Item 2.3 Result to be achieved by the commissioners (vii) “Specific recommendation as to changes to the cane pricing arrangements, if any are made” July 16, 2010

Introduction The SMCJ is overwhelmingly supporting the existing cane testing and payment system. Our position is so as the purpose of this system is expected to result in an improvement in productivity in the sugar industry and growers and manufacturers alike have expressed confidence in it. Cane payment systems define one of the most important relationships of any cane industry, since they determine how revenues are distributed between growers and millers. Cane payment systems also play a central role in establishing the incentives that growers and millers face. Not only do they influence heavily the incentives to improve technical efficiency, they also have far-reaching implications for investment decisions. 2

However the manufacturers feel the system must remain with the level ‘playing field’ it started in 1991 in the movement of funds from factories to growers and growers to factory. This was a fair introduction to increasing efficiency to achieve incentive. The distribution puts to rest the future policies and logistic base on the majority. In any business the world over, it is the majority that counts for representation. 3

The Distribution (inclusive) Tonnes Cane total = M 100% Tonnes Cane - Farmers = M 48.49% Tonnes Cane - Estate = M 51.51% Sugar Produced Million tonnes Value of Sugar B $ = 100% Factory share sugar B $ = 36.94% Estate cane (estimated value) B $ = 32.48% Subtotal = (manufacturer) B $ = 69.42% Farmers Cane (estimated value) B $ = 30.58% 4

Types of Cane Payments Systems The number and different type of cane payment systems in existence are an indication that there is no single formula for an efficient and effective cane payment system (Table1). However, payment systems used to divide revenue between growers and millers can be separated into two broad groups. Fixed cane price systems Revenue sharing systems These systems can be divided into two main types: Fixed revenue sharing Variable revenue sharing 5

Table 1. Summary of revenue sharing arrangements Cane IndustriesCane payment systemRevenue share base on revenue from: Australia Brazil Colombia Fiji Jamaica India Maharashtra Uttar Pradesh Tamil Nadu Mexico Philipines South Africa Thailand USA Louisiana / Florida Hawaii China Vietnam Revenue sharing Co-operative Fixed price (flat rate) Fixed price 2 Revenue sharing Integrate growers/ Millers Fixed price (flat rate) Raw sugar (Millers retain molasses) Cristal 1 sugar and ethanol Raw/ Mill white sugar (Millers retain molasses) Sugar and other by-products Sugar and molasses n.a. Sugar (millers retain molasses) Raw sugar and molasses Raw/ refined 3 sugar and molasses Raw/ white/ refined 4 sugar and molasses Raw sugar and molasses n.a. Notes: 1. Cristal sugar is a very high polarity raw sugar produced by the Brazilian sugar industry. 2. Growers receive quality premium based on sugar yield per tonne cane. 3. Growers share in only part of the premium earned from exports of refined sugar. 4. Growers share in only part of the premium earned from exports of white and refined sugar. 6

INCENTIVES TO IMPROVE THE CANE QUALITY AND SUCROSE RECOVERY Table 2 shows the extent to which each country’s cane payment system rewards growers and millers (as a group) for improvements in cane quality and factory efficiency. The table presents estimates of the percentage change in growers’ revenue that result from 10% increase in cane sucrose content. The equivalent figure for millers showing the effect of a 10% increase in factory sucrose recovery is also presented. 7

Systems based on the average quality of growers’ cane Cane payment systems that are based on the average quality of cane delivered to a mill by all growers provide little incentive for individual growers to improve cane quality. For example, a cane grower who produces cane with a high sucrose content will only receive payment based on the average quality of all the cane delivered to the mill. Consequently, the grower is unable to influence the price received for his cane, and has no financial incentive to produce cane of higher quality. 8

JAMAICA’S CANE PAYMENT SYSTEM Cane analysis based on the core sampling method Required to test at least 50% of all deliveries Price/ tonne cane is based on the all suppliers average cane quality Cane quality is determined by measuring The Jamaican Recoverable Cane Sugar (JRCS) content in canes delivered within 72 hours after burning or cutting 9

