The only thing certain is change
The sugarbeet industry in California is undergoing the most significant changes in recent memory. These changes are driven by declining acreage for the crop, a new farm bill, and the merging of Spreckels with Holly Sugar, leading to a single beet processing company in California for the first time. Any one of these changes singly would cause adjustment by the industry. All three together suggest an assessment of the commodity’s future, and whether farmers should consider planting sugarbeets any longer.
Contracted acreage for the current year according to the CBGA is close to 90,000 statewide. One third of these acres is located in the Imperial Valley where the beet crop is thriving. Another ten percent is planted in the Upper Klamath Basin, and the remainder (approximately 60,000 acres) is in the central valley from Redding to Bakersfield. This is less than 1 % of the irrigated crop acres in the Central Valley. During the 1970's, beet acreage in the central and Salinas valleys totaled nearly 300,000. The current year’s total represents the lowest acreage in California since 1944, when severe labor shortages reduced crop acres equivalently. Is the sugarbeet commodity in its last days in California?
The single most important factor in the decline in sugarbeet acreage, in my view, has been the decline in the selling price of sugar over the last five years. Since 1990, the price of sugar has declined, primarily due to the significant expansion of sugarbeet production in the Red River Valley of Minnesota and North Dakota. Someone once remarked that agriculture is the only industry in which producers buy retail and sell wholesale. The low price of sugar has meant that despite efforts by growers to reduce costs, the beet crop has been caught in a serious cost-price squeeze throughout the decade. While yields have improved somewhat in the last few years over the decades-long average in California, they have not improved sufficiently to offset reduced sugar prices and rising production costs. More recently, the prices of small grains, safflower, and even corn have risen. Because of these unusually high prices, these competitive crops can provide an equivalent or better return currently than sugarbeets, but with lower costs of production and less capital at risk. This last point is not lost on the agricultural lenders who finance crop production.
The price of sugar
What is likely to happen in the next several years with respect to price of sugar? To answer this, some background on the new farm bill is necessary. The congress revised sugar policy this year. Put simply, The loan rate for sugar has remained the same, except when sugar is forfeited. If sugar is forfeited, the loan rate is reduced by $0.01 per pound from $0.19 to $0.18. If the sugar import quota is not reached, loans to processors become recourse instead of non-recourse. Lastly, the surcharge on domestic sugar producers to run the sugar program has been increased and the provision allowing for marketing allotments by region and some restrictions on cane and beet acres have been eliminated. The net outcome is that the sugar commodity will be subject to market forces more now than in the past. The last time market forces had free range, sugar prices increased substantially. In a recent talk, Rodger Hill, the president of Holly Sugar, was optimistic about increasing sugar prices this year. He anticipates lower acreage for sugarbeet nationwide than previously estimated by USDA and few high yields in the current year elsewhere in the USA due to weather-related factors. Also, there are low carryover sugar stocks. All these factors should put upward pressure on sugar prices.
In fact, the wholesale price of refined sugar in California in early June is $0.335 per pound. Earlier this year it was $0.25 and the NSP was approximately $0.225. An NSP of $0.26 per pound may be possible later in the year and will mean that beets with 15% sugar will be worth almost $40.00 per ton, and a 28 ton yield (close to the average of the last three years) will be worth approximately $1,100. A higher sugar percentage and/or increased tonnage improve the return accordingly. Domestic sugar stocks are now low, and sugar production levels in the USA have declined sufficiently in the last year to put upward pressure on prices. There are also some financial forces at work in the Red River Valley to limit further expansion of beet production. These include a drop in the value of coop shares, bad weather, and a desire to see the price of sugar rise in the region to improve grower returns. Montana, the Red River Valley, and Michigan seem to be having a late, and probably low-yielding year in 1996. Sugarbeet production is also declining in Texas, reducing domestic supply further. Environmental legislation in Florida will retire some land from sugar cane production, and cane production is declining in Hawaii. Still, despite all these encouraging signs for California production, it is difficult to forecast the price of basic commodities like sugar accurately beyond the short-term. But at least for the short-term, the prospects for sugar prices appear to be improving.
What’s in a name?
