INVESTMENT OPPORTUNITY IN SUGARCANE PLANTATION Introduction The government is promoting the development of tracks of land in Southern Philippines into sugarcane plantations. A foreign investor engaged in food or beverage production which consumes a lot of sugar may invest in sugarcane production in the Philippines to supply its sugar requirements. Although Philippine sugar cannot be exported directly, some forms of cost leverage on the foreign investor s sugar from the Philippines can be arranged. We also consider bioethanol as another source of revenue for the sugar industry. Its demand in the domestic market is high and will further rise as the government mandates the increase in the blend of bioethnol with all gasoline sold domestically. Promotion of agribusiness projects like sugarcane plantations will make use of our undeveloped or idle lands or existing farmlands where investments are needed to make them more productive. Owners of undeveloped alienable and disposable lands, cultural ancestral domain claimants (CADCs) and beneficiaries of agrarian reform programs (ARBs) are important stakeholders. Sugarcane production is highly desirable and very profitable. Supporting computations done by an industry player prove its desirability. Furthermore, sugarcane production is one of the government s priority activities that would be eligible for a package of incentives under the Omnibus Investments Code. Investment Opportunities Most of the sugar produced in the country go to the domestic market. On top of this, we set aside about 200,000 tons to preserve preferential access to sugar exports to the US. The Philippines tries to always honor its commitment to the US because it is a generally favored market. Normally, the industry is producing enough of what the country needs. It is for this reason that area expansions in the industry are geared for the production of alternative products. But sometimes, an El Nino-induced drought may damage crop resulting to low harvest. The Sugar Regulatory Administration (SRA) determines if there is a need to import sugar when the crop year ends and sugar millers had reported their actual sugar productions. When the SRA sees that there will be a tight domestic supply, importation becomes necessary for the government to ensure it keeps preferential export quotas to the US and to maintain a buffer stock. Newcomers in the industry will have this market in case such phenomenon happens. But we don t want them to exist just to address the shortage in sugar when there is tight domestic supply. The Mill District Development Committees (MDDCs) are optimistic on increasing the country s production of ethanol. The Biofuels Act of 2006 which aims to achieve a three-pronged objective of energy security, countryside development, and environmental protection mandates the use of ethanol and/or ethanol-blended gasoline for the transport sector.
The enactment of the Biofuels law created a sure market for locally-produced ethanol but our existing capacity cannot supply the demand. To address this gap and to comply with the mandate, oil companies import their additional requirements from other countries particularly from Brazil. Meanwhile under the said law, fuel companies are currently required to blend ethanol with gasoline at 10% this year with some exemptions. Current ethanol demand is estimated at about 219 million liters versus domestic production of merely 80 million liters, derived from sugarcane and molasses. The table below shows the production and importation trend of the industry since 2008 vis-a-vis the demand based on the mandate of the law. Source: Department of Energy As of December 2008, three companies had registered with the DOE as bioethanol producers. One additional bioethanol plant will operate this year and another two have secured certification from DOE for their plant site. The SRA has certified 4,990.07 hectares of existing sugarcane plantations as feedstock areas for bioethanol. General Profile of the Sugar Industry* Total area planted to Sugarcane ~ 383,000 hectares - Average size of farm holding ~ 5 hectares - Estimated number of farm owners = 55,000 - Estimated number of farm workers ~ 580,000 individuals Number of operating Sugar Mills = 29 mills (as of February 13, 2011)
