INDEPENDENT ASSESSMENT OF THE SUGAR INDUSTRY
The Assessment
On 15 February 2002, the Federal Minister for Agriculture, Fisheries and Forestry, the Hon Warren Truss MP, announced that Mr Clive Hildebrand would conduct an Independent Assessment of the Sugar Industry. Mr Hildebrand was asked to focus on the industry’s key economic, social and environmental drivers, with a view to providing the government with a sound basis for future interaction with the industry and to enhance its long term sustainability and profitability.
Over 200 submissions were received during the Assessment. Over 100 public and private meetings were held with industry participants and other interested parties, including a series of public meetings in sugar regions attended by over 1,000 people. Mr Hildebrand submitted his report to the Minister in June.
The degree of constructive cooperation received from all parties during the Assessment was generally outstanding. In particular the thoughtful contributions of individuals and groups, some with commercially sensitive information, underlined a high degree of commitment and goodwill to the industry. At the same time it was evident that the industry itself has very serious concern for its future and that most participants believe that change is essential.
The key areas for a potentially improved whole of industry performance are widely known by thoughtful industry participants. The Assessment concluded that changes have not occurred or have been slow in implementation because members of industry sectors had sometimes divergent priorities, and particularly because no one industry sector has the mechanism or authority to make the necessary changes.
The comments below refer to Queensland in particular, as the Assessment concluded that the Ord River and New South Wales sectors conduct more cohesive, stand-alone businesses.
Regional focus
The sugar industry must adopt a “mill area” or “mill region” focus in all its operations as a matter of urgency. The profit centres for the industry lie autonomously within each mill area, and responsibility for control therefore needs to be accepted and exercised at a regional level. This regionalisation is predicated upon an appropriate level of technical, managerial and financial skills being available, in order for each mill area to plan for its own future. Improved business management skills must be a priority.
The wholesale adoption of such a regional focus would have a number of ramifications for the industry and help overcome a number of the problems it faces:
“traditional” collective sectoral conflicts such as those between farmer and miller on a wider than mill area basis are counterproductive – there continues to be too much time, effort and resources devoted to these conflicts, which do not add to the individual mill area’s overall income;
industry arrangements relating to Mill Suppliers’ Committees, negotiating teams and Cane Production Boards must be reviewed to reflect a regional focus and to further enhance the independence of each mill area; and
there are significant inefficiencies in current harvest and transport arrangements, which are best addressed locally according to the circumstances of each mill area, rather than deferring to a state-wide default arrangement (the harvesting sector also needs to be included in mill area deliberations).
An overarching peak industry body is required, to deal only with wider issues that are common to all mill areas, such as water, fertiliser, energy, and health and safety policy issues. In absence of mill areas accepting the responsibility available under the Sugar Industry Act1999, the current industry representational arrangements reinforce a state wide approach to all industry issues (the majority of which are best left to the mill areas to resolve) and tend to focus on the “lowest common denominator” in achieving outcomes.
Current industry arrangements
In order to reduce costs and minimise individual farmer risks, larger farm units are required. There are a number of options for achieving this, but in the current economic climate, an appropriate and available method is a form of cooperative based upon individual retention of farm title, greater risk sharing, cost reduction through higher productivity and the elimination of so-called “farmer equity”.
The majority of answers to technical and operational problems facing the industry are already known within the industry, but the uptake of solutions is poor (including of R&D). This is due to long-standing industry habits, a lack of genuine business focus, and lack of overall industry leadership (because of its wider than mill area sectoral focus).
For example, the work of the Far North Queensland Sugar Industry Task Force has not been pursued to date, a case in point of traditional industry behaviour impeding available change. The Task Force released a report in late 2001 which contains a number of solutions and ideas warranting further examination and implementation.
The environment
The industry has demonstrated an above average capacity and commitment to adapt to changing conditions and societal demands, which is often overlooked in public comment by observers. The continuation and development of voluntary programs such as COMPASS is therefore to be encouraged. However, the sugar industry must adopt an “engage not defend” approach and lead the way on the environment, demonstrating that it can and will continue to adapt to current environmental challenges, against a social backdrop of increasing expectations, with a catchment-focused approach. While there has been an independent audit in the recent past, regular external independent audits are needed to demonstrate positive environmental practice.
The world market
The future of the sugar industry is heavily dependent on the internationally traded price for raw sugar. The forecast is for a range of A$225-260/t next season with an average of A$240 possible, which will place many farmers under severe pressure.
Notwithstanding any efficiencies that are gained within the industry’s current operations, the largest potential impact on future price (and therefore on the profitability of the industry) lies in a reduction of the protectionist policies of the USA, Europe and Japan. Government and the industry should therefore intensify efforts for more trade reform, although significant reform is unlikely in the short-medium term.
Social issues
The plight currently facing many farmers is undeniable, and there is likely to be some attrition of the industry, notwithstanding any productivity and/or cost improvements.
In the current climate, the traditional notion of the “family farm” is to a large extent threatened. The Australian sugar industry has tended to adapt around the needs of the small farm, rather than the small farm adapting to the changes required to improve international competitiveness. A balance is required between keeping the virtues of the smaller family farm, and taking advantages of the economies of scale available from a degree of farm rationalisation - therefore providing a greater competitiveness and economic return for all participants.
