Current and future arrangements for the marketing of Australian sugar
Submission 23
GPO Box 1032 BRISBANE QLD 4001 ABN 94 089 992 969 GPO Box 608 BRISBANE QLD 4001 ABN 68 009 657 765 13 October 2014 Mr Tim Watling Committee Secretary Senate Standing Committees on Rural and Regional Affairs and Transport PO Box 6100 Parliament House Canberra ACT 2600 By email: [email protected] Dear Sir Thank you for your letter inviting a submission to the inquiry into the current and future arrangements for the marketing of Australian sugar. CANEGROWERS & ACFA make the following joint submission in relation to each point of the inquiry’s terms of reference. A. The impact of proposed changes on the local sugar industry, including the effect on grower economic interest sugar Recommendation: that Government facilitate Real Choice in sugar marketing The role for government is to establish a regulatory structure that prevents the misuse of market power, addresses market failure1 and establishes a competitive market. To address the imbalance in market power between mill owners and growers, CANEGROWERS and the Australian Cane Farmers Organisation (ACFA) recommend that Government secure for growers the right to have Real Choice over who sells and prices Grower Economic Interest (GEI) sugar. CANEGROWERS and ACFA recommend that Government introduce pro‐competition 2 amendments to the Competition and Consumer Act 2010, which address market failure in the case of monopsony buyers of agricultural products. 1
An abuse of market power occurs when a single buyer or seller exerts significant influence over prices or output is a clear case of market failure. Abuse of market power is best tackled through competition policy and laws that balance the economic power of single buyers and sellers with their counterparts. With the removal of regulations governing the sugar industry, mills are once again able to exert their market power to the detriment of growers. Growers also have incomplete or asymmetric information about returns achieved in the sugar market. Reflecting this, QSL has a constitutional responsibility act in the best interests of the industry, growers and millers together. Working to the benefit of their shareholders, Mill companies do not have this same obligation. Current and future arrangements for the marketing of Australian sugar
Submission 23
Current Situation: mills are denying growers Real Choice in marketing Already, mill decisions to withdraw from QSL and market sugar on their own account are having a significant impact on the Australian sugar industry and its regional sugar communities. Mills are exercising their region mill monopoly powers and growers are being denied the ability to determine how Grower Economic Interest (GEI) sugar, the sugar that determines the value of cane, is sold. There is no feasible alternative market for cane. In cane growing regions, other land uses are not economically viable alternatives to cane production. In each of the sugarcane producing regions the local cane growing community must deal commercially with a raw sugar miller. In most regions, a single company owns all of the mills; there is no feasible alternative market for cane; and there are few if any worthwhile alternatives to sugarcane production. Queensland Government legislation enables growers to collectively negotiate Cane Supply Agreements with the mill they supply. These agreements can be negotiated at a regional level. However several sugar milling groups; Wilmar Sugar, Mackay Sugar and MSF Sugar, each own mills across several different areas. This gives those mills considerable economic strength and advantage in their negotiations with growers. There is a clear imbalance in economic strength favouring the milling sector. This imbalance, characteristic of sugar industries around the world and recognised by governments in all sugar producing counties, has resulted in a suite of regulations governing the commercial relationship between millers and growers in each of those countries. The imbalance and the power of the regional monopoly enjoyed by each mill was first recognised in Australia in the early years of the 20th century when a 1912 Royal Commission expressed its concern about the imbalance in market power in the industry and the mill owner’s ability to “squeeze the primary producer”. Legislation to regulate the Sugar industry was introduced in 1915 following the first Commonwealth of Australia‐Queensland sugar agreement. Among other things, this legislation established the Central Sugar Cane Prices Board (Central Board) and Local Sugar Cane Prices Boards. One task of these Boards was to make binding Awards to set sugarcane prices. These Awards ensured growers and mills shared market rewards and risks. The Awards determined the basis on which the proceeds from the sale of vested sugar were distributed between growers and mills. In its 1917 decision, the Central Board “endeavoured to divide the estimated profits of the industry for the season on a basis fair and equitable to both millers and growers.”3 Although not described as such, the concept of Grower Economic Interest (GEI) sugar was given effect. GEI sugar is recognised in the Raw Sugar Supply Agreements (RSSAs) each mill has with QSL. Growers’ economic interest in the market outcomes for sugar is reflected in Wilmar Sugar’s expression “Notional Price 2
We are not seeking to revert to a legislated single desk marketing structure. 3
Central Board (1917), ‘Awards made in accordance with the Regulation of Sugar Cane Prices Act of 1915: Baffle Creek Bingera, Gin Gin, Fairymead, Invicta, Millaquin, Qunaba, Childers, Doolbi, Maryborough, Mount Bauple and Moreton Mills’, Queensland Government Gazette, Brisbane, 25 May, 1669‐78. The cane payment formula first appeared two years later. Pathways to Market for GEI Sugar – CANEGROWERS & ACFA 2 Current and future arrangements for the marketing of Australian sugar
Submission 23
Exposure” and its associated mechanisms for growers to receive a price for cane that reflects a price of sugar that includes market premiums net of costs. Large milling companies plan to take control of the marketing and remove Real Choice Sugar industry regulations were replaced with voluntary structures in 2005. In April 2014, Wilmar issued a public statement indicating its intention to exit the current sugar marketing arrangements from the end of the 2016 season. Shortly after, two other milling groups, MSF Sugar (owned by Thailand’s Mitr Phol Group) and Tully Sugar (owned by China’s COFCO), also announced their intention to exit current marketing structures from the end of the 2016 season and market all the raw sugar produced in their mills. Unless addressed, these anti‐competitive actions will have ramifications across the whole industry. These unilateral mill decisions will deny growers any choice in how the sugar (GEI sugar) that determines the value of their sugarcane is marketed from the 2017 season. This misuse of market power is designed to undermine the stability and integrity of the industry’s existing marketing structures and alter the way in which rewards and risks are shared across the industry in favour of the mill. Unless addressed, these anti‐competitive actions will have ramifications across the whole industry, affecting all milling companies and their supplying growers. CANEGROWERS and ACFA are looking for growers to have the right to decide how GEI sugar is priced and sold. The market value (price + premiums net of costs) of this sugar passes directly to the price of sugarcane. Under current structures there is no margin in this for the mill. So why are mill owners denying growers the right to choose how the value of GEI sugar is determined? Ownership of Sugar Current ownership structures for sugar are determined by the provisions of Cane Supply Agreements (CSAs). Historically title to sugar has not been an issue because, as noted, the proceeds from sale of vested sugar were shared between growers and mills, with both sectors sharing market risk and reward. At the crucial stage of marketing and selling, title to the raw sugar was vested in QSL (and its predecessors) under Queensland Government legislation. Following deregulation sugar is contracted to QSL under the RSSAs between each Mill Company and QSL and title to the raw sugar passes to QSL. Under current and previous marketing arrangements title for GEI sugar is NOT held by the mills for the critical sales and marketing function. Wilmar's decision to withdraw from QSL substantially alters QSL’s risk profile. This change is reflected in MSF Sugar and Tully Sugar's subsequent decisions to give notice to QSL. Wilmar’s decision to withdraw from QSL, if it proceeds, will trigger major changes to its CSAs ahead of the 2017 season. These changes have not yet been agreed. In the absence of revised CSA’s, Wilmar has no agreement to buy or process independent growers' cane for the 2017 season and future seasons. It is not clear that the new, yet to be negotiated, cane supply agreements will contain the same clauses as existing CSAs. Wilmar purchased Sucrogen's sugar assets and CSA obligations. It did not buy GEI sugar. Pathways to Market for GEI Sugar – CANEGROWERS & ACFA 3 Current and future arrangements for the marketing of Australian sugar
Submission 23
B. Equitable access to essential infrastructure Recommendation: all sugar producers, growers and millers, continue to have access to essential industry infrastructure including raw sugar mill crushing capacity and bulk raw sugar storage and handling facilities. Current Situation: access to essential industry infrastructure (raw sugar mills and bulk storage and handling) is open to all industry participants on an equitable basis. The industry made a significant investment in the establishment and operation of bulk raw sugar storage and handling. This investment was financed by the industry, through pool revenues with the cost effectively borne two‐thirds by growers and one‐third by millers. It introduced a significant structural change to the way sugar was stored and handled. The burden of providing raw sugar storage was shifted from mills to the wider industry. Through the QSL Shared Pool, growers continue to share the costs of maintaining and operating the bulk sugar terminals. Access to raw sugar mills for cane to be crushed is governed by Queensland legislation. The Sugar Industry Act 1999 states that in order to supply to a mill for crushing, a grower must have a cane supply and processing agreement with the mill. These agreements are entered into on a commercial basis. The dispute resolution process mandated is post‐contractual, not pre‐contractual. There is no recourse to a commercial dispute resolution process; one that addresses the imbalance in negotiating power between millers and growers if agreement cannot be reached that enables negotiation of a fair contract. C. Foreign ownership levels in the industry and the potential to impact on the interests of the Australian sugar industry Recommendation: CANEGROWERS and ACFA welcome all investment in the industry, foreign and domestic alike Current Situation: foreign investment has been a cornerstone of the industry since the establishment of commercial cane sugar production in the 19th century. Foreign investment has been enormously positive for the Australian sugar industry. The much needed investment has enabled the refurbishment and restoration of mills, boosting crushing capacity and enabling a recovery in sugarcane production. The sheer amount of interest by international investors is being driven by their own commercial interests. This is demonstrated in the decisions taken by Wilmar, Mitr Phol and COFCO to withdraw from QSL, with little regard for the longstanding institutional arrangements and the likely impact of these decisions on grower confidence. Pathways to Market for GEI Sugar – CANEGROWERS & ACFA 4 Current and future arrangements for the marketing of Australian sugar
