Sweet change on the way

Some current developments in the sugar industry are interesting to ponder given the changes that take effect this week for Warrnambool Cheese & Butter (WCB). WCB’s cap on individual shareholder ownership will lift - potentially exposing itself to a full takeover.

Sugar may seem an industry a large distance from many readers, but it has some interesting parallels to the dairy industry, with a historical co-operative base that has gradually given way to public and private ownership as the globalisation of food commodities has compelled bigger processing and marketing units.

There are other similarities between this sugar play and WCB’s situation. The plays for Tully are between other farmer-owned processors and global processors and traders who’d like to pick up an Australian asset.

The sugar industry is going through some pain in the wake of destruction from cyclones and floods. Ownership looks like being one of the consequences. Rationalisation has a long way to go in sugar, with 26 sugar factories in Australia owned by 10 milling groups. Analysts predict there is room for only 3 to 4 if the industry is to remain competitive in scale.

Shareholders in Tully Sugar Ltd, one of the largest remaining independent farmer-owned sugar millers, have strongly supported change in ownership when they last week voted to lift a 20 per cent ownership limit to 50.1%. The move comes as a number of takeover offers are already on and expected to land on the board table at Tully. The situation has changed quickly – the owners of Tully voted in support of the limit just 3 months ago.

As with any significant agri-food supply asset that is up for grabs in the food world these days, there is a flock of circling bidders hovering for the chance to pick up one of the last independent sugar producers left in Australia’s industry. Tully might only process 6% of the industry’s sugar cane, but is a strategic asset in the sweetener supply chain. It allows for geographic diversification in the hands of a global player and the seasonal position also allow market “windows” to be serviced by Tully’s crop. This is especially critical in the aftermath of the sale of the biggest sugar business (Sucrogen) to Singapore’s Wilmar International in 2010.

Naturally, the Chinese government’s food companies are there. China’s state-owned COFCO and US-based agribusiness giant Bunge Ltd each already has offers on the table, which value Tully Sugar at close to $130 million. Another grower-owned company Mackay Sugar, in partnership with the grower-controlled Mossman Mill, has matched those offers.

The pivotal role in the bidding war for Tully sits with the industry’s major marketing company QSL which holds just under 20% of Tully’s shares. The sugar industry retains a strong collective marketing vehicle in the form of Queensland Sugar Limited (QSL) which markets 90% of the crop.

Tully was in the news for all the wrong reasons early this year as one of the towns in the path of Cyclone Yasi. The crop in the region was in early stages but damage to plantations and infrastructure on farms has hurt growers. For many farmers hurt by the wind and floods, a buy-out will be an important way to crystallise their company investment, without affecting their market for sugar. Sugar – like most commodities – will continue to benefit from a global food shortage.