SAMPLING Approximately a 7kg sample is taken by a rotating diagonal Core Tube For canes transported in a tandem of carts samples are taken as follows: - One to three carts - all should sampled - Four to six carts - a minimum of three should be sampled - Seven to eight carts - a minimum of four should be sampled - One sample is taken from trucks typically weighing tonnes. 10

JRCS DETERMINATION Samples are shredded to obtain a cell breakage of not less than 80% Sub-samples of 1kg is weighed on an electronic balance for processing The juice is extracted by a hydraulic press at 3000 psi for two minutes The press residue (bagasse) is analyzed for Fibre% Cane The extracted juice is analyzed for brix, pol, purity and sediments 11

CANE PAYMENT FORMULA ● Cost-Based System ● Aim: To Attain an Equitable Distribution of Sugar Revenue ● Principles: (1) Revenues should be divided in proportion to the costs involved in producing and processing a tonne of cane (2) The revenue should be determined on the basis of the recoverable sugar in cane. (3) The main factors which influence the payment of sugar from cane are: - Standard Cane Quality - Standard Factory Efficiency 12

FACTORY OPERATIONS Since the implementation of the new system, the indicator of efficiency has been the Factory Recovery Index. This is based on the actual sugar produced expressed as a percentage of that predicted. Predicted sugar is calculated from a structured formula, partly scientific with standards set for losses in:- Milling - Bagasse pol loss = 5% (reduced pol extraction 95 at 12.5%F) Processing - Filter cake pol loss, 0.60% of cane - Undetermined pol losses (physical and chemical) 1.3% of cane and - Final molasses pol loss, W & C formula modified ( /Q). 13

DETERMINATION OF POL % CANE & JRCS  Data Obtained From at the Core Laboratory. Eg. - Pol % Press Juice = P = Fibre % Cane = F = Press Juice Purity = Q=  Pol % Cane = P ( f/100) (1.0 - f/100) =  JRCS = 1.03P ( f/100) ( /Q) =

The Cane Payment Formula and the Core Sampling Method of testing introduced in 1991, have brought about many positives in managing and stabilizing the Sugar Industry. Firstly, up to 100% of grower’s cane can be tested. Secondly, the Payment Method has brought about a more equitable distribution of the proceeds from sugar between the growers and the manufacturers. Thirdly, Cane Payment is based on the sugar in cane tested at the Core independent of factory operation. The amount of sugar in cane is expressed as the Jamaica Recoverable Cane Sugar (JRCS) or sugar percent cane. 15

JRCS Measures directly the amount of sugar in a given quantity of cane. The higher the JRCS, the better the quality A JRCS of 10 indicates a quality better than a JRCS of 8. JRCS to tonnes of cane per tonne of sugar High Low 12.5 The tc/ts gives the ratio or the amount of cane required to make 1 tonne sugar. The lower the tc/ts ratio, the higher the quality. JRCS therefore, is now the important measure of quality on which the cane payment is based. 16

CANE PAYMENT FORMULA V = P x FRI/100 (Average JRCS– FF) + BYP V 1 = P x FRI/100 (Average JRCS x RF) – FF) + BYP ● V = Average Price/Tonne Cane at the respective factory ● V 1 = Individual Payment at each respective factory ● P = Price/Tonne Sugar ● FRI= The standard factory efficiency on which payment is based ● JRCS = All growers’ average recoverable sugar in cane ● FF = Factory fraction - The fixed number of Units of recoverable sugar of the standard cane quality to be retained by the factory ● BYP = Value per tonne cane for by-products 17

STANDARD CANE QUALITY ◘ Derived from the Moving Weighted Crop Average JRCS of All Factories ◘ A new value is calculated each year based on the last five years results ◘ Annual Factory Fraction Represents 38% Of the Standard Cane Quality (JRCS) 18

Commission Report 4.32 The Factory Fraction Total revenue for 1987 for 7 estates as per 4.3 $ 478,597,00 Total tons sugar for 1987 for 7 estates as per ,409 Total Revenue per ton sugar = $ 478,597,00 = $ 2, ,409 Cane growers/ farmers share of 62% = $ 1, average TC/TS = price per ton cane = $ 1, = $ 161, average JRCS = 100 (assuming percent sugar = 9.58 is the inverse of TC/TS) Therefore - Price per ton cane of $ = x $ 2,713 ( fixed fraction) ( ) ( x $2,713) = ( fixed fraction) (68.12%) = ( fixed fraction) = = 31.88% Since 9.58 is at.91FRI then the JRCS reported = 9.58/.91 = Price = 2713 x.0091 x ( ) = $ Therefore it should be 2713 x.0091 ( ) =

