SUGAR INDUSTRY

Processing sugarcane into raw sugar is one of Australia's largest and most important rural industries. Australia is a low-cost producer and major exporter, with the capacity to produce more than 5 million tonnes (“mt”) of sugar annually. Depending on prices, the industry generates direct revenue of around $1.5 - $2 billion, including $1.2 billion in exports. The flow on to the regions increases these numbers many times over. About 20% of output is sold on the domestic market.

Milling and Transport

Around 4,000 business enterprises supply more than 37.5 mt of cane to 26 sugar mills. About 95% of Australia’s cane is grown in Queensland. Most mills crush an average 10,000 tonnes of cane daily and employ around 150 people during the season.

Sugarcane is transported to the mills on cane railway and road systems. Millers, growers and harvesters determine harvesting and transport schedules that ensure cane is crushed as fresh as possible. Average cut to crush time is less than 12 hours.

Sugarcane Marketing

Up until deregulation in 2006, Australia enjoyed a 'single desk' arrangement where all sugar was compulsorily acquired by sugar marketer, Queensland Sugar Limited (“QSL”). The majority of growers’ production was managed by marketing arrangements with QSL, which uses bulk marketing power to leverage better deals for Australian sugar on the international market. (Queensland Cane Growers Organisation Limited)

SUGAR INDUSTRY FORECAST

World Sugar Prices

The world indicator price for sugar (Intercontinental Commodities Exchange no.11 spot, fob Caribbean) is forecast to average US23.1 cents a pound in 2009-10, which is US7.2 cents a pound higher than 2008-09, and the highest in real terms since 1989-90.

The high prices result from a significant decline in world sugar stocks caused initially by a poor 2009 monsoon in India and exacerbated by the adverse effect on cane and sugar yields of too much rain in Brazil in the latter part of 2009.

Downward pressure on world sugar prices is expected to emerge over the remainder of the current marketing year, as the market anticipates a return to larger world production in 2010-11, easing the current tight supply situation.

World Sugar Consumption

World sugar consumption has increased at an average rate of 2.5% a year over the 10 years to 2008-09, faster than the rate of world population growth rate of 1.2%.

Reflecting higher sugar prices, world sugar consumption is projected to grow at an average rate of only 2.1% a year over the medium term.

A characteristic of world sugar consumption is that per person consumption of sugar is declining in developed countries, but increasing in less developed countries. This trend reflects, in part, that consumers can afford to choose more costly (and perceived to be healthier) food alternatives as income increases.

Returns to Australian Cane Growers

Forecast high world sugar prices will deliver favourable returns to Australian cane growers in 2009-10 and 2010-11, despite the strength of the Australian dollar.

The indicative price at 15 February 2010 for the season pool offered by QSL for 2009-10 production (harvested in the second half of 2009) was $504 to $514 a tonne IPS (“International Polarity Scale”), compared with $335 a tonne IPS for 2008-09 production.

At the same time, the indicative price for QSL’s aggressive pool for 2009-10 production was $498 to $515 a tonne IPS. The returns to millers and cane growers in any year also reflects returns from long-term contracts and from higher priced markets in which import tariff quotas are applied, such as the United States.

The average return to Australian growers for cane in 2009-10 is forecast to be $51 a tonne, compared with $32.46 a tonne in 2008-09 and $26.39 in 2007-08. Although Australian sugar production is estimated to have been 5% lower in 2009-10, the gross value of Australian sugar production is forecast to be around $1.5 billion, which is 55% higher than in 2008-09.

World sugar production is projected to increase to 185 mt by 2014-15. The key determinant of world sugar production over the medium term is likely to be Brazilian cane sugar production and its allocation between sugar production and ethanol production. Government policies in India and the European Union will be important determinants of sugar production in those countries.

Australian marketers of sugar are increasingly giving Australian cane growers the opportunity to lock in forward prices for their cane, based on the use of ICE sugar futures contracts. For example, at 1 February 2010, the Proserpine Cooperative Sugar Milling Association Limited was quoting cane prices to growers for 2010-11 production of $46.65 to $48.73 a tonne of average quality cane at 14.34% contained content of sugar (“CCS”); $40.01 to $40.33 a tonne for 2011-12 production; and $38.20 to $38.53 for 2012-13 production. 2010-11 will be the first year since 2002-03 that Australian sugar area harvested has increased.

The area harvested of sugar cane in Australia is projected to stabilise at around 402,000 hectares by 2014-15, still 46,000 hectares less than the record harvest in 2002-03. Modest growth in Australian cane and sugar yields is also projected for the medium term. Australian sugar production is projected to increase to around 4.9 mt by 2014-15, compared with 4.5 mt in 2009-10 and the record of 5.4 mt in 2002-03.

At the farm level, it is expected that the number of growers in Australia will continue to decline and cane farms will increase in size. The number of cane growers in the Australian sugar industry has declined from around 6,300 in 2000 to less than 4,000 in 2010. Over the same period, cane production per grower has increased from 5,000 tonnes to 9,000 tonnes. (ABARE, Australian Commodities, March 2010)