Australia's sugar industry is widely acknowledged as one of the lowest-cost in the world. Australia currently ranks seventh among world sugar producers well behind the European Community (EC), China, India and Brazil, and closely behind the United States and Thailand. Among exporters, Australia is surpassed at the global level only by the EC and Brazil, competing with Thailand for third place. Sugar, first grown experimentally as early as 1820, was not cultivated commercially until the 1860s, when production spread rapidly from northern New South Wales (NSW) up the Queensland Coast. Originally a plantation industry relying upon indentured labour, it became a family-based industry from the late-1890s. By the end of the nineteenth century, there were over 70 small sugar and juice mills operating in Queensland and NSW. Today there are 29 including the recently established small mills in the Ord River.

In its formative years the sugar industry supplied the Australian domestic market, along with imports, but during the First World War, shortages resulted in the stimulation of the industry by the state and federal governments. Australia became a net exporter of sugar in 1923, and at the same time, an embargo was introduced on sugar imports, which remained in effect until 1989.

In 1915 the Queensland government introduced the Sugar Acquisition Act and Regulation of Sugar Prices Act which effectively regulated sugar production in Queensland until 1991 when a new Sugar Industry Bill was introduced. NSW sugar was produced and marketed within this general framework, while a Commonwealth/State agreement allowed the domestic price of refined sugar to be regulated.

From 1923, when Australia became a net exporter of sugar, until 1990, there were only three planned substantial increases in the area assigned for cane growing. These took place in 1953-54 in response to new export market opportunities provided by the then recently negotiated Commonwealth and International Sugar Agreements; in 1964/65 after a period of high world market prices and in 1990/91. There were smaller increases approved in 1975/76 and 1981/82, again in response to dramatically improved (but not sustained) world market prices. Under the prevailing regulatory arrangements, cane could only be grown on assigned areas and only on a fixed proportion (net) of the gross assignment. Mill peaks had been established in 1929 in order to ensure that production was kept in line with domestic consumption requirements plus anticipated export outlets and were only increased in line with market growth. There were also corresponding farm peaks. There was a strong sentiment among sections of the industry, which prevailed well into the seventies that regulation provided some assurance of security, and this position was broadly supported by government.

PRODUCTION

About 95 percent of Australia's sugar are produced in Queensland, one of Australia's seven States located on the northern half of Australia's eastern coast. Most of the remaining production is to the south of Queensland in NSW, and there is a small new growing area in the Ord River district of western Australia.

Most sugarcane is grown in a strip within about 50 km of the Queensland coast, stretching about 2 100 km from Mossman and the Atherton Tablelands in North Queensland to Grafton in northern NSW. There are four growing regions in Queensland, each with between 1 500 and 1 700 growers, and an average farm size around 77 ha NSW has 600 growers with an average farm size of about 33 ha, whereas in western Australia which commenced operations only in 1995 the industry has a target of 560 000 tonnes of cane from 22 farms covering 4 000 ha.

As indicated above, sugarcane growing was initially highly regulated, under various Australian and Queensland government laws. These controlled the land on which cane could be grown, specified the mill to which it could be delivered, and the framework for distributing revenues to growers. However, the Sugar Industry Act of 1991 introduced significant regulatory reforms. Whereas previously cane had to be grown on clearly specified plots of land, the 1991 Act allowed for a more flexible assignment system and eased the process of transfer within a grower's own land holdings, between growers, and between mill areas. One of the most important contributions of the 1991 Act was that it specified that assigned cane area should be increased at least 2.5 percent annually, where previously the assigned area had tended to be stagnant.

The area under assignment has grown rapidly since 1991, and exceeded 400 000 ha for the first time in 1996. While a large area of land has been allocated for increased assignments since 1988, potential for growth still remains. Movements in world prices, exchange rates, and seasonal cultivation conditions are major determinants in the amount of land assigned to grow sugar cane. Growers have responded to the opportunities to expand production as the returns from sugar cane production are currently more favourable than many alternative enterprises, which include tobacco, cattle, vegetable and rice production.

Since 1979 all sugarcane is mechanically harvested. In areas of North Queensland where heavy rainfall occurs, special tracked harvesters with high flotation have been developed for the wet conditions. Both "green harvesting" and "harvesting after burning" are practised, and efforts continue to develop better methods for handling green cane. Partly because of concerns about the environment, the percent of cane harvested green rose from 3 percent in 1982 to over 40 percent by 1995. The growing season lasts for 12 to 15 months. Many farmers practice crop rotation, and after growing several ratoon crops, farmers may then plant a cover crop such as legumes prior to replanting cane. Irrigation is also practised, mainly on the Atherton Tablelands and in Burdekin, Proserpine, Mackay, Bundaberg, Maryborough. In Queensland, about 40 percent of cane land is irrigated.

