Strategic Planning in the Australian Sugar Industry - Assignment Example

Question 1: What is the significance of the quality assurance comments made by the speaker in the case of the sugar industry? What sort of ‘quality assurance’ activities does Canegrowers undertake on behalf of individual sugar cane producers; and to what end? How will you explain this in economic terms? As per the speaker, the sugar cane is tested once received in the factor. The process starts with weighing the sugar cane and then crushing them to get the juice. Thereafter, the sugar content is analysed by measuring the sugar through polar imagery. In this process, the sugar solution is held against a beam of light to understand how much light is being twisted through the solution. The density of the juice is also measured to find out the impurities and pure sugar content. This process is further calibrated with the new-infrared Spectrophotragpy, wherein an infrared light beam is passed through a sugar cane to analyse the reflection of the cane from the back. This helps in understanding the sugar content and the impurities in the sugar cane, the fiber content as well as the amount of dirt inside the cane, without having to touch the sugar cane. This rightly points out that the sugar industry is taking proper steps to provide quality assurance to its customers. The industry is utilizing modern technology to select only high quality sugarcane to produce quality sugar products. This has helped the sector in raising its quality barometer with regards to price rise. Further, this also helps the industry in producing sugar at varying quality with different price tags, something that was unheard of till a few years ago (Windle 2003). Another major development that has resulted due to this development is the growing demand for branded sugar. The growth in technology and quality assurance has given added impetus to the organised sugar sector. Further, selling quality products have increased the reputation of the sugar companies as well and have helped them in getting corporate clients. The farmers have also benefitted as they are able to claim for better prices for their produce (Milford 2002). Thus, overall, focus on quality assurance has become a win-win situation for the farmers, the mills, stock owners and of course the consumers. Question 2: Why is it in the interests of individual firms to support an industry association such as Canegrowers? Justify your answer. The cane growers are the backbone of the sugar industry and as the speaker suggests that with the implementation of quality assurance at the initial stages of sugar production itself, the quality could be improved substantially, which in turn benefits the entire industry. The cane growers are the major component in the entire industry as they produce the raw materials on which the quality of the sugar is dependent on. Thus, it is important to support the industry associations of cane growers. Further, most cane growers are small farmers without the know-how of technological advancements (Cox 1999). These farmers do not have the resources to spend on such sophisticated technologies to improve their produce. As farmers are the most important part of the entire value chain, it is imperative to provide them with support, not only financial but also technological, in order to improve the quality of the end-product (Kumar 2000). The support given to the cane growers would help them in producing quality sugar canes and thereby also garnering the right prices for their produce. They may in turn use the higher profit to better their produce by implementing technology and using latest agricultural equipments and tools. On the production side, it would help the mill owners to get the best quality raw material and produce the finest sugar quality and earn higher profits. Therefore, the support given at the lowest rung to the cane growers would translate into higher profits and gain to all the participants in the value chain (Woolcock & Narayan 2000). Question 3: What factors does the sugar industry have to consider when determining the equilibrium price and quantity of supply and demand for sugar? Illustrate and explain. An analysis of the worldwide sugar industry reveals that the prices of sugar are naturally volatile. Economists further believe that liberalization of sugar trade has in fact increased price fluctuations rather than decreasing them. However, due to the lack of risk taking appetite amongst the decision makers, most of them restrain production at the time when the price fluctuate too much (Routledge et al 2000). Sugar is being produced by a range of producers, from small farmers to large industrial units. Further, consumption of sugar is diverse as well, with different countries witnessing varied consumption pattern. For instance, in Denmark, on an average a person consumes 35 kgs sugar in a year, whereas in China a person only consumes 6 kgs per year. It may be believed that due to the heterogeneous nature of sugar consumption and production, sugar might have a smooth price function in the market and constantly adopt itself with the preferences of the consumers. However, due to the very nature of the commodity, sugar has a very volatile characteristic and in the volatility index it is measured more than average (Routledge et al 2000). Thus, it is necessary to follow an equilibrium price due to the volatile nature of the commodity and the highly fragmented characteristics of the sector. In order to create equilibrium, the sector follows an established practice wherein the product is bought and sold in an organised chain through the producers to the final consumers. The process begins with the farmers agreeing to sell the raw produce to the processing units, who in turn concur to buy the entire production at the prevailing price during the time of harvest. Therefore, the quantity of sugar to be supplied would be depended on the production, which is being controlled by the farmers, and thereafter by the processing units. However, the production itself is decided during the time of planting the crop, which in turn is dependent on the market equilibrium