Required Report - public distribution

**Date:** 3/30/2006

**GAIN Report Number:** PE6003

PE6003

**Peru**

**Sugar**

**Annual**

**2006**

**Approved by:**

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

U.S. Embassy

**Prepared by:**

Gaspar E. Nolte

**Report Highlights:**

Sugar production in CY 2006 is expected at 760,000 MT, up from 696,000
MT in CY 2005 due to favorable weather conditions. Sugar exports are
estimated at 70,000 MT in CY 2006, mostly to the U.S. under the TRQ
system. Imports in CY 2005 were 265,085 MT, 63 percent of which were
from Colombia.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Unscheduled Report

Lima \[PE1\]

\[PE\]

**Executive Summary**

Cane sugar production for CY 2006 is forecast to rebound to 760,000 MT.
Due to a drought that affected most of Peru in 2004, sugar production
fell from 747,000 MT to 696,000 MT in CY 2005. Sugar cane production is
forecast at 7.25 MMT in CY 2006, a significant recovery from 6.85 MMT in
CY 2005. Yields range from 53 to 190 MT of cane per hectare and age from
13 to 18 month between cuts. Peru's milling capacity is 37,000 MT of
cane per day.

Cane sugar consumption is estimated at around 935,000 MT in CY 2006, 66
percent of which is for direct consumption and the remaining for
industrial use. As the Peruvian economy improves, sugar demand will
increase, especially in sugar based beverages and confectionary
products.

Peruvian sugar exports in CY 2006 are estimated at about 70,000 MT. The
U.S. is virtually Peru's only sugar export market under the U.S. sugar
tariff-rate quota. Sugar imports in CY 2005 increased significantly due
a diminished local production that created a deficit in the market.
Colombia was the leading sugar exporter to Peru with almost 63 percent
of the market.

The U.S. and Peru have finished negotiating a bilateral free trade
agreement that is expected to come into force, once signed by the
presidents and approved in both congresses, by January 2007. This trade
agreement includes five-year linear tariff reductions for glucose and
fructose including high fructose corn syrup. These reductions will start
at a tariff level of 17 percent and 30 percent for glucose and fructose
respectively.

Currently sugar is assessed a 25 percent import tariff and is also
subject to the price band system, which is a surcharge assessed
depending on the international prices (the lower the international
price, the higher the tax). The surcharge under the price band for sugar
in 2004, ranged from \$38 to \$147 per MT. The price system will be
eliminated upon implementation of the bilateral trade agreement.

Peru grants duty free entrance to Bolivian sugar due to a bilateral
trade agreement. It also grants duty free access to sugar from the CAN
member countries as of January 2006. However, it has established a 21
percent temporary safeguard for refined sugar from Colombia.

+----------------+------+------+------+------+------+------+------+
| ###            |      |      |      |      |      |      |      |
| #### PSD Table |      |      |      |      |      |      |      |
+----------------+------+------+------+------+------+------+------+
| **Country**    | **Pe |      |      |      |      |      |      |
|                | ru** |      |      |      |      |      |      |
+----------------+------+------+------+------+------+------+------+
| ##             | **S  |      |      |      | (    |      |      |
| #### Commodity | ugar |      |      |      | 1000 |      |      |
|                | Cane |      |      |      | HA)( |      |      |
|                | for  |      |      |      | 1000 |      |      |
|                | C    |      |      |      | MT)  |      |      |
|                | entr |      |      |      |      |      |      |
|                | ifug |      |      |      |      |      |      |
|                | al** |      |      |      |      |      |      |
+----------------+------+------+------+------+------+------+------+
|                | 2005 | Rev  | 2006 | Esti | 2007 | Fore | UOM  |
|                |      | ised |      | mate |      | cast |      |
+----------------+------+------+------+------+------+------+------+
|                | USDA | Post | USDA | Post | USDA | Post |      |
|                | Offi | Est  | Offi | Est  | Offi | Est  |      |
|                | cial | imat | cial | imat | cial | imat |      |
|                | \[O  | e\[N | \[O  | e\[N | \[O  | e\[N |      |
|                | ld\] | ew\] | ld\] | ew\] | ld\] | ew\] |      |
+----------------+------+------+------+------+------+------+------+
| **Market Year  |      | 01/  |      | 01/  |      | 01/  | MM/  |
| Begin**        |      | 2004 |      | 2005 |      | 2006 | YYYY |
+----------------+------+------+------+------+------+------+------+
| Area Planted   | 83   | 83   | 84   | 80   | 0    | 81   | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | HA)  |
+----------------+------+------+------+------+------+------+------+
| Area Harvested | 71   | 71   | 75   | 68   | 0    | 68   | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | HA)  |
+----------------+------+------+------+------+------+------+------+
| Production     | 7850 | 7159 | 8300 | 6850 | 0    | 7250 | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL SUPPLY   | 7850 | 7159 | 8300 | 6850 | 0    | 7250 | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Utilization    | 7850 | 7159 | 8300 | 6850 | 0    | 7250 | (    |
| for Sugar      |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Utilizatn for  | 0    | 0    | 0    | 0    | 0    | 0    | (    |
| Alcohol        |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL          | 7850 | 7159 | 8300 | 6850 | 0    | 7250 | (    |
| UTILIZATION    |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+

