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April 26, 2012

Sugarcane Crop in Brazil Struggling, Recent Rains Have Helped

The sugarcane sector in Brazil is struggling to regain its footing after a very disappointing 2011/12 harvest season. While the state of Sao Paulo continues to be the largest sugarcane producing state in Brazil, its percentage of Brazil's total sugarcane production slipped last year to 61.7% from 64.5% the previous year. Adverse weather and an ageing sugarcane crop resulted in a total production of 493 million tons of sugarcane in southern Brazil in 2011/12, which was a decline of nearly 10%.

For the 2012/13 sugarcane crop in southern Brazil, the Union of Sugarcane Industries (Unica) estimates that the production will increase 3.2% to 509 million tons and that estimate may go higher after recent rains in Sao Paulo and northern Parana. Dry weather during the November-February period slowed the development of the sugarcane crop, and the hope is that these recent rains will help the crop to partially recuperate.

The recent problems in Brazil's sugar/ethanol sector are well illustrated in the state of Parana. Even though the sugarcane acreage in the state increased 4% in 2012/13, the total sugarcane production is estimated to be unchanged from last year at 40.5 million tons. The main reason for the lack of improvement in productivity is once again adverse weather and an ageing sugarcane crop. That would represent a reduction of 6% compared to the 43 million tons produced in 2010/11. Parana used to be the second leading producer of sugarcane in Brazil, but it has now slipped to fourth place after Sao Paulo, Minas Gerais, and Goias.

Of the 30 sugar/ethanol mills in the state of Parana, three of the mills have ceased operations in 2011. The mill owners claim that the high cost of producing ethanol makes it uncompetitive with gasoline. In Brazil, ethanol had reached 50% market share for flex fuel vehicles just several years ago, but ethanol has now fallen back to a 35% market share. Owners of flex fuel vehicles can choose every time they fill their tank if they want to purchase ethanol (E100) or gasoline (E20) and over the last two years, more have chosen gasoline. Whenever the price of ethanol is more than 70% the price of gasoline, it is more economical to use gasoline.

Ethanol producers want the government to do more to make ethanol more competitive by either reducing the taxes on ethanol or increasing the taxes on gasoline. Currently, ethanol is taxed at 31% and gasoline is taxed at 35%.

The three closed plants in Parana would normally process 2.7 million tons of sugarcane and officials feel that at least 50% to 60% of the sugarcane will be processed by nearby facilities. The remainder of the sugarcane may just be lost. The plant closures will certainly have a negative impact on their communities because every 5 hectares of sugarcane generates one job. The loss of these three plants will cost approximately 7,000 jobs.