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BCGREPORTTOCANEGROWERSReviewOfConstraintsOnIndustryCompetitivenessAndInnovation21January2003-1-20030121-SYD-FIN-40517-00Final.pptFOREWORDThisreportwaspreparedbyTheBostonConsultingGroupinasixweekperiodduringNovemberandDecember2002WewerecommissionedbyCANEGROWERSto•Conductananalysisofcurrentregulationsandindustrypractices,especially,butnotexclusively,intheareasproposedforstudybythegovernments’MoU,includingthebenefitstogrowersofthepresentsystem,limitationsofthepresentsystem,especiallywithrespecttoinnovation,andtheneedforchangesintheActtoamelioratethepresentsystem•Identifyissuesrelatingtothesingledeskapproach-possiblechangesandmechanismsforchangeincludingdomesticderegulation-impactofthesechangesongrowersOurapproachinvolvedfivesteps•Developeda‘baseline’ofinformationontheindustry’scompetitivenessandinnovation•Identifiedtherangeofopportunitiesthatcouldsignificantlyincreaseindustryreturns•InterviewedindustryparticipantstocollectargumentsastohowtheActpreventsrealisationoftheopportunities•Assessedtheseargumentsbyreferencetoactualindustryeconomicsandcasestudiesfromotheragriculturalindustriesandensuredthelikelycostsandbenefitsofderegulation•Identifiedpotential‘pathways’forchangestoindustryregulationandthelikelybenefitsaswellascostsandrisks-2-20030121-SYD-FIN-40517-00Final.pptCONTENTSA.TheChallengeFacingTheQueenslandSugarIndustryB.ProductivityImprovementOpportunitiesC.ValueAddingOpportunitiesD.ConstraintsOnTheIndustryE.AnAssessmentOfDeregulationAsAResponseToConstraintsF.PossibleDirectionsForReform-3-20030121-SYD-FIN-40517-00Final.pptSUMMARYOFFINDINGS(I)A.TheQueenslandsugarindustryfacesasignificantchallengetosurviveandprosper•Togetbacktoreasonableprofitabilityitmustincreasereturnsacrosstheindustryby,onaverage,~$1,000/haB.Productivityimprovementopportunitiescouldfillthisgap,butwouldrequireafundamental‘stepchange’inindustryperformanceC.Valueaddingisanotherpotentialsourceofbenefitandmustbepursued.HoweverthecurrentbusinesscasesforthemostdiscussedopportunitiesappearmarginalD.Theindustry’sabilitytorespondtothischallengeisindirectlyconstrainedbythreefactors•Amisalignedrisk/rewardprofileforgrowersintheirrelationshipwithmillers•Lackofcompetitivepressurewithinlayersofthevaluechainbecauseofbothgeographicandlegislativefactors•Lowpressureforchangeandhighbarrierstochangegivenbothlegislativerestrictionsandindustryhistory-4-20030121-SYD-FIN-40517-00Final.pptE.Simplederegulationisunlikelytobeaneffectiveresponsetotheindustry’schallenges•DeregulatingCPAandcollectivebargainingwouldremovemanyconstraints,butnotall,andwouldsignificantlyredistributeincomefromgrowerstomillers•DeregulatingAcquisitionwouldputsignificantbenefitsatriskandmoretargettedreformsareavailabletoavoidanyimpactofthesingledeskoninnovationF.However,fundamentalimprovementinindustryperformanceisrequired.Theindustrymustinvestigateboth•Acombinationofcooperativeindustryactionandtargetedderegulatoryreformtoaddressmanyoftheopportunitiesforimprovement•Fundamentalchangestothestructureoftheindustrytoprovidethebasisforamoredynamic,competitiveandinnovativeindustrySUMMARYOFFINDINGS(II)-5-20030121-SYD-FIN-40517-00Final.pptA.THEQUEENSLANDSUGARINDUSTRYFACESASIGNIFICANTCHALLENGETOSURVIVEANDPROSPERA1.Globalcompetitivepressureshavesignificantlyincreased,placingtheindustryunderseriouspressureA2.Levelsofreturnintheindustryareunsatisfactory,andthisisonlypartlyduetorecentpooryieldsA3.Assumingareturntoaverageyields,anaverageearningsimprovementof~$1,000/haisrequiredtoreturnto1998levelsofprofitability•~$700/haforgrowers•~$300/haformillersA4.Lookingforwardfiveyears,givenlikelycostandpricepressures,anadditional$150-550/hacouldberequiredtosupportahealthyindustryA5.ThesefindingsaregenerallyconsistentwiththoseoftheCIE-6-20030121-SYD-FIN-40517-00Final.pptA1.GLOBALCOMPETITIVEPRESSURESHAVESIGNIFICANTLYINCREASED,PLACINGTHEINDUSTRYUNDERSERIOUSPRESSURETwoglobalcompetitorshaveboostedtheirvolumesinalowgrowthmarket•BrazilhasemergedasamajorindustryparticipantwithalowcostpositionversusAustralia,partlydrivenbyasubstantialdevaluationoftheBrazilianreal•EUwhitesugarexportshavealsoincreasedsomewhat(butarelesslikelytogrowinthefuture)Asaresult,sugarpriceshavedeclinedTheQueenslandsugarindustry’shighexposuretoworldpriceshasplaceditunderenormouspressureandmayeventhreatenitssurvivalinitscurrentform-7-20030121-SYD-FIN-40517-00Final.ppt024681012141618020406080PARTLYDUETODEVALUATION,BRAZILHASASIGNIFICANTCOSTADVANTAGECumulativeVolume(Mt)BrazilWorldProducedRawSugarCostCurve(1):2001(US¢/lb)Cost(US¢/lb)(1)Costsbeforedepreciation,interestandtax(2)Brazilianexchangerate1997~1.2;Brazilianexchangerate2001~2.5Source:LMC;ISO;InternationalFinancialStatisticsYearbook;BCGAnalysisSwazilandAustraliaSouthAfricaColombiaUnitedStateGuatemalaThailandIndiaPhilippinesMexicoChinaOthersBasedon1997exchangerate(2)-8-20030121-SYD-FIN-40517-00Final.pptWITHEXPANSIONINSUGARPRODUCTION,EXPORTSFROMBRAZIL(ANDEU)HAVEINCREASEDBrazilHasExpandedAndExportedMostOfItsIncreasedProduction...BrazilianSugarProductionAndExports(Mt)...AndEUHasAlsoIncreasedExportsOfBeetSugarEUWhit