Economics of sugarcane production: What does it take for this industry to survive?

Linda Benedict  |  7/8/2008 12:12:04 AM

Michael E. Salassi

The production of sugarcane in Louisiana is a major contributor to the agricultural economy of the state. In total market value, sugarcane is the leading row crop commodity produced in Louisiana. The 2007 market value of Louisiana raw sugar and molasses was $666.9 million, well ahead of both cotton ($224.5 million) and rice ($298.6 million). For the 2007 crop year, Louisiana’s raw sugar factories processed 13.4 million tons of sugarcane, producing 1.46 million tons of raw sugar. Each harvested acre produced an average yield of 34.1 tons of sugarcane in 2007 (an increase of 3.0 tons or 9.6 percent over 2006). The average sugar recovery was 10.89 percent, or 218 pounds of raw sugar per ton of cane, an increase of 7.4 percent or 15 pounds of sugar per ton of cane compared to the 2006 crop.

Raw sugar produced in Louisiana is shipped to sugar refineries for further processing into refined white sugar, and the molasses is used primarily by the livestock industry to feed cattle. Both of these final products are eventually sold throughout the United States. In 2007, 609 producers grew sugarcane on 418,933 acres in 24 Louisiana parishes. The total economic impact on the state’s economy attributable to sugarcane production, processing and raw sugar refining is estimated to exceed $3 billion per year.

Refined sugar can be produced from either sugarcane, after initially being processed into raw sugar, or directly from sugar beets. Only four U.S. states produce sugarcane: Florida, Louisiana, Texas and Hawaii. Florida and Louisiana are the major sugarcane-producing states, accounting for 85 to 90 percent of cane sugar produced annually. From 1996 through 2007, Louisiana has accounted for an average of 37.5 percent of U.S. cane sugar production and 16.8 percent of total U.S. sugar production.

The Louisiana sugar industry currently faces critical economic challenges from several sources, all of which will have a significant impact on what this industry will look like over the next decade. Sugarcane production costs per acre have risen dramatically over the past several years. Raw sugar market prices have historically varied within a rather narrow range and have actually trended downward slightly since 1990 (Figure 1).

Although increases in average sugarcane yield have generally kept pace with rising production costs over the years, the substantial rise in diesel fuel and nitrogen fertilizer costs since 2005 have squeezed much of the profit out of sugarcane production. Total estimated sugarcane production costs for Louisiana have risen from $447 per acre in 2005 to a projected $615 per acre in 2008 (Figure 2). Increased energy prices have caused fuel costs to rise from 10 percent to 18.1 percent of total sugarcane production costs and fertilizer costs to rise from 13.3 percent to 18.3 percent of total sugarcane production costs. A sugar yield of 7,000 pounds per harvested acre would require a raw sugar price of 17.3 cents per pound to cover variable production costs and a price of 22.6 cents per pound to cover total estimated production costs in 2008 (Table 1).

In addition, international trade agreements, such as the North American Free Trade Agreement (NAFTA) and the recently approved Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), have opened up the domestic U.S. sugar market to potentially more foreign imports, which would reduce market prices for sugar producers in Louisiana as well as across the country. Under the current sugar farm program, the USDA supports U.S. sugar market prices by using allotments to restrict marketing of domestically produced sugar. Increased foreign imports of sugar could cause the USDA to restrict domestic production to maintain the market price. Limiting production increases fixed costs per unit of output for both sugarcane farms and raw-sugar factories.

These economic challenges currently facing the Louisiana sugar industry raise the question: What does it take for this industry to survive?

Sugar title continuation of the farm bill
Sugar is one of the many commodities whose domestic market price is supported by provisions of the farm bill. The basic goals of U.S. agricultural policy, as stipulated in farm bills enacted by Congress, have been to stabilize and support income to farmers across the country. A stable market price sufficient to cover total production costs is critical in the production of any commodity, and sugar is no exception. Although sugar is a farmprogram commodity like corn, soybeans, rice and cotton, its price support program is different from the other commodities. Sugar producers receive no government payments. The market price sugar producers receive is supported by indirectly restricting domestic production through marketing allotments, which limit sales of domestically produced sugar from either sugarcane or sugar beets.

Unlike most other program commodities, sugar is import-sensitive, meaning that the United States consumes more sugar than it produces. Imports of foreign sugar are limited by a tariff rate quota in an effort to support market prices for domestic producers. Domestic sugar production in Louisiana and other sugar- producing states depends on the  continuation of a farm program that limits the possibility of excess foreign imports driving down the domestic sugar price to the detriment of domestic growers.

Increased yield per acre  
As sugarcane production costs per acre increase, farmers must minimize production costs per unit of output as much as possible to help ensure their profitability. With relatively stagnant market prices for raw sugar, managing costs per unit of output is critical. Although many factors can affect per-unit production costs, the single greatest factor is sugar yield per acre. Table 1 shows how a 10 percent change in sugar yield per acre can change production costs by approximately 1.5 to 2 cents per pound. For this reason having a viable sugarcane variety-development program has been and will continue to be the lifeblood of Louisiana’s sugar industry.

