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The unfair 1989 SUGAR TRIBUNAL DRAFT AWARD 1989

29/03/2012

The 1989 Sugar Tribunal, amongst its other recommendations, is advocating a new sharing formula which will supposedly award basic costs (not the entire proceeds) of $21 per tonne to farmers and $14 per tonne to millers (ie a 60/40 split, with some modification), while any remaining proceeds will be split 80/20. While the objectives of wishing to encourage greater all-round efficiency and higher sugar content of cane are no doubt desirable, the proposed sharing formula may not be fair to farmers, especially when sugar receipts are down and/or cane output is high.

 

The actual overall shares for farmers may range from below 60% to above 70%, depending on what the sugar proceeds are and how much cane is produced. However, during periods of low sugar receipts, the formula leads to not just lower gross receipts (as might be expected) but to lower shares. Worst of all, farmers’ shares and gross receipts will be even lower if the low sugar receipts are associated with high cane output.

 

The eventual results may be unfair losses for farmers, greater debt and bankruptcies, further discouragement of the recently increasing indigenous Fijian farmers, increased rural unemployment and also lower rents for land-owners. If the canefarmers are not satisfied by the Tribunal’s method and basis for decision-making, there may be continuing instability and possibly decline in Fiji’s most important industry.

 

Fair Returns to Both Parties?

 

With the prices of sugar and molasses being determined outside of Fiji, the sharing of the proceeds is a zero sum game. If returns are low, it is impossible to guarantee adequate returns on investment to both millers and farmers; special protection of one party must mean lower incomes for the other.

 

For this reason, the most acceptable Commission of Inquiry so far, Lord Denning’s, decided that the fairest and most workable system was to award each party a fixed proportion (for farmers 70% originally) of the gross proceeds, out of which they paid for all their costs, derived profits in good years, and equally shared losses in bad years. It is significant that in recent years, the proportion for farmers was increased to more than 70% to when output of sugar was high.

 

It should not be forgotten that even then, as now, all the major risks (disease, drought, floods, hurricanes) of the sugar industry were borne relatively more by the farmers who received no revenue until their cane actually went into the mills. The millers only paid for the good cane that they accepted.

 

The New Sharing Formula

 

The Tribunal’s new formula claims to allot to each party, their basic costs on a 60/40 basis per ton of cane. It admitted, however, that “FSC’s estimate of the average growers’ cost to produce a tone of cane was accepted rather than the figures the (Growers’) Council submitted at the enquiry which were lower than FSC’s estimate”.

It seems impolitic, if not wrong on principle, that the Tribunal should accept the miller’s estimates of the costs of growing cane, when the millers obviously have a vested interest in positing a lower figure. (Would the Tribunal have accepted the growers‘ estimates for milling cane?).

 

Since it was on the basis of costs that Denning and his independent accountants originally established the 70/30 split, any changes by the Tribunal, if advocated on purely economic grounds, must be justified on the basis of evidence produced by independent cost analyses of both growing and milling operations, which would be more acceptable to both parties.

 

Farmers’ Proposed Shares

 

Looking only at the effects of the formula for proportions (disregarding the effects of burnt cane, transport allowances and some reallocation of costs) the following table gives the possible farmers’ shares and gross receipts under the new formula, at different levels of cane output (coming down) and different levels of sugar proceeds (going horizontally).

