Required Report - public distribution

**Date:** 4/13/2006

**GAIN Report Number:** AS6023

AS6023

**Australia**

**Sugar**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Kathleen Wainio, Agricultural Counselor

U.S. Embassy

**Prepared by:**

Mike Darby, Agricultural Specialist

**Report Highlights:**

Australian sugar cane production is forecast at slightly lower levels as
the damage from Cyclone Larry is expected to have reduced production by
100,000 -- 200,000 MT. Exports for 2006/07 are also forecast at below
average levels and represent a significant decline from the previous
year, despite improved export prices.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Canberra \[AS1\]

\[AS\]

Table of Contents

[SECTION ONE: SITUATION AND OUTLOOK
3](#section-one-situation-and-outlook)

[Summary 3](#summary-1)

[SECTION TWO: STATISTICAL TABLES 4](#section-two-statistical-tables)

[SECTION THREE: NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING
5](#section-three-narrative-on-supply-and-demand-policy-marketing)

[Sugar Cane for Centrifugal 5](#sugar-cane-for-centrifugal)

[Sugar Cane Area (cut for crushing)
5](#sugar-cane-area-cut-for-crushing)

[Cane Yield 5](#cane-yield)

[Centrifugal Sugar 6](#centrifugal-sugar)

[Sugar production 6](#sugar-production)

[Commercial Cane Sugar Content (CCS)
6](#commercial-cane-sugar-content-ccs)

[Exports 7](#exports)

[Prices 7](#prices)

[Ethanol 8](#ethanol)

[Policy 8](#policy)

[US Sugar Quota 8](#us-sugar-quota)

[Changes to Single Desk 8](#changes-to-single-desk)

[Sugar Industry Reform 9](#sugar-industry-reform)

[Recent Reports from FAS/Canberra 9](#recent-reports-from-fascanberra)

# SECTION ONE: SITUATION AND OUTLOOK

## Summary  {#summary-1}

Australian sugar cane production is forecast at slightly lower levels
for 2006/07. Tropical Cyclone Larry, which recently hit the far north
Queensland cane-growing region caused much damage to crop and
infrastructure and has lowered expectations of the 2006/07 harvest.

Exports for 2006/07 are also forecast at below average levels and
represent a significant decline from the previous year. Earlier
expectations of above average export levels are now unlikely to be
achieved despite improved export prices received for sugar.

The arrival of Cyclone Larry in March of 2006 caused much damage to the
far north Queensland cane-growing region. Post anticipates that the
effect of this cyclone is the reduction in raw sugar production in the
order of 100,000 to 200,000 MT, or the equivalent of 17,100 hectares of
cane. Although it should be noted that it remains too soon to determine
the exact level of damage.

Despite the ferocity of this cyclone, industry sources remain hopeful
that much of the cane damaged can be salvaged. Much of the damage to
mills is expected to be repaired in time for the beginning of harvest.
Also, some areas that were not affected by the cyclone received
well-timed rainfall as a result and are expected to see above average
production in 2006/07.

Recent price increases have improved the outlook for cane production in
Australia. ABARE forecasts local prices to continue increasing through
2006/07 in contrast to the historically low prices that forced industry
restructure in recent years.

Ethanol production has received much attention in the media since the
significant rise in oil prices. Current ethanol production in the
Australian sugar industry is not displacing crystal sugar production.

