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A Sugar Manufacturing Corporation of Jamaica

A Sugar Manufacturing Corporation of Jamaica. (SMCJ). Position on the WINT Commission of Inquiry June - July 2010. Item 2.3 Result to be achieved by the commissioners (vii) “Specific recommendation as to changes to the cane pricing arrangements, if any are made”. July 16, 2010. Introduction

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A Sugar Manufacturing Corporation of Jamaica

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  1. A Sugar Manufacturing Corporation of Jamaica (SMCJ) Position on the WINT Commission of Inquiry June - July 2010 Item 2.3 Result to be achieved by the commissioners (vii) “Specific recommendation as to changes to the cane pricing arrangements, if any are made” July 16, 2010

  2. Introduction The SMCJ is overwhelmingly supporting the existing cane testing and payment system. Our position is so as the purpose of this system is expected to result in an improvement in productivity in the sugar industry and growers and manufacturers alike have expressed confidence in it. Cane payment systems define one of the most important relationships of any cane industry, since they determine how revenues are distributed between growers and millers. Cane payment systems also play a central role in establishing the incentives that growers and millers face. Not only do they influence heavily the incentives to improve technical efficiency, they also have far-reaching implications for investment decisions.

  3. However the manufacturers feel the system must remain with the level ‘playing field’ it started in 1991 in the movement of funds from factories to growers and growers to factory. This was a fair introduction to increasing efficiency to achieve incentive. The distribution puts to rest the future policies and logistic base on the majority. In any business the world over, it is the majority that counts for representation.

  4. The Distribution 1991 - 2009 (inclusive)

  5. Types of Cane Payments Systems • The number and different type of cane payment systems in existence are an indication that there is no single formula for an efficient and effective cane payment system • (Table1). However, payment systems used to divide revenue between growers and millers can be separated into two broad groups. • Fixed cane price systems • Revenue sharing systems • These systems can be divided into two main types: • Fixed revenue sharing • Variable revenue sharing

  6. INCENTIVES TO IMPROVE THE CANE QUALITY AND SUCROSE RECOVERY Table 2 shows the extent to which each country’s cane payment system rewards growers and millers (as a group) for improvements in cane quality and factory efficiency. The table presents estimates of the percentage change in growers’ revenue that result from 10% increase in cane sucrose content. The equivalent figure for millers showing the effect of a 10% increase in factory sucrose recovery is also presented.

  7. Systems based on the average quality of growers’ cane Cane payment systems that are based on the average quality of cane delivered to a mill by all growers provide little incentive for individual growers to improve cane quality. For example, a cane grower who produces cane with a high sucrose content will only receive payment based on the average quality of all the cane delivered to the mill. Consequently, the grower is unable to influence the price received for his cane, and has no financial incentive to produce cane of higher quality.

  8. JAMAICA’S CANE PAYMENT SYSTEM • Cane analysis based on the core sampling method • Required to test at least 50% of all deliveries • Price/ tonne cane is based on the all suppliers average cane quality • Cane quality is determined by measuring The Jamaican Recoverable • Cane Sugar (JRCS) content in canes delivered within 72 hours after • burning or cutting

  9. SAMPLING • Approximately a 7kg sample is taken by a rotating diagonal Core Tube • For canes transported in a tandem of carts samples are taken as follows: • - One to three carts - all should sampled • - Four to six carts - a minimum of three should be sampled • - Seven to eight carts - a minimum of four should be sampled • - One sample is taken from trucks typically weighing 10 - 15 tonnes.

