Sweet Source of Growth

In a lush valley flanked by the Andes Mountains, sugar is sweet again for cane grower Andres Martinez. Global prices of sugar have doubled in the last year, hitting 15-year highs and creating a windfall.

The reason: ethanol, an alcohol made from sugar that is increasingly in demand worldwide as an additive to gasoline to produce so-called biofuels.

“This has been a nice surprise, although the full impact is only beginning to reach us,” said Martinez, an agronomist who works a 50-acre farm in the Cauca Valley, which is carpeted with sugar cane.

Sugar is one of many commodities whose prices have skyrocketed in recent months. Crude oil, copper, soybeans and timber are up dramatically thanks largely to increased demand from China and India.

Latin America’s economies, whose fortunes rest on natural resources, have especially benefited from the boom. Lifted by exports of coal, coffee and crude, in addition to sugar, Colombia’s economy grew 5.3% last year, among the strongest rates in the hemisphere.

What’s fueling sugar’s rise is, well, fuel.

Increasing percentages of the harvests in countries such as Brazil, the world’s largest sugar exporter, and Colombia, which ranks No. 7, are being diverted to making ethanol, and that’s constraining supplies and driving up prices.

Ricardo Villaveces, president of Colombia’s largest association of cane farmers and sugar refinery owners, said demand for biofuels was causing a structural change in the sugar market. He noted that even President Bush had jumped on the bandwagon, saying in his State of the Union message that Americans should use more biofuels.

In Colombia, ethanol’s future is now. Since November, motorists in three large cities -- Cali, Bogota and Popayan -- have been required by law to fill their tanks with at least 10% ethanol. Over time, the list of cities and the share of ethanol will increase as the country seeks to reduce its dependence on oil, officials said. In Brazil, motorists are required to buy fuel that contains at least 40% ethanol.

Drivers don’t get much of a break with ethanol -- in fact, just the opposite. In Bogota, they pay about the same as for a gallon of regular gasoline, about $2.50, but get 20% fewer miles per gallon, according to several taxi drivers.

The biofuel law is spawning investment in ethanol infrastructure in the Cauca Valley, Colombia’s sugar-growing capital. Two ethanol processing plants have been completed, two are under construction and as many as six more are on the drawing board. Total investment in ethanol processing facilities here could easily reach $100 million, Cali Chamber of Commerce President Julian Dominguez said.

So it’s no accident that Cali, where half of all jobs are connected to the sugar industry, exudes prosperity these days. The unemployment rate in this city of 2.5 million, 11.4%, is the lowest of any large Colombian city. Eleven shopping centers have opened or begun construction in the last year, Dominguez said, and crime is down significantly.

Cali’s environs are far from secure, however. Leftist guerrillas still operate in the mountains that surround the city, and farmers who asked not to be named say they have to pay protection money called “vaccinations” to avoid being kidnapped.

Although the outlook for sustained high prices seems good in the short term, even Villaveces of the sugar trade association is concerned that the current market may be a bubble.

“These high prices are transitory,” he said. “That’s how commodities are.”

Prices have been pushed up by a disappointing harvest in Brazil, which accounts for 40% of total world exports and is expected to expand acreage dedicated to sugar farming in coming years, he said.

Moreover, the feasibility of ethanol and the value of sugar could fall in tandem if oil prices decline substantially. High prices for crude are considered essential for ethanol to remain an affordable alternative to pure hydrocarbons.

The jury is out on the effect on sugar from the free-trade agreement Colombia recently signed with the United States; the pact must still be approved by both countries’ legislatures.

Economist Mauricio Cardenas of Fedesarrollo, a think tank in Bogota, says the overall effect on Colombia’s economy will be positive, as will its effect on the sugar industry, at least in the short term. The deal allows Colombia to increase sugar exports to the U.S. to 75,000 tons a year from 25,000.

Over the longer haul, farmer Martinez and others worry that free trade will break down protective barriers that have kept low-cost U.S. corn sweeteners from dominating Colombia’s market.

For now, this valley is booming, its 10 sugar refineries working overtime to produce the white crystals. At the Centro Castilla refinery, production has risen to 7,300 tons of cane processed a day, a 20% increase from two years ago, said Juvenal Gonzalez, an operations manager.

Martinez is skeptical that prices will stay high. Typical of farmers just about everywhere, he downplays suggestions of sudden riches.

“I’m just emerging from debt and paying off the farm after many years of depressed prices,” he said. “This has made paying the loan much easier.”