EXPORTING SUGAR FROM BRAZIL

SHREE SWAMI SUGAR MILLS INDIA PRIVATE LIMITED

Group members:

PRODUCT – SUGAR

About 20% of the world's supply of sugar is derived from sugar beet, the vast

majority of which is produced in industrialized countries (France and USA are the top

producers; Source: FAOSTAT), while the remaining 80% is derived from sugarcane,

mainly produced in developing countries (Brazil, India, EU and China are the top

producers; Source: FAOSTAT) and under tropical climates.

Sugar cane is a sub-tropical and tropical crop that prefers lots of sun and lots

of water. Sugarcane crop typically takes about 12 to 18 months to reach maturity and

is harvested by chopping down the stems but leaving the roots so that it re-grows in

time for the next crop. The plantation of sugarcane usually starts in the beginning of

June and the crushing season begins in October. Generally, the costs of producing

sugar from sugar cane are lower than those in respect of processing sugar beets.

Sugar cane is a hardy crop which can stand climatic extremities without a significant

decline in crop yield or sugar recovery.

Sugarcane offers production alternatives to food, such as feed, fibre and

energy, particularly biofuels (sugar-based ethanol) and/or co-generation of electricity.

Sugarcane is generally regarded as one of the most significant and efficient sources

of biomass for biofuel production, and given expectations of rising oil prices, the

considerable potential for expansions in production for biofuel feedstock has resulted

in a heightened focus on sugar as an internationally traded commodity.

Cane sugar is the primary source of internationally traded sugar, as

sugarbeets are grown and processed almost exclusively for internal domestic

markets Specifications for sugar purchases will vary according to the specific

applications of the end users, with trade volumes and prices broadly categorized as

raw or refined types of sugar. Sugar polarity, or degree of refining purity, is a

measurement of the degree of purity of the sugar (based on molasses content), how

close the color of the sugar is to pure white and dextran content. Dextran is the

fibrous content of the sugar that develops when sugarcane is cut during harvest,

which tends to make refining the cane more difficult. Polarization is what

distinguishes raw from refined sugar, with polarity at 100 percent signifying pure

refined sugar. Raw sugar trades according to various polarity specifications, based

upon the specific needs of refining and processing facilities as well as refinery sugar

production costs. There are four general sugar product types trade in international

markets based on polarity: refined (white) sugar; semi-refined or direct white (also

called plantation white); very-high polarity raw sugar (VHP); and standard raw sugar.

Polarity is a key determinant of raw and refined sugar pricing.

World Sugar Balance

  2010/11 2009/10 Change

  (mln tonne, raw value) in mln t in %

Production 168.045 160.569 7.476 4.66

Consumption 167.849 164.549 3.300 2.01

Surplus / Deficit 0.196 -3.980    

Import demand 50.309 53.393 -3.084 -5.78

Export availability 50.496 53.023 -2.527 -4.77

End Stocks 58.808 58.799 0.009 0.02

Stocks/Consumption ratio in% 35.04 35.73    

Source: ISO Quarterly Market Outlook, February 2011

SUGAR REQUIREMENTS OF SOME OF THE COUNTRIES

EU EYES SUGAR SALES, IMPORTS TO CURB SHORTAGE

EU would approve extra sugar imports and the sale of out-of-quota sugar on

the EU market to address an expected supply shortage and to curb rising prices. The

European Commission said it would open an autonomous import quota for sugar

from any non-EU country, but there were no details on the total volume of the quota

or any tariffs that may apply. The Commission's plans to approve the sale of EU out-

of-quota sugar on the domestic market appeared to confirm the reversal of its

decision to export 350,000 tonnes, which it announced in November but

subsequently delayed. Out-of-quota sugar refers to excess sugar produced above

EU national quotas, which is often sold on world markets as, unlike quota sugar, it

does not benefit from a guaranteed EU minimum sale price.

INDONESIA PERMITS TO IMPORT 2.43 MLN T RAW SUGAR

Indonesia has issued permits to import 2.43 million tonnes of raw sugar for

2011, an increase of 5% from 2010. The raw sugar, which could come from

Thailand, India and Australia, will be processed into refined sugar and sold to

Indonesia's food and beverage industry.

JAPAN RAISES 2010/11 SUGAR IMPORT ESTIMATE

Japan has revised up its sugar import estimate for the year to September

2011 from three months ago as local sugar beet output fell more than expected.

Japan now estimates sugar imports for the current sugar year at 1.372 million tonnes

on a refined basis, up 10.3% from a year earlier. In September, sugar imports in

2010/2011 were estimated at 1.265 million tonnes. If annual imports were at 1.372

million tonnes, that would be the highest level since 2007/2008. Major foreign sugar

suppliers to Japan are Thailand, Australia and South Africa.

RUSSIA MAY CUT RAW SUGAR IMPORT TARIFF FROM MARCH

The customs union of Russia, Kazakhstan and Belarus may cut import tariffs

for raw cane sugar to $50 per tonne from March following a drop in domestic beet

sugar production due to a drought. Currently, the tariff is $140 per tonne, unchanged

from October 2010. Brazil, Cuba and Thailand are the main raw sugar suppliers.

Russia, the world's third-largest sugar buyer, imported 1.94 million tonnes of raw

sugar in January-October last year, up 59.7% year-on-year.

THAILAND SUGAR ESTIMATE SEEN RISING BY 100,000 TONNES

The Cane & Sugar Board may revise its output forecast for the crop year

ending Sept. 30 to around 7 million tonnes from an earlier estimate of 6.9 million

tonnes. Cool weather is aiding harvesting and the crop quality also looks good. Area

under cane plantation also increased to 1.1 million hectares this year from about 1

million hectares in 2009/10. Sugarcane yields are as high as 110 kilograms a tonne,

up 10%. Sugar crushing in Thailand, the largest exporter after Brazil, began in end-

November and will likely continue until May.

