Project Management

Selection of site for Sugar Industry to serve US market

Submitted to: Prof. Deepak Jakate

Group Members: Yogesh Shinde Pallavi Naik Ninad Vedak Swapnil Nandanwar Milind pawar

Introduction The Food and Agricultural Organisation (FAO) reports that 133 countries produce sugar. Sugar is the conventional name for sucrose, which is extracted commercially from two plant sources, sugar beet and sugarcane. Sugarcane accounts for 70% and sugar beet for 30% of sugar production throughout the world (Vidal, 2000). Chemically, both types of sugars are identical and consist of 99.9% sucrose. The largest sugarcane producers are Australia, Brazil, Cuba, India, Indonesia, Mexico, South Africa, and Thailand. The largest sugar beet producing countries are the EU, Canada, Algeria, Turkey and Poland. Other countries such as China, the USA, Japan and Egypt. produce both beet and cane sugar. Most sugar produced in the world is consumed domestically, and the residual is sold on the world market. The worldwide average sugar consumption as per statistics released by Rabobank International (1999) is 21 kilos per capita, but this varies considerably by region and continent. Sugar consumption in Brazil has grown to 55 kilos per capita in comparison to 6.5 kilos per capita in China. On the basis of the current trends, world sugar consumption is expected to increase to more than 135 million tonnes by 2003/2004. The Australian Bureau of Agricultural and Resource Economics (ABARE, 1999) reports that an important feature of the bulk trade in sugar is that it is internationally traded in both raw and white (refined) forms. Furthermore, though the majority of sugar imports in recent years have been in raw form, nearly all consumption is in the form of white sugar. Imports of raw sugar constitute an important feedstock for refineries in a number of countries. Sugar can be divided into three product categories: white granulated sugar, liquid sugars and specialty sugars. Industrial users of sugar are the food processing industry, and the chemical and the pharmaceutical industry. The export of sugar is dominated by Brazil, the European Union, Australia, Thailand and Cuba, which together account for 65% of sugar exports. The majority of the worlds raw sugar imports are dominated by the European Union, Russia, the United States, South Korea, Canada and Malaysia and the major importers of white sugar are Indonesia, Russia, and some African and Middle East countries. The export of raw sugar takes place from the cane producing countries while that of white sugar (refined) from the beet producing region. Less than 30% of world sugar production is traded internationally. A proportion of this trade takes place under bilateral long-term agreements or preferential terms. Around 20% of world sugar is traded freely. The world sugar market is characterised by long-term growth in production and consumption of almost 2% per annum. However, production, which is often controlled or influenced by government policy decisions, is more volatile than consumption. World sugar prices are very unstable. Sugar is one of the most regulated food commodities of the world. The world sugar market is heavily influenced by domestic government policies of many countries leading to distortions in the world sugar trade. The main directions of the sugar policies in the developed economies are towards maintenance of farm incomes,
2

industry expansion, and safeguards from unstable price cycle. Additionally, sugar industries, especially in the developed economies, have historically been isolated from volatilities in the world sugar market through the use of import restrictions. The extremely volatile prices on free markets of world sugar reflect the recurring supply/demand imbalances (Borrell and Pearce, 1999). Besides these considerations, in the developing economies domestic government policies are directed at earning and/or conserving foreign exchange. The impact of all these policies on the world sugar market is to increase the volatility of the price and also the variability in production and supply. The sugar trade is characterised by protected markets, special trade arrangements and volatile prices. At the same time however, the market for freely traded sugar is large and deep compared with other agricultural commodities. However, liberalisation has not been a priority. Sugar is thus excluded from many regional free trade agreements like the Australia-US FTA or it is given special treatment (Canada/US, South Africa/Swaziland). Sugar has also been excluded from the US Freedom to Farm Act, which introduces deregulation of American agriculture. Australia The Australian sugar industry produced 5.35 million tonnes of raw and refined sugar from sugarcane in the year 2002/03. Typically, it produces only 4% of world sugar supply. It exports approximately 12% of the sugar traded worldwide (SRDC, 2002). Australia is exceptional among sugar producing countries as it exports around three quarters of its sugar production. So, in effect, the domestic prices get associated with world prices and therefore the viability of the industry depends largely on the conditions and prices prevailing in the world market for sugar. Sugar is Australias second largest export crop and Queenslands largest rural commodity and is a major contributor to the Australian economy (SRI, 2002). Its a substantial foreign exchange earner (APSRU, 2004) and is also instrumental in generating additional revenues for the allied sectors of the economy (Sugar Industry Submission, 1999). Sugarcane is produced on the coastal plains and river valleys along 2100 kilometres of the eastern coastline between Mossman and the Atherton Tableland in Northern Queensland to Grafton in Northern New South Wales and in the Ord River region of Western Australia. Australia has over 545 000 hectares (ha) devoted to cane growing of which the sugarcane area in Queensland now exceeds 508 000ha. Cane fields represent 20% of Queenslands total crop area (SRI, 2002). Raw sugar is produced from sugarcane in three Australian states: almost 95% in Queensland, around 5% in New South Wales (NSW) and 0.7% in Western Australia (WA). There are 26 raw sugar mills in Queensland (including one mill that processes sugarcane to syrup stage only), three in NSW and one in WA. Australia is currently one of the worlds largest exporters of raw sugar, with Queensland exporting about 80 to 85% of its total raw sugar production. Almost 100% of raw sugar exports originate in Queensland. Australia also exports refined
3

