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June 26, 2014

Brazilian Sugarcane Producers are in Lose-Lose Situation

Continued dry weather in southern Brazil is adding up to a no-win situation for sugarcane producers in southern Brazil. The sugarcane continues to suffer from the prolonged drought that started in December of last year, but if El Nino-triggered heavy rains start to fall during the second half of 2014, they could end the drought but dilute the sucrose content of the already diminished sugarcane crop. Even if the drought would end, sugar and ethanol production could still end up below current projections.

In southern Brazil sugarcane producers harvested 595 million tons of sugarcane in 2013/14, but estimates for the 2014/15 harvest continue to decline with some estimates as low as 570 million tons. In some of the hardest hit regions of Sao Paulo, sugarcane production in 2014/15 could decline by as much as 30% to 60%. From the beginning of the harvest until the end of May, the average sugarcane yield was 78.4 tons per hectare or 7.3% less than during the same period in 2013.

As a result of the lower production, some sugar mills have had to harvest more hectares of sugarcane compared to recent years in order to maintain their levels of sugar and ethanol production. This has led to speculation that the harvest may end earlier than normal if the current harvest pace is not slowed down. Some mill operators have already slowed their harvest pace in order to allow the newly planted sugarcane to gain more height and therefore more tonnage before it is harvested.

The dry weather appears to have impacted the older sugarcane more so than the younger sugarcane. Losses appear to be greater in the sugarcane fields that were to be cut for the fifth or sixth time. Even though the younger sugarcane has not suffered as much from the drought, it too is expected to be a disappointing harvest. Once sugarcane is planted, it can be harvested annually for up to six years before the productivity starts to decline by as much as 10% per year after 5-6 cuttings.

The dilemma for sugarcane producers is that if heavy rains return to the region during the second half of 2014, which is typical for an El Nino year, the total tonnage of sugarcane may increase, but the total recoverable sugars (sucrose) in the remaining sugarcane would decline resulting in lower sugar or ethanol production.

Many small producers are already undercapitalized after suffering from several years of adverse weather and low sugarcane prices and they can ill afford what appears to be another bad year. If sugar and sugarcane prices do not rebound quickly, many small producers may go out of business, especially producers who sell directly to the sugar mills.