COUNTRY FOR OPERATIONS – BRAZIL

Brazil is the world leader in sugar exports, a position it has held for several

decades, and one that it does not seem to be relinquishing any time soon. In fact,

Brazil’s sugar exports are increasing yearly.

Brazil’s sugar successes are due to many factors. With a sugar industry that

is almost 500 years old, Brazil certainly has plenty of experience in the arts of

growing, processing, and refining sugar. Some of Brazil’s success can be attributed

to the geographic features of the country. Brazil is a very large country with vast

swathes of cultivatable land, and a climate suited to sugar cane growing. Much of the

Sao Paulo region of Brazil in the center south of the country has now been turned

over to the production of sugar cane because its large flat fields are ideal for growing

sugar cane.

That is only part of the formula of Brazil’s sugar success however. Not content

to rest on its environmental laurels, Brazil strives constantly to improve the way it

grows and processes sugar cane. There are currently over sixty strains of Brazilian

sugar cane in Brazil, the bulk of which have been developed over the years by

Brazilian sugar scientists. Compare this with the six strains of sugar cane commonly

used in Thailand, the world’s second largest sugar exporting country, and it is easy

to see the extra resources which have been invested in the Brazilian sugar industry.

The various strains of sugar cane are designed to adapt to different growing

conditions and also to provide optimal material for processing. For example, there

are special high sucrose strains of sugar cane which yield much more sucrose per

cane than typical sugar cane, and then there are other strains of sugar cane that can

survive and thrive in conditions that normal sugar cane could not withstand, such as

particularly dry, non fertile or hard soil. The Brazilians have even gone so far as to

sequence the sugar cane genome, so dedicated are they to fully understanding their

business, and the plant that underlies the multi billion dollar industry.

Brazil’s sugar mills and refineries are also models of efficiency. Most major

mills spend thousands of dollars a year, if not millions, monitoring efficiency and

ensuring that unnecessary costs are not incurred. Water, sugar cane fiber, even

pieces of dirt are all recycled and reused in Brazilian sugar mills. This has paid great

dividends for the industry as a whole, and Brazil’s sugar mills and refineries are now

the most efficient in the world.

During (Marketing Year) MY 2011/12, sugarcane production is projected at

631 million metric tons (mmt), up 2 percent from MY 2010/11. The CS region is

expected to harvest 569 mmt of sugarcane, up 12 mmt up vis-à-vis the previous

crop, primarily due to a likely increase in the area for harvesting, especially from new

units and those which began operations in the past 3-4 years, notably in Mato

Grosso, Mato Grosso do Sul, Goias and Minas Gerais. ATO/Sao Paulo forecasts the

North-Northeastern (NNE) production for MY 2011/12 at 62 mmt, a slight increase (1

mmt) from 2010/11.

Approximately 30 units started the crushing in the CS as early as late March

of 2011 and 44 units should begin operations in early April. However, the bulk of

mills will start crushing as of mid-April/early May given that the development of

sugarcane stocks is somewhat late.

For MY 2011/12, total sugarcane area is forecast at 9.65 million hectares (ha), a 8

percent increase from MY 2010/11 (8.95 million ha). Total area harvested for MY

2011/12 is forecast at 8.89 million ha, up 400,000 ha from previous crop. (8.49

million ha).

Only five new units are expected to start crushing in 2011, quite below the

number of new investments in previous years. Poor sugar and ethanol prices in 2007

and 2008, and the world financial crisis in October 2008, limited the availability of

credit, thus significantly reducing investments in green fields.

The table below shows sugarcane harvested area, according to the Ministry of

Agriculture, Livestock and Supply’s (MAPA) National Supply Company (CONAB),

and the Agricultural Economics Institute (IEA) of the State of Sao Paulo Secretariat

of Agriculture.

2005 2006 2007 2008 2009 2010

Brazil5,339.

4 5,529.6 6,016.0

7,088.

97,409.6 8,033.6

Sao

Paulo3,120.6 3,436.8 3,907.4 4,614.7 4,937.9 5,135.3

Table: Area harvested to Sugarcane (1000 ha)

ENTRY MODE SELECTION

SHREE SWAMI SUGAR MILLS INDIA PRIVATE LIMITED will have a wholly

owned subsidiary in Brazil which will export raw and refined sugar.

STRATEGY

Acquisition of a sugar-ethanol company called Vale do Ivaí, in the state of Parana,

Brazil

• Vale do Ivaí is located close to the ports and owns logistic assets

• Installed crushing capacity of 3.1 million tons in two mills: São Pedro do Ivaí & Cambuí

• Enterprise Value of the company = USD 240 mn

• Approximately USD 82 Million outgo for SSSMIPL and the rest debt in the acquired company

• Debt Terms: 3 yrs moratorium +5 yrs principal repayment

About Vale do Ivaí

Established in 1981 by the Longo family

• One of the main sugar and ethanol players in the state of Paraná

• Cane cultivation on over 18,000 ha of land on long lease

• Currently the company has an installed crushing capacity of 3.1 million tons in two mills: São Pedro do Ivaí (PR) & Cambuí (PR)

• Part ownership of common logistics infrastructure including port terminal and railside storage terminal

Manufacturing Facilities

• São Pedro do Ivaí : Main facility since the group was established

• Cambuí: Ethanol distillery located in Marialva and is the 2nd Grupo Vale do Ivaí

manufacturing facility in Paraná. It was acquired in 2008 from Cooperativa

Agroindustrial Cocari

• Fronteira: This ethanol plant located in Fronteira, in the state of Minas Gerais is

excluded from the Sale

Strengths

• High percentage of Owned cane:

VDI has over 18,000 hectares of its own land on long lease (72% own cane

compared to 50% average for Center-South Brazil)

• Export oriented location with proximity to port:

VDI holds strategic stakes in several logistics assets including terminals for

storage and

transportation of sugar and ethanol at the port of Paranagua

Logistics

The average distance between VDI processing plants and sugarcane farm is

around 14 km, decided logistics advantage

• Vale do Ivai owns equity in four logistics organizations that contribute to make it

very competitive for export logistics

• Located close to ethanol distributors and the Port of Paranagua (551 km) , VDI can

ship out goods by road or rail (with numerous transfer and storage options)

• Port of Paranagua ranks 2nd in terms of the volume of sugar handled, behind

Santos

• VDI holds a key strategic stake in PASA – the automated sugar storage and

shiploading terminal at Paranagua port

INTERNAL ENVIRONMENT

The Corporation has to address several specific concerns as a matter of

urgency, and they may be summarized as follows.