sugar. Currently there are four sugar refineries in Australia, two in Queensland (Mackay and Bundaberg), one in New South Wales (Harwood), and one in Victoria (Melbourne). The remaining 15%-20% of raw sugar production is refined for domestic consumption and export. The establishment of additional refinery capacity has increased competition in this segment of the market over recent years. Exports of white sugar have also increased as a result of this increased capacity. Accompanying the considerable expansion in the Australian sugar industry are the government deregulation policies especially the reduction of central controls on areas planted and the removal of import tariffs on sugar. Australia advocated the cause of world agricultural trade reform at the Uruguay Round and in the circumstances introduced a number of reforms in its own economy. This has led to a situation where Australian cane growers do not enjoy the protective subsidies and price support as enjoyed by their European counterparts. Brazil Brazil is among the world leaders in the production of sugarcane, sugar, and ethanol (fuel alcohol). In addition, its producers are among the most efficient of all major sugar producers. Brazils production of sugarcane reached 321 million metric tonnes and produced 23.7 million tonnes of sugar and 12.6 billion litres of ethanol (anhydrous and hydrated) in the marketing year 2002/03. Its export of sugar alone is in the range of 8-9 million metric tonnes. Its foreign exchange earnings through exports are around US$ 2 billion. Sugar directly employs 1.5 million people. Brazil produces 60% of the world ethanol production made from sugarcane and has important challenges. It is used in the country as an alternative fuel (to gasoline), being more environmental friendly and renewable. For Brazil, sugarcane is important for job generation. It is a very powerful commodity that can be exported, generating credits for the Brazilian trade balance. The oil crisis of the 1970s created a need for self-sufficiency and import substitution of oil. Brazil was innovative by turning to biomass of sugarcane as an alternative energy source and began developing its ethanol industry, mostly through government support and control. The country also produces and exports a diverse number of sugar products. Brazil vies with India to be the worlds largest producer of raw sugar. Since Brazil can produce either sugar or ethanol from sugarcane, it is one of the few countries that can adjust sugar production rapidly to take advantage of potential world sugar (or oil) shortfalls and high international prices. With the fifth largest world population and a long tradition of high per capita sugar consumption, Brazil is one of the worlds largest consumers of sugar. Brazil ranks fifth as a sugar-consuming nation, with annual consumption measured at 9.45 million tonnes. Per capita consumption is about 50 kilograms of sugar per year and has increased nearly 10% in recent years as more sugar is used in processed products. Consumption of sugar largely reflects Brazils population growth. Food manufacturers, including those that produce carbonated drinks, chocolate, icecream, crackers, and pasta (massas) account for approximately 35 to 45 percent of domestic sugar consumption. The remaining 55 to 65 percent is direct consumption. Given the economic importance of sugar in the national diet, the Brazilian Government has regularly given priority to the industry to ensure that production is
4

sufficient to cover consumers needs. Sugar for export, while vital to the national economy, has been secondary. (Bolling and Suarez, 2001) There are major factors that make Brazil a strong competitor in the world sugar market including: In 1999, freight rates fell in the wake of the Asian financial meltdown, making shipping to distant Asian markets such as South Korea, Malaysia, and Indonesia more attractive. The continued devaluation of its floating currency increases the attractiveness of Brazilian sugar. Brazil is enhancing its export ability by improving transportation and loadin facilities. This has reduced costs and speeded up the flow of exports to the world market. Brazil is the second largest quota holder to the US market and ships that US sugar quota from the northern ports of Maceio and Recife. The European Union (EU) The European sugar industry produces around 18 to 19 million tonnes of sugar annually from sugar beet and imports over 1.3 million tonnes of white sugar equivalent from third world countries in Asia, the Caribbean and Pacific. This level of production puts the EU among the worlds leading sugar producers and at the same time accounts for around 19% of the internationally traded sugar. About a million people are involved in the European sugar industry, of whom there are 335,000 beetgrowers and 52,000 employees in the sugar manufacturing industry. The sugar industry forms an integral part of the rural economy. Two million hectares are given over to sugar-beet growing on generally medium-sized farms (CEFS, 2002). France and Germany account for about 50% of the total EU sugar production. In the EU, practically all sugar 98% of total production comes from sugar beet (Vidal, 2000). In this worlds largest beet sugar producing area, the Common Agriculture Policy (CAP) is protective in nature and provides high incomes for its farmers. Rabobank International (2002) reports that the current EU sugar policy is founded on three key principles: 1 production quotas and guaranteed price to regulate the sale of sugar; 2 a system of intervention buying and export restitutions to maintain a high internal price; and 3 tariff-rate quotas and import tariffs to restrict imports in terms of country of origin and volume. According to various sources, in the late 1960s the EU-6 came under the umbrella of the EU sugar regime, which was part of the Common Agricultural Policy (CAP). All national sugar policies of the members were abolished for the overall EU sugar regime. The main features of the regime were as follows: Production quotas for every producing country. Fixed prices for sugarbeets and sugar. Variable tariffs to protect against imports from the world market. Mechanism to export surplus production to the world sugar market through
5