+----------------+------+------+------+------+------+------+------+
| ###            |      |      |      |      |      |      |      |
| #### PSD Table |      |      |      |      |      |      |      |
+----------------+------+------+------+------+------+------+------+
| **Country**    | **Pe |      |      |      |      |      |      |
|                | ru** |      |      |      |      |      |      |
+----------------+------+------+------+------+------+------+------+
| **Commodity**  | **Su |      |      |      | (    |      |      |
|                | gar, |      |      |      | 1000 |      |      |
|                | C    |      |      |      | MT)  |      |      |
|                | entr |      |      |      |      |      |      |
|                | ifug |      |      |      |      |      |      |
|                | al** |      |      |      |      |      |      |
+----------------+------+------+------+------+------+------+------+
|                | 2005 | Rev  | 2006 | Esti | 2007 | Fore | UOM  |
|                |      | ised |      | mate |      | cast |      |
+----------------+------+------+------+------+------+------+------+
|                | USDA | Post | USDA | Post | USDA | Post |      |
|                | Offi | Est  | Offi | Est  | Offi | Est  |      |
|                | cial | imat | cial | imat | cial | imat |      |
|                | \[O  | e\[N | \[O  | e\[N | \[O  | e\[N |      |
|                | ld\] | ew\] | ld\] | ew\] | ld\] | ew\] |      |
+----------------+------+------+------+------+------+------+------+
| **Market Year  |      | 01/  |      | 01/  |      | 01/  | MM/  |
| Begin**        |      | 2004 |      | 2005 |      | 2006 | YYYY |
+----------------+------+------+------+------+------+------+------+
| Beginning      | 10   | 10   | 22   | 30   | 15   | 30   | (    |
| Stocks         |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Beet Sugar     | 0    | 0    | 0    | 0    | 0    | 0    | (    |
| Production     |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Cane Sugar     | 790  | 747  | 850  | 696  | 0    | 760  | (    |
| Production     |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL Sugar    | 790  | 747  | 850  | 696  | 0    | 760  | (    |
| Production     |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Raw Imports    | 0    | 12   | 0    | 38   | 0    | 15   | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Refined        | 180  | 180  | 110  | 227  | 0    | 185  | (    |
| Imp.(Raw Val)  |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL Imports  | 180  | 192  | 110  | 265  | 0    | 228  | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL SUPPLY   | 980  | 949  | 982  | 991  | 15   | 1018 | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Raw Exports    | 41   | 41   | 41   | 33   | 0    | 70   | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Refined        | 0    | 0    | 0    | 0    | 0    | 0    | (    |
| Exp.(Raw Val)  |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL EXPORTS  | 41   | 41   | 41   | 33   | 0    | 70   | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Human Dom.     | 876  | 878  | 885  | 928  | 0    | 935  | (    |
| Consumption    |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Other          | 0    | 0    | 0    | 0    | 0    | 0    | (    |
| Disappearance  |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Total          | 917  | 878  | 926  | 928  | 0    | 935  | (    |
| Disappearance  |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| Ending Stocks  | 22   | 30   | 15   | 30   | 0    | 13   | (    |
|                |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+
| TOTAL          | 980  | 949  | 982  | 991  | 0    | 1018 | (    |
| DISTRIBUTION   |      |      |      |      |      |      | 1000 |
|                |      |      |      |      |      |      | MT)  |
+----------------+------+------+------+------+------+------+------+

+--------------------------------+-------------------------------------+
| **Import Trade Matrix**        |                                     |
+--------------------------------+-------------------------------------+
| **Country**                    | ######## Peru                       |
+--------------------------------+-------------------------------------+
| **Commodity**                  | Sugar, Centrifugal                  |
+--------------------------------+-------------------------------------+
| Time Period                    | 2005                                |
+--------------------------------+-------------------------------------+
| Imports for:                   |                                     |
+--------------------------------+-------------------------------------+
| U.S.                           |                                     |
+--------------------------------+-------------------------------------+
| Others                         |                                     |
+--------------------------------+-------------------------------------+
| Colombia                       | 166,492                             |
+--------------------------------+-------------------------------------+
| Bolivia                        | 48,495                              |
+--------------------------------+-------------------------------------+
| Ecuador                        | 32,376                              |
+--------------------------------+-------------------------------------+
| Brazil                         | 14,124                              |
+--------------------------------+-------------------------------------+
|                                |                                     |
+--------------------------------+-------------------------------------+
| Total for Others               | 261,487                             |
+--------------------------------+-------------------------------------+
| Others not Listed              | 3,598                               |
+--------------------------------+-------------------------------------+
| Grand Total                    | 265,085                             |
+--------------------------------+-------------------------------------+

