The Philippine Sugarcane Industry: Challenges and Opportunities


Good afternoon to everyone, especially to the officers and staff of Banco de Oro led today by no less than Ms. Teresita Sy!

It is my honor to stand in front of you today to make a case for the sugarcane industry. For me, the challenge at hand is personal because I am a true blooded sugarcane farmer. It is also a challenge of the industry because I realized that as Administrator I play a very important part for this industry.

Last June, I was invited to speak at the Asia Pacific Sugar Conference on the topic: The Philippines: A Structural Exporter? That topic clearly suggests how the international community view our industry – a question mark!. But on the positive note, that also suggests that there is a future for our industry.

Thus, I believe that this is a great opportunity for me to share with you some important facts and insights on the Philippine Sugarcane Industry, including our plans for the years ahead. After my presentation, I hope that I would have aptly answered the title of my presentation.

The years ahead are critical, and offer great opportunities and challenges to the Philippine Sugarcane Industry. Foremost is the fact that the tariff on imported sugar under the ATIGA is now 28%, starting January 2012. This will continue to decline annually until January 2015, when it shall be no more than 5%. With cost of production a little higher than our neighbouring competitors, the possible entry of cheaper imported sugar to service the needs of 96 million Filipinos is considered a threat by the country’s sugar producers.

My presentation will cover four major topics: 1) basic information about the Philippine Sugarcane Industry; 2) the Industry Roadmap; 3) the Industry challenges; and 3) the Opportunities ahead.

The Philippines Sugarcane Industry contributes no less than P70 Billion to our economy annually. Out of the total land area of about 30 million hectares, sugarcane is planted toabout 422,500 hectares in the Philippines, with about 62,000 farmers. There are 29 operating raw mills with combined crushing capacity of 185,000 metric ton cane per day.

There are 14 refineries with combined capacityw of 8,000 metric tons refined sugar perday, all operating adjunct to the raw mill. In terms of ethanol, there are only 4 bioethanol

distilleries, with total annual rated capacity of 133 million liters.

Geographically, there are 7 sugar mills and 1 distillery in Luzon, 4 sugar mills in Mindanao, and the rest are located in the Visayas region, which produces about 65% of the country’s sugar output. The biggest sugarcane hectarage is in the Visayas, particularly in Negros island, followed by the fast-growing area of Mindanao.

In terms of farm sizes, 75% of farms have sizes less than 5 hectares and another 11% have sizes of 5 to 10 hectares. Of the remaining farms, 11% have sizes 10 to 50 hectares and a mere 2% have sizes 50 to 100 hectares, while only 1% with a size of over 100 hectares.

 

In terms of total area covered, the small farms of 10 hectares and below cover about 36%, and the big farms of 50 hectares and above cover about 34%, while the farms of sizes 10 to 50 hectares take up the remaining 30%. Area planted to sugarcane for the past decade have practically maintained at about 390,000 hectares, with annual changes primarily due to local prices. But the recent years have seen an increase when local prices breached the 1,000 peso per bag level, ($0.23/pound). In addition, the biofuels law which mandated the blending of bioethanol have encouraged expansion as new fields are cultivated.

 

The apparent stable hectarage is reflected in the sugarcane harvested and sugar produced. Except in the past 3 crop years, national production for the past decade have had no significant changes. Production has been a cycle of up and down as the country pursued a strategy of maintaining sugar self-reliance and discouraging exports, because of perceived low world market prices. Productivity in terms of tonne cane harvested per hectare – averaging at about 60 tons per hectare – and sugar produced per hectare at an average of less than 6 tons per hectare, also tell a similar story. But please note that the variation in yearly production is also largely affected by weather, which have shifted from the pattern of past years.