 

┌───────────────────────────────────────────────────────┐

│   Table 1         FARMERS’ PERCENTAGE SHARE (%)       │

│                                                       │

│ Sugar Rev ($m) 150    170    190    210    230    250 │

│ Cane (000 tonnes)                                     │

│      3000     66.0   67.6   68.9   70.0   70.9   71.6 │

│      3200     65.1   66.9   68.2   69.4   70.3   71.1 │

│      3400     64.2   66.1   67.5   68.7   69.7   70.5 │

│      3600     63.3   65.3   66.8   68.1   69.1   70.0 │

│      3800     62.5   64.5   66.1   67.5   68.6   69.5 │

│      4000     61.6   63.7   65.5   66.8   68.0   68.9 │

│      4200     60.7   63.0   64.8   66.2   67.4   68.4 │

│      4400     59.8   62.2   64.1   65.6   66.8   67.9 │

│      4500     59.4   61.8   63.7   65.3   66.5   67.6 └───────────────────────────────────────────────────────┘

   Table 2     FARMERS’ AGGREGATE INCOME  ($m)         │

│                                                       │

│ Sugar Rev ($m) 150    170    190    210    230    250 │

│ Cane (000 tonnes)                                     │

│      3000     99.0  115.0  131.0  147.0  163.0  179.0 │

│      3200     97.7  113.7  129.7  145.7  161.7  177.7 │

│      3400     96.3  112.3  128.3  144.3  160.3  176.3 │

│      3600     95.0  111.0  127.0  143.0  159.0  175.0 │

│      3800     93.7  109.7  125.7  141.7  157.7  173.7 │

│      4000     92.4  108.4  124.4  140.4  156.4  172.4 │

│      4200     91.0  107.0  123.0  139.0  155.0  171.0 │

│      4400     89.7  105.7  121.7  137.7  153.7  169.7 │

│      4500     89.1  105.1  121.1  137.1  153.1  169.1 │

├───────────────────────────────────────────────────────┤

│ 70% share:   105.0  119.0  133.0  147.0  161.0  175.0 │

│ Diff. from income at 3,400th tonnes                   │

│  ($m)         -8.7   -6.7   -4.7   -2.7    -.7   +1.3 │

└───────────────────────────────────────────────────────┘

 

The figures show that the farmers’ share will be lower, the lower are the sugar proceeds, but more unfortunately, a high output of cane will be associated with an even lower share and gross income. The farmers will not achieve 70% unless the sugar proceeds are high and their cane output is low (i.e. some combination of high sugar prices and high sugar content).

 

But suppose that the farmers with extra effort (for cultivation, pesticides, fertilizer, harvesting) produce a bumper crop usually at higher costs. If, however, the cane has a low sugar content because of unforseen and uncontrollable adverse weather conditions, while the price of sugar also falls internationally, the formula will give the farmers not only a lower share of gross revenue, but also a lower overall revenue despite their increased costs. The millers’ share and revenue will of course be correspondingly increased.

 

Thus whenever the sugar receipts are low and/or cane output is high, according to the new formula, the farmers will be asked to bear a greater proportion of the burden than the millers. In the very good times, their share will just approach what they have been receiving recently.

 

While it is usually argued that farmers are more flexible with respect to costs, this is surely because their costs, such as unpaid family labour and their debt payments to unofficial moneylenders, are less visible than in large corporations like FSC. The costs and burdens are real and felt nevertheless. One should remember that reducing the farmers’ share of gross receipts by 10% to 15% will reduce their net receipts by a much greater proportion.

 

Returns to the Parties?

 

The Draft Award points out that the 80/20 division of the funds, after costs had been deducted, would be sufficient to “enable FSC in a normal year to receive sufficient to pay its shareholders a reasonable dividend and provide a modest sum for reserves”. It makes no statement about whether the sums received by the growers would be an adequate return for their investment and labour, whether it would enable them to pay off their heavy debts, and whether it would be sufficient to encourage the canefarming sector to grow, or even to maintain it at its current state.

 

It is unfortunate that those in power too easily see the costs and problems of a single large corporate body whose top executives are socially accessible, visible and articulate. They are unable to see the interests of twenty thousand small illiterate cane farmers whose costs are not easily quantifiable. Yet these tens of thousands of farmers, canecutters, casual farm labour, and their dependents ought to be the major interests safeguarded by those in power.

