Let’s talk about production risk and its management

Production risk is the possibility that you don’t produce the quantity of sugar you expected to, resulting in a production shortfall.

This can occur for many reasons and at various points of the supply chain. Weather, pests and diseases can reduce cane yields and harvests, and equipment failure, fire and transport problems can have substantial impacts further down the line.

Production shortfalls can impact an individual farm, many farms in a particular area or even the entire Queensland industry, with significant consequences.

Production risk is highly relevant to the sugar industry because of the way sugar is sold. In order to achieve the best price outcomes, sugar is often priced and sold ahead of being produced, via futures contracts. Once a contract is entered into, sugar needs to be available to supply that contract.

If you can’t supply sugar that has been sold, the sale has to be ‘unwound’, which can have financial consequences. Sometimes these can be positive, but sometimes not—we all remember the financial impact of the 2010 Season production shortfall.

Sugar marketers need to have strategies to manage the risk of a production shortfall, in order to ensure sales contracts can be fulfilled and financial consequences are not incurred.

Some marketers will require you to ‘put aside’ part of your seasonal estimate to guard against a production shortfall and its potential ramifications. Putting aside a percentage of your estimate is one way of ensuring you don’t overcommit to supplying sugar.

Mackay growers who forward price know they must deliver sugar that has been priced for a particular season or there may be financial consequences, but they also know they have never had to ‘put aside’ any of their estimate for managing production risk.

This is because in-season production risk for Mackay growers is managed by QCS, within the structure of the Short Term Pool.

As a part of Mackay Sugar, QCS is in a unique position to monitor production risks for its growers. We work closely with Mackay Sugar’s milling operations to ensure we have up-to-date information about every aspect of the harvest and the crush. Grower directors have a significant presence on the Mackay Sugar and QCS boards, providing us with valuable insight into conditions in the Mackay region. And because we are managing the sugar for a specific region, we are able to tailor pricing strategies to suit regional conditions.

QCS also has stringent policy requirements for managing production risk, which include only selling certain quantities of sugar once it has been produced. Our risk management policy is approved by the QCS and MSL boards and executed by an experienced pricing team.

We will continue to manage production risk within the Short Term Pool going forward.

If you would like to discuss any aspect of risk management or sugar marketing, please don’t hesitate to call the team at QCS on 1800 774 246.