Shortage of Skilled Personnel

There is a shortage of managerial and technical skills in every major area of

activity. A human resource development programme is being implemented. There is

in place an aggressive recruitment drive, but while there has been some success in

attracting young graduates, existing remuneration packages are inadequate to bring

aboard the more experienced and qualified to the extent that they might be available.

Serious attention needs to be given to the skills required for the technical

planning and implementation of the rehabilitation programme.

Labour Turnout

Reducing labour turn out could emerge as one of the more intractable

problems facing the business, given the Brazilian industrial development and the

emergence of other new businesses as the economy opens up. Competition for

labour will drive labour rates up beyond the recent increases and further undermine

the viability of the industry.

Capital Expenditure Programme

The capital expenditure programme during the period of the Strategy needs to

be carefully determined recognising the industry's objectives and funding sources.

Any plan requiring capital investment that cannot be sourced must be deemed

unrealistic. A pragmatic development programme must recognise the realities of the

environment if it is to be achieved. The proposed capital expenditure may appear

large but is in fact reasonable, given the age of the equipment in the factories and

after making allowance for what can be considered a normative annual capital

programme for factories.

Cost of Production

The rising cost of production and declining profit levels with the concomitant

deteriorating cash generation has to be addressed urgently. While the declining

average sugar prices might level off by the end of the period, it is not clear by how

much they will fall in total, and the rate at which the cost of production has been

escalating cannot be sustained over the years. There is need for radical review of

the industry's cost structure, as the industry has emphasised on a number of

occasions. This is perhaps the most daunting challenge faced by the sector.

Water Availability and Drainage

No significant expansion of cane production can be achieved until the issue of

water availability is resolved. It would therefore be in the best interest of the

industry's long term future to ensure that the right conditions are created for

expanded sugar production. Dealing adequately with this issue will require additional

investment, in amounts not yet quantified.

Drainage capacities need to be increased to improve yields and sustain them

in wetter than average years. This also will require additional investment beyond that

which is included in the proposed investment programme.

Prices

International markets are reasonably secure in the short term in current

prices, but that may imply a continuing slight decline each year in real terms. In the

medium term, prices will be influenced by policy decisions and by exchange rate

fluctuations, and the prospects that they will decline substantially are much greater

than the possibility of an increase.

One indicator of the pressure for price reductions in Europe is found in the

fact that fully two-thirds of European producers' income arises from governmental

intervention, which means that the cost is paid by European consumers.

Agricultural Strategy, Basic Assumptions, and Common Parameters

The cane yields are expected to continue to increase based on the continuing

timely availability of soil ameliorants, fertilisers, agrochemicals, and water, and that

machine availability will continue to be sufficient to allow a sustained annual replant

programme of 20 percent of the cane area reaped for the mill, with the concomitant

maintenance of the industry infrastructure, particularly canals, drains, and roads.

For the present purposes, it is assumed that the Drainage and Irrigation Board

plans to clean the canal and reduce seepage losses will proceed. If the projected

long-term yields are to be achieved, the planned improvements to drainage systems

must progress as rapidly as possible. The continuation of the specific pest and

disease control programmes initiated should have removed significant limitation to

production at the majority of estates. It is assumed that there will be no significant

incursion of any exotic pest or disease in the short term.

The cane transferred from the fields of one estate to the factory of another is

processed at the tons cane/tons sugar (tc/ts) ratio of the receiving factory. The sugar

so produced, with the cane that give rise to it, is incorporated into the field production

schedules of the cane producing estate.

It is taken as a reasonable view, based on long-term rainfall patterns, that in

each year 40 percent of total cane should be crushed in the first crop period and 60

percent in the second.

The distribution of acres reaped for the mill between the first and second

crops period is then predicated on the relative cane yield potentials of the two

cropping periods This is expected given the rainfall and distribution patterns through

the boom periods of growth of each crop. It is expected that the production in the

field and at harvest will not be constrained as a result of labour shortages for such

critical operations as planting and cane cutting. In case labour shortages occur for

fertiliser application, manual weeding, canal cleaning and herbicide application,

mechanical or aerial systems can be substituted.

Factory

Rehabilitation

The Strategy has addressed the issue of factory rehabilitation while considering

the following technical objectives:

to ensure the ability of the factories to process enough cane at lowest

possible cost to satisfy market demand for sugar;

to safeguard ongoing production by phasing out unreliable obsolete factory

plant and where possible, using second hand plant from closed factories

without compromising factory time efficiencies;

to improve factory sugar recoveries by applying proven modern sugar

technology, within accepted financial investment strategies;

to plan and phase project implementation to provide minimum disruption to

ongoing operations;

to provide a minimum-cost option that satisfies the above criteria.

Capital Costs

When assessing the capital costs, the prices used were those from traditional

sources. During the execution of the strategy, alternative prices from third world

countries and available second hand equipment will be fully explored.

A major factor influencing capital cost is the requirement to expand factory

capacities to suit available cane supplies. Both the available grinding hours and crop

length need to be considered when sizing factory throughputs.

