ECONOMIC APPRAISAL OF THE SUGAR OPERATIONS OF THE

VIRGIN ISLANDS CORPORATION

SUMMARY AND CONCLUSIONS

The problems of the Virgin Islands Corporation were studied by the present writer after completion of the 1953 crop. The report of that study, Economic Appraisal of the Operations of the Virgin Islands Corporation, after setting forth 17 specific recommendations, concluded with the following passage:

In short, yields obtained in recent years demonstrate that St. Croix's natural resources are sufficient to maintain a sugar industry of limited size. Agricultural practices are comparable with those of Puerto Rico and field mechanization has progressed somewhat further. The Corporation's field equipment surpasses that in general use in Puerto Rico. Dollar investment in the factory at the start of the next crop will be far above that for mills of similar size elsewhere, although the performance ability of the factory remains to be proved. Attainment of a self-sustaining enterprise depends largely on the human element: On the success of the Corporation in organizing its own efforts; on the degree of integration of future Federal activity on St. Croix; and on the extent of cooperation obtained from workers and local leaders in the effort to bring labor productivity into balance with current wage rates.

Shortly thereafter, a new president was placed in charge of the Corporation, and the Corporation since then has followed many of the recommendations of the earlier report.

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Corporation losses have been reduced but only to a limited extent, having averaged $375,000 annually in the last 3 years compared with $491,000 annually in the preceding 3 years. There is one notable difference, losses are now trending downward (they were $186,000 in 1956) whereas they had been running along on a high plateau. Losses from the sugarcane and sugar enterprise alone averaged $493,000 annually in the 3 years preceding 1954 and were $701,000 in 1954 (principally not the responsibility of the present management), $406,000 in 1955, and $278,000 in 1956.2

Sugarcane operations have been improved in recent years. The mechanical condition of the sugar factory is much better, maintenance costs have been lowered, and crop labor expenses have been reduced to a point more in keeping with what may be regarded as reasonably

Depreciation rates were reduced after the 1954 crop by enough to lower depreciation charges about $90,000 per year. On a basis comparable with previous years, the average annual loss would have been about $435,000.

? If depreciation rates were on a basis comparable with earlier years, losses in both 1955 and 1956 would be $90,000 higher than shown.

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appropriate to the Bethlehem factory. However, sugar recovery efficiency of the factory has been improved to only about half the extent reasonably attainable, while factory lost time has actually increased slightly. Factory supply costs are much too high. As a result, factory costs per unit of production are still substantially higher than they should be and sugarcane production costs are higher per unit of sugar than they would be were it not for the low recovery performance of the factory. It should be noted that inadequate and erratic cane supply rather than machinery breakdowns has been the principal cause of lost time in recent years. Closer synchronization of harvesting with factory operations would enable gains resulting from the improved mechanical condition of the factory to be realized. Other measures can be taken to correct the remaining adverse conditions cited.

In view of the progress made, the opportunities for further cost savings (particularly in the sugar factory), and the probability of reduced sugar transportation expenses as the result of the Corporation's experiment with bulk shipments, it is probable today as it was 3 years ago that the Corporation can be placed upon a self-sustaining basis and that the sugarcane and sugar enterprise itself can be made selfsustaining. It probably will not be accomplished in 1957 and whether it is achieved at all depends upon the determination of management to exploit every opportunity to reduce costs and to increase returns.

Losses of the sugarcane and sugar enterprise for 1957 are estimated at $200,000 including a $100,000 fire loss. Under optimum conditions attainable within the remaining life of the Corporation's charter a crop profit of $110,000 appears possible. (See tables 3 to 5, inclusive.)

Certain of the fundamental conditions which place the Virgin Islands at a disadvantage compared to other sugar-producing areas persist. Principal among these is the scarcity of talent on this small island to make available an able corps of foremen and supervisors capable of utilizing labor as economically as it must be used in order to compete with sugar produced under American standards in other domestic areas. With this recognized as a competitive disadvantage which can be improved to a substantial extent only over a long period of time after the Corporation has had a history of cost conscious operations, management should exert strong effort to (1) attract from other sugar areas, principally Puerto Rico, additional key personnel, and (2) continuously keep under review all phases of its operations in order that it may plan its activities with an eye to eliminating or modifying situations which contribute disproportionately to costs. With regard to the last named consideration, management must do a better job than most companies in other areas are called upon to do and should keep this need constantly in mind. Sucrose losses in milling must be reduced, molasses must be sold at not less than competitive prices, supplies and property must be more adequately protected and administrative expenses reduced. A lower rate of payment for sugarcane purchased from growers also is a prerequisite. In the face of the present situation and prospects, it is recommended that

