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June 27, 2013

Wet Weather Delaying Brazilian Sugarcane Harvest

Heavy rains across southern Brazil have delayed sugarcane harvesting for at least ten days in the states of Sao Paulo, Parana, and Mato Grosso do Sul. The rains are not only slowing the harvest, they are also lowering the sugar content of the sugarcane and slowing export loading of sugar.

The heaviest rains fell in Mato Grosso do Sul and Parana, but rains also slowed the harvest in the state of Sao Paulo which is responsible for approximately 60% of Brazil's total sugarcane production. The amount of sugarcane harvested in June should decline significantly compared to the rapid harvest pace of May. The sugarcane harvest in Sao Paulo would be even further behind were it not for the faster than normal harvest pace in April and May.

Dry weather tends to concentrate the sugars in the plant in what is called the Total Recoverable Sugars. When there is rainfall during what is considered the normal dry season (May to September), the plant resumes growth and the sugars are then somewhat diluted.

Conab is estimating that Brazil will harvest 653 million tons of sugarcane during the 2013/14 harvest season or 11% more than last year. If achieved, it will help the sector to recover from a downturn that started after the financial crisis in 2008. After two years of poor weather, the sector bottomed out in 2011/12 when the average production in southern Brazil was 69 tons of sugarcane per hectare compared to a more normal yield of 85 tons per hectare.

Part of the problem over the last few years in addition to poor weather, was the fact that sugarcane producers in southern Brazil did not have adequate capital to renovate their ageing sugarcane fields. After sugarcane is planted, it is harvested multiple times for five or six years. From that point forward, the sugarcane productivity declines about 10% per year if it is not replanted. Farmers are reluctant to replant the fields because there is no income from the newly planted field for one growing season and there was limited credit available to cover the expenses of replanting, so many farmers let the sugarcane get too old.

Ethanol prices in Brazil have been increasing in recent weeks in anticipation of lower production and the fact that some of the ethanol that is being produced in southern Brazil must be transported to northern Brazil where an ongoing drought continues to reduce sugarcane production in that part of the country. The government has also stepped in with additional credit for sugarcane renovation. The recovery in the sector has come too late for some of the more inefficient sugar/ethanol mills in southern Brazil.

The Union of Sugarcane Industries (Unica) reported that 43 mills have closed in southern Brazil over the last five years and that another 12 may close in 2013. In the state of Parana there are 30 registered sugar/ethanol mills, but three are closed and 2 are in receivership. The mill operators are trying to stay afloat by cutting costs and limiting investments.

Most expansion plans have been put on hold until the sector further recovers. A new sugar/ethanol mill costs approximately R$1.5 billion to build over the course of four years and it takes approximately a decade for the mill to turn a profit.

Government efforts to stimulate the sector have been somewhat disappointing. The National Development Bank (BNDES) instituted two lines of credit in 2012 with R$ 4 billion for sugarcane investments, but only R$ 1.38 was loaned out in 2012. The bank is hoping for greater participation in 2013.