# SECTION TWO: STATISTICAL TABLES

+---------------------+-----+------+-----+------+-----+------+------+
| **PSD Table**       |     |      |     |      |     |      |      |
|                     |     |      |     |      |     |      |      |
| Sugar, Centrifugal  |     |      |     |      |     |      |      |
+---------------------+-----+------+-----+------+-----+------+------+
|                     | **  | **R  | **  | **Es | **  | **Fo | *    |
|                     | 200 | evis | 200 | tima | 200 | reca | UOM* |
|                     | 5** | ed** | 6** | te** | 7** | st** |      |
+---------------------+-----+------+-----+------+-----+------+------+
|                     | **U | **   | **U | **   | **U | **   |      |
|                     | SDA | Post | SDA | Post | SDA | Post |      |
|                     | Of  | Es   | Of  | Es   | Of  | Es   |      |
|                     | fic | tima | fic | tima | fic | tima |      |
|                     | ial | te** | ial | te** | ial | te** |      |
|                     | \[O |      | \[O |      | \[O |      |      |
|                     | ld\ | **\  | ld\ | **\  | ld\ | **\  |      |
|                     | ]** | [New | ]** | [New | ]** | [New |      |
|                     |     | \]** |     | \]** |     | \]** |      |
+---------------------+-----+------+-----+------+-----+------+------+
| **Market Year       |     | **0  |     | **0  |     | **0  | *    |
| Begin**             |     | 7/20 |     | 7/20 |     | 7/20 | MM/Y |
|                     |     | 04** |     | 05** |     | 06** | YYY* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Beginning         | 543 | 543  | 403 | 343  | 223 | 203  | *(   |
| Stocks**            |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Beet Sugar        | 0   | 0    | 0   | 0    | 0   | 0    | *(   |
| Production**        |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Cane Sugar        | 5   | 5388 | 5   | 5297 | 0   | 5185 | *(   |
| Production**        | 388 |      | 200 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL Sugar       | 5   | 5388 | 5   | 5297 | 0   | 5185 | *(   |
| Production**        | 388 |      | 200 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Raw Imports**     | 3   | 4    | 3   | 4    | 0   | 4    | *(   |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Refined Imp.(Raw  | 7   | 5    | 7   | 5    | 0   | 5    | *(   |
| Val)**              |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL Imports**   | 10  | 9    | 10  | 9    | 0   | 9    | *(   |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL SUPPLY**    | 5   | 5940 | 5   | 5649 | 223 | 5397 | *(   |
|                     | 941 |      | 613 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Raw Exports**     | 4   | 4307 | 4   | 4156 | 0   | 3750 | *(   |
|                     | 248 |      | 100 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Refined Exp.(Raw  | 140 | 140  | 140 | 140  | 0   | 140  | *(   |
| Val)**              |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL EXPORTS**   | 4   | 4447 | 4   | 4296 | 0   | 3890 | *(   |
|                     | 388 |      | 240 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Human Dom.        | 1   | 1150 | 1   | 1150 | 0   | 1150 | *(   |
| Consumption**       | 150 |      | 150 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Other             | 0   | 0    | 0   | 0    | 0   | 0    | *(   |
| Disappearance**     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Total             | 1   | 1150 | 1   | 1150 | 0   | 1150 | *(   |
| Disappearance**     | 150 |      | 150 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **Ending Stocks**   | 403 | 343  | 223 | 203  | 0   | 357  | *(   |
|                     |     |      |     |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+
| **TOTAL             | 5   | 5940 | 5   | 5649 | 0   | 5397 | *(   |
| DISTRIBUTION**      | 941 |      | 613 |      |     |      | 1000 |
|                     |     |      |     |      |     |      | MT)* |
+---------------------+-----+------+-----+------+-----+------+------+