It appears likely that not all farm businesses will survive on current projections, and this needs to be carefully managed by government. There is a general lack of understanding of the extent of economic deprivation that many industry participants are prepared to endure, and a need to re-examine regional assistance and exit programmes in this light. There is also a lack of prominence of women and younger people in the industry, and difficulty in succession planning, particularly on a farm level.
Role for industry and governments
The majority of solutions identified by the Assessment lie largely (often exclusively) within the remit of the industry. The government role is primarily one of facilitating change and providing initiative-based support for various activities, best targeted at projects and individuals aimed at achieving sustainable, profitable outcomes. A clear (re)statement of the appropriate level of government support is also needed.
The full report, plus appendices, is available on-line at. Published copies will be available shortly –
please contact the Secretariat on (02) 6272 4497.
RECOMMENDATIONS
The following recommendations reflect the general thrust of the Assessment. Further ideas and specific actions are indicated in the text of the report,
to be developed by industry and, as appropriate, government.
INDUSTRY AND COMPETITION
Scenario:
At present the sugar industry is largely unprofitable and the business management skills are variable and often not well-developed. The notion of “industry leadership” is often focused on sectoral representation at state level while the profit centre is at regional level. The technical and production needs of the industry are generally known, as is the required technology. However a whole of value chain systems approach to all aspects of operations is lacking.
Action:
The Queensland industry must establish a strong mill area or mill region focus of operations.
For improved mill area economic outcomes, election to the Mill Suppliers’ Committee specified in the (Queensland) Act should be completely free of any link whatsoever to the constitution of CANEGROWERS or ACFA, with no “unity” tickets permitted, and with voting to reflect economic interests of farmers.
A Queensland industry body should be established to represent all mill regions (farm and mill) on extra-regional issues (eg water, transport, health and safety).
Industry must develop local economic leadership for local negotiations, in preference to established sectoral state representational routes.
With government support, the industry must build business management skills in the regions. An upgrading of business management training is urgently required.
Industry should install a whole of value chain systems approach to all operations, particularly in relation to harvest and transport arrangements.
Within mill areas, a rationalisation of the industry into larger units of farms or farm cooperatives is highly desirable. Government should be fully supportive of industry’s efforts.
Worldwide benchmarking of industry activities against the strongest competitors is required, followed by implementation of cost effective options.
Millers need to work to ensure the early rationalisation of mill areas and feeder farms in Far North Queensland.
THE MARKET
Scenario:
The world sugar price is at a low level and is likely to remain so for the short to medium term. The Australian sugar industry is fully exposed to world price at home and abroad.
Action:
Urgent continued efforts are required by government and industry to gain access to protected European, US and Japanese markets.
DIVERSIFICATION
Scenario:
There are diversified products available such as ethanol and surplus power co-generated at the mill. Investment in ethanol for transport fuel requires market access and supply undertakings, at a price sufficiently profitable to divert sugar potential. Ethanol from molasses has limited production potential.
Action:
Product diversification of both cane and raw sugar must be further encouraged, in order to increase returns. Product diversification of both cane and raw sugar must be further analysed and opportunities to increase returns exploited.
Industry should pursue the further potential for co-generation.
The current Commonwealth Government biofuels study should include the development of a model of market access and pricing for ethanol.
Industry and government should investigate the implications of domestic ethanol production for the exports of raw sugar.
The industry should investigate possibilities of partnership arrangements with
co-investors in diversified products.
ENVIRONMENT
Scenario:
The sugar industry has tended to isolate itself in the environmental debate, despite having been a leader in rural environmental work.
Action:
The industry must adopt an “engage not defend” approach to all environmental matters and demonstrate leadership on a catchment-focused level.
The industry should continue to develop and promote voluntary programs such as COMPASS (and beyond) and advance its environmental performance through independent audits.
The industry should work to ensure sustainability through ongoing education.
SOCIAL
Scenario:
The local communities in sugar regions are under pressure as a result of successive poor seasons, low prices, higher debt levels, and succession difficulties. Many cane farmers are prepared to endure extreme economic deprivation to preserve the lifestyle of the family farm, but the lifestyle itself is declining severely.
Action:
Options should be explored for allowing some industry participants to exit the industry with support, in the context of achieving more consolidated and viable industry arrangements.
Further work is needed on the local impacts of industry change on industry participants and the broader community, especially the decreased labour requirements of larger farm units.
Support must be provided to vulnerable communities in sugar regions, through an urgent review of existing assistance measures and the provision of training and re-training wherever necessary.
RESEARCH AND DEVELOPMENT
Scenario:
The research base is contracting through a sudden funding reduction. The main funding source of facilitation work in “systems-thinking” solutions and best management practices will cease this year, and the industry is also losing scientists. A CRC bid is under way for sugarcane as a biofactory.
Action:
Government should investigate the continuation of supplementary funding for the development of “systems-thinking” solutions, particularly towards integrated harvest and transport arrangements, in order to consolidate strategic mill area viability.
The industry should be encouraged to leverage its intellectual property base, through seeking suitable funding partners.
Industry and government should work at least to maintain and where possible broaden the researcher base serving the industry.