 

No doubt there is a case for keeping FSC’s finances buoyant for further growth and investment. However, rather than doing this at the farmers’ expense, there surely is a strong case for allowing tax exemptions etc, which would be insignificant costs to the nation, for keeping the spine of its economy in good condition.

 

Other Damages

 

One of the significant findings of the 1984 Bienefield Employment Mission was that the cane farming industry had been the largest absorber of new labour for the previous decade. This will not be possible if the farmers are not given a reasonable margin from which to pay for farm labour for cultivation and harvesting. One set of likely victims will be indigenous Fijian cane cutters, who in recent years have found this activity to be the major source of their cash income.

 

The reduced farming incomes will hit the relatively smaller and inefficient farmers first and foremost. A significant proportion among them will be indigenous Fijian farmers who, in contrast to more experienced and efficient Indian farmers, have found great difficulty in surviving the years when sugar and cane prices have been depressed. Reduced net sugar earnings must also seriously reduce farmers’ capacity to pay rents on the land they lease, thus exerting a downward pressure on land rents all round.

 

Other clauses of the Tribunal make little sense also. The harsh penalties against burnt cane is justified using Australian experience, yet the Tribunal notes that the change in Australian towards green cane was because farmers there now had the “ability to mechanically harvest green cane“. In Fiji, howver, it has been long recognised that mechanical harvesting is unsuitable on most of the sugar terrain, would create a massive loss of jobs while contributing to another drain of foreign exchange.

 

To grant transport allowances for cane on the distance the “crow flies” between the farm and the mill, rather than the distance actually travelled by the cane trucks, offends against common sense. FSC’s sugar transport costs are not based on the distance the plane flies, but on actual costs of shipping.

 

Need for Consensus

 

It is not too late for a return to the bargaining table. Even if no consensus is reached, there could be a continuation of the existing formula, that has worked reasonably well for almost two decades in an industry that is unmatched anywhere in the world.

 

 

Following was cut for reasons of space:

 

Local Bosses and Public Policy

 

Some ten years ago in an article on the history of cane farmers’ struggles against CSR, I warned of the danger that locals who had replaced CSR officials might come to implement similar policies which treated unfairly the politically weak canefarmers and workers. I also warned that Government might take on the role of exploitation that private capitalists previously held. If those in power and FSC executives insist on reducing the farmers’ share of the proceeds as currently intended, they will be going down this path, with unfortunate consequences for the sugar industry and the entire economy.

 

┌─────────────────────────────────────────────────────────────────────────────────────┐

│ Table 1  FARMERS’ PERCENTAGE SHARE (%)                                              │

│          (at different levels of cane output and sugar receipts)                    │

├─────────────────────────────────────────────────────────────────────────────────────┤

│                      Gross Receipts from Sugar ($m)                                 │

│           150    160    170    180    190    200    210    220    230    240    250 │

│ Cane                                                                                │

│ Prod.                                                                               │

│   3000   66.0   66.9   67.6   68.3   68.9   69.5   70.0   70.5   70.9   71.3   71.6 │

│   3100   65.6   66.5   67.3   68.0   68.6   69.2   69.7   70.2   70.6   71.0   71.3 │

│   3200   65.1   66.0   66.9   67.6   68.2   68.8   69.4   69.8   70.3   70.7   71.1 │

│   3300   64.7   65.6   66.5   67.2   67.9   68.5   69.0   69.5   70.0   70.4   70.8 │

│   3400   64.2   65.2   66.1   66.8   67.5   68.2   68.7   69.2   69.7   70.1   70.5 │

│   3500   63.8   64.8   65.7   66.5   67.2   67.8   68.4   68.9   69.4   69.9   70.3 │

│   3600   63.3   64.4   65.3   66.1   66.8   67.5   68.1   68.6   69.1   69.6   70.0 │

│   3700   62.9   64.0   64.9   65.7   66.5   67.2   67.8   68.3   68.8   69.3   69.7 │