+-----------------+------+-------+------+-------+------+-------+------+
| **PSD Table**   |      |       |      |       |      |       |      |
|                 |      |       |      |       |      |       |      |
| Sugar Cane for  |      |       |      |       |      |       |      |
| Centrifugal     |      |       |      |       |      |       |      |
+-----------------+------+-------+------+-------+------+-------+------+
|                 | **20 | *     | **20 | **    | **20 | **    | *    |
|                 | 05** | *Revi | 06** | Estim | 07** | Forec | UOM* |
|                 |      | sed** |      | ate** |      | ast** |      |
+-----------------+------+-------+------+-------+------+-------+------+
|                 | **   | *     | **   | *     | **   | *     |      |
|                 | USDA | *Post | USDA | *Post | USDA | *Post |      |
|                 | Offi | Estim | Offi | Estim | Offi | Estim |      |
|                 | cial | ate** | cial | ate** | cial | ate** |      |
|                 | \    |       | \    |       | \    |       |      |
|                 | [Old | *     | [Old | *     | [Old | *     |      |
|                 | \]** | *\[Ne | \]** | *\[Ne | \]** | *\[Ne |      |
|                 |      | w\]** |      | w\]** |      | w\]** |      |
+-----------------+------+-------+------+-------+------+-------+------+
| **Market Year   |      | *     |      | *     |      | *     | *    |
| Begin**         |      | *07/2 |      | *07/2 |      | *07/2 | MM/Y |
|                 |      | 004** |      | 005** |      | 006** | YYY* |
+-----------------+------+-------+------+-------+------+-------+------+
| **Area          | 0    | 0     | 0    | 0     | 0    | 0     | *(   |
| Planted**       |      |       |      |       |      |       | 1000 |
|                 |      |       |      |       |      |       | HA)* |
+-----------------+------+-------+------+-------+------+-------+------+
| **Area          | 420  | 441   | 410  | 415   | 0    | 403   | *(   |
| Harvested**     |      |       |      |       |      |       | 1000 |
|                 |      |       |      |       |      |       | HA)* |
+-----------------+------+-------+------+-------+------+-------+------+
| **Production**  | 3    | 38600 | 3    | 39370 | 0    | 37900 | *(   |
|                 | 7483 |       | 8000 |       |      |       | 1000 |
|                 |      |       |      |       |      |       | MT)* |
+-----------------+------+-------+------+-------+------+-------+------+
| **TOTAL         | 3    | 38600 | 3    | 39370 | 0    | 37900 | *(   |
| SUPPLY**        | 7483 |       | 8000 |       |      |       | 1000 |
|                 |      |       |      |       |      |       | MT)* |
+-----------------+------+-------+------+-------+------+-------+------+
| **Utilization   | 3    | 38600 | 3    | 39370 | 0    | 37900 | *(   |
| for Sugar**     | 7423 |       | 7940 |       |      |       | 1000 |
|                 |      |       |      |       |      |       | MT)* |
+-----------------+------+-------+------+-------+------+-------+------+
| **Utilizatn for | 60   | 0     | 60   | 0     | 0    | 0     | *(   |
| Alcohol**       |      |       |      |       |      |       | 1000 |
|                 |      |       |      |       |      |       | MT)* |
+-----------------+------+-------+------+-------+------+-------+------+
| **TOTAL         | 3    | 38600 | 3    | 39370 | 0    | 37900 | *(   |
| UTILIZATION**   | 7483 |       | 8000 |       |      |       | 1000 |
|                 |      |       |      |       |      |       | MT)* |
+-----------------+------+-------+------+-------+------+-------+------+

# SECTION THREE: NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING

## Sugar Cane for Centrifugal

### Sugar Cane Area (cut for crushing)

Area dedicated to sugar cane production in 2006/07 is forecast at
403,000 hectares, down from the revised estimate of 415,000 hectares for
the previous year. Extreme weather conditions experienced recently in
the northern cane growing region are believed to have damaged the
equivalent of 17,200 hectares, although this figure will likely be
revised as more information becomes available.

The forecast of 403,000 hectares for 2006/07, if achieved, would be
below average. Historical figures put the five-year average at around
435,000 hectares. Below average area forecast reflects crop damage from
Cyclone Larry in North Queensland as well as low prices and disease
problems in recent years.

![](media/image2.wmf)

*Source: ABARE Data (July to June)*

### Cane Yield

Post forecasts for 2006/07 assume a cane yield of about 94 MT/hectare,
an historically high level, but not a record. Cyclone Larry brought
beneficial rains to areas in northern Queensland that were not
devastated by the cyclone itself. Furthermore, some key areas received
above average rainfall earlier in the season which is also expected to
contribute to above average yields.

![](media/image3.wmf)

*Source: ABARE Data (July to June)*

## Centrifugal Sugar

### Sugar production

Australian sugar production for 2006/07 is forecast at 5.185 MMT
(international polarization scale -- IPS). This figure would roughly
equal raw sugar production of about 5.0 MMT in typical raw form using a
conversion factor of 1.037.

This figure reflects a decline in production in the vicinity of 100,000
to 200,000 MT as a direct result of Cyclone Larry, which is expected to
reduce cane area available for harvest as well a reduce the Commercial
Cane Sugar content (CCS) of cane in affected areas. At time of this
report the exact impact of the cyclone remains uncertain and production
estimates are likely to be revised as further information becomes
available.

An estimate of 5.185 MMT is considered to be a below average crop
compared with historic data. Post has calculated a five-year average of
about 5.334 MMT (IPS).

![](media/image4.wmf)

*Source: ABARE Data (July to June, MT Actual)*

### Commercial Cane Sugar Content (CCS)

Post forecasts for 2006/07 assume a CCS content of around 13.2 percent
(on a MT actual basis). Despite this figure being lower than earlier
forecasts, it represents an increase on the notional CCS for the
previous year. According to historical data, a CCS of 13.2 percent would
be considered below average with the five-year average of 14.3 percent
(on a MT actual basis).

