USDA Attache: El Salvador Sugarcane Planted Area Declines

Sugarcane planted area in El Salvador for 2007/08 decreased 3,000 hectares compared to 2006/07, dropping to 57,000 hectares. However, sugar recovery yields increased during the 2007/08 harvest mainly due to favorable weather conditions, according to a U.S. Department of Agriculture attache report posted Tuesday on the Foreign Agricultural Services Web site.

The Salvadoran Sugar Council (CONSAA) continues to regulate sugar trade. Most sugar exports are destined to the Russian Federation and to the U.S. re-export market. However, Peru and Jamaica are new export markets in MY 2007. Additional tariff rate quota (TRQ) under the Central America - Dominican Republic Free Trade Agreement (CAFTA-DR) has provided a boost to the Salvadoran sugar industry in 2007/08. The sector continues to get tariff protection by the Government of El Salvador (GOES). The Ministry of Agriculture (MAG) continues efforts to shift traditional agricultural production into more profitable non-traditional export crops. The GOES and the sugar industry have agreed on a 10 percent mixing ratio for ethanol and gasoline. Pressed by record high oil prices, the GOES is working on a law for production of alternative fuels, including ethanol, which could be ready by the end of 2008.

Executive Summary

Higher yielding sugarcane varieties, diversification of industry to produce energy and alcohol/ethanol, investment in milling equipment to improve sugar yields, additional access to the U.S. market due to CAFTA-DR and stable international prices all augur well for El Salvador's sugar industry over the next 3 to 5 years. A National Sugar Law for commercialization, production and distribution of sugar is an important component to the reengineering process that the industry has undergone. In addition, assisted by higher prices and additional access to the U.S. market, the sector seems to be recovering financially after facing debt complications due to natural disasters such as tropical storm Stan and lack of government policies to assist sugar farmers. Ultimately, however, the success of the industry will rely on compliance with the Sugar Law by all parties involved, continued improvement in sugarcane and sugar yields, and increased diversification into additional energy co-generation projects and ethanol production.

Sugarcane production for the 2007/08 harvest is estimated at 4.62 million MT, 27,000 MT higher than Post's previous estimate. Production for 2006/07 has been increased to 4.56 million MT due to new data provided by CONSAA.

Higher sugar recovery yields led to increased sugar exports in 2007/08. New data provided by CONSAA show exports increasing by 43,000 MT compared to 2006/07. Sugar production is expected to reach 555,000 MT in 2007/08. Sugar production for 2008/09 is expected to increase slightly due to additional planted area and continued favorable recovery yields. However, weather conditions will continue to play a major role in future production. Weather patterns have become erratic due to global warming and the possibility of the natural phenomenon La Nina occurring in 2008/09 poses a threat to sugarcane production.

El Salvador only exports raw sugar. The GOES continues to control wholesale sugar prices. The current average retail price for white sugar is $ 0.31 per pound plus a 13 percent value-added-tax. The Salvadoran sugar industry seems to be improving its production scenario. Sugar production is expected to be higher in 2008/09 reaching approximately 560,000 MT. Area planted is expected to increase to approximately 59,000 has. El Salvador is already capitalizing on a CAFTA-DR 6.6 million duty free ethanol quota that will grow annually until it reaches 25 million gallons in 2020.

Production

New production numbers compiled by the Foreign Agricultural Service (FAS) office in San Salvador revealed that the 2007/08 sugarcane harvest is expected to reach 4.62 million MT. Sugar production is estimated to reach 555,000 MT in 2007/08. Sugar recovery yields averaged approximately 120 kilograms per MT, up 5 % from the previous year's output. Favorable weather is the main reason for better recovery yield performance. Overall, the local sugar industry has been working hard to control sugarcane burning during harvest, to create new sugarcane varieties that are more resistant to pests and diseases and increase investments in the sugar milling process. Thus, sugar recovery yields are expected to continue a positive trend for the 2008/09 harvest. Sugar production is also expected to increase in 2008/09 reaching approximately 560,000 MT.

Area planted remains stable at 57,000 has. during 2007/08. CONSAA is expecting area planted in 2008/09 to reach 59,000 has. mainly due to higher international prices for sugar and interest in ethanol production. There is ample idle land in the country that can be devoted to sugarcane production. The GOES continues programs to encourage Salvadoran farmers to shift production away from plantation agriculture into value-added non-traditional crops such as tropical fruits.

Grower prices continue to be set according to sugar content of the cane. According to the Sugar Law, producers are to receive 54.5 percent of total sugar sales, with the rest appropriated by sugar mills. Sugar mills distribute this sales income among sugar producers. Privatization of all mills has helped reduce downtime during the milling process, as well as increase sugar recovery rates to a more competitive position within the region. However, some mills continue to face financial restructuring and in some cases, are being monitored by financial institutions that want their loans to be honored.

Consumption

Increased consumption by the candy and juice industry has provided stability to internal consumption numbers reaching 228,000 MT in 2007/08. Higher exports of these products, mainly due to CAFTA-DR, are expected to contribute to increased consumption in the medium term. In 2008/09, consumption numbers are expected to be similar to the previous year.

Trade

Exports for 2007/08 are expected to reach 330,000 MT compared to the USDA database number of 302,000 MT. A better crop and increased sugar recovery yields are the main reasons behind the surge in exports. The export forecast for 2008/09 is 332,000 MT.

The GOES continues to impose a 40 percent import tariff on all sugar. The bound rate on sugar is 70 percent ad-valorem. The GOES considers sugar politically sensitive because it offers large rural employment and for that reason, the GOES provides tariff protection. CAFTA-DR has spurred regional tariff harmonization to avoid triangulations and market disruptions. However, the Central American region still has not agreed on a harmonized import tariff for sugar.

The Russian Federation continues to be the major destination for Salvadoran sugar exports. In 2007, 142,771 MT were exported to the Russian Federation. Some new markets include Peru, Mexico and Jamaica. Export destinations for 2008 are expected to be similar to 2007. Including additional CAFTA-DR Tariff-Rate-Quota, exports to the U.S. are expected to reach approximately 52,339 MT in 2008.

CAFTA-DR has also increased industrial sugar consumption in El Salvador because sugar-containing products such as candy and juices have immediate duty-free access to the U.S. market.

Stocks

Ending stock levels in 2007/08 increased to 14,000 MT, mainly due to higher sugar production. Contraband sugar coming from neighboring Guatemala is under control and is no longer causing a disruption to the local market. The Sugar Law states that all sugar sold locally must carry a safety seal provided by CONSAA. Stock levels are expected to remain similar in 2008/09.