Units: Metric Tons

+--------------------------------+-------------------------------------+
| **Export Trade Matrix**        |                                     |
+--------------------------------+-------------------------------------+
| **Country**                    | Peru                                |
+--------------------------------+-------------------------------------+
| ######### Commodity            | Sugar, Centrifugal                  |
+--------------------------------+-------------------------------------+
| Time Period                    | 2005                                |
+--------------------------------+-------------------------------------+
| Exports for:                   |                                     |
+--------------------------------+-------------------------------------+
| U.S.                           | 32,187                              |
+--------------------------------+-------------------------------------+
| Others                         |                                     |
+--------------------------------+-------------------------------------+
| Italy                          | 269                                 |
+--------------------------------+-------------------------------------+
| France                         | 159                                 |
+--------------------------------+-------------------------------------+
|                                |                                     |
+--------------------------------+-------------------------------------+
| Total for Others               | 428                                 |
+--------------------------------+-------------------------------------+
| Others not Listed              | 24                                  |
+--------------------------------+-------------------------------------+
| Grand Total                    | 32,639                              |
+--------------------------------+-------------------------------------+

Units: Metric Tons

**Production**

Cane sugar production for CY 2006 is forecast to rebound to 760,000 MT.
Due to a drought that affected most of Peru in 2004, sugar production
fell from 747,000 MT to 696,000 MT in CY 2005. This fall was caused by
lower yields and less area planted as a consequence of the drought. Good
weather conditions and abundant water supply will allow production to
recover in CY 2006.

Sugar cane production is forecast at 7.25 MMT in CY 2006, a significant
recovery from 6.85 MMT in CY 2005. Sugar mills in Peru are located along
the coast and have a total milling capacity of 37,000 MT of cane per
day. Since sugar cane in Peru is produced year round, mills do not need
to be very large. Yields and cane age vary greatly from one producer to
another. Yields range from 53 to 190 MT of cane per hectare and age from
13 to 18 month between cuts. Production costs also vary quite a bit, one
of the most important being fuel. Fuel utilization range from 5 to 90
gallons per metric ton of sugar produced.

Sugar in Peru is produced in the rich valleys along the northern coast.
Normally this area has excellent conditions for growing sugar cane such
as high temperatures and lack of rain. All the fields in this area are
surface irrigated, which allows producers to cut the supply of water at
a given time to obtain higher sucrose yields. Under normal weather
conditions, and if the cane is milled on time, sucrose yields are around
12 percent.

Private investment in both fields and processing infrastructure has
boosted production in recent years, encouraging more planted area
(especially from independent producers), new plantations to replace old
and inefficient fields, a better extraction rate due to the upgrade of
the mills, and better quality of the cane at harvest time. Total
investment in the last nine years has been around \$330 million, of
which about \$130 were invested in improving the quality of the
plantations and installing new ones, \$100 million were used to upgrade
the mills and about \$100 million were destined to improve
administrative and control processes and systems.

After a long privatization process, most sugar mills have been able to
improve their financial situation and production levels. After the land
reform of 1968 sugar companies were expropriated and given to the
workers in a socialist type cooperative. Due to its precarious financial
situation, poor production and inability to pay their taxes and social
security debts with its workers, these cooperatives were encourage, in
the late 1990s, to become private companies by issuing shares and find
strategic partners that could invest in upgrading mills, replace old
fields and improve irrigation systems.

Casa Grande, Peru's largest sugar producer, was the most recent company
to find an investor. Gloria, an important Peruvian dairy processor, who
has announced a \$60 million investment plan to improve the company's
efficiency, has recently bought it. Casa Grande has 30,000 hectares but
only about 12,000 hectares under production and its milling capacity
(10,000 MT of cane per day, a third of total capacity in Peru) 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. Casa Grande could at least double 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.

Other mills such as Pomalca and Tuman still refuse to merge with a
strategic partner and continue falling in a financial black hole.
Political parties have a strong influence on these companies' workers
and are often a source of political unrest. The leadership of these
companies, who have been in office for over three decades, have made a
good living off the status quo and are the least interested in finding a
strategic partner.

