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December 28, 2012

Economics Uncertain Despite Increased Sugarcane Prod. In Brazil

Dry weather in southern Brazil during the month of November has helped sugarcane producers harvest more cane than what was expected just a few months ago. According to the Union of Sugarcane Industries (Unica), the sugarcane producers in southern Brazil were expected to harvest 518 million tons of sugarcane this harvest season, but the total may now reach 532 million tons or 2.6% more that the September estimate and 4.5% more than what was estimated when the harvest began in April.

For all of Brazil, Conab is estimating that 595 million tons of sugarcane will be harvested, which would be up 6.2% compared to the 560 million tons harvested in 2011/12. The harvest season for sugarcane in most of Brazil starts in April and usually concludes by early December. The harvesting machines generally cannot get into the fields during the peak of the summer rains which run from December to March, so the mills close down during that period in order to conduct their annual maintenance operations.

Processors have shifted more of the production capacity to sugar production this season due to the higher margins associated with sugar production compared to ethanol production. In their third evaluation of the 2012/13 Brazilian sugarcane harvest, Conab estimated that sugar production in Brazil will hit 37.6 million tons in 2012/13, which would represent an increase of 4.7% compared to last harvest season.

In contrast, ethanol production in Brazil is expected to be 23.6 billion liters, which would represent a decline of 5.2% compared to the 2011/12 harvest season. The production of hydrous ethanol, which is used in E100, is expected to decline 8% to 13.9 billion liters. The production of anhydrous ethanol, which is used to blend with gasoline, is expected to decline 0.8% to 9.6 billion liters.

Hydrous ethanol (E100) accounts for 59% of the total ethanol produced in Brazil and anhydrous ethanol, which is used to blend with gasoline, accounts for 41% of the ethanol produced in Brazil.

Conab estimates that there are 8.5 million hectares of sugarcane in Brazil, which is up 2% compared to last year. The state of Sao Paulo has 52% of the total sugarcane acreage at 4.4 million hectares, followed by Goias at 8.5% (725,000 hectares, Minas Gerais at 8.4% (721,000 hectares), Parana at 7.1% (610,000 hectares), and Mato Grosso do Sul at 6.3% (542,000 hectares). While the state of Mato Grosso is the principal grain and cattle producing state in Brazil, it is a minor sugarcane producer with just 235,000 hectares of sugarcane or 2.7% of the total acreage in Brazil.

While the industry will end up processing more sugarcane than what was originally anticipated, the economic outlook for the industry as a whole has not improved. Unica estimates that during the 2012/13 harvest season processors in the state of Sao Paulo will generate on average an income of R$ 105.90 per ton of sugarcane, which is down 6.7% from the R$ 113.53 generated last harvest season. The decline is being attributed to higher costs, lower sugar prices and currency fluctuations.

For mills in southern Brazil that just produce ethanol, their income thus far this year has averaged R$ 92.18 per ton (down 10% compared to R$ 102.90 per ton last year) and for mills that just produce sugar, their income has averaged R$ 118.70 per ton (down 4% compared to R$ 123.59 last year).

The last several years have been a difficult time for the sugar/ethanol industry in Brazil. Increased costs, lower sugar prices, and over capacity in the industry has led to negative margins for some processors forcing them to close their doors.

Currently there are six sugar/ethanol mills in Brazil that have indicated that they will cease operations and not process sugarcane during the 2013/14 harvest season which will start next April. Additionally, only two new mills are scheduled to open in Brazil in 2013/14. This is down significantly from the peak of recent sugarcane expansion in Brazil when 30 new sugar/ethanol mills started operations during the 2008/09 harvest season.