Operating Costs

Reductions in unit costs of labour and materials are expected (in constant

value terms) through a continuation of programmes already in place. This reflects

further improvements in management control and reduced maintenance costs as

equipment that is expensive to maintain is replaced under the capital programme.

Manpower

Human Resources Development

There is significant lack of qualified and experienced staff in all areas, but

particularly in factory engineering. Every effort is being made to recruit suitably

qualified Brazilian to meet immediate and medium term needs in these key areas.

At the same time, the investment in capital expenditures to improve factory

operations through new technology, upgrading agronomic research, practices to

improve field productivity, and the installation of effective information systems and

enhanced technical and managerial competence.

A comprehensive manpower development and succession plan is drawn up

which identify a number of strategies designed to develop competent managerial and

technical staff for the future. This plan will be regularly reviewed during the next five

years to ensure that it is responsive to the development needs of the industry.

Emphasis will continue to be placed on the cadetship scheme, the

management trainee scheme for engineers, supervisory training and apprentice

training. Similar programmes, including training will continue to provide for the

development of the requisite agricultural managerial skills.

There will be continuing emphasis on specific technical programmes, locally

and overseas, relevant to the new technology being introduced into the industry. At

the most senior level the training will be supplemented with attachments to

comparable operational units overseas to provide relevant experience. In-house

training will continue, together with programmed attachments to relevant operational

units within the industry, in order to expand the appreciation of senior jobs, as well as

other jobs at the lateral level.

A fundamental aim of the manpower development efforts is to replace

systematically expatriate staff over the period with suitably qualified and experienced

Brazilian, recruited both locally and from overseas, while maintaining high operating

standards.

External Environment

Economical Environment

Brazil is the largest economy is South America. It has a Gross Domestic

Product of $2.09 trillion and is ranked ninth in the world. Gross Domestic Product or

GDP is the sum of all goods and services produced by the country in a given year.

GDP includes total consumer, investment, and government spending, and exports

minus imports. Brazil also has a well-developed service sector, that includes

restaurants and taxi services, as well as a mining sector in which its abundant

natural resources such as gold, are extracted and exported around the world. Brazil

has also become an important trade partner as its presence has been noticed in the

world market. In Brazil, 34% of people live below the poverty line. There is a huge

difference in income between the rich and the poor in Brazil. Brazil’s wealth is

evident in its booming cities of Rio de Janeiro, Sao Paulo, and Salvador.

With a gross domestic product (GDP) exceeding $2 trillion, Brazil is among

the world’s top 15 economies and represents about half of South America’s

economic output. Although economic growth slowed in 2009, due largely to the

global financial crisis, the International Monetary Fund (IMF) predicts Brazil’s

economy will expand an estimated 5.5% in 2010.

Brazil has been weathering the turmoil in the global economy relatively well

due to strong consumer demand, policies that have promoted fiscal discipline, and a

banking sector that was less exposed to “toxic” real estate assets. As a result, the

country is now experiencing its fastest economic growth in almost two decades. At

the outset of the global downturn, Brazil’s Central Bank lowered interest rates to spur

domestic demand and increase consumption. The move succeeded, and the Bank is

now raising rates to curb inflationary pressures.

Brazil is a country rich in natural resources, and its economy depends heavily

on commodity exports, specifically minerals and agricultural products. The uncertain

outlook in Brazil’s export markets in North America and Europe means that

fluctuations in global commodity prices will have a significant impact on Brazil’s

prospects going forward.

Characterized by large and well-developed agricultural, mining,

manufacturing, and service sectors, Brazil's economy outweighs that of all other

South American countries, and Brazil is expanding its presence in world markets.

Since 2003, Brazil has steadily improved its macroeconomic stability, building up

foreign reserves, and reducing its debt profile by shifting its debt burden toward real

denominated and domestically held instruments. In 2008, Brazil became a net

external creditor and two ratings agencies awarded investment grade status to its

debt. After record growth in 2007 and 2008, the onset of the global financial crisis hit

Brazil in September 2008. Brazil experienced two quarters of recession, as global

demand for Brazil's commodity-based exports dwindled and external credit dried up.

However, Brazil was one of the first emerging markets to begin a recovery.

Consumer and investor confidence revived and GDP growth returned to positive in

2010, boosted by an export recovery. Brazil's strong growth and high interest rates

make it an attractive destination for foreign investors. Large capital inflows over the

past year have contributed to the rapid appreciation of its currency and led the

government to raise taxes on some foreign investments. President Dilma

ROUSSEFF has pledged to retain the previous administration's commitment to

inflation targeting by the Central Bank, a floating exchange rate, and fiscal restraint.

GDP (purchasing power parity): $2.172 trillion (2010 est.) and ranked 9 in the

world.

GDP (official exchange rate): $2.09 trillion (2010 est.)

GDP - real growth rate: 7.5% (2010 est.) and ranked 30th in the world

GDP - per capita (PPP): $10,800 (2010 est.) and ranked 102th in the world

GDP - composition by sector

Agriculture: 5.8%

Industry: 26.8%

Services: 67.4% (2010 est.)

Labor force: 103.6 million (2010 est.) and ranked 6th in the world

Unemployment rate: 6.7% (2010 est.) and ranked 65th in the world

Population below poverty line: 26% (2008)

Labor force: 103.6 million (2010 est.) and ranked 6th in the world

Unemployment rate: 6.7% (2010 est.) and ranked 65th in the world

Population below poverty line: 26% (2008)

Investment (gross fixed): 18.4% of GDP (2010 est.) and ranked 112 th in the

world

Budget: Revenues : $485.5 billion

Expenditures: $572.3 billion (2010 est.)