COMPARISON OF VARIATION IN PRICE/ TONNE CANE AND SHARE OF PROCEEDS DUE TO VARYING EFFICIENCY CASE JRCS FRI (ACHIEVED) PRICE/ T ($) GROWERS SHARE (%) FACTORY SHARE (%) This demonstrates the challenges to both growers and manufacturers to maintaining not only their standard sharing but to exceed for incentives. 20

CANE PRICE AS A FUNCTION OF QUALITY (JRCS) ESTIMATED SUGAR PRICE - $36,000.00/T STANDARD CANE QUALITY FACTORY FRACTION PRICE/TONNE = $ STANDARD TARGET JRCS F.F PRICE/ T $ DIFF FROM TARGET $ (98.31)(65.54)(32.77)NIL This demonstrates the value of one tenth (1/10) of one JRCS that is gained or lost by a grower. 21

$ X.0091 (JRCS - FF) Standard JRCS = = $ x ( – ) Growers Fraction = = x (JRCS – ) WORTHY PARK = X = 2, LONG POND = X = 2, MONYMUSK = X = 2, BERNARD LODGE = X = 2, FROME = X = 1, APPLETON = X = 1, ST. THOMAS = X = 1, ISLAND AVERAGE = X = 1, CANE PAYMENT FORMULA In this example the fixed factory fraction is demonstrated and shows the incentive to be gained from improved cane quality. Note the difference between Worthy Park and St. Thomas then St. Thomas to the island average. 22

LEVELING THE PLAYING FIELD COMPARISION TO THE OLD SYSTEM WITH THE NEW FOR THE 1990/91 CROP FACTORY % SHARE FACTORYDIFF. IN PRICE/TC TO SUPPLIER FACTORY EFFICIENCY* OLDNEW FROME MONYMUSK PETRONOL LONG POND TROPICANA NEW YARMOUTH APPLETON WORTHY PARK HAMPDEN AVERAGE The Standard Factory Efficiency in 1991 was As a result of the new system growers earned a net $19.47M FROM ALL FACTORIES, while three manufacturers earned $10.70M and six paid out an additional $30.17M 23

ALL ISLAND GROWERS -ANALYSING THE CANE PAYMENT SYSTEM BASE ON RECORDS ANNUAL JRCS % ANNUAL CHANGE YEARPRICE/T SUGAR STD PRICE/TC AVERAGE % CHANGE ACTUAL PRICE PAID PRICE/TC PRICE/TS N.A.$257.75N.A $ (5.57)$ $ $ (2.25)$ $ (6.58)(16.33) (9.53)$835.68(20.63)(3.12) $ $ (9.95)$ (17.77)(5.12) (0.53)$ (4.75)$ $ (1.50)$ (5.19)$ (2.29)$ $ $ Avg $

This table demonstrates the movement in the price of sugar compared to the quality of cane and the price of cane which is often non-proportional to the sugar price movement. The growers often fail to achieve the standard quality that they set, resulting in significant losses. 25

APPLICATION OF THE RELATIVE FACTOR FOR INDIVIDUAL PAYMENT  V 1 = P x FRI/100 ((Average JRCS x RF) – FF) + BYP The implementation of the “Relative Cane Payment System” for the 1972/73 crop arose out of the concerns for the uneven deliveries of cane by growers throughout the crop. Such a system had the desirable effect of removing the advantages of the growers who deliberately delivered canes during the peak period of juice quality at a cost to those who delivered at the beginning and end of crop. Such practices also had a negative impact on the factory performance of low operating time due to a shortage of cane at the beginning and end of crop and high stocks in the peak periods. The basis of the system was that the quality of any cane delivery is related to the factory average cane quality for the week in which it was delivered. It operates so that a supplier who supplies cane at the beginning of crop of a quality equal to that of the factory average for the particular week will get the average price paid for cane at that factory for the crop. If at the peak juice period a supplier supplies cane which is equal in quality to the factory average for the particular week, that supplier will also be paid at the said crop average price. Better or worse than average quality cane for the particular weeks would attract higher or lower than average price, in the proportion by which they are better or worse than the factory average for the particular week. 26