Transportation of the cane to the mill is done mostly by narrow-gauge railway (tram) lines. Only 6 mills use road transport. The cane transportation system allows for rapid and efficient delivery of cane to the mills, usually within 16 hours to minimize deterioration. In recent years, computerization of the system has greatly increased efficiency.

Over the past ten years, the harvested area of sugarcane increased from 311 000 ha in 1986 to 400 000 ha in 1996, a record level. Correspondingly, sugarcane production increased from around 25 million tonnes in 1986 to 39 million tonnes in 1996, a 56 percent increase. During the same period, sugar production has expanded from around 3.4 million tonnes to 5.3 million tonnes, a more than 50 percent increase. Australia has consistently achieved among the highest yields in the world, and recorded record yields of 97.7 tonnes per ha in 1995 and 97.3 tonnes in 1996.

PROCESSING

Sugar milling in Australia has become more concentrated in recent years. In 1980, 19 companies operated 33 mills; in 1990, 12 companies operated 28 mills. Currently, there are 25 mills in Queensland while 3 operate in NSW, and one in western Australia. In Queensland, there are seven cooperative companies with 10 mills, three public (stock) companies with 14 mills, and one privately-held mill. The three largest groups, the Colonial Sugar Refinery Company (CSR), Bundaberg, and Mackay Sugar Co-operative Association Ltd own 17 of the 25 mills.

CSR Ltd operates about 40 percent of Queensland's milling capacity, and one of the largest mills in the world at Victoria. Bundaberg Sugar Company Ltd is Australia's largest cane grower, with about 7 000 sugarcane hectares, and they are also a large miller accounting for about 15 percent of Queensland's milling capacity at their six mills. Bundaberg is a wholly owned subsidiary of Tate & Lyle PLC. With a refinery with capacity of about 150 000 tonnes a year, Bundaberg is fully integrated in the growing, milling, refining and marketing of sugar. The Mackay Sugar Co-operative Association produces about 750 000 tonnes of sugar at 4 mills in the Central Region. There are over 1 000 shareholders. In 1994, Mackay entered into a joint venture with ED&F Man to produce refined sugar at a new refinery adjacent to the Racecourse mill.

For many years the industry did not crush sugarcane on weekends. At least 75 percent of Queensland's mills now run continuously. This practice lowers costs by allowing for more cane to be processed during the season. The length of the crushing season varies from 18 to 27 weeks. The average mill can crush up to 1.4 million tonnes of cane, a substantial increase from the 200 000 tonnes in 1950, although there is a wide variation among the size of mills.

The Queensland Sugar Corporation (QSC) is a statutory authority established under the provisions of the Sugar Industry Act of 1991. The QSC receives no financial support from the Government, as it obtains funds from its sales of raw sugar before distributing the net proceeds back to the mills. It is responsible for managing the regulation of the quantity and quality of sugarcane and raw sugar produced in Queensland, deciding issues relating to the size of the Queensland sugar industry, acquiring and marketing all raw sugar produced in Queensland and distributing the net proceeds resulting from the marketing to mill owners. The QSC may also acquire, construct, manage and maintain bulk terminals and other storage facilities for the processing, storing and handling of products of the Queensland sugar industry.

After the deregulation of the Australian refining industry on 1 July 1989, the NSW sugar industry withdrew from its previous voluntary participation in the Queensland arrangements. The growers supply three raw cane sugar mills in NSW, of which they are joint owners. Production has risen from under 200 000 tonnes in 1989 to about 250 000 tonnes in 1995.

In NSW, all relations between growers and the New South Wales Sugar Milling Cooperative are handled by contract. Cane growers are required to contribute capital to the Cooperative, which is returned over several years if they choose to leave the industry. By breaking away from the Queensland arrangements, the NSW industry hoped to obtain higher average returns.

The Australian sugar refining industry is currently undergoing a period of significant change that may enable Australia to become an even greater exporter of white sugar in the future. Industry analysts currently estimate that Australia has the capacity to produce around 1.2 million tonnes of white sugar, a significant increase from the 850 000 tonnes capacity prior to 1989. Before the sugar import embargo was removed in 1989, sugar was refined by CSR on behalf of the Queensland Sugar Board. This arrangement covered approximately 95 percent of the Australian market, with the remainder being controlled by Bundaberg sugar.

A joint venture was established in 1989 between the NSW Sugar Milling Cooperative and the Manildra group of companies. This joint venture built the Manildra Harwood refinery at Harwood near Grafton, NSW. This refinery handles all of the sugar produced in NSW and supplies about 20 to 25 percent of the entire domestic refined sugar market with a current capacity of 250 000 tonnes per year. The major Australian refiner is CSR, with Manildra, Bundaberg and Mackay holding the remainder.