The sugarcane breeding program in Louisiana is operated under a threeway cooperative agreement among the LSU AgCenter Sugar Research Station in St. Gabriel, the U.S. Department of Agriculture’s Agricultural Research Service Sugarcane Research Unit in Houma and the American Sugar Cane League in Thibodaux. Through this program, researchers develop sugarcane varieties that can be grown successfully in Louisiana given our climatic and agronomic conditions. Two factors affect the sugar yield per acre of sugarcane produced: tons of cane per acre and pounds of sugar per ton of cane. One of major goals of sugarcane variety development in Louisiana is to develop sugarcane varieties that have high tonnage as well as high sugar per ton.

Sound farm business management practices  
Research across all types of farms has shown that the most successful farms in terms of income or net returns are those for which the manager made sound management decisions. This is especially true in today’s agriculture. Sugarcane producers must use sound business practices to help ensure continued profitability. These business functions are generally grouped into three categories: planning, implementation and control.

Planning is the most fundamental and important part of sound farm management. It is difficult to make the right decision unless first some plan has been formulated specifying the overall direction of the farm business operation. This plan is highly dependent on the farm’s overall short-term and long-term goals.

Once a plan for the coming year has been defined, implementation involves acquiring the necessary resources and materials to implement it. Acquiring production financing, purchasing fuel, fertilizer and chemicals in a timely and price-efficient manner and overseeing the entire production operation are examples of implementing a production plan.

Control involves monitoring production results and taking corrective action if necessary. It ensures that the overall plan is being followed and will produce the desired results. This farm management function can only be successful with good record keeping.

Biofuel from sugarcane
Another factor that will affect the future economic viability of the Louisiana sugar industry is the eventual role of sugarcane for biofuel production. In 2006, the United States produced 4.8 billion gallons of ethanol for fuel. Almost all was produced using corn as the primary feedstock. Although corn is currently the least expensive feedstock for ethanol production, it does have some disadvantages. The increased demand for corn for ethanol production has pushed corn market prices to record highs. These higher prices mean higher livestock feed prices at the producer level and eventually higher retail meat prices at the consumer level. In addition, because the expected demand for ethanol is expected to go to 9 billion gallons in coming years and the fact that ethanol has approximately two-thirds the energy value of gasoline, experts estimate 20 million acres of corn will be required nationwide to meet this demand. Such a large amount of acreage used for fuel production raises an efficiency question in the use of land resources.

The focus of biofuel production research today is on cellulosic conversion – converting cellulose found in plant biomass to ethanol. Although ethanol can be produced from sugarcane juice, the economics have not been commercially feasible in the United States. However, the use of the entire sugarcane plant as a feedstock for ethanol production through cellulosic conversion could offer unique economic opportunities for the Louisiana sugarcane industry. In 2007, the AgCenter’s Sugar Research Station, in conjunction with USDA/ARS Sugarcane Research Unit in Houma and the American Sugar Cane League, released three high-fiber cane varieties that could be commercially produced as a biomass feedstock. When this process becomes commercially viable, the Louisiana sugarcane industry will be in a unique position to capitalize on this opportunity.

Value-added opportunities
Finally, to remain economically viable, the Louisiana sugarcane industry needs to continue to identify, evaluate and pursue value-added opportunities. These can take on many forms, from using sugarcane or sugarcane processing byproducts in the development of new commercial products that add additional revenue to existing industry operations to vertically integrating the state’s industry up the supply chain to capture more of the value associated with converting sugarcane into refined sugar.

Much of the research conducted at the Audubon Sugar Institute is directed toward increasing the economic efficiency of the state’s existing raw-sugar factories as well as evaluating potential new products from sugarcane or processing byproducts. Efforts have been under way in the Louisiana sugar industry to partner with other agribusinesses to build a new sugar refinery in the state in which Louisiana producers would have an ownership interest. Such an endeavor would provide additional revenue and help producers weather the agronomic and economic risks associated with producing sugarcane.

For the Louisiana sugar industry to remain economically viable, it must look at every opportunity to increase economic efficiency at every stage of the production cycle. A federal farm program that stabilizes and supports domestic market prices, the continued availability of new, higher-yielding varieties, the use of sound farm business management practices, the potential to enter the biofuel production arena, and the continued search for other value-added opportunities will help ensure that sugarcane production in Louisiana will withstand environmental, climatic, economic and political challenges and continue to contribute to the overall economy of the state in the coming decades.

Michael E. Salassi, J. Nelson Fairbanks Professor, Department of Agricultural Economics & Agribusiness, LSU AgCenter, Baton Rouge, La.

(This article was published in the spring 2008 issue of Louisiana Agriculture.)
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