For example, if a farmer at the start of the crop delivers cane taking 11 tonnes of cane per tonne of sugar, and the factory average for that week was also 11 tonnes of cane per tonne of sugar (his Relative Factor would be 11/11 = ), he would be paid the crop average price for cane for that factory, if his cane tested 10 tonnes per tonne of sugar, he would be paid 11/10 (a Relative Factor of ) of the crop average price for his cane delivered for that week. If a farmer delivers cane of 9 tonnes per tonne of sugar at the peak quality period and the factory average for the week in which the cane was delivered is also 9 tonnes per tonne of sugar, he would be paid for that cane at the average cane price for the factory. If, however, his cane quality is 10 tonnes of cane per tonne of sugar, he would be paid at a rate of 9/10 (or Relative Factor) of the average price for cane for that factory. 27

The average Relative Factor for the crop is calculated from the Tonnes Relative Cane delivered. The Tonnes Relative Cane is calculated weekly - this is the product of tonnes cane delivered x the Relative Factor (see table below). WeekTonnes cane suppliedSupplier’s TC/TS (=A) Factory average TC/TS (=B) Relative Quality (B/A) Tonnes cane x Relative Quality Total Average AVERAGE RELATIVE FACTOR = ÷ 600 = Note the cane quality curve for 1999 and 2000 crop below. Farmer (a average quality grower) is compared with farmer (an inefficient grower) compared to farmer (an efficient farmer) 28

IMPACT OF THE RELATIVE FACTOR Farmer : R.F X 9.52 = 9.52 (1999) Farmer : R.F X = (2000) Farmer : R.F X 9.52 = 8.76 (1999) Farmer : R.F X = (2000) Farmer : R.F. 1.1 X 9.52 = (1999) Farmer : R.F. 1.1 X = (2000) 29

Example of 2009 season Worthy Park average JRCS = Highest Lowest JRCS R.F Average Quality at time of delivery Price at actual JRCS $ Price at Relative Factor JRCS $ Frome average JRCS = Highest Lowest JRCS R.F Average Quality at time of delivery Price at actual JRCS $ $ Price at Relative Factor JRCS $ $

Monymusk average JRCS = Highest Lowest JRCS R.F Average Quality at time of delivery Price at actual JRCS $ Price at Relative Factor JRCS $ Long Pond average JRCS = Highest Lowest JRCS R.F Average Quality at time of delivery Price at actual JRCS $ Price at Relative Factor JRCS $

St. Thomas average JRCS = Highest Lowest JRCS R.F Average Quality at time of delivery Price at actual JRCS $ Price at Relative Factor JRCS $ Appleton average JRCS = Highest Lowest JRCS R.F Average Quality at time of delivery Price at actual JRCS $ Price at Relative Factor JRCS $

COMPARISM OF ESTATE vs FARMERS QUALITY Appleton Factory JRCS RELATIVE FACTOR Estate total Frome Estate St. Elizabeth Farmers New Yarmouth Estate B/ Lodge & Clarendon Average Frome Factory JRCS RELATIVE FACTOR Farmers Estate

Long Pond Factory JRCS RELATIVE FACTOR Farmers Total Estate Total Average Monymusk Factory JRCS RELATIVE FACTOR Farmers Estate Bernard Lodge Average

St. Thomas Factory JRCS RELATIVE FACTOR Farmers Estate Duckenfield Indvl Serge Island Indvl Average Worthy Park Estate JRCS RELATIVE FACTOR Farmers Estate Hillside Farmers Bog Walk Farmers W.P./ Tulloch Spring Garden Average

CROP YEAR: 1999/2000 EstateJRCS Highest Relative Factor Group No. JRCS Lowest Relative Factor Group No. Span Tropicana Worthy Park * Hampden * B/ Lodge Long Pond * Monymusk Frome Appleton * These are examples of a good and acceptable span (highest to lowest). 36