A loss of market share has prompted CSR to close refineries in Adelaide and Sydney, which had throughput of around 60 000 tonnes and 250 000 tonnes, respectively, and to upgrade the capacity of the Melbourne refinery. Bundaberg Sugar, which was purchased by the international sugar company Tate and Lyle in 1991, has upgraded its refinery capacity from around 40 000 tonnes to 80 000 tonnes. Mackay Refined Sugars, a partnership between the Mackay Sugar Co-op and the British commodities house ED & F Man, commissioned a 350 000 tonnes capacity refinery in April 1994.

The first new cane mill to be built in Australia in seven decades is now in production. The Ord River irrigation area in the Kimberley region of western Australia was the subject of hopes for a number of years, and it appears that earlier problems have now been solved. The first cane crop harvested in 1996 produced 75 000 tonnes of cane, and with an expected sugar content of around 16 percent, sugar production is estimated at 1 200 tonnes. In 1997, it is estimated that the Ord River industry will produce around 40 000 tonnes of raw sugar for the domestic market rising to 60 000 tonnes during the 1998 marketing year. Subsequently, potential would exist for production of around 80 000 tonnes of raw sugar annually. The new industry is expected to target the domestic market in western Australia which consumes around 50 000 tonnes annually, with the remainder going to nearby Asian markets of Indonesia and other South East Asian countries. The Ord River industry has a commercial agreement with the QSC for any potential export marketing of its raw sugar.

CONSUMPTION

At an average of 50 kg per caput per year, Australian sugar consumption exceeds that of European countries at around 40 kg per year, the United States of America at 33 kg and Japan at 20 kg. The Australian industry is constantly monitoring domestic sugar consumption and attitudes to sugar, and adapts its marketing strategies and educational material as needed.

An increasing proportion of sugar is being consumed in manufactured goods, rising from 32 percent in 1938/39 to 72 percent in 1992/93. The percentage shares of key market sectors in domestic industrial sugar consumption in recent years are as follows:

• Non-alcoholic beverages 29

• Retail sale 23

• Confectionery 11

• Bakery 8

• Preserved foods 8

• Alcoholic beverages 7

• Dairy foods 5

• Other 9

Refined sugar faces its strongest competition in Australia from fermentables such as glucose syrup, starch and some grains products, which can be used in the production of beer. There is currently one dextrose and one High Fructose Syrup (HFS) manufacturing plant in Australia. The major starch source is wheat, as Australian maize production is limited and often more expensive than wheat. Alternative sweeteners have had difficulty increasing market share due to the aggressive marketing strategies employed by the sugar industry.

In the early nineties, alternative sweeteners accounted for 17 percent of the total sweetener market in Australia, as compared with 14 percent in the mid -eighties. This proportion is lower than in the United States, the EC and Japan. The use of non-nutritive sweeteners in Australia is strongly influenced by food regulations.

The diet soft drink sector leads the demand for non-nutritive sweeteners. Aspartame is a leading sweetener, but some other intense sweeteners have not fared as well. A slump in Australian sales of cyclamates has caused the closure of Australia's only cyclamate producing plant. The expiry of the Nutra Sweet patent at the end of 1992 has resulted in more products using either aspartame or sucralose. Sales of saccharin are expected to increase in the next decade, although the total share of saccharin in the diet sweetener market may decrease as a result of competition from other sweeteners.

TRADE

Outside of Australia and New Zealand, the QSC contracts with CSR Raw Sugar Marketing as agent to handle export sales. C. Czarnikow acts as the QSC's principal sugar broker. The QSC sells sugar directly to end users, rather than sugar traders as is common for most other major exporters.

Prior to 1 July 1997, Queensland raw sugar was sold to domestic refiners (for sale either in Australia or for subsequent export) at an import parity price. Beginning 1 July 1997, when the 15 percent import tariff was abolished upon recommendation of the Sugar Industry Review Working Party (SIRWP), raw sugar may be sold to refiners at an export parity price (i.e., lower than the previous import parity price).

Sugar exports from Australia have risen from about 2.5 million tonnes in the eighties, to a record 4.3 million tonnes in 1996. Australia is well positioned to take advantage of rising demand for both raw and refined sugar in the rapidly-growing Asian market. The main competition is from Thailand, which has significant capacity to export either raw or refined sugar.

The largest importers of Australian sugar in recent years have been Canada, Japan, Malaysia and the Republic of Korea. China is a regular customer, but in 1996 exports to that destination amounted to only 302 000 tonnes compared to 397 000 in 1995 and 720 000 in 1994. Exports to the United States, the only premium market for Australian exports, vary with the size of the import quota. In 1996 exports to the United States amounted to 234 000 tonnes, which was less than 6 percent of Australia's total exports. Asia accounted for around 60 percent of the industry's exports in 1996, compared to just over 30 percent in the seventies. Canada, the largest single market, accounted for nearly 19 percent of exports in 1995-96. The Australian industry recently made sales for the first time to Slovenia, Kazakhstan, Latvia, Croatia, Mexico and the Philippines. Long-term supply arrangements are in place with Canada, Malaysia and Singapore.