Submission 23
D. Whether there is an emerging need for formal powers under Commonwealth competition and consumer laws, in particular, whether there are adequate protections for grower‐producers against market imbalances. Recommendation: that the ACCC be given greater power to regulate anti‐competitive behaviour and impose penalties where anti‐competitive behaviour has been found. This would shift the decisions framework from the judicial system to a regulatory system, making it more accessible to small producers facing large multinational adversaries. Current Situation: The Queensland legislation that ensured there were adequate protections for grower‐producers against market imbalances in the sugar industry was removed in 2005. In the absence of these protections, new mill owners entering the industry are exercising their regional mill monopoly power. An important reason for Government action is to prevent or ameliorate the effects anti‐
competitive conduct is likely to have in the marketplace, rather than waiting to remedy the situation when the market behaviour has caused far‐reaching social and economic dislocation. Governments have the right to pass laws for the good governance of the State (Queensland Government) and Australia (Commonwealth Government). CANEGROWERS and ACFA are concerned about the misuse of market power by regional mill monopolies. Establishing laws and regulations to overcome this market failure is a bona fide area for Government intervention. None of the trade agreements Australia has entered into diminish these rights. A process that gave the ACCC greater power to regulate anti‐competitive behaviour and impose penalties where anti‐competitive behaviour has been found would shift the decisions framework from the judicial system to a regulatory system, making it more accessible to small producers facing large multinational adversaries. A process for collective bargaining approvals that recognises the unique characteristics of agricultural industries would be worthwhile. In the case of the sugar industry a threshold for primary production, bargaining of $5 million, is too restrictive. The value of Australian sugar production regularly exceeds $2 billion annually. The value of cane comprises approximately two‐thirds of this value. To be effective, amendments to the Competition and Consumer Act 2010 should enable peak bodies to commence and progress collective bargaining with mills on behalf of their members. In those cases where there is market failure and imbalance in negotiating power between regional mill monopolies, in many cases large multi‐national companies and individual growers who have limited worthwhile commercial uses for their land, collective bargaining is essential. However, collective bargaining alone does not level the playing field sufficiently and there needs to be a mechanism for resolving deadlocks in the cane supply contract negotiating process. A key principle of the National Competition Policy is that competitive markets will generally best serve the interests of consumers and the wider community. A key strength of the Australian Competition and Consumer Act 2010 is in the protections it affords consumers from the misuse of market power by monopoly sellers. The Act is much weaker in the Pathways to Market for GEI Sugar – CANEGROWERS & ACFA 5 Current and future arrangements for the marketing of Australian sugar
Submission 23
protections it affords agricultural producers from the misuse of market power from monopsony (monopoly) buyers of their products. It was concerns about the imbalance of market power and its misuse by regional mill monopolies that underpinned the original establishment of sugar industry regulations by the Queensland Government in 1915. Making the changes recommended here safeguards those longstanding arrangements and secures a commercially workable foundation upon which the industry can continue to grow. E. Any related matters CANEGROWERS and ACFA recommend that growers have the right to a say in how the US quota is managed. Attachments 1. Grower Economic Interest (GEI) Sugar – rectifying an imbalance in market power
2. Pathways to Market for GEI Sugar – a marketing model proposed by growers
3. Information Brief: Sugar Marketing – Policy Framework
4. Fact Sheet: Grower Choice CANEGROWERS & ACFA model compared with Wilmar’s 2013
proposal
5. Fact Sheet: Grower Economic Interest (GEI) Sugar
6. Sugar Marketing – Choice, Rights and Securing the Future
7. Former Deputy Prime Minister and Treasurer Swan – Foreign Investment Decision with
respect to Wilmar’s purchase of Sucrogen Limited
Yours faithfully Paul Schembri Chairman CANEGROWERS Don Murday Chairman Australian Cane Farmers Association
Pathways to Market for GEI Sugar – CANEGROWERS & ACFA 6 Current and future arrangements for the marketing of Australian sugar
Submission 23
GPOBox1032
BRISBANEQLD4001
ABN94089992969
GPOBox608
BRISBANEQLD4001
ABN68009657765
ATTACHMENT1
A. Theimpactofproposedchangesonthelocalsugarindustry,
includingtheeffectongrowereconomicinterestsugar
GrowerEconomicInterest(GEI)Sugar–rectifyinganimbalanceinmarket
power
1. Introduction
Ineachofthesugarcaneproducingregions,thelocalcanegrowingcommunitymustdeal
commerciallywitharawsugarmiller.Inmostregions,asinglecompanyownsallofthe
mills;thereisnofeasiblealternativemarketforcane;andtherearefewifanyworthwhile
alternativestosugarcaneproduction.Withoneexception,themillowneriseitheralarge
multinationalcompanyorlinkedtoalargemultinationalinwhichAustraliansugaraccounts
forasmallpartofitstotalbusinessactivities.Thereisaclearimbalanceineconomic
strengthfavouringthemillingcommunity.
Thisimbalance,characteristicofsugarindustriesaroundtheworldandrecognisedby
governmentsinallsugarproducingcounties,hasresultedinasuiteofregulationsgoverning
thecommercialrelationshipbetweenmillersandgrowersineachofthosecountries.
TheimbalancewasfirstrecognisedinAustraliaintheearlyyearsofthe20thCenturywhen,
intheabsenceofeffectivecompetitionlaws,thethenfederalgovernmentappointeda
RoyalCommissiontoreviewthesugarindustry.Initsreport,theRoyalCommission
expressedconcernabouttheimbalanceinmarketpowerintheindustryandthemill
owner’sabilityto“squeezetheprimaryproducer”.Inlightofthisfinding,asinglechannel
marketingsystemwasintroducedthatensuredtherisksandrewardsflowingfromthe
marketingofrawsugarwereshared.Theregulationsalsoenabledcanegrowerstocome
togethertobargaincollectivelywithmillstonegotiatethetermsandconditionsforthe
supplyofcanetothemill.
WiththeadventofAustralia’snationalcompetitionpolicyframeworkthemarketing
structuresevolved,becomingvoluntaryratherthancompulsory.Nonethelessthe
continuingimbalanceinnegotiatingpowerwasrecognisedwithgrowersauthorisedinthe
QueenslandSugarIndustryAct1999tocollectivelybargainwiththemillforthesupplyof
cane.
Systemswereintroducedtoenablemillsandgrowerstomanagetheirrawsugarpricerisk
independentlyofthephysicalsale.In2013,inresponsetomillsseekingtheabilitytosell
theirshareofthesugarproducedontheirownaccount,andwithCANEGROWERS
agreement,structureswerechangedtoenablethistooccurshouldmillschoosetodoso.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
1
Current and future arrangements for the marketing of Australian sugar
Submission 23
Withthischange,growers’shareofsugarproductioncontinuedtobemarketedthroughthe
longstandingexportchanneland,inthisway,growers’interestswereprotected.
InApril2014,exploitingtherelativelyweakprovisionsoftheCompetitionandConsumerAct
2010(Cth)whichprohibitacorporationwithasubstantialdegreeofpowerinamarket(in
thiscasecombiningregionalmillingmonopolypowerwithmarketing)fromtaking
advantageofthatpowertoeliminateorsubstantiallydamageacompetitor(inthiscase
QSL,themarketerofgrowereconomicinterestsugar)andpreventmarketentryor
deterringorpreventingapersonfromengagingincompetitiveconduct(inthiscasedenying
growerstheabilitytodeterminewhomarketstheirshareofthesugarproduced),Wilmar
Sugarissuedapublicstatementindicatingitsintentiontoexitthecurrentsugarmarketing
arrangementsfromtheendofthe2016season.Shortlyafter,twoothermillinggroups,
MSFSugar(ownedbyThailand’sMitrPholGroup)andTullySugar(ownedbyChina’s
COFCO)alsoannouncedtheirintentiontoexitcurrentmarketingstructuresfromtheendof
the2016season.
Bydenyinggrowersrealchoiceinhowtheirshareofsugarproductionismarketed,this
misuseofmarketpowerisdesignedtounderminethestabilityandintegrityofthe
industry’smarketingstructuresandalterthewayinwhichrisksandrewardsareshared
acrosstheindustryinfavourofthemill.TheseantiͲcompetitiveactionswillhave
ramificationsacrossthewholeindustry,affectingallmillingcompaniesandtheirsupplying
growers.
2. EstablishmentandevolutionofGEIsugar
GrowerEconomicInterest(GEI)sugarhasbeenacornerstoneconceptoftheAustralian
sugarindustrysincethepriceofsugarcanewaslinkedtothepriceofsugar.
2.1. The1900s
ThefirstmajorreviewoftheAustraliansugarindustrybytheCommonwealthGovernment
wasundertakenbyaRoyalCommission4in1912.TheRoyalCommissionhadawideͲranging
briefwhichincluded,amongotherthings,therequirementtoinquireintoandreporton
costs,profits,wagesandpricesintheAustraliansugarindustry.
Intheabsenceoflegislativeguidelines,thedistributionofproceedstothevarioussegments
oftheindustryfromthesaleofsugarwasdetermined,inlargepart,onthebasisofdirect
negotiationsbetweenrefinersandmillersandinturnbetweenmillersandgrowers.Insuch
circumstancestheRoyalCommissionconsideredthatthedistributionofproceedsamong
segmentsoftheindustrycouldbeconsideredtobefairwherethereisstrongcompetition,
wherethereispotentialforcompetitionorfromcollectivebargaining(Brownetal1912).
TheRoyalCommissionobserved:
“Itwouldbefutiletocontendthattheforegoingfactors(competitiveforces)arewholly
inoperativeinAustraliawithrespecttothepricesofsugarcane,rawsugarandrefinedsugar
4
Brown,W.J.,Hinchcliffe,A.,Anderson,R.M.M.,andShannon,M.R.(1912),ReportoftheRoyalCommissionon
theSugarIndustry,GovernmentPrinter,Melbourne,2December.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
2
Current and future arrangements for the marketing of Australian sugar
Submission 23
respectively.Itwouldbenolessfutiletocontendthattheiroperationisreasonablyeffective
asameansofsecuringanequitabledistributionoftheprofitsinthesugarindustry”.
TheRoyalCommissionfoundthatthepriceforbothrefinedandrawsugarwassetby
domesticrefiners.Thepriceforsugarcane,inturn,wassetbythemillowners.
TheRoyalCommissionwasconcernedthatcompetitiveforcesintheAustraliansugar
industrywerenot“effectiveasameansofsecuringanequitabledistributionoftheprofitsin
thesugarindustry”.Itnotedthat,“growersasaclassdonot,inouropinion,receivetheir
fairshareoftheprofitsoftheindustryasawhole”.
Itrecommendedstepsbetakentoensure“squeezingoftheprimaryproducer”didnot
occur.Itreported,“Australianstatesmanshipshouldseektopreventaswellasto
ameliorate–todealwithevilsastheyarisewithoutwaitingforthemtoreachastagewhen
anyremedymustinvolvefarͲreachingsocialandindustrialdislocation”(emphasisgivenby
theRoyalCommission).
TheroleofgovernmentidentifiedbytheRoyalCommissionhasnotchanged.Itis
toestablisharegulatorystructurethatpreventsthemisuseofmarketpower,
addressesmarketfailureandestablishesacompetitivemarket.
NoneofthetradeagreementsAustraliahasenteredintodiminishthisroleor
constraintherightsofeithertheQueenslandorAustralianGovernmentstopass
lawsforgoodgovernancewithintheirrespectivejurisdictions.
In1915theQueenslandGovernmentintroducedtwopiecesoflegislationtocoincidewith
theCommonwealthͲQueenslandsugaragreement:
x SugarAcquisitionAct1915
x RegulationofSugarCanePricesAct1915.
TheSugarBoard,establishedin1923,wasgiventhetaskofsellingthevestedsugar.It
engagedtheColonialSugarRefinerscompanytomarketthesugar.Themajorityofacquired
sugarwassoldintothedomesticmarketandthebalanceexported,largelytomarketsinthe
BritishCommonwealthandmostlyatadministeredprices.Thecombinedeffectsofthe
legislationwastorecognisethatbothgrowersandmillershaveaneconomicinterestinthe
sugarproducedandtoregulatethedistributionofproceedsfromthesaleofsugarbetween
millersandgrowers,toensuregrowersgetafairshare,byregulatingthepriceofcane.