- Average capacity of sugar mill ~ 6,900 tons cane/day (TCD) - Average duration of milling season ~ 180 days per annum Number of Refineries = 12 refineries (as of February 13, 2011) - Average refining capacity ~ 12,000 LKg Sugar/Day Annual raw sugar production (5-year average) = 2. 2 million metric tons Annual refined sugar production (5-year average) = 20.437 million 50Kg/bag Sugarcane is one of the major crops of the Philippines. It is cultivated in 19 provinces across the country. From 2002 to 2006, sugarcane production contributed an average of P24.91 billion/per year to national agricultural production. Based on the latest statistical data, about 392,300 hectares are for sugarcane production which accounts for 7.43 percent of agricultural lands for major crops. Sugarcane areas are divided into small farms with an average farm size of 5 hectares. A hectare of sugarcane usually requires 1.5 workers. This puts the labor force directly employed by the industry, including sugar mills and refineries, at 600,000 workers, with an additional 5 million indirectly dependent on sugar production for livelihood. On the average, the country milled 20.42 million tons cane per season in CY 2008-2009 and CY 2009-2010 and has, at present, 29 operating mills and 12 operating refineries strategically located in the various sugar producing areas. *Source: Philippine Sugar Millers Association, Inc. Constitutional Provisions and Statutory Laws Relevant to Agribusiness Ventures with Foreign Investors Foreign corporations or associations can not be owners of alienable lands of the public domain. They may hold such lands only through lease for a period not exceeding 25 years, renewable for not more than 25 years and not to exceed 1,000 hectares in area. Modality Options Open to Investors in Agribusiness Commercial Plantations Agribusiness Venture Agreements (AVAs) in agrarian reform areas involves a contract signed between a lessee and a lessor wherein the lessor (agrarian reform beneficiary) binds itself to give the lessee (investor) control over the use and supervision of the land for a specific period of time and for a certain amount. Management Contract
This is a form of agribusiness agreement whereby Agrarian Reform Beneficiaries (ARBs) or their cooperative/farmers organizations that assume full and exclusive ownership of the land, hire services of the former land owner or contractor-investor to manage and operate the farm in exchange for fixed wages or commission, as the case may be. Joint Venture In a joint venture arrangement, the agribusiness firm and the cooperative agree to form a third party or a joint venture (JV) company. The JV leases the land from the cooperative while the agribusiness firm provides the technology, financing the management of the operations. The cooperative members now become hired laborers in the farm and if operations include processing, qualified household members can be hired in the processing plant as well. The market could be the JV company and or the agribusiness firm, depending on the terms and conditions agreed upon. In case of the ARBs, the land is their equity in the joint venture and its value is based on the computed valuation. Nucleus Estate Scheme This is an integration of contiguous individual lots to form a single estate or several nucleus farms. The management of the nucleus estate can be handled by a cooperative or a company. Two possible set-ups are as follows: Company-Managed Farm The company negotiates the lease of the land to individual owners over fixed term. The nucleus farm can be managed by the anchor firm as core plantation. Management is centralized. The company handles the production, financing and management of the nucleus farm. The cooperative members are hired as laborers. Cooperative-Managed Farm This is a grower-type arrangement between the company and cooperative. The cooperative is contracted as a supplier of raw materials for the company. In this case, the members of the cooperative surrender their right to operate the land they owned to the cooperative that subsequently manages the nucleus farm. The member-owner of the nucleus farm provides the necessary labor. Identification of Possible Plantation Areas The Philippines Agricultural Development and Commercial Corporation (PADCC), the designated agribusiness marketing, investment promotion and project development corporate arm of the Department of Agriculture, extends assistance to investors for their projects basic requirements, namely:
Identification of possible plantation areas, which include: - assistance and provision of general support identification and evaluation of suitable agricultural lands - endorsement of the project to interested and qualified landowners - provision of complete data and information necessary in the implementation of the project Consolidation, packaging, and contract negotiation with the land owners Facilitation of endorsements, accreditations, licenses, and permits from concerned government agencies. Keys to a More Sustainable and Globally-Competitive Sugarcane Industry Tariff rates on imported sugar from competing ASEAN countries will be gradually reduced from the current 38% to only 5% by 2015. By 2012, tariff rate will further go down to 28%, to 18% by 2013, and 10% by 2014. This schedule of tariff reduction is expressly provided under Executive Order 892. In the light of the implementation of the ASEAN Free Trade Agreement (AFTA), sugarcane farmers need help from the government in providing the necessary equipment and infrastructure particularly tractors, trucks and irrigation systems to increase productivity and enhance long-term competitiveness in the world market. Other farmers also clamor for more farm-to-market roads in major sugar producing provinces for faster and more efficient transport of canes to the mills. Investors may provide funds to bankroll their equipment needs or they may enter into any of the different modalities presented herein. Incentives Under the Omnibus Investments Code (E.O. 226) 1. Income Tax Holiday (ITH) for registered enterprises engaged in new, expanding and modernizing projects. Period of availment shall be as follows: New registered pioneer firms - 6 years from commercial operations. Registered projects locating in Less Developed Areas (LDA) - 6 years from commercial operation regardless of status (pioneer or non-pioneer) or type of project (new or expansion). New registered non-pioneer firms - 4 years from commercial operations. Expanding firms - 3 years from commercial operations of the expansion. Registered firms can avail of bonus year if they meet any of the following criteria, but the aggregate ITH availment (basic and bonus years) shall not exceed eight (8) years: The ratio of the total imported and domestic capital equipment to the number of workers for the project does not exceed US$ 10,000 to one (1) worker; or
The net foreign exchange savings or earnings amount to at least US$500,000 annually during the first three (3) years of operation; and The indigenous raw materials used in the manufacture of the registered product must at least be fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension unless the Board prescribes a higher percentage. 2. Additional deduction from taxable income of fifty percent (50) of the wages corresponding to the increment in the number of direct labor for skilled and unskilled workers in the year of availment as against the previous year for the first five (5) years from date of registration if the project meets the prescribed ratio of capital equipment to the number of workers set by the Board of $10,000 to one worker and provided that this incentive shall not be availed of simultaneously with the Income Tax Holiday. 3. Employment of foreign nationals. This may be allowed in supervisory, technical or advisory positions for five (5) years from date of registration. The president, general manager and treasurer of foreign-owed registered firms or their equivalent shall not be subject to the foregoing limitations. 4. Importation of consigned equipment for a period of ten (10) years from date of registration, subject to the posting of re-export bond.