Imports were nil prior to the lifting of the embargo in 1989. After rising to 15 000 tonnes in 1991, imports subsequently fell gradually to about 2 000 tonnes in recent years. The main cause of the decline was severe competition from the Australian refined sugar industry, which drove domestic prices below import parity levels.

In 1996, the Queensland and Commonwealth governments established the SIRWP, which reviewed the tariff on raw and refined sugar and the Queensland industry regulatory arrangements. The key conclusions of the review included not only that tariffs should be removed effective from 1 July 1997, but also that the single desk selling function of the QSC should be retained for both domestic and exported raw sugar. In addition, the pool price differential should be phased out over two years. A new producer pricing scheme would be introduced which would not compromise the benefits of compulsory acquisition and single desk selling, while giving cane growers and mills the opportunity to manage their own price risks.

Following implementation of these proposals, the Australian sugar industry would be among the least regulated in the world. The domestic sugar price would not provide higher returns than exported sugar, except to the extent that potential sugar imports would face some transportation costs. Expansion would be largely conditioned by the local situation of mills and growers, although there would remain some central oversight to assure that expansion did not exceed facilities for storage and export.

PRICES

The 1990 season saw the end of administered price arrangements for refined sugar, with domestic sugar prices being determined on the basis of import parity considerations (including the import tariff). However, in July 1997 the import tariff was removed. With sole acquisition rights in Queensland, the QSC was authorized to sell raw sugar to domestic refiners at prices based on the export parity price of raw sugar. Similar sole acquisition powers also exist in NSW.

In Queensland, proceeds from the sale of sugar are pooled for payments. The QSC acquires all raw sugar production. The revenue is distributed back to mills and growers after being adjusted for net profit or loss arising from risk management activities in currency and commodity futures markets, marketing costs, transportation costs and administration costs incurred by the Corporation. The pooling of funds is done primarily to smooth the effect of price fluctuations, enabling producers to receive an average of prices received during the year and not the sales price on the day their output is physically sold.

Prior to 1990, the "No 1" Pool price mainly consisted of returns from the domestic market and from sugar sold on long term contracts (including the United States sugar quota). Each mill was assigned an amount of sugar output called the "mill peak", and any sugar in excess of the "mill peak" received a lower, "No. 2" Pool, price. Similarly, each grower was assigned a peak entitlement under a cane price formula, and received a cane price based on the "No. 2" pool price for cane production above the peak entitlement.

The 1989 crop was the last season in which the difference between the No. 1 and No. 2 pool price was based on the different sales destinations. Since then a fixed (and somewhat arbitrary) difference has been established each year, for example, at 10 percent in 1993, 8 percent in 1994, and 6 percent in 1995 and 1996. For the 1997/98 crop year, the "No. 1" and "No. 2" pool prices would be reduced to 4 percent and then discontinued from 1998/99 onwards.

Technically, sugar produced from cane grown on unassigned land is paid at a penalty rate of A$1 per tonne, but, in practice, this is not a constraint since assignment allocations have been expanding and further liberalization of the assignment system may occur in the future.

Mills test each farmer's cane using a measure called Commercial Cane Sugar (CCS), and payments to the farmers are based on this indicator of the recoverable sugar. In order not to discriminate against farmers who deliver early in the season, there is an adjustment in the payment scale to compensate for early-season deliveries, as these tend to have lower CCS measurements.

FUTURE PROSPECTS

A recent industry study assessed that by 2003 the harvested area of cane in Queensland could expand to nearly 440 000 ha, an increase of nearly 80 000 ha from the area harvested during the 1995 season. Most of the expansion would occur in the Tully, Herbert, Burdekin and Proserpine areas. Production on the Atherton Tablelands, where up to 5 000 ha may be available, has the potential to expand as tobacco growers look to alternative enterprises.

The Australian sugar industry is more directly dependent upon the future direction of the world price than any other major producing country. The industry forecasts that with present capacity, production in 2000 would be about 6 million tonnes, with further strong expansion possible in the longer run, depending of course on domestic and world market developments in the interim. At the international level, the industry's prospects would largely mirror the future direction of world prices, which in turn would depend on the decisions taken in many other countries (particularly other major producers such as Brazil and Thailand); and also on any developments in international trade policies affecting sugar, as for example might result from the next round of multilateral trade talks in World Trade Organization. The growth of world population and income, especially in Asia, should provide an underpinning of support for the world sugar price, and thus the industry's future.