  10. JRCS DETERMINATION • Samples are shredded to obtain a cell breakage of not less than 80% • Sub-samples of 1kg is weighed on an electronic balance for processing • The juice is extracted by a hydraulic press at 3000 psi for two minutes • The press residue (bagasse) is analyzed for Fibre% Cane • The extracted juice is analyzed for brix, pol, purity and sediments

  11. CANE PAYMENT FORMULA ● Cost-Based System ● Aim: To Attain an Equitable Distribution of Sugar Revenue ● Principles: (1) Revenues should be divided in proportion to the costs involved in producing and processing a tonne of cane (2) The revenue should be determined on the basis of the recoverable sugar in cane. (3) The main factors which influence the payment of sugar from cane are: - Standard Cane Quality - Standard Factory Efficiency

  12. FACTORY OPERATIONS Since the implementation of the new system, the indicator of efficiency has been the Factory Recovery Index. This is based on the actual sugar produced expressed as a percentage of that predicted. Predicted sugar is calculated from a structured formula, partly scientific with standards set for losses in:- Milling - Bagasse pol loss = 5% (reduced pol extraction 95 at 12.5%F) Processing - Filter cake pol loss, 0.60% of cane - Undetermined pol losses (physical and chemical) 1.3% of cane and - Final molasses pol loss, W & C formula modified (1.45 - 45/Q).

  13. DETERMINATION OF POL % CANE & JRCS • Data Obtained From at the Core Laboratory. Eg. - Pol % Press Juice = P = 13.92 • - Fibre % Cane = F = 14.86 • - Press Juice Purity = Q= 82.81 • Pol % Cane = P (1.02 - 0.44 f/100) (1.0 - f/100) = 11.31 • JRCS = 1.03P (1.02 - 1.73 f/100) (1.45 - 45/Q) = 9.92

  14. The Cane Payment Formula and the Core Sampling Method of testing introduced in 1991, have brought about many positives in managing and stabilizing the Sugar Industry. Firstly, up to 100% of grower’s cane can be tested. Secondly, the Payment Method has brought about a more equitable distribution of the proceeds from sugar between the growers and the manufacturers. Thirdly, Cane Payment is based on the sugar in cane tested at the Core independent of factory operation. The amount of sugar in cane is expressed as the Jamaica Recoverable Cane Sugar (JRCS) or sugar percent cane.

  15. JRCS Measures directly the amount of sugar in a given quantity of cane. The higher the JRCS, the better the quality A JRCS of 10 indicates a quality better than a JRCS of 8. JRCS to tonnes of cane per tonne of sugar 13.00 High 7.7 12.00 8.3 10.00 10.0 8.00 Low 12.5 The tc/ts gives the ratio or the amount of cane required to make 1 tonne sugar. The lower the tc/ts ratio, the higher the quality. JRCS therefore, is now the important measure of quality on which the cane payment is based.

  16. CANE PAYMENT FORMULA V = P x FRI/100 (Average JRCS– FF) + BYP V 1 = P x FRI/100 (Average JRCS x RF) – FF) + BYP ● V = Average Price/Tonne Cane at the respective factory ● V 1 = Individual Payment at each respective factory ● P = Price/Tonne Sugar ● FRI = The standard factory efficiency on which payment is based ● JRCS = All growers’ average recoverable sugar in cane ● FF = Factory fraction - The fixed number of Units of recoverable sugar of the standard cane quality to be retained by the factory ● BYP = Value per tonne cane for by-products

  17. STANDARD CANE QUALITY ◘ Derived from the Moving Weighted Crop Average JRCS of All Factories ◘ A new value is calculated each year based on the last five years results ◘ Annual Factory Fraction Represents 38% Of the Standard Cane Quality (JRCS)

