April 2, 2015
Weaker Currency lowers Break-even for Brazil's Sugar Producers
The weakened Brazilian currency is having an impact on commodities produced in Brazil including sugar. Sugar prices are at multiyear lows, but the devalued Brazilian currency means that mill operators now have a lower break-even for their sugar production.
Most sugar/ethanol mills in Brazil can adjust their operations somewhat to produce either more sugar or more ethanol depending on market signals. The market now is signaling to mill operators to produce more sugar because of the weaker Brazilian currency. Most of Brazil's sugar goes into the export market and it is priced in dollars, therefore with a weaker currency, mill operators are paid more in the local currency for every pound of sugar they export because it is priced in dollars. That is not the case for ethanol which is sold primarily in the domestic market and priced in Brazilian reals.
As a result of the new exchange rate, the break-even point for sugar producers in Brazil has declined. The break-even point for mill operators in Brazil was generally considered to be 17 to 18 cents per pound of sugar, but that has now been reduced to a range of 11 to 13 cents per pound. If you factor in that it costs about 2 cents per pound to transport the sugar from the interior to the Brazilian ports, the new equilibrium point for sugar producers might be in the range of 12.5 cents per pound of sugar.
It is expected that mill operators in Brazil will now put more emphasis on producing sugar and less emphasis on ethanol production in order to get their products prices in dollars instead of reals. This could put additional pressure on sugar producers in India and Thailand because their currencies have not devalued as much as the Brazilian real.
Each mill has different operating costs and mills that have debts dominated in dollars will not reap the benefits of a weaker currency. In fact, the weaker Brazilian currency makes their debts more expensive. The Brazilian currency is at its weakest point since 2003 and it may weaken even further due to economic and political problems in Brazil
The 2015/16 sugar harvest is now getting underway in southern Brazil and sugarcane producers are worried that dry weather earlier in the summer may once again impact their sugarcane production. For the last four years, the sugar sector in Brazil has suffered from low prices, adverse weather, and the government's indifference toward their economic struggles.