levies paid by the sugar producers on sugar sales. Production quotas given to producers of HFCS, thereby limiting market growth. The oversupply of EU sugar led to five to six million tons of surplus sugar being placed on the world market, suppressing world prices. The EU offered export subsidies to close the gap between the world price and internal prices. In 2004 the World Trade Organization (WTO) ruled that the EU had been cross-subsidizing its out-ofquota surplus sugar. In 2006 the EU adopted a farreaching reform of its sugar policy. The main objectives were: Inclusion of sugar beet agriculture in the reform of the CAP by reducing the price of beets, as had been done with grains. Initially, beet prices were reduced by 45% and the sugar price was reduced by 36%. Allocation of sugar production quotas to the most efficient growing regions via a restructuring of the sugar sector.

The basic tools of the EUs sugar policies are:

(1) Internal support prices that ensure returns to producers for fixed quantities of

production and permit the maintenance of refining capacity: This is done through the mechanism of target and intervention prices for refined sugar. The target price is fixed only for white sugar of a standard quality, and is applicable to bulk sugar, ex-factory and free-on-board purchasers transport and is also, on average, the price the EU considers growers should obtain for sugar. The intervention price applies for the processed product (white sugar) and is set at
7

95% of the target price and is also the price at which the national intervention agencies will buy all Union-produced sugar that is required to be purchased. Intervention price differs among the EU members depending on the production conditions and transport costs. Intervention prices have been substantially above the world market prices. (2) Production Quota System: Each EU member state is allocated a quota under which the quantity produced is supported by a three-tier pricing system. Every EU member is allocated a base quantity of refined sugar. The A-quota, on which the full intervention price is paid. This A-sugar (produced within the A-quota) is subjected to a maximum levy of 2% of the basic beet price. The B-sugar is subjected to higher levies. Together, the A and B quotas make up what is termed the maximum quota. Any sugar which is produced outside the sum of total A and B quotas is referred to as C-sugar. According to the EU legislation, C-sugar must be sold on the world market without export subsidies or carried over to the following marketing year. To ensure that the C production is exported, a time limit is applied. It has to be sold on the world markets before January 1 following the end of the marketing year in which it was produced with the exception that processors are allowed to carry over a quantity of sugar, up to a maximum equal to 20% of their A quota into the following production year. (3) Export Subsidies/Import Controls: The EUs production of A and B quota sugar exceeds domestic consumption, and then this excess production is exported. When world prices are less than the EU support prices, an export subsidy is granted to make EU sugar competitive on the world market. When the price level in the EU is lower than the world market, EU sugar is subjected to an export levy in order to ensure adequate supply to the domestic market. All of the EUs imports form part of a preferential system aimed at helping the least developed countries in the African-Caribbean-Pacific zone by bringing an essential market within their reach. However, protection against imports is provided through system of import levies and threshold prices.

Comparison of Current Sugar Industry Situations in Australia, Brazil, and the EU

Supply Position

Australia Produces raw & refined sugar from sugarcane. Produces around 4% of world sugar supply and exports around 12% of world traded sugar. Exports around 75% of its production. Second largest export crop and Queenslands largest rural commodity. Sugarcane is produced along 2100kms coastal line in Northern Queensland & in W.Australia. Over 545,000 ha devoted to cane growing of which over 508,000 ha is in Queensland 20% of total crop area in Queensland

Brazil

European Union

Among the world leaders in production Supply sugarcane, sugar, and ethanol (fuel alcohol). Among the most efficient sugar producers in the world. Brazil enjoys: Flexibility due to its natural resources and capability to adjust sugar production rapidlyas per the world market demand. Continued devaluation of its currency that increases the attractiveness of sugar exports.

Industry produces around 18-19 mt of sugar from sugar beet accounting for around 19% of internationally traded sugar putting EU among the worlds leading sugar producers. About a million people are involved in the sugar industry of which 335,000 are beet growers and 52, 000 employed in sugar manufacturing. Sugar Industry forms an integral part of the rural economy.