Sugar produced in the Philippines in the last decade, at least until year 2010, has beenalmost entirely for the domestic market and the US quota. In the last couple of years - buoyed by high production – the Philippines began exporting sugar to the world with a volume of more than 300,000 metric tons and another 300,000 metric tons last crop year. This brought the Philippines back into the global sugar trade map. Over the last four years, the Philippines studied the factors that affect sugar prices. Maybe, the threat of tariff-free trade with ASEAN has been the impetus that enabled the country to draw effective strategies for global competitiveness. As a result, the last three crop years saw better composite prices for Philippine sugar – much better in comparison to the prices of ten years prior.

 

From sugar, let’s now look at bioethanol and power cogeneration. In year 2006, the Philippines enacted the Biofuels Law. This law mandated the blending of bioethanol into gasoline sold in the country. The blending started as voluntary but is now mandatory at 10% bioethanol. For year 2012, this translates to 486 million liters of ethanol requirement. But with our 4 operational distilleries, we project to produce only 133 million liters, or a deficit of about 80%, which we source from imports.

 

Another area that we are closely studying is power generation. The Philippines generated about 68,000 GWh in the year 2010, with the largest coming from coal plants and only about 288 GWh from biomass plants. We see this as an opportunity as we join the rest of the world for “greener” power sources. With the feed-in-tariff for biomass pegged at P6.63 per Kilowatt-hour, we hope that most of the sugar mills, if not all, will sell power as a new revenue stream for the industry.

 

So, where are we going? To answer this, we have drawn up a roadmap of development. The roadmap of the Philippine sugarcane industry mirrors the development in other sugar producing countries. From producing only sugar, the industry now looks at sugarcane as its main product. Sugarcane can produce many other products, not only sugar. For the Philippines, we want to start the diversification towards the logical products of ethanol and power.

 

We plan to increase area planted to sugarcane to about 465,000 hectares in the year 2015. This will solidify our status as a net exporter of sugar. We shall be self-reliant and will continue to service our US commitment, as well as becoming a stable supplier to other countries. This increased area is also targeted to produce bioethanol, addressing about 57% of our local needs.

 

Simultaneous with our efforts to increase area, we plan to increase our productivity at manageable cost of production. And hopefully, we would be successful in maintaining our cost at less than 20 cents per pound. And as we bravely face the years ahead, we have identified four major challenges which I shall separately discuss.

 

The first challenge for the Philippine sugarcane industry is the reduction in tariff of imported sugar which was 38% last year, 28% this year, 18% next January, 10% in January 2014 and down to 5% in January 2015. The Philippine sugar market is driven by market forces. There are producers of varying sizes; millers of varying market influence including millers who are also traders; and traders ranging from small local operators to big multinational players. This reality brings to fore a certain degree of weakness to compete in the fast changing atmosphere of world trade, where size matters.

 

The sizes of Philippine farm, as presented in the previous slides, show a large portion of small-sized family-operated farms. This fragmentation of farm holdings is largely because of the agrarian reform program adopted by the Philippine government. This has lead to decreased productivity which is inherent in small sized farms. Small farmers usually do not have the financial capability to cultivate their farms to the fullest potential. Coupled with previous lack of government support to infrastructure, the small farmer will not be able to take advantage of economies of scale. Thus, the SRA, the DA, and the DAR has implemented the block farming program whereby consolidation of small farms into an aggregate area of 30-50 hectares is pursued. The block farms will be operated as agribusiness ventures taking advantage of efficient tractor operations, volume purchases and sales, technical assistance for better farming practices, crop loans, and other services that will improve farmer income. Along this line, we are encouraging businessmen to develop service companies that will provide farming services.

 

On the mill side, most sugar mills have begun gearing up to improve their efficiencies to be competitive in the world. Overall recovery has been quite low with modest improvements over the past decade. All financial assistance have been provided by private institutions., including BDO which have substantially invested in our industry. Thus, the proposed Sugarcane Development Act must be enacted into laws to provide comprehensive assistance to the industry. In addition, the Philippines is using a quedanning system in milling sugarcane. This system gives the growers 70% of the sugar and molasses produced. Translated to investments, the mill which will spend for mill improvement will recover investments at a longer time because it can only get 30% from its output. This has deterred higher investments for mills, most of whom are still profitable at their present state.

