Economies of Scale in Contract Harvesting of Sugarcane

With increasing international competition it is imperative that the South African sugar industry improves cane yields and quality, and curtails production costs. It is thus likely that increasing domestic labour costs will result in the long-run substitution of capital for labour (i.e. increased mechanisation). Given the high cost and indivisible (or lumpy) nature of mechanical inputs, it is important that machinery used in the production of sugarcane is efficiently utilised. This creates the opportunity for efficient contractors to exploit economies of scale in cane harvesting, loading and transport by spreading fixed capital and management costs over a large tonnage. This paper investigates the economic optimum size contracting unit using information from the North Coast region, and extends this analysis to investigate the cash flow implications of different levels of capital leverage (debt financing) on contractor viability.