Mar 28, 2014

2014/15 Does not look like a Rebound Year for Brazil's Sugar Sector

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

April 1st marks the official start of the 2014/15 sugarcane harvest season in Brazil and the harvest will end sometime in December. Several sugar mills though have started harvesting their sugarcane earlier than normal due to the poorer condition of the sugarcane which was impacted by the hot and dry weather during December, January, and early February. In the region of Aracatuba, Sao Paulo, six mills have started processing sugarcane at least 15 days earlier than normal.

The sugar sector had been hoping for a rebound year after several years of disappointing weather and slumping sugar prices. Over the last five years, 44 sugar mills in Brazil have closed their doors and another 12 suspended their operations. An estimated six of the mills are scheduled to emerge from bankruptcy this year. The sugarcane associated with the closed mills was taken over by other mills for processing.

There are three big hurdles for the sugarcane producers in Brazil: high cost of production, lower productivity due to adverse weather, and lower prices for sugar and ethanol. Sugar prices have fallen 40% in recent years and the problem with the ethanol price is that it is dependent on the price of gasoline. International sugar prices have firmed in recent months due to concerns over adverse weather in Brazil and other producing countries. The prices though have not increased enough to insure profit margins high enough to recoup investments and pay down debts.

The problem for ethanol production is the price of gasoline. If the price of E100 (pure ethanol) exceeds 70% the price of gasoline, then consumers with flex fuel vehicles will use gasoline instead of E100. Ethanol producers in recent years have complained that the government is artificially holding down the price of gasoline in order to help control consumer inflation and as a result, ethanol prices are being held down as well. They would like to see the price of gasoline increase, which would then lift ethanol prices as well.

Solutions to these problems will not be easy, but the president of Unica, Elizabeth Farina, feels two things need to be done immediately to revive the sector - reverse the reduction in subsidies recently announced by the government and increasing the percentage blend of ethanol in gasoline, which now stands at 25%. It is uncertain whether the government will adopt either of these recommendations.

Sugarcane production in southern Brazil in 2013/14 totaled 596 million tons, which was 12% greater than the 532 million tons produced in 2012/13, but slumping sugar prices put many processors in the red.

The company Datagro estimates that the sugarcane growers in southern Brazil will process 575 million tons of sugarcane in 2014/15, which is down 3.5% from the prior year. Brazil produced 34.3 million tons of sugar in 2013/14 and 25 billion liters of ethanol. During the upcoming harvest season, Brazil is expected to produce 33.2 million tons of sugar (-3%) and 27.6 billion liters of ethanol (+9%).

During the harvest season that just ended, approximately 54% of the sugarcane was used to produce ethanol and 46% was used to produce sugar. The percentages are expected to be very similar during the 2014/15 harvest season.