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Sugar prices and production and investment incentives

Friday, October 23, 2009
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World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.

This BBC news article reports that Mozambique’s government is planning to almost double its annual sugar production following soaring sugar prices and an abundance of available arable land. Helped by free access to the lucrative EU single market under the Everything But Arms (EBA) initiative, the issue is whether the sugar growing industry can scale up sufficiently to take advantage of a period of high prices to drive higher production, exports and lift average incomes for the thousands directly or indirectly employed by the sugar sector.

Sugar prices are inherently volatile and this poses big risks for investors in new capacity. Political risks and fluctuations in exchange rates must also be taken into account as Mozambique exports most of her sugar to European and American markets. In recent months the Mozambique currency has appreciated a little against the dollar which may make it slightly harder to sell sugar into US markets. But a weak currency against the Euro together with favourable trade arrangements is making Europe a good bet for a country desperate for higher foreign exchange earnings to boost her development.

Read more about the Everything but Arms Initiative here



 

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