Southern African sugar industry gets massive investment as EU barriers wind down

A flood of investment is pouring into Southern Africa's sugar industry in direct response to European Union plans to slash import duties and subsidies that for years have locked out farmers in developing countries.

The expansion shows how the EU's gradual opening of its farm sector can boost production in some developing countries, offer cheaper prices to European consumers and force inefficient EU producers to close. "Europe is relenting on tariffs that put developing countries at a disadvantage," says Leonardo Bichara Rocha, an economist with the London-based International Sugar Organization. "Outside Brazil, southern Africa is now the hottest spot in the sugar industry."

The EU is being made to open its sugar sector by a World Trade Organization ruling. Europe's 27-nation political and trading bloc still spends roughly $79 billion on farm subsidies annually. The EU, in particular France, is also resisting wider cuts to farm subsidies in the stalled Doha round of global trade talks, which are designed to encourage rural economies in the developing world.

Mozambique is one country that expects to benefit in a big way when the EU lowers its sugar defenses in roughly two years' time. Per capita income in Mozambique is $750 a year, making it one of the poorest places in the world. The government's budget, much of which is funded by foreign aid, was $1.3 billion in 2004, according to the International Monetary Fund.

Sugar concern Tongaat-Hulett Group Ltd. of South Africa says it will spend $180 million over the next two years to plant roughly an additional 21,250 acres of sugar cane, install modern technology in existing mills and hire 8,800 more workers in Mozambique. This is an enormous investment relative to the country's economy. "It will make sugar a national economic pillar," said Duarte Da Silva, who covers the country for the African Development Bank.

Another South African company, Illovo Sugar Ltd., 51%-owned by Associated British Foods PLC, plans to expand in neighboring Zambia, although Illovo's board has yet to sign off on the plan, according to a person familiar with the matter.

For years, the EU has kept a high wall around its sugar market -- the world's second largest, after India -- and guaranteed high prices for the its 500,000 domestic producers and farmers. Often, European sugar prices were four times higher than the world average. But in 2005, the WTO ordered the EU to cut sugar subsidies, ruling that the payments were distorting global sugar-export markets.

The EU has since eliminated a third of its price supports and cut subsidies in a bid to force out inefficient producers. It also decided to eliminate duties for the world's 50 poorest countries -- which include Mozambique and Zambia -- starting Jan. 1, 2009.

source : Wall Street Journal, Feb. 19 2007