Irrigation Prices in the Queensland Sugarcane Regions
Total Page:16
File Type:pdf, Size:1020Kb
IRRIGATION PRICES IN THE QUEENSLAND SUGARCANE REGIONS AN ANALYSIS OF THE COMMUNITY BENEFITS AND COSTS OF IMPROVED IRRIGATION PRICING APRIL 2020 Prepared by the Australian Sugar Milling Council with economic modelling conducted by Lawrence Consulting WHO WE ARE AUSTRALIAN SUGAR MILLING COUNCIL LAWRENCE CONSULTING The Australian Sugar Milling Council (ASMC) is the peak Lawrence Consulting provides specialised professional services to representative body for the sugar manufacturing sector, businesses and government agencies across Australia. representing the five companies that collectively produce The company has significant consultancy experience in undertaking approximately 90% of Australia’s raw sugar at 17 sugar mills economic and statistical research and analysis and the production across Queensland. of marketable economic reports and related products across a broad These mills also own and operate large sugarcane farms. range of industries, projects and skill areas. Sugar manufacturing generates around $2 billion in revenue Lawrence Consulting specialises in analysing the dynamics of annually – 75% of which comes from global raw sugar sales. regional economies. They provide timely, accurate and authoritative economic and industry data and analysis on a regional basis that The Australian sugar industry – including millers and growers can assist business, government and individuals in their decision – is responsible for $4 billion in annual economic activity and making process. underpinning 23,000 jobs in regional Queensland. DISCLAIMER To the maximum extent permitted by law, the information contained in this document is given without any liability to the Australian Sugar Milling Council or any of their related bodies corporate or their respective directors, officers, partners, employees, advisers and agents (Relevant Parties). No representation or warranty, express or implied, is made by any Relevant Party about the accuracy, completeness or fairness of the information, statements or opinions in this document. No responsibility or liability is accepted by any of them for that information or those opinions or for any errors, omissions, misstatements (negligent or otherwise) or for any communication written or otherwise, contained or referred to in this document. CONTENTS EXECUTIVE SUMMARY 4 1. INTRODUCTION 5 2. BACKGROUND 5 2.1 DETERMINATION OF IRRIGATION PRICES 5 3. THE INCREASE IN IRRIGATION PRICES SINCE 2006/07 6 4. THE IMPACT ON GROWERS AND MILLERS 8 4.1 SUGARCANE GROWERS 8 4.2 SUGAR MILLERS 10 5. BENEFITS OF IMPROVED PRICE INCENTIVES 11 5.1 REDUCED STRANDED ASSET RISK 11 5.2 SHORING UP MILL VIABILITY THROUGH GENERATION OF ADDITIONAL REVENUES AND EARNINGS 11 5.3 REGIONAL DEVELOPMENT 12 5.3.1 FINDINGS OF ECONOMIC MODELLING 12 5.4 ENVIRONMENTAL 14 ATTACHMENT 1: ECONOMIC MODELLING ASSUMPTIONS 15 LIST OF CHARTS AND TABLES CHART 1: QUEENSLAND SUGAR INDUSTRY WATER COSTS BY WATER SUPPLY SCHEME (PER ML) CHART 2: TOTAL QUEENSLAND SUGAR INDUSTRY WATER COSTS BY WATER SUPPLY SCHEME CHART 3: COMPOUND AVERAGE GROWTH RATE INCREASES IN QCA REGULATED BULK WATER AND DISTRIBUTION CHARGES (2006/07-2024/25) CHART 4: PERCENTAGE CONTRIBUTION OF EACH COST DRIVER TO THE INCREASES IN BULK AND DISTRIBUTION CHARGES BETWEEN 2006/07 AND 2024/25 CHART 5: IRRIGATION COSTS AS A PERCENTAGE OF ALL IRRIGATED CANE FARM COSTS CHART 6: IMPACT OF INCREASING IRRIGATION CHARGES IN THE BURDEKIN TABLE 1: IRRIGATION REQUIREMENTS OF THE QUEENSLAND CANE FIELDS CHART 7: CANE PRODUCTION BY MILL AREA (AND WATER SUPPLY SCHEME) CHART 8: CANE YIELD BY MILL AREA (AND WATER SUPPLY SCHEME) CHART 9: IMPACT ON MILL EBIT FROM VARIOUS DECREASES IN CANE SUPPLY TABLE 2: QCA AND SUNWATER ESTIMATES OF WATER USAGE IN QUEENSLAND WATER SUPPLY SCHEMES TABLE 3: ECONOMIC BENEFITS OF A 15% REDUCTION IN WATER PRICES BY MILL AREA AND WSS TABLE 4: ECONOMIC BENEFITS OF A 25% REDUCTION IN WATER PRICES BY MILL AREA AND WSS TABLE 5: QCA PROPOSED PRICES AND 15% AND 25% DECREASES EXECUTIVE SUMMARY ASMC POLICY RECOMMENDATION The Australian Sugar Milling Council (ASMC) is calling for a 15-25% reduction in the Queensland Competition Authority (QCA) proposed water tariffs between 2020/21 – 2023/24 for all Water Supply Schemes. Key Points • Total costs for sugarcane (cane) field irrigation would increase from around $39 million in 2006/07 to $79 million by 2023/24 on a constant consumption basis if the QCA’s draft 2020/21 – 2023/24 irrigation price recommendations were adopted. This would represent a 4% per annum increase between 2006/07 and 2023/24. • Water represents upwards of 15% of a cane irrigator’s total farm costs. A significant increase in irrigation prices coupled with the current, persistently low sugar (and cane) prices would increase