Slip sliding away: restricted by trade ruling, Europe's sugar barons race to invest in Brazil, the world's new top producer.

Across the sugar world, Brazil is the newly crowned king. For decades, the European Union (EU) has trailed only Brazil in terms of global sugar exports. But a World Trade Organization (WTO) ruling last year will chop sugar exports to a fraction of what they used to be. For European sugar companies that wish to stay in business, the key to survival seems to be simply putting that cash into Brazil while they still have it to spend.

In a ruling taking effect this month, the world trade body ordered EU producers to cap sugar exports to just under 1.3 million tons. Reduced foreign sugar sales will be a tough pill to swallow: During the harvest season ending in June, EU producers will have exported an estimated 7.2 million tons.

Today, Brazil accounts for 40% of global sugar exports. Production has nearly doubled over the past nine seasons to 28.7 million tons, while exports mushroomed to 18.3 million tons. Now that EU sugar producers have had their wings clipped, Brazil might double its production again in the main sugar cane growing areas in southern Brazil. EU producers will have to limp behind and perhaps become a net importer.

To reach its growth goal, the Brazilian government in February said it was looking for US$10 billion in investments during the next six years. Brazilian sugar companies are rolling in cash, now that sugar prices have climbed to quarter-century highs, but there's a need for outside investment as well.

Europeans are on a spending spree, too, not only with their own money but also on the taxpayers' dime. As part of a restructuring fund set up for industries looking to get out of sugar production, the EU is offering up to $869 per ton for producers to halt production. For companies closing up shop partially or completely, they'll get that cash in hand as a one-off payment. "Europeans have the money. Right now, talking to them is like talking to sheiks," says Patrick Zen-Ruffinen, director for the Swiss arm of Brazilian logistics and trading company Grupo Coimex. "The big ones came to Brazil a long time ago, but now the smaller ones are coming in."

Some of that money, if not a lot, will make its way to Brazil, the world's far-and-away low-cost producer, especially if sugar prices stay high. But the Brazilians won't give up control of their assets too easily--or too cheaply. "People coming in will have to pay high prices if they want to buy mills or even higher prices to go in and build new mills," says Zen-Ruffinen.

The European Union began subsidizing farming in the 1950s in order to insure that people would not go hungry, as they did in the disorganized rubble that was Europe just after World War II. As the European Union began to grow from its original six members to today's 25, it has continued to subsidize agricultural production--and far too successfully. Domestic market reforms in 2003 changed how the EU subsidizes its farmers: Regulators revamped payments to producers, going from a production basis to the area farmed, except for a few products that would be reformed later, including sugar.

During the years of "lakes of wine and mountains of sugar," terms used to refer to the overproduction of protected staples, the EU farmed so much sugar that it often sold the excess on the world market, depressing global prices. By selling sugar at below-market rates, a practice known as dumping, the global price no longer represented the true cost of production. Brazil was the only country that could produce sugar cheaply enough that it could make profit. Even so, Brazil sought to end EU dominance. Together with global sugar producers Australia and Thailand, which could not compete with EU sugar on the world market, Brazil successfully brought a suit against the Europeans at the WTO.

Partly because of the ruling, and partly because of the need to bring the EU domestic sugar market in line with other local reforms, the EU agreed to accept a 36% cut in its sugar price, eased in over four years starting in July. That drastic cut is an effort to bring production into line with demand and to significantly lower exports.

French sugar giant Tereos broke into the Brazilian market in 2000 by entering into a joint venture with Brazil's largest sugar and ethanol producer, Cosan, to create FBA, a sugar and ethanol company. According to Alexis Duval, director of Tereos' Brazilian holdings, the partnership will bring Cosan's sugar and ethanol production trading experience in Brazil. In 2005, Tereos swapped its stake in FBA for a stake in Cosan. Doing so let the company take part in Cosan's listing on the Brazilian stock exchange. That wouldn't be the sole Tereos investment in Brazil. In 2002, the company took over France's Beghin-Say, which had just purchased Brazilian sugar company Acucar Guarani a year earlier.

"Most sugar companies in Brazil are controlled by families and, therefore, are administered by them. However, FBA counts on a professionalized administration, with a board of directors composed by hired professionals and whose director-president, Rubens Ometto, is the company's major shareholder," Duval says. Today, Dural is a member of Cosan's board as a Tereos representative. When Tereos took control of Acucar Guarani, the Brazilian company already had a board of directors made up not of family members but professional managers like those at Cosan and FBA, Duval says.

European sugar ownership in Brazil isn't new. Multinational European companies such as Tate & Lyle, of the U.K., or France's Louis Dreyfus--which went into Brazilian agribusiness at the turn of the 20th century and again in the 1940s when it bought Comercio e Industrias Brasileiras (Coinbra)--saw the advantage of doing business in Brazil a long time ago. It's only now, however, that the playing field is starting to shift, thanks to the WTO ruling, as well as internal sugar policy reforms in Europe.

"Brazil is one of the most important factors within Tereos' strategy towards EU sugar reform. It allows the group to keep and even raise its performance in the world sugar market, turning Tereos into the single company capable of meeting the demand of clients in EU, Brazil and the world," Duval says.

A lot of European companies are looking into Brazil right now, says Toby Cohen, director of research at Czarnikow, a U.K. sugar-trading firm. "In terms of foreign direct investment, EU firms are taking ownership and looking into investing in new projects," says Cohen. French sugar company St. Louis Sucre, recently acquired by Germany's Sudzucker, as well as Nordzucker, another German sugar company, are said to both be pursuing projects in Brazil. Neither would comment for this article.

But it's not as easy as grabbing a plane for Rio with a suitcase full of cash. Brazilian sugar is getting a very good return at the moment, so there aren't many willing sellers, says Cohen. Those who are willing to sell are often selling under pressure, such as heavy debt. Foreigners looking to invest in Brazil might be more successful with new projects and services catering to existing operations, Cohen says. "Many of the new projects are self-financed by Brazilians, so a foreign investor would need to bring some added value to get the Brazilians interested," he says.

Foreign direct investment isn't the only way to get involved in the Brazilian sugar market. Over the last 18 months, agricultural commodities have become a hot trend for investment funds and index-linked investments.

Raw sugar futures traded on the New York Board of Trade are largely considered to be simply price-risk hedging instruments, most often used by producers and industrial consumers. Yet investments in sugar futures have soared. Sugar futures prices have jumped more than 60% over the past year, reaching 25-year highs in February.

"Commodities are becoming more of a diversification tool in financial portfolios," says Cohen, who estimates index-linked funds alone could account for 70,000 to 80,000 contracts out of more than half a million trading on the exchange. Add to those figures traditional investment funds and you've got big numbers. "It's hard to quantify because of how the index funds are structured and how they're bought," Cohen says. "Everyone is estimating how much money is under management and, the way indexes are set up, you can estimate what their participation is."

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MEGHAN SAPP * BRUSSELS