 

The last challenge is on the implementation of the Biofuels Law and the Renewable Energy Law, because of the obvious fact the bioethanol will come from sugarcane either from molasses or direct from cane juice, and energy will come from bagasse and cane trash. The Biofuels Law mandates that all locally-produced bioethanol will have to be bought by oil companies prior to using imported ethanol. While already in place, we still have to be very vigilant to ensure that this emerging industry will grow to maturity faster than it is now. The Philippines is committed to support – short of saying protect – the bioethanol industry.

On the area of renewable energy generation, most of the sugar mills are prepared to supply electricity to the grid. Their corporate plans have included the improvement of boilers and purchase of turbo generators. With the FIT already out, as I said at P6.63 per Kilowatt-hour, there is now greater incentive for mills to pursue their diversification plans.

Having described the present situation of the Philippines Sugarcane Industry and the challenges it faces, let us now look at some of the opportunities. And as I put on my hat as market officer of the industry, let me say that we need your assistance. We need the funds to translate our opportunities into on-going business concerns.

First, the expansion of sugarcane areas is needed to produce enough sugar and bioethanol. Most of the existing sugar mills have underutilized milling capacities as our data shows only 68-80% utilization. This needs investments, and improved technologies in growing sugarcane. At the same time, we must be globally competitive in terms of productivity and cost. In concrete terms, we must increase our national productivity to 70 tons cane per hectare and sugar recovery of 2.1 bags per ton cane or roughly 150 bags per hectare. At the same time, we must manage our cost to about P70,000 to P80,000 per hectare or about P850 per bag of raw sugar. At 5% tariff on imported sugar by year 2015, this competitiveness is imperative to support a stable domestic market, which has for years been selling sugar higher than world market prices. All our productivity improvement programs need funds and most of our farmers and millers will surely look towards the direction of the banking community for help.

 

Second, for bioethanol production, the Philippines need to have 13 distilleries with annual capacity of 30 million liters to meet the mandated blend of 10%. For this, the purchase of locally-produced bioethanol is guaranteed, and the investors are given incentives such as tax holidays and other benefits. In the Global Ethanol Focus held this month in Bangkok, the Philippines is considered a model for implementing the biofuel program because of its implementation of the blending mandate. This has made our country the biggest importer of bioethanol in Asia, and pricing of bioethanol in this region is based on CFR Subic! Thus, increasing our production capacity will be a viable business opportunity within the next decade and beyond.

Third, existing power generation capacity of Philippine sugar mills is about 200 MW, which is used only for crushing sugarcane and producing sugar. Given a favorable investment environment, we believe that the FIT of P6.63 per Kilowatt-hour will bring improvements in the boiler and turbogenerators that can add up to 400 MW capacity, which in turn can be sold to the electric grid.

Fourth, there is a natural pressure for farm mechanization. While the country has a high population growth rate, there is a decline in the number of laborers joining the force in the sugarcane industry especially in planting, cultivating, and harvesting. This is primarily due to the natural preference of the younger generation to shy away from labor-intensive jobs. Thus, the sugarcane farms will just need to mechanize. And we need all the technological help from companies and countries with this capacity.

We shall continue to take the stance that our domestic market will prefer our local sugar; that we are able to service our US sugar quota; that we are open to bilateral sugar supply agreement with other countries; that we can provide all the bioethanol needed for blending with our gasoline requirement; that we can increase the profitability of our sugar mills and ethanol distilleries by selling power to the electric grid; and that we can openly compete in the global trade of sugar.

I will close by telling you that in all occasions that we deliver this presentation we have always been asked where shall we get the funds to finance our programs. And we always answer that it will come from the private sector. To many foreigners, that will not work, because to them, the business model should be that which is led by government. But we are Pinoy and as we see it, we can do this by partnership. With your help, and with the prospects of enacting the Sugarcane Development Act, I am very sure that we can tap the PPP (public private partnership) model to bring about the needed competitiveness!

 

Thank you.