Inoneofthefirstdecisions,theCentralSugarCanePricesBoard5notedtheintentionofthe
QueenslandGovernmentwhenitincreasedthepriceforrawsugar,wastoincreasethe
remunerationofthoseintheindustry,“notonlytobenefitmillersbutalsotoassistgrowers
andotherpersonsengagedintheindustry”.
With1915beingadroughtyear,theharvestwaspoor.Ineffect,theCentralBoard’s
decisionrecognisedthatbothgrowersandmillownershadaneconomicinterestinthe
sugarproducedandensuredthattheimpactsofcropproductionriskswerebornebyboth
canegrowersandmillowners.
55
CentralSugarCanePricesBoard(1916),‘AwardsmadeinaccordancewiththeRegulationofSugarCane
PricesAct1915:BingeraMill,QueenslandGovernmentGazette,Brisbane,5January,75.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
3
Current and future arrangements for the marketing of Australian sugar
Submission 23
AmongstthematterstheCentralBoardwasrequiredtotakeintoconsiderationinsetting
thepriceofcaneweretheestimatedcommercialcanesugar(CCS)contentsofthe
sugarcane;thecrushingcapacityandefficiencyofthemill;andthesellingpriceofsugar,
rawandrefined.
TheCentralBoardintroducedsugarpaymentscalesthatdistributedtheproceedsofsugar
salestwoͲthirdstothegrowersandoneͲthirdtomillownersatbaselevelsofindustry
efficiency.Itwasbasedontheirviewthatthevalueofassetsandthecostsofproduction
felltogrowersandmillownersonatwotooneratio.Thescalesweredesignedtoprovide
incentivestogrowerstoimprovetheCCSincaneandtomillownerstoimprovetheir
recoveryofsucrosefromthecane.
Thesugarcanepaymentscalesreflectedthesugarcanepaymentformula:
Priceofcane=Priceofsugarx0.009x(CCS–4)+constant.
Althoughsubjecttointensescrutiny,includingaspartoftherigorousInvestigationintothe
DistributionofProceedsofVestedSugarconductedbyQueenslandSugarLimitedin1993,
thesugarcanepaymentformulahasremainedapillarofthefinancialrelationshipbetween
growersandthemillstheysupplysinceitsintroduction.Thekeychangehasbeenthe
additionofafewcentspertonneofcanetothepriceofsugarbyincreasingthelevelofthe
constant.In1995,itwasincreasedby$0.50.
Until1996thesugarpricewasdeterminedcollectivelybyQSL(oritspredecessors)asan
averagepricepertonnefromthenetproceeds(grosssalesrevenueslesscostsofoperation)
ofsale.Inthoseyearswhentherewasmorethanonepoolinoperation,thepoolswere
establishedprincipallyonthebasisproductionrisk.
2.2. Domesticmarketchanges
Australia’sdomesticsugarmarketwasderegulatedin1989whentheCommonwealthͲ
Queenslandsugaragreementwasremovedandtheembargoonrawsugarimportswas
replacedbyatariff.
Thefactthatdomesticpriceswerenolongeradministered,butmarketdetermined,caused
the(then)SugarBoardtochangeitsapproachtosellingsugarintotheAustraliadomestic
market.Awareofthepotentialconflictsofinterest,thepossibledilutionofthepriceofraw
sugarthatmightarisewiththeCSRRawSugarMarketingsellingrawsugartotheCSR
refinedsugargroupandtoensuretransparencyinitsdomesticsalesactivities,TheSugar
BoardestablisheditsowninͲhousemarketingteamtomanagethedomesticsalesprogram.
In1996,theQueenslandSugarCorporation(QSC,thesuccessororganisationtoTheSugar
Board)firstintroducedamechanismtoprovideproducerstheopportunitytomanagepart
ofthepricerisktheyfacedseparatelytoQSC’smanagementofthephysicalsalesactivity.
ThisfirstevolutionofProducerPricinganditssuccessorsenabledtherawsugarpricing
functiontobeseparatedfromthephysicalsalesactivity.Themechanismenabled
producerstohedgetheirsugarpriceriskassociatedwiththesugartheyproducedusingthe
NewYorkfuturesmarket(nowtheInterͲContinentalExchange(ICE))eitherontheirown
accountorthroughQSCandtouseQSCtocloseouttheirfuturesmarkettransactionby
linkingitwithaphysicalsalestransaction.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
Submission 23
Thisstructureevolved.In2000,thegovernmentͲownedcorporationQSCwasabolishedand
QueenslandSugarLimited(QSL),anindustryͲownedcompanylimitedbyguaranteewith
ownershipheld50%bygrowers(CANEGROWERSandACFAeachholdingamembership
entitlement)and50%bymills,wasestablished.QSLtookovertheindustrymarketingrole
formerlyundertakenbyQSCandallrawsugarproducedinQueenslandwasvestedinQSL.
ThisevolutionofindustrystructuresalsosawtheestablishmentofSugarTerminalLimited
(STL)asaseparatecompanylimitedbysharesandjointlyownedbygrowersandmillers.
ShortlyafteritsestablishmentQSLintroducedaCallPoolasitsprincipalproducerpricing
mechanism.Thiswasreplacedin2005byaSelfͲManagedPricingSystem(SMPS)providing
pricingoptionsformills.In2006thecurrentQSLpricingplatformwasintroduced.This
latestdevelopmentmakespriceriskmanagementtoolsavailabletobothgrowersandmill
owners,enablingthemtofixpricesthreetofourseasonsbeyondthecurrentseason.
Animportantconsiderationintheintroductionandevolutionofproducerpricingwasthe
calculationofthepriceexposureofmillownersandcanegrowersrespectively.Thecane
paymentformularesolvesthisissue.Inmost6forwardpricingagreementsassociatedwith
canesupplyagreementsagrower’ssugarpriceexposureiscalculatedas:
Sugarexposure(tonnesofsugar)=Tonnesofsugarcanex0.009x(CCS–4).Theconstantis
dealtwithseparatelyinthecanesupplyagreements.
Thismechanismenablesmillownersandcanegrowerstomanagetheirexposuretothe
ICE11rawsugarpriceindependentlyfromeachotherandindependentlyfromQSLshould
theychoosetodoso.
TheRawSugarSupplyAgreements(RSSA)thatQSLhaswitheachmillacknowledgesthe
priceexposureheldbytheirsupplyinggrowers,describingthequantityofsugarasGrower
EconomicInterest(GEI)sugar.
IntheRSSAs,“GrowerEconomicInterestSugarmeansRawSugarforwhichGrowers,
excludingthoseGrowerswhoareRelatedBodiesCorporateofaSupplier,bearthe
priceexposureunderthecanesupplyorotheragreementsbetweentheSupplier
andtheGrower”.
ThesameRSSAsdefineMillEconomicInterestsugar.Thetermsuppliereconomicinterest
sugarisusedbecausemillsareseenassuppliersofrawsugartoQSL.SupplierEconomic
Interestsugarisdefinedbydifference.Itisthetotalamountofsugarproducedlessthe
quantityofGEImade.
IntheRSSAs,“SupplierEconomicInterestSugarmeansthatpartoftheTotalRaw
Sugarforwhich,pursuanttocanesupplyorotheragreementswithGrowers,the
SupplieroritsRelatedBodiesCorporatehavethepriceexposure.Fortheavoidance
ofdoubt,thisexcludesanyRawSugarforwhichaGrower(otherthanaGrowerthat
isaRelatedBodyCorporateoftheSupplier)hasthepricingexposureto”.
6
ThecanesupplyagreementsusedinMackayrefertothetermPercentRecoverableSugar(PRS).Although
differenttoCCS,thedistributionofproceedsisbasedonhistoricalCCS.Italsotakesaccountofincome
derivedfrommolassesandcanefibre.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
Submission 23
2.3. SugarIndustryAmendmentBill2005
In2004theQueenslandGovernmentdecideditwouldderegulatetheindustryandabillwas
introducedtoamendtheSugarIndustryAct1999“toremovestatutoryvestingandto
providetransitionalarrangementstofacilitatetheorderlymarketingoftheQueensland
sugarcrop.”
TheamendmentswereintroducedfollowingtheestablishmentofaWorkingGroupin2004
todevelopvoluntarymarketingarrangementsandworktowardsanewsystemforthe
marketingofrawsugar.AsreflectedintheExplanatoryNotes7totheSugarIndustry
AmendmentBill2005,theHeadsofAgreementbetweentheQueenslandGovernment,
CANEGROWERSandtheAustralianSugarMillingCouncilreachedaheadofthedevelopment
oftheBillrecognisedthatthekeytosuccessinmovingtoanewmarketingsystemwas
continuingthebenefitsandsynergiesofpresentingacoordinatedfacetoQueensland’sbulk
rawsugarcustomers.
ThetransitionalarrangementswhichtheQueenslandGovernmentestablishedwereto
movetheindustryfromlegislativetocontractuallyͲbasedmarketingarrangementsforbulk
exportsales.ItwasinthiscontextthatthepeakindustrybodiesCANEGROWERSandASMC
committedthemselvesandalloftheirmemberstoworkingwithQSLtoassistitremainthe
preferredmarketerandthekeyprinciplesagreedtointhenewmarketingsystemreflected
theindustry’scommitmenttoQSLcontinuingtobetheindustry’sbulkrawsugarexport
marketingcompany8.
ThechangeswereintroducedontheunderstandingthatunderthecontractuallyͲbased
marketingarrangements,thepriceofcanewouldcontinuetobelinkedtothepriceof
sugar.Throughthismechanism,canegrowersandmillownerscontinuedtoshareinthe
riskandrewardsfrombulkrawsugarexportsales.
2.4. VoluntaryMarketingArrangements
In2004millsenteredVoluntaryMarketingAgreementswithQSLtoenableittocontinueas
thesinglechannelexporterofrawsugarfromQueensland.Undertheseagreements
growersandtheirrepresentativeswerelegallyremovedfromdecisionsaboutmarketing
rawsugarproducedinQueenslanddespitethecanepricebeingdirectlylinkedtotheprice
ofrawsugar.
Between2005and2014millsdrovetheevolutionofrawsugarmarketingstructures.First,
thevoluntarymarketingagreementswerereplacedwithrawsugarsupplyagreements
(RSSAs).FollowingadecisionmadebyWilmar,withoutreferencetoitssupplyinggrowers,
thatitwantedtoexporttherawsugaritsmillsproducedonitsownaccount,QSLdeveloped
amechanism(aseparatesalescontractwithWilmar)thatenabledthistooccur.
In2013allmillownerssoughttheabilitytomarkettherawsugarproducedintheirmillson
theirownaccount,independentlyofQSL.MillsimposedsignificantpressureonQSLto
changeitsmarketingstructures.
7
https://www.legislation.qld.gov.au/Bills/51PDF/2005/SugarIndAB05Exp.pdf
AMemorandumofUnderstandingbetweentheQueenslandSugarIndustryandtheQueenslandGovernment
(2005),http://www.daff.qld.gov.au/__data/assets/pdf_file/0006/75903/SugarͲMemorandum.pdf.