Raw sugar is produced in 3 states Queensland(around 95%), NSW (around 5%), WA (0.7%).There are 26 mills in Queensland, 3 in NSW, and one in WA. Queensland exports 80-85% of its raw sugar production and 100% of Australias raw sugar export. 15-20% of remaining raw sugar is

CAP that is protective in nature and provides high incomes for its farmers regulates the sugar industry, in the worlds largest beet sugar Second largest producing area. quota holder to US Sugar policy is founded market. on 3 key principles: Enhancing Production quotas infrastructure & guaranteed price facilities to further to reduce costs and regulate the sale of speed up export sugar; flow to world market. A system of intervention buying Fall in and export international restitutions to freight rates as a 10 maintain a high result of Asian internal price; financial crisis has facilitated exports

Australia About 95% of Australias sugar is produced in Queensland. Before Australia reformed its sugar policies, it maintained stringent production and marketing controls. Reforms began in 1989-90, when an import tariff replaced the import ban. The Australian and Queensland Governments reviewed the countrys sugar policy in 1996. As a result of this review, the federal government eliminated import tariffs in July 1997 The regulatory framework for the Queensland sugar industry is established primarily by the Sugar Industry Act 1999. In 2000, the Act was amended to allow for the transfer of bulk sugar terminals to industry ownership and for the creation of an industry-owned marketing company to replace the previous statutory marketing authority. The stated principal objective of The Sugar Industry Act 1999 is To facilitate an internationally competitive, export oriented sugar industry based on sustainable production that benefits those involved in the industry and the wider community. The Act seeks to achieve this objective through establishing a series of frameworks relating to the operation of the industry. These frameworks are for: Negotiation of contracts for cane supply and processing between farmers and millers; Sustainable resource management; and Marketing of raw sugar. Subsequent legislation, the Sugar Industry Reform Act 2004, which varies this framework in ways which are as yet unclear. The various elements of the new legislation are to take effect in subsequent future years (like in the year 2005 and 2006). The Sugar Industry Act 1999 will suffice for current purposes. Brazil Brazil exports both raw and refined sugar, as well as ethanol produced by processing sugarcane. While Brazil is the largest producer of raw and refined sugar in the world, a large portion of sugarcane production in Brazil goes towards the production of ethanol the fuel (anhydrous and hydrous) alcohol. Anhydrous alcohol in Brazil is used to blend with gasoline as mandated by the Brazilian government. Hydrous alcohol in Brazil is used as fuel for vehicles that are powered by 100% alcohol though the number of vehicles powered by hydrous alcohol gas has declined sharply over recent years. Brazil exports between 0.5 and 1.0 billion litres of ethanol per year. There has been three-fold increase in the efficiency of ethanol produced from sugarcane from the year 1975.

11

Brazils history has been that of an agro-exporting nation. The oil crisis of the 1970s worsened their terms of trade. This led Brazil to reorient their commodities producing abilities towards exporting and earning foreign exchange. However, Brazils drive for modernisation and growth in agriculture resulted in their borrowing from international institutions. This caused further financial distress and the ever-increasing need to export commodities. Such economic conditions resulted in the creation of the government program PROALCOOL in 1975 to promote domestic production of fuel alcohol from sugarcane production. This resulted in: The creation of a home-grown technology, The efficient utilisation of sugarcane, Import-substitution of oil, and Conservation of scarce foreign exchange. During the 1970s and 1980s, sugarcane production received considerable government support under PROALCOOL. Government policies affecting sugarcane production and use of ethanol were the main determinants of growth in sugar output and exports. Since 1998, there have been some policy changes that have affected the Brazilian sugar sector such as: A common external tariff of 20% on sugar imports was established in 2001, Imports of ethanol are taxed at 30%. product, without facing competition from other low-cost exporters on the domestic Such policies ensure that sugar and ethanol producers receive a higher price for their market. However, there is no tax on intra-zone trade of ethanol for MERCOSUR (the regional trading block created by Argentina, Brazil, Paraguay, and Uruguay). Finally, there still remains a support mechanism that compensates for sugarcane-cost differentials across regions that is well under the de minimis clause of the WTO The production environment of sugarcane in Brazil and the beneficial utilisation of sugarcane in the Fuel Ethanol Program stem from some of the crucial factors that are developing and shaping the commercial viability of the fuel ethanol production. The ethanol market today still profits and gains from a captive market of anhydrous alcohol as mandated by a gasoline/ethanol blending ratio, and The prices of this fuel alcohol is to a great extent determined by the market. The commercial viability of ethanol from sugar crops depends on the following key factors (Banerjee and McGovern, 2003): o The price of sugar in relation to ethanol. The relative ex-mill prices of ethanol and sugar in Brazil are a key determinant of the volume of sugar that Brazil produces for export to the world market. o The price of crude oil and the ethanol production costs. Despite technological advances in bio fuel/ethanol production process that helped in lowering the production cost, the cost of bio fuels production has typically been higher than the world market price for gasoline. Summarily, the production of sugarcane, sugar and ethanol in Brazil is intricately intertwined with a direct and indirect role (through the fuel-alcohol ratio) of the government that has bearing on the production of sugar.