Taxes and other revenues: 23.2% of GDP (2010 est.) and ranked 127th in the

world

Budget surplus (+) or deficit (-): -4.2% of GDP (2010 est.) and ranked 123th in

the world

Inflation rate (consumer prices): 5% (2010 est.) and ranked 146th in the world

Commercial bank prime lending rate: 39.992% (31 December 2010 est.) and

ranked 2th in the world

44.65% (31 December 2009 est.)

Industrial production growth rate: 10.5% (2010 est.) and ranked 26th in the

world

Exports: $201.9 billion (2010 est.) and ranked 24th in the world

Exports - commodities: transport equipment, iron ore, soybeans, footwear,

coffee, autos

Exports - partners: China 12.5%, US 10.5%, Argentina 8.4%, Netherlands

5.4%, Germany 4.1% (2009)

Imports: $181.7 billion (2010 est.) and ranked 22th in the world

Imports - commodities: Machinery, electrical and transport equipment,

chemical products, oil, automotive parts, electronics

Imports - partners: US 16.1%, China 12.6%, Argentina 8.8%, Germany 7.7%,

Japan 4.3% (2009)

Reserves of foreign exchange and gold: $288.6 billion (31 December 2010

est.) and ranked 7th in the world

Debt - external: $346.5 billion (31 December 2010 est.) and ranked 26th in the

world

Stock of direct foreign investment - at home: $368.4 billion (31 December

2010 est.) and ranked 14th in the world

Stock of direct foreign investment - abroad: $128.9 billion (31 December 2010

est.) and ranked 23th in the world

Exchange rates: reals (BRL) per US dollar -1.77 (2010)

Political Environment

Brazil is a federal republic. Similar to the United States, democracy is the

foundation of a federal republic in which the public elects its officials and

representatives. Brazilians are required by law to vote if they are between the ages

of 18 and 70. Like the United States, the Brazilian government is broken up into

three branches, the Executive Branch, the Legislative Branch, and the Judicial

Branch that perform checks and balances on one another in order to prevent one

branch from becoming more powerful than the next.

In 2006, both men were re-elected with a 60.83% popular vote. The president

can only hold two terms of four years. The Legislative Branch is a bicameral (two

branch) National Congress consisting of the Federal Senate (Senato Federal) and

the Chamber of Deputies (Camara dos Deputados). Each of the 27 Brazilian states

sends three representatives to the Senate.

Brazil returned to democracy from military rule in 1985. In an effort to repair

past abuses, in 1988 a new constitution emphasizing human rights was adopted. In

addition, the country sought to repair its economic model and began opening its

economy to trade, abandoning import substitution, and privatizing state owned

enterprises.

Brazilian import substitution industrialization (ISI) began in the 1930s

under the Vargas regime and involved tariff barriers and currency devaluation to

retard imports (and increase exports). In the Brazilian context, ISI was intended to

stimulate industrialization through application of government capital projects for

heavy industry and infrastructure, private capital for consumer products, and foreign

capital for durable goods. For example, during the 1950s and 1960s Volkswagen,

Ford, GM and Mercedes all established Brazilian operations. The goal of ISI is to

emphasize domestic production and export higher value-added goods. Unfortunately

Brazil’s economy stagnated behind these barrier and its products were not

competitive on world markets.

A key part of Brazil’s economy since the 1980s is its stance on trade. Brazil is

a founding member of Mercosur – the southern cone trading bloc which was

established in 1991 and also includes Argentina, Paraguay, and Uruguay. While the

organization’s charter is to promote trade, investment and human flows, it has been

accused of trade diversion and blocking U.S. efforts to create the Free Trade Area

of the Americas (Council on Foreign Relations 2009). Brazil became a member of

the WTO on January 1, 1995. Brazil is granted MFN status by the U.S. as well as the

European Union and the other members of the World Trade Organization (WTO).

Brazil is a federative republic with 26 states and a capital district. It has a

vigorous multi-party system with 20 parties represented in its congress. The quality

and efficiency of government services and infrastructure is poor – surprising given

the high amount of government spending as a percentage of total GDP.

Brazilian politics are characterized by a partisan fractiousness that mirrors the

country’s diverse socio-economic make-up. Relations are generally difficult between

the executive and the legislature, as well as between federal and state governments.

In addition, a tradition of switching parties has made party politics and political

strength in Congress fluid. In 2007 the Supreme Court barred members of Congress

from party-hopping; however this has yet to forge stronger party loyalty.

Political progress requires constant horse-trading that slows the passage of

fundamental reforms such as tax policies, widely considered necessary to maintain

fiscal sustainability and to accelerate growth to a level that will continue to move

Brazil forward. A difficult balancing between promoting business and making

progress on social issues undermines the government’s ability to meet expectations

on all fronts. President Dilma Rousseff took office January 1st, 2011 and is backed

by a ten-party coalition representing 70% of Congress. Like her mentor, former-

President Luiz Inácio Lula da Silva, Rousseff faces challenges maintaining a

cohesive alliance particularly with the centrist Partido do Movimento Democrático

Brasileiro (PMDB). The PMDB will jockey for political posts since it holds the most

seats in the ruling congressional alliance (across both Chambers) as well as in the

Senate.

However, in Brazil’s fragmented Congress the party’s absolute number of

seats is fairly small. Rousseff is considered a competent technocrat but lacks Lula’s

charisma. The first months of Rousseff’s term were characterized by economic policy

continuity, as her government is taking steps to keep inflation low and government

spending under control. Although Rousseff is increasingly asserting her autonomy

from Lula, balancing the former President’s power and popularity remains a

challenge. Lula’s presence will certainly be felt if he has a serious interest in a 2014

presidential bid, as even he has himself hinted before leaving the presidency.

Although Brazil’s ratings for control of corruption (see sidebar) are improving,

corruption is an ongoing concern. It is more visible now than in the past because of

increased transparency and willingness to prosecute. During his presidency Lula

remained skillfully at arm’s length of the various corruption scandals that touched

many of his close allies and PT party.

