What next for sugar marketing? 12 August 2014
QSL’s purpose QSL’s purpose is to serve the interests of growers and millers for the long-term prosperity of the Queensland sugar industry
Agenda 1. The current situation 2. Challenging some common views • Why should growers have a say in how their sugar is marketed? • Industries work best when they are deregulated and governments are removed • QSL is trying to hold onto an outdated, single desk model 3. The future for the Queensland sugar industry
Current situation (Approximately 3.5Mt contracted to QSL until 2017) Industry Minister Minister agrees to Tully Bundaberg, McVeigh Wilmar McVeigh MSF discuss (COFCO) Mackay, Isis announces provides provides grower calls provides rollover sugar market notice industry notice choice notice RSSA investigation (27 May) (27 June) except meeting (30 June) (14 July) (24 June) Wilmar (15 July) (2 July)
Challenging some common views • Don’t sugar cane farmers simply produce cane and sell it directly to a mill? Why then should growers have a say in how the sugar produced by the mill is sold and priced? • Shouldn’t the free market reign? Don’t industries work best when they are deregulated and governments do not interfere? • Isn’t QSL just trying to hold onto an outdated, single desk model to protect their own interests?
Growers’ say in pricing and sale of sugar Don’t sugar cane farmers simply produce cane and sell it directly to a mill? • Cane pricing is linked to world sugar prices • Growers’ payments are directly impacted by how sugar produced by the mill is priced and sold • QSL Raw Sugar Supply Agreements recognise growers’ economic interest sugar as around two- thirds of the sugar produced by the mill and millers’ economic interest sugar as around one-third of the sugar produced by the mill • Through QSL, growers and millers are able to choose how their economic interest sugar is priced and the risk they are willing to take on the world sugar market
Shouldn’t the free market reign? • Sugar mills have a natural monopoly – High transport costs relative to cane value and the highly perishable nature of sugar cane means the vast majority of growers have no option but to use their local mill • Around the world governments have put systems in place to manage this monopoly situation • The collaborative sugar industry pricing and marketing system in Australia is often cited as an example of a deregulatedmodel that works • QSL has a membership, which is structured to have equal representation between growers and millers. • Millers can withdraw without agreement from their growers, which means growers are then subjected to their millers’ marketing arrangements
Local industries and government intervention It is not unusual to see government intervention in industries where a natural monopoly exists • Wheat industry – Background: With the deregulation of wheat marketing, it was identified that marketing entities which controlled the natural monopoly port infrastructure could gain a competitive advantage by refusing access to the port, or only providing access or discriminatory terms, to wheat growers who were seeking to have the wheat marketed by another entity – Legislation: Wheat Export Marketing Act 2008 (Cth), Proposed mandatory wheat port access code – Result: Where a port operator also markets bulk wheat exports, the terms of access to the port is regulated by ACCC approved undertaking to prevent the port operator discriminating against growers who choose to market their wheat via a different marketing company. • Coal industry (rail and port) – Background: Australia’s major coal producing regions (Bowen Basin and Hunter Valley) are each serviced by a single monopoly below rail provider . All coal mines (and their rail haulage provider) are effectively ‘captive’ users of the relevant rail ne twork. – Legislation: Part 5 Queensland Competition Authority Act 1997 (Qld), Part IIIA Competition and Consumer Act 2010 (Cth) – Result: An access undertaking approved by the QCA (for the central Queensland coal network) and ACCC (for the Hunter Valley rail network) provides the standard terms of access to each natural monopoly rail network, including reference pricing and in Queensland measures aimed at preventing Aurizon Network discriminating against haulage operators competing with Aurizon. • Gas Pipelines – Background: Pipelines are natural monopoly infrastructure, where gas producers and gas customers in some regions will sometimes only have one pipeline which provides a way of transporting the gas to market – Legislation: National Gas Laws (including application legislation in each State) – Result: Numerous major gas transmission pipelines are ‘covered’ resulting in the Australian Energy Regulation approving the standard terms of access arrangements and pricing for pipeline transportation services.
Local industries and government intervention It is not unusual to see government intervention in industries where a natural monopoly exists • Power - Distribution and Transmission – Background: Distribution and transmission networks are natural monopoly infrastructure – where all consumers of power from the grid are ‘captive’ customers that have to be connected to their network. – Legislation: National Electricity Law and Rules – Result: Australian Energy Regulator sets a ceiling on the revenues that can be earned by transmission and distribution network owners, to ensure the owners of these network do not extract monopoly pricing. • Airports – Background: Airports are natural monopoly infrastructure, where each capital city has one principal airport. – Legislation: Airports Act 1996 (Cth); Competition and Consumer Act 2010 (Cth) – Result: ACCC price monitoring of major services provided at 4 major airports and ACCC assessment of proposed price increases in relation to some airports services, with a view to limiting the prospects of monopoly pricing. • Broadband – Background: NBN Co in the process of developing the National Broadband Network as a monopoly provider . There was concern about the terms on which retailers of broadband services would have access to NBN Co’s network. – Legislation: Part XIC Competition and Consumer Act 2010 (Cth) – Result: The terms on which services from NBN Co are provided are regulated by the ACCC under the NBN Co Special Access Undertaking (including through revenue and price caps).
Is QSL a single desk model? • Voluntary participation • Pricing choices • Marketing choices • Industry owned
Is QSL an outdated model? Industry-owned marketing company - $1.5 billion revenue • Track record of outperforming the market – strong 2013/14 season pool prices • Not-for-profitand tax exempt • Owned by industry – represents 4,000 growers and seven milling companies (until July 2017) • Purpose is to serve the interests of growers andmillers for the long-term prosperity of the QLD sugar industry • Grower economicinterest (GEI) and miller economic interest (MEI) sugar recognised in Raw Sugar Supply Agreements • Cost-effective financing (borrowing around 3.5%) to finance next season’s crop • Range of pricing products tochoose from for different risk appetites • Experts that actively monitor the futures market • Long-term relationships with customers who value a producer-seller model • All profits given back to growers and millers – premiums, other origin, business development • Highly effective storage, handling and shipping of bulk sugar to customers with a strong on-time and in-full track record • Independenceand transparency in its operations – profits disclosed and returned to industry
Role of Government • The industry is at an impasse. Where monopolies make decisions about sugar marketing not supported by their growers, this raises misuse of market power issues and leads to a market failure. • QSL welcomes the stated announcement by Minister McVeigh that the State Government will investigate competition concerns: – Formally requesting action by the Federal Government to consider powers under the Federal Competition and Consumer Act – Launching an Agricultural Cabinet Committee investigation to see if the traditional practice of growers choosing where their economic interest in the sugar is marketed could be preserved in the current Sugar Industry Act 1999 – Calling on all sectors of the industry to step up their own efforts to reach resolution • Millers have no legal obligation to consider grower choice or what is in the best interest of the entire Queensland sugar industry • Growers and millers should have the ability to choose if they want to access QSL’s services • Industry must now work to assist both the State and Federal Government in their investigations
Our proposed Solution - grower choice model GROWER CHOICE = Choose either QSL or your mill (Mills can choose QSL to market their sugar) Provides true Encourages Delivers the fairest competition innovation outcome
Looking to the future – a fair competitive system • Increased competition, innovation and pricing options, fairest outcome for all • Grower economic interest and miller economic interest continue to be recognised and growers and millers have genuine choice in marketer • QSL continues to adapt, evolve and transform to meet the changing needs of the industry over time • Industry continues to prosper for the benefit of all participants
Questions? THANK YOU
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