12

The European Union (EU) The policies that govern the EU sugar regime have helped nurture the region to become a formidable force in the global sugar market. The Swedish Competition Authority Report (2002) on the present production and trade in sugar states: The common organization of the markets in the sugar sector (CMO Sugar) is one of the components of the Common Agriculture policy (CAP) of the European Union. The CAP was put in place in 1962, and the CMO Sugar has been in place since 1967. While most of the regulations regarding other products covered by the CAP have been subject to reforms over the years, CMO Sugar has remained almost intact since it came into force. The EC Treaty contains both rules or the safeguarding of competition on the different EU markets, and rules establishing and governing production and trade in the agricultural sector. When a market is covered by the Common Agricultural Policy, EC competition rules do not necessarily apply to anti-competitive agreements between undertakings. The intervention price and quota system under CMO Sugar has in principle such anti-competitive features which since they are incorporated into the CMO Sugar cannot be tackled by either national or competition law in EU.

The main objectives of the CAP are: A B C D to increase productivity, to ensure a fair living standard for the agricultural society, to stabilise markets, to ensure the availability of supplies and to ensure that supplies reach consumers at reasonable prices.

prodution Quota System Price Guarantees Trade Regimes Storage Cost Equalisation Scheme Reimbursement fixed at level necessary to cover stock financing costs, insurance and rent. E. Self-Financing Regime Production levies are charged as a means of recouping for the EU budget the entire cost refunds on sugar exports to the world market. F. Refining Regime. Institutional support prices, such as the intervention price, the basic beet price and the minimum beet price. These support prices guarantee a certain level of income for the sugar beet growers and for the sugar producing industry; Intervention purchases, either by the member states intervention agencies, or by the EU Commission; Production quotas and levies, regulating both the total EU quality of sugar production and the quantity of sugar production in each sugar producing member state; Export refunds, safeguarding that sugar producers/exporters receive a guaranteed price for
13

exported sugar if the world market sugar price is lower than the EU intervention price; Import duties and preferential imports, safeguards on the one hand that the price for imported sugar is not lower than the EU sugar price, and on the other hand that sugar imported from certain countries receive a preferential status. It also provides for special preferential treatment in relation to some countries. Production refunds for the chemical and pharmaceutical industries, compensating these industries for the high sugar prices in their competition with such industries outside the European Union.

The EU sugar regime, in respect to the above, however, has ensured that: The mechanism of target and intervention prices exists, intervention buying does not apply to the farm products (sugar beet or sugarcane), but to the products as processed (raw or white sugar) as sugar beet and cane sugar are not storeable. EU support is not open-ended, but is restricted to production within quota. The principle of co-responsibility has been applied most fully to the sugar regime. Sugar producers (growers and processors jointly) are responsible for paying (through their producer levies) the full costs to the EU budget of disposing of surplus quota sugar. There is guaranteed access to the EU market for a significant quantity of Third Country sugar, principally from ACP countries associated with the EU by the Lome Convention.

SWOT Analysis Australia Good infrastructure Cost efficient low production costs. Highly mechanised sugar industry in the world. Increased productivity Recovery rate is highest in the world (around 90%). Good quality.

Strengths

14

Weakness

Exports around 80% of production at low world price. Balance quantity sold domestically also at world price. Operating in a high wage environment. Growers and millers are tied contractually & cannot expand or contract production. Lacks competition domestically as all sugar is marketed through state trading enterprise. Enjoys high currency exchange rates. Export relies on unstable market like Russia or Arabian countries where import volumes fluctuate significantly.

Expected based on policy changes especially in the triad economies of EU, USA, & Japan. Lie in use of differentiated & value-added Opportunities sugar. Diversifying in energy sector. Most vulnerable to fluctuations of world sugar prices with no Govt. assistance. Brazils increase in sugar production will find its way in international market. Industry threatened from environmental issues. Climatic variability.

Threats

Brazil

15

Strengths

Vast natural resources remain long-term economic strength. Worlds largest & most efficient producer of sugar. Cheap labour costs, but creates jobs. Concentrates around 60% of world ethanol production from sugar cane an alternative to fuel. Sugar-alcohol & related industry has attracted FDI. Devaluation of currency increases exports. Over Exports around 80% of production at low world price. Balance quantity sold domestically also at world price. Operating in a high wage environment. Growers and millers are tied contractually & cannot expand or contract production. Lacks competition domestically as all sugar is marketed through state trading enterprise. Enjoys high currency exchange rates. Export relies on unstable market like Russia or Arabian countries where import volumes fluctuate significantly. Expected with opening up of triad economies. Lie in exporting home-grown technology in producing fuel-alcohol from sugarcane production. In the use of differentiated and value-added sugar. Sugar buyers like food & beverages industry cannot apply supply management concepts. Climactic variability. Entrance of large MNCs to tap domestic market and international markets when liberalised.

