Required Report - public distribution

**Date:** 4/10/2006

**GAIN Report Number:** RS6021

RS6021

**Russian Federation**

**Sugar**

**Annual Report**

**2006**

**Approved by:**

![](media/image1.wmf)Eric Wenberg

American Embassy Moscow

**Prepared by:**

Mikhail Maksimenko

**Report Highlights:**

Sugar beet production and refining is set to grow this season. Sugar
beet acreage is expected to grow based on higher profitability and
because many winter wheat fields will be resown with sugar beets due to
the rainless autumn and cold winter. Domestic prices are following world
prices and are up significantly. Raw sugar import volumes will depend on
import duties. Russia is considering adjustments to its sugar tariff
regime to counteract high world prices. Foreign companies are investing
in the sugar processing and substitute industry. The niche for
substitutes is not yet well developed in Russia.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Moscow \[RS1\]

\[RS\]

Table of Contents

[**Executive Summary 3**](#executive-summary)

[Production 3](#production)

[Production Subcategory 3](#production-subcategory)

[Consumption 3](#consumption)

[Trade 3](#trade)

[Trade Subcategory 4](#trade-subcategory)

[Stocks 4](#stocks)

[Policy 4](#policy)

[Policy Subcategory 5](#policy-subcategory)

[Marketing 5](#marketing)

[Sugar substitute production in Russia
5](#sugar-substitute-production-in-russia)

# Executive Summary

Sugar acreage growth was almost flat in spring 2005 in comparison with
spring 2004 and is expected to increase in spring 2006 due to winter
wheat that did not survive the cold; most winter wheat damaged areas
will be resown to sugar beets. Acreages will also go up in line with the
increased profitability of sugar beets due to better management and
higher retail sugar prices. Imports of raw cane sugar are increasing
because growth in the food processing industry's use of sugar. But this
year high world sugar prices will limit raw cane sugar import volumes.
White sugar imports will decrease because of the limit the Government of
Russia put on imports from Belarus. Higher prices in Ukraine will also
attract white sugar from Belarus; Ukraine lifted all restrictions from
Belarus and Moldova\'s white sugar to prevent further growth of sugar
prices. Sugar consumption is, and will continue to grow in Russia, due
to the growth in production of sugar-containing food products. Stocks
will decrease due to dramatically increasing prices on raw sugar in
world markets.

# Production

Russia harvested 21.4 MMT of sugar beets in CY2005 (in CY2004 --
21.9MMT) with sugar beet yield 28.2 MT/ha and 27.7 MT/ha, respectively.
Sugar beet acreage decreased slightly in 2005 but will increase in 2006.
Autumn drought and a very cold winter 2005/2006 damaged vast acreages of
winter wheat that will be re-sown with sugar beets. High sugar retail
prices increased the profitability of sugar beet production and has
encouraged farmers to sow more sugar beets. Sugar refineries in many
growing areas are offering credits to sugar beet producers for seed
purchase and other expenses. In return, the grown sugar beets will be
sold to the refinery. Credits are better than in banks. As a guarantee,
the refinery requests security for the loan using collateral such as new
agricultural machinery, cattle and other property.

## Production Subcategory

Russia processed 18.0 MMT of sugar beet in CY2005. Sugar beet production
cost was about 500 (\$17) ruble per ton, while refineries pay 1,200
ruble (\$42) per ton, earning the farmer \$25 per ton for beets. Sugar
from domestic beets costs about \$430-435 per ton to produce, including
the beets. That is why sugar refineries trend towards producing their
own beets and rent more land for beet growing next year. Profit margins
from domestic sugar beets approaches 100 percent, while from imported
cane sugar are just 1%-2%.

The sugar content of beets in 2005 was 13.66% (in 2004 г -- 12.21%),
losses during sugar production -- 0.69 percent (in 2004 -- 0.77
percent).

# Consumption

Consumption of sugar will increases in 2006 by 6 percent and by at least
two more percent in 2007 due to growth in the food processing industry.
Home alcohol production alters depending on sugar prices and vodka
prices at the market and consumes around 15 percent of the sugar
supplies. The remaining sugar is used by the domestic vodka distilling
industry, in food processing, and is directly consumed in Russians' tea.

# Trade

According to Russia's official statistics raw sugar imports were almost
flat in MY 2005 in comparison with MY 2004. The share of Brazilian raw
sugar in total raw sugar imports was 49 percent in 2003, 62 percent in
2004 and, 80 percent in 2005. In January-April, 2006 Russia imported
680,000 tons of raw sugar that is three percent less than in 2005.

