THE sugar industry is notorious for attaching itself to the public teat. Concentrated in several marginal seats along the Queensland coast, it has a long history of extracting taxpayer subsidies when prices are down, coercing governments into mandatory use of ethanol in fuel, and blocking imports of both sugar and ethanol.
Most famously, a decade ago it received hundreds of millions of taxpayer dollars to help it restructure in the face of low prices. Prices bounced back soon after the scheme commenced and, apart from the impact of abolition of the single desk in 2006, not a lot of restructuring occurred. They kept the money though.
A major controversy has now erupted as a result of the decision by the sugar processing company Wilmar to sell all its sugar direct to international customers rather than via the grower-owned marketing organisation, Queensland Sugar Limited (QSL), beginning in 2017. This has prompted another processor, Thai-owned MSF Sugar, to suggest it may follow suit. True to form, there are numerous calls for regulators and governments to intervene. A horde of politicians, including the Queensland Minister for Agriculture, is taking a close interest.
Wilmar is a Singapore-based agribusiness firm involved in palm oil, edible oils, specialty fats, oleochemicals, biodiesel, fertiliser and grain processing, as well as sugar. It operates in over 50 countries with 450 manufacturing plants and a workforce of 90,000 people. Its business model is based on integration from origination to processing, branding and distribution, based on lower cost due to economies of scale and integration. A relative newcomer to sugar, it is now among the top ten global raw sugar producers as well as the largest raw sugar producer and refiner.
MSF Sugar, based in North Queensland, is Australia’s third largest producer of raw sugar and part of Mitr Phol, the largest sugar producer in Asia and one of the world's largest sugar producers.
A legacy of the single desk, QSL manages most of Australia’s raw sugar exports through a system of pools. Typical throughput is 3.5 million tonnes of raw sugar with annual revenue of $1.5 billion. It employs about 160 people.
What QSL offers sugar processors is economies of scale through pooling. These include logistics, quality management, funding and managing price risk, which Wilmar and MSF obviously consider they also have. For growers, QSL offers a range of price and risk options for selling their sugar along with market transparency to help choose between these options.
What QSL and its supporters are arguing is that if Wilmar proceeds with its plan, growers will lose these options for marketing their sugar. In many areas Wilmar is the only processor, which means producers will have to accept its offers. What they want is to retain the ability to sell via QSL.
Wilmar says its system is transparent and that growers will lose nothing in comparison with QSL. Indeed, it proposes to offer pooling and pricing options which it says will deliver better outcomes for growers, and suggests the QSL approach is no longer needed.
Given Wilmar’s international networks, it is quite improbable it will generate lower prices than QSL. Sugar is an international commodity actively traded all around the world, and the prices received by Australian producers are all driven by the same international market. For producers who like to play the market in the hope of catching the top price, the only question will be whether they have all the information needed. This is a matter of transparency rather than who is doing the marketing.
The key to understanding opposition to Wilmar’s plan can be found in the fact that QSL is an Australian cooperative while Wilmar is foreign-owned multinational company. Fear of foreigners, particularly big multinationals, is never far from the surface in rural Australia. In conjunction with the ever present assumption that everyone is out to rip farmers off, it is a formula for conspiracy theories and high anxiety.
Such concerns are being stoked by QSL, which is probably fighting for its very existence, with its arguments stoking lingering agrarian socialist sentiments surrounding the fate of profits.
In the end, this is a matter for the market to sort out. If Wilmar turns out to offer inferior service or prices to QSL, the market will deal with it by attracting new competitors. If growers think they need greater control over their marketing, they will either compel Wilmar to cooperate or find a way to avoid using it. If it turns out Wilmar is pointing the way of the future, QSL will be gone within five years and the industry will have finally restructured.
Whatever the outcome, governments and regulators need to keep their noses out of it.