Weakness

Opportunities

Threats

European Union
16

Strengths

EU firms have structured through concentration of production & economies of scale EU has highly regulated sugar market. Selffinancing sugar programs. Without subsidies & protection, the survival of EU sugar companies is threatened. EUs (almost) total sugar production is from sugar beet production cost of which is substantially high. Beet sugar is mainly grown in developed countries with temperate climates does not enjoy the favourable energy balance that makes cane so attractive for renewable energy source. Protected EU market from competition reduces incentive to upgrade technology and efficiency. Reduced policy intervention will result in significant gains to EU member states. With increased in world prices, EU manufacturers can better export.

Weakness

Opportunities

Threats

WTO requirements and pressure for liberalisation threaten EU to reduce protection afforded to EU sugar producers that threatens EU sugar firms. From Brazilian sugar in future (otherwise the market is protected).

Strategy Options for Australia Internal Strengths Educated, skilled labour force. Highly experienced in global market (e.g. export). Good infrastructure. Large areas of cultivable land with suitable climatic conditions. Most technically efficient with low production cost and recovery rate being highest in the world. Good quality of product and services. High concentration on R&D. Strong Australian dollar (also weakness). Highly deregulated market (also weakness).

Internal Weaknesses
17

High labour & social costs. Small domestic market size. High reliance on exports (75% of production) on low world price. Strong Australian dollar (also strength). Growers and millers are tied contractually & cannot expand or contract production. Relatively no Govt. support. In the sugar belt, alternate agricultural production options are limited. Lacks domestic competition due to single desk selling. Export relies on unstable market Russia & Arabian countries, where import volumes fluctuate widely. Climatic variability.

External Opportunities Brazil: increased natural wealth, investment opportunities, & management expertise. Pacific Rim & Asia: increased wealth, investment opportunities. USA, EU, and Japan: expected based on policy changes in the triad economies.

External Threats Government policies on sugar in the triad economies of USA, EU, and Japan. Constant economic instability due to fluctuating world sugar prices.

Strategy Options for Brazil Internal Strengths

Vast natural resources with suitable climatic conditions.Cheap labour force but source of job creation. Good infrastructure. Worlds largest and most efficient producer of sugar. Concentrates around 60% of the world ethanol production from sugar cane. Strong sugar-alcohol industry and network. Extensive national R&D network that has a proven track record in PROALCOOL program. Weak currency increases exports.
18

Internal Weaknesses

Harvesting workforce not qualified. Mechanisation is causing problem for workforce reallocation. Economy relies heavily on sugar. Sugar millers lack international exposure and/or experience. Millers are perceived as protected entrepreneurs, and the image of the industry does not convey the advantages that it has. Govt. policies are at times not clear. Family management still in place and modern techniques are needed to be employed. Several mills have financial problems. Poor infrastructure facilities. High inflation, interest rates & heavy external debt burden. Climatic variability.

External Opportunities

Various open economies like Australia and other developing and prospering economies like India, for ethanol production. USA, EU, and Japan: expected based on policy changes in the triad economies.

External Threats

Government policies on sugar in the triad economies of USA, EU, and Japan. Constant economic instability due to fluctuating world sugar prices.

Strategy Options for the European Union Internal Strengths

Educated, skilled labour force; pride in quality. Experience in global market(e.g. export). Stable labor-management relations. Strengths in large companies in sugar and in chemical, pharmaceuticals, and food industry. Good infrastructure. Strong Euro (also weakness) Accession of C&EECs* to EU. Highly protected market with external competition (also weakness).
19

Strong government support. Under restriction of EU sugar, perfected concentration of production & economies of scale. Strong lobby groups for change (also weakness).

Internal Weaknesses

High labour & social costs. No incentive in responding to external changes. Slowness in innovation. Few natural resources. Relatively high unemployment rate. Strong Euro (also strength). High cost of accession of C&EECs. Regulated market with protection (no growth prospect) & subsidies (also strength). Lacks favourable advantages of sugar cane cost of production & energy balance. Strong lobby groups for change (also strength).

External Opportunities

C&EECs: expansion & investments opportunities of EU companies. Brazil: increased natural wealth, investment opportunities, & management expertise. Pacific Rim & Asia: increased wealth, investment opportunities.

External Threats

WTO pressure for liberalisation of EU sugar. Australia & Brazil have initiated dispute proceedings at WTO against EU sugar subsidies. C&EECs: structural imbalances due to high unemployment & migration. C&EECs: political & economic uncertainties, legal & economic structures still in transition. EU: Economic instability due to accession of C&EECs. Import concession to sugar exporting countries of C&EECs due to their accession to EU.