PHILIPPINE SUGAR INDUSTRY ANNEX Total Volume of Production and Area Harvested with Sugarcane Sugarcane 2006 2007 2008 2009 2010 Volume of Production (in 000 metric tons) 24,345.1 22,932.80 26,601.4 22,932.8 18,421,429.2 Area Harvested (in 000 hectares) 392.3 383.0 398.0 404.0 362.8 Source: Bureau of Agricultural Statistics Raw and Refined Sugar Production CY 2005-2006 CY 2006-2007 CY 2007-2008 CY 2008-2009 CY 2009-2010 Raw Sugar (in metric 2,138,075 2,233,453 2,455,027 2,100,048 1,970,784 tons) Refined Sugar (in 50K bag) 20,036,314 21,645,089 21,843,627 18,977,540 19,684,060 Source: Sugar Regulatory Administration (SRA) Number of Sugarcane Farms by Farm Size (Crop Year 2005-2006) Mill District 0.01-5 5.01-10 10.01-25 25.01-50 50.01-100 over 100 Total (in hectares) Philippines 44,895 6,059 4,843 2,396 1,378 808 60,379 Luzon 1. Carsumco (Cagayan) 2. Basecom (Pasudeco) 3. Tarlac 4. Batangas 5. Don Pedro 6. Pensumil (Bisudeco) Negros 1. Aidsisa/ HawPhil 2. BacMur/ FFTalSilay 10,118 450 295 1,142 2,392 4,983 856 17,114 277 881 1,221 110 162 146 430 285 88 2,265 54 235 1,041 101 142 184 405 167 42 1,797 89 138 503 47 71 83 238 56 8 1,022 100 108 288 29 49 31 155 20 4 619 47 87 231 44 21 107 50 5 4 284 17 38 13,402 781 740 1,693 3,670 5,516 1,002 23,101 584 1,487
3. Binalbagan 4. Dacongcogon 5. Danao/ Sagay 6. La Carlota 7. Lopez 8. Ma-ao 9. San Carlos 10. Sonedco 11. Victorias 12. Bais-Ursumco 13. Tolong 1,064 3,426 642 190 240 107 587 1,015 67 5,885 2,733 280 450 272 72 82 66 121 119 50 292 172 245 117 240 97 120 93 134 103 178 180 63 131 49 104 69 83 63 40 33 155 76 11 68 18 39 58 49 43 15 19 112 43 21 44 7 37 19 13 13 9 49 36 2 1,832 4,060 1,304 523 593 385 910 1,298 611 6,512 3,002 Panay 1. Monomer 2. Capiz/ Pilar 3. Passi 4. Santos-Lopez 2,767 305 639 1,266 557 417 55 141 122 99 329 32 113 120 64 104 15 28 43 18 79 8 8 6 57 15 2 4 5 4 3,711 417 933 1,562 799 Eastern Visayas/ Mindanao 1. BogoMedellin 2. BogoDurano 3. Ormoc Hideco 4. Bukidnon 5. Davao 6. Cotabato 14,896 161 136 763 7,499 4,128 2,209 2,156 56 11 199 1,453 306 131 1,676 33 14 205 1,074 203 147 767 15 4 71 602 38 37 392 10 4 61 249 46 22 278 25 2 73 144 28 6 20,165 300 171 1,372 11,021 4,749 2,552 Source: SRA Wholesale Sugar Prices in Metro Manila per 50K Bag (in PhP) CY 2003-2010
Source: SRA Retail Sugar Prices in Metro Manila (in PhP) CY 2003-2010 Source: SRA Potential Areas for Sugarcane Plantations in Mindanao Province Potential Area (in hectares)
Agusan del Norte/Sur 35,000 Lanao del Norte 38,110 Southern Bukidnon 10,000 Maguindanao 60,000 South Cotabato 15,000 Sultan Kudarat 70,000 General Santos/ Saranggani 22,000 Zamboanga del Norte 6,250 Source: Philippine Agricultural Development and Commercial Corporation Directory of Sugar Mills Crop Year 2010-2011 Luzon Mill District / Region Rated Capacity Planter-Miller Sharing (TCD) 1 Universal Robina Corp. - CARSUMCO II 3,800 Piat, Cagayan 60/40 2 Sweet Crystals Integrated Sugar Mill Corp. - III 3,500 San Fernando 3 Sweet Crystals Integrated Sugar Mill Corp. - III 2,500 Planas, Porac, Pampanga 4 Central Azucarera de Tarlac III 7,000 67.5/31.5 1-CATPA 5 Batangas Sugar Central, Inc. IV 5,500 Balayan, Batangas 6 Central Azucarera Don Pedro, Inc. IV 13,000 Nasugbu, Batangas 7 PENSUMIL, Inc. Mill V 3,500 Camarines Sur 60/40 Negros 1 Central Azucarera de Bais, Inc. VII 9,000 Bais City, Negros Oriental 67/33
2 Binalbagan-Isabela Sugar Co., Inc. VI 12,000 Negros Occidental 66.33/30 3 First Farmers Holding Corp. VI 4,800 Talisay, Negros Occidental 70/30 4 Hawaiian-Phil. Co. VI 7,500 Silay City, Negros Occidental 68/32 5 Herminio Teves & Co., Inc. VII 3,000 Sta. Catalina, Negros Orienta; 68/32 6 Central Azucarera de la Carlota, Inc. VI 18,000 La Carlota City, Negros Occidental 7 Lopez Sugar Corp. VI 7,000 Sagay City, Negros Occidental 70/30 8 Universal Robina Corp. - URSUMCO VII 8,000 Manjuyod, Negros Oriental 67/33 9 Sagay Central, Inc. VI 4,000 Bato, Sagay, Negros Occidental 70/30 10 Universal Robina Corp. - SONEDCO VI 9,000 Kabankalan City, Negros Occidental 70/30 11 Victorias Milling Company, Inc. VI 15,000 Victorias City, Negros Occidental 69.5/30.5 12 OPTION MPC VI 500 Sagay City, Negros Occidental 70/30 Central and East Visayas 1 Bogo-Medellin Milling Co., Inc. VII 2,800 Medellin, Cebu 64.5/33.5
2 R. D. Durano III & Co., Inc. VII 2,000 Dungo-an, Danao City, Cebu 3 Hideco Sugar Milling Co., Inc. VIII 5,000 Kananga, Leyte 66/34 Panay 1 Capiz Sugar Central, Inc. VI 4,500 Pres. Roxas, Capiz 2 Universal Robina Corp. VI 4,500 San Enrique, Iloilo 3 Central Azucarera de San Antonio VI 8,000 Passi City, Iloilo 35/35 Mindanao 1 Busco Sugar Milling Co., Inc. X 18,000 Bukidnon 64/36 2 Crystal Sugar Co., Inc. X 10,000 Maramag, Bukidnon 60/40 3 Davao Sugar Central Co., Inc. XI 5,000 Hagonoy, Davao del Sur 60/40 4 Cotabato Sugar Central Co., Inc. XII 4,500 Matalam, North Cotabato 62/38