8
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
6
Current and future arrangements for the marketing of Australian sugar
Submission 23
QSL,awareofgrowers’economicinterestinthesugaritsolddevelopedaseriesofoptions
andconsulteditsmembers,bothgrowersandmillerstogether.Thisresultedinan
agreementtodevelopanewRSSAimplementingwhatwaslabelledas“OptionB”.This
optionrecognisedbothGrowerandMillEconomicInterestsugaranddefinedthesetwo
termsasabove.TheRSSArecognisedtherightofmillownerstoselltheirMillEconomic
InterestsugarintothedomesticandexportmarketsusingQSLorbyothermeans,asthey
sawfit.GrowerswerenotaffordedthesamerightsintheRSSA.
AlthoughnotpartytotherevisedRSSA,forthefirsttimegrowerrepresentativeswere
involvedinthedecisiontoimplement“OptionB”andinthenegotiationoftheagreement.
AkeyconsiderationinthedevelopmentoftherevisedRSSAwastoestablishthequantityof
sugareachmillwasentitledtoexportonitsownaccount.Theindustry’slongstandingcane
paymentarrangements,asreflectedintheforwardpricingagreementsmillshavewiththeir
growers,providedthesolution.
Canepaymentstructuresmakeitclearthatbothgrowersandmillownershaveaneconomic
interestinthesugarmillsmanufacture.TheRSSArecognisesthisinterest.Itfirstdefines
GEIsugarand,usingthedefinitionofGEIsugar,definesMEIsugarasthedifference
betweenthetotalquantityofsugarmanufacturedatasugarmillandthequantityofGEI
sugarproducedbythatmill.
TherevisedRSSAwithitsmoreflexibleexportmarketingstructureswasagreed,finalised
andsignedbyallmillsinJanuary2014.
2.5. Unilateralmilldecisions–2014
DespitebeinganactivecontributortothedevelopmentofandapartytotheupdatedRSSA,
inApril2014Wilmarannounceditsdecisiontoexitthecurrentsugarmarketing
arrangementswithQSLfromtheendofthe2016season.SimilarannouncementsbyMSF
SugarandTullySugarfollowedshortlythereafter.
Thedecisionstakenbythesemillinggroups,eachmadeindependentlyoftheirsupplying
growers,effectivelywrestedcontrolofthemarketingofallsugar(bothGEIandMEI)
manufacturedintheirmillsfromQSL.Unlessthesemillswithdrawtheirnoticestoexitfrom
theendofthe2016season,thereturnsthatgrowersreceivefortheircanewillbetotally
dependentonthenetreturnthemilltheysupplyreceivesforthesaleoftherawsugarit
manufactures.
WilmarSugar,MSFSugarandTullySugarareexercisingachoiceoverthesugartheirmills
produce.Indoingsothemillers,byexertingtheirregionalmillmonopolypower,are
denyinggrowerstherighttoexercisechoiceoverhowGEIsugarispricedandsold.Theyare
reͲestablishingthecommercialimbalancedescribedbythe1912RoyalCommission.The
decisionalterstheriskprofileoftheindustry,movingitinfavourofmills.Unconstrainedby
regulation,“competitiveforcesintheAustraliansugarindustrywillnotbeeffectiveasa
meansofsecuringanequitabledistributionoftheprofitsinthesugarindustry”.
Thisiscountertotheintentexpressedinthe2005MemorandumofUnderstanding
betweentheQueenslandSugarIndustryandQueenslandGovernment.CANEGROWERSand
ACFAbelievethethreemillingcompaniesdecisionstoexitQSLisanunintended
consequenceoftheremovalofindustryregulationsandcallsontheQueensland
GovernmenttousethepowerithastorestorethebalancebyenactingproͲcompetitive
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
Submission 23
changestotheSugarIndustryAct1999.Thesechangesshoulddefinegrowerandmill
economicinterestsugarandassignrightstogrowersandmillownersinrelationtothe
pricingandsellingoftheirrespectiveeconomicinterestsugar.
3. CommercialunderpinningsofGrowerEconomicInterest
Until2005legislativearrangementssupportedastructureinwhichgrowerssharedthefull
spectrumofrisksandrewardsfromthemarketplace.In2010thecommercialstructures
thatfollowedderegulationcontinuedthisapproach.Thetreatmentofmarketinglosses
associatedwiththe2010seasonisoneillustration.Anotheristhewayinwhichthefull
rangeofmarketingcosts,includingbutnotlimitedtothoseassociatedwithestablishingand
operatingthebulksugarterminalsandthefundingofQSL’srawsugarqualityincentive
scheme,aresharedbetweengrowersandmillowners.
3.1. Marketinglosses–2010
The2010seasoncommencedwithwidespreadoptimismacrosstheindustry.Agoodcane
cropwasinprospectandsugarpriceswerehigh.TheICENo.11March2010rawsugar
futuresbrieflyspikedtoa29yearhighon5January2010.Pricesretreatedforaperiod
beforerecoveringstrongly,movingtheirhighestlevelsince1974.Inthispriceenvironment,
QSLaccelerateditspricing(hedging)activitiesandsalesprogram.Duringthe2010harvestit
becameclearthatsevererainandfloodswouldpreventtheentirethecropfrombeing
harvested.ThispreventedmillsfromdeliveringtoQSLallthesugartheyhadpreviously
indicatedwouldbedelivered.
Withlesssugartodeliverthanplanned,QSLwasrequiredtocloseoutitsfuturescontracts
byliftinghedgesonitsownaccountratherthanhavethehedgesclosedoutthroughfutures
markettransactionslinkedtoaphysicalsalescontract.Itincurredlossesonthosefutures
markettransactions.QSLpassedtheseontomillsintheformofnonͲdeliveryfees.The
millsinturnpassedthemarketinglossesontogrowersintheformofalowercaneprice
throughthecanepaymentarrangements.
Notwithstandingthefactthatgrowerswerenotconsultedindividuallyorcollectivelyby
millswhenthemillsprovidedQSLwiththeirproductionforecastsfortheseason,allgrowers
wererequiredtoshareinthemarketinglossesincurredbyQSL.
ThisdecisionreͲconfirmedthefactthatgrowersandmillerssharedintherisksandrewards
associatedwiththemarketingofsugarproducedinQueenslandandhaveastrongeconomic
interestinthesugarproducedandmarketed.Thenetpriceachievedfromthesaleofsugar
isdirectlylinkedtothepriceofsugarcane.
Adirectconsequenceoftheindustrydebatesurroundingtheapportionmentofthe
marketinglossesbetweengrowersandmillerswasformalacknowledgementbythemilling
sectorthatgrowers’economicinterestinrawsugardoesnotstopwiththedeliveryofcane
toasugarmill.Thateconomicinterestextendstorawsugarmarketingandthereturnsthat
areachievedfromitssale.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
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3.2. Sharingmarketingpremiumsandcosts
AllrevenuesandcostsassociatedwithQSL’soperationsaresharedbygrowersandmills
throughtheoperationofQSL’spools.Allrevenuesarecreditedtosuppliersthroughoneor
moreofQSL’spricepoolsandallcostsincurredinconnectionofrawsugarexportare
chargedbyQSLtoitssuppliersthroughtheoperationofQSL’sSharedPool.
TheSharedPoolcontainstherevenuesQSLgeneratesfromexportsalesthatareinaddition
totherawsugarfuturesprice(ICE11forworldmarketsalesandICE16forUSmarketsales).
Theadditionalrevenuesinclude:
x ThepremiumpaidforQueenslandrawsugarreflectingthevalueofitsfreightadvantage
intotheEastAsianmarketcomparedwiththenextbestalternativesourceofsupply.
x ThevaluepaidforshipmentflexibilitysuchasonͲtimedelivery.
x Thevaluepaidforaccessinghigherquality(inadditiontopolarisation)Australianraw
sugarcomparedwithalternativeproductthatmaybeavailableontheworldsugar
marketwithinthesameshipmentperiod.
x Apolarisationpremium.
x QSLsellsrawsugarontoitscustomersona“cost,insuranceandfreight(cif)”basis.
Othersellersofrawsugarselltheirproducton“freeonboard(fob)”basis.QSLcollects
revenuesfromitscustomerstocovertheseafreightcostsofshippingsugar.
TheSharedPoolalsoreceiveschargesincurredbyQSLinthecourseofcompletingitssales
andcostsassociatedwithQSL’srelatedpoolingactivities.Theseinclude:
x Seafreightcostsofshippingsugar(i.e.thecostofdeliveringrawsugartocustomers).
x Dischargeportcosts(includingchargessuchasthoseforthesupervisionofweighingand
samplingrawsugaratthecustomer’sport).
x Bankingandexecutioncosts(costsofconfirmingLettersofCredit,bankingfees,future
brokerageandothercommissionsincurred).
x Quotapurchases(thecostofacquiringUSquotafrommillingcompaniesthatdonot
supplytoQSLundertheRSSA).
x AnyothercoststhatrelatetomarketingactivitiesofQSL,whichcanincludecostsfor
unwindingforwardpricingandsalesifthesetonnagesarenotreceived(suchasoccurred
in2010season).
x Profitsassociatedwiththirdoriginsugartransactions.
x Thecostofsugarstorageandhandingatthebulksugarterminals.
x ThecostofQSL’srawsugarqualitymanagementscheme.
x Rawsugarbrandallowances.
x QSL’sdirectoperatingcosts(suchasrent,wagesetc).
x Thefinancingcostsoftheadvancepaymentsschemeandfundingoffutures’margins
associatedwithforwardpricing
Generally,theserevenuesandcostsarepooledandthecostsareallocatedtopoolspro̻
rata,basedonthetonnageineachpool.However,somerevenuesandcostsareallocated
tospecificpools,forexamplethoseassociatedwithsalestotheUSmarketareallocatedto
theUSQuotaPool.
Operatingtheexportmarketingsystemisasignificantmanagementtask.TheSharedPool
receivesinexcessof$250millioninrevenueanddefraysasimilaramountincostseachyear
(Figure1).Inmanagingthisaspectofitsexportmarketingoperation,QSLstandsatarm’s
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
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lengthfromWilmarandotherAustralianmillingcompaniesandtheirrelatedparties.QSL
independentlymanagestheserevenuesandcostsinaccordancewithitsconstitutional
requirementtoactinthebestinterestsoftheindustryandtomaximisereturnsbefore
returningthenetsalesproceedstoindustry.Itdoesnotfacetheconflictsofinterestthat
canbeassociatedwithtransactionsmadebetweenrelatedpartiesinthesupplychain.
1. SharedPool–a$250Mmarketingtask
500
$/t sugar
480
460
440
420
Revenues
Costs
400
ThefinalpriceQSLdeclaresforeachofitspoolsisdeterminedonceall(futuresandother)
revenuesfromthesaleofthesugarhavebeencollectedandallrelevantexpensesincurred
havebeendeducted.
3.3. Investinginindustryinfrastructure
Theindustrymadeasignificantinvestmentintheestablishmentandoperationofbulkraw
sugarstorageandhandling.Thisinvestmentwasfinancedbypoolrevenuesandeffectively
bornetwoͲthirdsbygrowersandoneͲthirdbymillers.Itintroducedasignificantstructural
changetothewaysugarwashandledandmovedtheburdenofprovidingrawsugarstorage
frommillstothewiderindustry.