![](media/image5.wmf)

*Source: ABARE Data (July to June)*

### Exports

Sugar exports for 2006/07 are forecast at 3.75 MMT (IPS), down
significantly from the previous year's level. The decreased export
forecast is in contrast to forecasts reported prior to the cyclone in
north Queensland, when it appeared that greatly improved export prices
would result in increased exports. Exports at this level would be
considered slightly below average and in line with lower production.
![](media/image6.wmf)

*Source: ABARE Data (July to June)*

### Prices

Australian sugar prices have trended upwards from a very low base
according to ABARE data. This price increase is forecast to continue
into the 2006/07 forecast periods.

![](media/image7.wmf)

*Source: ABARE Data (July to June)*

## Ethanol

Post estimates that Australia currently produces about 73 million liters
of ethanol from sugar cane in two plants. The vast majority of this
production is hydrous ethanol, which contains about 10 percent water and
is unsuitable for use in vehicles. Changes are currently underway to
significantly increase the proportion of ethanol suitable for use in
vehicles, as the vast majority of ethanol products used in vehicles is
currently derived from grain products.

Current sugar industry ethanol manufacturing processes are not
displacing crystal sugar production. Local sugar mills currently
manufacture three grades of molasses, with only the poorest grade used
for to make ethanol. This grade is unable to be used for crystal sugar
production and therefore its use displaces stock feed products only.

## Policy

### US Sugar Quota

Tight world sugar supplies have resulted in higher-than-usual
allocations for quota holders. Australia's current FY 2006 TRQ
allocation for raw sugar is 149,126 MT, which is 61,724 metric tons or
41 percent above the WTO minimum traditionally given to Australia of
87,402 metric tons The U.S. Trade Representative (USTR) allocates the
raw cane sugar TRQ among 40 supplying countries based on their share of
exports to the United States between 1975 and 1981.

### Changes to Single Desk 

On January 1, 2006, the Queensland state government made the necessary
arrangements to allow for contractually-based marketing arrangements.
This essentially replaced the existing single desk powers (also known as
"vesting rights") with negotiated commercial arrangements between
millers and Queensland Sugar, the traditional statutory marketer of bulk
export sugar. Industry sources suggest that the majority of mills have
negotiated new contracts with Queensland Sugar, while one mill has opted
out and won an international tender and is now exporting its own sugar.

These recent changes follow changes introduced in January 2005, which
effectively removed restrictions on: delivery of cane to mills,
bargaining between mills and growers, and dispute resolution. These
regulations allowed specific exemptions from vesting rights for specific
purposes, including the production of sugar for alternate uses such as
ethanol and sugar packaged in bags.

### Sugar Industry Reform 

# 

The Australian sugar industry has undergone structural and financial
difficulties over the past decade due to persistent low prices. In 2002,
the government introduced a Sugar Industry Reform Program (SIRP)
providing A\$444 million of assistance over a multiple-year period to
help the industry through immediate short-term difficulties and
longer-term measures to help the industry undertake necessary reform.

A five-year sugar levy was implemented on January 1, 2003 to provide
funding for the SIRP. The levy, A\$0.03 per kilogram (A\$30/MT), is
assessed on domestically produced or imported sugar packaged for retail
sale, and sugar that is used as an ingredient in goods that are produced
in Australia for human consumption. Exports of refined sugar are exempt
from the levy and there is a rebate for exports of sugar-containing
products. Imports of sugar-containing products are also exempt from the
levy.

## Recent Reports from FAS/Canberra

The reports listed below can all be downloaded from the FAS website at:
<http://www.fas.usda.gov/scriptsw/AttacheRep/default.asp>.

  ---------- --------------------------------------------------- ----------
  **Report   **Title of Report**                                 **Date**
  Number**                                                       

  5029       Sugar Semi Annual                                   09/28/05

  5045       Top Food Trends in Australia                        12/05/05

  6002       Ag Down Under, Vol. 1                               01/13/06

  6003       Health Claims & Sugar Content of Fresh Fruit        01/24/06

  6006       Ag Down Under Vol. 2                                01/27/06

  6009       Ag Down Under Vol. 3                                02/15/06

  6013       The Corish Report: "Creating Our Future: Ag & Food  03/08/06
             Policy for the Next Generation"                     

  6015       Ag Down Under Vol. 4                                03/10/06

  6016       Cyclone Larry Affects Sugar Industry                03/21/06

  6019       Ag Down Under Vol 5                                 03/24/06
  ---------- --------------------------------------------------- ----------