1. The three crop years 1957 to 1959 inclusive be regarded as the test period to determine whether the sugar enterprise actually can be made self-sustaining;

2. Management step up its efforts to reduce costs;

3. Any attempt to dispose of the sugar enterprise to private industry be deferred while the attempt is made to place it on a profitable basis with the thought that it may then be turned over on terms favorable to the Government and with a greater likelihood that the enterprise will continue to function for the benefit of the residents of St. Croix; and

4. The Corporation not be turned over to the Government of the Virgin Islands because of the inherent difficulty of operating at all as a profitable enterprise, a difficulty which would be accentuated if the enterprise were further exposed to local political pressures.

SPECIFIC RECOMMENDATIONS

Recovery as sugar of the sucrose in the cane is one of the principal areas in which the present management has made only limited progress. The following is quoted from the prior report:

For the 1953 crop, Vicorp's percentage of cane sucrose recovered as sugar amounted to only 71 percent. Grinding late in the year was partially at fault but even for the period prior to May 31 the recovery was only 73 percent. The average for United States mills is 85 percent. With the new milling equipment that has been installed and even granting that the cane tonnage figures for 1953 contained a substantial quantity of trash, estimated by the mill superintendent as 6 percent, recovery should be improved to 80 percent on a comparable basis-a 10 percent improvement in sugar extraction. When and if realized, the corporation's share of the 1,200 tons of sugar, plus related Sugar Act payment, less cost of bags and shipping will mean a savings of upward of $100,000 per crop.

Later Dr. Keller estimated that recovery of 82 percent rather than 80 percent should be attainable. Average recovery during the last three crops has been less than 77 percent. In 1956 it was 76.2 percent.

Sucrose losses beyond the experience of other areas occur principally in the bagasse and filter cake and from undetermined sources. Undetermined losses in particular should be studied constantly to identify causes since they represent either incomplete accounting for sucrose or inaccurate evaluation. Faulty piping, overflow from holding tanks, and other sources of juice losses should be remedied at the first opportunity after discovery. Filter cake losses can be reduced by improved filter cake washing techniques. High reported losses of sucrose in bagasse stem principally from two sources, one apparent and one real. First, cane weights are not tared for trash content and therefore are somewhat inflated. Under the sucrose accounting methods used, this tends to inflate the reported losses of sucrose in bagasse. Second, St. Croix cane has high fiber-17 to 19 percent of the weight of the cane compared with about 13 percent in Puerto Rico-which acts to absorb juices and sucrose. Only limited improvement is anticipated with respect to sucrose losses in bagasse.

1. Effort should be made to increase the percentage of sucrose recovered as sugar from the present 76.2 to 81 percent. This 6 percent improvement would add the same percentage to the quantity of sugar obtained from a given quantity of cane and would mean a savings to the Corporation of roughly $60,000 per crop. Growers would likewise benefit to the extent of $20,000. Progress should be sufficient during the balance of the 1957 crop to raise the ratio to at least 78 percent for this year.

Lost time in the factory as the result of mechanical failures has declined steadily in recent years (18 percent in 1954, 14 percent in 1955, and 10 percent in 1956). Concurrently, time lost because of inadequate cane supply has increased (10 percent in 1954, 18 percent in 1955, 22 percent in 1956, and 25 percent in the first 2 weeks of 1957). A larger force of cane cutters would avert this difficulty. Management has refrained from hiring a sufficient force because for all those who are imported it is under obligation to provide a certain level of work each week regardless of whether the factory is in operation. Doubts concerning the mechanical ability of the factory have induced caution. A cane cutting force of 500 men was recommended in the previous report at a time when 200 local cutters were available, for whom no minimum work guaranty is required. In 1956 the Corporation had 330 imported cane cutters but only a handful of local cutters. Incidentally, local off-season employees of the Corporation in 1956 cut cane for independent growers, who thus maintained a desirable balance between local and imported cutters. While this was advantageous to the independent growers it was costly to the Corporation which was in the position of providing employment when available to a group of workers in the off-season without having the benefit of their services during the busy season. In a small way, this practice reflects the lingering islandwide attitude that the Corporation's role is to subsidize (in this case, growers).

2. Management should endeavor to obtain greater flexibility in the work guarantee provision of its imported labor contract,