Preferred Location In drawing a conclusion from the three analyses conducted on the three nations Brazilian firms have acquired assets and capabilities that are simultaneously valuable and unique. This has enabled the firms to place themselves in such a position wherein they can reap efficiencies through economies of scale and diversification. Moreover, the sugar industry has strategically aligned itself with generation of fuel alcohol resulting in a situation wherein Brazilian firms and the sugar industry, if required, can partially protect themselves from any adverse effect
20

of the world sugar market. Additionally, such an environment in Brazil has been provided by the political effects that have been shaped by changing economic imperatives, societal realities and the underlying historical developments of the institutions. The Brazilian Government intention to maintain its involvement in the pursuit of international competitiveness by its firms can be gauged from the fact that it continues to formulate national policies effecting the relative costs and factor endowments of the food-energy sector of the economy. Also their involvement at the WTO against EU sugar export subsidies reflects the political imperatives that the Brazilian government is so keen to impart in keeping with the interests of concerned groups. Brazil is among the worlds largest producer and exporter of sugar and has a significant effect on world sugar prices. Brazilian Government policies supporting economic liberalization are likely to stimulate greater sugar production and result in increased Brazil sugar export availability. Brazilian sugar can be expected to remain competitive in the world market because of increased internal efficiencies as Brazil deregulates its industry, modernizes its ports, and reduces its transportation costs from the mill to the port. However, the main determinant of growth in sugar output and exports is likely to be government policies affecting production and use of ethanol. These policies may be affected by trends in international prices of crude oil, as well as by Brazils approach to environment issues such as air quality.

SELECTION OF SITE

Sao Paulo
Factors Considered While Selecting Sao Paulo As Site For The Sugar Industry:

Raw Material: Sugarcane is the principal raw material used in the production sugar. Sugarcane is a tropical grass that grows best in locations with stable warm temperatures and high humidity, although cold and dry winters are an important factor for the sucrose concentration of sugarcane. The annual sugarcane harvesting period in the Center-South region of Brazil begins annually in May and ends in November.

Proximity to market: Our mills and other facilities will be located in the Center-South region of Brazil i.e. in Sao Paulo state. As it is in South America (Latin America) it will be better to serve US market, our operations also are in close proximity to our customers, sugarcane fields owned by us and growers, port terminals and other transportation infrastructure and warehouses. These factors help us to manage our operating costs. Increasing mechanization in our agricultural processes and

21

improvements in industrial operations, combined with our energy self-sufficiency, should allow us to continue to lower our operating costs.

Land: We would lease certain hectares of land and then we will also purchase some sugarcane from third party growers. The soil, topography, climate and land availability of the Center-South region of Brazil are ideal for the growth of sugarcane. The Center-South region of Brazil accounted for approximately 87.5% of Brazils sugarcane production. Transportation : (Ports) Our export of sugar will be shipped through the sugar loading terminal at the Port of Santos, which is located in Sao Paulo itself. There are many sugar-loading terminal is equipped with modern freight handling and shipment machinery. The close proximity of our mills to the port will enable us to benefit from lower transportation costs. Availability of Competing and competitive Industry: The sugar industry in Brazil has experienced increased consolidation through merger and acquisition activity during the last several years. Most of this activity has involved companies and facilities located in the Center-South region of Brazil, one of the most productive sugar producing regions in the world. Despite this recent wave of consolidation, the industry remains highly fragmented with more than 320 sugar mills and 100 company groups participating. Many ethanol and sugar producers in Brazil, including Grupo Zillo Lorenzetti, Grupo So Martinho and Grupo Irmos Biagi, market their ethanol and sugar products through the Copersucar cooperative. Copersucar is a private cooperative that was created in 1959 by 10 sugar mills in the State of So Paulo in order to provide a shared commercial distribution for their ethanol and sugar production. Currently, Copersucar is comprised of 28 producers in the states of So Paulo. Availability of water and power: There is enough supply of water and power in Sau Paulo State as it consists of various sugar industries. We will further going to create our own electricity by creating it through the By-product Its called as Cogeneration process: It is as follows Cogeneration of Electrical Power Cogeneration is the production of two kinds of energyusually electricity and heatfrom a single source of fuel. In our process, sugarcane bagasse is burned at very high temperatures in boilers, heating the water that is transformed into steam. This will be used further in electricity production.

Disposal of waste, By-product (Process of preparing Ethanol):

22

Sugarcane is composed of water, fibers, sucrose and other sugar molecules (glucose and fructose) and minerals. When the sugarcane goes through the milling process, we separate the water, sugar and minerals from the fibers, and are left with sugarcane bagasse. Sugarcane bagasse is an important by-product of sugarcane, and it is will be used as fuel for the boilers in our plants, through the so-called cogeneration process.
1. Cogeneration Process will be used to create our own electricity (It is

explained in the point Availability of water & power) 2. Ethanol is produced as a by-product of sugar bagasse: Ethanol Production Process: We will produce ethanol through a chemical process called yeasting, which is a process of fermenting the sugars contained in both sugarcane juice and molasses. Initially, we will process the sugarcane used in ethanol production the same way that we process sugarcane for sugar production. The molasses resulting from this process is mixed with clear juice and then with yeast in tanks, and the by-product resulting from the yeasting process. After the yeasting process, the yeasted wine will be centrifuged, so that we can separate the yeast from the liquid. We will then boil the yeasted wine at different temperatures, which causes the ethanol to separate from other liquids. Hydrous ethanol is produced after different distillation stages. In order to produce anhydrous ethanol, hydrous ethanol undergoes a dehydration process. The liquid remaining after these processes, a by-product we will use as fertilizer in our sugarcane fields.