Rousseff emerged relatively unscathed from the resignation of her Chief of

Staff Antonio Palocci in June 2011 over allegations of corruption. However, she

does not share Lula’s level of popularity and in the event of future scandals she may

not be given the latitude afforded to the former president.

Government type :

Federal republic

Administrative divisions

26 states and 1 federal district

Independence :

7 September 1822 (from Portugal)

National holiday :

Independence Day, 7 September (1822)

Constitution :

5 October 1988

Legal system :

Civil law; note - a new Brazilian civil law code was enacted in 2002 replacing

the 1916 code

International law organization participation :

Has not submitted an ICJ jurisdiction declaration; accepts ICCt jurisdiction

Suffrage :

voluntary between 16 and 18 years of age and over 70; compulsory over 18

and under 70 years of age; note - military conscripts do not vote

Executive branch :

chief of state: President Dilma ROUSSEFF (since 1 January 2011); Vice

President Michel TEMER (since 1 January 2011); note - the president is both

the chief of state and head of government

cabinet: Cabinet appointed by the president

elections: president and vice president elected on the same ticket by popular

vote for a single four-year term; election last held on 3 October 2010 with

runoff on 31 October 2010 (next to be held on 5 October 2014 and, if

necessary, a runoff election on 2 November 2014)

election results: Dilma ROUSSEFF (PT) elected president in a runoff

election; percent of vote - Dilma ROUSSEFF 56.01%, Jose SERRA (PSDB)

43.99%

Judicial branch :

Supreme Federal Tribunal or STF (11 ministers are appointed for life by the

president and confirmed by the Senate); Higher Tribunal of Justice; Regional

Federal Tribunals (judges are appointed for life); note - though appointed "for

life," judges, like all federal employees, have a mandatory retirement age of

70.

Legal Environment

Brazil is a federative republic, constituting an indissoluble union of States,

Municipalities, and the Federal District. Brazil’s legal system is codified, and laws are

issued by the Federal Government, States, and Municipalities, each within its own

sphere of authority. Court decisions entail correct application of current Brazilian

laws.

When no specific legal provision exists, courts decide based upon analogy,

custom, and general legal principles. Legal precedents do not bear the force of law

in Brazil, though they may play a significant supporting role in specific court

decisions. The Federal Constitution provides for the legislative authority of the

Federal Government, States and Municipalities, thus avoiding redundancy or

overlapping of jurisdictional spheres.

In consonance with principles laid down in the Federal Constitution the

legislative authority of the Federal Government supersedes that of States and

Municipalities. The Federal Government is thus vested with exclusive authority to

legislate on civil, commercial, criminal, procedural, electoral, agrarian, maritime,

aeronautical, space, and labor law; expropriation, water, power, informatics,

telecommunications, radio broadcasting, monetary system, foreign exchange, credit

policy, insurance, foreign trade, mineral deposits, nationality, citizenship, and other

matters.

The Federal Constitution authorizes the Federal Government, States and the

Federal District to legislate concurrently regarding such matters as: taxation,

financial, economic, and prison law; production and consumption; environmental

liability and consumer rights; education and teaching; social security, social

protection, and health. On such issues, the authority of the Federal Government is

limited to setting general guidelines, whereas that of the States and the Federal

District is circumscribed by enabling legislation, observing general guidelines of

federal legislation. The Federal Constitution is the keystone of the Brazilian

legislative system. It ensures the citizen fundamental rights and guarantees, and

determines the political and administrative structure of the Federative Republic of

Brazil. It defines the respective spheres of authority of the Executive, Legislative and

Judicial Branches; orients the tax system; and provides for economic and financial

policy, and the social order. Organization and government of the States is provided

for in their own constitutions and laws, observing principles laid down in the Federal

Constitution.

Brazil’s main legal texts are Codes, compiling basic legislation. The most

prominent of these are: the Civil Code, the National Tax Code, the Penal Code, the

Consolidated Labor Laws, the Code of Civil Procedure, and the Code of Penal

Procedure. None of these codes takes precedence over the Federal Constitution,

which is the supreme law of Brazil.

Cultural Environment

Brazil’s unique cultural heritage has been influenced by a variety of diverse

populations and cultures. First inhabited by indigenous tribes over 8,000 years ago,

Brazil became a Portuguese colony in the 16th century after it was discovered by

Europeans. In 1822 Brazil gained its independence and has since seen an

exponential increase in its population as people from around the world settled there.

Traditionally a very agriculturally based economy, Brazil is known for its production

of sugar, coffee, soy beans, orange juice and beef. Brazil also has very strong

service and industry sectors which have fuelled its economy over the last century.

The last decade has seen Brazil open up its economy to foreign markets and

investment making it the fifth largest economy in the world. Recognised as the

largest economy in Latin America, Brazil also benefits from its position as the

gateway to the lucrative Mercosur market. A strong diversified economy and unique

culture make doing business in Brazil an exciting but often challenging endeavour.

Understanding Brazilian business culture and etiquette is therefore essential for

successfully doing business in Brazil.

Working in Brazil (Pre-departure)

Working practices in Brazil

In most Brazilian cities, working hours are 8:30 am to 5.00pm with an hour or

two in the middle for lunch. Businesses are usually open from 9:00am to 7:00pm

Monday-Friday and 9:00-1:00pm on Saturday. Larger businesses and most in Sao

Paulo may be open longer hours.

It is important to schedule business appointments at least two to three weeks

in advance and confirm them once you have arrived in Brazil. Also try to leave a few

hours in between them should they go on longer than anticipated.

Brazilians love socialising and spending time with each other. This is often

done over lunches or mid morning coffee breaks which can go on for several hours.

Often coffee is served before or during a meeting.