ThroughtheQSLSharedPool,growerscontinuetosharethecostsofmaintainingand
operatingthebulksugarterminals.
Onebenefitoftheindustry’sstoragecapacityisthatitprovidesflexibilityoverthetimingof
rawsugarsales.WithBrazil,theworld’slargestrawsugarexporter,theworldsugarmarket
frequentlyhasapricestructurethatoffersincentivesforrawsugarproducerstostoresugar
producedinthesecondhalfofthecalendaryearforsaleinthefirsthalfofthefollowing
calendaryear.Pricesavailablefor2014and2015werenoexception(Figure2).
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
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On29AugusttheICE11rawsugarfuturesmarketofferedthosewhoareabletostoresugar
apriceincentiveofUS1.95c/lb(AUD46.23/t)toholdthesugarfordeliveryinMarch2015
ratherthaninOctober2014.AfurtherpriceincentiveofUS0.44c/lb(AUD10.43/t)was
availabletodeliverthesugaragainsttheMay2015contract.
Thismarketstructure,combinedwiththestoragecapacitypaidtwoͲthirdsbygrowersand
oneͲthirdbymills,providesopportunityforsellersofQueenslandsugartoearnsignificant
tradingprofits.AllthetradingprofitsQSLgeneratesarepaidintotheSharedPooland
distributedtogrowersandmillersonthebasisoflongstandingpaymentarrangements.
UnderWilmarSugar’smarketingproposal,50%ofthetradingprofitsarecapturedby
WilmarSugartradingand50%bytheJMCwhichthendistributestheprofitstoWilmar
SugarAustraliaandgrowers.
2. ICE11RawSugarPrices(29August2014)
4. Growersworkhardtoimprovethesugartradingenvironment
Withthepriceofsugarcanedirectlylinkedtothepriceofsugar,growershaveactively
engagedinalleffortstoimprovethepricesreceivedfromthesaleofAustralianrawsugar.
Recognisingtheireconomicinterestinthesugarproducedgrowers,workingcloselywith
mills,werestronglyinvolvedinthesettingofsugarpricesintheregulatedprice
environment,bothdomesticallyandinternationally:
x
Domesticpriceswereadministrativelydetermineduntil1989.
x
InternationallypriceswereheavilyinfluencedbyGovernmentpolicy.
o FormanyyearspricesforAustralia’ssugarsalestothemajormarketsintheBritish
CommonwealthweredeterminedthroughaBritishCommonwealthSugar
Agreement.
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Current and future arrangements for the marketing of Australian sugar
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o AustraliaparticipatedinthevariousInternationalSugarAgreements,includingthose
thatrequiredtheindustrytoinvestinadditionalrawsugarstoragecapacity.
Withthefailureofinternationalagreementstoeffectivelyregulateworldsugarprices,
growersactivelylobbiedinfavourofandsupportedactionstakenbytheAustralian
Governmenttoremovedistortionsfromtheworldsugarmarket.
x
In1989asuccessfulcasewastakenintheGATTagainsttheUSsugarregime.
o ThiscasesecuredAustralia’squotaaccesstotheUSmarketandpreventedtheUS
Governmentfromimplementinganexportsubsidyprogramforitssurplussugar.
x
Throughoutthe1990s,growerswerestrongadvocatesfordisciplineonagriculturetobe
includedintheUruguayroundoftradetalks.
x
In1999theAustralianindustrywiththefullsupportofgrowerorganisations,was
instrumentalinthecreationoftheGlobalSugarAlliance.
x
In2005theWTOruledinfavourofAustralia,BrazilandThailandfindingthatallsugar
producedbytheEUwassubsidisedandthattheEUwasinviolationofitsWTOsugar
exportsubsidycommitments
CANEGROWERSprovidesthemanagementresourcesonbehalfoftheindustryandactively
supportstheAustraliangovernment’stradeagenda–multilateral,regionalandbilateral.
5. Interdependenceofgrowersandmillers
Growersworkcloselywithmillstoensurethelongtermsustainabilityoftheindustry.The
mostrecentillustrationofthisistherestructuringoftheindustry’sresearchand
developmentactivitiesandtheestablishmentofafinanciallysustainablebasisforR&Dto
continue.
Thegrowingandmillingsectorshavelongrecognisedtheirinterdependence.Growersrely
onthemilltowhichtheysupplyfortheefficientprocessingoftheircaneandmillsrelyon
canegrowersforasupplyofcanetotheirfactories.Acriticalmassofcaneproductionina
regionisessentialfortheeconomicviabilityofsugarproductionandrelatedactivitiesina
region.Withtheplantingofsugarcanebeinganinvestmentmadeforafiveyearcropcycle,
forthegrowthanddevelopmentoftheindustrygrowersneedconfidenceandtrustinthe
longtermrelationshipwiththemilltowhichtheysupply.
ThedecisionstakenbyWilmar,MSFSugarandTullySugartoexitQSLhaveshakenthis
relationshiptoitscore,underminingconfidenceandreducinggrowers’appetitetoinvest.
6. Millmarketingproposals
ToͲdate,onlyWilmarSugarhasputforwardapossiblemodelforhowitplanstomarket
sugarforthe2017seasonandbeyond.MSFSugarandTullySugarhavenotclearly
articulatedtheirmarketingmodelsfor2017andhavenotengagedwithgrowersinthe
developmentofthosemodels,whatevertheymaybe.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
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6.1. Wilmar’smodel
ThefeaturesofWilmarSugar’sproposedapproachtomarketingare:
1. Tomarketalloftherawsugarproducedinitsmills.
x InmakingthisdecisionWilmardeniesgrowers’economicinterestinthesugar
producedatitsmills
2. WilmarSugaracknowledgesandascribestogrowersanotionalsugarexposure(NSE).
x ItappearsthatWilmar’scalculationofNSEisequivalenttothecalculationofGEI
sugardefinedintheRSSA.
3. WilmarSugarisproposingthatgrowershaveNOchoiceinhowtheirshareofthesugar
(eitherGEIorNSE)issold.
4. Wilmarplanstoestablisha“JointMarketingCompany”(JMC)tooverseethemarketing
ofitssugar
x TheBoardoftheJMCwillincludegrowerrepresentatives.
5. TheJMCwillnotmarketthesugarandwillnotmakedayͲtoͲdaymarketingorpricerisk
managementdecisions.Itwillenterafifteen(15)yearnonͲcontestableservices
agreementwithWilmarSugarTrading(amemberoftheWilmarGroup)tomarketthe
sugar.
x Growerswillnotbeinvolvedinanymarketingdecisions.
6. TheJMCwillenteraseparateservicelevelagreementwithWilmarSugarAustraliato
managetheflowofnetproceedsfromsaletogrowers.
PrincipalamongsttheCANEGROWERSandACFAconcernswiththeWilmarSugarmodelis
itslackoftransparencyandtheriskofintraͲcompanytransferpricingtowhichitexposes
growers.WilmarSugar’sdocumentsmakeitclearthatWilmarSugarTrading’s(WST)
activitieswillnotbeopentogrowerscrutiny,norwillitstradingbooksbesubjecttogrower
audit.EvenifWST’stradingoperationswereopentogroweraudit,thatauditwouldonly
examinetheactualtransactionsmade.Itwouldnotrevealanarbitrageorotherfutures
marketrelatedtransactionsthatWSThasengagedinandmadeonthebasisofits
knowledgeofitsowndealingswiththeQueenslandcomponentofitstradingportfolio.
WilmarSugar’smodelenablestheWilmarGrouptocapturemarketrewardswhilesharing
theassociatedriskwithgrowers.WithQSLsellingsugar,growerssharein100%ofthe
profitsgeneratedfromQSL’stradingactivities(Figure3).WilmarSugar’sdocumentation
makesitclearthattheJMCwillshareinonly50%ofthetradingprofitsWilmarSugar
TradinggeneratesonitstradingactivitiesassociatedwithsugarproducedinQueensland.
Thisdilutesthereturnsgrowerswillreceivefromtradingprofits.
x
x
UnderQSL’smarketingstructure,alltradingprofitsarepaidintotheSharedPooland
distributedtogrowersonthebasisofcanepaymentarrangements.Growersare
entitledtoandreceiveapproximatelytwoͲthirdsofthetradingprofits.
UnderWilmarSugar’smodel,WilmarSugarTradingretains50%ofthetradingprofits
andpaystheremaining50%totheJointMarketingCompany.TheJMCthendistributes
theprofitsonthebasisofcanepaymentarrangements.Thismeansgrowersareentitled
toandreceiveapproximatelyoneͲthird(50%oftwoͲthirds)ofthetradingprofits.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
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3. ProfitSharingforGEIsugar–QSLmodelcomparedwithWilmarJMC
Note:WSTreferstoWilmarSugarTradingandWSAreferstoWilmarSugarAustralia.
Wilmar’smodelheavilyskewsthereturnstoWilmar.TheWilmarGroupreceivestwoͲ
thirdsofthetradingprofitswhilegrowersreceiveoneͲthird.ThismeansWilmarwillneed
togeneratetwicethetradingprofitsthatQSLgeneratesforgrowerstoachieveabetter
returnfromtheWilmar’sproposedmarketingapproach.
Asnoted,the1912RoyalCommissionwasconcernedthatthecompetitiveforcesinthe
Australiansugarindustrywerenoteffectiveasameansofsecuringanequitabledistribution
ofprofitsintheindustry.Wilmar’sproposedmarketingstructureshowsthatintheabsence
ofregulations,millownersareagainlookingtocaptureagreatershareoftheindustry’s
profitsattheexpenseofgrowers.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
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Current and future arrangements for the marketing of Australian sugar
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B. Equitableaccesstoessentialinfrastructure
In2010,thenDeputyPrimeMinisterandTreasurerWayneSwanannounced;
TodayIapprovetheapplicationbyWilmarInternationalLimited(Wilmar)toacquire,
throughitsAustraliansubsidiary,WilmarAustraliaPtyLtd,fullownershipofSucrogen
Limited(Sucrogen)fromCSRLimited(CSR).Thisapprovalissubjecttolegallyenforceable
undertakings.
TheundertakingsprovidedbyWilmarwill,insummary:
RestrictSucrogen'sabilitytoinfluencekeydecisionstakenbytheindustry-ownedexport
marketingbodyQueenslandSugarLimited(QSL)ifSucrogenwastoannouncea
terminationofmarketingactivitieswithQSL;and
EnsurethatifSucrogenacquiresaninterestinstrategicsugarstorageinfrastructure
ownedbySugarTerminalsLimited(STL),itmustoperatetheinfrastructurewithproper
regardtothebroaderinterestsoftheindustryandotherparticipants.
TheseundertakingsensureconsistencywithAustralia'snationalinterestprinciplesand
areaconditionofmyapprovalundertheForeignAcquisitionsandTakeoversAct1975(as
setoutinAttachmentA)…
WilmarhasinformedFIRBthatitdoesnotanticipateanysignificantchangesto
Sucrogen'soperationsanditsmanagement,withcurrentemploymentconditions
remainingunchanged.Wilmarhasalsoadvisedthatifitsgrowthplansareachieved,
therewillbeincreasedjobsintheAustraliansugarindustry.