Legal & Environmental Issues: a. We are subject to various Brazilian federal, state and local environmental protection and health and safety laws and regulations as well as foreign environmental protection and health and safety laws and regulations.
b. We are subject to the regulations of the Companhia de Tecnologia de

Saneamento AmbientalCETESB, or CETESB, the pollution control and remediation agency of the State of So Paulo. c. Brazilian Forestry Code. We are subject to the Brazilian Forestry Code, which prohibits land use in certain permanently protected areas, and obligates us to maintain and register a forestry reserve in each of our rural landholdings covering at least 20% of the total area of such land.

23

Bibliography Aaker, D.A. (1989), Managing Assets and Skills: The Key to a Sustainable Competitive Advantage, California Management Review, Vol. 31 Iss. 2, pp. 91 106. Ahmad, R. and Ali, N.A. (2003), The Use of Cognitive Mapping Technique in Management Research: Theory and Practice, Management Research News, Vol. 26 No. 7, pp. 1 16. Ames, G.C.W. (1991), An Observation on the Political Economy of Agricultural Policy Making in the European Community, Agribusiness, Vol. 7 No. 4, pp. 375 388. Antony, G. and Higgins, A. (2002), Torn between Social Equity and Economic Efficiency: The Evolution and Crisis of Institutional Relationships in the Australian Sugar Industry, Presented at the Conference Evolution of Institutions and the Knowledge Economy, Debrecen, Hungry, 4-5 October 2002. http://www.apsru.gov.au/apsru/Documents/sugar.htm Arburn, G.W., Rosson, C.P. , Nyankori, J.C.O. (1991), Soybean Production and Trade Policy Changes in Argentina and Brazil: Implications for the Competitive Position of the United States, Agribusiness (1986-1998), Vol. 7 No. 5, pp. 489 502. Banerjee, S. and McGovern, M. (2003), Influences on Competitiveness from Sugar Production and Marketing Regimes, Australia New Zealand International Business Conference, Nov. 6-7, 2003. Bolling, C.and Suarez,N.R (2001), The Brazilian Sugar Industry: Recent Developments, Sugar and Sweetener Situation & Outlook/SSS-232/September 2001, Economic Research Service, USDA. Bureau, J-C., Guyomard, H., and Requillart, V. (2001), On Inefficiencies in the European Sugar Regime, Journal of Policy Modeling, Vol. 23 Iss. 6, pp. 659 667. http://www.ib.be/cefs/sugarindustry.htm http//money.cnn.com/2004/08/04/news/international/wto_sugar.reut

24

Haley, S. and Suarez, N.R. (2003), USDA Increases Sugar Marketing Allotments, Sugar and Sweetener Situation & Outlook/SSS-236/January 2003, Economic Research Services, USDA. Helfand, S.M. (1999), The Political Economy of Agricultural Policy in Brazil: Decision Making and Influence from 1964-1992, Latin American Research Review, Vol. 34 No. 2, pp. 3 41. Helfand, S.M. (2000), Interest Groups and Economic Policy: Explaining the Pattern of Protection in the Brazilian Agricultural Sector, Contemporary Economic Policy, Vol. 18 No. 4, pp. 462 476. http://sugarbeet.ucdavis.edu/sbchap.html http://www.rabobank.com http://www.rabobank.com/content/services/corporates/ research/ http://www.rabobank.com/asp/Press/document.asp http://www.nytimes.com http://www.srdc.gov.au/industry\industry.htm http://www.biotech-info.net/farming_Eden.htm LMC International, Brazil: Outlook for Ethanol Demand and Implications for Sugar Exports. Sweetener Analysis, 12 pp., March 2001. F.O. Licht, Australian Sugar Industry Fears Rising Brazil Threat. F.O. Lichts International Sugar and Sweetener Report, pp. 213-219, Vol. 131, No. 14, Apr. 26, 1999. ABARE Research report 99.14, Sugar, International Policies Affecting Market Expansion. pp. 52-69. Buzzanell, Peter, and John C. Ronney, The Brazilian Sugar and Ethanol Industry: Performance and Prospects. Sugar and Sweetener Situation and Outlook Report, Economic Research Service, July 1988. Brazil Attache Sugar Reports, various issues. Sugar and Sweetener Situation & Outlook/SSS-232/September 2001

25

26