  18. Commission Report 4.32 The Factory Fraction Total revenue for 1987 for 7 estates as per 4.3 $ 478,597,00 Total tons sugar for 1987 for 7 estates as per 4.3 176,409 Total Revenue per ton sugar = $ 478,597,00 = $ 2,713 176,409 Cane growers/ farmers share of 62% = $ 1,682 1987 average TC/TS = 10.44 1987 price per ton cane = $ 1,682 10.44 = $ 161,11 1987 average JRCS = 100 (assuming percent sugar 10.44 = 9.58 is the inverse of TC/TS) Therefore - Price per ton cane of $ 161.11 = 0.0091 x $ 2,713 (9.58 - fixed fraction) ( 161.11 ) (0.0091 x $2,713) = (9.58 - fixed fraction) 6.526 (68.12%) = (9.58 - fixed fraction) = 3.054 = 31.88% Since 9.58 is at .91FRI then the JRCS reported = 9.58/.91 = 10.5274 Price = 2713 x .0091 x (10.5274 - 3.054) = $ 184.57 Therefore it should be 2713 x .0091 (10.5274 - 4.0004) = 161.14

  19. COMPARISON OF VARIATION IN PRICE/ TONNE CANE AND SHARE OF PROCEEDS DUE TO VARYING EFFICIENCY This demonstrates the challenges to both growers and manufacturers to maintaining not only their standard sharing but to exceed for incentives.

  20. CANE PRICE AS A FUNCTION OF QUALITY (JRCS) ESTIMATED SUGAR PRICE - $36,000.00/T STANDARD CANE QUALITY 10.0422 FACTORY FRACTION 3.8160 PRICE/TONNE = $2037.70 STANDARD TARGET This demonstrates the value of one tenth (1/10) of one JRCS that is gained or lost by a grower.

  21. CANE PAYMENT FORMULA $36000.0 X .0091 (JRCS - FF) Standard JRCS = 10.0447 = $36000.0 x 0.0091 (10.0447 – 3.8170) Growers Fraction = 6.2277 = 327.60 x (JRCS – 3.8170) WORTHY PARK 11.14 - 3.817 = 7.323 X 327.6 = 2,399.01 LONG POND 10.51 - 3.817 = 6.693 X 327.6 = 2,192.62 MONYMUSK 10.11 - 3.817 = 6.293 X 327.6 = 2,061.58 BERNARD LODGE 10.04 - 3.817 = 6.223 X 327.6 = 2,038.65 FROME 9.65 - 3.817 = 5.833 X 327.6 = 1,910.89 APPLETON 9.55 -3.817 = 5.733 X 327.6 = 1,878.13 ST. THOMAS 8.90 - 3.817 = 5.083 X 327.6 = 1,665.19 ISLAND AVERAGE 9.89 - 3.817 = 6.073 X 327.6 = 1,989.51 In this example the fixed factory fraction is demonstrated and shows the incentive to be gained from improved cane quality. Note the difference between Worthy Park and St. Thomas then St. Thomas to the island average.

  22. LEVELING THE PLAYING FIELD COMPARISION TO THE OLD SYSTEM WITH THE NEW FOR THE 1990/91 CROP The Standard Factory Efficiency in 1991 was 90.5. As a result of the new system growers earned a net $19.47M FROM ALL FACTORIES, while three manufacturers earned $10.70M and six paid out an additional $30.17M

  23. ALL ISLAND GROWERS -ANALYSING THE CANE PAYMENT SYSTEM BASE ON RECORDS % ANNUAL CHANGE ANNUAL JRCS

  24. This table demonstrates the movement in the price of sugar compared to the quality of cane and the price of cane which is often non-proportional to the sugar price movement. The growers often fail to achieve the standard quality that they set, resulting in significant losses.

  25. APPLICATION OF THE RELATIVE FACTOR FOR INDIVIDUAL PAYMENT • V 1 = P x FRI/100 ((Average JRCS x RF) – FF) + BYP The implementation of the “Relative Cane Payment System” for the 1972/73 crop arose out of the concerns for the uneven deliveries of cane by growers throughout the crop. Such a system had the desirable effect of removing the advantages of the growers who deliberately delivered canes during the peak period of juice quality at a cost to those who delivered at the beginning and end of crop. Such practices also had a negative impact on the factory performance of low operating time due to a shortage of cane at the beginning and end of crop and high stocks in the peak periods. The basis of the system was that the quality of any cane delivery is related to the factory average cane quality for the week in which it was delivered. It operates so that a supplier who supplies cane at the beginning of crop of a quality equal to that of the factory average for the particular week will get the average price paid for cane at that factory for the crop. If at the peak juice period a supplier supplies cane which is equal in quality to the factory average for the particular week, that supplier will also be paid at the said crop average price. Better or worse than average quality cane for the particular weeks would attract higher or lower than average price, in the proportion by which they are better or worse than the factory average for the particular week.

