Ambitious aims: Diversifying the sugarcane segment into new growth areas

Plans to use sugarcane for the cultivation of a number of new products and growth markets are under way in the Philippines. Having nearly reached self-sufficiency in sugar, industry representatives and regulators have laid out a roadmap with several objectives designed to raise exports, use sugarcane to produce bioethanol, increase its contribution to power generation and to create further efficiencies to reduce production costs.

These initiatives are also designed to upgrade competitiveness of the industry in time for 2015, when under ASEAN trade rules the import tariff of sugar will be lowered from its current rate of 38% to between 0% and 5%. Without diversification and a push to lower costs, the domestic market is at risk of being flooded with cheap sugar imports, particularly from regional neighbours Thailand and China.

PRODUCTION INCREASE: Designed by the Sugar Regulatory Authority (SRA), the roadmap sets out some ambitious aims. Production of sugarcane is targeted to increase from 25.4m tonnes in 2011 to 35.4m by 2016, growth of 39% over five years. Bioethanol output is also targeted to rise from 14m litres in 2012 to 304m litres by 2016. The SRA also hopes to increase farm productivity from 63 tonnes of cane per ha to 75 tonnes per ha.

Two of the largest demand drivers for the industry are in the production of bioethanol, produced from sugar, and in power cogeneration using sugarcane field-waste called bagasse. Regulation passed in 2007 mandated that bioethanol be added to gasoline at a graduated rate of 5% in 2009 rising to 10% by 2011. This equates to a 2011 demand of 460m litres. Current production is supplied by three distilleries with a total capacity estimated at just 79m litres. To fill the supply gap, energy companies have been allowed to import bioethanol.

In addition to creating ethanol, boosting local employment and adding power to the national grid, bioethanol made from sugarcane has been shown to consume the least amount of energy and to emit the least amount of greenhouse gas, making it among the greenest of green power sources.

GROWTH AREA: Produced on a relatively small scale, domestic bioethanol is priced at approximately P42 ($0.95) per litre, well above world market prices. Bioethanol producers have been struggling to sell their output to domestic energy suppliers, and mixed signals in the market have reduced the inflow of required investment in new production facilities.

In an attempt to assure domestic production is used first, the SRA has now mandated that local bioethanol be bought by energy companies in proportions comparable to their overall market share. With the market now looking more stable and a persistent supply gap on the horizon investors are finally beginning to take note of the opportunities to take advantage of this vital growth area.

Regina Bautista Martin, the administrator of the SRA, fully supports the diversification strategy. “Across various sectors in the agriculture industry, but especially in the sugar sector, industry players are increasingly looking towards bioethanol and bioenergy as holding significant growth potential. We expect global demand for such alternative fuels to continue to rise, and if the Philippines plays its cards right, it could reap many rewards from this emerging market for biofuels.”

One company that has already seen the full potential of this growing sector is Japan’s Green Future Innovations, which is led by Itochu and Japan Gas Green Future plans to put a $120m ethanol and cogeneration facility into commission in June 2012. The plant, located at Isabela Ecofuel Agro-Industrial Ecozone, will use sugarcane as its feedstock. When operational, it will have the capacity to produce 200,000 litres of ethanol per day, or 54m litres per year, as well as generating 19 MW of renewable power, 13 MW of which will be fed into the national grid. About 4000 farmer families in Isabela province have signed sugarcane-growing contracts with Green Future. Indeed, the plant’s operations are expected to create employment for 15,000 workers in the local community alone. Green Future has also developed 11,000 ha of agricultural land in eight adjacent towns in Isabela to supply the sugarcane stock.

ENERGY SOURCE: Power cogeneration could be a potentially strong growth area for the sector. Sugar producers have for some time been using bagasse to fire boilers for the refining of sugar, lowering production costs. Refiners are now being encouraged to invest in larger boilers that allow them to produce excess power that they can sell into the main electricity grid. The benefits of this are numerous. Not only is it a renewable source of energy, but production costs are currently approximately the same as coal. With coal prices likely to rise in the long term, bagasse should become the cheaper option.

HURDLES TO OVERCOME: To realise the potential benefits of power cogeneration two obstacles must first be overcome. Sugar refiners must invest in new boilers, requiring significant capital expenditure, yet most are only using 60-70% of their existing capacity and argue they are not yet reaching economies of scale to see returns. Clearly, demand must increase or some consolidation must occur in the industry to make it viable for producers to increase capacity. In addition, the rate at which the government has said it will buy electricity, known as the feed-in tariff, has been offered at just P7 ($0.16) per KWh. The industry originally asked for P20 ($0.45) per KWh, though investors have privately admitted the offered tariff would still be profitable.

DIVERSIFICATION PLANS: Successful implementation of the plan will require several targets to be met. The total area harvested is due to increase from 400,000 ha to 470,000 ha by 2015. Economies of scale are also being encouraged through block farming, where farmers join in cooperatives to invest in equipment and fertilisers designed to increase yields.

Under the block farming system, small farms of less than 10 ha will be consolidated and integrated into 30-to-50-ha farms through joint ventures, contracting, partnership and sharing with the ultimate goal of transforming these smallholdings into large, well-managed farms that can reach 100 tonnes of cane sugar per ha compared to just 50 tonnes per ha on small farms. According to the SRA, block farming could increase production from 99 to 147 bags of sugar per ha, resulting in increases in agrarian workers’ incomes in the region of P39,000 ($885).

A pilot sugarcane block farming project, with P96.69m ($2.2m) in initial government funding, was announced in early 2012 and will consolidate small farms owned in 12 sugar-producing provinces. This is backed by credit institutions, which prefer to lend to cooperatives rather than individual farmers.

Investment in equipment is also needed, both from the private sector in field-trash collecting machines and new boilers, but also from the government in improved field-to-mill roads. Promotion of sugar-derived products is also necessary as the industry looks to diversify beyond energy and into areas including food additives and biochemicals.

The sector has laid down an ambitious plan and is looking to reap significant rewards. Around 100,000 direct jobs could be created if the targets are achieved. As the deadline for sugar tariff reductions draws nearer, the clock is ticking in the race to diversify, but the industry has the strategy and support of the Philippine government to enable it to succeed.

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The Report: The Philippines 2012

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