Question

Cyclone Debbie leaves a sour taste for sugar cane growers. Cyclone Debbie crossed the coast near the Whitsunday islands in March 28, 2017 and tore a path from Bowen in QLD down to Northern New South Wales bringing 260 kph winds, torrential rains and flooding. The storm caused a total of $3.5 billion in damage. The cost to Queensland’s sugar industry, in destroyed cane infrastructure and equipment was $250 million. Cane growers Queensland chairman Paul Schembri said 125,000ha of cane farms from Bowen to south of Mackay were severely damaged. Sugar production volume loss on average was 20 to 25% from the three regions of Burdekin, Proserpine and Mackay that produce 50% of Australia’s national sugar cane crop. The losses would also far exceed that for many individual cane farms in the most severely affected locations. The cyclone disrupted production methods. Most sugar cane is mechanically harvested whilst still green and the canes are standing upright. However, the cyclone winds caused damage to farm structures and bent and flattened the canes. Torrential rains then flooded the fields and farm tracks with debris. Sprawled crops make mechanical harvesting difficult. After the damaged cane dries out and fine weather returns, the green leaves at the top turn toward the sun to try to stand up again but the cane stick itself often remains flattened and bent on the ground. There is a risk of damage to mechanical harvesters from cane in that condition and excessive leaf and other unseen debris in the fields. The smaller crop yields less tonnes to spread costs over and even where mechanical harvesters can still be used, the excessive leaf and other debris in the fields slows harvesting time down, increasing costs further. Many cane growers resorted to burning the flattened cane in the fields of excess leaf and debris, to salvage some harvest, a method not used for decades. This is a more labour intensive method of harvesting. Cyclone Debbie’s timing was not good for sugar cane growers. The cane was nowhere near its traditional harvest time (December) so couldn’t be harvested early. The best some farmers hoped for was that the cane ‘would straighten itself up’. In addition, the global sugar price had been above US $22 cents in 2016 but had fallen to between U.S. $12 cents and U.S. $13 cents per pound by August 2017, after trader realisations that a global surplus was emerging. One bank analyst linked sugar prices to the oil price, which had been under downward pressure for two years. This then put pressure on the ethanol price in Brazil, forcing Brazilian sugar mills to reduce ethanol production and increase sugar production. Good weather also prevailed in South East Asian cane growing nations contributing to the emerging global surplus. The price fall was further exaggerated by speculators who were selling on the market. Some cane growers may not have suffered the price fall as badly as others if they had secured earlier more favourable forward pricing contracts over their crop. Australian cane growers claimed that the price was approaching “cost of production” even without the cleanup and damage costs caused by Cyclone Debbie. Growers were forced to search hard for cost cuts such as reducing the nutrient or irrigation or maintenance inputs despite knowing such cuts would impair next year’s product quality. The Indian Government then declared subsidies for its sugar industry in September 2017, indicating further increases in global production, causing the global price to fall below the cost of production. The Australian sugar industry receives no government price support and 80% of Australian sugar is exported, so the industry is trade exposed to global sugar market price volatility. Cane growers Proserpine manager Mike Porter said growers just had to follow the appropriate steps; “There is nothing else you can do. This is an export industry, so we are captured by both the international commodity price and the exchange rate. We don’t have control over either fundamentals.” One Queensland cane grower estimated his loss at $400,00 - $500,000 in 2017 on the back of the cyclone, global sugar glut and subsequent very dry conditions through 2017 and 2018, claiming recovery would take him five years. However, for many farms total recovery may never be possible, leaving them vulnerable to future climate events.

5.1 What market structure most appropriately describes the sugar cane growing industry?

5.2 Explain what the likely short run effect of the cyclone is on the cost curves of a sugar cane growing firm in the cyclone affected region?

5.3 Explain using the relevant market structure model, the likely short run effect of the cyclone on the profits and quantities produced by sugar cane growing farms in the cyclone affected region

5.4 What is the long term response in the industry to the existence of economic losses, economic profits or normal profit? How will the changes from Q.5.2 and Q.5.3 affect the firm’s profit position in both the short run and long run?

Answer 1

1. sugar can grower industry is highly volatile due to the weather effect. but if we will define the market in terms of sugarcane as a product it will fall under the perfectly competitive market.

2. The short-run cost of sugar cane growing industry was negative as all the growers falling under the cyclone-affected zone got damaged by the effect. here the big firms are affected more as they use the mechanical harvesting process for cultivation. so to get some salvage out of the damage is nearly impossible for them as the labor-intensive collection is high cost. In the case of small firms, they have recovered some of the damage as salvage value but it could not help the cost curve to better off.

3. The effect of the cyclone in the short-run is vulnerable. where the AS1 shift the AS2 and with the existing demand the price shoot up to P2 and the quantity available is come down to Y2. so the after effect price hike will decrease the demand itself to AD2 and the price come down to P1 back with a y3 amount of quantity.

4. The expected long term response for this type of natural calamities effect on the sugar can prevail in between normal profit to economic profit. as the sugarcane grower aware of the type of losses that happen in such kind of situation they can be alerted before minimizing the loss. so we can expect a minimum loss in case of long-run projection.

If we will discuss the cost, profit, and quantity of sugarcane production in the short -run, which is highly affected by the cyclone as the cost increased, profit became negative, and quantity decrease. The prediction for the future will be the cost will be back to the normality, the production quantity will increase and the profit may lie in between normal profit to economic profit as it depends on the firm's size.