Australia / Analyst Insights
Sweet deal: Several sugar manufacturers are leaving QSL
by Brooke Tonkin
Nov 22 2016

Australia’s sugar cane harvest is currently in full swing, with approximately 5.6 million tonnes of sugar cane expected to be milled by Mackay Sugar alone by mid-December. Nationally, an estimated 34.8 million tonnes of sugar cane will be milled for the 2015-16 season. With the harvest well underway, farmers are starting to turn their attention to growing the cane for next season. However, the 2017 season is expected to be different to other seasons. Sugar manufacturers Wilmar Sugar, MP Australia (MSF Sugar) and Tully Sugar are set to break away from the industry’s long-standing single-export body Queensland Sugar Limited (QSL). Sugar cane growers are nervous that the split will spark price competition that will reduce their profit margins. However, Australia’s position as a price-taker in the world sugar market means the effects are unlikely to be as detrimental as expected.

QSL was established in 2000 to replace the Queensland Sugar Corporation, which was responsible for marketing Australian sugar to export markets. As an industry-owned marketer, QSL is responsible for negotiating prices on behalf of sugar manufacturers and sugar cane growers. Following the deregulation of the industry in 2006, QSL has operated through voluntary contracts with sugar millers. Despite the voluntary nature of the contracts, most millers continued to operate through QSL. However, in 2014, three of the five largest sugar manufacturers announced their plans to sever ties with QSL at the end of the 2016 season. The announcement sparked strong opposition from sugar cane growers that worried that the split would spark price competition, limiting their returns.

In some respects, the growers’ worries are not unwarranted. Sugar cane must be processed before it can be consumed. As a result, sugar cane growers, which mostly operate on small and mid-size farms, rely on sugar manufacturers. In addition, sugar cane must be processed within sixteen hours of harvest to prevent the sugar cane juice from evaporating, which means that sugar cane growers have little choice about which mill they supply, and often have to sell to the closest one.

 

Although approximately 80% of Australia’s processed sugar (in volume terms) is exported, Australia accounts for around 3% only of global sugar production. Because of this, local sugar cane growers have little control over the world sugar market. Similarly, although Wilmar Sugar, MSF Sugar and Tully Sugar are major players in the domestic sugar manufacturing industry, they are unlikely to significantly influence the world prices received for sugar. This means that despite the imminent changes, farmers are likely to receive similar prices for their cane regardless of which sugar mill they sell to, even if they can’t choose.

Despite the shake-up, the sugar cane growing industry and the sugar manufacturing industry are both projected to grow in the current year as low world sugar stocks cause world sugar prices to increase. As these effects flow through to the Australian market, the sugar cane growing industry is expected to grow by 12.9%, while the sugar manufacturing industry is anticipated to grow by 19.9%.

 

Relevant industries:

Sugar Cane Growing

Sugar Manufacturing