Voluntary Report - public distribution

**Date:** 10/27/2005

**GAIN Report Number:** PE5023

PE5023

**Peru**

**Sugar**

**Largest producer looking for partner**

**2005**

**Approved by:**

![](media/image1.wmf)Melinda D. Sallyards

U.S. Embassy

**Prepared by:**

Gaspar E. Nolte

**Report Highlights:**

Casa Grande, Peru\'s largest sugar producing company finds new local and
foreign investors. Sugar production in Peru could increase by 20
percent.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Lima \[PE1\]

\[PE\]

**Summary**

Lately Peruvian, Bolivian and Colombian investors have shown interest in
buying Casa Grande, Peru's largest sugar producing company in terms of
land size and responsible for about 20 percent of total sugar
production. If the purchase of Casa Grande goes through, total sugar
production in Peru could increase 20 percent up to 1.2 MMT (raw sugar
equivalent). This increase could make Peru a net sugar exporter, as
sugar consumption is stable at 900,000 MT (raw sugar equivalent).

# Background

Casa Grande is a "sugar state" with 4,000 workers, but a population of
70,000. These include retired employees who still own shares in the
company. Increased privatization threatens further unrest since the
residents of Casa Grande fear loosing their homes and benefits, even
though the GOP has assured them that this would not occur.

With about 30,000 hectares (to have some perspective, Belgium is about
26,000 hectares) Casa Grande, located in the department of La Libertad,
has experienced financial difficulties for many years. However there has
been reluctance on the part of the worker/owners to form a partnership
that could in theory improve their financial situation.

In 1996, the GOP published Decree N°802 which allowed private investment
into the socialist style sugar cooperatives. Since then, many
sugar-producing companies have been able to attract foreign and local
investment, turning its management to the new major shareholder who have
restructured the companies making them more efficient. Casa Grande has
not been able to find a strategic partner to run the company. General
unrest among the worker/owners, continue to be the major obstacle for
further privatization of Casa Grande. These worker/owners believe that
their land is the best in the country and have overpriced it not taking
into account the enormous debts carried by the former cooperative. More
over, in an attempt to keep their power and income, the ex-coop leaders
have blocked several attempts of finding a partner.

As part of the strategy to encourage cooperatives to find investors, the
GOP passed a law by which sugar cooperatives were not subject to
foreclosure due to debt. This protection was meant to be temporary while
cooperatives found investors and could resume payments. However the
protection has become permanent. As a result cooperatives that have not
found a partners have effectively increased its debt. This protection
also included taxes which government has been capitalizing. The
government now owns 32 percent of Casa Grande's shares.

**Outlook**

Currently Casa Grande's stock share structure is as follows: 32 percent
owned by the government, 35 percent owned by the workers, 22 percent
owned by Gloria and 11 percent owned by other private investors. There
are at least three companies interested in buying the government's
shares, the GOP has already announced its interest in selling its
shares, this process should begin by mid November.

The three companies interested in buying the government's shares are:
Gloria, the largest Peruvian dairy processor who already owns 22 percent
of Casa Grande's shares; UNAGRO, one of the largest sugar producers in
Bolivia; and Manuelita, an important Colombian sugar producer with
significant experience in the Peruvian market.

Casa Grande has only about 12,000 hectares under production, less than
50 percent of its total area. Its milling capacity is 10,000 MT of cane
per day, about a third of total milling capacity in Peru, but operates
at less than fifty percent. Casa Grande's production and processing
ratios are very inefficient, 105 MT of cane per hectare compared to 160
MT per hectare of its neighbors. Increased productivity by Casa Grande
would change the Peruvian sugar landscape.

Casa Grande could at least double fold its sugar production, very
rapidly by planting the areas currently idle and improving yields
through technological changes. Ethanol production is also an important
project that investors are evaluating.

Casa Grande needs to find an investor urgently if it is going to be a
viable company. As time continues passing, the company's financial
situation will keep deteriorating rapidly. At the same time the
government's will to protect it is fading away.