Specific to California, the merging of Spreckels and Holly into a single company should improve its efficiency and the NSP that can be paid to growers. The factories in central California will be operated under the Spreckels name to honor the historic value of that name in California and to continue the direct marketing to consumers of sugar products that Spreckels has developed in California. Two more factories, however, will be closed, one at Manteca (now closed) and the other in Hamilton City (June, 1996). These factories had a combined slice capacity of 8,200 tons per day, representing approximately 40% of the factory capacity in the central valley and 28% statewide. This will leave the factories at Mendota (Fresno County--4,200 tons per day slicing capacity), Tracy (San Joaquin County--5,000 tons per day), and Woodland (Yolo County-3,600 tons per day) in the central valley. Holly’s factory at Brawley in the Imperial Valley (9,000 tons per day) completes the set of factories now operating in California. Closure of the Manteca and Hamilton City factories will allow the remaining ones to operate closer to capacity, and hopefully more profitably. The assembly and transport of beets to factories should also become more efficient with a single company organizing the statewide campaign. If the remaining factories were to run during their traditional number of days of operation each year and slice at capacity for that entire period, then about 3,600,000 tons of beets will be needed each year. At 26 tons per acre average root yield, somewhat more than 100,000 acres would be needed in the central valley and the Upper Klamath Basin-Intermountain Valley region. A higher average root yield, less than full operation, or a reduced slice capacity would lower that total, suggesting that 30,000 more acres are needed in the Central Valley and Upper Klamath Basin-Intermountain region to keep the beet industry healthy in California, as it is currently configured.
With the reduction in size of the sugar industry, some have lost their jobs and will be missed. The largest number of job losses occurred with the closing of the factories. Many from the Spreckels and Holly agronomic staff have been retained, however, and the faces in the industry will remain largely familiar. Holly Sugar has made a substantial financial commitment to the future of the sugar industry in California, and will do whatever they possibly can to see it return to prosperity.
The cost of sugar production
Clauson and Hoff and Ali and McElroy recently compared the cost of sugarbeet production nationally. Details are reproduced in Tables 1 and 2. In both analyses, the Red River Valley was the lowest cost region and California was the highest cost region of the country. Total economic costs of production were estimated at $1,156.67 per acre in California, compared to $675.51 per acre in Minnesota and North Dakota (Clauson and Hoff, 1993). Cash costs were $770.77 in California, compared to $297.29 (ibid.). In both analyses, the major differences between low and high cost producers in the USA generally were attributed to irrigation (both water and pumping costs), hired labor and custom operation charges, freight charges, and slightly higher costs for fertilizer and chemicals. Surprisingly, fixed costs were not very different. To produce a ton of beets, variable plus fixed cash costs were $26.52 in California and $23.28 in the Red River Valley and total economic costs were $36.18 and $33.64 respectively. The closeness of these figures is due to the higher yields achieved in California. Unfortunately, the season average price per ton of beets was much different. California farmers received $36.80 and Red River Valley growers $43.10 (Clauson and Hoff, 1993), with the difference largely explained by the higher sugar percentage achieved on average in the Red River Valley. These figures show that in California total economic costs are approximately equal to returns at average yield levels. Each ton of yield above the long-term average in California (26 tons per acre) is almost entirely profit, so it pays growers to do the best possible job with their sugarbeet crops.
Lowering costs
Since irrigation costs contribute significantly to the cost of production in California, it is appropriate to ask if these costs can be reduced. Improving the efficiency of existing irrigation systems will save money providing the amortized cost of improving the system is less than the amount of money saved on irrigation. The simplest way to lower water costs, however, is to produce the crop when evaporative demand is lowest, yet light levels are sufficient to provide for adequate levels of growth. Fall establishment and June and July harvest result in greater water use efficiency than spring planting and late summer-early fall harvest. Comparing work carried out by Jack Hills in Yolo County and work by Howell et al. in Fresno County in which water use by spring-planted beets was determined with work we have carried out in Fresno County estimating water use by fall-planted beets indicates that fall-planted beets use about two-thirds of the water that spring-planted beets require. Some of this water is derived directly from rainfall during this period. It is difficult to imagine a new, cost-effective irrigation system providing so great an improvement. Additionally, during the winter months, armyworms and mildew will be less of a problem and cost less to control, overall.