AttachmentAtotheTreasurer’sstatement,‘UndertakingsbyWilmarInternationalimposed
asapprovalconditionsundertheForeignAcquisitionsandTakeoversAct1975,’states;
Wilmardoesnotcurrentlyhaveanyintention,whetheritselforthroughSucrogen,toseek
toacquirefromSTLaleaseofanyofSTL'ssugarterminalinfrastructure;
If,contrarytoitsexistingintention,Wilmardoes,throughSucrogenorotherwise,seekto
operateSTL'ssugarterminalinfrastructure,eitherthroughalease,directownershipor
othermeans,thenWilmarwillprovidethesameopenaccessarrangementstoSTL'ssugar
terminalinfrastructurethatarecurrentlyprovidedbyQSL.
WiththeterminationofitsRSSAwithQSLanditssubsequentattemptstointegrateits
growersintoitssupplychainandawayfromtheindustryownedQSL,Wilmarhasmadea
significantchangetoitsoperations.
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Current and future arrangements for the marketing of Australian sugar
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C. Foreignownershiplevelsintheindustryandthepotentialto
impactontheinterestsoftheAustraliansugarindustry
CANEGROWERSandACFAarecomfortablewithforeigninvestmentinAustraliansugar
millingassets,providingthat,asforanyotherinvestor,theforeigninvestormakes
themselvesavailabletogrowersforthepurposeofnegotiation,ingoodfaith.
ThreeoutoffourforeignͲownedmillershavenowwithdrawnfromQSL.Wilmarwithdrew
on21May2014.MSFSugarwithdrewon27JuneandTullySugaron30June.WilmarSugar
AustraliaisasubsidiaryofWilmarInternational,apubliccompanylistedontheSingapore
stockexchange.MSFSugarLimitedisasubsidiaryofMitrPholSugarCorpLtdofThailand.
TullySugarLimitedisawhollyownedsubsidiaryofthestateͲownedChineseagribusiness
companyCOFCO.
Indealingswithallthreecompanies,growersarefindingitdifficulttoachievesupply
contracts(whichareastatutoryrequirementundertheQueenslandSugarIndustryAct
1999),wheretheyareabletocontrolanddirectthemarketingandpricingoftheireconomic
interest.ItisimportantthatadisputeresolutionprocessincorporatingtheQueensland
Government’sCommercialArbitrationAct2013isestablishedtoresolvepreͲcontractual
issues.
AnalternativeapproachcouldbeamandatoryindustrycodeundertheCompetitionand
ConsumerAct2010.
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Current and future arrangements for the marketing of Australian sugar
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D. Whetherthereisanemergingneedforformalpowersunder
Commonwealthcompetitionandconsumerlaws,inparticular,
whetherthereareadequateprotectionsforgrowerͲproducers
againstmarketimbalances
1. CommonwealthCompetitionandConsumerAct2010(CCA)
TheunconscionableconductprovisionsoftheCCAhavenotbeenahelpfulsourceof
protectiontoproducersintheagriculturalsectorandgovernmentinterventionisrequired
toprovidetransparencyinthesupplychain.Thisincludesrecognitionthatcertainclassesof
suppliers,suchassugarcaneproducers,arepredisposedtosufferingfromaspecial
disadvantagebecauseoftheirproductionofsugarcane,aperishablegood,andexposureto
aregionalmonopsony(monopolybuyer)ofthatproduct.
Whenconsideringthemisuseofmarketpower,theinterventionmust:
i.
Levelthebalanceofmarketpowerinnegotiationsfortheintermediateproduct(which
inthecaseofthesugarindustryissugarcane)betweencontractingparties,primary
producersandtheregionalmonopolymilltheysupply.
ii. Ensuretransparencyinthetransmissionofmarketpricesalongthesupplychainand
doesnotallowforfinalmarketriskstobebornebytheprimaryproducerwhenthe
marketrewardsarecapturedbytheprocessoroftheprimaryproduct.
iii. Providetransparencyofcontractprocessestoallowforcomplianceandenforcement
“audits”toensuretherehasbeennomisuseofmarketpower.
AnimportantreasonforGovernmentactionistopreventoramelioratetheeffectsantiͲ
competitiveconductislikelytohaveinthemarketplace,ratherthanwaitingtoremedythe
situationwhenthemarketbehaviourhascausedfarͲreachingsocialandeconomic
dislocation.
AprocessthatgavetheACCCgreaterpowertoregulateantiͲcompetitivebehaviourand
imposepenaltieswhereantiͲcompetitivebehaviourhasbeenfoundwouldshiftthe
decisionsframeworkfromthejudicialsystemtoaregulatorysystem,makingitmore
accessibletosmallproducersfacinglargemultinationaladversaries.UntiltheACCChas
thosepowers,stategovernmentinterventionisbothwarrantedandconsistentwiththe
centraltenetsofNationalCompetitionPolicy.
1.1Marketpower
Inmostcases,thereisnotamarketfortheacquisitionofcaneandthesupplyofcane
crushingservicestogrowerswithinaregionsurroundingeachmill,whichencompassescane
farms,forwhichitiseconomictodelivercanetoacompetingmill.
Assugarcaneisexpensivetotransportandhighlyperishable,needingtobedeliveredtoa
sugarmillwithinapproximately18hoursofharvesting,thereis,innearlyallcases,onlyone
millineachsuchmarket.Asthecapitalcostsofdevelopinganewmillmakenewentry
uneconomic,theownerofthemillhasclearmarketpowerandcanegrowersinmost
regionshavenochoicebuttosupplytheircanetotheirlocalmonopsonistsugarmiller.
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Current and future arrangements for the marketing of Australian sugar
Submission 23
Thisisthecasefortheregionswiththeexceptionofaminorityofgrowersatthejunctionof
somemillingregions,e.g.TablelandandMossman;SouthJohnstoneandTully;Proserpine
andMackay;PlaneCreekandMackay;BundabergandIsis;RockyPointandCondong.
2.2Takingadvantageofmarketpower
Therearguablycouldbeatakingadvantageofmarketpower,asitwouldbeprofitablefora
monopsonistmilltorefusetoacquirecanebecauseitknowsthatitsmarketpowerissuch
thatcanegrowerswillpracticallyhavetosupplyit.
3.3Prohibitedpurpose
WheremillshaveterminatedtheirQSLrawsugarsupplyagreement,seekingtoestablish
theirownmarketingoperations,withQSLhavingareducedroleinmarketing;anyrefusalto
dealwithgrowersonabasiswhichallowsQSLtocompetewithamillintheQueensland
marketforsugarexportingandmarketingservices,raisesthepossibilitythatthismay
involveapurposeofdamagingQSLordeterringQSLfromcompetingwithamillinrelation
toexportingandmarketingservicesforrawsugarproducedinaregion.
4.Commercialdisputeresolution
Aproblemfacedincanesupplycontractnegotiationsisthatthereisnorecoursetoa
commercialdisputeresolutionsystemifagreementcannotbereached.
ArecentexampleisthatdespiteanumberofsignedlettersfromTullySugaranditsowner
COFCO,TullySugarhasnotagreedtoincludeadisputeprocessinthedevelopmentofthe
termsofthecollectivecanesupplyagreement.
Indealingswithallthreecompanies,growersarefindingitdifficulttoachievesupply
contracts(whichareastatutoryrequirementundertheQueenslandSugarIndustryAct
1999),wheretheyareabletocontrolanddirectthemarketingandpricingoftheireconomic
interest.Withthecollectiveagreementunresolved,theonlychoicegrowershadifthey
wishedtosupplycaneforthe2014season,wastosignanIndividualCaneSupplyContract
withthemill.
Itisimportantthatadisputeresolutionprocesssuchasonethatincorporatedthe
QueenslandGovernment’sCommercialArbitrationAct2013isestablishedtoresolvepreͲ
contractualissues.
AnalternativeapproachcouldbeamandatoryindustrycodeundertheCompetitionand
ConsumerAct2010.
Thisisstrongevidenceofthemillexercisingitsregionalmillmonopolypowerandthe
imbalanceinnegotiationsbetweengrowersandmills,evenwhenagreementshave
previouslybeenenteredintoingoodfaith.
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
18
Current and future arrangements for the marketing of Australian sugar
Submission 23
E. Anyrelatedmatters
QSLpresentlymanagesAustralia’squotaaccesstotheUSmarketforsugarbyaccumulating
allcertificatesofquotaeligibilityissuedbytheUSandallocatedinAustraliabythe
DepartmentofAgriculture.Thisensuresefficiencyandtransparencyinsupplytothequota
constrainedUSmarket.IndoingsoitensuresallAustraliaparticipantsmillsandgrowersare
abletooptimiseaccesstotheUSmarket.Thefullbenefitofthisaccessissharedamongst
allproducersthroughlongstandingpoolingarrangements.
CANEGROWERSandACFArecommendthatgrowershavetherighttoasayinhowtheUS
quotaismanaged.
End
GEISugar:rectifyinganimbalanceinmarketpower–CANEGROWERSandACFA
19
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment 2
Pathways to Market for Grower Economic Interest (GEI) Sugar
A marketing model being proposed by growers
P.T.
O.
QSL is governed by independant
board, selected by committee
of 2 grower reps, 2 miller reps.
• Mackay Sugar
Manages ‘3+1 pillars’
• MSF Limited
•
•
•
•
• Wilmar
• Bundaberg Sugar
pricing
logistics
financing
sales
(for nominated MEI & GEI Sugar)
$
• Isis Central Sugar Mill
• Heck & Sons
• Tully Sugar
$
MEI
$
FOB sales
contracts
GROWERS
SUPPLY
CANE
MILL CO.
SUPPLY
SUGAR
QSL
$
SELL
SUGAR
QSL Export
sales
CSA
(cane supply agreement)
• Define GEI (Grower Economic
Interest) sugar as in RSSA &
establish grower rights and
clear links to the RSSA
• Term rolling five (5) years,
reflecting crop cycle
• Include reference to RSSA - Growers
nominate where GEl sugar is
marketed, either QSL or Mill Co.
• All mills offer full range of
QSL pricing options
RSSA
(raw sugar supply agreement)
• GEI sugar defined in RSSA & grower
rights confirmed
- Growers party to RSSA
- Include reference to CSA /
Pricing Agreement
- Grower nominated pathway to
market for GEI sugar confirmed.
• Term rolling five (5) years
• Unchanged raw sugar
delivery logistics & raw sugar
quality arrangements
• Restructure QSL as grower
marketing company
QSL Marketing Arrangements
FOB (free onboard) Sales Contracts
(to mills who market their MEI (Mill
Economic Interest) Sugar & GEI sugar
where grower makes the nomination)
QSL Sales Contracts
(to export customers)
• GEI Sugar
• MEI
EXPORT
CUSTOMERS
Current and future arrangements for the marketing of Australian sugar
Submission 23
Pathways to Market for Grower Economic Interest (GEI) Sugar
P.T.
O.