GENERAL The report of the Sugar Industry Enquiry Commission (1987/88) contained the following recommendation (see paragraph 8.53): “We also recommend that the Sugar Industry immediately commence a cane- growers education programme detailing the JRCS measurement system and the reasons for its introduction, and particularly emphasizing its aims and the effect on the returns to growers who continue to supply poor quality cane” The contents of the AIJCFA submission to the CPC suggests that the case for an educational programme is at least as strong today as it was fourteen years ago. The submission makes it clear that there remains a lack of understanding of the principles upon which the Cane Payment System is based. This, in turn, has led to a general state of confusion on the part of the cane farmers and their representatives. 37

As a result this unique and most brilliant system of testing and payment has failed to bring the degree of achievement in efficiency and prosperity to a failing industry. The strength of the Euro coupled with the devaluation of the Jamaican Dollar has not helped as there were this satisfaction of the significant price increases although efficiency was falling. Scientific studies show why cane quality will decline and although this has been exposed very little attention is given. Example:- SUGAR CONTENT OF COMPONENTS COMPONENTSPERCENT SUCROSE MATURE STALK TOPS2 - 3 SUCKERS

FACTORS AFFECTING QUALITY Variety Cane maturity Fertilizer programme Moisture supply nearing harvest Delay between harvesting and testing FACTORS INFLUENCING CANE QUALITY FRESHNESS Below 24 hours after kill - ideal 48 hours - good Up to 72 hours - acceptable Over 72 hours - unacceptable Aim to supply as much cane as possible within the first 24 hours after kill. 39

DROP IN CANE PRICE DUE TO STALENESS After cut or burnCumulative % loss Day 10 Day Day Day Day Day

FIBRE % CANE True cane fibre = % of cane weight Extraneous matter also classified as “fibre” Extraneous matter is added to true fibre Higher fibre = lower cane price IMPACT OF FIBRE COMPONENTS Components (10% of sample)Percent Price drop Dry trash11.7 Green leaves7.4 Dry dirt13.6 Tops8.3 41

FACTORS AFFECTING PURITY Immature cane Suckers Tops Dead cane Stale cane 42

FACTORY RECOVERY INDEX (FRI) This is: ◘ The Relationship Between a Factory’s “Sugar In” Measured in JRCS Purchased and its “Sugar Out” Expressed as Tonnes 96º Sugar Made Tonnes 96º Sugar Actually Produced by Factory (including sugar equivalent sold to distillery) ◘ FRI = _____________________________________ Tonnes Jamaican Recoverable Cane Sugar The negative/ positive impact is demonstrated for a factory processing 300, 000 tonnes cane. The value of one (1) FRI is $ million or $ million for 0.1FRI. Refer to factory (A) below 43

FACTORY REVENUE AS A FUNCTION OF FACTORY RERCOVERY INDEX (FRI) Factory “A” FRI‘89‘90‘91‘92‘93 T. Cane grnd300,000 Price/ T. Sugar36000 Crop avg. JRCS10.50 T. sugar prod28,03528,35028,66528,98029,295 TC/TS Total revenue from sugar ($) 1,009,260,0001,020,600,0001,031,940,0001,043,280,0001,054,620,000 Price/ T. cane Total revenue to suppl. ($) 656,904,000 Suppl. Share ($) Total revenue to factory 352,356,000363,696,000375,036,000386,376,000397,716,000 Fact. Share (%) Fact. (loss) / Gain for FRI above/ below 91 ($) (22,680,000)(11,340,000)0.0011,340,00022,680,000 NB: STD. CANE FF

For the period 1991 to 2009 each factory existing is analyzed in accordance with the standard cane quality, standard FRI.91 and the Growers/ Manufacturers share of %. Appleton Tonnes cane received4.683 Million Tonnes sugar produced430, Average JRCS Revenue for cane$5.233 Billion Average FRI92.76 Factor share39.68 The value of the increase factory share of 1.68 = $ million. This is due to the growers failure to achieve the standard JRCS ( ) costing them $ million and the major upgrading of the factory in 1998/99. This is a good example of the intended outcome of the system with an incentive for investment and efficiency. 45