and demand (Routledge et al 2000). The processing unit after buying the raw produce at fixed prices leverages on the Markowitz utility function by earning profit after deducting the costs incurred while procuring the raw produce and processing it. Before them, even the farmers maximize Markowitz utility function by deducting the cost incurred for crop planting and harvesting (Newbery 1981). The processing unit thereafter sells the finished stock to the stockholders, who are the chief components to decide on the quantity of stock to be released in the market. They decide about the price and variance in the market based on the equilibrium price. The final component of this chain is the consumers who buy the sugar in the retail market at the prevailing market price. The consumers do not contribute towards the equilibrium price as they are the final consumers and do not gain profit from the process (Schwartz et al 2000). A process flowchart of the sugar industry Question 4: How is the elasticity of demand concept useful for the Sugar industry? Illustrate. The sugar industry is cyclic in nature and the sugar production fluctuates extensively every year. It has been seen that sugar prices oscillates widely depending on the sugar production on a worldwide and country level as sugar prices are inversely propositional to the sugar production. Further, the sugar prices are also dependent on the sugar stocks being released in the market. However, research indicates that even when sugar prices increases, the demand for sugar does not get affected too much, as sugar forms a very small amount towards the personal budget of a consumer. Thus, even with price fluctuations, consumers would still buy sugar for their daily needs (Routledge et al 2000). Price elasticity of demand is explained as the measuring the responsiveness regarding the amount demanded for a commodity due to fluctuation of prices for the said commodity. It means the change in percentage in the amount demanded that is in relation with the change in percentage in the price of the commodity analysed. In economics, this change is measured in terms of elasticity i.e. the percentage ratio change between the price and quantity demanded (Belan and Gauthier 2004). Recent researches suggest that the price elasticity of demand for sugar is almost zero, which means that the commodity is not responsive to any price change and even if the price of the commodity increases by almost 25%, it would not impact the sugar sales. There are several reasons for this low price elasticity and chief among them is the low cost of the commodity, which even if increases slightly would not impact the consumers. Other than that, sugar is has become an essential ingredient in our diet and it might take time for us to adjust our consumption pattern in case of price rise, therefore, the rate of overall sugar consumption might not get affected instantly due to price rise. Further, there are very little or no substitutes for sugar and therefore, people have to continue consuming sugar even with a price rise (Rolfe et al 2002). Thus, in case of sugar, the quantity demanded would not change in proportion to the price fluctuation. Although, price fluctuations would impact the revenue of the companies, it would not create any affect on the demand. In this case of elasticity, which is almost zero, the demand curve is shown to be vertical as the demand is not dependent on the price. This state of elasticity is known as perfectly inelastic demand curve (Baltagi 2001). Perfectly Inelastic Demand Curve Question 5: Explain and illustrate the market structure which applies to the Australian Sugar Industry. The sugar industry in Australia is dominated by family owned farm lands, with a variety of ownership arrangements followed for harvesting. The process of transporting cane, producing sugar and other by-products, storing final products, marketing and transporting the commodity is owned by various cooperatives and privately owned mills. Thus, within each process, there are various sub-divisions and companies that are able to create profit for their centers (Chapman et al 1997). For instance, the farmers sell the raw produce at a profit to the mills, who in turn sells the final product to the shop owners after earning a profit. This result in price acceleration at every process stage, which if not monitored may result into false price rise. Thus, in order to provide similar opportunity to the entire value chain, an integrated management system needs to be adopted which would provide similar revenue structure to all the participants in the sector (Baker 2001). Most of the sugar produce in Australia comes from Queensland, which produces around 94 per cent of the total sugar in the country. Northern New South Wales produces 5 per cent of sugar, while the rest is being produced by the Western Australia. Sugar producing regions in Australia Privately owned and family operated cane farms are the norm in Australia, with most of the farms ranging around 35 to 250 hectares. However, in the recent years, the trend has started to grow cane in a larger farm area as well. The country has around 6,500 cane farmers who produce raw as well as refined sugar for consumption. A large quantity of its produce is also exported to other countries. In the recent years, the industry has witnessed strong growth after the decline in production and profit for several years. The recovery has resulted due to the growing price of sugar worldwide as well as increase in domestic consumption. Reference: Baker JA 2001, ‘Strategic Planning in the Australian Sugar Industry’, In ‘Proceedings of the Australian Society of Sugar Cane Technologists.’ 23, 32-36. Baltagi, B. 2001, ‘Econometric Analysis of Panel Data’ (Second ed.), John Wiley and sons. Belan, P. and S. Gauthier 2004, ‘Optimal commodity grouping in a partial equilibrium framework,’ Economics Letters, 83(1), 49-54. Chapman RN, Milford BJ, Burrows GH 1997, ‘Transaction Costs in the Sugar Industry – Actual and Potential. In ‘Proceedings of the Australian Society of Sugar Cane Technologists.’ 19, 54-59. 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