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August 16, 2011

Estimates of Brazil's Sugarcane Production Continue to Decline

In their latest report, the Union of Sugarcane Industries (Unica) has once again lowered its estimate of the total sugarcane production in southeastern Brazil. They are currently estimating that 510 million tons of sugarcane will be processed in southeastern Brazil during the 2011/12 harvest season, which is 4.3% lower than their latest estimate in July. For the entire harvest season, they feel the total production will be 8.3% lower than last year.

In addition to lower tonnage, the quality of the sugarcane is lower this year as well due to a series of freezing temperatures and the fact that the sugarcane has started to flower. Damage from the cold temperatures is much more widespread than originally thought and the cold temperatures apparently triggered the sugarcane to start flowering, which is rare in Brazil. The energy devoted to flowering has lowered the overall sucrose production in the plant.

Unica estimates that 48% of the sugarcane will be processed into sugar and 52% into ethanol. Southeastern Brazil is expected to produce 31.5 million tons of sugar, which is 5.7% less than the 2010/11 harvest season. Total ethanol production is estimated at 21 billion liters, which is 17% less than last year.

With more adverse weather in the forecast, it is expected that Unica will continue to lower their production estimate through the remainder of the harvest season. Some mill operators are expecting to shut down operations a month earlier than normal due to a lack of sugarcane. Normally mills close down in December and resume operations in March, but this year, some may cease operations by mid-November.

Domestic ethanol prices have been stable in Brazil for the last 40 days, which is not the normal case during the peak of the harvest season. Ethanol prices usually decline during this time of the year due to excess supply and rise during the intra-harvest period (January to April). In April of 2011, domestic ethanol prices reached an all time record high price in Brazil prompting many owners of flex fuel vehicles to use gasoline instead of E100 ethanol. Domestic ethanol prices are expected to surge once again in early 2012.

The Brazilian government is very concerned about the declining sugar and ethanol production and has allocated more resources for the financing of new sugar/ethanol mills and increased sugarcane production. In 2011, there are only four new sugar/ethanol mills scheduled to come online whereas dozens of new mills are needed just to meet the ever increasing domestic demand.