  26. For example, if a farmer at the start of the crop delivers cane taking 11 tonnes of cane per tonne of sugar, and the factory average for that week was also 11 tonnes of cane per tonne of sugar (his Relative Factor would be 11/11 = 1.0000), he would be paid the crop average price for cane for that factory, if his cane tested 10 tonnes per tonne of sugar, he would be paid 11/10 (a Relative Factor of 1.1000) of the crop average price for his cane delivered for that week. If a farmer delivers cane of 9 tonnes per tonne of sugar at the peak quality period and the factory average for the week in which the cane was delivered is also 9 tonnes per tonne of sugar, he would be paid for that cane at the average cane price for the factory. If, however, his cane quality is 10 tonnes of cane per tonne of sugar, he would be paid at a rate of 9/10 (or 0.90000 Relative Factor) of the average price for cane for that factory.

  27. The average Relative Factor for the crop is calculated from the Tonnes Relative Cane delivered. The Tonnes Relative Cane is calculated weekly - this is the product of tonnes cane delivered x the Relative Factor (see table below). AVERAGE RELATIVE FACTOR = 583.35 ÷ 600 = 0.97225 Note the cane quality curve for 1999 and 2000 crop below. Farmer (a average quality grower) is compared with farmer (an inefficient grower) compared to farmer (an efficient farmer)

  28. IMPACT OF THE RELATIVE FACTOR Farmer : R.F. 1.00 X 9.52 = 9.52 (1999) Farmer : R.F. 1.00 X 11.26 = 11.26 (2000) Farmer : R.F. 0.92 X 9.52 = 8.76 (1999) Farmer : R.F. 0.92 X 11.26 = 10.36 (2000) Farmer : R.F. 1.1 X 9.52 = 10.47 (1999) Farmer : R.F. 1.1 X 11.25 = 12.39 (2000)

  29. Example of 2009 season Worthy Park average JRCS = 12.06 HighestLowest JRCS 15.72 6.51 R.F 1.2727 0.5279 Average Quality at time of delivery 12.35 12.33 Price at actual JRCS $ 5019.88 1124.01 Price at Relative Factor JRCS $ 4862.84 1063.30 Frome average JRCS = 11.34 HighestLowest JRCS 13.93 5.14 R.F 1.2726 0.4699 Average Quality at time of delivery 10.95 10.94 Price at actual JRCS $2997.63 $543.67 Price at Relative Factor JRCS $4468.63 $623.36

  30. Monymusk average JRCS = 10.63 HighestLowest JRCS 14.36 5.24 R.F 1.2157 0.5823 Average Quality at time of delivery 11.81 9.00 Price at actual JRCS $ 4416.96 583.14 Price at Relative Factor JRCS $ 3812.83 982.40 Long Pond average JRCS = 10.88 HighestLowest JRCS 13.46 5.25 R.F 1.0051 0.5322 Average Quality at time of delivery 13.39 9.86 Price at actual JRCS $ 4017.03 524.21 Price at Relative Factor JRCS $ 2961.46 890.25

  31. St. Thomas average JRCS = 10.87 HighestLowest JRCS 13.91 5.87 R.F 1.1946 0.6723 Average Quality at time of delivery 11.64 8.73 Price at actual JRCS $ 4243.00 851.06 Price at Relative Factor JRCS $ 3853.03 1457.72 Appleton average JRCS = 10.69 HighestLowest JRCS 13.40 7.10 R.F 1.2251 0.6300 Average Quality at time of delivery 10.94 11.27 Price at actual JRCS $ 4047.78 1376.73 Price at Relative Factor JRCS $ 3919.02 1222.18

