertiliser, pesticides and sediment from sugarcane farms entering the Great Barrier Reef lagoon.  In fact, armed with strong scientific evidence, the Queensland government in February introduced a Bill to Parliament to regulate farming activities – particularly cane growing and grazing - to protect the Reef -  the Environmental Protection (Great Barrier Reef Protection Measures) and Other Legislation Amendment Bill 2019 . Whilst the government explicitly recognises and applauds the many sugarcane producers who are managing their land sustainably, and who have adopted Smartcane BMP, it also asserts strengthened reef protection regulations are still needed to reduce water pollution (nutrients and sediment) from agricultural and industrial land uses entering Reef waters.

The Queensland Government draws its strong scientific evidence that significant quantities of fertiliser, pesticides and sediment are still entering the Great Barrier Reef lagoon from the 2017 Scientific Consensus Statement for the Great Barrier Reef (Land use impacts on Great Barrier Reef water quality and ecosystem condition). The consensus statement was produced by a multidisciplinary group of 48 scientists with expertise in Great Barrier Reef water quality science and management, led by TropWATER James Cook University, with oversight from the Reef Water Quality Independent Science Panel.

So where to now? CANEGROWERS is asking Parliament to reject the Bill. Because industrial users have already accepted smartcane BMP’s sustainability credentials, new State government legislation will not help win new friends domestically or in export markets. Furthermore, the canegrowing industry is proactively moving to better understand the relationship between farm management and water quality through a new project to be undertaken by Sugar Research Australia - the Cane to Creek 2.0 project, which is funded by a partnership between the Australian Government’s Reef Trust, the Great Barrier Reef Foundation and with the support of the SRA. The goal is to see increased adoption of improved practices that have been shown to improve productivity, profitability and sustainability of the sugarcane industry. Perhaps then it is understandable why the CANEGROWERS organization is dead against the proposed Barrier Reef legislation. Tighter Reef regulations won’t boost the already market-accepted sustainability credentials of Queensland’s Sugar and so all the legislation would bring is much loathed bureaucratic interference on growers and increased regulation of farm activities and of the sugar supply chain. But to the scientific community and the government, the plea of canefarmers that new Reef legislation will only frustrate the Smartcane BMP success story may still not ring true.

Will the WTO Dispute Over India’s Sugar Subsidies Spark Fundamental Sugar Policy Reform?

Beyond the just-instigated WTO proceedings by Australia and Brazil against “illegal” subsidies provided by India’s government to its domestic sugar industry, what is the likelihood of significant reform of the country’s sugar policy to transition the industry to a more market oriented footing?

India’s domestic sugar policy is complex and the government’s approach has more to do with domestic politics than ensuring sensible market outcomes. Most fundamentally, self-sufficiency is a priority for India’s government because sugar has long been considered a staple or essential commodity rather than an optional item. This is deeply embedded in the psyche, particularly in a region where food riots have sometimes destabilised governments.  Government is also focussed on the massive voting block that is the farming sector but for sugar, rather than farmers and millers benefitting simultaneously, over the last decade it has been a win-lose scenario. This arises from the most glaring and enduring contradiction in India’s sugar policy: the disconnect between farmer cane prices and the price millers receive for sugar on the domestic market.  This disconnect -which has seen cane prices set at a high level and increased yearly (to many, a simple plot to win voter support)- is one of the key culprits to over production at present (others include better agronomic practices, more efficient irrigation management, boosted productivity from government sponsored varietal research and farm extension, as well as good monsoons over the past few years). Whilst private millers have frequently called for better alignment between cane and domestic sugar prices, with the government refusing to budge, then is it really any surprise millers have sought to rid the domestic market of oversupply though government financial aid to stock and to export?  

The core of the case Australia and Brazil have taken to the WTO is that very large domestic surpluses currently being generated by India are having a significant impact on global stock levels. They claim there is a strong inverse correlation between rising ‘stocks to use’ ratios and global raw sugar prices. India is currently the largest contributor to ‘all time high’ global ‘stocks to use’ ratios (currently 53%). Consequently, without India’s over production, global prices would be correspondingly higher, resulting in direct quantifiable losses to efficient global exporters.

 Whilst the outcome of a WTO Panel and its propensity to spark broader reform of India’s sugar policy will take time to be revealed, several general remarks can be made. Transitioning India’s mainly small subsistence agriculture sector on to a more market oriented footing is a road yet to be trod. More than anything else, conflicts of interest within Government could well hinder market driven reforms. For sugar specifically, if the Government wishes to cut back sugar production to manageable levels (e.g. approximating local offtake and adequate stocks to ensure food security), it could replicate the reform measures in the EU in 2006 where farmers were paid to give up quotas, and which was self-financing. It could also revisit the Rangarajan Committee recommendations (2012) concerning the introduction of a revenue sharing formula between growers and millers, which would forge a link between cane prices and domestic sugar prices. The government can also look to provide incentives to the sugar industry to boost fuel ethanol production (diverting cane juice from sugar to ethanol) in the context of its National Policy on Biofuels-2018.  A target of 20% blending of ethanol with gasoline is proposed by 2030 (as against a 2018 blend average of 3.8%). Blending mandates of 10%+ were never reached under the governments previous biofuels policy framework.