Bernard Lodge Tonnes cane received4.597 Million Tonnes sugar produced404, Average JRCS Revenue for cane$5.409 Billion Average FRI89.00 Factor share36.87 This level of inefficiencies resulted in the Growers losing of $ million from poor quality in relationship to the standard ( ) and the factory $ million, for realizing only FRI and 36.87% of the share, this is dictated by the Payment Formula as designed. Frome Tonnes cane received Million Tonnes sugar produced million Average JRCS Revenue for cane$ Billion Average FRI89.21 Factor share37.44 Similar to Bernard Lodge both sectors failed the standard ( ) which costed the Growers $ million and the factory $ million. 46

Long Pond Tonnes cane received2.430 Million Tonnes sugar produced212, Average JRCS Revenue of cane$3.032 Billion Average FRI85.45 Factor share31.94 This once more dictated by the Formula shows the Growers earning to be $ million greater than the standard cane quality ( ) and the factory losing $ million for failing the achieve 38% of the share. Monymusk Tonnes cane received6.688 Million Tonnes sugar produced606, Average JRCS Revenue for cane$7.759 Billion Average FRI89.25 Factor share36.25 Similar to Long Pond the Monymusk Growers benefit for quality at $ million while the factory lost $ million for poor recovery. 47

St. Thomas Tonnes cane received2.726 Million Tonnes sugar produced221, Average JRCS Revenue for cane$3.405 Billion Average FRI85.01 Factor share34.53 Both sector lost with the Growers $ million and the factory $ million. Even so the Growers were less efficient than the factory. Worthy Park Tonnes cane received3.791 Million Tonnes sugar produced430, Average JRCS Revenue for cane$6.240 Billion Average FRI98.44 Factor share37.75 This is most revealing of a system, a perfect example of the challenges to supremacy for each side. The growers earned $ more per tonne of cane above standard ( ) with a Gross of $ billion. Although this factory was so outstanding in its efforts failed by 0.25% of the standard share which cost it $ million. 48

Summary This system as explained is second to none throughout the cane industries of the world. Its scientific development and with all due consideration given has proven it to be so. The industry has failed to make progress and failed to be viable and profitable. This is attributable to both sectors’ inefficiencies some more than others. Inasmuch as the cane production has fallen to ( million tonnes) less than fifty percent (50%) of its potential and with the industry producing million tonnes sugar earning $ billion over the past 19 years it could have been much better. This was shared: Growers = 63.06% at JRCS Manufacture = 36.94% at 89.87FRI The losses estimated for unacceptable performance are: Growers = $ billion by failing to achieving the standard they set at JRCS Manufacture = $ billion for excess losses in all areas of processing Total = $ billion This represents 2.90% of the $ billion earned over the period under review inclusive. 49

Growers Additional Losses/ Potential Gain JRCS JRCS = $ per tonne Average reported $ per tonne Difference ($ ) per tonne Value million tonne cane B $4.667 Productivity The average productivity 1991 – 2009 Was – Cane Harvested million tonnes - Area Harvested hectares - Average JRCS Tones sugar per hectare 5.99 Tonnes sugar per hectare (target) 7.5 Growers actual earnings B $ Growers potential earnings at target B $ Difference at the average JRCS of is B $ or 25.20% 50

The manufacturers have incurred massive losses in: A.Sugar loss in cane yard tonnes valued at M $ above 4% at which this loss is calculated. Due to cane yard management but primarily to washing dirty cane. Loss of sugar in washing whole stick cane is at 4lb per tonne and 8lb per tonne for chopped cane. There is no allowance for such losses in the JRCS formula. B. Milling – it is estimated that the loss of sugar was tonnes valued at M $ for losses in excess of the standard set. C. Excess loss of sugar in molasses at tonnes valued at B $ from which the growers got 62% or M $ a double payment. D. Baggasse/ oil consumption Year L/T.S. Tonnes Sugar Volume used , million litre , million litre , million litre , million litre , million litre 51

E. COST FOR FACTORY DOWN TIME – OUT OF CANE Long Pond St. Thomas Worthy Park Frome Appleton Monymusk Number of Days The system has not failed us we failed ourselves. The only change to the system may be the fixed sharing of proceed which now stands at Growers 62%, Manufacturers 38%. Such a change is mandatory upon the review of the actual costs of production from audited accounts that is long overdue. 52