│   3800   62.5   63.6   64.5   65.4   66.1   66.8   67.5   68.0   68.6   69.0   69.5 │

│   3900   62.0   63.1   64.1   65.0   65.8   66.5   67.2   67.7   68.3   68.8   69.2 │

│   4000   61.6   62.7   63.7   64.6   65.5   66.2   66.8   67.4   68.0   68.5   68.9 │

│   4100   61.1   62.3   63.4   64.3   65.1   65.9   66.5   67.1   67.7   68.2   68.7 │

│   4200   60.7   61.9   63.0   63.9   64.8   65.5   66.2   66.8   67.4   67.9   68.4 │

│   4300   60.3   61.5   62.6   63.5   64.4   65.2   65.9   66.5   67.1   67.7   68.2 │

│   4400   59.8   61.1   62.2   63.2   64.1   64.9   65.6   66.2   66.8   67.4   67.9 │

│   4500   59.4   60.7   61.8   62.8   63.7   64.5   65.3   65.9   66.5   67.1   67.6 │

│                                                                                     │

├─────────────────────────────────────────────────────────────────────────────────────┤

│ Table 2   FARMERS’ AGGREGATE INCOME  ($m)                                           │

├─────────────────────────────────────────────────────────────────────────────────────┤

│                            Gross Sugar Receipts ($m)                                │

│           150    160    170    180    190    200    210    220    230    240    250 │

│ Cane                                                                                │

│ Prod.                                                                               │

│   3000   99.0  107.0  115.0  123.0  131.0  139.0  147.0  155.0  163.0  171.0  179.0 │

│   3100   98.3  106.3  114.3  122.3  130.3  138.3  146.3  154.3  162.3  170.3  178.3 │

│   3200   97.7  105.7  113.7  121.7  129.7  137.7  145.7  153.7  161.7  169.7  177.7 │

│   3300   97.0  105.0  113.0  121.0  129.0  137.0  145.0  153.0  161.0  169.0  177.0 │

│   3400   96.3  104.3  112.3  120.3  128.3  136.3  144.3  152.3  160.3  168.3  176.3 │

│   3500   95.7  103.7  111.7  119.7  127.7  135.7  143.7  151.7  159.7  167.7  175.7 │

│   3600   95.0  103.0  111.0  119.0  127.0  135.0  143.0  151.0  159.0  167.0  175.0 │

│   3700   94.3  102.3  110.3  118.3  126.3  134.3  142.3  150.3  158.3  166.3  174.3 │

│   3800   93.7  101.7  109.7  117.7  125.7  133.7  141.7  149.7  157.7  165.7  173.7 │

│   3900   93.0  101.0  109.0  117.0  125.0  133.0  141.0  149.0  157.0  165.0  173.0 │

│   4000   92.4  100.4  108.4  116.4  124.4  132.4  140.4  148.4  156.4  164.4  172.4 │

│   4100   91.7   99.7  107.7  115.7  123.7  131.7  139.7  147.7  155.7  163.7  171.7 │

│   4200   91.0   99.0  107.0  115.0  123.0  131.0  139.0  147.0  155.0  163.0  171.0 │

│   4300   90.4   98.4  106.4  114.4  122.4  130.4  138.4  146.4  154.4  162.4  170.4 │

│   4400   89.7   97.7  105.7  113.7  121.7  129.7  137.7  145.7  153.7  161.7  169.7 │

│   4500   89.1   97.1  105.1  113.1  121.1  129.1  137.1  145.1  153.1  161.1  169.1 │

└─────────────────────────────────────────────────────────────────────────────────────┘

 

NOTE THAT FOR OUTPUT

BETWEEN 3 AND 3.5m tons, farmers’ aggregate revenue

= 0.8R ‑ 6.68x ‑ .96

 

MORE THAN 3.5 tons,

= 0.8R ‑ 6.60x ‑ 1.24

 

 

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