A marketing model being proposed by growers
Objective
To provide cane payment security through a stable marketing platform that features a stable
grower-miller risk/reward profile, that is transparent,not open to the abuses of intra-company
transfer pricing and provides growers Real Choice over who sells and prices GEI sugar.
Central Principle
CSA Key Terms
RSSA Key Terms
• Defines GEI sugar, establishes grower rights, and links to RSSA
• Marketing: Grower determines how GEI sugar is priced and sold
- Grower may elect to price and market sugar with their mill
or the central marketing agent
• Pricing: Mills offer a full suite of QSL pricing products to all
growers with no add on costs
• Term: five (5) years – reflecting crop cycle
• Logistics: All sugar (GEI and Mill Economic Interest (MEI))
passes through the central marketing agent
• GEI sugar definition unchanged, link to CSA maintained
• Marketing: Grower nominated pathway to market for GEI
sugar confirmed
• Term: five (5) years—reflecting crop cycle
• Logistics unchanged: All sugar (GEI and Mill Economic Interest
(MEI)) passes through the central marketing agent
• Restructure QSL as a grower marketing company
• CANEGROWERS to be a party to the RSSA
Growers decide who sells GEI sugar
CSA contains grower rights over GEI sugar
RSSA reflects grower GEI sugar decision
GROWERS
GROWERS
GROWERS
MILLS
CSA
Growers’ right to determine who sells GEI sugar and how that sugar
is priced is embedded in Cane Supply and Related Agreements
(CSA) with those rights linked to and reflected in the Raw Sugar
Supply Agreement (RSSA).
CSA
GEI
QSL
GEI
Mill Co.
QSL
GEI
Mill Co.
QSL
Mill Co.
RSSA
SELL
SUGAR
SELL
SUGAR
SELL
SUGAR
SELL
SUGAR
SELL
SUGAR
SELL
SUGAR
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment 3
Information Brief
Sugar Marketing – Policy Framework
Call for action
CANEGROWERS is requesting that the Queensland
Government introduces a legislative solution that:
• Recognises the economic interest in sugar by both players:
◦◦ Grower Economic Interest (GEI) sugar.
◦◦ Mill Economic Interest (MEI) sugar.
• Provides for genuine market choice by giving:
◦◦ Growers the right to determine how
GEI sugar is priced and sold.
◦◦ Mills the right to determine how MEI
sugar is priced and sold.
• Clearly defines GEI and MEI sugar:
◦◦ Grower Economic Interest sugar is raw sugar for
which Growers, excluding those Growers who
are Related Bodies Corporate of a mill, bear the
price exposure under the cane supply or other
agreements between the Supplier and the Grower.
◦◦ Mill Economic Interest sugar is the total of raw
sugar that a mill produces for which the mill bears
the price exposure. For the avoidance of doubt,
this excludes any Raw Sugar for which a Grower
(other than a Grower that is a Related Body
Corporate of the mill) has the pricing exposure.
• Increasing the level of competition in the
market is consistent with the principles
of National Competition Policy.
• The regulatory regime introduced in the early years
of the 20th century to address the commercial
imbalance in market power that favours mills
over growers was dismantled in 2006.
◦◦ The regulations were removed in a very short timeframe
without taking full account of the underlying monopoly
market structure and the likely market failure.
◦◦ Unconstrained by regulation, mills are again exerting their
regional mill monopoly power at the expense of growers.
• A key issue for government is the establishment
of a regulatory framework that builds
confidence and encourages investment
in both the milling and growing sectors to
build a strong industry for the future.
◦◦ Mills would be unable to exert their regional
mill monopoly power and engage in behaviour
that denies growers the right to determine
how their GEI sugar is priced and sold.
◦◦ Grower confidence and their appetite for
investment in the industry would be restored.
Headline items
Policy framework
• This approach does not alter the ownership of sugar.
• CANEGROWERS is calling for pro-competitive
intervention by the Queensland Government
to overcome the market failure caused by mills
exerting their regional mill monopoly market
power in an unregulated segment of the market.
• Recognition of rights to GEI and MEI sugar
overcomes the current imbalance in market power,
removes mills’ ability to exert their regional mill
monopoly power and increases competition in the
market for raw sugar produced in Queensland.
• The Sugar Industry Act could be amended
to restore the commercial balance between
growers and the mill they supply and makes
sure the mills do not engage in anti-competitive
practices and market manipulation.
• By establishing a light but effective
pro-competition regulatory framework, government
would restore the industry’s confidence to
continue to invest in and build a strong future
for this important Queensland commodity.
◦◦ This is not a call to restore a mandatory single desk,
but a call for regulation to address market failure by
offsetting the power of regional mill monopolies.
• Such a regulatory framework would increase, not
diminish, the level of competition in the sugar
market and, in doing so, would overcome the issues
associated with growers being a captive supplier
of cane to a regional mill monopoly processor.
• The basic framework increases competition
for sugar, in doing so it increases the
effective level of competition for sugarcane
and overcomes potential NCP issues.
• It is not unusual to see government intervention
in industries where a natural monopoly exists.
Page 1
Current and future arrangements for the marketing of Australian sugar
Submission 23
Information Brief
Background
Wilmar’s proposal
With COFCO, MSF Sugar and Wilmar all having
given notice to QSL the future of QSL itself is
in question. The three companies are riding
roughshod over the Queensland Government’s
own efforts led by Minister McVeigh and supported
by CANEGROWERS and ACFA to find a workable
solution that looks after the rights of growers.
• Wilmar’s proposed structure purports to
involve growers in marketing decisions.
But the marketing of Wilmar’s sugar will be
undertaken by a separate Wilmar entity based
in Singapore. It will report to growers, but not
involve them in any marketing decision.
The decisions made in board rooms in Beijing, Bangkok
and Singapore, each taken in isolation of growers:
• Deny growers have any rights in
the raw sugar produced.
• Are designed to enable profits to be taken off-shore.
• Wilmar Sugar Trading’s activities will not
be open to grower scrutiny, nor will its
books be subject to grower audit.
MSF Sugar and Tully Sugar proposals.
• Neither MSF Sugar (Mitr Phol) nor Tully Sugar (COFCO)
have tabled proposals for how they see marketing
arrangements work for the 2017 and future seasons.
• Lack transparency and open growers to the
risk of intra-company transfer pricing.
• Overturn longstanding arrangements
in the way market risks and reward are
shared between growers and mills.
• Dent growers choice in how their share
of the sugar produced is marketed.
• Threaten QSL and in doing so impacts
growers across the state, both those supplying
Wilmar and those supplying other mills .
• Diminish the value of raw sugar sales from Australia by
commoditising the product and destroying the value
QSL has built in taking a branded product to market.
Page 2
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment 4
Fact Sheet
Grower Choice
CANEGROWERS & ACFA model compared with Wilmar’s 2013 proposal
CANEGROWERS & ACFA—Grower Choice
“Pathways to Market GEI Sugar”
Wilmar—Grower Choice
(no longer on the table)
Defines Grower Economic Interest (GEI) sugar in
Cane Supply Agreement (CSA)
Denies Growers Economic Interest in the sugar
produced
Recognises Mill Economic Interest (MEI) sugar
MEIsugar = TOTALsugar - GEIsugar
Recognises Mill Economic Interest (MEI) sugar
MEIsugar = TOTALsugar - GEIsugar
Assigns grower rights to determine how GEI sugar
is priced and sold detailed in CSA
Acknowledges growers have a notional sugar
exposure (NSE)*
*NSE is an amount of sugar equivalent to GEI sugar
Growers choose the pathway to market for their
GEI sugar with all or part directed to either the mill
or central marketer
Growers choose the pathway to market for their NSE
with all or part directed to either the mill or central
marketer
Links to Raw Sugar Supply Agreement (RSSA) with
QSL to give growers a say in the future of QSL
Does not link CSA to RSSA. Denies growers a say in
the future of QSL
Term 5 years
Term 5–6 years
QSL restructured so that marketing activities
overseen by grower representatives
QSL not restructured, mills oversee QSL marketing
activities
Transparency—choice in marketer quaratines
growers from intra-company transfer pricing
Transparency—choice in marketer quarantines
growers from intra-company transfer pricing
Ensures the risks and rewards from the marketplace
are shared by growers and millers
Enables a sharing of market risks and rewards
Coordinated logistics—all sugar passes through
QSL
Coordinated logistics—all sugar passes through
QSL
QSL operates in best interests of the industry
Wilmar operates in best interests of Wilmar
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment 5
Fact Sheet
Grower Economic Interest (GEI) Sugar
Wilmar’s withdrawal from QSL comes with a statement
that “growers do not have any legal or contractual rights
over the sugar.” This is a denial of longstanding industry
structures.
and growers’ share. The RSSA confers on mills the ability
to sell their MEI sugar through QSL or other pathways.
The next logical step is for growers to have the same
rights to choose who sells their GEI sugar.
A 1912 Royal Commission expressed concern about the
imbalance in market power in the sugar industry, noting
that mills could ‘squeeze the primary producer’. This
gave rise to a system that recognised grower rights and
ensured growers and mill owners shared the risks and
rewards from raw sugar marketing.
Wilmar’s ‘Grower Choice’ sugar marketing proposal (8
July 2013) refers to growers’ Notional Sugar Exposure
(NSE). The calculation of a growers’ NSE appears to be
equivalent to the calculation of a growers’ GEI sugar.
Under sugar industry regulations the price of cane was
directly linked to the price of sugar.
The proceeds from sugar sales were distributed
based on the value of assets contributed and costs of
production, and were shared generally on a 2/3 grower
and 1/3 miller, at base levels of industry efficiency. This
concept was reflected in the cane payment formula:
Price of cane = Price of sugar x 0.009 x (CCS – 4),
where CCS is a measure of the amount of recoverable
sugar in the cane.
Embedded in the formula is an incentive for growers
to produce more and higher quality cane and mills to
maximise the extraction of sugar from that cane. The
formula was premised on the then Sugar Board (now,
QSL) declaring a price for sugar.
In recent years, pricing structures have evolved and
individual growers and millers can manage their own
raw sugar price exposure. The cane payment formula
has also changed. As reflected in each of Wilmar’s Cane
Supply Agreements, it apportions the rights to price the
raw sugar produced between the mill and its supplying
growers. But the intent of the original sharing has
been largely preserved with approximately 2/3 of the
sugar produced from a growers cane apportioned to
the grower for pricing and 1/3 apportioned to the mill.
Grower sugar = Tonnes of cane x 0.009 x (CCS-4).
The Raw Sugar Supply Agreement (RSSA) that Wilmar
has with QSL describes growers’ interest in sugar as
GEI sugar. Mill Economic Interest (MEI) sugar is the
difference between the total amount of sugar produced
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment 6
Sugar marketing:
The State Government can and must take action
Cane growers want a guarantee of competition and choice in the sugar market, not a return to full regulation.
The actions of large multinational corporations with regional mill monopolies are threatening growers’ basic rights over the
sugar produced and to be able to choose how it is sold.
Pro-competitive legislation must: Recognise in law the economic interest growers have in sugar and their right to decide
how that sugar is priced and sold.
CHOICE
RIGHTS
CHOICE OF MARKETER
CHOICE IN PRICING
Growers call on the Queensland
Government to secure their
right to choose a marketer.