**Table 1: Russian Sugar Imports, MT, 2003-2005**

  ------- ------------------------- ------------- ------------- -------------
  ** **   **Description**           **Oct 02-Sep  **Oct 03-Sep  **Oct 04-Sep
                                    03**          04**          05**

          \--The World\--                                       

          17 SUGARS                 4,332,976     3,490,991     3,450,263

                                                                

   1701   CANE/BEET,SOLID FORM      3,924,408     3,002,654     3,333,458

   1704   CONFECTION, NO COCOA      48,050        59,121        62,595

   1702   OTHER SUGARS              359,980       88,216        54,210
  ------- ------------------------- ------------- ------------- -------------

Source of data: Customs Committee of Russia

**Table 2: Russian Raw Sugar Imports, by countries MT, 2003-2005**

  ---------- ------------------- ---------------- ----------------- -------------
  **Rank**   **Country -**       **Oct 02-Sep     **Oct 03-Sep 04** **Oct 04-Sep
                                 03**                               05**

  0          \--The World\-- -   3,924,408        3,002,654         3,333,458

  1          Brazil -            1,934,230        1,845,335         2,651,304

  2          Cuba -              727,438          848,609           185,811

  3          Kazakhstan -        57,585           67,686            41,036

  4          Kyrgyzstan -        11,988           54,045            39,317

  5          El Salvador -       120,517          49,932            65,002

  6          Poland -            53,630           39,219            58,189

  7          Thailand -          566,843          39,190            74,337

  8          Colombia -          2,045            30,718            57,804
  ---------- ------------------- ---------------- ----------------- -------------

Source of data: Customs Committee of Russia

## Trade Subcategory

For the last 12 months sugar prices have demonstrated the biggest growth
in comparison with all other commodities' price growth. Sugar prices
increased by 60 percent in 2005 and by 12 percent in January-March 2006.
Prices in Russia are growing due to the growth of world market prices.

# Stocks

Stocks are expected to decrease with high world sugar prices which will
keep consumption from growing quickly in the first half of the year.
Prices in Russia will remain flat or even decrease, following world
prices in the second half of the year.

# Policy

**Belarussian sugar**

Sugar from Belarus will now be exported to Russia through a single
customs checkpoint based on a decree signed by Economic Development and
Trade Minister German Gref on customs procedures for white sugar and
sugar-containing products \-- Customs Control Department Number Two of
the Troyekurovo customs checkpoint in Western Moscow. This action is
taken to defend the Russian market from illegal, undeclared sugar
imports from Belarus.

Belarussian imports are not subject to customs duties. This often leads
to raw cane sugar, subject to a duty of \$340 per ton, being imported to
Russia but declared as sugar beets. If a laboratory determines that
sugar imported to Russia via Belarus was made from cane, it can be
re-categorized as goods from a third country and Russia can charge
customs duties.

World sugar prices may solve the problem because as of March 30, 2006,
Belarus issued a resolution raising retail sugar prices by 10 percent to
compensate for higher sugar refining costs and raw sugar world prices.
This action will reduce sugar exports to keep prices stable within
Belarus.

## Policy Subcategory

**The import duty on raw sugar**

Alexey Gordeyev, Agriculture Minister said recently, that to lower the
domestic market's vulnerability to world price fluctuations Russia could
change the scale used to determine the import duty on raw sugar. A
decision will likely be made to extend the scale upwards to include the
sharp rise in prices over the past few months. The government has
instructed agencies to come up with proposals on a possible
clarification on the rates for customs import duties. Currently import
duties on raw sugar are determined by a scale that takes into account
the price of sugar on the New York Commodities Exchange. The Minister
admitted these measures are aimed at supporting those who produce sugar
beets and lowering Russia\'s dependence on the world sugar market.

Gordeyev says changing the scale is appropriate for the period of raw
sugar imports in May-July, after that the sugar beet production season
begins. The duty scale should be developed so that the average price for
imported sugar corresponds to the production cost of raw sugar. He added
that the best production price level is \$700 per ton. By October,
market players should already know exactly what conditions they face
next year, he said.

The Russian Ministry for Economic Development and Trade (MEDT) stated in
March 2006, that raw sugar tariffs could be changed but it will be clear
in 3-4 month if this should be done next year or urgent measures should
be taken this year if prices continue to grow.

Industry representatives argue, that the regime for importing raw sugar
into Russia should not be changed this year, especially just ahead of
the planting season. Otherwise it will not reduce inflation, but could
create a number of serious problems for the country\'s sugar industry.
The industry also stands for a maximum profit control for sugar,
especially in Moscow. The difference between wholesale and retail prices
in the capital is often as high as 93 percent.

Ag Attaché believes such an inflexible system is likely unworkable as it
cannot be structured to allow for all world and domestic price
fluctuations, and results only in higher consumer prices. Actors in a
market who want command controls will often be mislead by reining in
profit margins, rather than understand changes in input prices.