  32. COMPARISM OF ESTATE vs FARMERS QUALITY Appleton Factory JRCS RELATIVE FACTOR Estate total 10.47 0.9958 Frome Estate 10.84 1.0035 St. Elizabeth Farmers 11.21 1.0276 New Yarmouth Estate 10.59 0.9919 B/ Lodge & Clarendon 10.01 0.9887 Average 10.69 1.0000 Frome Factory JRCS RELATIVE FACTOR Farmers 11.14 0.9866 Estate 11.59 1.0167

  33. Long Pond Factory JRCS RELATIVE FACTOR Farmers Total 10.49 0.9815 Estate Total 11.17 1.0139 Average 10.88 1.0000 Monymusk Factory JRCS RELATIVE FACTOR Farmers 11.05 1.0096 Estate 11.11 1.0399 Bernard Lodge 9.69 0.9421 Average 10.63 1.0000

  34. St. Thomas Factory JRCS RELATIVE FACTOR Farmers 10.83 1.0009 Estate 10.91 0.9991 Duckenfield Indvl 10.59 0.9849 Serge Island Indvl 12.36 1.1033 Average 10.87 1.0000 Worthy Park Estate JRCS RELATIVE FACTOR Farmers 11.70 0.9690 Estate 12.65 1.0573 Hillside Farmers 11.40 0.9475 Bog Walk Farmers 11.80 0.9637 W.P./ Tulloch 12.79 1.0035 Spring Garden 10.10 0.8532 Average 12.06 1.0000

  35. CROP YEAR: 1999/2000 * These are examples of a good and acceptable span (highest to lowest).

  36. GENERAL The report of the Sugar Industry Enquiry Commission (1987/88) contained the following recommendation (see paragraph 8.53): “We also recommend that the Sugar Industry immediately commence a cane- growers education programme detailing the JRCS measurement system and the reasons for its introduction, and particularly emphasizing its aims and the effect on the returns to growers who continue to supply poor quality cane” The contents of the AIJCFA submission to the CPC suggests that the case for an educational programme is at least as strong today as it was fourteen years ago. The submission makes it clear that there remains a lack of understanding of the principles upon which the Cane Payment System is based. This, in turn, has led to a general state of confusion on the part of the cane farmers and their representatives.

  37. As a result this unique and most brilliant system of testing and payment has failed to bring the degree of achievement in efficiency and prosperity to a failing industry. The strength of the Euro coupled with the devaluation of the Jamaican Dollar has not helped as there were this satisfaction of the significant price increases although efficiency was falling. Scientific studies show why cane quality will decline and although this has been exposed very little attention is given. Example:- SUGAR CONTENT OF COMPONENTS

  38. FACTORS AFFECTING QUALITY • Variety • Cane maturity • Fertilizer programme • Moisture supply nearing harvest • Delay between harvesting and testing FACTORS INFLUENCING CANE QUALITY • FRESHNESS • Below 24 hours after kill - ideal • 48 hours - good • Up to 72 hours - acceptable • Over 72 hours - unacceptable Aim to supply as much cane as possible within the first 24 hours after kill.