Growers call on the Queensland
Government to safeguard their
right to choose how to price
their share of the sugar.
A loophole created when the industry
was deregulated in 2006 has allowed
mills to change marketing systems
without reference to growers.
Growers don’t want their current
rights in relation to making decisions
taken away by corporate entities.
FUTURE
FORMALISE GROWERS RIGHTS
OVER GEI SUGAR
PROTECT GROWERS AGAINST
MONOPOLIES
Growers call on the State Government
to recognise and formalise their
rights over GEI sugar.
Growers call on the State Government
to protect them from potentially anticompetitive behaviours. Ensuring
large monopoly players cannot
exert power over smaller players in
business is a core Australian value.
It has been a longstanding practice that
the economic interest in the sugar is
shared by millers (1/3rd) and growers
(2/3rd). This is threaded into current
marketing arrangements with QSL and
UHÁHFWHGLQVXSSO\DUUDQJHPHQWV7KH
concept was central to mills when they
called on growers to bear their 2/3rd
share of marketing losses incurred
during a low production season in 2010.
The mills have their 1/3rd economic
LQWHUHVWFRQÀUPHGEXWQRZZDQWWR
take from growers’ their 2/3rds and sell
that sugar through their mill-owned
marketing entity without reference to
growers. This takes away growers’ rights
to choose the marketer for GEI sugar.
A century of changes to sugar marketing
If millers are allowed to take the growers
choice of marketer away, and force the
sale of large tonnages through their own
commercial business, those companies
could get competitive advantage over
growers. Transparency of marketing
operations is also brought into question,
with mills able to engage in transfer pricing
and other intra-company transactions
that potentially transfer risk to growers
while enabling mills to capture additional
value on their corporate account.
Queensland Sugar Corporation
(QSC) established as a
statutory authority
Mills ability to leverage monopoly
powers questioned in Australia
Sugar Board established
Royal Commission reports
Board with statutory vesting rights.
1912
1923
1915
Legislation introduced to protect growers
Queensland Government takes action to
address ability of large millers exerting
unfair power over the smaller growers
which supply them. Growers and millers
share proceeds from the sale of sugar with
the cane price linked to the sugar price.
•
Regulation of Sugar Cane Prices Act
•
Sugar Acquisition Act
PRESERVE REAL TRANPARENCY
BUILD GROWER CONFIDENCE
You get far more transparency from a
company you own that is operating for the
EHQHÀWRILQGXVWU\WKDQDFRUSRUDWHHQWLW\
ZKLFKZRUNVIRUWKHEHQHÀWRILWVHOIDQG
its shareholders. Companies can change
their policies surrounding transparency
and their operating systems, including
the way they pay their suppliers, at any
time without consultation or consent from
those suppliers which in this case are
cane growers. Regional mill monopolies
would have the ability to transfer costs
within their business to give growers a
OHVVHUVKDUHRISURÀWVWKDWWKH\RWKHUZLVH
would receive – without the grower having
any ability to know this is the case.
Having as much control as possible over
\RXUSURÀWOLQHLVDNH\FRQVLGHUDWLRQIRU
any investor – farmers are no different.
7RKDYHWKHFRQÀGHQFHWRFRQWLQXH
to invest in sugarcane, our growers
need a stable system which protects
their rights and ensures marketing
transparency and competition in
how GEI sugar is priced and sold.
WHERE WE ARE NOW...
Grower groups CANEGROWERS
and ACFA unite on behalf of
growers to ask the Queensland
Government to recognise in law
the economic interest growers
have in sugar and their right to
decide how that sugar is priced
and sold.
Mills economic interest
formally recognised
•
QSC make domestic sales
Statutory restrictions on sugar
marketing removed
•
QSC contracts CSR Raw
Sugar Marketing to
undertake export sales
Voluntary Raw Sugar Supply Agreements
(RSSA) between QSL and mills with
3 year termination clause.
Mills one-third economic interest
is formally recognised with mills
able to choose pricing options
for their share of the sugar.
2006
2013
1991
1989
2000
2010
2014
Domestic market deregulation
Industry owned QSL established to
replace QSC as the exclusive marketer
of Queensland raw sugar.
Mills publically recognise
grower economic interest
Wilmar, MSF and COFCO give notice
to withdraw from QSL marketing
arrangements in July 2017-Growers
deem this move, which would strip them
of their rights, absolutely unacceptable.
Ownership of export terminals
moved to Sugar Terminals Ltd
Mills insist that growers wear two
thirds losses during a wet season which
resulted in lower production than the
sugar contracts forward sold.
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment 7
WAYNE SWAN
Deputy Prime Minister and Treasurer
3 December 2007 - 27 June 2013
NO.078
FOREIGN INVESTMENT DECISION
Today I approve the application by Wilmar International Limited (Wilmar) to
acquire, through its Australian subsidiary, Wilmar Australia Pty Ltd, full
ownership of Sucrogen Limited (Sucrogen) from CSR Limited (CSR). This
approval is subject to legally enforceable undertakings.
The undertakings provided by Wilmar will, in summary:

Restrict Sucrogen's ability to influence key decisions taken by the
industry-owned export marketing body Queensland Sugar Limited (QSL) if
Sucrogen was to announce a termination of marketing activities with QSL;
and

Ensure that if Sucrogen acquires an interest in strategic sugar storage
infrastructure owned by Sugar Terminals Limited (STL), it must operate
the infrastructure with proper regard to the broader interests of the
industry and other participants.
These undertakings ensure consistency with Australia's national interest
principles and are a condition of my approval under the Foreign Acquisitions
and Takeovers Act 1975 (as set out in Attachment A).
In addition to these undertakings, I have taken account of Wilmar's ambitious
growth plans for Sucrogen. These include the expansion of the company's
Australian operations by providing better access for its sugar products to
growth markets in Asia, and jointly developing refining facilities and distribution
networks in the region. Wilmar has informed FIRB that it does not anticipate
any significant changes to Sucrogen's operations and its management, with
current employment conditions remaining unchanged. Wilmar has also advised
that if its growth plans are achieved, there will be increased jobs in the
Australian sugar industry.
I also note that CSR has exposures to asbestos liabilities arising from its past
manufacture and sale of building products containing asbestos.
As part of my decision, I have taken account of CSR's undertakings to further
protect the interests of both current and future asbestos injury claimants. These
Current and future arrangements for the marketing of Australian sugar
Submission 23
arrangements increase the legal safeguards to protect creditors that exist under
the Corporations Act 2001, and will ensure that for future capital returns to
shareholders, including from proceeds of its sale of Sucrogen, CSR will receive
independent expert advice regarding its potential to materially prejudice
creditors, including asbestos claimants. Importantly, the arrangements will take
into account the potential liabilities arising from future asbestos claimants in
addition to the liabilities associated with existing creditors.
The key elements of the arrangements (as set out in Attachment B) involve
CSR's Board:

receiving an independent actuarial review of its estimated liabilities to
current and future asbestos claimants;

considering the results of the actuarial report, impact on its prospective
credit rating and financial ratio tests in determining whether to undertake
a proposed capital reduction;

treating the unascertainable future creditors (i.e. asbestos victims that are
not yet diagnosed and who have not yet made asbestos claims) as though
they are crystallised creditors;

receiving an independent ‘big 4' accounting firm review of its proposed
decision, having regard to the position of the company and the report of
the actuary, to determine whether it is reasonable (CSR will not undertake
the capital event unless the accounting firm confirms that the proposed
capital payment has a reasonable basis); and

having an independent entity overseeing the governance arrangements,
supported by a legally binding deed between it and CSR.
These arrangements provide a valuable additional safeguard for current and
future asbestos claimants, and are a welcome demonstration of CSR's publicly
stated commitment to meet its asbestos liabilities.
Given the undertakings provided by both Wilmar and CSR, I am satisfied that
the national interest concerns with respect to this acquisition are sufficiently
mitigated and appropriately managed.
It is on these bases that I have approved the acquisition of Sucrogen by Wilmar
under the Foreign Acquisitions and Takeovers Act 1975.
8 November 2010
Current and future arrangements for the marketing of Australian sugar
Submission 23
Attachment A
UNDERTAKINGS BY WILMAR INTERNATIONAL IMPOSED AS APPROVAL
CONDITIONS UNDER THE FOREIGN ACQUSITIONS AND TAKEOVERS ACT 1975
1. WHEREAS,
i.
Sucrogen Limited is a mill owner member of Queensland Sugar
Limited, ACN 090 152 211, (QSL) and currently holds a majority of
the voting power of the mill owner members;
ii.
QSL currently undertakes certain marketing activities on behalf of
its members in relation to raw sugar in the Asia-Pacific region; and
iii. Sucrogen Limited and QSL have entered into a Deed, whereby
Sucrogen agrees that it will vote in favour of any resolution put to a
general meeting of QSL's members which proposes to amend the
Constitution in accordance with Schedule 1 of that Deed, and that if
any such resolution is not passed due to being opposed by other
members of QSL, Sucrogen will meet with QSL to discuss in good
faith amending the resolution to resolve that opposition while
achieving a materially fair outcome,
Wilmar agrees that Sucrogen is bound by the terms of the Deed with QSL,
and Wilmar will support Sucrogen acting in accordance with its obligations
under the Deed; AND
2. WHEREAS,
i.
Sugar Terminals Limited, ACN 084 059 601, (STL) has beneficial
ownership of certain sugar terminal infrastructure in Queensland,
being the six bulk sugar terminals located at the ports of Cairns,
Mourilyan, Lucinda, Townsville, Mackay, and Bundaberg;
ii.
as at 30 June 2010, Sucrogen holds, through Sucrogen Investments
Pty Ltd, 1, 111, 343 of the Grower (G) class shares in STL;
representing around 0.48 per cent of the G class shares; and 59,
824, 003 of the Miller (M) class shares in STL, representing around
45.8 per cent of the M class shares in STL;
iii. STL's sugar terminal infrastructure is currently operated by QSL
pursuant to a Sublease, commencing with effect as of 1 January
2009 and for an initial period of 5 years with an additional period of
5 years provided both STL and QSL notify renewal of the Sublease
by 30 June 2013;
iv.
QSL currently operates the sugar terminals infrastructure on an
‘open-access' basis; and
v.
Wilmar does not currently have any intention, whether itself or
through Sucrogen, to seek to acquire from STL a lease of any of
STL's sugar terminal infrastructure;
if, contrary to its existing intention, Wilmar does, through Sucrogen or
otherwise, seek to operate STL's sugar terminal infrastructure, either through a
lease, direct ownership or other means, then Wilmar will provide the same open
Current and future arrangements for the marketing of Australian sugar
Submission 23
access arrangements to STL's sugar terminal infrastructure that are currently
provided by QSL.
These conditions, imposed under section 25 (1A) of the Foreign Acquisitions and
Takeovers Act 1975, are subject to any revocation or amendment by the
Treasurer.
Attachment B
Current and future arrangements for the marketing of Australian sugar
Submission 23
Current and future arrangements for the marketing of Australian sugar
Submission 23