DOLCE VITA

Unfavourable weather conditions in India and Brazil have played their part: the world is facing a shortage of sugar for the second year in a row. Global demand is expected to increase by 5 million tons by 2010, which will inevitably provoke a record shortage of this product.

The price of sugar has almost doubled since the beginning of this year. Its price on international commodity exchanges has reached a 28-year high - $0.23 per pound. And this is not the limit. Some experts think the price may rise by another 80 per cent - to $0.40 per pound. These reports have caused "sugar" anxiety in many countries. Ukraine, for example, has started using state sugar reserves in order to slightly reduce sugar prices, even though its quality is far from ideal.

The situation in Azerbaijan is stable so far - the only local producer of sugar, Azersun Holding, is keeping the price constant by fair means or foul. However, it can hardly be expected to continue this self-sacrifice if prices for the raw material, which the holding's Imisli enterprise buys abroad, keep rising…

No sweet life ahead …

As mentioned above, the main reason for the price hike is a sugar cane crop failure in Brazil, the world's biggest producer. Due to a prolonged season of torrential rain, Brazil has reduced its harvest forecasts. India, the world's second biggest producer of sugar, has, on the contrary, had a season of drought. As a result, the sugar cane harvest this year has fallen to 15.5 million tons, against 26 million tons last year. The country has gone from being an exporter into an importer. According to preliminary calculations, India will buy 5 million tons of sugar in the 2009-2010 marketing year, as opposed to 2.7 million tons this year.

The situation in China, the third biggest sugar producer, is no better. An official from the state commission on national development and reform has said that the shortage of sugar this year may constitute 1.5 million tons. In fact, a report has surfaced that farmers in Australia, which shares third place for sugar production with China, have expanded areas under sugar cane and intend to increase sugar production by 250,000 tons next year. This report has slightly slowed the price hike. However, experts believe that this information is unlikely to prevent a global trend towards higher sugar prices.

Also affected by drought are sugar cane plantations in Thailand and Mexico. In June, analysts raised the shortage forecast for the 2009-2010 marketing year to 6 million tons worldwide, although in March it was expected to be 2.5 million tons.

"The price of sugar may rise by 80 per cent to exceed 40 cents per pound ($881 a ton) due to the global deficit," says Michael Coleman, managing director of the Aisling Analytics hedge fund. The same opinion is held by the management of the Al Kaleej Sugar Co, which owns the world's biggest sugar factories. High sugar prices have led managers of major US food industry companies to ask the government to increase sugar import quotas (in the US sugar imports are subject to quotas to encourage local producers).

In other words, the world has encountered a sugar crisis, which is affecting all countries as much as the financial crisis.

As mentioned earlier, no-one is sounding the alarm about the world sugar deficit in Azerbaijan yet. Moreover, it can be said that it is not so evident here, even in the "jam-making season". Certain price fluctuations do take place, but mainly with regard to imported products and on wholesale supplies. The only local producer, the Imishli sugar factory, which is part of Azersun Holding, has not officially raised prices and has no intention of doing so, and not only because there is sugar beet production in the country. Yes, due to the holding's policy of developing the entire production chain from raw material to finished and packaged product, the interest in growing sugar beet in Azerbaijan, namely in Imisli and adjacent districts, has increased significantly. Considering the fact that this crop was first cultivated in Azerbaijan only in 1992, the figures recorded to date are certainly pretty impressive.

Keep prices down by all means

It has to be said that Azerbaijan used to be a supplier of raw materials to neighbouring producer countries - Iran and Turkey. Sugar factories in these countries would gladly buy Azerbaijani beet, which has good sugar content. However, that situation was not profitable from the standpoint of supplying local consumers with cheap, good quality sugar. The problem was considered at state level and a decision was taken to construct a domestic factory. The construction of this food industry giant cost almost $100 million.

Since its establishment, the enterprise has been enhancing its production facilities, upgrading processing technology and paying special attention to the quality of product. In 2006, the factory was awarded the ISO 9001:2000 quality management certificate, while it now plans to achieve the ISO 14001 environmental safety certificate and pass the food safety standard. The factory's sugar has been tested in the company's laboratories in Belgium. It has been established that the quality of sugar is 50 per cent better than in Europe.

The commissioning of the Imisli factory has dramatically improved the population's supply of sugar. It is thanks to this factory's operation that sugar prices have remained stable. However, in all fairness, the managers of the enterprise are facing a number of difficulties, because the enterprise has to import most of the raw materials from abroad, certainly at world prices.

Of course, sugar beet plantations have expanded considerably of late and beet is now grown in many districts of the Aran lowland, in Ganca, Qazax, Upper Sirvan and other economically developed agricultural zones. A total of 20,000 to 30,000 people are now engaged in cultivating beet. Farmers achieve 30-40 tons of products per hectare, with the capacity to produce 80 to 160 tons.

In 2009, in order to improve the financial status of local producers, the Imisli factory raised the price of the beet it buys from businessmen from AZN 43 to 49 per ton. The factory has also taken on expenses for the growing and transportation of beet. As a result, the net profit per hectare of beet is AZN 2,300-2,500, which certainly enhances business interest in this sector. Evidence of this are the data for the last three years, which show that the harvest in 2008 increased by more than 110,000 tons, as compared with 2006. Growth is set to continue in 2009.

However, this is not enough to meet the factory's demand for raw materials in full, and beet has to be bought at high prices abroad. The factory currently produces 400,000-450,000 tons, while domestic demand is for 230,000-250,000 tons. The sugar produced in Imisli, says a source from within Azersun Holding, is used to meet domestic demand and is also exported to Central Asia, Afganistan, Georgia, Ukraine and Iraq.

Thus, despite all Azersun Holding's efforts to keep prices unchanged, it is impossible to make any predictions, because sugar is one of the few products whose prices are regulated on commodity exchanges. At the same time, the source added that "Azersun Holding will continue to supply the domestic market with quality sugar products without raising the price".

Currently the holding has reserves capable of meeting one month's demand.