It will take several years to re-build the industry after our ‘top to bottom’ flogging in 2010.
Once more the industry has been occupied with mergers and takeover offers. This issue discusses the state of play and it serves us well to thoughtfully ponder the ramifications of the consolidation of milling assets, especially the impact on cane supply, contract conditions, industry structures and policy interests. Our front page story asks wether the sun is setting on grower controlled assets in the Australian industry?
For the moment market look positive with some good prices available.
Proposed R&D Restructure
In April 2011, ACFA received a letter about the first phase of the review of sugar industry research, development and extension (RD&E) being progressed by the Australian Sugar Industry Alliance (ASA). It also advised of formation of a Reform Project Group (RPG) to oversee and be responsible for Implementation, reporting to the ASA Board, and that a Reform Project Leader would be appointed to manage the project including achieving agreement on new structures and sustainable arrangements for sugar RD&E.
The Reform Project Group, involving the Chair and Deputy Chair of ASA, Chair and a Deputy Chair of ASMC and CANEGROWERS plus the Chairmen of BSES, SRDC and SRL, had its first meeting in Mackay on 5 May. This meeting appointed Dr Sandra Welsman in the role of Reform Project leader. Dr Welsman has been consulting with a wide range of stakeholders and has twice met with the ACFA. We will continue to inform members of developments in this review.
Sunday 10 July, the Prime Minister announced the ‘Securing a Clean Energy Future’ climate change plan, incorporating a carbon tax. This policy will result in embedded costs in farm inputs, raising farmers’ costs. This is a complex issue where potentially farmers could earn income from carbon sequestered in their farmers but it is not yet known whether farmers would incur a net gain or loss from this. The plan includes a $1.7 billion Land Based Sector Package. This package is aimed to support farmers to take climate change action, and includes a $429 million Carbon Farming Futures Program and others discussed in this newsletter.
QSL Review of Pooling and Pricing
In 2010, the Queensland sugar industry suffered one of the most extreme weather events in a generation. This extreme weather event resulted in a very challenging 2010 season. A total supply shortfall of 723,000 tonnes of raw sugar generated delivery shortfall issues and costs across the industry.
QSL announced on 9 March 2011 that it would establish a sugar industry working group to conduct an industry‐wide review focused on pooling and pricing arrangements (with particular emphasis on the establishment of new RSSAs) better suited to coping with weather related and other production shocks.
It is the intention that the future pooling and pricing solution, as agreed by industry stakeholders, will be delivered and implemented by mid‐October 2011.
The intention is to review QSL pooling and pricing arrangements to ensure that they are relevant for the future.
The project is investigating, among other things;
• Collation of industry requirements to form the basis of future pooling and pricing arrangements.
• Coordination, with milling companies and key grower organisations, of the development of and approval process for future pooling and pricing arrangements.
• Implementation of new pooling and pricing arrangements in time for the 2012 season, following all participants’ agreement.
Project deliverables will:
• protect the value to the Australian sugar industry provided by the pooling system.
• provide uniformity of contracts between QSL, millers and growers.
• provide greater transparency on and industry input into the forward hedging and sales program.
• develop (or enhance existing) pricing and risk management products appropriate to industry’s risk appetite and commercial objectives.
• provide for appropriate allocation of costs incurred as a result of extreme events develop options on independent and timely crop and crush forecasting.
The project has significant time constraints. The current pricing declaration date for the 2012 Season is 30 November 2011. To enable any new pooling and pricing arrangements to be utilised in the 2012 season, changes need to be agreed and implemented prior to the declaration date. To ensure that the review will meet these time constraints, QSL will undertake a coordination role through the project lifecycle, including monitoring adherence to required schedule and quality criteria.
Round one of stakeholder consultation on future pooling and pricing arrangements complete by 31 July 2011. A first draft future pooling and pricing arrangements, based on stakeholder requirements, is to be completed for stakeholder feedback by 10 August 2011. Round two of stakeholder consultation on future pooling and pricing arrangements complete by 31 August 2011.The review is to be completed by 15 October 2011
For now sugar markets look favourable. Thailand expects a record crop around 100MT of cane and the Brazil crop is now heading below expectations. Two months ago the consensus was for surplus of 5-12MT but now that surplus is fast disappearing to what could be small or even balanced. India is the ‘wild card’ here.
Markers are saying that market volatility is likely to remain high with the AUD in the range of $1.00 -$1.10, resulting in AUD prices above $550. 2012 onwards is currently >$500.
Prices are now well above a structural producer price level of US20-22c/lb; based on greenfield costs in Brazil, much stronger ethanol prices and tight sugar inventory levels globally.
Supply surprises, inventory levels, ethanol demand and awareness of food security are all currently positives for raw sugar prices going forward. Forward pricing for 2011 by mills and growers currently in place have the industry well price protected.
Australia’s Currency strength is a function of Australia’s commodity boom, high interest rates and a weaker USD. The AUD is a proxy for risk appetite because of our deep capital markets and is a heavily traded currency by global investors. The Australian economy is coping better with stronger currency due to our resource base delivering higher commodity prices.
Elevated AUD levels, versus historic levels are likely to persist with the China growth story still relevant and the US economy very slow to recover from the Global Financial Crisis. Some analysts are saying that the AUD unlikely to trade under USD0.90 for some time, with levels above USD1.10 are quite likely.