total cane costs above long-run revenues. This will exacerbate the current under-utilisation of water allocations and contribute to the flat lining of cane yields currently being observed in all irrigated cane areas. Stagnant and falling cane volumes and mill under-utilisation threatens the viability of mills because 70% of manufacturing costs are fixed and these costs are increasing. • A 25% price decrease in the proposed 2020/21 – 2023/24 irrigation prices in the Mareeba-Dimbulah, Burdekin-Haughton, Pioneer River, Eton, Bundaberg and the Lower Mary River Water Supply Schemes (WSSs) (to various pre-2016 levels) could increase water usage by 130,400 ML or 4% over these four years. • Cane production could also increase by 1.3 million tonnes which would deliver the following community benefits over the 2020/21 – 2023/24 period: BENEFITS 1. Improved mill sustainability via the generation of an additional $88.3 million in raw sugar, molasses and energy revenues (output). 2. Queensland regional development via the generation of an additional $131.9 million in indirect output ($220 million in total output). This $220.3 million in total output generates $41.7 million in incomes, an additional 140 direct and indirect jobs throughout sugar communities and $87.9 million in value add (Gross State Product). 3. Lower risk of stranded water assets via an increase in the utilisation of water allocations, which lowers the socialisation of costs from non-users on to users, making Water Supply Schemes (WSS) more affordable and viable. 4. Environmental gains via reduced losses of nitrogen and herbicides. COSTS (1) SunWater’s revenues would fall by $68 million as a result of the lower water prices (but increasing consumption). 4 | IRRIGATION PRICES IN THE QUEENSLAND SUGARCANE REGIONS 1 INTRODUCTION Approximately two-thirds of the state’s sugarcane (cane) production requires affordable and reliable water supply. The combined impacts of sustained, low global sugar and cane prices, and increasing cane production costs is resulting in flat lining cane yields and reductions in the area of cane under cultivation. Falling cane volumes threatens the viability of certain Australian sugar mills because of the high percentage (70%) of fixed costs. A significant source of increasing costs in irrigated cane farming is regulated irrigation (water) charges. This paper examines the increase in these charges since 2006/07 and assesses the increasingly negative impact on cane farming and sugar milling operations. The economic and environmental benefits of achieving more prudent and economically efficient water pricing are also outlined. 2 BACKGROUND The Queensland Competition Authority (QCA) delivered its report ‘Rural irrigation price review 2020-24’ to the Deputy Premier and the Minister for Natural Resources, Mines and Energy on 31 January 2020. Like numerous reports before it, this report recommends to the Queensland Government further substantive increases in irrigated water prices between 2020/21 and 2023/24 (and beyond). The government will now consider the QCA’s findings, and the views of stakeholders, and make a decision on future prices. This decision comes at a critical time – with sugar and cane prices at decade low levels and the industry financially impaired, regional economies hurting, utilisation of water allocations falling and stranded asset risk now emerging. In guiding its decision, government will need to consider a variety of objectives including the price levels that will promote economic efficiency and outcomes that are in the broader public interest. In keeping with the original regional development objectives of the state’s water supply schemes (WSSs), the question then becomes, at what price levels are allocation holders incentivised to better utilise their allocations and irrigate optimally to maximise regional development and environmental outcomes? 2.1 DETERMINATION OF IRRIGATION PRICES The Queensland Government sets the price of irrigation water supplied by SeqWater in South-East Queensland and SunWater elsewhere in Queensland to recover the associated costs of the infrastructure. Of relevance to the sugar industry are SunWater’s bulk and distribution water charges, proposed by SunWater but ultimately subject to QCA scrutiny and determination. Prices are set following a QCA review process generally covering a 4–5 year period. The QCA recommends prices to government, which makes the final decision. Government has a number of regulatory pricing principles1 for the water sector to guide its decision making. These principles include, inter alia, economic efficiency and the public interest. 1 https://www.qca.org.au/project/queensland-wide-issues/water-pricing-principles/ | 5 3 THE INCREASE IN IRRIGATION PRICES SINCE 2006/07 Sugarcane growers in the drier areas of the state consume