# Marketing

## Sugar substitute production in Russia

A German company plans to start production of sugar substitute in
Russia. It initiated construction of production facilities for diet
caramel candy from isomalt. A Russian company has already started to
develop the caramel production technology with a St. Petersburg research
center. Plans are to produce 120,000 MT of caramel annually. The market
is at its initial stage. Sales are predicted to increase 100 percent
annually due to growth in the number of customers wanting a healthy
lifestyle. The product will be not be positioned as "diet" product as
the Russian customers still link "diet" products with the special
dietary needs for those with illness rather than for healthy people.
Products made from fructose or sugar substitutes still are traded in
drug stores in a section of diet and diabetic products. There has been
some success for creating "healthy food" sections in supermarkets, but a
market of healthy food in Russia has only started to develop and the
customer is not sufficiently informed about balanced and diet food
products.

# 

  --------------- -------------- ----------------- ---------- ----------------- ---------- ----------------- ---------
  **PSD Table**                                                                                              

  **Country**     **Russian                                                                                  
                  Federation**                                                                               

  **Commodity**   **Sugar                                                       (1000                        
                  Beets**                                                       HA)(1000                     
                                                                                MT)                          

                  2005           Revised           2006       Estimate          2007       Forecast          UOM

                  USDA Official  Post              USDA       Post              USDA       Post              
                  \[Old\]        Estimate\[New\]   Official   Estimate\[New\]   Official   Estimate\[New\]   
                                                   \[Old\]                      \[Old\]                      

  **Market Year                  09/2004                      09/2005                      09/2006           MM/YYYY
  Begin**                                                                                                    

  Area Planted    1000           1000              980        980               0          1070              (1000 HA)

  Area Harvested  950            950               950        965               0          1040              (1000 HA)

  Production      21700          21700             21000      21800             0          22000             (1000 MT)

  TOTAL SUPPLY    21700          21700             21000      21800             0          22000             (1000 MT)

  Utilization for 21700          21700             21000      21800             0          22000             (1000 MT)
  Sugar                                                                                                      

  Utilizatn for   0              0                 0          0                 0          0                 (1000 MT)
  Alcohol                                                                                                    

  TOTAL           21700          21700             21000      21800             0          22000             (1000 MT)
  UTILIZATION                                                                                                
  --------------- -------------- ----------------- ---------- ----------------- ---------- ----------------- ---------

#  

  --------------- --------------- ----------------- ---------- ----------------- ---------- ----------------- ---------
  **PSD Table**                                                                                               

  **Country**     **Russian                                                                                   
                  Federation**                                                                                

  **Commodity**   **Sugar,                                                       (1000 MT)                    
                  Centrifugal**                                                                               

                  2005            Revised           2006       Estimate          2007       Forecast          UOM

                  USDA Official   Post              USDA       Post              USDA       Post              
                  \[Old\]         Estimate\[New\]   Official   Estimate\[New\]   Official   Estimate\[New\]   
                                                    \[Old\]                      \[Old\]                      

  **Market Year                   10/2004                      10/2005                      10/2006           MM/YYYY
  Begin**                                                                                                     

  Beginning       440             440               580        580               470        470               (1000 MT)
  Stocks                                                                                                      

  Beet Sugar      2250            2250              2250       2500              0          2550              (1000 MT)
  Production                                                                                                  

  Cane Sugar      0               0                 0          0                 0          0                 (1000 MT)
  Production                                                                                                  

  TOTAL Sugar     2250            2250              2250       2500              0          2550              (1000 MT)
  Production                                                                                                  

  Raw Imports     3600            3600              3500       3600              0          3700              (1000 MT)

  Refined         700             700               700        600               0          600               (1000 MT)
  Imp.(Raw Val)                                                                                               

  TOTAL Imports   4300            4300              4200       4200              0          4300              (1000 MT)

  TOTAL SUPPLY    6990            6990              7030       7280              470        7320              (1000 MT)

  Raw Exports     10              10                10         10                0          10                (1000 MT)

  Refined         100             100               100        100               0          100               (1000 MT)
  Exp.(Raw Val)                                                                                               

  TOTAL EXPORTS   110             110               110        110               0          110               (1000 MT)

  Human Dom.      6300            6300              6450       6700              0          6810              (1000 MT)
  Consumption                                                                                                 

  Other           0               0                 0          0                 0          0                 (1000 MT)
  Disappearance                                                                                               

  Total           6300            6300              6450       6700              0          6810              (1000 MT)
  Disappearance                                                                                               

  Ending Stocks   580             580               470        470               0          400               (1000 MT)

  TOTAL           6990            6990              7030       7280              0          7320              (1000 MT)
  DISTRIBUTION                                                                                                
  --------------- --------------- ----------------- ---------- ----------------- ---------- ----------------- ---------