+------------------+----------------+-------------+------------------+
| **Sugar          |                |             |                  |
| Production by    |                |             |                  |
| Company**        |                |             |                  |
|                  |                |             |                  |
| 2005             |                |             |                  |
+------------------+----------------+-------------+------------------+
| **Company**      | **Production** | **Market    | **Accumulative   |
|                  |                | Share**     | Share (%)**      |
|                  | **(MT)**       |             |                  |
|                  |                | **(%)**     |                  |
+------------------+----------------+-------------+------------------+
| Casa Grande      | 114,477        | 16.44       | 16.44            |
+------------------+----------------+-------------+------------------+
| Cartavio         | 112,966        | 16.22       | 32.66            |
+------------------+----------------+-------------+------------------+
| Paramonga        | 109,240        | 15.68       | 48.34            |
+------------------+----------------+-------------+------------------+
| Laredo           | 101,113        | 14.52       | 62.86            |
+------------------+----------------+-------------+------------------+
| Tuman            | 96,814         | 13.90       | 76.76            |
+------------------+----------------+-------------+------------------+
| Andahuasi        | 67,882         | 9.75        | 86.51            |
+------------------+----------------+-------------+------------------+
| San Jacinto      | 51,592         | 7.41        | 93.91            |
+------------------+----------------+-------------+------------------+
| Pomalca          | 34,117         | 4.90        | 98.81            |
+------------------+----------------+-------------+------------------+
| Chucarapi        | 8,269          | 1.19        | 100.00           |
+------------------+----------------+-------------+------------------+
| # Total          | 696,470        | 100         |                  |
+------------------+----------------+-------------+------------------+

The industry is very interested in start producing ethanol out of sugar
cane. Law 28054, passed in 2003 promotes the use of environment friendly
fuel "biofuel". The procedures to implement this law were recently
(2005) issued, meaning it actually comes in effect. This law encourages
the substitution of highly contaminating components of fuel, for more
environment friendly elements. The estimated investment for ethanol
production is about \$130 million, about 40 percent for adjusting mills
and 60 percent to increase area planted. A 100,000-liter per day ethanol
plant cost around \$6-8 million. The industry estimates that around 7.8
percent of the gasoline and 5 percent of diesel would be replaced by
ethanol.

Consumption

Cane sugar consumption is estimated at around 935,000 MT in CY 2006, 66
percent of which is for direct consumption and the remaining for
industrial use. As the Peruvian economy improves, sugar demand will
increase, especially in sugar based beverages and confectionary
products.

Producers are concerned about Colombian sugar coming into Peru at
lower-than-production costs. A single-desk seller sets prices in
Colombia and the surplus over domestic consumption is allegedly dumped
in Peru.

# Trade

Peruvian sugar exports in CY 2006 are estimated at about 70,000 MT. The
U.S. is virtually Peru's only sugar export market under the U.S. sugar
tariff-rate quota. The U.S. quota is distributed by the Ministry of
Agriculture among the sugar mills, in coordination with the Sugar
Producers Association.

Sugar imports in CY 2005 increased significantly due a diminished local
production that created a deficit in the market. Colombia was the
leading sugar exporter to Peru with almost 63 percent of the market,
followed by Bolivia and Ecuador with 18 and 12 percent of the market
respectively.

*U.S. -- Peru Trade Promotion Agreement (TPA)*

The U.S. and Peru have finished negotiating a bilateral trade agreement
that is expected to come into force, once signed by the presidents and
approved in both congresses, by January 2007. This trade agreement
includes five-year linear tariff reductions for glucose and fructose.
These reductions start at a tariff level of 17 percent and 30 percent
for glucose and fructose respectively.

**Policy**

After ten years of a relatively successful privatization process, there
still are four sugar mills that have not found an strategic partner. Of
the four mills, there is one (Andahuasi) that has decided not to sell
shares and has developed an investment plan to upgrade the mills and
renovate plantations. This is the only case of a mill that has not sold
shares and is being successful. The other three mills are virtually
broke. A general unrest among the worker/owners of these
ex-cooperatives, continues to be the major obstacle for privatization.
Political manipulation have led workers to believe that their land is
the best in the country and have overpriced it, not taking into account
the major debts carried by the cooperative.

Peru is expected to recover and become self sufficient in the upcoming
years, maybe even have a 200,000 MT surplus.

Sugar cane is assessed 25 percent import tariff and is also subject to
the price band system, which is a surcharge assessed depending on the
international prices (the lower the international price, the higher the
tax). The surcharge under the price band for sugar in 2004, ranged from
\$38 to \$147 per MT.

As of October 2005, Peru grants duty free entrance to Bolivian sugar due
to a bilateral trade agreement. As a result of Decision 414 of the
Andean Community, Peru began granting duty free access to sugar from the
CAN member countries as of January 2006. However, Peru has established a
21 percent safeguard for refined Colombian sugar. This safeguard is
temporary (six months) and should be abolished in June 2006.