Although Brazilian culture tends to be relatively informal, Brazilians are quite

fashion conscious. It is important therefore to dress smartly and conservatively.

o Structure and Hierarchy in Brazilian companies

Brazilian companies tend to have vertical hierarchies where managers at the

top make most of the decisions. These positions tend to be dominated by men, but

women are slowly gaining employment in executive roles.

Differences in class are still very prevalent in Brazilian society and business

culture. Class is mostly determined by economic status and is reflected in the

salaries people receive resulting in large disparities of pay and status. There are

laws against discrimination, and most class differences in business are subtle.

o Working Relationships in Brazil

Relationships are one of the most important elements in Brazilian business

culture. By cultivating close personal relationships and building trust, you will have a

greater chance of successfully doing business in Brazil.

The strong importance placed on family relations in Brazil means that often

you will find a number of family members working for the same company. This is

especially reinforced since Brazilians prefer to do business with those they know and

trust.

o Business practices in Brazil

Handshakes are the most common form of greeting between business

colleagues. In more informal situations, women will tend to greet each other with a

kiss on either cheek while men may briefly embrace.

When you meet someone for the first time, it is polite to say ‘muito prazer’

(‘my pleasure’). Expressions such as ‘como vai’ and ‘tudo bem’ are common forms of

saying hello once you know someone and can show you are making an effort to

know them.

The use of titles and first names vary across Brazilian society. It is polite to

address your Brazilian counterpart with their title and surname at the first meeting or

when writing to them. Once you know them, it is common to use just first names, or

else their title followed by their first name.

An extensive system of regulations combined with a relaxed attitude to time

often results in lengthy business interactions. It is imperative not to rush this process

however and spend the time to continue developing relationships for negotiations to

be successful.

It is common practise in Brazil to hire a despachante, or middleman, to help

you in your business dealings. A despachante will help you navigate Brazilian

bureaucracy for a nominal fee.

INTERNATIONAL FUNCTIONS

HIGH SEA TRADING

High Seas Trading – what is it?

In short High Sea sale is when the cargo is already loaded on a ship and

sailing on the high seas (international waters, under no jurisdiction) without actually

being sold to the final buyer yet. Seller is looking for a buyer, while shipment is on

the way. Once the cargo is sold, the captain of the vessel is notified to change

course and deliver it to the new buyer’s port. Usually the ship is sailing in a certain

direction (example: from Brazil to Middle East). Seller is looking for buyers in

destination area (which in this example can be any Middle Eastern country, India,

Pakistan, etc.)

What is the reason for selling on High Seas?

High Sea sale is done to avoid the burden of Local Sales Tax or VAT which

would otherwise have to be paid by the final buyer if the cargo was first bought by

the importer and then re-sold to the final buyer. What High Sea Sale does, is put the

final buyer in the position of direct importer thus saving him an additional tax. For

that reason, goods bought on the high seas, while the ship is in international waters

are between 25% – 5% cheaper for the final buyer (depends on the Local Sales

Tax / VAT rate in buyer’s country).

Is High Sea Trading Legal?

“High seas sale” sounds like something done hush-hush in the middle of the

ocean like we see in the movies. Which is why you have instinctively raised doubts

about its authenticity and legality. Let we assure you, “high seas sale” is a perfectly

legal transaction though the term might have a mysterious ring to it. High sea sale is

simply turning the final buyer into direct importer, and thus saving on the Sales Tax /

VAT which would have to be paid on the re-sale if the importer was involved as a

middle man.

Example of sale on the High Seas

Suppose a Candy producer in India needs raw sugar which, if imported, would

be more economical for him. But he cannot directly import, as the volumes simply do

not justify such direct effort. He, therefore, decides to buy it from a sugar trading

company in this country whose main business is import/export of raw sugar.

Suppose further that the trading company is in Mumbai where it normally

unloads the imported sugar. The candy producer will now have to pay Sales Tax, as

the transaction is between two companies (Sugar trading company and Candy

producer). You may note that the Sugar trading company has already paid the import

duty on the sugar from Brazil. “High seas sale” enables one to avoid the second

dose of taxes. In this example, the Candy producer could have approached the

Sugar trading company much before the goods reached the Mumbai port. In other

words, the Sugar trading company could have sold the sugar to the Candy producer

while the goods were still at “high seas”. This is possible by suitable endorsement to

the document of title to the goods.

Because the sugar was sold in high seas, the Candy producer becomes the

importer. He now has to pay the Customs duty (which he would have to pay in any

case even if he bought the sugar from the Sugar trading company after the cargo

has landed in Mumbai) because the Sugar trading company would have passed on

the duty liability to him. But now the Candy producer does not have to pay the Local

Sales tax / VAT because the movement of sugar from Mumbai to Delhi is not seen

as a sale but rather as simple transport from one location to another by the same

owner (the Candy producer) without involving any sale. The purpose of the whole

procedure, therefore, is to get rid of the final sales tax / VAT liability. It does not

matter if the trading company and final buyer are in the same country, what matters

is that the final buyer also becomes the importer and does not have to buy the

imported sugar locally.

HIGH SEA SALE

PRODUCTS

White Refined Sugar:

polarization min. 99.80%

colour max. 45 Icumsa

ash max. 0.04%

moisture max. 0.04%

White Crystal Sugar:

polarization min. 99.70%

colour max. 150 Icumsa

ash max. 0.08%

moisture max. 0.08%

Raw Brown Sugar (VHP):

polarization from 99.00% to 99.50%

colour between 450 and 1200 Icumsa

ash max. 0.15%

moisture max. 0.15%

PACKING

We can supply as follows:

big bags of 1000 kg

50 kg pp bags

25 kg pp bags

1 kg, 2 kg and 5 kg plastic bags

It is not economically viable to use 40' containers for sugar. Final price is

cheaper if in 20'.

On a 20' container we put 26 tons of Icumsa 45, and 27 tons of Icumsa 150

and 650/1200.