In short, India’s evolving supply-demand balance and potential exports, the WTO dispute and whether the government ultimately reveals an appetite to further reform sugar policy – in particular to break the disconnect between cane and sugar prices - will remain in laser sharp focus by all sugar market stakeholders over coming months.

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Can Australia's Sugar Industry Diversify to Revitalise?

Transforming to a diversified value-adding platform is a necessity for Australia’s raw sugar industry.

#WKS Consulting# believes Australia’s sugar industry can diversify if the industry and government want it badly enough. Indeed, there are compelling reasons for the Australian sugar industry to diversify. For a start, in a single dimensional industry like Australia’s - where raw sugar offers the only real revenue stream -  the only road to long-term survival is to continuously boost productivity.  Multi-dimensional industries in contrast, have additional revenue streams and a greater ability to face and endure volatile sugar markets.

The “penny has dropped” for the Australian Sugar Milling Council. The Organization in its Sugar Policy Insights – February 2019 issue declares that the Australian sugar industry has no plan and no supportive policy framework to fight deteriorating terms of trade via diversification. The Council notes that milling revenues need to grow by more than 2 % each year to improve profitability, competitiveness and resilience. In 2017, 90 % of the almost AUD2 bln in revenues earned by the Australian sugar manufacturing industry were derived from raw sugar production alone.

The ASMC plans to meet industry stakeholders and government over the coming months to stimulate development of a revitalisation strategy, including a discussion on how diversification (ethanol, co-generation and other bio-products) as well as increased cane acreage and improved yields can be best achieved.

This is a laudable initiative!!

WKS Consulting believes there are potent drivers for Australia’s sugar industries to move beyond sugar to embrace renewable energy (bioenergy), amongst other opportunities. In terms of G1 value-adding the key opportunities are biomass power exported to the national grid, and fuel ethanol. In terms of next generation value-adding, we move to cellulosic ethanol, drop-in advanced fuels, and bioplastics/biochemicals.

But there are considerable potential stumbling blocks. Whilst the Brazilian model proves that sugarcane can sustain a far more diverse and multifunctional role beyond sugar production, there is sometimes a surprisingly slow rate of diversification in other countries.  Why?

Reason 1: Technical-economic justification is not always straight forward. Sugar industries around the globe embrace a wide range of production systems over a large spectrum of agro-climatic conditions, socio-economic conditions and ownership structures. The economics of ethanol production is heterogeneous and location-specific: feedstock availability and cost are the most important drivers.  These factors in turn hinge on land availability and quality, agricultural productivity, labour costs and so on. Operating costs hinge upon plant location, size and technology. There may also need for investment in storage infrastructure.  The second important determinant of viability is ethanol’s competitiveness with rival fuels in the transport sector.  This is a function of the cost, demand and availability of these other fuels, which fluctuate around global petroleum prices, foreign exchange rates and domestic refining capacity.

An overriding consideration for fuel ethanol from sugar cane is opportunity cost – the value of the sugar foregone. For countries that are net exporters of sugar to regional and world markets, in some cases the opportunity cost of producing ethanol would be higher than for sugar production, meaning it would be unlikely those sugar industries would divert sucrose to ethanol production. Instead, ethanol production would be largely limited in the near term to production from molasses for local fuel consumption and some regional export markets.

Reason 2: the absence of enabling policy and regulatory frameworks. This is the most contentious issue impacting sugar industry diversification.  Both need to be provided by governments. 

Experience elsewhere in the world, including in the United States and Brazil shows that implementation of a biofuel blending scheme requires supportive government policies.   Stronger policy incentives such as blending mandates as well as some financial incentives, such as carbon credits or loan guarantees, would be needed in order for national and regional markets to move towards a scale that is economically sustainable.

Similarly, investment is required to unlock sugarcane’s biomass power potential. That investment will only take place if there are clear and well formulated regulatory frameworks to assure investors. To make cogeneration commercially viable, millers’ power generation costs including capital costs have to be covered. Ideally, any private power purchase agreement would have to include the provision of renewable energy feed-in tariffs (FIT), and an incentive structure to encourage the adoption of renewable energy.

A Final Compelling Reason to Embrace Diversification

Finally, and just as importantly, there’s another compelling reason for Australia’s sugar Industry to diversify. In the future, competitiveness levels will be increasingly defined amongst sugar producers  and sugar producing countries that are, and those that are not, engaged in full utilisation of sugarcane as a renewable resource.

All industries need to extract the full value from sugarcane to improve resilience against commodity cycles and weather. This means sugar manufacturers need to go boldly into the future, often with the right partner to understand the business and the technology; but beyond that, governments need to accept that they are also a key stakeholder in any sugar industry’s roadmap into a sustainable diversified future.