  39. DROP IN CANE PRICE DUE TO STALENESS

  40. FIBRE % CANE • True cane fibre = 12 - 16% of cane weight • Extraneous matter also classified as “fibre” • Extraneous matter is added to true fibre • Higher fibre = lower cane price IMPACT OF FIBRE COMPONENTS

  41. FACTORS AFFECTING PURITY • Immature cane • Suckers • Tops • Dead cane • Stale cane

  42. FACTORY RECOVERY INDEX (FRI) This is: ◘ The Relationship Between a Factory’s “Sugar In” Measured in JRCS Purchased and its “Sugar Out” Expressed as Tonnes 96º Sugar Made Tonnes 96º Sugar Actually Produced by Factory (including sugar equivalent sold to distillery) ◘ FRI = _____________________________________ Tonnes Jamaican Recoverable Cane Sugar The negative/ positive impact is demonstrated for a factory processing 300, 000 tonnes cane. The value of one (1) FRI is $11.340 million or $ 1.134 million for 0.1FRI. Refer to factory (A) below

  43. FACTORY REVENUE AS A FUNCTION OF FACTORY RERCOVERY INDEX (FRI) Factory “A” NB: STD. CANE 10.0422 FF 3.8160

  44. For the period 1991 to 2009 each factory existing is analyzed in accordance with the standard cane quality, standard FRI.91 and the Growers/ Manufacturers share of 62 - 38%. Appleton The value of the increase factory share of 1.68 = $183.159 million. This is due to the growers failure to achieve the standard JRCS (10.0534) costing them $129.484 million and the major upgrading of the factory in 1998/99. This is a good example of the intended outcome of the system with an incentive for investment and efficiency.

  45. Bernard Lodge This level of inefficiencies resulted in the Growers losing of $138.012 million from poor quality in relationship to the standard (10.0534) and the factory $204.997 million, for realizing only 89.00 FRI and 36.87% of the share, this is dictated by the Payment Formula as designed. Frome Similar to Bernard Lodge both sectors failed the standard (10.0534) which costed the Growers $667.232 million and the factory $119.466 million.

  46. Long Pond This once more dictated by the Formula shows the Growers earning to be $95.050 million greater than the standard cane quality (10.0534) and the factory losing $270.974 million for failing the achieve 38% of the share. Monymusk Similar to Long Pond the Monymusk Growers benefit for quality at $119.100 million while the factory lost $252.055 million for poor recovery.

  47. St. Thomas Both sector lost with the Growers $266.616 million and the factory $183.862 million. Even so the Growers were less efficient than the factory. Worthy Park This is most revealing of a system, a perfect example of the challenges to supremacy for each side. The growers earned $295.00 more per tonne of cane above standard (10.0534) with a Gross of $1.119723 billion. Although this factory was so outstanding in its efforts failed by 0.25% of the standard share which cost it $35.198 million.

  48. Summary This system as explained is second to none throughout the cane industries of the world. Its scientific development and with all due consideration given has proven it to be so. The industry has failed to make progress and failed to be viable and profitable. This is attributable to both sectors’ inefficiencies some more than others. Inasmuch as the cane production has fallen to (40.121 million tonnes) less than fifty percent (50%) of its potential and with the industry producing 3.629 million tonnes sugar earning $78.202 billion over the past 19 years it could have been much better. This was shared: Growers = 63.06% at 9.9066 JRCS Manufacture = 36.94% at 89.87FRI The losses estimated for unacceptable performance are: Growers = $1.201344 billion by failing to achieving the standard they set at 10.0534 JRCS Manufacture = $1.066552 billion for excess losses in all areas of processing Total = $2.267896 billion This represents 2.90% of the $78.202 billion earned over the period under review 1991 - 2009 inclusive.

  49. Growers Additional Losses/ Potential Gain JRCS JRCS 10.50 = $ 1309.86 per tonne Average reported 9.9066 $ 1193.53 per tonne Difference ($ 116.34) per tonne Value million 40.121 tonne cane B $4.667 Productivity The average productivity 1991 – 2009 Was – Cane Harvested 40.121 million tonnes - Area Harvested 667446 hectares - Average JRCS 9.9066 Tones sugar per hectare 5.99 Tonnes sugar per hectare (target) 7.5 Growers actual earnings B $ 49.314 Growers potential earnings at target B $ 61.745 Difference at the average JRCS of 9.9066 is B $ 12.431 or 25.20%

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