QUANTITY

In our specific case, we prefer to supply smaller volumes (from 150 to 1500

mt per shipment) in containers (up to 27 tons net each, as per buyers' possibilities).

It's safer and easier to get smaller volumes. Eventually, we can work full ship loads,

but this is not our goal.

Indeed, sometimes we can offer larger volumes, like 10,000 mt or 15,000 mt,

provided buyers permit partial shipments. Usually, buyers do not need the sugar to

be with them at once. They can buy larger volumes, for weekly shipments, for

instance. This can avoid buyers to have large amounts of money blocked.

Buying smallers volumes, in containers, can be cheaper than to buy full ship

loads, because freight for chartered vessels became extremely expensive, more

expensive than in containers. Also, when in containers, buyers and sellers do not

take any risk for demurrage, etc. They know the final cost, in advance.

PROCEDURES

In case of containers loads (which is our main goal), there is no need for LOI,

POF, BCL, etc., from buyers' side. Procedures are very simple, as bellow:

1. Buyers and sellers agree on price and conditions

2. Buyers confirm purchase order, by e-mail

3. Sellers issue Pro Forma Invoice and Sales Contract

4. Buyers sign Pro Forma and Contract and return to sellers, by e-mail

5. Buyers effect the downpayment

6. Upon receipt of downpayment, sellers ship goods

7. Sellers send copy of shippind documents to buyers

8. Buyers effect payment of balance

9. Sellers send original documents by courier

In case balance is paid by LC, following is the procedure:

1. As above

2. As above

3. As above

4. As above

5. Buyers effect the downpayment and open the LC

6. Upon receipt of downpayment and LC, sellers ship goods

7. Sellers give shipping docs to the negotiating bank in Brazil

8. Negotiating bank in Brazil checks docs and if all in good order, pays sellers

and send docs to opening bank abroad.

SHIPMENT

Within 10/20 days after receipt of payment instrument

PAYMENT

Basically all Brazilian sugar exporters require a downpayment (usually 30%)

to close any deal. Balance is against fax of shipping documents (a few sellers accept

LC for balance). In our specific case, we must state that we will nof be able to find a

reliable supplier to accept 100% LC, as it used to be. Of course, we perfectly

understand that buyers do not feel comfortable to put front money to get sugar.

That's why we must emphasize, again, the importance to know the reliable sources.

By the way, this is a two way road: as there are frauds from the suppliers' side, there

are also frauds from the buyers' side, and that's the reason for sellers to require a

downpayment. Many "buyers" use to confirm the order, and then they do not open

the LC, which can cause much trouble to sellers. We have never experienced the

opposite. Our suppliers have never failed, they have always delivered the sugar as

per buyers orders.

So, currently, DOWNPAYMENT IS A SINE QUA NON CONDITION TO

START BUYING SUGAR IN BRAZIL. Maybe, depending on the buyer, after some

shipments, sellers can discuss other terms and conditions. Also, we should say that

the big risk in this case is taken by sellers, because they ship the sugar with only

30% guarantee of payment. Their risk is 70%.

We should also say that the current way of payment required by sellers is the

best we can expect. We can mention some good advantages, for both, buyers and

sellers, when there is no Letter of Credit involved:

lower final cost, because there is no cost to open LCs

absence of discrepancies on documentation

no risk of warehousing and demurrage cost at discharging port (mainly when

transit time is short), because shipping documents have not to go through

negotiating banks. They will be sent straight from sellers to buyers.

buyers have not to put all the money in advance. They pay some 30% when

putting the order, and then, balance with proof of each shipment.

Finally, that's the way the market operates now, mainly for containers

shipments, which is our case.. If we are not able to put some front money, it will be

extremely difficult (no to say impossible) to buy sugar in Brazil. That's the current

uniform way of payment.

PRICES

Market price is available from major commodity news services and

newspapers. Sugar is mainly quoted at the London Stock Exchange, LIFFE (for

Icumsa 45), and New York Stock Exchange (NYSE) for other grades. Buyers must

also know that there may be a premium or a discount on the levels of the Stock

Exchange. Circumstances will determine the premium or discount. Of course, it's not

true that some suppliers can offer sugar much under the Stock Exchange levels,

from Brazil. This information is false. Market prices do not change dramatically in a

short period of time, and no method exists by which sugar can be traded at lower

prices. Much before looking for price, buyers should look for safety with reliable

sources.

RETURN ON INVESTMENT DETAILS

The company will be making a total investment in of INR 240 Mn to acquire the

company of which a sum of INR 82 Mn will be in form of outgo money and INR

158Mn will be raised through equity and debt measures.

The company will repay the loan as mentioned earlier .

With a crushing capacity of 3.1 Mn tons we expect to have a total production of

240,000 tons at the rate of 8% from sugarcane juice.

The amount of revenue generated from sale of the sugar in finished form in the open

market at the current rate of USD 620.5/ton will be USD 192.355 million

158 mn USD debts will be repaid back in form installments over a period of 15 years.

The bank allows us to repay loan starting from 3 yrs from the date of commencing of

agreement.

The interest amount will be repaid back starting three years from the date of

agreement.

Principle amount will be paid back in installment starting from 5 years from date of

commencement.

Year premium

0-3 years Zero USD as per agreement

3-5 years USD 1.975 Mn/ year

5-15 years USD 17.775 Mn/ year

Expectation for next 5 years.

YEAR SUGAR PRODUCED REVENUE (USD)

2011-12 .31Mn tons 192.355 Mn

2012-13 .356 Mn tons 221.20 Mn

2013-14 .409 Mn tons 254.38 Mn

2014-15 .470 Mn tons 292.537 Mn

2105-16 .540 Mn tons 336.417 Mn

The aim of the company is to achieve a profit of USD 48 Mn every year over a period

of 5 year from the date of acquisition.