Fertilizer and chemical costs are higher in California than in the Midwest. In part this is due to a generally lower incidence of pests and diseases in the Midwest. Greater attention to proper fertilization practice and the reduction of "insurance" type spray programs for armyworm might reduce these costs somewhat. Transgenic, herbicide-tolerant sugarbeets would might also reduce chemical and labor costs by simplifying weed control and allowing for the substitution of less expensive materials. Any form of plant resistance or tolerance to disease and insect attack is a cost reducing factor. Improving resistance or tolerance to the most difficult pests of sugarbeet through transgenic methods offers the promise of reduced costs of production and higher yields.
Another way in which costs might be lowered would involve planting to stand. Growers usually report thinning costs between $50.00 and $100.00. Planting to stand would reduce costs significantly but increase the risks associated with stand establishment. There are some locations, times of year and seed treatment and related management practices where planting to stand in California should be less risky. This will be discussed in an upcoming sugarbeet research review. It is unclear if hired labor and custom operation costs, which are high in California, can be reduced in other ways.
Raising yields
Sugarbeet varieties have a higher yield potential than is achieved on average. In every region except the Klamath Basin with its short growing season, yields are achieved by some growers in the high thirty to forty ton range. Occasionally, a fifty ton yield is reported and in the Salinas Valley at least two crops have been produced of 60 tons. In the Klamath Basin, with a short growing season, some yields have approached thirty tons compared to the average twenty. Could a larger portion of the crop be grown at higher yield levels? A 35 ton crop at 15% sugar would be worth $1,400.00 at a $0.26 NSP. The variable and fixed costs of producing such a crop would be only slightly higher than for a 26 ton crop worth $1,000.00.
Excellent management, good soils, and disease-free conditions lead to high yields. Excellent management can be achieved by all who are interested, but disease-free conditions are more difficult to insure. The aphid-borne viruses and rhizomania remain the most difficult yield limiting factors for sugarbeet. Currently, beet yellows virus is largely absent due to low beet acres in and around the Delta region and careful management of the beet-free program. Rhizomania resistance is improving steadily in newer beet cultivars. For the short-term, these two significant problems may be reduced, allowing more growers to achieve higher yields. In the mid- to long-term, continued aggressive plant breeding efforts and the use of molecular biotechnology to provide new traits to plant breeders, that confer better levels of resistance, will be needed.
Short-term and mid-term prospects for the industry
The federal sugar program represents a compromise between the interests of farmers and sugar processors and those of consumers. For the most part this compromise has worked reasonably well. It is designed to allow domestic sugar production, yet keep prices constant and low for consumers, and has provisions to keep prices from rising too high for consumers. If northern sugarbeet producing regions maintain some restraint in the growth of acres, the program also will work to keep prices in their current range for producers. In the short run, a number of factors seem to be leading to a modest increase in wholesale sugar prices in the USA, and these may remain at this improved level for one or two years. It is difficult to forecast prices any farther. Also, it is unlikely that prices will improve dramatically given the provisions and intent of the sugar program. For the sake of the growers, it would be nice to be proven wrong.
Farmers who can achieve above-average yields should find sugarbeets to be a profitable crop in 1997 if current increased sugar prices hold up through their contract period. Even at current prices, farmers in the Imperial Valley, where average yields have reached 34 tons per acre at 16% to 17% sugar in recent years are doing well with their sugarbeet crops and the demand for acres exceeds the capacity of the factory. Sugarbeets have valuable characteristics that make them useful in farming systems, including high tolerance of salinity and ozone, the ability to grow as a winter crop in California, and other rotation benefits for weed and pest control, and nutrient conservation. I expect them to remain an option for some farmers in California for a long time. The difficult question for the industry is whether acres can be increased sufficiently in the next two or three years to sustain current capacity. Each time a factory is closed, it eliminates the opportunity to grow beets for more farmers.
Table 1. 1992 average sugarbeet production costs per planted acre
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Notes for the tables:
1. Tractor, truck, machinery, and irrigation eqwuipment
fuel, lubrication and electricity.
2. Tractor, truck, machinery, and irrigation equipement repairs.
3. All hired labor, but excludes operator labor.
4. Rental value of housing ,personal property, utilites, drinks, snacks, and field toilets for workers.
5. Purchased water by the operator, excluding water purchased by the owner whichis included in the cash rent or share agreement (return to land).
6. Costs deducted by the processor from the net payment.
7. Excludes interest (fixed cash expense).
Tables 1 and 2 are adapted from Clauson and Hoff (1993).